Document/Exhibit Description Pages Size
1: 10-K Digital Equipment Corp. 17 77K
2: EX-10.(F) 1995 Equity Plan 11 49K
3: EX-10.(G) 1995 Stock Option Plan for Non Employee Directors 6 26K
4: EX-10.(J) Retirement Arrangement for Non Employee Directors 4 15K
5: EX-10.(M) Employment Agreement - Bruce Clafin 5 21K
6: EX-11 Computation of Net Income (Loss) Per Common Share 2± 9K
7: EX-13 1992 Annual Report 64 313K
8: EX-21 List of Subsidiaries 2 14K
9: EX-23 Consent of Independent Accountants 1 8K
10: EX-27 Financial Data Schedule 1 10K
EXHIBIT 13
[DIGITAL LOGO]
[Photograph of a globe, on which a smaller photograph of two people in front of
a workstation appears. The words "www.digital.com" appear over both
photographs.]
WWW.DIGITAL.COM
1997 ANNUAL REPORT
...and some of our customers:
www.bestwestern.com
www.firstquote.com
www.kvaerner.com
www.lmco.com
www.nymex.com
www.optus.com.au
www.psi.ch
www.siemens.co.uk
www.southernco.com/site/home.asp
www.timewarner.com
Digital Equipment Corporation is a world leader
in implementing and supporting networked
business solutions. Building on its core
competencies in software, systems, networks and
services, DIGITAL--working with its business
partners--is addressing new market opportunities
while supporting its existing customer base.
DIGITAL networked business solutions are helping
our customers compete and win in today's global
marketplace.
CONTENTS
2 Chairman's letter
9 Building the networked world
13 Internet: changing the very definition of networking
17 Windows NT: delivering enterprise solutions
21 Digital UNIX and OpenVMS: owning the standard
for high-performance 64-bit computing
24 Delivering on the promise: the Internet, our
children and the environment
25 Financial statements
WINNING IN A
NETWORKED WORLD
In 1969, a group of U.S. Department of Defense and academic researchers created
a new computer network--one that allowed them to share information and provide
access to computers at key government facilities and research institutions
around the country. Their requirements included speed, reliability and security.
Their platform of choice was DIGITAL.
Known as the ARPANET after its sponsor, the Advanced Research Project
Agency, this fledgling network and its visionary founders sowed the seeds
for the most important information technology paradigm shift of the
1990s--the Internet.
Today, more than a quarter century after the birth of the Internet and 40
years after Digital's own founding, we are more focused than ever on the
enormous opportunities the Internet is creating for enterprises around the
world.
Our strategy concentrates not only on the Internet, but on the other
essential building blocks of the networked enterprise--Windows NT and
high-performance computing--and the associated services needed by our
customers.
Our goal is very simple: to deliver Internet business solutions that enable
our customers and partners to win in the global, networked economy.
[Download Table]
Fiscal year 1997 1996
Total operating revenues $13,046,832,000 $14,562,775,000
Restructuring charge $ -- $ 492,000,000
Net income/(loss) $ 140,875,000 $ (111,812,000)
Net income/(loss) per common share $ 0.68 $ (0.97)
Total stockholders' equity $ 3,544,956,000 $ 3,606,206,000
Number of common stockholders 53,911 62,804
Stockholders' equity per common share $ 20.81 $ 20.62
Number of employees 54,900 59,100
Annual meeting
The annual meeting of
stockholders will be held at
11:00 a.m., Thursday, November
13, 1997, at the World Trade
Center, Commonwealth Pier, 164
Northern Avenue, Boston,
Massachusetts, 02210.
Common stockholders of record
on September 15, 1997 will be
entitled to vote at this
meeting.
1
[PHOTO OF ROBERT B. PALMER]
CHAIRMAN'S LETTER
TO OUR SHAREHOLDERS, EMPLOYEES, CUSTOMERS AND PARTNERS Last year was one of
transition for DIGITAL--a year that began with a temporary setback and ended
with improving results and increasing momentum for our company. It was also a
year in which we took several actions that will have a positive impact on
Digital's performance going forward.
For fiscal 1997, DIGITAL reported net income of $141 million, or $.68 per
common share. Total operating revenue was $13 billion, a 10 percent decline
from the previous year. I am certainly not satisfied with that performance
because I know that we can--and will--do much better. But I am pleased with
the way the company responded after a disappointing loss in our first
quarter. We showed continuous improvement in profitability throughout the
rest of the year.
For DIGITAL, the key to achieving and sustaining competitive levels of
profitability--and to increasing shareholder value--is growth, and that is
our top priority. I am confident that we will begin to grow again during the
current fiscal year. My confidence is based on the continued progress we made
during fiscal 1997 in strengthening our foundation for both growth and
profitability. For example:
o We further evolved our corporate strategy, sharpened our focus on targeted
growth markets and increased our emphasis on Internet-based solutions.
o We created a single, worldwide sales and marketing organization to improve
our marketing, revitalize the DIGITAL brand and generate more demand for our
products and services.
o We brought our product businesses together in a new division that provides
the increased coordination we need to build on our product leadership and to
exploit emerging technologies.
o And we continued to build on our leadership in providing the global service
and support that are essential to deliver comprehensive information
technology solutions.
2
Last year was also noteworthy for the action we took to protect DIGITAL's
intellectual property. In May, DIGITAL filed an important lawsuit charging
Intel Corporation with willful infringement of DIGITAL patents in the
development, manufacture and sale of its Pentium, Pentium Pro and Pentium II
microprocessor families.
Our decision to file suit was praised by some and questioned by others. But
irrespective of the reactions, we believe DIGITAL has an obligation to
protect your investments in research and development by enforcing DIGITAL's
intellectual property rights.
Throughout the year the one constant was the dedication and determination of
DIGITAL employees. Everywhere I go in the DIGITAL world, I am impressed by
the talent and the skills of our employees. They are one of the most
important reasons for my confidence in our future. Our success is the direct
result of their hard work.
