[LOGO OF DIGITAL EQUIPMENT CORPORATION APPEARS HERE]
[FOUR PHOTOGRAPHS SHOWING AN ALPHASERVER 8400 SYSTEM, A DIGITAL PERSONAL
COMPUTER RUNNING MICROSOFT WINDOWS 95, AN ALPHASERVER 2100 AND A HINOTE ULTRA
NOTEBOOK COMPUTER APPEAR HERE]
Digital Equipment Corporation
1995 annual report
Digital Equipment Corporation is a world leader in implementing and
supporting networked platforms and applications in multivendor environments.
Building on its core competencies in software, systems, networks and
services, Digital--working with its business partners--provides a complete
range of information processing solutions from personal computers to
integrated worldwide networks. Digital's products and services for open
client/server computing are helping customers simplify business practices and
enhance organizational productivity. The company does business in more than
100 countries and develops and manufactures products in the Americas, Europe
and Asia-Pacific.
Contents
2 Chairman's letter
6 Introduction: customer needs and market realities
8 High-performance computing: a billion
instructions per second
12 Software: creating an integrated software environment
16 Multivendor services and systems
integration: the added value
20 Advanced technology: looking to the future
24 Contributing to the community
25 Financial statements
[FOUR PHOTOGRAPHS SHOWING AN ALPHASERVER 8400 SYSTEM, ADIGITAL PERSONAL
COMPUTER RUNNING MICROSOFT WINDOWS 95, AN ALPHASERVER 2100 AND A HINOTE ULTRA
NOTEBOOK COMPUTER APPEAR ON THIS PAGE.]
Working with partners to build open networks to span the enterprise and
the world
Digital has the ability--directly and through its partners--to implement and
support networked platforms and applications in multivendor environments more
cost effectively and quickly than anyone else.
We have the software and integration services needed to build networks that
connect the enterprise with its employees, customers, suppliers and the world.
The barriers are down. The base technologies--the World Wide Web and the
Internet, wireless and mobile computing, broadband networks and virtual LANs--
are in place to enable individuals and businesses to take full advantage of
computer communications.
Annual Meeting
The annual meeting of stockholders will be held at 11:00 a.m., Thursday,
November 9, 1995, at the World Trade Center, Commonwealth Pier, 164 Northern
Avenue, Boston, Massachusetts, 02210.
Common stockholders of record on September 11, 1995 will be entitled to vote
at this meeting.
Fiscal Year 1995 1994
Total operating revenues $13,813,062,000 $13,450,790,000
Restructuring charges $ -- $1,206,000,000
Net income/(loss) $121,818,000 ($2,156,063,000)
Net income/(loss) per $0.59 ($15.80)
common share
Total stockholders' equity $3,528,280,000 $3,279,799,000
Number of common 68,572 77,722
stockholders
Stockholders' equity per $20.89 $20.24
common share
Number of employees 61,700 77,800
1
[PHOTOGRAPH OF ROBERT B. PALMER, CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER OF DIGITAL APPEARS HERE]
Chairman's letter
To our Stockholders, Employees, Customers and Partners:
The past year was one of tremendous accomplishment for Digital, a year in which
we returned to profitability, added significant strength to our product
portfolio and positioned our businesses for sustainable, long-term growth and
industry leadership.
The restructuring plan we put in place a year ago helped produce three
consecutive quarters of operating profit. As a result, Digital ended the year
with net income of $122 million, or $0.59 per common share. It was our first
profitable year since 1990.
Overall, Digital's market value increased more than $3 billion in FY95, a clear
signal that we are on the right track and an encouraging sign of renewed
confidence in Digital's future.
There are a number of reasons for this improvement, but none is more important
than the hard work of Digital's employees. The company's success is the direct
result of their dedication and determination. Their efforts, together with the
commitment and loyalty of our customers and partners, built the foundation we
need for sustainable profitability.
Our turnaround is not complete. We have more work to do and no intention of
becoming complacent. But from operating results...to products...to services...to
strategies for growth, we have an excellent story to tell--a story that says as
much about our future as it does about our past.
Operating results
Income generated by the company's businesses increased by more than half-a-
billion dollars in FY95. Total operating revenues grew three percent, or $362
million over FY94. Adjusted for divestments, total operating revenues were up
six percent year-over-year. Total product orders grew seven percent over the
previous year, or 13 percent adjusted for divestments. This indicates growing
market acceptance and demand for our products.
We ended the year with a gross margin of 32 percent, meeting our goal by
focusing on manufacturing efficiency and pricing discipline.
2
We also made significant progress in getting our costs to more competitive
levels. During the past three years, we eliminated more than $2 billion of
expenses on an annualized basis. Overall, operating expenses in FY95 dropped 14
percent year-over-year to 31 percent of revenue.
Reducing employment was the most difficult task we had to perform, but it was
absolutely critical to our turnaround plan. We ended the year with approximately
61,700 employees worldwide, down more than 16,000--or 21 percent--from FY94. In
the past five years, we have cut our population in half, and we did this while
maintaining revenue at approximately the same level. This makes Digital one of
the very few large, multinational companies that has maintained revenue during a
major restructuring.
Overall, we have strengthened our balance sheet, increasing cash to $1.6
billion. At 23 percent, our debt to debt plus equity position remains one of the
lowest among Fortune 100 companies. This positions us well for the competitive
challenges ahead.
Strategic relationships
Changes in the way we do business were never more evident than when we invited a
partner to join us in introducing our new AlphaServer 8400 system. This is our
most powerful enterprise server for large commercial and scientific
applications, powered by our most advanced Alpha microprocessor and running the
only enterprise 64-bit UNIX operating system in the industry.
Combined with 64-bit database software introduced by our partner Oracle
Corporation on the same day, this system delivers unprecedented performance. By
working closely with Oracle--and by having a focused marketing plan in place
when the system was announced--Digital delivered a product that is winning broad
market acceptance.
And the momentum has continued with other database partners, including Informix,
Sybase and Software AG, who subsequently announced plans to offer 64-bit
database software to exploit the advantages of Digital's platform.
These alliances underscore our strategy of combining the best of Digital with
the best of our partners to deliver the best information technology solutions to
our customers.
3
To leverage our product and service strengths and meet customer needs, Digital
will continue to form key strategic alliances. The expansion of our long-
standing relationship with Microsoft is the most recent example.
That alliance combines Microsoft's industry-leading desktop and client/server
software with Digital's leadership enterprise systems, service, support and
systems integration. This powerful combination enables customers to implement
Microsoft Windows and Windows NT-based business applications and integrate them
into the most complex computing environments.
As part of this agreement, Microsoft committed to release future server software
on Intel and Alpha systems simultaneously and also committed to simultaneous
release of client software on Alpha and other RISC systems. This represents a
strong endorsement of the tremendous market advantages of Digital's Alpha-based
systems and architecture. It also reinforces our determination to build on that
technology and position Digital for long-term growth.
Strategy for growth
As our financial turnaround progressed last year, we devoted considerable time
and energy to defining our strategy for the future--a strategy built on our core
competencies and responsive to the rapidly evolving information technology needs
of our customers.
Executing these strategies and demonstrating that we can grow profitably will be
significant challenges in the year ahead.
During the past year we created independent business units that are competing
according to the market rules of the 90s. The previous business model--
vertically integrated businesses dedicated to providing a Digital solution to
every customer problem--is simply no longer competitive. Today, the most
successful companies focus on their most promising market segments. Digital is
poised to be among those successful companies.
We will choose our market opportunities carefully, competing aggressively and
according to the rules of those markets. At the same time, we will help
customers improve their productivity and competitiveness through connectivity
solutions that build on Digital's unique strengths in ser-
4
vices and networking. As our partnerships with Oracle and Microsoft demonstrate,
we will not do it alone. We will work hand-in-hand with our partners to deliver
value to our customers, building on the excellence of our individual businesses
and the synergy among them.
Our goals for 1996 and beyond are very straightforward: To help our customers
create more value for their customers and shareholders. To build cooperative,
mutually beneficial relationships with our partners. To create a rewarding
environment for our employees. And, through these efforts, to achieve long-term,
sustainable growth and profitability for Digital and increased value for our
shareholders.
/s/ Robert B.Palmer
Robert B.Palmer
Chairman of the Board,
President and Chief Executive Officer
5
Customer needs and market realities
Customers around the world are making it very clear what they want from the
computer industry. They want an open computing environment that includes
products and services from different vendors. They want an open marketplace with
alternate channels of distribution so they can buy what they need, when they
need it, from whomever they choose. They want to be able to network and
integrate new technology with existing systems. They want to manage computer
resources and support users in a way that will reduce costs while implementing
their business strategies.
[PHOTOGRAPH OF ALPHA CHIP ON WHICH IS SUPERIMPOSED THE WORDS "DESKTOP",
"ENTERPRISE" AND "DATACENTER" APPEARS HERE]
Digital is combining the power of its billion-instruction-per-second Alpha chips
with Windows NT, OpenVMS, and UNIX software, systems integration, and
multivendor and network services to build networks that span the desktop, the
enterprise and the datacenter.
Digital is responding to these customer concerns by focusing its resources on
helping customers build the networked information systems they need to compete
in today's changing business environment. Digital has the ability--directly
and through its partners--to implement and support networked platforms and
applications in multivendor environments more cost effectively and quickly
than anyone else.
In this annual report, we'd like to show you the technology, support services,
business alliances and market realities on which this capability is based.
Standardization, open systems and the accelerating rate of technological
change have profoundly altered the industry and the way our customers buy.
In the past, the industry was vertically integrated. That is, large computer
companies provided systems, software, applications, peripherals, networks and
services based on their own proprietary technologies.
That has changed.
6
In response to customer needs for flexible, open and more economical systems,
the industry is moving toward a competitive model based on horizontal market
segments where one company may be a leader in database technology, another in
components, and a third in operating systems. For those who master it, this
specialization has proven to be a very successful and profitable business
strategy.
The lesson: market and organizational focus drives success. Today, Digital has
that focus. We're concentrating our efforts on those market segments where we
have unique competencies--networking, multivendor services, software, high-
performance systems--while developing a network of alliances with industry
leaders whose competencies complement our own.
An inherent paradox
In this way, we are addressing the paradox inherent in a segmented
marketplace. As horizontal segments have become more distinct and independent,
the market has rewarded those vendors who narrowed their focus. At the same
time--and here is the paradox--customers find themselves in need of a vendor
with capabilities broad enough to integrate and support their various systems
and networks.
This is the opportunity that Digital is addressing.
We have the technological resources and organizational skills to tie the
segments together. Our global presence in multivendor services and systems
integration, our leadership in high-performance computing--and the strong
partnerships we have forged with companies that are leaders in particular
market segments--place Digital in a unique position to provide customers with:
. Connectivity between the desktop and the enterprise
. Connectivity and integration among enterprise information systems
. Internetworking to link the enterprise to customers, partners, suppliers and
public networks
. The ability to manage all the elements of an enterprise solution
"By working closely with our partners, Digital is delivering enterprise
solutions that help our customers become more productive, more efficient and
more competitive."--Enrico Pesatori, Vice President and General Manager,
Computer Systems Division
7
[PHOTOGRAPH OF AN ALPHASERVER 8400 SYSTEM, ON WHICH IS SUPERIMPOSED A PORTION OF
A FINANCIAL APPLICATION, APPEARS HERE]
Digital's AlphaServer 8400 system delivers the industry's highest RISC
performance for business-critical applications at one-tenth the price of the
most widely used mainframes.
8
A billion instructions per second
High-performance systems, servers and clients
Applications and performance drive the market. Whether you're looking at a
personal computer, a workstation, a server or a database engine, your buying
decision will be based--in large part--on the application you want to run and
the speed with which it runs on a particular system.
The Alpha advantage
Digital's 64-bit Alpha systems run more than 7,000 applications and offer the
highest performance and the best price/performance in the industry. We have
the fastest microprocessors on the market today. And, although every major
manufacturer has announced plans to move to a 64-bit architecture to respond
to the speed and processing power of Alpha systems, Digital is the only
company to offer a complete family of 64-bit microprocessors and computer
systems--the only company with a commercial 64-bit UNIX operating system.
Our first Alpha chip--introduced in 1992--had a two-to-one performance
advantage over the fastest 32-bit microprocessor. Despite several years of
competitive scrambling by the rest of the industry, Digital has maintained its
performance lead. Digital's newest Alpha chip, produced at our chip
fabrication facility in Hudson, Massachusetts, operates at 300 MHz, processes
more than one billion instructions per second (BIPS) and contains 9.3 million
transistors.
Alpha symmetrical multiprocessing systems and Alpha clusters are tackling some
of the largest and most complex applications in the world. Digital pioneered
clustering technology so that a number of computers could share a common
database and be managed as a single system. Today, customers can combine VAX
and Alpha systems in OpenVMS clusters. We developed a software gateway to more
than 60 different database systems so that you can get the data you need over
the network regardless of the system on which it resides. We also provide the
integration and support services customers need to downsize mainframe
applications.
Today, many database applications are simply outstripping the capabilities of
competitive systems that can only support up to four gigabytes of memory. This
limits the amount of data with which these systems can work. Alpha systems
don't have this limitation. An AlphaServer 8400 system can keep 14 gigabytes
of data in memory for immediate access.
This means that an Alpha system can support all the memory a customer needs to
run even the most complex database and scientific applications. The potential
limits of a 64-bit architecture boggle the imagination. In theory, a 64-bit
system could support enough memory to address or track all the data in 400
billion file cabinets.
9
[PHOTOGRAPH OF AN ALPHASERVER 8400 SYSTEM APPEARS HERE]
Digital's AlphaServer 8400 system is the first computer to deliver performance
of more than 300 SPECint92. With up to 12 300-MHz processors and up to 14
gigabytes of memory, AlphaServer 8400 systems are redefining performance and
price/performance standards.
Sybase, Informix and Software AG are actively developing--and Oracle is
already delivering--64-bit database software for Alpha systems. With an Oracle
database, customers can access data more than 200 times faster than they can
with 32-bit software. This 64-bit database technology provides the foundation
for next-generation applications including:
. Decision support
. Data warehousing
. Data mining/micromarketing
. Simulation and modeling
. Realtime worldwide geographic information systems
. On-line transaction processing
. Interactive video
A "killer" application
Industry analysts are calling 64-bit database software the "killer
application" that will open the floodgates of demand for 64-bit systems and
lead to the downsizing of many mainframe applications in the retail,
insurance, credit card, utility, distribution, manufacturing and other
industries, and in research institutions and government agencies that process
huge amounts of data.
Intel and Alpha: the desktop and the enterprise
In addition to building Alpha servers that match mainframes and supercomputers
in processing power, Digital offers a complete family of Alpha workstations
and Intel-based servers and personal computers. Alpha workstations have set a
new standard for price/performance and cost of ownership. They support high-
speed 3-D graphics, enhanced video capture, built-in "whiteboarding" and
speech recognition. In addition, Digital's Intel-based servers and personal
computers combine new and proven technology with service and support customers
have come to expect from Digital.
In the past two-and-a-half years, Digital has built a multi-billion-dollar-a-
year PC business and shouldered its way from twenty-seventh to eleventh place
in worldwide PC shipments by:
. Building high-quality Intel-based servers and personal computers that offer
the latest technology at the right price points
. Making these servers and personal computers available through the distribution
and retail channels from which customers want to buy
. Providing comprehensive, award-winning services
"With the introduction of the Alpha architecture in 1992, we set new performance
standards for the industry. With the second generation chip, we again raised the
bar. With each generation of the Alpha chip family, we will extend our lead as a
frontrunner."--R. E. Caldwell, Vice President, Digital Semiconductor
10
[PHOTOGRAPH OF AN OFFICE IN WHICH SEVERAL PEOPLE ARE WORKING ON DIGITAL
PERSONAL COMPUTERS APPEARS HERE]
Digital was one of the first PC companies to offer systems based on the PCI
(Peripheral Component Interconnect) bus and one of the first companies to
offer 64-bit graphics and Pentium-based systems. We were also the first
company in the industry to offer home theater-quality audio on our line of
retail PCs.
Our HiNote Ultra notebook systems showed the industry how to squeeze a full-
function 75 MHz system with built-in wireless capabilities into a package
measuring just 1.2 inches thick and weighing about four pounds.
And, through our alliance with Microsoft, Digital is helping customers
capitalize on Windows 95 and Windows NT capabilities to bring new levels of
functionality to the desktop.
We're making advanced server and PC technology available to businesses in the
U.S., Europe and Asia-Pacific through distributors like Merisel, MicroAge and
Metrologies. And we're reaching the growing small business and home user
markets through retail chains and volume retailers like CompUSA, Sam's Club
and Circuit City.
--------------------------------------------------------------------------------
Setting a higher standard
--------------------------------------------------------------------------------
Unprecedented: Linley Gwennap of The Microprocessor Report called the Alpha
chip's performance lead over its competitors "nearly unprecedented in the
microprocessor industry."
Digital inside: Digital Semiconductor's PCI-Ethernet controller chips are used
by five of the ten leading NIC (Network Interface Connection) card vendors and
have claimed 70 percent of this emerging PCI-Ethernet market.
Head-to-head: PC Magazine gave Digital's Prioris HX 590 server an "Editor's
Choice" award in a head-to-head review of 14 departmental file servers. SCO
World gave it a "Top of the World" award in a comparison test of five dual-
processor PC servers.
StorageWorks: Digital's storage business grew 22 percent over last year. We
build plug-and-play storage systems--integrating disk, tape and optical drives
from storage component manufacturers with our high-performance RAID (Redundant
Array of Inexpensive Disks) array controllers and storage management software.
We provide the industry's broadest range of interoperable storage solutions for
desktop, enterprise and network environments. Applications range from simple
file storage to large transactional databases and high-accessibility production
systems.
Best RAID disk array: According to PC Digest magazine, Digital's RAID Array 230
"has the fastest performance and the widest range of features" and "is one of
the least expensive units tested."