OPERATIONAL REVIEW Our performance during the early part of the fiscal year
was a reminder that corporate transformations do not move in a straight line.
But we are unwavering in our determination to succeed and to achieve
competitive levels of growth and profitability. While reaching that goal is a
multiyear process, we have set specific financial targets that will help mark
our progress.
At the beginning of fiscal 1997, DIGITAL outlined our plan for achieving a
competitive financial return.
Our goal for net profit margin is seven percent, and we are making progress
in that direction. A key element in achieving that goal is improving gross
margins. Total gross margin in the fourth quarter was up a full two points
year over year. The increase was even more dramatic in product gross margins,
which were up three points year over year and 11 points over the past three
years. And we met another important financial objective by stabilizing gross
margins in our services business.
Our balance sheet also remained strong. An important factor was continued
improvement in all areas of asset management. The cash and short-term
investment balance increased to $2.5 billion--an all-time high for the
company--even as we repurchased 10 million shares of common stock during the
year. Reflecting its strong confidence in our future, the Board of Directors
has authorized the company to repurchase up to 15 million additional shares.
One of the highlights of the fiscal year was the return to profitability of
our personal computer business. During the previous fiscal year, this
business was losing money, and revenue was declining. Since then there has
been a remarkable turnaround, driven by new leadership, a more focused
strategy and a greater emphasis on business controls. The PC business was
profitable for the full fiscal year, and revenues are growing.
3
DIGITAL also made further progress in controlling expenses, managing assets
more effectively and improving the efficiency of our processes and
operations. As we grow, we will leverage our improved cost structure to
deliver significant improvements in earnings.
GROWTH STRATEGY As the information technology market and customer needs
evolve, we are more confident than ever about the strategic decisions we made
two years ago. Those decisions were based on key market trends, including the
dramatic expansion of the Internet and its increasing use as a business tool;
the rapid acceptance of Windows NT as an enterprise operating system; and
continuing strong demand for high-performance, 64-bit computing.
As our growth strategy has developed, we have increased our emphasis on the
Internet, particularly the multimedia portion of the Internet known as the
World Wide Web. This is reflected in our corporate vision: DIGITAL will be
the undisputed leader in Web-based enterprise computing.
Digital has more than two decades of experience with the Internet. But what
gives us confidence in our vision of leadership are the breadth and depth of
what we offer customers today:
o A broad range of integration and operations management services that helps
customers design, integrate and deploy Internet business solutions across the
enterprise,
o Powerful servers to run the most demanding Web-based applications,
o Innovative software like the AltaVista search engine, the most powerful
search and index service on the Internet; security firewalls that protect
corporate networks from intruders; and Millicent, a revolutionary
microcommerce system that will make Web-based transactions profitable down to
a fraction of a cent, and,
o Strategic alliances and partnerships with industry leaders like Microsoft,
MCI, British Telecom, Oracle, Computer Associates and SAP, which enable us to
deliver comprehensive Internet solutions to customers.
The growing list of companies that have chosen DIGITAL AlphaServer systems to
run their critical Web applications reads like a Who's Who of Internet
pioneers: Netscape, Amazon.com, PointCast, Lycos and Microsoft. In fact, a
Computerworld survey of the 100 premier Web sites found that nearly
three-quarters of them use DIGITAL products.
4
Our share of key markets is growing. For example, DIGITAL had more than 14
percent of the $1.4 billion Internet Service Provider (ISP) market worldwide at
the end of 1997. Our ISP revenues were up 400 percent while that overall market
doubled. We expect our market share to increase to 20 percent by the end of
fiscal 1998.
THE EXPANDING INTERNET Businesses today are adopting Internet technology at a
very rapid pace. They are building internal networks known as "intranets" that
help unlock the valuable information stored in corporate databases and make that
information available throughout the enterprise. They are establishing virtual
networks that link their businesses with customers, partners and suppliers. They
are devising new channels to distribute their products directly to customers.
And they are creating new forms of electronic commerce, laying the foundation
for a truly global, networked economy.
DIGITAL is a leader in the intranet market. We are involved in two of the
largest intranet deployments in the world. One is for Kvaerner, a Norwegian
multinational that is building a network to link 40,000 of its employees around
the world. The other is for the American Red Cross, with the potential to link
1.4 million volunteers and staff members.
Another important trend is the emergence of a wide variety of so-called Internet
appliances like network computers, TV set-top boxes, palmtop computers, smart
telephones and Web phones. DIGITAL is a pioneer in this new market with our
StrongARM microprocessor. This very efficient chip delivers breakthrough
performance with very low power consumption and low cost--making it the ideal
engine for these new devices. More than 40 companies are already designing
Internet appliances around the StrongARM chip, and we expect dramatic growth in
this market segment.
In addition to the Internet, we also are focusing on two other major growth
opportunities: Microsoft Windows NT and high-performance 64-bit UNIX. Within
each of these markets, we are targeting segments where we expect to achieve
industry leadership.
During fiscal 1997, for example, DIGITAL established itself as the clear leader
in mail and messaging solutions based on Windows NT and Exchange--two of
Microsoft's fastest-growing enterprise offerings. Working closely with Microsoft
as part of our Alliance for Enterprise Computing, DIGITAL won more than one
million Exchange seats worldwide.
We are also integrating Windows NT with other operating environments, like
Digital's OpenVMS operating system, which is still unrivaled for
mission-critical computing. By integrating OpenVMS and Windows NT, customers can
enjoy the reliability and availability of OpenVMS and the broad applications
portfolio of Windows NT. DIGITAL will continue to invest in OpenVMS to meet the
needs of our customers.
5
In the UNIX market, we are targeting segments such as data warehousing and
high-performance technical computing, both of which benefit from the power
and performance of DIGITAL's 64-bit systems and software.
Many companies have selected DIGITAL to provide data warehouse solutions.