Hot iron: Digital's Alpha and Intel-based systems received six of the ten 1995
"Hot Iron" Awards presented by AIM Technology at the UNIFORUM trade show.
The world's only: Digital's GIGAswitch/FDDI is the world's only FDDI (Fiber
Distributed Data Interface) networking switch and was recently selected by R&D
magazine as one of the year's most technologically significant new products.
Making connections: According to Dataquest, Digital ranks second in the U.S.
Ethernet switching market and second in the number of FDDI hub ports shipped
worldwide.
Customer innovation: Three of the ten winners in the seventh annual
Computerworld Smithsonian Awards Program for the innovative use of technology
were Digital customers. The Fox Chase Cancer Center was cited for consolidating
chromosome research performed at four separate sites into a single genetic map,
helping to put the Human Genome Project ahead of schedule. MCI
Telecommunications won for a system that provides around-the-clock monitoring
and access capabilities for network users. Another Alpha customer, the PharMark
Corp., was cited for a system that identifies patients at high risk for drug-
induced conditions.
Switching servers: When Datamation and Cowen & Company surveyed mainframe sites
they found more respondents planning to switch to Digital network servers than
any other product.
"Megaframe": According to Brad Day, director and principal analyst of
client/server computing for Dataquest, "The AlphaServer 8200/8400 has put a
stake in the ground in the new megaframe server segment of the market. The
balanced optimization of I/O bus bandwidth, memory and disk capacity makes this
a unique competitive platform within the high-end database server market.
Digital can now claim to have the fastest servers, based on its 21164 BIPS Alpha
chip."
[PHOTOGRAPH OF A DIGITAL PERSONAL COMPUTER RUNNING MICROSOFT WINDOWS 95 AND
ANOTHER DIGITAL PERSONAL RUNNING PATHWORKS AND ON WHICH IS SUPERIMPOSED THE
WORDS "WINDOWS", "PATHWORKS", "NETWARE" AND "DBASE" APPEARS HERE.]
On the day Windows 95 was announced, Digital--building on its alliance with
Microsoft--introduced a complete line of personal computers that optimize
Windows 95 for enterprise computing environments.
Creating an integrated software
environment
Windows NT, OpenVMS, Digital UNIX and 7,000 applications
In the past, departmental and corporate applications--whether in manufacturing,
distribution, marketing or sales--were written as stand-alone programs.
That has changed. Today, management expects applications to work together and
wants to see information presented in a consistent manner. This requires
systems and network integration, multivendor services and software frameworks
for integrating new and existing applications. By offering three server
operating systems--Windows NT, OpenVMS and Digital UNIX--Digital gives
customers a choice, enabling them to match computer resources to the
environment where they are used.
Digital UNIX
While the integration of the Windows NT and OpenVMS operating systems plays an
important role in Digital's client/server strategy, the Digital UNIX operating
system is playing an increasingly important role in high-performance
applications. In fact, sales of Digital's X/Open-branded and POSIX-compliant
UNIX operating system grew 40 percent last year.
As the only full-function 64-bit commercial UNIX currently available, Digital
UNIX supports very large databases (up to 14 gigabytes of system memory
today), symmetrical multiprocessing, clustering, mechanical design automation
and other complex 64-bit applications in the aerospace, petrochemical,
automotive, electronics and biomedical industries. At the same time, it
provides a high level of interoperability with Windows NT and OpenVMS
applications. And, with Digital UNIX, Alpha systems run 32-bit applications
much faster than competitive RISC processors. According to a leading industry
analyst at the Yankee Group, this operating system provides Digital with
"uninterrupted price/performance leadership in UNIX systems for the
foreseeable future."
Windows NT and OpenVMS
Windows NT provides a consistent way of presenting data and working with
applications on both Alpha and Intel-based systems. This is particularly
important in client/server computing. If different programs have a different
look and feel, it is very difficult for users to navigate among them.
Windows NT was designed for the server in client/server environments. Running
on a Digital Alpha or Intel uniprocessor, symmetrical multiprocessor or
cluster, Windows NT can process requests and provide client services for
applications running on Windows, Windows 95 and other systems on a local area
network.
13
Digital was one of the first computer companies to support Windows NT. Working
in partnership with Microsoft, we're implementing a seamless client/server
computing environment that includes:
. Windows and Windows 95 for the desktop
. Windows NT for the server
. OpenVMS for the enterprise
As part of our alliance, Digital and Microsoft are implementing common
application interface standards for Windows NT and OpenVMS programs. By
following these standards, software developers and customers will be able to
write programs that can be deployed on both Windows NT and OpenVMS platforms.
At the same time, Digital and Microsoft software developers are working
together to integrate Digital cluster technology with Windows NT and to
develop Windows NT applications for Digital Alpha systems.
This integration will provide current and future OpenVMS users with a growing
library of applications that will run on a system that meets the standards--
X-Open branding and POSIX compliance--customers use to define an open system
while meeting their requirements for high-availability, around-the-clock
operations, multi-site clustering and disaster tolerance.
Beyond the desktop
In addition to operating systems, Digital--working with its partners--has
developed software frameworks for integrating databases, electronic mail
systems, local area networks and workgroup, production and technical
applications across multivendor environments. Digital PATHWORKS "LAN to
enterprise" networking software is one of the key elements in this software
Digital's top-of-the-line, Pentium-powered Celebris GL 5120 personal computer
provides the power and sizzling graphics needed to implement today's complex
workgroup, business and financial applications.
[PHOTOGRAPH OF DIGITAL CELEBRIS GL 5120 PERSONAL COMPUTER RUNNING PATHWORKS
APPEARS HERE]
"Software drives hardware sales. Working with partners like Microsoft, we're
giving our customers a choice of operating systems and more applications from
which to choose."--William D. Strecker, Vice President, Advanced Technology
Group and Chief Technical Officer
14
[PHOTOGRAPH OF HANDS AT A KEYBOARD OF A DIGITAL PERSONAL COMPUTER APPEARS HERE]
portfolio. With PATHWORKS software, customers can build a common environment
for NetWare, Macintosh, MS-DOS, Windows, LAN Manager, UNIX, OS/2 and OpenVMS
systems. PATHWORKS software includes the Mosaic browser so users can navigate
the Internet's World Wide Web.
In addition, we have developed the software and the networking switches, hubs
and routers needed to link Ethernet and token ring LANs running Novell,
Microsoft and Apple networking software and integrate them with corporate and
wide area TCP/IP and SNA networks.
An integrated environment
Digital can provide the software customers need to build, maintain and manage
integrated multivendor computing environments and networks that:
. Integrate new and existing systems in a seamless, multivendor computing
environment that extends from the desktop to the datacenter
. Provide customers with the widest possible choice of Windows NT, OpenVMS and
UNIX applications
. Link employees working in different groups and sites together into cohesive
teams by creating virtual local area networks that extend across the
enterprise and the globe
. Create a consistent, reliable and manageable computing environment while
reducing operating and support costs
--------------------------------------------------------------------------------
More to choose from
--------------------------------------------------------------------------------
Applications, applications, applications: With more than 7,000 UNIX, OpenVMS and
Windows NT applications, Alpha is the most successful new product in Digital's
history. Although priced considerably lower than the first VAX systems, Alpha
revenues topped $4 billion in the first three years. By comparison, it took
five years for sales of VAX systems to reach the billion-dollar mark.
Microsoft and Alpha: Digital will introduce Alpha and Intel-based systems
optimized for Windows NT while Microsoft will release Microsoft BackOffice and
other server software simultaneously on Alpha and Intel platforms.
Award-winning technology: Digital cluster technology for Windows NT won the
"Most Significant Technology" award at COMDEX.
The ultimate client: With Digital's Alpha-based Multia desktop workstations,
users can tap into servers running Windows, Windows NT, UNIX and legacy
applications. At the same time, Multia desktops can be configured and managed
from a single server. This dramatically cuts support costs, as each system does
not have to be configured individually.
Data warehousing: Baxter Healthcare is replacing mainframes with AlphaServer
systems running SAP R/3 and the Oracle7 database. This will give immediate
access to a huge database and the processing power needed to manage a $9-billion
company.
The Digital advantage: "Digital has a commanding lead in 64-bit application
availability as well as in performance."
--Andrew Allison, Editor, Inside the New Computer Industry.
Help: Digital offers Windows, Windows 95, and Windows NT users on-site and
remote support 24 hours a day, 365 days a year from local service offices in
more than 100 countries, and has established 29 Microsoft Authorized Support
Centers--more than any other Microsoft Solution Provider. In addition, Digital
has 800 Microsoft-certified professionals and is training another 1,500 to
support Microsoft Windows running on both Alpha and Intel systems from different
manufacturers.
First, worldwide: Novell named Digital as its first worldwide software
maintenance provider. Digital now manages the procurement of upgrades,
documentation and media at Novell sites, making it easier for NetWare users to
keep their client/server software current. In addition to providing worldwide
software maintenance, Digital also participates in Novell's Authorized Service
Center Program.
15
[PHOTOGRAPH OF AN ALPHASERVER 2100, ON WHICH IS SUPERIMPOSED A CIRCUIT, APPEARS
HERE]
High-performance systems--like the Alpha 2100 server--that support multivendor
computing environments play a key role in network services and systems
integration.
16
The added value
Multivendor services and systems integration
Traditionally, MIS managers have seen service as an expense. Digital is showing
how it can add value to multivendor networks and environments while reducing
support costs. The goal is not simply to address problems as they arise or to
provide additional resources when personnel or budgets are constrained, but to
reduce the cost of ownership, improve asset management and provide a better
return on investment by helping users take full advantage of their computer
resources.
Digital is helping its customers reduce the direct and hidden costs inherent
in planning, designing, implementing and maintaining multivendor computer
networks and hardware and software systems from the desktop to the datacenter.
These costs can be substantial--particularly for large corporations with
geographically dispersed operations. According to the Gartner Group, it can
cost a company as much as $8,000 a year to own and operate a personal
computer. Return on investment is harder to measure. However, Digital's
Multivendor Customer Services Division has grown into a multi-billion dollar,
22,000-person business by demonstrating ways to cut service and network
integration costs and ensure the success of new investments in information
technology.
Lifecycle services
We support customers through the entire lifecycle, from asset acquisition to
product retirement. We help customers plan, design, implement, manage and
maintain hardware, software and networks. And we provide these services 24
hours a day, 365 days a year in more than 100 different countries.
Our role is not limited to supporting Digital systems. As a multivendor
service organization, we support hardware, software and networking products
from IBM, Hewlett-Packard, Olivetti, Intel, Dell, Apple, Compaq, Sun,
Microsoft, Novell, Oracle, NeXT and 1,400 other vendors. In many cases,
hardware and software companies rely on Digital as a focal point to support
their products.
17
A key alliance
For example, our alliance with Microsoft is designed to help customers
implement client/server solutions where Windows, Windows 95, Windows NT,
OpenVMS and other systems work together in a seamless environment. Working in
partnership with Microsoft, Digital can help customers manage Windows
implementation and support costs by providing installation, software
integration, help desk and network support services for both local and global
companies.
Digital's PC and Software Utility programs
With the introduction of our PC Utility program, Digital became the first
computer company to provide business customers with lifecycle services to
support desktop users including:
. Planning and local area network design
. Multivendor product procurement
. Staging, installation and training
. Hardware, software and networking upgrades
. Help desk support
. Trade-in and product disposal
Digital's AlphaServer 2100 4/275 system supports up to four processors, two
gigabytes of memory and industry-standard PCI and EISA I/O. It offers twice the
performance of competitive systems at half the price.
[PHOTOGRAPH OF AN ALPHASERVER 2100 4/275 SYSTEM APPEARS HERE]
"Digital's services enable companies to rapidly assimilate multivendor
technology and capture a competitive advantage."--John J. Rando, Vice President
and General Manager, Multivendor Customer Services Division
18
[PHOTOGRAPH OF TWO PEOPLE IN AN OFFICE WITH A COMPUTER, ONE OF WHOM IS SPEAKING
ON A TELEPHONE, APPEARS HERE]
Our Software Utility program provides customers with an enterprise-wide
service that includes software acquisition, license management and tracking
and maintenance to help reduce support costs and ensure the smooth
implementation and integration of new applications.
Systems integration
Digital is one of the four largest systems integration companies in the world.
In fact, Digital is ranked second by both International Data Corporation and
Computer Reseller News magazine. We take a "hands-on" approach. Working in
partnership with the customer--and in many cases with outside consultants and
other computer companies--we are ready to tackle downsizing programs, design
and implement IT infrastructures and reengineer business processes to
integrate them with advanced information technology.
--------------------------------------------------------------------------------
Supporting customers around the world
--------------------------------------------------------------------------------
Lifecycle service: "Although many companies have attempted to package sets of
services to meet the needs of the IS services market, Digital has assembled one
of the most comprehensive sets of offerings yet."--Kurt Johnson, International
Data Corporation.
Service innovation: PC Utility, Digital's complete personal computer service,
won the 1995 Harold H. Short, Jr. Innovations in Service Award presented by
Service News.
The Microsoft network: When Microsoft entered the on-line service business, they
selected Digital to manage the datacenter--including hundreds of servers--for
this new global online service.
Best support: Digital received the first annual InfoWorld magazine award for
Best Client/Server Technical Support.
MicroAge: Digital was named "New Vendor of the Year" by MicroAge. Almost
overnight, Digital became one of the top ten suppliers to the Tempe, Arizona
distribution company.
Within the hour: Out of the five million help desk calls to Digital Customer
Support Centers, 75 percent were resolved within the hour, 92 percent within the
same day.
Banking on Digital's PC Utility: With 170 branch banking offices throughout
South Australia, 1,500 Digital PCs, 81 Digital servers, 76 local area networks,
software and network equipment from dozens of different companies, the Bank of
South Australia turned to Digital for complete PC support services. Digital
prestaged PCs with preconfigured images, installed local area networks,
deinstalled old equipment and continues to provide user support for bank
employees.
A bull market: The Spanish stock exchanges are moving their transaction
processing from an IBM environment to a cluster of VAX systems and a network of
85 AlphaServers that will be installed in stockbroker offices together with 400
Pentium-powered Digital PCs. The S.I.B.E. system--Sistema de Interconexion
Bursatil Espanol--was developed by the Madrid Stock Exchange and will support
the fixed income and equities market.
A sure bet: Working in partnership with GTECH UK, Digital helped The Camelot
Group, operators of the United Kingdom's National Lottery, build a secure
network to process ticket sales from 35,000 retailers throughout England,
Scotland, Wales and Northern Ireland. The network--which went online this past
year--is based on an open operating platform with custom encryption boards. It
includes both VAX systems running Digital's OpenVMS operating system and Alpha
systems running the Digital UNIX operating system.
19
[PHOTOGRAPH OF DIGITAL'S HINOTE ULTRA NOTEBOOK COMPUTER RUNNING DIGITAL'S HOME
PAGE ON THE INTERNET APPEARS HERE.]
Digital's Home Page on the Internet as seen on a HiNote Ultra notebook. With
Digital's Mobilizer for Windows software, notebook users can work anywhere,
anytime without an active network connection.
20
Looking to the future
Interactive video, mobile and wireless computing, the Internet and
virtual networking
To help customers and business partners successfully build new interactive
network applications and integrate them with existing systems, networks and
applications, Digital developed the enVISN (Enterprise Virtual Intelligent
Switched Network) architecture. This hardware and software architecture provides
the foundation for creating not only virtual LANs, but virtual networks that can
bring everyone in the enterprise together. It is the link between existing
network investments and the advanced communications and switching technologies
needed to support growing network traffic. It provides a roadmap for our
customers and business partners and a blueprint for the development of new
networking hardware and software.
Hardware and software based on the enVISN architecture--together with Digital's
interactive video, Internet, mobile and wireless products--are redefining
networking as we know it.
Mobilizer for Windows
Mobilizer for Windows software is one of the new Digital products that is
redefining the way people think of networks. With this software and a notebook
computer, users--whether they are at home or on the road--can access E-mail,
file and database servers and other network resources just the way they would
if they were sitting in the office with a desktop computer connected to their
network. Building on sophisticated caching, queuing, resynchronization and
redirection technology, Mobilizer for Windows software integrates existing
mail, file and database applications and "mobilizes" them on a remote notebook
system so applications run the same way regardless of whether the user is on-
or off-line.
21
Interactive video
The video server market is another example that shows how computers are
changing the way we live and work. PC users and television viewers want to
choose the multimedia and video programs they want--when they want them.
The AlphaStudio Broadcast System has the storage, speed and capacity needed to
create, produce and store the highest quality video available for broadcasters
and businesses. In the studio, AlphaServers can produce special effects,
titling and morphing with an ease never before possible.
With Digital's Mediaplex software, an AlphaServer system can combine video,
audio, text and other data to make movies, games, educational and other
multimedia applications available to thousands of subscribers over public
broadband networks and private LANs and WANs.
Digitized video makes it possible for cable companies to insert local
commercials into network programs on a town-by-town basis. It is the
foundation for video-on-demand and pay-per-view systems for hotels, cable
franchises, home shopping networks, new educational and financial services and
interactive video applications for business.
While multimedia and interactive video applications are still in their
infancy, 64-bit technology predominates. More cable and telecommunications
companies have selected AlphaServer systems for interactive video trials and
deployment over competing products from other computer companies. Digital
customers include Ameritech, NYNEX, U S WEST, British Telecom, Svenska Kable-
TV in Sweden and TMN Networks, Inc. of Canada.
Opening up the Internet
The Internet will grow in importance as more and more customers use it as a
business tool. All our Alpha and Intel-based platforms are Internet-ready.
Digital has also developed a broad set of Internet products and services that
are available through our distribution channels. And we're sharing what we
learned from our own creative use of the Internet while working with Commerce
Net, the World Wide Web Consortium and other industry groups. Working with our
partners, we're helping customers implement electronic commerce, collaboration
and information-sharing over the Internet.
Weighing as little as four pounds and measuring just 1.2 inches thick, Digital's
HiNote Ultra notebooks put desktop performance and graphics into a sleek package
designed for mobile and wireless computing.
[PHOTOGRAPH OF DIGITAL'S HINOTE ULTRA NOTEBOOK COMPUTER APPEARS HERE]
"Leading-edge technology is creating new applications and new opportunities for
Digital and for our customers."--Charles F. Christ, Vice President and General
Manager, Components Division
22
[PHOTOGRAPH OF PORTIONS OF THREE BUSINESSMEN RUNNING IN BUSINESS SUITS APPEARS
HERE]
Our own Internet web server contains more than 6,000 pages of product and
market information and is accessed more than 150,000 times a week. Search
capabilities and hypertext links are provided so customers with World Wide Web
capability can point-and-click their way smoothly from document to document,
following threads of thought and interest. We're even giving customers direct
access to Alpha computers so they can log on and test-drive their software on
these systems.
The virtual network
Interactive video, mobile and wireless computing and the Internet are changing
the very definition of networking. In the past, a network was a defined
entity. It covered a specific area. It served specific users. And it was
usually optimized for specific applications. That is changing. Communications
technologies are converging. Digital's enVISN network architecture gives our
customers and business partners the foundation they need to capitalize on this
convergence and:
. Use the Internet as a business tool
. Implement interactive video and other multimedia applications
. Create local and wide area virtual networks when, where and as needed to
support workgroups, project teams and corporate initiatives and programs
. Preserve existing networking investments while implementing distributed
routing, high-speed Ethernet, FDDI and ATM switching and other new
technologies
. Reduce network operating and support costs
--------------------------------------------------------------------------------
Moving along the information superhighway
--------------------------------------------------------------------------------
Creating virtual LANs: "Digital's enVISN provides users with a practical roadmap
leading to virtual LANs that save network managers' time in managing workgroup,
department and project teams."--Michael Howard, President, Infonetics Research,
Inc.
Immediate returns: In the largest live Internet project ever, Digital and the
California Secretary of State created a multimedia news center to provide
realtime access to state-wide election returns. There were more than one million
accesses on election day--giving the media and the public both the immediacy of
live television and the depth of newspaper coverage. The start-to-finish
election returns provided instant, up-to-the-minute information about all
candidates, propositions and campaign spending.
Customer choice: Westminster Cable, owned by British Telecommunications plc, is
testing an interactive video-on-demand service in the London market. Using
Digital's Mediaplex technology, Westminster Cable will offer subscribers a
choice of 200 constantly updated movie titles so they can see what they want,
when they want it. In addition to offering viewers a wide range of TV channels,
Westminster's cable network carries the Reuters 1000 business information
service, which can be accessed by personal computers via the cable TV network.
Cy-brary: Using the Internet, libraries in the San Francisco Bay Area will be
able to access over 400,000 pieces of sheet music that are being stored on a
multimedia AlphaServer computer.
Lands' End/MicroMall: MicroMall, Inc.--using Digital's video server technology
and the resources of the Digital Media Studio--is building an at-home shopping
environment for interactive cable networks. Lands' End, a major worldwide
catalog house featuring men's and women's sportswear, was the first retailer to
sign up for the new service. MicroMall is a unified direct marketing approach
that enables retailers to advertise and sell their goods and services over
multiple interactive networks, with production, promotion, merchandising, usage
tracking, transaction management and billing handled by one point of contact.
A national resource: The Government of Canada and the Province of Quebec joined
with Digital to finance and create a National Multimedia Institute for the
design, development, storage and distribution of multimedia applications,
information, and solutions over multiple broadband networks and the Internet.
A thousand channels: Adlink will use Digital Mediaplex video servers to connect
its headquarters to more than 50 cable facilities throughout Southern California
to deliver locally customized ads over the 20 cable TV channels originating at
each facility.
R&D commitment: According to Business Week, in 1994 Digital had the eighth
largest R&D budget of any company based in the United States.
Johnny Mnemonic: Sony Pictures Imageworks used Digital PCs to produce high-end
visual effects and graphics for TriStar Pictures' "futuristic cyberpunk
thriller," Johnny Mnemonic.
http://www.digital.com: If you want information about Digital products or
services, or if you want to test-drive an Alpha computer, here's our World Wide
Web site address.
23
Contributing to the community
Children and young people represent the future. Digital is focusing its
Corporate Contributions Program around the theme of "Children and Youth:
Investing in the Future." Digital is a national sponsor of City Year, a U.S.
program that brings together young adults from diverse backgrounds in a year of
full-time community service. Hundreds of Digital employees are actively involved
in this program, and the company has provided funding and equipment to help
bring it to cities throughout the United States. The success of the program is
such that President Clinton based Americorps--his national service program--in
part on the City Year model.
Digital's Contributions Program also provides corporate funding to assist
local Digital operations around the world in efforts to help children in their
communities to reach full potential.
We are supporting more than 80 innovative programs around the world, including
the Foundation for Handicapped Children in Lazni, Slovakia; the Foundation for
Political Refugees in Zaandam, The Netherlands; the Centro de Reabilitacao
Profissional de Cercizimbra in Sessimbra, Portugal; and the North Avenue Day
Nursery in Chicago, Illinois.
Project Reach is another example of our commitment to play a constructive role
in the countries where we do business. This program is providing tuition
assistance, leadership training and support to more than 50 undergraduates in
South African universities.
In addition to these programs, Digital:
. Established an HIV/AIDS program office to help educate its employees
. Eliminated ozone-depleting CFCs from all its products, processes and services
. Funds an External Research Program that supports projects at 125 colleges and
universities around the world
. Published a formal code of business conduct
. Reaffirmed "Earth Vision," the company's long-standing commitment to
protecting and preserving the environment
Taken together, these initiatives reflect Digital's core values and the
belief--shared by management and employees alike--that we can help bring the
world together.
[PHOTOGRAPH OF THE ARCHBISHOP DESMOND TUTU HUMAN RIGHTS AWARD APPEARS HERE.]
Digital was one of the five recipients of the first annual Archbishop Desmond
Tutu Human Rights Awards presented by Kagiso Trust and the Parliamentary Human
Rights Foundation Awards Committee of South Africa.
"Digital's employees are continuously making a difference. They have a tradition
of working together, building the future on common values and goals."--Sid
Ferrales, Vice President, Worldwide Human Resources
24
Financial statements
26 Eleven-year financial summary
28 Management's discussion and analysis of
results of operations and financial condition
32 Report of management
32 Report of independent accountants
Consolidated financial statements
33 Consolidated statements of operations
34 Consolidated balance sheets
35 Consolidated statements of cash flows
36 Consolidated statements of stockholders' equity
Notes to consolidated financial statements
37 Note A: Significant accounting policies
38 Note B: Geographic operations
40 Note C: Income taxes
41 Note D: Capitalized computer software development costs
42 Note E: Restructuring actions
43 Note F: Debt
43 Note G: Postretirement and other postemployment benefits
46 Note H: Commitments and contingencies
46 Note I: Financial instruments
48 Note J: Investing and divesting activities
49 Note K: Stock plans
50 Note L: Stockholders' equity
Supplementary information
51 Quarterly financial data
52 Officers and management
53 Directors
54 Committees of the Board
54 Corporate Consulting Engineers
55 Investor information
25
Eleven-year financial summary
(dollars in millions except per share data and stock prices/6/) 1995 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------------
Revenues
Product sales $ 7,616 $ 7,191 $ 7,588 $ 7,696
Service and other revenues 6,197 6,260 6,783 6,235
--------------------------------------------------------------------------------------------------------------------------------
Total operating revenues 13,813 13,451 14,371 13,931
--------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of product sales, service and other revenues 9,392 8,912 8,631 8,132
Research and engineering expenses 1,040 1,301 1,530 1,754
Selling, general and administrative expenses/1/ 3,273 5,234 4,447 6,181
--------------------------------------------------------------------------------------------------------------------------------
Operating income/(loss) 108 (1,996) (237) (2,136)
--------------------------------------------------------------------------------------------------------------------------------
Net interest income/(expense) (33) (24) 13 57
--------------------------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes and cumulative
effect of changes in accounting principles 76 (2,020) (224) (2,078)
--------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 18 85 27 232
--------------------------------------------------------------------------------------------------------------------------------
Net income/(loss)/2/ $ 122 $(2,156) $ (251) $ (2,796)
--------------------------------------------------------------------------------------------------------------------------------
Net income/(loss) applicable per common share/2,3,4/ $ .59 $(15.80) $ (1.93) $ (22.39)
--------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (in millions)/4/ 146 137 130 125
--------------------------------------------------------------------------------------------------------------------------------
Financial position
Inventories $ 2,054 $ 2,064 $ 1,755 $ 1,614
Accounts receivable, net of allowance $ 3,219 $ 3,319 $ 3,020 $ 3,594
Net property, plant and equipment $ 2,269 $ 3,129 $ 3,178 $ 3,570
Total assets $ 9,947 $10,580 $10,950 $ 11,284
Long-term debt $ 1,013 $ 1,011 $ 1,018 $ 42
Stockholders' equity $ 3,528 $ 3,280 $ 4,885 $ 4,931
Stockholders' equity per common share/3/ $ 20.89 $ 20.24 $ 36.19 $ 38.58
--------------------------------------------------------------------------------------------------------------------------------
General information and ratios
Current ratio 1.7:1 1.4:1 1.8:1 1.4:1
Quick ratio 1.1:1 .9:1 1.2:1 1.0:1
Working capital $ 3,026 $ 1,832 $ 2,964 $ 2,015
Investments in property, plant and equipment $ 366 $ 682 $ 529 $ 710
Depreciation $ 508 $ 574 $ 699 $ 733
Total debt as a percentage of total debt plus equity 22.5% 24.1% 17.5% 1.8%
Operating income/(loss) as a percentage of revenues 0.8% (14.8)% (1.7)% (15.3)%
Income/(loss) before income taxes as a percentage
of revenues 0.5% (15.0)% (1.6)% (14.9)%
Effective tax rate 24.2% 4.2% 12.0% 11.2%
Net income/(loss) as a percentage of revenues 0.9% (16.0)% (1.7)% (20.1)%
Net income/(loss) as a percentage of average
stockholders' equity 3.6% (52.8)% (5.1)% (44.5)%
Net income/(loss) as a percentage of average total assets 1.2% (20.0)% (2.3)% (24.1)%
Non-U.S. revenues as a percentage of total revenues 65% 62% 64% 63%
Number of days sales of accounts receivable outstanding 77 76 69 83
Inventory turns 4.6 4.7 5.1 5.1
Number of employees at year-end 61,700 77,800 89,900 107,900
Common stockholders at year-end 68,572 77,722 86,611 99,644
Common stock yearly high and low sales prices $ 49-18 $ 43-18 $ 49-30 $ 72-33
--------------------------------------------------------------------------------------------------------------------------------
/1/ Includes restructuring charges of $1,206M in 1994, $1,500M in 1992, $1,100M
in 1991 and $550M in 1990. Includes reduction in carrying value of
intangible assets of $310M in 1994.
26
1991 1990 1989 1988 1987 1986 1985
-----------------------------------------------------------------------------------------------------------------------------------
Revenues
Product sales $ 8,299 $ 8,146 $ 8,190 $ 7,541 $ 6,254 $ 5,103 $ 4,530
Service and other revenues 5,612 4,797 4,552 3,934 3,135 2,487 2,156
-----------------------------------------------------------------------------------------------------------------------------------
Total operating revenues 13,911 12,943 12,742 11,475 9,389 7,590 6,686
-----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of product sales, service and other revenues 7,278 6,795 6,242 5,468 4,514 4,282 4,087
Research and engineering expenses 1,649 1,614 1,525 1,306 1,010 814 717
Selling, general and administrative expenses/1/ 5,572 4,521 3,639 3,066 2,253 1,665 1,432
-----------------------------------------------------------------------------------------------------------------------------------
Operating income/(loss) (588) 13 1,336 1,635 1,612 829 450
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income/(expense) 68 111 85 106 77 28 (19)
-----------------------------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes and cumulative
effect of changes in accounting principles (520) 124 1,421 1,741 1,689 857 431
-----------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 97 50 348 435 552 240 (16)/5/
-----------------------------------------------------------------------------------------------------------------------------------
Net income/(loss)/2/ $ (617) $ 74 $ 1,073 $ 1,306 $ 1,137 $ 617 $ 447
-----------------------------------------------------------------------------------------------------------------------------------
Net income/(loss) applicable per common share/2,3,4/ $ (5.08) $ .59 $ 8.45 $ 9.90 $ 8.53 $ 4.81 $ 3.71
-----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (in millions)/4/ 122 125 127 132 133 131 124
-----------------------------------------------------------------------------------------------------------------------------------
Financial position
Inventories $ 1,595 $ 1,538 $ 1,638 $ 1,575 $ 1,453 $ 1,200 $ 1,756
Accounts receivable, net of allowance $ 3,317 $ 3,207 $ 2,965 $ 2,592 $ 2,312 $ 1,903 $ 1,539
Net property, plant and equipment $ 3,778 $ 3,868 $ 3,646 $ 3,095 $ 2,127 $ 1,867 $ 1,731
Total assets $ 11,875 $ 11,655 $ 10,668 $ 10,112 $ 8,407 $ 7,173 $ 6,369
Long-term debt $ 150 $ 150 $ 136 $ 124 $ 269 $ 333 $ 837
Stockholders' equity $ 7,624 $ 8,182 $ 8,036 $ 7,510 $ 6,294 $ 5,728 $ 4,555
Stockholders' equity per common share/3/ $ 61.18 $ 66.76 $ 66.12 $ 59.47 $ 49.87 $ 44.54 $ 38.43
-----------------------------------------------------------------------------------------------------------------------------------
General information and ratios
Current ratio 2.0:1 2.3:1 2.9:1 2.9:1 3.4:1 4.9:1 4.9:1
Quick ratio 1.4:1 1.6:1 1.9:1 2.0:1 2.4:1 3.5:1 2.8:1
Working capital $ 3,777 $ 4,332 $ 4,501 $ 4,516 $ 4,377 $ 4,223 $ 3,694
Investments in property, plant and equipment $ 738 $ 1,028 $ 1,223 $ 1,518 $ 748 $ 564 $ 572
Depreciation $ 772 $ 759 $ 659 $ 516 $ 435 $ 384 $ 315
Total debt as a percentage of total debt plus equity 2.2% 2.0% 2.0% 3.6% 4.2% 5.9% 15.7%
Operating income/(loss) as a percentage of revenues (4.2)% .1% 10.5% 14.2% 17.2% 10.9% 6.7%
Income/(loss) before income taxes as a percentage
of revenues (3.7)% 1.0% 11.2% 15.2% 18.0% 11.3% 6.4%
Effective tax rate 18.8% 40.0% 24.5% 25.0% 32.7% 28.0% (3.7)%/5/
Net income/(loss) as a percentage of revenues (4.4)% .6% 8.4% 11.4% 12.1% 8.1% 6.7%
Net income/(loss) as a percentage of average
stockholders' equity (7.8)% .9% 13.8% 18.9% 18.9% 12.0% 10.5%
Net income/(loss) as a percentage of average total assets (5.2)% .7% 10.3% 14.1% 14.6% 9.1% 7.5%
Non-U.S. revenues as a percentage of total revenues 60% 56% 55% 50% 47% 42% 40%
Number of days sales of accounts receivable outstanding 76 86 76 75 78 79 75
Inventory turns 4.6 4.3 3.9 3.6 3.4 2.9 2.3
Number of employees at year-end 115,100 116,900 118,400 113,900 103,000 88,300 83,000
Common stockholders at year-end 98,023 92,934 99,084 103,162 99,379 76,860 68,810
Common stock yearly high and low sales prices $ 87-45 $ 103-70 $ 122-86 $ 199-99 $ 174-82 $ 94-46 $ 63-39
-----------------------------------------------------------------------------------------------------------------------------------
/2/ In fiscal year 1995, net income and net income per share include a one-time
benefit of $65M, or $.44 per share, for the cumulative effect of a change in
accounting principle. In fiscal year 1994, net loss and net loss per share
include a one-time charge of $71M, or $.51 per share, and a one-time benefit
of $20M, or $.14 per share, for the cumulative effect of changes in
accounting principles. In fiscal year 1992, net loss and net loss per share
include the cumulative effect of change in accounting principle of $485M and
$3.89, respectively.
/3/ Per share data adjusted to reflect two-for-one stock split in May 1986.
/4/ See Note A of Notes to consolidated financial statements.
/5/ Includes elimination of DISC taxes of $63M accrued prior to 1984.
/6/ Note: amounts may not be additive due to rounding.
27
Management's discussion and analysis of
results of operations and financial condition
Income and expense items as a
percentage of total operating revenues (a) Percentage changes
------------------------------ ------------------------------------------------------ -----------------------------------
1993 1994 1995 Income and expense items 1994-95 1993-94 1992-93
------------------------------ ------------------------------------------------------ -----------------------------------
52.8% 53.5% 55.1% Product sales 6% (5)% (1)%
47.2% 46.5% 44.9% Service and other revenues (1)% (8)% 9%
------------------------------ ------------------------------------------------------ -----------------------------------
100.0% 100.0% 100.0% Total operating revenues 3% (6)% 3%
------------------------------ ------------------------------------------------------ -----------------------------------
58.8% 69.1% 70.9% Cost of product sales (b) 9% 11% 5%
61.4% 63.0% 64.5% Service expense and cost of other revenues (b) 1% (5)% 7%
------------------------------ ------------------------------------------------------ -----------------------------------
60.1% 66.3% 68.0% Total cost of operating revenues 5% 3% 6%
10.6% 9.7% 7.5% Research and engineering expenses (20)% (15)% (13)%
30.9% 29.9% 23.7% Selling, general and administrative expenses (19)% (9)% (5)%
- 9.0% - Restructuring charges NM NM NM
------------------------------ ------------------------------------------------------ -----------------------------------
(1.7)% (14.8)% .8% Operating income/(loss) 100+% 100+% (89)%
------------------------------ ------------------------------------------------------ -----------------------------------
.4% .3% .4% Interest income 16% (23)% (34)%
.4% .5% .7% Interest expense 23% 44% 32%
------------------------------ ------------------------------------------------------ -----------------------------------
Income/(loss) before income taxes and cumulative
(1.6)% (15.0)% .5% effect of changes in accounting principles 100+% 100+% (89)%
------------------------------ ------------------------------------------------------ -----------------------------------
.2% .6% .1% Provision for income taxes (78)% 100+% (88)%
------------------------------ ------------------------------------------------------ -----------------------------------
Income/(loss) before cumulative effect of changes
(1.7)% (15.6)% .4% in accounting principles 100+% 100+% (89)%
------------------------------ ------------------------------------------------------ -----------------------------------
(Benefit)/charge due to cumulative effect of changes
- .4% (.5)% in accounting principles, net of tax benefits 100+% NM NM
------------------------------ ------------------------------------------------------ -----------------------------------
(1.7)% (16.0)% .9% Net income/(loss) 100+% 100+% (91)%
------------------------------ ------------------------------------------------------ -----------------------------------
Note (a) Percentages of operating revenues may not be additive due to rounding.