They include Tele-Communications Inc., one of the nation's largest cable
operators, and HFS Incorporated, the nation's largest franchise holding
company, with brands like Century 21 and Avis. And we are gaining share in
the market for high-performance technical computing with customers like the
Los Alamos National Laboratory and Sandia National Laboratories in the U.S.,
and CERN, a research center in Switzerland. According to International Data
Corporation, a market research company, DIGITAL's share of the midrange,
high-performance market increased to 28 percent last year from 21 percent the
year before.
Across all of these growth markets, one of our most important competitive
advantages is our ability to provide service and support worldwide.
Enterprise customers are not just looking for a product supplier. They are
looking for an information technology partner who can integrate products and
applications in a multivendor environment, provide support after the project
is complete and, in many cases, take over management of critical IT
resources.
The DIGITAL Services Division is widely recognized for leadership in these
areas. In fact, DIGITAL was ranked No. 1 in customer satisfaction among
systems integrators in Computerworld magazine's 1997 user survey.
EXECUTING THE STRATEGY One of our continuing objectives is to improve the
execution of our strategy. The most important step we took in that direction
last year was a major refocusing of DIGITAL's marketing and sales operations.
A single organization is now responsible for all of our marketing efforts
worldwide. This has several benefits, but the most important is that DIGITAL
will go to market as one company, with a unified marketing strategy and
common messages that support our growth strategy and brand. By revitalizing
our single brand, we will increase demand for a multitude of DIGITAL
solutions.
Part of going to market as one DIGITAL is having a sales force that is
empowered to represent the entire company, not just a single business unit or
function. To that end, we consolidated our product sales operations into the
worldwide sales and marketing organization and increased coordination among
our sales and service professionals. This enables us to
6
do business with customers and partners in a more uniform way. By reducing
our sales complexity and redundancy, it also makes it easier for customers
and partners to do business with DIGITAL.
The other major organizational change we made was the creation of the DIGITAL
Products Division. Although we have attained product leadership in some key
segments of the market, we are not taking that leadership for granted. By
putting all of our product businesses in one division, we will increase
cooperation and coordination and leverage our technical excellence across our
product lines.
40 YEARS OF INNOVATION AND CUSTOMER SUCCESS On August 23, 1997, DIGITAL
celebrated its 40th Anniversary. That milestone was a reminder of just how
much has changed since a small group of visionaries started DIGITAL in a
19th-century woolen mill in 1957--and of how much this company has
contributed to the growth of the computer industry. We are proud of that
heritage of innovation and industry leadership.
From its inception, our company has been driven by a relentless focus on the
future and on developing innovative technologies that will help make our
customers more successful. We did these things in the past with the PDP and
VAX architectures, the VMS operating system, distributed computing and
clustering, to name a few. And we are doing them today with Alpha, StrongARM,
DIGITAL UNIX, AltaVista and our HiNote Ultra notebook computers.
But it will take more than leadership services and technology for DIGITAL to
succeed. It will take the support of our shareholders, employees, customers
and partners. We know that we must continue to earn that support. Digital is
committed to increasing value for shareholders, providing an exciting and
rewarding workplace for our employees, and offering customers and partners
nothing less than the industry's best products, services and solutions.
That is what DIGITAL has enjoyed doing for the last 40 years, and it is why
we are looking forward to the next 40.
/s/ Robert B. Palmer
--------------------------------------
Robert B. Palmer
Chairman of the Board,
President and Chief Executive Officer
7
[Photograph of the trading floor of the New York Mercantile Exchange]
NEW YORK MERCANTILE EXCHANGE
WINDOWS NT, OPEN VMS AND DIGITAL UNIX INTEGRATED IN A
DISASTER-TOLERANT ENTERPRISE SOLUTION
www.nymex.com
The world's largest petroleum and precious metals exchange is moving its core
trading, settlement and compliance applications from fault-tolerant Tandem
systems to mirrored disaster-tolerant Alpha clusters in separate locations as
part of a DIGITAL/Microsoft solution.
Traders will now get realtime trading information rather than having to depend
on written reports prepared after the market closes. At the same time, the
trading floors and computer rooms in the Exchange's new building will be linked
through a high-speed DIGITAL GIGAswitch system and fiberoptic cable to a second
building that will serve as a backup center for both the trading floor and back
office applications.
This enterprise network will include 1,100 DIGITAL PCs, 50 DIGITAL x86-based
servers running Windows NT and ten AlphaServer systems in two different
buildings running OpenVMS and DIGITAL UNIX operating systems. The network
provides a dramatic demonstration of the interoperability of these three
operating systems. Through the DIGITAL Windows NT integration program, Affinity
for OpenVMS and AllConnect for UNIX provide the tools to integrate legacy
systems with new applications.
BUILDING THE
NETWORKED WORLD
THE INTERNET IS NOT JUST ABOUT THE FUTURE OF TECHNOLOGY--THE INTERNET IS NOW. IT
PROVIDES THE INFRASTRUCTURE NEEDED TO ACQUIRE, SHARE AND PUBLISH INFORMATION. IT
IS THE PLATFORM WHERE VOICE, DATA AND VIDEO TECHNOLOGIES CONVERGE. IT IS THE
HEART OF A NEW GLOBAL, NETWORKED ECONOMY.
DIGITAL customers are showing the way. Netscape is operating the busiest site
on the Web, handling 140 million requests per day. Best Western's reservation
system supports 3,700 hotels in 73 countries. And Lockheed Martin is building
a mail system to support 120,000 users. These are just three of thousands of
customers who rely on DIGITAL to meet their information technology needs.
These customers recognize DIGITAL as the premier network solutions company.
Network solutions were the key to our prosperity in the 1980s. They remain
the foundation of our strategy today. The only difference is that now,
instead of proprietary solutions, DIGITAL is using Internet technology to
deliver some of the most open solutions in the industry.