Note (b) Cost of product sales and service expense and cost of other revenues
are shown as percentages of their related revenues.
NM - Not meaningful.
Revenues
--------------------------------------------------------------------------------
In fiscal 1995, total operating revenues increased $362 million or 3% to $13.8
billion, following a decrease of $921 million or 6% in fiscal 1994, and an
increase of $440 million or 3% in fiscal 1993.
Non-U.S. revenues accounted for 65% of total operating revenues in fiscal 1995,
up from 62% and 64% in fiscal 1994 and 1993, respectively. In fiscal 1995,
strong growth in the Asia-Pacific region and slight growth in Europe were
offset by a modest decline in United States revenues. At the end of fiscal 1994
and during fiscal 1995, the Corporation implemented restructuring and other
actions in response to the fiscal 1994 decline in European revenues which
resulted principally from weak demand for the Corporation's products and
services in that region, exacerbated by difficulties associated with the
Digital-Kienzle business (see Note J).
Product sales for fiscal 1995 were $7.6 billion, or 55% of total operating
revenues, compared with $7.2 billion, or 53% of revenues in fiscal 1994 and $7.6
billion, or 53% of revenues in fiscal 1993. Product sales increased in fiscal
1995 due principally to increased demand for Alpha-based systems and Intel-based
personal computers, offset by the effects of divestments and reduced VAX systems
revenue as the Corporation approaches the end of a major product transition.
Adjusted for divestments as described below, product sales for fiscal 1995
increased by 14% over the prior year.
For the year, Alpha-based systems represented 22% of product sales, up from 13%
and 3% in fiscal 1994 and 1993, respectively. Revenue from Intel-based personal
computers represented 26% of product sales, up from 19% in fiscal 1994 and 9% in
fiscal 1993. VAX systems revenues represented 10% of product sales, down from
19% and 34% in fiscal 1994 and 1993, respectively. The remainder of product
sales included revenue from the sale of software, storage subsystems, network
products, memory products, printers and other component parts.
Increased demand for the Corporation's UNIX-based offerings and server products
contributed to the growth in Alpha-based systems revenue in fiscal 1995. New
products and expanded distribution channels contributed to growth in demand for
the Corporation's personal computer products. The Corporation also experienced
growing demand for certain networks and storage subsystem products.
28
Revenues (continued)
--------------------------------------------------------------------------------
In fiscal 1995, service and other revenues totaled $6.2 billion, or 45% of total
operating revenues, compared with $6.3 billion, or 47% of total operating
revenues in fiscal 1994 and $6.8 billion, or 47% of total operating revenues in
fiscal 1993. In fiscal 1995, the components of the Corporation's service
revenues reflected the changing nature of the Corporation's business, including
anticipated lower levels of revenue from VAX systems maintenance business,
increased revenues from multivendor maintenance services and more competitive
pricing. In addition, the Corporation experienced a lower level of revenue from
consulting services, as the Corporation focuses on systems integration
opportunities which best align with its technical competencies.
During fiscal 1995, the Corporation sold portions of its storage business, its
relational database business, a software distribution subsidiary, a contract
manufacturing business and a semiconductor facility. In fiscal 1994, these
businesses generated approximately 5% of total consolidated operating revenues
but had an immaterial effect on the consolidated net loss. In addition, as part
of the Corporation's ongoing restructuring actions, the Corporation transferred
part of its business in Germany to a new, independent, employee-owned company,
effective as of October 1, 1994. In fiscal 1994, this business represented less
than 1% of total consolidated operating revenues and had an immaterial effect on
the consolidated results of operations.
--------------------------------------------------------------------------------
Operating revenues
--------------------------------------------------------------------------------
[ ] Product sales [ ] Service and other revenue
Dollars in billions
[BAR GRAPH APPEARS HERE]
Expenses and profit margins
--------------------------------------------------------------------------------
The Corporation's total gross margin for fiscal 1995 was 32% of total operating
revenues, compared with 34% and 40% for fiscal 1994 and 1993, respectively.
The Corporation's gross margin on fiscal 1995 product sales was 29%, compared
with 31% and 41% of product sales in fiscal 1994 and 1993, respectively. The
decline in product gross margin for the year was due to several factors,
including the continued shift in the Corporation's product sales toward lower-
end, industry-standard systems which typically carry lower margins, as well as
greater use of indirect distribution channels, partially offset by the
divestment of certain low-margin businesses and increased demand for higher
margin server products. The decline in product gross margin in fiscal 1994 was
due principally to pricing, as well as the product mix and distribution channel
shifts noted above. In fiscal 1995, revenues associated with products sold
through indirect channels of distribution accounted for approximately 58% of
product sales, compared with 45% and 33% in fiscal 1994 and 1993, respectively.
Gross margin on service revenues for fiscal 1995 was 36%, compared with 37% and
39% of service revenues in fiscal 1994 and 1993, respectively. The decline in
service gross margin was due to a continuing shift in the mix of service
revenues toward multivendor and other service offerings, which generally carry
lower margins than the Corporation's VAX system maintenance services, as well as
lower margins from systems integration and other consulting services.
Research and engineering (R&E) spending for fiscal 1995 totaled $1 billion, or
8% of total operating revenues, compared with $1.3 billion, or 10% of total
operating revenues in fiscal 1994 and $1.5 billion, or 11% of total operating
revenues in fiscal 1993. The decrease in R&E expense in fiscal 1995 was due
principally to the elimination of redundant engineering efforts, more
standardized product offerings and divestments. The Corporation believes that
its R&E spending is appropriate to support current operations and to maintain a
strong, consistently market-driven product set.
Selling, general and administrative (SG&A) expenses for fiscal 1995 were $3.3
billion, or 24% of total operating revenues, compared with $4.0 billion
(including $310 million of non-recurring charges), or 30% of total operating
revenues and $4.4 billion, or 31% of total operating revenues, for fiscal 1994
and 1993, respectively (see Note J). The decrease in SG&A expense in fiscal 1995
was due principally to restructuring actions.
29
Expenses and profit margins (continued)
--------------------------------------------------------------------------------
At the end of fiscal 1994, the Corporation approved a restructuring plan
intended to achieve a more competitive cost structure. While certain
restructuring actions remain to be implemented in fiscal 1996, the Corporation
expects to meet the objectives of the plan. The total estimated cost of planned
restructuring actions remains unchanged (see Note E). While the Corporation has
made progress in reducing costs, the Corporation continues to review
opportunities to improve its cost structure.
Total employee population decreased by 16,100 during fiscal 1995 to
approximately 61,700. The Corporation had approximately 77,800 and 89,900
employees at the end of fiscal 1994 and 1993, respectively.
The net effect of currency exchange rate movements on revenues was positive in
fiscal 1995 compared with fiscal 1994 and negative in fiscal 1994 when compared
with fiscal 1993. These effects were offset substantially by the effects of
currency exchange rate movements on non-dollar denominated costs and by
competitive responses to market conditions resulting from currency fluctuations
(see also Note I for a further description of the Corporation's use of foreign
exchange option and forward contracts).
Interest income in fiscal 1995 was $57 million, up from $49 million in fiscal
1994 and down from $64 million in fiscal 1993. The increase in interest income
in fiscal 1995 reflects higher interest rates and higher average cash balances.
Interest expense increased to $90 million from $73 million and $51 million in
fiscal 1994 and 1993, respectively, due to rising interest rates partially
offset by the differential received on interest rate swap agreements in fiscal
1995 and 1994 (see Note I).
In fiscal 1995, income tax expense was $18 million on a pre-tax income of $76
million. Income tax expense in fiscal 1994 was $85 million, including a $70
million reduction in net deferred tax assets associated with non-U.S.
operations, on a pre-tax loss of $2.0 billion. Income tax expense was $27
million on a pre-tax loss of $224 million in fiscal 1993. Income tax expense
reflects several factors, including income taxes provided for profitable non-
U.S. operations, benefit taken for net operating loss carryforwards in certain
non-U.S. operations and an inability to recognize currently U.S. and certain
non-U.S. tax benefits from operating losses (see Note C).
Operating expenses
Dollars in billions
--------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
--------------------------------------------------------------------------------
Employees
Thousands of employees
--------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
--------------------------------------------------------------------------------
US dollar relative to major foreign currencies
Fiscal 1991 equals 1.00
--------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
30
Expenses and profit margins (continued)
--------------------------------------------------------------------------------
The Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 115 - Accounting for Certain Investments in Debt and Equity Securities,
effective July 3, 1994. The Corporation recorded a one-time benefit of $65
million, or $.44 per common share, from unrealized gains on long-term
investments. There was no cash flow impact from the adoption of SFAS No. 115
(see Note J).
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121 -
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires that an impairment loss be recognized for
long-lived assets and certain identified intangibles when the carrying amount of
an asset may not be recoverable. The Corporation must adopt SFAS No. 121 by
fiscal 1997. The Corporation does not expect the adoption of SFAS No. 121 to
have a material effect on the consolidated results of operations or financial
position of the Corporation. Adoption of SFAS No. 121 will have no cash flow
impact on the Corporation.
Availability of funds to support current and
future operations and spending for operations
--------------------------------------------------------------------------------
Cash and cash equivalents totaled $1.6 billion, $1.2 billion and $1.6 billion at
the end of fiscal 1995, 1994 and 1993, respectively.
Net cash used by operating activities was $348 million and $375 million in
fiscal 1995 and 1994, respectively, compared with net cash generated of $47
million in fiscal 1993. The $348 million net use of cash from operating
activities in fiscal 1995 was due principally to restructuring activities and
increased inventory levels in support of increased demand for Alpha-based
systems and personal computer product line extensions.
Net cash generated from investing activities, including divestments, was $669
million in fiscal 1995, compared with net cash used of $626 million and $884
million in fiscal 1994 and 1993, respectively. During fiscal 1995, the
Corporation sold all of its shares of Ing. Olivetti & C. S.p.A. common stock,
portions of its storage business, its relational database business, a software
distribution subsidiary, a contract manufacturing business and a semiconductor
facility and other assets generating approximately $863 million in cash
proceeds. The sale of property, plant and equipment generated an additional $209
million in cash proceeds. Capital spending was $366 million for fiscal 1995,
compared with $682 million for fiscal 1994, due to continued efforts to focus
and control all spending in the Corporation and a reduced level of spending for
a new fabrication facility in Hudson, Massachusetts, as the initial construction
neared completion.
Net cash generated from financing activities was $100 million, $538 million and
$1.1 billion in fiscal 1995, 1994 and 1993, respectively. The principal
financing activity for fiscal 1995 was the issuance of stock under the
Corporation's employee stock purchase plans. Cash generated was offset by the
payment of approximately $36 million of dividends on preferred stock. In the
third quarter of fiscal 1994, the Corporation issued and sold preferred stock
generating net proceeds of $387 million. Dividends of approximately $2 million
were paid in fiscal 1994. In fiscal 1993, the Corporation issued a total of $1.0
billion of long-term debt.
Long-term debt was $1.0 billion at the end of fiscal 1995, 1994 and 1993. At the
end of fiscal 1995, substantially all of the Corporation's available lines of
credit were unused. During the first quarter of fiscal 1995, the Corporation
terminated its domestic credit facility, having replaced it as a source of
liquidity with a domestic accounts receivable securitization facility. During
the fourth quarter of fiscal 1995, the Corporation entered into an accounts
receivable securitization facility in the United Kingdom as an additional source
of liquidity (see Note F).
For fiscal 1995, cash expenditures for restructuring activities were $524
million, net of proceeds of approximately $200 million from the sale of
property, plant and equipment. Cash expenditures for the year were less than
originally projected due to lower than anticipated facilities-related costs, the
timing of cash payments for employee separation actions and higher than
originally estimated cash proceeds from the sale of property, plant and
equipment associated with restructuring actions. Due principally to higher than
anticipated proceeds from the sale of facilities, the Corporation currently
estimates that the total net cash expenditures for restructuring actions will be
approximately $900 million, including approximately $300 million expected to be
paid in fiscal 1996 (see Note E).
The Corporation's need for, cost of and access to funds are dependent on future
operating results, as well as conditions external to the Corporation. The
Corporation historically has maintained a conservative capital structure, and
believes that its current cash position and its sources of and access to capital
are adequate to support current and future operations.
31
Report of management
--------------------------------------------------------------------------------
The Corporation's management is responsible for the preparation of the financial
statements in accordance with generally accepted accounting principles and for
the integrity of all the financial data included in this annual report. In
preparing the financial statements, management makes informed judgments and
estimates of the expected effects of events and transactions that are currently
being reported.
Management maintains a system of internal accounting controls that is designed
to provide reasonable assurance that assets are safeguarded and that
transactions are executed and recorded in accordance with management's policies
for conducting its business. This system includes policies which require
adherence to ethical business standards and compliance with all laws to which
the Corporation is subject. The internal controls process is continuously
monitored by direct management review and an internal audit program under which
periodic independent reviews are made.
The Corporation's independent accountants annually review the accounting and
control systems of the Corporation. Their audit includes a review of the
internal control structure to the extent they consider necessary and selective
tests of transactions to support their report.
The Board of Directors, through its Audit Committee, which is composed of four
Board members who are independent of management, is responsible for determining
that management fulfills its responsibility with respect to the Corporation's
financial statements and the system of internal accounting controls.
The Audit Committee meets regularly with representatives of management, the
independent accountants and the Corporation's internal auditors to review
audits, financial reporting and internal control matters, and when appropriate,
meets with the Corporation's outside counsel on relevant matters. The
independent accountants and the internal auditors have full and free access to
the Audit Committee and regularly meet privately with the Audit Committee.
Coopers & Lybrand L.L.P., independent accountants, have been engaged by the
Audit Committee of the Board of Directors, with the approval of the stock-
holders, to audit the Corporation's financial statements. Their report follows.
/s/ Robert B. Palmer
Robert B. Palmer
Chairman of the Board,
President and Chief Executive Officer
/s/ Vincent J. Mullarkey
Vincent J. Mullarkey
Vice President, Finance and Chief Financial Officer
Report of independent accountants
--------------------------------------------------------------------------------
To the Stockholders and Directors,
Digital Equipment Corporation
We have audited the accompanying consolidated balance sheets of Digital
Equipment Corporation as of July 1, 1995 and July 2, 1994, and the related
consolidated statements of operations, cash flows, and stockholders' equity for
each of the three fiscal years in the period ended July 1, 1995. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Digital Equipment
Corporation as of July 1, 1995 and July 2, 1994, and the consolidated results of
its operations and cash flows for each of the three fiscal years in the period
ended July 1, 1995, in conformity with generally accepted accounting principles.
As discussed in Note J to the consolidated financial statements, the Corporation
changed its method of accounting for certain investments in debt and equity
securities in fiscal 1995.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 31, 1995
32
Consolidated statements of operations
Digital Equipment Corporation
(in thousands except per share data)
-----------------------------------------------------------------------------------------------------------------------------
Year ended July 1, 1995 July 2, 1994 July 3, 1993
-----------------------------------------------------------------------------------------------------------------------------
Revenues (Notes A and B)
Product sales $ 7,616,441 $ 7,191,251 $ 7,587,994
Service and other revenues 6,196,621 6,259,539 6,783,375
-----------------------------------------------------------------------------------------------------------------------------
Total operating revenues 13,813,062 13,450,790 14,371,369
-----------------------------------------------------------------------------------------------------------------------------
Costs and expenses (Notes A, D, G, and K)
Cost of product sales 5,397,723 4,968,025 4,464,445
Service expense and cost of other revenues 3,993,970 3,943,612 4,166,946
Research and engineering expenses 1,040,028 1,301,347 1,530,119
Selling, general and administrative expenses (Note J) 3,272,913 4,027,869 4,447,160
Restructuring charges (Note E) - 1,206,000 -
-----------------------------------------------------------------------------------------------------------------------------
Operating income/(loss) 108,428 (1,996,063) (237,301)
Interest income 57,497 49,422 63,831
Interest expense (Notes F and I) 90,268 73,353 50,837
-----------------------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes and cumulative effect
of changes in accounting principles 75,657 (2,019,994) (224,307)
Provision for income taxes (Notes A and C) 18,342 85,043 27,023
-----------------------------------------------------------------------------------------------------------------------------
Income/(loss) before cumulative effect of changes in
accounting principles 57,315 (2,105,037) (251,330)
(Benefit)/charge due to cumulative effect of changes in
accounting principles, net of tax (Notes C, G and J) (64,503) 51,026 -
-----------------------------------------------------------------------------------------------------------------------------
Net income/(loss) 121,818 (2,156,063) (251,330)
Dividends on preferred stock (Note L) 35,500 10,650 -
-----------------------------------------------------------------------------------------------------------------------------
Net income/(loss) applicable to common stock $ 86,318 $ (2,166,713) $ (251,330)
-----------------------------------------------------------------------------------------------------------------------------
Per common share (Note A)
Income/(loss) applicable before cumulative effect of changes
in accounting principles $ .15 $ (15.43) $ (1.93)
Benefit/(charge) due to cumulative effect of changes in
accounting principles .44 (.37) -
-----------------------------------------------------------------------------------------------------------------------------
Net income/(loss) applicable per common share (Note A) $ .59 $ (15.80) $ (1.93)
-----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding (Note A) 146,331 137,090 130,409
-----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
33
Consolidated balance sheets
Digital Equipment Corporation
(dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------
July 1, 1995 July 2, 1994
------------------------------------------------------------------------------------------------------------------------------
Assets:
Current assets
Cash and cash equivalents (Note A) $ 1,602,148 $ 1,180,863
Accounts receivable, net of allowance of $150,655 and $111,925 3,219,082 3,318,854
Inventories (Note A) 2,053,620 2,063,978
Prepaid expenses, deferred income taxes and other current assets (Note C) 397,047 324,676
------------------------------------------------------------------------------------------------------------------------------
Total current assets 7,271,897 6,888,371
Net property, plant and equipment (Note A) 2,268,722 3,129,489
Other assets (Notes A, C, D and J) 406,533 561,911
------------------------------------------------------------------------------------------------------------------------------
Total assets $ 9,947,152 $ 10,579,771
------------------------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity:
Current liabilities
Bank loans and current portion of long-term debt (Note F) $ 14,371 $ 32,614
Accounts payable 1,113,160 1,197,350
Income taxes payable (Note C) 76,757 20,753
Salaries, wages and related items 562,442 619,756
Deferred revenues and customer advances (Note A) 1,232,050 1,239,792
Accrued restructuring costs (Note E) 492,046 1,351,075
Other current liabilities 755,466 594,925
------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,246,292 5,056,265
Deferred income taxes (Note C) 16 4,758
Long-term debt (Note F) 1,012,885 1,010,680
Postretirement and other postemployment benefits (Note G) 1,159,679 1,228,269
------------------------------------------------------------------------------------------------------------------------------
Total liabilities 6,418,872 7,299,972
------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note H)
------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity (Notes K and L)
Preferred stock, $1.00 par value (liquidation preference of $100 per share);
authorized 25,000,000 shares; 4,000,000 shares of Series A 8 7/8%
Cumulative Preferred Stock issued and outstanding 4,000 4,000
Common stock, $1.00 par value; authorized 450,000,000 shares;
149,777,573 shares and 142,287,078 shares issued 149,778 142,287
Additional paid-in capital 3,544,712 3,390,040
Retained deficit (170,210) (256,528)
------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,528,280 3,279,799
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 9,947,152 $ 10,579,771
------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
34
Consolidated statements of cash flows
Digital Equipment Corporation
(in thousands)
--------------------------------------------------------------------------------------------------------------------------------
July 1, 1995 July 2, 1994 July 3, 1993
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income/(loss) $ 121,818 $ (2,156,063) $ (251,330)
--------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation 507,966 573,970 698,631
Amortization 67,624 106,584 139,552
(Gain)/loss on disposition and write-down of other assets (Note J) (57,333) 310,000 -
Other adjustments to income (34,576) 84,026 185,617
(Increase)/decrease in accounts receivable 42,862 (298,602) 574,016
Increase in inventories (Note A) (272,037) (308,838) (141,106)
(Increase)/decrease in prepaid expenses and other current assets (17,862) 82,513 (26,552)
Increase/(decrease) in accounts payable (49,517) 374,916 (218,866)
Increase in taxes (Note C) 16,813 18,913 75,590
Increase/(decrease) in salaries, wages, benefits and
related items (Note G) 31,306 163,221 (49,581)
Increase/(decrease) in deferred revenues and customer advances 544 101,469 (70,312)
Increase/(decrease) in accrued restructuring costs (Note E) (859,029) 612,086 (807,915)
Increase/(decrease) in other current liabilities 153,911 (39,101) (60,828)
--------------------------------------------------------------------------------------------------------------------------------
Total adjustments (469,328) 1,781,157 298,246
--------------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities (347,510) (374,906) 46,916
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Investment in property, plant and equipment (365,551) (682,100) (528,691)
Proceeds from the disposition of property, plant and
equipment (Notes E and J) 208,505 97,456 46,049
Investment in other assets (Note J) (37,687) (64,377) (423,573)
Proceeds from the disposition of other assets (Note J) 863,468 23,516 22,100
--------------------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities 668,735 (625,505) (884,115)
--------------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating and investing activities 321,225 (1,000,411) (837,199)
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from issuance of debt 13,253 22,742 984,482
Payments to retire debt (29,336) (19,451) (36,860)
Issuance of preferred, common and treasury shares,
including tax effects 151,643 536,563 195,600
Dividends paid (35,500) (1,775) -
--------------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities 100,060 538,079 1,143,222
--------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 421,285 (462,332) 306,023
Cash and cash equivalents at beginning of year 1,180,863 1,643,195 1,337,172
--------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,602,148 $ 1,180,863 $ 1,643,195
--------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
35
Consolidated statements of stockholders' equity
Digital Equipment Corporation
(in thousands)
---------------------------------------------------------------------------------------------------------------------------------
Additional Retained Total
Preferred Common paid-in earnings/ Treasury stockholders'
stock stock capital (deficit) stock equity
---------------------------------------------------------------------------------------------------------------------------------
June 27, 1992 - $130,008 $2,692,444 $ 2,282,688 $(174,206) $ 4,930,934
---------------------------------------------------------------------------------------------------------------------------------
Shares issued under stock plans 5,482 149,321 (93,731) 134,528 195,600
Restricted stock plans, charge
to operations 42,038 42,038
Repurchase unexercised option shares (31,843) (31,843)
Net loss--1993 (251,330) (251,330)
---------------------------------------------------------------------------------------------------------------------------------
July 3, 1993 - 135,490 2,851,960 1,937,627 (39,678) 4,885,399
---------------------------------------------------------------------------------------------------------------------------------
Issuance of preferred stock $ 4,000 382,745 386,745
Shares issued under stock plans 6,797 130,785 (27,442) 39,678 149,818
Restricted stock plans, charge
to operations 24,550 24,550
Dividends declared--preferred stock (10,650) (10,650)
Net loss--1994 (2,156,063) (2,156,063)
---------------------------------------------------------------------------------------------------------------------------------
July 2, 1994 4,000 142,287 3,390,040 (256,528) - 3,279,799
---------------------------------------------------------------------------------------------------------------------------------
Shares issued under stock plans 7,491 143,993 151,484
Restricted stock plans, charge
to operations 10,679 10,679
Dividends declared--preferred stock (35,500) (35,500)
Net income--1995 121,818 121,818
---------------------------------------------------------------------------------------------------------------------------------
July 1, 1995 $ 4,000 $149,778 $3,544,712 $ (170,210) $ - $ 3,528,280
---------------------------------------------------------------------------------------------------------------------------------
See Notes K and L of Notes to consolidated financial statements.
Cash dividends on common stock have never been paid by the Corporation. The
Corporation commenced paying dividends in fiscal 1994 on preferred stock issued
in March 1994.
The accompanying notes are an integral part of these financial statements.
36
Notes to consolidated financial statements
Note A: Significant accounting policies
--------------------------------------------------------------------------------
Principles of consolidation: The consolidated financial statements of the
Corporation include the financial statements of the parent and its U.S. and non-
U.S. subsidiaries. All significant intercompany accounts and profits have been
eliminated. Certain prior years' amounts have been reclassified to conform with
current year presentation.
Fiscal year: The fiscal year of the Corporation is the fifty-two/fifty-three
week period ending the Saturday nearest the last day of June. The fiscal years
ended July 1, 1995 and July 2, 1994 included 52 weeks. The fiscal year ended
July 3, 1993 included 53 weeks.
Translation of foreign currencies: For non-U.S. operations, the U.S. dollar is
the functional currency. Monetary assets and liabilities of foreign subsidiaries
are translated into U.S. dollars at current exchange rates. Nonmonetary assets
such as inventories and property, plant and equipment are translated at
historical rates. Income and expense items are translated at average exchange
rates prevailing during the year, except that inventories and depreciation
charged to operations are translated at historical rates. Exchange gains and
losses arising from translation are included in current income.
Revenue recognition: Revenues from product sales are recognized at the time the
product is shipped. Provisions for product sales returns and allowances are
recorded in the same period as the related revenue. Service and other revenues
are recognized ratably over the contractual period or as the services are
performed.
Warranty: Warranty service revenues are recognized ratably over the warranty
period; warranty-related costs are recognized as incurred. The Corporation also
provides warranty coverage as a product attribute on certain products. Estimated
costs to repair such products are accrued as product cost when the product is
shipped.
Net income/(loss) applicable per common share: Per common share amounts are
calculated based on the weighted average number of common shares and common
share equivalents outstanding during periods of net income, after deducting
applicable preferred stock dividends. Common share equivalents are attributable
to stock options. Per share amounts are calculated based only on the weighted
average number of common shares outstanding during periods of net loss, after
deducting applicable preferred stock dividends.
Cash equivalents: The Corporation considers all highly liquid temporary cash
investments with maturities of three months or less at date of acquisition to be
cash equivalents. Cash equivalents are valued at cost plus accrued interest,
which approximates market.
Taxes: In general, the Corporation's practice is to reinvest the earnings of its
foreign subsidiaries in those operations, and repatriation of retained earnings
is done only when it is advantageous to do so. Applicable taxes are provided
only on amounts planned to be remitted.
Inventories: Inventories are stated at the lower of cost (first-in, first-out)
or market.
(in thousands) July 1, 1995 July 2, 1994
--------------------------------------------------------------------------------
Raw materials $ 595,829 $ 476,172
Work-in-process 434,408 605,503
Finished goods 1,023,383 982,303
--------------------------------------------------------------------------------
Total inventories $ 2,053,620 $ 2,063,978
--------------------------------------------------------------------------------
Property, plant and equipment: Property, plant and equipment are stated at cost.
(in thousands) July 1, 1995 July 2, 1994
--------------------------------------------------------------------------------
Land $ 244,187 $ 356,586
Buildings 1,418,636 1,967,815
Leasehold improvements 355,887 414,622
Machinery and equipment 3,457,017 4,281,866
--------------------------------------------------------------------------------
Total property, plant
and equipment 5,475,727 7,020,889
Less accumulated depreciation 3,207,005 3,891,400
--------------------------------------------------------------------------------
Net property, plant and
equipment $ 2,268,722 $ 3,129,489
--------------------------------------------------------------------------------
Depreciation expense is computed principally on the following bases:
Classification Depreciation lives and methods
--------------------------------------------------------------------------------
Buildings 10 to 33 years (straight-line)
--------------------------------------------------------------------------------
Leasehold Life of assets or term of lease,
improvements whichever is shorter (straight-line)
--------------------------------------------------------------------------------
Machinery and 3 to 10 years (principally
equipment accelerated methods)
--------------------------------------------------------------------------------
When assets are retired, or otherwise disposed of, the assets and related
accumulated depreciation are removed from the accounts. Gains or losses
resulting from restructuring actions are included in accrued restructuring
costs. Other resulting gains and losses are included in income.
37
Note A: Significant accounting policies (continued)
--------------------------------------------------------------------------------
Other assets: Other assets include long term investments, capitalized software
development costs, goodwill, deferred taxes and other intangible assets.
Software development costs are capitalized beginning at the time that technical
feasibility is established. These costs are amortized over no more than three
years from the date the products are available for general use.
Goodwill is amortized using the straight-line method over the estimated useful
life of the asset, subject to periodic review of realizability.
Other intangible assets are amortized using unit-volume and straight-line
methods, as applicable, over their estimated useful lives, subject to periodic
review of realizability.
Note B: Geographic operations
--------------------------------------------------------------------------------
Industry: The Corporation operates in one business segment: the design,
manufacture, sale and service of networked computer systems.
Non-U.S. operations: Sales and marketing operations outside the United States
are conducted through sales subsidiaries throughout the world; by direct sales
from the parent corporation; and through various representative distributorship
arrangements, value-added resellers and retailers. The Corporation's non-U.S.
manufacturing operations include plants in Canada, Europe and Asia-Pacific. The
products of these manufacturing plants are sold to the Corporation's sales
subsidiaries, the parent corporation or other manufacturing plants for further
processing. Intercompany transfers between geographic areas are accounted for at
prices which are intended to be representative of unaffiliated party
transactions.
Sales to unaffiliated customers outside the United States, including U.S. export
sales, were $9.0 billion, $8.3 billion, and $9.2 billion for the fiscal years
ended July 1, 1995, July 2, 1994 and July 3, 1993, respectively, which
represented 65%, 62% and 64%, respectively, of total operating revenues. In
general, the Corporation's practice is to reinvest the earnings of its foreign
subsidiaries in those operations, and repatriation of retained earnings is done
only when it is advantageous to do so. These accumulated retained earnings,
before elimination of intercompany transactions, aggregated $3.0 billion, $2.9
billion and $4.0 billion at July 1, 1995, July 2, 1994 and July 3, 1993,
respectively.
38
Note B: Geographic operations (continued)
--------------------------------------------------------------------------------
(in thousands)
-----------------------------------------------------------------------------------------------------------------------
Year ended July 1, 1995 July 2, 1994 July 3, 1993
-----------------------------------------------------------------------------------------------------------------------
Net revenues
United States:
Unaffiliated customer sales $ 4,816,024 $ 5,176,748 $ 5,219,276
Inter-area transfers 1,426,305 1,830,749 1,793,832
-----------------------------------------------------------------------------------------------------------------------
6,242,329 7,007,497 7,013,108
-----------------------------------------------------------------------------------------------------------------------
Europe:
Unaffiliated customer sales 5,973,188 5,832,332 6,973,709
Inter-area transfers 792,277 373,354 633,935
-----------------------------------------------------------------------------------------------------------------------
6,765,465 6,205,686 7,607,644
-----------------------------------------------------------------------------------------------------------------------
Canada, Latin America, Asia-Pacific:
Unaffiliated customer sales 3,023,850 2,441,710 2,178,384
Inter-area transfers 2,081,764 1,707,291 1,378,870
-----------------------------------------------------------------------------------------------------------------------
5,105,614 4,149,001 3,557,254
-----------------------------------------------------------------------------------------------------------------------
Eliminations (4,300,346) (3,911,394) (3,806,637)
-----------------------------------------------------------------------------------------------------------------------
Net revenue $ 13,813,062 $ 13,450,790 $ 14,371,369
-----------------------------------------------------------------------------------------------------------------------
Income/(loss)
United States $ (231,180) $ (740,709) $ (363,454)
Europe 236,641 (1,109,188) 12,446
Canada, Latin America, Asia-Pacific 70,196 (170,097) 115,091
Eliminations 32,771 23,931 (1,384)
-----------------------------------------------------------------------------------------------------------------------
Operating income/(loss) 108,428 (1,996,063) (237,301)
-----------------------------------------------------------------------------------------------------------------------
Interest income 57,497 49,422 63,831
Interest expense 90,268 73,353 50,837
-----------------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes and cumulative effect of
changes in accounting principles $ 75,657 $ (2,019,994) $ (224,307)
-----------------------------------------------------------------------------------------------------------------------
Assets
United States $ 3,924,941 $ 4,997,184 $ 4,202,395
Europe 3,321,429 4,098,780 4,910,165
Canada, Latin America, Asia-Pacific 2,335,236 1,945,236 1,730,754
Corporate assets 1,602,148 1,180,863 1,444,259
Eliminations (1,236,602) (1,642,292) (1,337,230)
-----------------------------------------------------------------------------------------------------------------------
Total assets $ 9,947,152 $ 10,579,771 $ 10,950,343
-----------------------------------------------------------------------------------------------------------------------
39
Note C: Income taxes
--------------------------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes and cumulative effect of changes in accounting principles (in thousands)
--------------------------------------------------------------------------------------------------------------------------------
Year ended July 1, 1995 July 2, 1994 July 3, 1993
--------------------------------------------------------------------------------------------------------------------------------
U.S. $ (231,180) $ (754,844) $ (383,808)
Non-U.S. 306,837 (1,265,150) 159,501
--------------------------------------------------------------------------------------------------------------------------------
Total $ 75,657 $ (2,019,994) $ (224,307)
--------------------------------------------------------------------------------------------------------------------------------
Reconciliation of U.S. federal statutory rate to actual tax rate
--------------------------------------------------------------------------------------------------------------------------------
Year ended July 1, 1995 July 2, 1994 July 3, 1993
--------------------------------------------------------------------------------------------------------------------------------
U.S. federal statutory tax (benefit) rate 35.0% (35.0)% (34.0)%
Tax benefit of manufacturing operations in: (a)
Puerto Rico - - (8.1)
Ireland (40.2) (2.3) (16.0)
Singapore (12.6) (.1) (7.8)
Tax impact due to net loss carryforward position:
U.S. 106.9 13.5 60.5
Non-U.S. (93.2) 41.1 21.6
Non-U.S. tax rates 27.3 (12.0) (.8)
Other 1.0 (1.0) (3.4)
--------------------------------------------------------------------------------------------------------------------------------
Effective tax rate 24.2% 4.2% 12.0%
--------------------------------------------------------------------------------------------------------------------------------
Note (a) The income from products manufactured for export by the Corporation's
manufacturing subsidiary in Ireland is subject to a 10% tax rate through
December 2010. The income from certain products manufactured by the
Corporation's manufacturing subsidiary in Singapore is taxed at 15% through
December 1995. During fiscal year 1993, the Corporation discontinued its
manufacturing operation in Puerto Rico.