As we celebrate our 40th Anniversary, we have an opportunity to capitalize on
communications paradigm shifts--like the telephone, the radio and
television--which can change the way we all live and work. That opportunity
is the Internet. We intend to seize this opportunity.
As Internet standards and technology become more robust and pervasive...as
issues surrounding bandwidth and security are resolved...and as new kinds of
Internet access devices are developed and deployed...the Internet will
undoubtedly become the universal computing platform of choice. There are
three operating environments where, today, DIGITAL is the leader in
delivering enterprise-class Internet solutions:
o Windows NT for general-purpose enterprise computing
o 64-bit UNIX for planetary-scale computing
o OpenVMS for very-high-availability computing
But having the right platforms means little unless you have the service and
support to apply those platforms to the task at hand. DIGITAL provides
integration, product support and operations management services in more than
100 countries through its 23,000-person Services Division.
9
DIGITAL's two-pronged, go-to-market strategy builds on these technological and
service strengths to deliver both infrastructure and industry-focused solutions
targeted at nine key markets. These solutions leverage DIGITAL's core
competencies--multivendor integration, Internet security, continuous computing,
high-availability data and high-performance networked platforms--to clearly
differentiate us from our competitors.
INFRASTRUCTURE SOLUTIONS As customers incorporate the Internet paradigm into
their corporate computing environment, they face infrastructure problems shared
by companies in almost every industry. DIGITAL has developed solutions targeted
at four key infrastructure markets. We are helping customers plan, design and
implement intranets, deploy Internet Commerce solutions, integrate Windows NT
into the enterprise, and modernize their mail and messaging systems.
INDUSTRY-FOCUSED SOLUTIONS DIGITAL also is focusing on select business solutions
customized for specific industries. Four targeted market segments--data
warehousing, enterprise applications, high-performance technical computing and
visual computing--address specific customer needs in key industries including
finance, manufacturing and telecommunications. In these markets, DIGITAL is
tightly tying solutions to industry-specific requirements.
--------------------------------------------------------------------------------
1997 MILESTONES
Forty years ago, DIGITAL opened for business with three employees and
8,500 square feet of production space in an old woolen mill. Today, as
DIGITAL celebrates its 40th Anniversary, the company is a leading
worldwide supplier of networked computer systems, software and services,
developing and manufacturing products and providing customer services in
the Americas, Europe and Asia-Pacific.
DIGITAL won the UNITED STATES POSTAL SERVICE 1997 Quality Service Award. DIGITAL
provides information technology solutions to Postal Service locations
nationwide, including computer hardware and software, maintenance and support
services. Since 1995, DIGITAL has provided the Postal Service with more than
82,000 PCs and servers.
MICRON ELECTRONICS, INC. presented DIGITAL Worldwide Services with an Award of
Excellence at its 1997 Supplier Conference. DIGITAL provides multivendor
desktop, server and notebook service and support for Micron customers
worldwide.
DIGITAL'S X86-BASED PRIORIS servers broke the performance record for Windows NT,
processing 8,145 transactions per minute at $48.67 per transaction.
DIGITAL announced that the STRONGARM MICROPROCESSOR will support Windows CE, the
Microsoft software platform developed for consumer electronic products and
Internet appliances such as hand-held personal computers, smart phones and DVD
players.
AIM TECHNOLOGY awarded DIGITAL 15 "Hot Iron" awards in the UNIX and Windows NT
categories at Networld+Interop.
FX!32, DIGITAL's Windows compatibility software for Alpha systems, was named
one of the five best Windows NT software products by Windows Magazine. It was
also named "Technology of the Year" by Windows Sources.
More than 400 companies joined DIGITAL's INTERNET INNOVATORS PROGRAM designed to
help software companies increase their success throughout the product
development cycle.
10
For example, we have delivered specific data warehousing solutions customized
for different industry needs. Sumitomo Bank of Japan and other money market
banks are using DIGITAL solutions to evaluate their credit card and publicly
held mortgage-backed securities portfolios. Consumer packaged goods
manufacturers and retailers like Schering-Plough have chosen DIGITAL
micro-marketing and consumer brand management solutions that help them identify
and target their best prospects. Telecommunication companies like Australia's
Optus Communications rely on DIGITAL solutions for billing and customer care so
they can provide better service to their subscribers.
INTERNET SERVICE PROVIDERS DIGITAL Internet Infrastructure Services play a key
role in the ninth target market--Internet Service Providers. Many of these
service providers look to DIGITAL for assistance in planning, designing and
implementing scalable facilities to keep pace with growing Internet traffic and
an expanding customer base.
PARTNERING TO PROVIDE TOTAL SOLUTIONS DIGITAL's global alliances with Computer
Associates, MCI, Microsoft, Oracle and SAP play an important role in building
solution sets for each of our nine targeted market segments. In addition, we
have established Centers of Expertise for each market segment and we're
integrating the entire value chain--aligning and teaming products, services and
business partners--to provide customers with highly reliable, scalable and fully
supported solutions tailored to their needs.
--------------------------------------------------------------------------------
DIGITAL's semiconductor manufacturing facility was named a "TOP FAB OF THE YEAR"
by Semiconductor International magazine.
At the 35th Anniversary meeting of DECUS, the DIGITAL EQUIPMENT COMPUTER USERS
SOCIETY, 3,000 customers were present to see significant expansions to the
Windows NT integration program. This is comprised of Affinity for OpenVMS and
AllConnect for DIGITAL UNIX and provides the technology, tools, services,
systems integration and support needed to integrate Windows NT into the
enterprise.
DIGITAL introduced ENTERPRISE INTEGRATION PACKAGES to extend OpenVMS application
and enterprise capabilities to the Windows NT environment.
DIGITAL opened a new CUSTOMER CALL CENTER. By dialing 1-800- DIGITAL, customers
and business partners can speak directly with a highly trained Customer Care
representative who will connect them with someone to address their needs.
DIGITAL announced 11 service offerings for enterprises adopting and migrating to
Microsoft technology, reinforcing DIGITAL's position as MICROSOFT'S PREMIER
SERVICE AND SUPPORT PARTNER.
Readers of Data Communications voted DIGITAL the "BEST OVERALL SERVICES AND
SUPPORT" provider in the magazine's annual user survey, prompting the
publication to give DIGITAL the top "Users' Choice" award.
For the third consecutive year, Datamation magazine readers named DIGITAL's
AlphaServer "SERVER OF THE YEAR."
11
[Photograph of a man at a newsdesk, over which the image of the Road Runner
and the words "Road Runner High Speed Online" appear.]
--------------------------------------------------------------------------------
TIME WARNER
"Road Runner" is bringing online news and entertainment to Hawaii
www.timewarner.com
Building on the technological expertise of the DIGITAL/Microsoft Alliance, the
Oceanic Division of Time Warner Cable is introducing a new high-speed, online
news and entertainment service to the island of Oahu, Hawaii. Named for the
famous Warner Bros. Looney Tunes character, Road Runner is super-fast, using
fiberoptic cable to provide customers with a unique user-friendly online service
and connectivity to the Internet at unparalleled speeds.
Road Runner seamlessly integrates local programming with national and
international content. Subscribers will have connectionless, permanent access to
a wealth of daily news sources from local media outlets, schools, libraries,
government offices, museums, zoos and shopping services. Still photos that would
choke a dial-up network will appear instantly over the broadband Internet.
The network is based on Microsoft's Internet Explorer browser and the Microsoft
Commercial Internet System (MCIS). DIGITAL is providing planning, design and
integration services, as well as DIGITALx86 Prioris servers and custom code to
interface with Oceanic's customer care system. The result is a cost-effective,
easily scalable, broadband Internet service that can support an exciting
combination of news, entertainment and information.
Oceanic is one of Time Warner Cable's larger operations reaching 332,000 homes.
According to Division President, Don Carroll, Oceanic's goal is "...to build
real communities, not just ethereal cyber-communities. The day will come when
the first thing you see when you go online with Road Runner will be news and
information about your own neighborhood. You'll be able to check your children's
school calendar, review proceedings of neighborhood board meetings and check for
promotions and sales at the stores nearest your home.
The possibilities are limitless."
11
INTERNET:
CHANGING THE VERY DEFINITION
OF NETWORKING
THE INTERNET IS CHANGING EVERYTHING--EVEN THE VERY DEFINITION OF NETWORKING.
MANY COMPANIES CLAIM TO BE "THE INTERNET COMPANY" OR EVEN THE INVENTOR OF
NETWORKED COMPUTING.
While many of these companies have made significant contributions to Internet
technology, DIGITAL was and is the leader in developing Internet solutions. We
were the first computer company on the ARPANET, the forerunner of the Internet,
and--as one of the original sponsors of Ethernet--we brought the network to the
desktop. Today, DIGITAL has all the components--from implementation and
integration services to high-capacity, high-performance servers--needed to
support large-scale Internet and intranet applications. This leadership can't be
challenged: of the Computerworld Premier 100 Internet sites, 73 use DIGITAL
products.
The experience we've gained in working with companies who have built world-class
Internet sites is one reason we can help other customers understand the
implications of Internet technology. We're helping them apply this technology to
their business needs and build intranets--private networks using Internet
technology and communications.
We're helping customers build Web infrastructures with the capacity, reliability
and security needed to conduct financial transactions and buy and sell
everything from new homes and cars to personalized news reports. And, as new
applications fuel the explosive growth of the Internet, we're working closely
with Internet Service Providers and telecommunication companies to help them
build and maintain the network.
INTERNET INTEGRATION, INFRASTRUCTURE AND OPERATIONS MANAGEMENT SERVICES As more
and more businesses evolve into networked enterprises where employees,
customers, business partners and suppliers share ideas and work together over
the Internet and intranets, the need to reduce network support costs and ensure
round-the-clock, 24x365 availability has become a priority.
DIGITAL Worldwide Services provide Internet Infrastructure Services, Network and
Application Integration Services and Internet Operation Management Services to
help customers plan, design, implement and manage intranet applications and
Internet communications and commerce.
13
HIGH-PERFORMANCE, HIGH-AVAILABILITY INTERNET SERVERS No business wants its
customers, partners or employees to experience repeated busy signals and "server
not available" messages. The need for high-performance, high-availability
Windows NT and UNIX servers is particularly critical for Internet Service
Providers and companies building intranets or engaged in Internet Commerce.
To demonstrate the power and scalability of our Internet business solutions,
DIGITAL established the AltaVista search service
(http://www.altavista.digital.com). AltaVista has become one of the most popular
sites on the World Wide Web. Each day, more than 30 million Internet users rely
on AltaVista to quickly and easily find the information they're looking for.
Driven by DIGITAL's powerful 64-bit AlphaServer technology, AltaVista gives
users access to more than 31 million pages of information. This past year,
AltaVista was enhanced with a new user interface that includes simple
customization tools and a "refine" function, enabling users to focus their
searches and obtain relevant results within seconds. A unique multilingual
search feature was also added. Now users can search for Web pages written in any
one of 25 languages--from Chinese to Swedish.
[Photograph of DIGITAL Prioris HX6000 series of x86 servers]
The DIGITAL Prioris HX6000 series of x86 servers delivers
exceptional value in a "no compromise" package, combining
state-of-the-art manageability, availability, performance,
scalability and service. Data integrity and reliability are assured
with high-availability system design including ECC EDO memory,
redundant cooling, optional redundant power, integrated Hot-Swap
drives and dual redundant backplane capabilities.
INFORMATION ACCESS, SECURITY AND INTERNET COMMERCE SOFTWARE Internet
applications require specialized software. Without this software,
the Internet becomes a tangled web where it is difficult to find the information
you're looking for, where transactions can go astray and where hackers and
viruses can bring your systems to a halt.