Components of provisions for (benefits from) U.S. federal and non-U.S. income taxes (in thousands)
--------------------------------------------------------------------------------------------------------------------------------
Year ended July 1, 1995 July 2, 1994 July 3, 1993
--------------------------------------------------------------------------------------------------------------------------------
U.S. federal:
Current $ - $ - $ (5,023)
Deferred (7,318) (14,431) (19,871)
--------------------------------------------------------------------------------------------------------------------------------
Total (7,318) (14,431) (24,894)
--------------------------------------------------------------------------------------------------------------------------------
Non-U.S.:
Current 48,388 5,618 (57,525)
Deferred (26,260) 92,989 103,497
--------------------------------------------------------------------------------------------------------------------------------
Total 22,128 98,607 45,972
--------------------------------------------------------------------------------------------------------------------------------
State income taxes 3,532 867 5,945
--------------------------------------------------------------------------------------------------------------------------------
Total income taxes $ 18,342 $ 85,043 $ 27,023
--------------------------------------------------------------------------------------------------------------------------------
40
Note C: Income taxes (continued)
--------------------------------------------------------------------------------
The Corporation adopted Statement of Financial Accounting Standards (SFAS) No.
109 - Accounting for Income Taxes, effective July 4, 1993. The Corporation had
previously accounted for income taxes under Accounting Principles Board Opinion
No. 11. In the first quarter of fiscal year 1994, the Corporation recorded a
one-time benefit of $20,000,000 or $.14 per common share, for the recognition of
previously unrecognized tax benefits. There was no cash flow impact from the
adoption of SFAS No. 109. The standard was adopted on a prospective basis, and
amounts presented for prior years were not restated.
Significant components of deferred tax assets and liabilities (in thousands)
---------------------------------------------------------------------------------------------------------
Year ended July 1, 1995 July 2, 1994
---------------------------------------------------------------------------------------------------------
Assets Liabilities Assets Liabilities
---------------------------------------------------------------------------------------------------------
Inventory-related transactions $ 148,399 $ 12,893 $ 101,933 $ 8,437
Depreciation 65,083 55,314 61,335 44,693
Deferred warranty revenue 101,094 - 80,506 -
Postretirement/postemployment benefits 447,948 23,524 400,037 18,323
Restructuring 199,319 - 446,505 -
Tax loss carryforwards 1,419,630 - 1,424,927 -
Tax credit carryforwards 166,526 - 149,013 -
Intangible assets 55,447 16,388 106,368 -
Research and engineering 504,382 - - -
Other 164,685 67,209 168,392 98,465
---------------------------------------------------------------------------------------------------------
Gross deferred tax balances 3,272,513 175,328 2,939,016 169,918
Valuation allowance 2,967,035 - 2,677,673 -
---------------------------------------------------------------------------------------------------------
Net deferred tax balances $ 305,478 $ 175,328 $ 261,343 $ 169,918
---------------------------------------------------------------------------------------------------------
The gross deferred tax asset from tax loss carryforwards of $1.4 billion
represents $3.6 billion of net operating loss carryforwards on a tax return
basis which will generally expire as follows: $100,000,000 in 1998, $200,000,000
in 1999, $1.2 billion in 2007, $500,000,000 in 2008, and the remainder
thereafter.
Tax credit carryforwards will generally expire as follows: $20,000,000 in 2001,
$50,000,000 in 2002, $70,000,000 in 2003, $20,000,000 in 2004 and the remainder
thereafter.
Tax benefit arising from previously unrecognized operating loss carryforwards
amounted to approximately $42,000,000 and $4,000,000 for the fiscal years ended
July 1, 1995 and July 2, 1994, respectively.
Major changes in the components of temporary differences and carryforwards for
the fiscal year ended July 1, 1995 include an increase in gross deferred tax
assets related to research and engineering in the amount of $504,382,000, and
decreases in gross deferred tax assets related to restructuring and intangible
assets in the amounts of $247,186,000 and $50,921,000, respectively.
For the fiscal year ended July 1, 1995, the total valuation allowance for
deferred tax assets increased $289,362,000, which is attributable to the
increase in gross deferred tax assets. For the fiscal year ended July 2, 1994,
the total valuation allowance increased by $872,887,000, resulting from
increased gross deferred tax assets associated with tax loss carryforwards,
restructuring and other deferred tax assets.
Gross deferred taxes were increased by $10,334,000 and $32,410,000 for the
fiscal years ended July 1, 1995 and July 2, 1994, respectively, as a result of
statutory tax rate changes, fully offset by valuation allowances.
In fiscal years 1995, 1994 and 1993, net income taxes paid were approximately
$3,008,000, $42,419,000 and $53,889,000, respectively.
See Note A for further explanation of the Corporation's income tax accounting
policies.
Note D: Capitalized computer software development costs
--------------------------------------------------------------------------------
Unamortized computer software development costs were $100,989,000 and
$124,780,000 at July 1, 1995 and July 2, 1994, respectively. Amortization
expense was $59,335,000, $67,515,000 and $68,978,000 for the years ended July 1,
1995, July 2, 1994 and July 3, 1993, respectively. Accumulated amortization was
$197,419,000 and $208,837,000 at July 1, 1995 and July 2, 1994, respectively.
41
Note E: Restructuring actions
--------------------------------------------------------------------------------
Accrued restructuring costs and charges include the cost of involuntary employee
termination benefits, facility closures and related costs associated with
restructuring actions. Employee termination benefits include severance, wage
continuation, notice pay, medical and other benefits. Facility closures and
related costs include gains and losses on disposal of property, plant and
equipment, lease payments and related costs. Restructuring costs were accrued
and charged to expense in accordance with approved management plans.
The Corporation's cost structure at the end of fiscal year 1994 was too high for
the level and mix of total operating revenues. As a result, the Corporation
approved additional restructuring actions and accrued related costs of $1.2
billion. The cost of employee separations associated with the fiscal 1994 charge
included termination benefits for approximately 20,000 employees, located
principally in the U.S. and Europe. The greatest portion of employee
separations, approximately 40%, were to come from sales and marketing functions,
as the Corporation sells more products through indirect channels of
distribution. Most other organizations and functions also were affected by the
reduction in employees. A portion of these employee separations occurred near
the end of the fourth quarter of fiscal 1994. The fiscal 1994 charge also covers
costs associated with closure of 10 million square feet of facilities, including
office and manufacturing space, principally in the U.S. and Europe.
During fiscal year 1995, restructuring actions resulted in approximately 7,400
employee separations. While some restructuring actions remain to be implemented
in fiscal 1996, the number of involuntary separations is expected to be lower
than originally planned due principally to a higher level of voluntary
separations and employees transferred in connection with divesting activities.
However, associated cost savings were offset by an increase in estimated
separation costs for certain non-U.S. employees.
The Corporation's experience in property dispositions in fiscal year 1995 was
favorable to plan on a cost per square foot basis. During fiscal 1995, the
Corporation sold, or entered into agreements to sell, approximately 5.3 million
square feet of space including the Corporation's former headquarters facilities
in Maynard, Massachusetts, generating approximately $200,000,000 of cash
proceeds.
The remaining reserve balance of $492,046,000 is adequate to cover currently
planned restructuring actions, the majority of which are facilities related.
Accrued restructuring costs (in thousands)
-----------------------------------------------------------------------------------------------------------------------------
Year ended July 1, 1995 July 2, 1994 July 3, 1993
-----------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $1,351,075 $ 738,989 $1,546,904
-----------------------------------------------------------------------------------------------------------------------------
Charges to operations:
Employee separations -- 679,000 --
Facility closures and related costs -- 527,000 --
-----------------------------------------------------------------------------------------------------------------------------
Total charges to operations -- 1,206,000 --
-----------------------------------------------------------------------------------------------------------------------------
Costs incurred:
Employee separations 507,816 372,450 454,900
Facility closures and related costs 323,029 212,300 314,250
Other 28,184 9,164 38,765
-----------------------------------------------------------------------------------------------------------------------------
Total costs incurred 859,029 593,914 807,915
-----------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 492,046 $1,351,075 $ 738,989
-----------------------------------------------------------------------------------------------------------------------------
Cash expenditures:
Employee separations $ 562,629 $ 532,000 $ 651,300
Facility closures and related costs, net of proceeds (38,850) 67,550 174,700
-----------------------------------------------------------------------------------------------------------------------------
Net cash expenditures $ 523,779 $ 599,550 $ 826,000
-----------------------------------------------------------------------------------------------------------------------------
Number of employee terminations due to restructuring actions 7,400 12,000 17,000
-----------------------------------------------------------------------------------------------------------------------------
42
Note F: Debt
--------------------------------------------------------------------------------
Long-term debt, exclusive of current maturities (in thousands)
-----------------------------------------------------------------------------------------------------------------------------
Maturity date
(Calendar year) Interest rate July 1, 1995 July 2, 1994
-----------------------------------------------------------------------------------------------------------------------------
Lease obligations 1997-2002 7.64%-11.0%(a) $ 16,091 $ 17,950
Notes (b) 1997 7% 250,000 250,000
Notes (b) 2002 7 1/8% 250,000 250,000
Debentures (b) 2012 8 5/8% 250,000 250,000
Debentures (b) 2023 7 3/4% 250,000 250,000
Unamortized discount and commissions (b) (14,150) (15,092)
Other debt obligations 10,944 7,822
-----------------------------------------------------------------------------------------------------------------------------
Total long-term debt, exclusive of
current maturities $ 1,012,885 $ 1,010,680
-----------------------------------------------------------------------------------------------------------------------------
Note (a) Weighted average interest rate at July 1, 1995 and July 2, 1994 of
8.5%.
Note (b) The Notes and Debentures are not redeemable prior to maturity and are
not entitled to any sinking fund. The unamortized discount and commissions
relate to these Notes and Debentures.
Principal payments during the next five fiscal years are as follows: 1996 -
$5,437,000; 1997 - $13,238,000; 1998 - $257,129,000; 1999 - $1,212,000; 2000-
$1,115,000.
In fiscal years 1995, 1994 and 1993, interest paid was $86,157,000, $76,203,000
and $37,123,000, respectively.
The Corporation had available lines of credit totaling $308,885,000 and $1.2
billion as of July 1, 1995 and July 2, 1994, respectively. In fiscal year 1994,
these lines of credit included a $750,000,000 committed credit facility which
was terminated by the Corporation on July 25, 1994, having been replaced as a
source of liquidity with an accounts receivable securitization facility as
described below. Substantially all of these lines of credit were unused at the
end of fiscal 1995 and 1994. Commitment fees on the unused lines of credit were
neither material nor significant.
In June 1994, the Corporation entered into a five-year agreement with a major
financial institution (i) providing for the transfer and sale by the Corporation
to a wholly-owned subsidiary of the Corporation of a designated pool of domestic
trade accounts receivable (the "Receivables"), and (ii) allowing the Corporation
to sell to a group of investors an undivided ownership interest in the
Receivables for proceeds of up to $600,000,000 (the "Purchase Limit"). The
agreement includes annual commitment fees up to a maximum of 0.2% of the
Purchase Limit. During the third quarter of fiscal 1995, the Corporation elected
to amend the Purchase Limit under the agreement from $600,000,000 to
$500,000,000. As of July 1, 1995 and July 2, 1994, no interests in the
Receivables had been sold.
In May 1995, Digital Equipment Co. Limited, a wholly-owned subsidiary of the
Corporation incorporated in the United Kingdom, entered into a five-year
agreement with a major financial institution allowing it to sell an undivided
ownership interest in a designated pool of trade accounts receivables (the "UK
Receivables") to a group of investors for proceeds of up to approximately
$125,000,000 (80,000,000 pounds). Commitment fees under the agreement are
neither material nor significant. As of July 1, 1995, no interests in the UK
Receivables had been sold.
Note G: Postretirement and other postemployment benefits
--------------------------------------------------------------------------------
Pension plans: The Corporation and its subsidiaries have defined benefit and
defined contribution pension plans covering substantially all employees. The
benefits are based on years of service and compensation during the employee's
career. Pension cost is based on estimated benefit payment formulas.
It is the Corporation's policy to make tax-deductible contributions to the plans
in accordance with local laws. Contributions are intended to provide not only
for benefits attributed to service to date but also for those expected to be
earned in the future. For the U.S. pension plan, there were no contributions in
the fiscal years 1995, 1994 or 1993. The assets of the plans include corporate
equity and debt securities, government securities and real estate.
43
Note G: Postretirement and other postemployment benefits (continued)
--------------------------------------------------------------------------------
The Corporation's fiscal year 1995 pension cost before curtailment gains
declined, reflecting the positive effects of restructuring activities and
increased returns on invested pension assets. The net periodic pension cost for
defined contribution pension plans was $6,816,000, $12,585,000 and $7,944,000
for the fiscal years ended July 1, 1995, July 2, 1994 and July 3, 1993,
respectively. The measurement dates for all plans were within 90 days of year-
end.
Components of net periodic pension cost (in thousands)
---------------------------------------------------------------------------------------------------------------------------------
Year ended July 1, 1995 July 2, 1994 July 3, 1993
---------------------------------------------------------------------------------------------------------------------------------
Service cost for benefits earned during the period $ 156,112 $ 180,694 $ 192,546
Interest cost on projected benefit obligations 182,363 191,525 201,203
Actual return on plan assets (344,486) (143,465) (291,127)
Net amortization and deferral 91,251 (79,567) 79,421
---------------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost before curtailment gains 85,240 149,187 182,043
Curtailment gains - (272,918) -
---------------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost for defined benefit pension plans $ 85,240 $(123,731) $ 182,043
---------------------------------------------------------------------------------------------------------------------------------
Total pension cost for all pension plans $ 95,249 $(107,686) $ 189,293
---------------------------------------------------------------------------------------------------------------------------------
Significant actuarial assumptions for pension plans
---------------------------------------------------------------------------------------------------------------------------------
Year ended July 1, 1995 July 2, 1994 July 3, 1993
---------------------------------------------------------------------------------------------------------------------------------
U.S. pension plan:
Discount rate 7.5% 8.0% 8.0%
Expected long-term rate of return on plan assets 9.0% 9.0% 9.0%
Rate of increase in future compensation levels 5.0% 6.0% 6.0%
---------------------------------------------------------------------------------------------------------------------------------
Non-U.S. pension plans:
Discount rate 5.0 - 9.5% 5.0 - 9.5% 5.0 - 9.0%
Expected long-term rate of return on plan assets 6.0 -10.0% 6.0 -10.0% 6.0 -10.0%
Rate of increase in future compensation levels 3.0 - 7.0% 2.8 - 7.2% 3.5 - 7.5%
---------------------------------------------------------------------------------------------------------------------------------
Funded status of pension plans as of the year-end measurement date (in thousands)
----------------------------------------------------------------------------------------------------------------
Year ended July 1, 1995 July 2, 1994
----------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $(1,725,467) $(1,448,067)
----------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $(1,891,032) $(1,635,422)
----------------------------------------------------------------------------------------------------------------
Projected benefit obligation $(2,727,920) $(2,558,421)
Plan assets at fair value 3,073,995 2,727,675
----------------------------------------------------------------------------------------------------------------
Over funded projected benefit obligation 346,075 169,254
Contributions made after measurement date but before end of fiscal year - 2,762
Unrecognized net gain (544,685) (326,710)
Unrecognized prior service credit (41,623) (88,519)
Unrecognized net transition asset (84,091) (88,916)
----------------------------------------------------------------------------------------------------------------
Pension liability recognized on the balance sheet $ (324,324) $ (332,129)
----------------------------------------------------------------------------------------------------------------
44
Note G: Postretirement and other postemployment benefits (continued)
--------------------------------------------------------------------------------
Postretirement benefits other than pensions: The Corporation has defined
benefit postretirement plans that provide medical and dental benefits for U.S.
retirees and their eligible dependents. Substantially all of the Corporation's
U.S. employees may become eligible for postretirement benefits if they reach
retirement age while working for the Corporation. The majority of the
Corporation's non-U.S. subsidiaries do not offer postretirement benefits other
than pensions to retirees.
The Corporation's fiscal year 1995 postretirement benefit cost before
curtailment gains declined, reflecting the positive effects of restructuring
activities and lower U.S. health care cost trends.
The Corporation's postretirement benefits plans other than pensions are funded
as costs are incurred.
Components of net periodic postretirement benefits costs (in thousands)
---------------------------------------------------------------------------------------------------------------------------------
Year ended July 1, 1995 July 2, 1994 July 3, 1993
---------------------------------------------------------------------------------------------------------------------------------
Service cost for benefit earned during the period $ 18,455 $ 24,949 $ 25,560
Interest cost on accumulated postretirement benefits obligations 41,279 47,309 50,915
Actual return on plan assets - - -
Net amortization and deferral (9,919) (9,964) (8,538)
---------------------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost before curtailment gains 49,815 62,294 67,937
Curtailment gains (20,741) (37,773) (30,000)
---------------------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefits cost $ 29,074 $ 24,521 $ 37,937
---------------------------------------------------------------------------------------------------------------------------------
Significant actuarial assumptions for postretirement benefits plans (dollars in thousands)
---------------------------------------------------------------------------------------------------------------------------------
Year ended July 1, 1995 July 2, 1994 July 3, 1993
---------------------------------------------------------------------------------------------------------------------------------
U.S. plans:
Discount rate 7.5% 8.0% 8.0%
Health care cost trend rate, current year 7.0% 9.3% 10.6%
Health care cost trend rate, ultimate year 5.5% 5.5% 6.0%
Trend rate decreases to the ultimate rate in the year 2005 2005 2005
Effect of a 1% increase in the trend rate:
Increase in accumulated postretirement benefits obligation $100,617 $110,011 $137,913
Increase in net periodic postretirement benefits cost $ 13,645 $ 15,643 $ 17,598
---------------------------------------------------------------------------------------------------------------------------------
Non-U.S. plans:
Discount rate 5.0- 8.5% 5.0- 8.5% 5.0- 8.5%
Health care cost trend rate, current year 4.0-11.0% 4.0-12.0% 5.0-13.0%
Health care cost trend rate, ultimate year 4.0- 7.0% 4.0- 7.0% 5.0- 7.0%
Trend rates decrease to the ultimate rates in the years 1995-2006 1994-2007 1993-2050
Effect of a 1% increase in the trend rate:
Increase in accumulated postretirement benefit obligation $ 8,072 $ 6,057 $ 5,861
Increase in net periodic postretirement benefit cost $ 1,043 $ 909 $ 564
---------------------------------------------------------------------------------------------------------------------------------
Funded status of postretirement benefits plans as of the year-end measurement date (in thousands)
----------------------------------------------------------------------------------------------------------------
Year ended July 1, 1995 July 2, 1994
----------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligations:
Retirees $(334,578) $(371,191)
Fully eligible plan participants (15,862) (22,180)
Other active plan participants (243,587) (233,065)
----------------------------------------------------------------------------------------------------------------
Unfunded accumulated postretirement benefit obligation (594,027) (626,436)
Unrecognized net (gain)/loss (44,092) 1,057
Unrecognized prior service credit (93,041) (116,138)
----------------------------------------------------------------------------------------------------------------
Other postretirement benefits liability recognized on the balance sheet $(731,160) $(741,517)
----------------------------------------------------------------------------------------------------------------
45
Note G: Postretirement and other postemployment benefits (continued)
--------------------------------------------------------------------------------
Postemployment benefits: In the fourth quarter of fiscal year 1994, the
Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 112 -- Employers' Accounting for Postemployment Benefits, effective as of
the beginning of the fiscal year. This standard requires the accrual of benefits
provided to former or inactive employees, after employment but before
retirement. These benefits include, but are not limited to, salary continuation,
supplemental unemployment benefits, severance benefits, disability-related
benefits and continuation of benefits such as health care and life insurance
coverage.
The cumulative effect of adopting this standard resulted in a one-time charge to
income of $71,068,000 (the "transition obligation"), or $.51 per common share.
This transition obligation represents principally the cost of providing medical,
dental and life insurance benefits to individuals in the U.S. currently on long-
term disability, during the estimated remaining period in which they will
receive disability benefits. The annual expense under the new standard,
exclusive of the transition obligation, is not significantly different than the
annual expense under the Corporation's former practice. There was no cash flow
impact from the adoption of SFAS No. 112. Prior years' consolidated financial
statements have not been restated to reflect this change.
Note H: Commitments and contingencies
--------------------------------------------------------------------------------
Lease commitments: Minimum annual rentals under noncancelable leases (which are
principally for leased real estate, vehicles and equipment) for the fiscal years
listed are as follows:
Fiscal years (in thousands)
--------------------------------------------------------------------------------
1996 $ 260,875
1997 202,876
1998 207,683
1999 262,506
2000 68,864
Later years 360,481
--------------------------------------------------------------------------------
Total minimum lease payments $1,363,285
--------------------------------------------------------------------------------
Total rental expense for the fiscal years ended July 1, 1995, July 2, 1994 and
July 3, 1993 amounted to $282,084,000, $436,080,000 and $503,094,000,
respectively.
Litigation: Several purported class action lawsuits were filed against the
Corporation during the fourth quarter of fiscal year 1994 alleging violations of
the Federal securities laws arising from alleged misrepresentations and
omissions in connection with the Corporation's issuance and sale of Series A
8 7/8% Cumulative Preferred Stock (the "Series A Preferred Stock") and the
Corporation's financial results for the quarter ended April 2, 1994. During
fiscal 1995, the lawsuits were consolidated into three cases, which were pending
before the United States District Court for the District of Massachusetts. On
August 8, 1995, the Massachusetts federal court granted the defendants' motion
to dismiss all three cases in their entirety. On September 6, 1995, notices of
appeal were filed in two of the cases.
Note I: Financial instruments
--------------------------------------------------------------------------------
Foreign exchange options: In the ordinary course of business, the Corporation
enters into foreign exchange option contracts for periods consistent with its
committed exposures to limit potential losses from adverse exchange rate
movements on operations. The contracts are primarily in European currencies,
Australian dollars and Japanese yen and generally have maturities which do not
exceed three months. The impact of exchange rate movements on contracts used to
hedge revenue and expense transactions is included in income in the period the
related operating revenues and expenses are recognized. Premiums on foreign
exchange option contracts are amortized over the life of the contract.
Unamortized premiums are included in prepaid assets. The Corporation does not
anticipate any material adverse effect due to exchange rate movements over the
short-term period covered by these contracts.
Foreign exchange forwards: In the ordinary course of business, the Corporation
enters into foreign exchange forward contracts for periods consistent with its
committed exposures to mitigate the effect of foreign currency movements on the
U.S. dollar value of monetary asset and liability positions of non-U.S.
subsidiaries. The contracts are primarily in European currencies, Australian
dollars and Japanese yen and generally have maturities which do not exceed three
months. The impact of exchange rate movements on contracts used to hedge
monetary assets and liabilities is included in income in the period in which the
exchange rates change.
With respect to foreign exchange option contracts and foreign exchange forward
contracts, there were no deferred gains or losses at July 1, 1995. Also, the
Corporation does not hold or issue foreign exchange futures contracts or foreign
exchange option contracts for trading purposes.
46
Note I: Financial instruments (continued)
--------------------------------------------------------------------------------
Interest rate swaps: The Corporation has entered into interest rate swap
agreements, with maturities of up to 10 years, to manage its exposure to
interest rate movements by effectively converting a portion of its long-term
debt from fixed to variable rates. The net face amount of interest rate swaps
subject to variable rates as of July 1, 1995 and July 2, 1994 was $250,000,000
and $750,000,000, respectively, as a result of offsetting positions. These
agreements involve the exchange of fixed rate payments for variable rate
payments without the exchange of the underlying principal amount. Fixed interest
rate payments are at rates ranging from 5.45% to 5.75%. Variable rate payments
are based on the 6 month U.S. dollar LIBOR. Interest rate differentials paid or
received under these swap agreements are recognized over the life of the
contracts as adjustments to interest expense. The Corporation does not hold or
issue interest rate swaps for trading purposes.
Fair value: The carrying amounts reflected in the consolidated balance sheets
for cash, cash equivalents, accounts receivable, bank loans, current portion of
long-term debt and accounts payable approximate fair value due to the short
maturities of these instruments. The fair values for long-term debt and hedging
instruments are based on dealer quotes for those instruments. The fair values
represent estimates of possible value which may not be realized in the future.
Fair value of financial instruments (in thousands)
--------------------------------------------------------------------------------
Face Carrying Fair
amount amount value
--------------------------------------------------------------------------------
July 1, 1995
Long-term debt $1,027,035 $1,012,885 $1,004,043
Hedging instruments:
Option contracts $ 611,100 $ 3,983 $ 3,291
Forward contracts $ 977,008 $ (238) $ 1,610
Interest rate swaps $1,250,000 $ -- $ (30,978)
--------------------------------------------------------------------------------
July 2, 1994
Long-term debt $1,025,772 $1,010,680 $ 831,077
Hedging instruments:
Option contracts $ 363,000 $ 1,994 $ 2,048
Forward contracts $ 557,656 $ (47,073) $ (45,776)
Interest rate swaps $1,250,000 $ -- $ (42,800)
--------------------------------------------------------------------------------
The face amount of hedging instruments does not necessarily represent amounts
exchanged by the parties and thus is not a direct measure of the exposure of the
Corporation through its use of hedging instruments. The amounts exchanged are
calculated on the basis of face amounts and other terms of the hedging
instruments, which relate to interest rates, exchange rates or other financial
indexes.
Concentration of credit risk: Financial instruments which potentially subject
the Corporation to concentrations of credit risk consist principally of
temporary cash investments, trade receivables and hedging instruments.
The Corporation places its temporary cash investments with high credit qualified
financial institutions and, by policy, limits the amount of credit exposure to
any one financial institution. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers comprising
the Corporation's customer base, and their dispersion across many different
industries and geographies.
The Corporation is exposed to credit-related losses in the event of
nonperformance by counterparties to hedging instruments. The counterparties to
these contracts are major financial institutions. The Corporation continually
monitors its positions and the credit ratings of its counterparties and limits
the amount of contracts it enters into with any one party.
47
Note J: Investing and divesting activities
--------------------------------------------------------------------------------
During fiscal year 1995, the Corporation sold portions of its storage business,
its relational database business, a software distribution subsidiary, a contract
manufacturing business and a semiconductor manufacturing facility. In fiscal
1994, these businesses represented approximately 5% of total consolidated
operating revenues but had an immaterial effect on the consolidated net loss.
At the end of the fourth quarter of fiscal year 1995, the Corporation sold its
South Queensferry, Scotland semiconductor facility and related assets to a
subsidiary of Motorola, Inc. for net proceeds of approximately $128,000,000.
Assets sold included approximately $8,000,000 of inventory and $127,000,000 of
net property, plant and equipment. Approximately 530 employees were transferred
to Motorola at the time of sale.
At the end of the third quarter of fiscal year 1995, the Corporation sold its
contract manufacturing business to SCI Systems, Inc. for net proceeds of
approximately $75,000,000. Assets sold included approximately $47,000,000 of
inventory and $20,000,000 of net property, plant and equipment, including a
manufacturing plant in Augusta, Maine. Approximately 700 employees were
transferred to SCI Systems, Inc. at the time of sale.
At the beginning of the second quarter of fiscal year 1995, the Corporation sold
its magnetic disk drive, tape drive, solid state disk and thin film heads
businesses (the "Business") to Quantum Corporation ("Quantum") for an aggregate
purchase price of $360,000,000, generating net proceeds of $348,000,000. Assets
sold included approximately $180,000,000 of inventory and $154,000,000 of net
property, plant and equipment, including facilities in Shrewsbury, Massachusetts
and Penang, Malaysia, as well as the Corporation's interest in Rocky Mountain
Magnetics, Inc. Quantum is leasing facilities owned by the Corporation in
Colorado Springs, Colorado and leased by the Corporation in Batam, Indonesia.
Approximately 3,100 employees were transferred to Quantum upon sale of the
Business.
Also during the second quarter of fiscal year 1995, the Corporation sold its
relational database business and related assets to Oracle Corporation for net
proceeds of $107,000,000. Approximately 250 employees were transferred to Oracle
Corporation at the time of sale.
In June 1992, the Corporation entered into agreements to purchase common stock
of Ing. Olivetti & C. S.p.A. ("Olivetti") and to form a strategic alliance with
Olivetti. Pursuant to these agreements, as amended, the Corporation purchased a
total of 98,533,000 shares of Olivetti common stock in fiscal year 1993 for a
total investment of approximately $287,800,000. As part of the alliance
agreement, as amended, Olivetti agreed to purchase a minimum level of Alpha
products from the Corporation over a specified period of time.
The Olivetti stock was recorded at $83,800,000. The remainder of the purchase
price was recorded as an intangible asset to be amortized over a period not to
exceed ten years. While the Corporation expected to generate significant
revenues from the sale of Alpha products to Olivetti in the long term, in fiscal
year 1994, the sale of Alpha products to Olivetti fell significantly short of
levels called for in the alliance agreement. In the fourth quarter of fiscal
1994, the Corporation concluded that revenues and profits in the future,
although potentially significant, would continue below levels called for in the
agreement. Accordingly, in the fourth quarter of fiscal 1994, the Corporation
reduced the carrying value of the intangible asset by $116,000,000 to its
expected net realizable value and included this amount as a charge to Selling,
general and administrative (SG&A) expenses on the Statement of operations. The
remainder of the intangible asset is being amortized over a period not to exceed
eight years using the greater of unit-volume or straight-line methods.
The Corporation adopted Statement of Financial Accounting Standards (SFAS) No.
115 -- Accounting for Certain Investments in Debt and Equity Securities,
effective July 3, 1994. SFAS No. 115 expands the use of fair value accounting
for certain debt and equity securities. At the date of adoption, the Corporation
recorded a one-time unrealized gain of $64,503,000, or $.44 per common share
related to the value of Olivetti common stock. Subsequently, in the first
quarter of fiscal year 1995, the Corporation sold all of its shares of Olivetti
stock for approximately $149,000,000, thereby realizing the gain. The cash flow
effect is included in the gain/(loss) on disposition and write-down of other
assets in the Statement of cash flows.
Revenue and operating results for the Corporation's Digital-Kienzle business,
acquired in fiscal year 1991, fell significantly short of operating plan for
fiscal 1994 and from results of prior years despite restructuring efforts and
management changes in fiscal 1994 aimed at improving results. During the fourth
quarter of fiscal 1994, plans for further restructuring actions to be taken in
fiscal 1995 were finalized. The Corporation concluded that the discounted cash
flow, including restructuring actions associated with the acquired business,
would no longer support the carrying value of the unamortized goodwill.
Accordingly, the unamortized balance of goodwill related to the acquisition of
approximately $194,000,000 was written off as a charge to operations. This was
included in SG&A expenses on the Statement of operations.
48
Note K: Stock plans
--------------------------------------------------------------------------------
Stock options and awards: Under its Equity Plan, the Corporation has awarded
restricted stock to certain officers and key employees. Under such Equity Plan
and its Restricted Stock Option Plans, the Corporation has granted options to
certain officers and key employees to purchase common stock at a price
determined by the Board of Directors. Shares purchased under the plans are
either subject to repurchase options and restrictions on sales which lapse over
an extended time period not exceeding 10 years, or become exercisable ratably
over periods of up to five years. At July 1, 1995, 4,457,650 options to purchase
shares were exercisable at prices ranging from $19.25 to $153.00. In fiscal year
1992, certain options were granted under such Equity Plan which become
exercisable ratably over five years, but only if the common stock achieves
certain price performance criteria.
The excess, if any, of the fair market value of shares on the measurement date
over the exercise price is charged to operations each year as the restrictions
lapse.
In May 1994, the Board of Directors approved a program to offer employees of the
Corporation (other than executive officers of the Corporation) the opportunity
to exchange their outstanding stock options for new options to purchase a
reduced number of shares of common stock at a per share exercise price equal to
the fair market value of the common stock on the date the program was approved
(the "Regrant Program"). Under the Regrant Program, outstanding options granted
between 1985 and 1993 to purchase up to 11,854,084 shares of common stock with
an average exercise price of $59.43 per share could be exchanged for new options
to purchase up to 4,554,870 shares with an exercise price of $22.88 per share.
The new options vest over four years and have a seven-year term. As of July 3,
1994 options to purchase 5,765,914 shares had been exchanged and cancelled for
new options to purchase a total of 2,328,910 shares. During fiscal year 1995, an
additional 4,476,977 shares were exchanged and cancelled for new options to
purchase a total of 1,663,430 shares. No further exchanges may occur under this
program. No compensation expense was reversed as a result of the Regrant
Program. Future expense associated with options cancelled, and not replaced by
new options under the Regrant Program, will no longer be recognized, resulting
in an expense reduction of approximately $31,000,000 over the years 1995 to
1998.
Stock option plans
--------------------------------------------------------------------------------
Shares Average
reserved for price
future grants Shares per share
--------------------------------------------------------------------------------
June 27, 1992 1,771,498 20,917,895 $71.81
Additional shares
available for grant 1,950,123 - -
Options granted (3,737,045) 3,737,045 $41.41
Shares awarded (277,650) - -
Options exercised - (553,486) $27.67
Options cancelled 1,623,333 (1,623,333) $66.42
Options cancelled under
repurchase program 2,653,570 (2,653,570) $153.00
Options terminated (3,362,938) - -
--------------------------------------------------------------------------------
July 3, 1993 620,891 19,824,551 $56.89
Additional shares
available for grant 2,032,347 - -
Options granted (896,650) 896,650 $23.07
Shares awarded (307,460) - -
Options exercised - (106,612) $33.78
Options cancelled 2,243,356 (2,243,356) $52.08
Options terminated (1,248,476) - -
Regrant program:
Cancelled 5,765,914 (5,765,914) $59.10
Terminated (2,843,639) - -
Regrant (2,328,910) 2,328,910 $22.88
--------------------------------------------------------------------------------
July 2, 1994 3,037,373 14,934,229 $49.59
Additional shares
available for grant 2,134,306 - -
Options granted (2,781,930) 2,781,930 $25.42
Shares awarded (897,680) - -
Options exercised - (677,299) $26.58
Options cancelled 3,278,129 (3,278,129) $35.73
Options terminated (1,748,323) - -
Regrant program:
Cancelled 4,476,977 (4,476,977) $59.26
Terminated (2,479,767) - -
Regrant (1,663,430) 1,663,430 $22.88
--------------------------------------------------------------------------------
July 1, 1995 3,355,655 10,947,184 $41.01
--------------------------------------------------------------------------------
49
Note K: Stock plans (continued)
--------------------------------------------------------------------------------
In April 1993, the Board of Directors approved the repurchase of outstanding
options to purchase up to 2,800,000 shares of common stock granted to certain
employees in fiscal year 1988 at an exercise price of $153.00 per share which
represented a discount of $30.00 per share from the fair market value of the
common stock on the date of grant. The original options to purchase 3,200,000
shares were subject to restrictions lapsing and amortizing ratably over ten
years. Optionholders were offered $3.00 per unexercised option share in return
for the cancellation of the option. The repurchase price was determined after
taking into account option pricing models, the opinion of an independent advisor
and the financial and compensation objectives of the program. The Corporation
repurchased approximately 2,700,000 shares at a cost of approximately
$8,000,000, which was charged to operations in fiscal 1993. In addition, the
Corporation reversed compensation expense recorded in previous years of
$31,843,000 with a corresponding reduction of additional paid-in capital.
Employee stock purchase plans: Under the Corporation's Employee Stock Purchase
Plans, all U.S. and certain non-U.S. employees may be granted the opportunity to
purchase common stock at 85% of market value on the first or last business day
of the six-month payment period, whichever is lower. Common stock reserved for
future employee purchases aggregated 7,547,860 shares at July 1, 1995. There
were 6,085,154 shares issued at an average price of $21.96 per share during the
year ended July 1, 1995; 6,938,772 shares issued at an average price of $23.72
per share during the year ended July 2, 1994; and 6,404,574 shares issued at an
average price of $28.38 per share during the year ended July 3, 1993. There have
been no charges to income in connection with these Plans other than incidental
expenses related to the issuance of the shares. Federal income tax benefits
relating to such Plans, if any, have been credited to additional paid-in
capital.