DIGITAL has addressed these issues. Our AltaVista family includes firewall,
tunneling, indexing and desktop-to-Web search software for x86 Windows, Windows
NT and Sun Solaris desktops and servers as well as Alpha systems running Windows
NT and DIGITAL UNIX.
With DIGITAL Internet transaction processing software and the recent
introduction of the advanced Millicent technology showcase, DIGITAL has the
specialized software and associated services needed to support Internet
Commerce. Millicent is the first cyber-commerce program that demonstrates how
users can buy and sell information over the World Wide
--------------------------------------------------------------------------------
KVAERNER
BUILDING AN INTRANET TO LINK 40,000 EMPLOYEES AND 400 OFFICES
WORLDWIDE
www.kvaerner.com
When Kvaerner--a multinational shipping and construction company with its roots
in Norway and its international headquarters in London--wanted to link its
worldwide subsidiaries, they named DIGITAL and Microsoft as their preferred
vendors for Internet/intranet solutions throughout the enterprise.
Service and support were critical issues. Kvaerner wanted to deal with a service
organization that had first-hand experience establishing and operating its own
enterprise-wide intranet. They looked for a service organization that could
demonstrate its ability to support a global enterprise and a user base
comparable in size to their own.
With facilities thoroughout the world, DIGITAL Worldwide Services is positioned
to work with Kvaerner subsidiaries on a one-to-one basis, while at the same time
providing the coordination necessary to build a highly reliable and functional
worldwide intranet based on Windows NT, Microsoft Internet Explorer and
high-performance DIGITAL servers.
14
[Photograph of 64-bit AlphaServer 4000 system]
The 64-bit AlphaServer 4000 system is part of DIGITAL's complete
family of ready-to-run Alpha and x86 Internet and intranet servers.
Designed for round-the-clock, 24x365 operation, AlphaServer systems
provide the high availability, data integrity and flexible
scalability needed to support growing Internet applications.
Web at prices as low as a tenth of a cent. It makes "pay-per-click" surfing
affordable for the user and opens a profitable new revenue stream for publishers
who can now sell news and sports stories, fiction, features, financial reports
and other information on a page-by-page basis.
To understand the potential of selling products and publishing information over
the Internet, you only have to look at Amazon.com and PointCast. Amazon.com, the
"electronic bookstore," has been growing 2,000 percent a year. Fortunately,
Amazon.com uses AlphaServer systems that have the scalability to handle this
growth for another 20 years.
PointCast is the leader in "push" technology, using the Internet to provide
customized news and information services to millions of individual users, 24
hours a day. Like Amazon.com, PointCast depends on highly scalable AlphaServer
systems to keep pace with its aggressive growth.
--------------------------------------------------------------------------------
VIRTUAL TELECOM, INC.
Providing Internet access in Switzerland and realtime financial
information services across Europe
www.firstquote.com
Virtual Telecom recognized that its core business is providing value-added
services over the Internet. The Swiss company wanted to provide Internet Service
Providers instant access to the network through multiple high-speed
communications links through a major Internet hub.
Under a multiyear, multimillion-dollar Operations Management Services contract,
DIGITAL designed, implemented and is managing the Virtual Telecom network.
In addition to Internet access, Virtual Telecom's FirstSwiss service includes
Web hosting, Web development, publishing and online catalog services. Virtual
Telecom also provides 1stQuote, a comprehensive range of realtime financial data
services over the Internet to banks, investment companies and brokerage houses
throughout Europe.
The Virtual Telecom network features DIGITAL AltaVista firewall software at each
point of presence to protect against unauthorized access and capitalizes on
alliances with Swiss Telecom PTT and British Telecom for high-speed
telecommunications services.
15
[Photograph of workers in a factory engaged in a manufacturing process]
SIEMENS (U.K.)
Building a scalable manufacturing control and management information
system
www.siemens.co.uk
Service, support for both Windows NT and UNIX, solutions that are scalable from
x86 desktops to Alpha clusters, strategic alliances with key software
companies--these are reasons customers give for partnering with DIGITAL.
Siemens is no exception. When they set up a new semiconductor wafer
manufacturing plant in the U.K., they needed a manufacturing system to control
production processes, improve product quality, lower costs and reduce
time-to-market. At the same time, they wanted a scalable mail and messaging
system that would initially support up to 1,200 users and link their U.K.
plant to other Siemens facilities in both Europe and North America.
In the DIGITAL solution, x86-based Prioris servers and UNIX-based AlphaServer
systems work together to support CELLworks, Microsoft Exchange and Oracle
database software. The DIGITAL solution enables Siemens to track work in
progress to control inventories and ensure just-in-time delivery to its
customers.
DIGITAL Worldwide Services played a key role in developing and implementing a
scalable solution that would allow Siemens to add new users and applications to
the network without interrupting work or replacing existing equipment.
WINDOWS NT:
DELIVERING ENTERPRISE
SOLUTIONS
AS CUSTOMERS LIKE THE NEW YORK MERCANTILE EXCHANGE, LOCKHEED MARTIN AND THE
SOUTHERN COMPANY IMPLEMENT CLIENT/SERVER APPLICATIONS AND BUILD MAIL AND
MESSAGING SYSTEMS TO SUPPORT TENS OF THOUSANDS OF USERS, THE CHALLENGE IS
INTEGRATING THESE APPLICATIONS INTO EXISTING COMPUTING ENVIRONMENTS.
Integration is DIGITAL's strength. In fact, DIGITAL was ranked as the industry's
top systems integrator by readers of Computerworld in its annual Customer
Satisfaction Survey.
It is the need to integrate computing resources around a platform optimized for
client/server and network computing that drives the rapid deployment of Windows
NT. The trend is accelerating. According to International Data Corporation, the
market for Windows NT systems, software and services will be an estimated $20.7
billion in the year 2000. DIGITAL intends to capture a significant share of this
growing market.