Stock option plan for non-employee directors: The Stock Option Plan for Non-
Employee Directors provides for a one-time grant of an option to purchase 5,000
shares of the Corporation's common stock to non-employee directors. The exercise
price of an option is 100% of the fair market value per share of common stock of
the Corporation on the date the option is granted. An aggregate of 100,000
shares of common stock are authorized for issuance under the Plan, of which
50,000 have been granted at an average purchase price of $49.01 per share. The
options become exercisable at the rate of 20% per year, with credit given for
past service. None of these options had been exercised as of July 1, 1995.
Note L: Stockholders' equity
--------------------------------------------------------------------------------
On January 21, 1994, the Corporation filed with the Securities and Exchange
Commission a shelf registration statement on Form S-3 under the Securities Act
of 1933, as amended, covering the registration of debt securities, preferred
stock, depositary shares, and warrants to purchase equity and debt securities,
in an aggregate amount of $1 billion. In March 1994, the Corporation issued and
sold 16,000,000 Depositary Shares under the shelf registration statement, each
representing a one-fourth interest in a share of the Corporation's Series A
8 7/8% Cumulative Preferred Stock (the "Series A Preferred Stock"), par value
$1.00 per share. Dividends on the Series A Preferred Stock accrue at the annual
rate of 8 7/8%, or $35,500,000 per year. At July 1, 1995, there were declared
and unpaid dividends of $8,875,000. These dividends were paid on July 17, 1995.
Total dividends of $10,650,000 were declared in fiscal year 1994, commencing
after issuance in March 1994.
The Series A Preferred Stock was offered to the public at $100 per share ($25
per Depositary Share) for a total of $400,000,000, leaving a balance of
$600,000,000 available for future issuance under the shelf registration. The net
proceeds of $387,000,000 from the Series A Preferred Stock offering is available
for working capital and other general corporate purposes. The Series A Preferred
Stock is not convertible into, or exchangeable for, shares of any other class or
classes of stock of the Corporation. The Series A Preferred Stock is not
redeemable prior to April 1, 1999. On or after April 1, 1999, the Corporation,
at its option, may redeem shares of the Series A Preferred Stock, as a whole or
in part, for cash at the redemption price per share of $100 ($25 per Depositary
Share), plus accrued and unpaid dividends to the redemption date. Upon
dissolution, liquidation or the winding up of the affairs of the Corporation,
the holders of the Series A Preferred Stock will be entitled to receive $100 per
share ($25 per Depositary Share), plus accrued and unpaid dividends, before any
distribution to holders of the Corporation's common stock.
50
Note L: Stockholders' equity (continued)
--------------------------------------------------------------------------------
The Corporation adopted a Stockholder Rights Plan in December 1989 pursuant to
which the Corporation authorized the distribution of one Common Stock Purchase
Right ("Right") for each share of outstanding common stock. Under certain
conditions, each Right may be exercised for one share of common stock at an
exercise price of $400, subject to adjustment. Under circumstances defined in
the Plan, the Rights entitle holders to purchase stock having a value of twice
the exercise price of the Rights. Until they become exercisable, the Rights are
not transferable apart from the common stock. The Rights may be redeemed by the
Corporation at any time prior to the occurrence of certain events at $.01 per
Right. The Plan will expire on December 21, 1999, unless the Rights are earlier
redeemed by the Corporation.
------------------------------------------------------------------------------------------------------------------------------
Supplementary information
Quarterly financial data (unaudited)
------------------------------------------------------------------------------------------------------------------------------
Income/ Income/
(loss) (loss) Income/
Total before after Net (loss) per
operating Gross income income income/ common
(in millions except per share data/4/) revenues profit taxes taxes/1/ (loss) share/2/
------------------------------------------------------------------------------------------------------------------------------
For the year ended July 1, 1995
Fourth quarter $ 3,750 $ 1,215 $ 165 $ 160 $ 160 $ 1.01
Third quarter 3,467 1,115 79 74 74 .44
Second quarter 3,473 1,148 23 19 19 .07
First quarter 3,122 943 (191) (195) (131) (.98)
------------------------------------------------------------------------------------------------------------------------------
Total year $ 13,813 $ 4,421 $ 76 $ 57 $ 122 $ 0.59
------------------------------------------------------------------------------------------------------------------------------
For the year ended July 2, 1994
Fourth quarter $ 3,923 $ 1,175 $ (1,673) $ (1,747) $ (1,747) $ (12.64)
Third quarter 3,259 1,101 (178) (183) (183) (1.34)
Second quarter 3,254 1,173 (69) (72) (72) (.53)
First quarter/3/ 3,015 1,090 (100) (103) (154) (1.14)
------------------------------------------------------------------------------------------------------------------------------
Total year $ 13,451 $ 4,539 $ (2,020) $ (2,105) $ (2,156) $ (15.80)
------------------------------------------------------------------------------------------------------------------------------
/1/ Before cumulative effect of changes in accounting principles.
/2/ The sum of the quarter's earnings per share does not equal the year-to-date
earnings per share due to changes in average share calculations. This is in
accordance with prescribed reporting requirements.
/3/ Restated to reflect the adoption of SFAS No. 112 - Employers Accounting
for Postemployment Benefits
/4/ Note: amounts may not be additive due to rounding.
51
Officers and management
--------------------------------------------------------------------------------
*Robert B. Palmer
Chairman of the Board,
President and Chief Executive Officer
*R. E. Caldwell
Vice President, Digital Semiconductor
Bobby A. F. Choonavala
Vice President; President, Asia Pacific
*Charles F. Christ
Vice President and General Manager,
Components Division
Harold D. Copperman
Vice President and General Manager,
Systems Business Unit
Vincenzo Damiani
Vice President and General Manager,
Accounts Business Unit;
President, Digital Europe
*Savino R. (Sid) Ferrales
Vice President, Worldwide Human Resources
Richard J. Fishburn
Vice President and Chief Information Officer
Samuel H. Fuller
Vice President, Corporate Research
Charles B. Holleran
Vice President, Communications
*Ilene B. Jacobs
Vice President and Treasurer
Gail S. Mann
Vice President, Assistant General Counsel,
Secretary and Clerk
*Vincent J. Mullarkey
Vice President, Finance and Chief Financial Officer
*Enrico Pesatori
Vice President and General Manager,
Computer Systems Division
*E. C. Mick Prokopis
Vice President and Corporate Controller
*John J. Rando
Vice President and General Manager,
Multivendor Customer Services Division
Robert J. Rennick
Vice President and General Manager,
Storage Business Unit
*Thomas C. Siekman
Vice President and General Counsel
*William D. Strecker
Vice President, Advanced Technology Group and
Chief Technical Officer
Laurence G. Walker
Vice President and General Manager, Network Product Business Unit
*"Executive Officer" under the Securities Exchange Act of 1934.
52
Directors
--------------------------------------------------------------------------------
Robert B. Palmer
Chairman of the Board,
President and Chief Executive Officer
Digital Equipment Corporation
Vernon R. Alden
Director and Trustee of several organizations
Former Chairman, The Boston Company, Inc.
Philip Caldwell*
Senior Managing Director of Lehman Brothers Inc.
Director of several corporations, Retired Chairman of the
Board and Chief Executive Officer, Ford Motor Company
Colby H. Chandler
Director of several corporations, Retired Chairman
of the Board and Chief Executive Officer,
Eastman Kodak Company
Arnaud de Vitry
Engineering consultant and Director and
Trustee of several organizations
Frank P. Doyle**
Executive Vice President, General Electric Company
Director of several corporations
Robert R. Everett
Retired President of the MITRE Corporation
Kathleen F. Feldstein
President of Economics Studies, Inc.
and Director of several corporations
Thomas P. Gerrity
Dean, Wharton School of the University of Pennsylvania
and Director of several corporations
Thomas L. Phillips
Director of several corporations, Retired Chairman of the
Board and Chief Executive Officer, Raytheon Company
Delbert C. Staley
Director of several corporations, Retired Chairman of the
Board and Chief Executive Officer, NYNEX Corporation
*Mr. Caldwell will retire on November 9, 1995, the date of the 1995 Annual
Meeting of Stockholders.
**Effective August 24, 1995.
[PHOTOGRAPH OF DIGITAL'S BOARD OF DIRECTORS APPEARS HERE]
Board of Directors, Digital Equipment Corporation: left to right, back row
(standing): Colby H. Chandler, Kathleen F. Feldstein, Frank P. Doyle, Delbert C.
Staley, Thomas P. Gerrity. Middle row (seated): Philip Caldwell, Thomas L.
Phillips, Arnaud de Vitry, Robert R. Everett. Front row: Vernon R. Alden, Robert
B. Palmer.
53
Committees of the Board
--------------------------------------------------------------------------------
Audit Committee
Philip Caldwell, Chairman*
Vernon R. Alden
Colby H. Chandler
Kathleen F. Feldstein
Compensation and Stock Option Committee
Thomas L. Phillips, Chairman
Robert R. Everett
Thomas P. Gerrity
Delbert C. Staley
Nominating Committee
Arnaud de Vitry, Chairman
Vernon R. Alden
Colby H. Chandler
Thomas L. Phillips
Strategic Direction Committee
Robert B. Palmer, Chairman
Robert R. Everett
Thomas P. Gerrity
Delbert C. Staley
*Mr. Caldwell will retire on November 9, 1995, the date of the 1995 Annual
Meeting of Stockholders.
Corporate Consulting Engineers
--------------------------------------------------------------------------------
Daniel W. Dobberpuhl
Senior Corporate Consulting Engineer
Digital Semiconductor
Richard B. Grove
Corporate Consulting Engineer
UNIX Business Segment
Robert J. Hannemann
Corporate Consulting Engineer
Components & Peripherals Business Unit
William R. Hawe
Corporate Consulting Engineer
Network Product Business Unit
Richard J. Hollingsworth
Senior Corporate Consulting Engineer
Vice President, Semiconductor
Manufacturing & Technology
Digital Semiconductor
Alan Kotok
Corporate Consulting Engineer
Internet Business Group
William A. Laing
Corporate Consulting Engineer
Computer Systems Division
Richard F. Lary
Corporate Consulting Engineer
Storage Business Unit
Jesse Lipcon
Corporate Consulting Engineer
Vice President, Systems Business Group
Maurice P. Marks
Corporate Consulting Engineer
Digital Semiconductor
Alan G. Nemeth
Corporate Consulting Engineer
UNIX Business Segment
Mahendra R. Patel
Corporate Consulting Engineer
Vice President, Systems Engineering
Systems Business Unit
Jeffrey A. Schriesheim
Corporate Consulting Engineer
Windows NT Business Segment
Richard L. Sites
Corporate Consulting Engineer
Corporate Research Group
Robert E. Stewart
Corporate Consulting Engineer
Workstations Business Segment
William D. Strecker
Senior Corporate Consulting Engineer
Vice President, Advanced Technology Group
Chief Technical Officer
Robert M. Supnik
Senior Corporate Consulting Engineer
Vice President, Architecture & Technology
Computer Systems Division
Charles P. Thacker
Corporate Consulting Engineer
Corporate Research Group
Richard T. Witek
Corporate Consulting Engineer
Digital Semiconductor
54
Investor information
--------------------------------------------------------------------------------
Information on common stock
The Corporation's common stock (Ticker Symbol "DEC") is listed and traded on
the:
Chicago Stock Exchange
New York Stock Exchange
Pacific Stock Exchange
Swiss Stock Exchanges of Zurich, Geneva and Basel
German Stock Exchanges of Frankfurt, Munich and Berlin
Common stock price composite:
There were 68,572 shareholders of record as of July 1, 1995. The high and low
quarterly sales prices for the past three fiscal years were as follows:
--------------------------------------------------------------------------------
Fiscal quarter High Low
--------------------------------------------------------------------------------
1995
Fourth 49 1/2 37 3/8
Third 38 7/8 31 1/8
Second 36 5/8 24 7/8
First 29 1/4 18 3/8
--------------------------------------------------------------------------------
1994
Fourth 30 5/8 18 1/4
Third 38 1/8 27 3/4
Second 39 1/8 34 1/8
First 43 1/8 35 1/4
--------------------------------------------------------------------------------
1993
Fourth 48 1/4 38 1/4
Third 49 1/4 32 3/4
Second 40 5/8 30 3/8
First 44 33 1/4
--------------------------------------------------------------------------------
Transfer Agent and Registrar for common stock:
First Chicago Trust Company of New York is the principal stock transfer agent
and registrar, and maintains the stockholder accounting records. For questions
on change of ownership, lost stock certificates, consolidation of accounts and
change of address, please contact:
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, New Jersey 07303-2500
Telephone: (201) 324-0498
For change of address, send a signed and dated note or postcard to First Chicago
Trust Company of New York and include the name in which the stock is registered,
account number and social security number, as well as the old and new addresses.
Employee investor services:
Digital Equipment Corporation is also a stock transfer agent and registrar, and
maintains employee stockholder accounting records. Inquiries of an
administrative nature relative to employee stockholder accounting records and
employee purchases should be directed to:
Digital Equipment Corporation
111 Powdermill Road MSO1-1/L12
Maynard, Massachusetts 01754
(508) 493-3703, (508) 493-5213
55
Investor information (continued)
--------------------------------------------------------------------------------
Information on preferred stock
The Corporation's Depositary Shares, each representing one-fourth of a share of
the Corporation's Series A 8 7/8% Cumulative Preferred Stock (the "Preferred
Stock") (Ticker Symbol DEC PRA), is listed and traded on the New York Stock
Exchange. The Preferred Stock carries a 8 7/8% cumulative annual dividend
payable quarterly on January 15, April 15, July 15, and October 15 of each year.
Depositary for the Series A 8 7/8% Cumulative Preferred Stock:
Citibank N.A.
Address correspondence to:
Citicorp Data Distributor
404 Sette Drive
Paramus, New Jersey 07653
(800) 422-2066
Stockholder communications
The Investor Relations Department is available to assist stockholders. Investor
inquiries regarding financial information are welcome by letter, telephone or
the Internet. The annual report on Form 10-K for the fiscal year ended July 1,
1995, including schedules thereto, which is filed with the Securities and
Exchange Commission, will be sent without charge upon written request to:
Digital Equipment Corporation
Investor Relations Department
111 Powdermill Road MSO2-3/B17
Maynard, Massachusetts 01754
Telephone: (508) 493-7182
Fax: (508) 493-7633
Digital Shareholder Direct:
Financial results, quarterly and annual reports and news on the Corporation's
products and services is available via voice, fax or mail by calling
1-800-998-9332 (U.S., Canada and Latin America only)
Digital on the Internet:
Access to financial and Corporate information is also available through the
Corporation's home page on the Internet: http://www.digital.com
Eliminate duplicate mailings
To maintain more than one account, but eliminate duplicate mailings of annual
reports to the same address, send a copy of the label from a Corporate mailing
to the Investor Services Department, indicating the names you wish to keep on
the mailing list and the names you wish to delete.
Auditors
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Telephone: (617) 478-5000
56
Digital believes the customer, market and product information in this annual
report is accurate as of its publication date. This information is subject to
change without notice. Digital is not responsible for any inadvertent errors.
Digital will conduct its business in a manner that conserves the environment.
The following are trademarks of Digital Equipment Corporation:
Alpha, AlphaServer, AlphaStation, AlphaStudio, ChannelWorks, Celebris, Digital,
the Digital logo, enVISN, GIGAswitch, HiNote, HiNote Ultra, Mediaplex,
Mobilizer, Multia, OpenVMS, PATHWORKS, PC Utility, Prioris, StorageWorks, VAX
and VMS.
The following are third-party trademarks:
Apple and Macintosh are registered trademarks of Apple Computer, Inc.
Ameritech is a trademark of Ameritech Corporation.
British Telecom is a registered trademark of British Telecommunications Public
Limited Company.
CompUSA is a registered trademark of CompService, Inc.
Compaq is a trademark of Compaq Computer Corporation.
Computer Associates is a registered trademark of Computer Associates
International, Inc.
Dell is a registered trademark of Dell Computer Corporation.
Hewlett-Packard is a registered trademark of Hewlett-Packard Company.
IBM and OS/2 are registered trademarks of International Business Machines
Corporation.
Informix is a registered trademark of Informix Software, Inc.
Intel and Pentium are registered trademarks of Intel Corporation.
MicroAge is a trademark of Computer Center, Inc.
MicroMall is a registered trademark of MicroMall, Inc.
Microsoft, MS-DOS and Windows are registered trademarks and
Windows NT and BackOffice are trademarks of Microsoft Corporation.
Mosaic is a trademark of Mosaic Communications Corporation.
NeXT is a trademark of NeXT Computer, Inc.
Novell and NetWare are registered trademarks of Novell, Inc.
NYNEX is a trademark of NYNEX Corporation, Incorporated.
Olivetti is a registered trademark of Ing. Olivetti & C. S.p.A.
Oracle is a registered trademark of Oracle Corporation.
POSIX is a registered trademark of the Institute of Electrical and Electronic
Engineers.
Reuters is a trademark of Reuters Limited.
Sun is a registered trademark of Sun Microsystems, Inc.
Sybase is a registered trademark of Sybase, Inc.
UNIFORUM is a trademark of UNIFORUM.
UNIX is a registered trademark in the United States and other countries,
licensed exclusively through X/Open Company.
X/Open is a trademark of X/Open Company, Ltd.
Printed in USA EA-C5173-87/95 09 23 235.0
Copyright 1995 Digital Equipment Corporation
All rights reserved
[LOGO OF RECYCLED PAPER APPEARS HERE]
Printed on recycled paper
Digital Equipment Corporation
111 Powdermill Road
Maynard
Massachusetts 01754