THE ALLIANCE FOR ENTERPRISE COMPUTING Windows NT was designed for client/server
environments. Under the Alliance for Enterprise Computing, DIGITAL and Microsoft
are working together to provide products and services to support a single,
integrated client/ server environment that extends from the desktop, across the
enterprise and out over the whole world through Internet communications.
DIGITAL has built the largest Windows NT service and support organization in the
world. We now have approximately 1,600 Microsoft certified systems engineers and
solution developers--a number that soon will grow to 2,500. We developed
software that supports the development of applications that will run across
Windows NT, DIGITAL UNIX and OpenVMS systems. We introduced the first Windows NT
clusters. And our x86 and AlphaServer systems own the benchmarks for Windows NT
performance. In tests conducted by Pro/E: The Magazine, a DIGITAL Personal
Workstation running Windows NT outperformed all workstations tested, regardless
of Central Processing Unit architecture or operating system. In fact, it
outperformed a similarly priced Sun system running UNIX by 171 percent.
17
Microsoft, for its part, is developing a 64-bit version of Windows NT for
initial release on Alpha. But the relationship between the two companies extends
beyond technology. It includes joint engineering, marketing, sales and service
programs. Working in partnership, we've helped customers build user-focused
enterprise systems and networks, and we have installed more than 500,000
Microsoft Exchange seats and have another 500,000 under contract.
[Photograph of DIGITAL HiNote VP laptop computer]
Winner of PC/Computing magazine's "Annual Torture Test"
and designated the "Best Windows NT Hardware Product of the Year"
by Windows Magazine, the DIGITAL HiNote VP family of laptop
computers features the latest in MMX processor, graphics and
removable media technologies.
"THIN CLIENTS"--REDUCING DESKTOP SUPPORT COSTS A whole new class of Internet
devices is emerging that will enable people to access the Internet--anywhere,
anytime. Collectively called "thin clients," these devices often combine
cellular telephone, pager, fax, handwriting recognition and computing functions
in a single unit. It would never have been possible to develop many of these new
devices without high-performance microprocessors that will run on a battery.
DIGITAL is leading the way. Our StrongARM microprocessor operates at speeds up
to 250 million instructions per second while running on AA batteries. This is a
two-to-one advantage in both absolute performance and price/ performance over
competing microprocessors.
The concept of the "thin client" also addresses the cost of purchasing and
supporting desktop and mobile systems in client/server networks where
applications and/or data reside on a central server rather than on the client.
Because data processing controls the server, it can control software used by
thin clients throughout select workgroups or the entire enterprise. There is no
longer the problem of individual users running different versions of the same
application. New software releases no longer have to be installed one desktop at
a time. Data is centralized so it can be easily secured and backed up. The
potential savings are significant.
WINDOWS NT SERVICE AND SUPPORT DIGITAL is the first computer company to offer a
comprehensive set of life-cycle services focused on the growing demand for
Windows NT and Microsoft Exchange migration, Internet and intranet solutions,
and data warehousing using Microsoft SQL Server. In providing these services,
DIGITAL intends to help customers decrease implementation time and lower costs.
--------------------------------------------------------------------------------
LOCKHEED MARTIN
Helping 120,000 users in 630 locations worldwide get the message
www.lmco.com
When Lockheed and Martin-Marietta merged to become one of America's largest
civilian and military aerospace manufacturing and contracting companies, they
needed a mail and messaging system with the muscle to support 120,000 users in
630 locations. They selected DIGITAL through a competitive process for an
enterprise-wide Windows NT solution that is expected to reduce long-term costs
by simplifying their messaging infrastructure and improving productivity.
Working with Microsoft, its partner in the Alliance for Enterprise Computing,
DIGITAL is implementing the largest Microsoft Exchange network in the world.
Running under Windows 95 and Windows NT, Microsoft Exchange provides a complete,
highly functional mail and messaging system that includes address book, auto
signature, remote mail and public folder functions. This last provides a forum
where authorized members of a workgroup or product team can share information
and ideas.
The DIGITAL/Microsoft solution for Lockheed Martin includes AlphaServer systems
with DIGITAL's X.500 directory services software, Microsoft Windows NT and
Exchange software, and DIGITAL program management, network design,
implementation and ongoing support services.
18
[Photograph of DIGITAL Venturis FX-2 PC client]
DIGITAL's Venturis FX-2 PC client provides breakthrough performance at
industry-standard prices with leading-edge features, including x86 MMX
technology and DIGITAL ClientWORKS systems management and control software.
This software provides powerful desktop management, asset management and
configuration utilities.
We provide Internet/intranet enterprise services to help organizations
understand the impact the Microsoft Merchant Server and the Microsoft Commercial
Internet System will have on their businesses and help them successfully deploy
and manage solutions for Internet Commerce.
SQL DATA WAREHOUSING As businesses migrate users and applications to
client/server environments, they often find themselves with disparate data
sources. DIGITAL is addressing this problem with the DIGITAL DataMart. This
innovative combination of Microsoft SQL Server with products from Informatica
Corporation and Business Objects SA provides the software and services needed to
map Microsoft SQL server to industry-standard databases from Oracle, Informix
and Sybase.
WINDOWS NT, FX!32 AND ALPHA Performance and scalability are critical issues in
many enterprise networks and applications. DIGITAL supports Windows NT on both
its x86 and Alpha platforms to provide the most extensive scalability in the
industry. In addition, with DIGITAL FX!32 translation and emulation software,
Alpha systems can run the entire library of Windows NT and Windows 95
applications.
--------------------------------------------------------------------------------
SOUTHERN COMPANY
America's largest electric utility powers up with Windows NT on
DIGITAL server systems
www.southernco.com/site/home.asp
Deregulation is coming to the U.S. electric utility industry. That puts a
premium on finding ways to improve customer service and cut costs. The Southern
Company is responding to this changing marketplace by standardizing on Windows
NT to gain a cost-effective solution.
The Southern Company network currently has more than 17,000 users and 500
NetWare servers from many different vendors. These are being replaced by DIGITAL
Alpha and Prioris systems running Windows NT, Microsoft Exchange and SMS in a
BackOffice environment.
As in many projects of this size, DIGITAL is working closely with Microsoft and
its other business partners. Universal Data Consultants provided systems and
network integration services for the Southern Company, while Wyle Electronics, a
billion-dollar DIGITAL distribution partner, is delivering the DIGITAL systems
on a "just-in-time" schedule.
19
[Photograph of a man on a telephone and another man viewing a screen in a room
with multiple computer and television screens]
--------------------------------------------------------------------------------
--------------------
OPTUS COMMUNICATIONS
--------------------
------------------------------------------
Caring for customers across the Australian
continent while introducing new wireline,
mobile, broadband and satellite services
------------------------------------------
----------------
www.optus.com.au
----------------
"Convergence billing" --providing a single bill for local, long distance, mobile
and cable-based local-loop telephone service, Internet access and cable TV--is
the major customer care issue facing telecommunications companies as they
introduce new services.
Using software developed by Kenan Systems, Optus Communications is one of the
first telecommunications companies to deploy a UNIX-based billing system to
support multiple communications services on an enterprise-wide basis. This
high-performance hardware/software solution is capable of supporting 15 million
residential subscribers in a production environment.
Running on DIGITAL Alpha systems, Kenan's Arbor/BP software owns the benchmark
for online telecommunications billing and customer care, processing four million
call details per hour.
Optus has been a major customer since 1992, when DIGITAL was initially selected
as the prime contractor and system integrator for building the Operational
Support Systems--the network operating, billing and administrative
systems--needed to control and manage the Australia-wide telecommunications
network.
20
DIGITAL UNIX AND OPENVMS:
OWNING THE STANDARD FOR HIGH-
PERFORMANCE 64-BIT COMPUTING
PERFORMANCE AND AVAILABILITY ARE ISSUES WHENEVER YOU HAVE LARGE
OR COMPLEX APPLICATIONS, MASSIVE AMOUNTS OF DATA OR A NETWORK
THAT SUPPORTS HUNDREDS OR EVEN THOUSANDS OF USERS. THESE ARE
ISSUES THAT DIRECTLY AFFECT SOFTWARE DEVELOPERS AND SYSTEMS
INTEGRATORS AS WELL AS USERS. CUSTOMERS ARE LOOKING FOR FULLY
SUPPORTED HARDWARE/SOFTWARE SOLUTIONS THAT DELIVER THE
PERFORMANCE, AVAILABILITY AND SCALABILITY TO MEET THEIR GROWING
NEEDS.
That's why systems integrators like Ernst & Young and Andersen
Consulting and leading application developers like SAS, Platinum
and Baan work in partnership with DIGITAL.
These companies recognize the need for 64-bit UNIX systems that
can handle massive applications. DIGITAL UNIX systems enabled
Schering-Plough's Health Products unit to implement a logistics
program that saved the company two million dollars in inventory,
transportation and accounts receivable costs. Alpha systems
running Digital UNIX and SAP R/3 software enabled Danish Railways
to implement a corporate-wide accounting and finance system.
Our partners also recognize the need for systems that deliver the
very highest levels of reliability and availability. This is the
strength of DIGITAL's OpenVMS operating system.
With 64-bit DIGITAL UNIX and OpenVMS systems, customers have a
choice. And they have the opportunity to run their applications
on the system that sets the standard for 64-bit
computing--DIGITAL's Alpha platform.
ALPHA PERFORMANCE: TWO BILLION INSTRUCTIONS PER SECOND
High-performance computing starts with high-performance
processors. Here DIGITAL has a clear-cut advantage.
"AlphaPowered" systems push the envelope for high-performance
technical computing, data warehousing, transaction processing and
visual computing applications, including videoconferencing, 3-D
modeling, video editing, multimedia authoring, image rendering
and animation. With patented cache management, branch prediction
and superscalar instruction execution technology, high-end Alpha
microprocessors run at speeds of more than 600 MHz to execute
more than two billion instructions per second.
21
[Photograph of Digital AlphaServer 8000 system]
AlphaServer 8000 systems support up to 14 symmetric multiprocessors, DIGITAL
UNIX TruClusters, 28 gigabytes of memory and 39 terabytes of storage to provide
better-than-mainframe and supercomputer performance. Business-critical
applications include data warehousing, high-performance technical computing,
sophisticated telecommunications applications and large-scale database
management.
Alpha microprocessors are now available from both DIGITAL and its
semiconductor partners. Mitsubishi and Samsung have joined
DIGITAL in developing, manufacturing and marketing Alpha
microprocessors to deliver performance leadership where
performance counts.
DIGITAL UNIX, THE HIGH-PERFORMANCE OPERATING SYSTEM More than 50
percent of all DIGITAL UNIX customers are new customers because
this 64-bit operating system--paired with AlphaServer
systems--supports large-scale data warehousing, visual computing
and other high-performance business, scientific and networking
applications that could not be cost-effectively addressed by
competitive systems. DIGITAL leads the industry in UNIX cluster
performance. The transaction processing benchmark set in April
1996 on a four-node DIGITAL TruCluster system has not been
matched by any other four-node cluster on the market.
HIGH-AVAILABILITY OPENVMS CLUSTERS FOR BUSINESS-CRITICAL
APPLICATIONS DIGITAL pioneered the cluster concept in 1983 and
continues to set the standard by which clustering and continuous
computing solutions are measured. DIGITAL cluster technology
provides bulletproof, round-the-clock, 24x365 disaster tolerance.
It supports VAX and Alpha systems in mixed clusters, Windows NT
clusters, multisite configurations within a 500-mile radius and
online backup. In addition, DIGITAL cluster technology allows you
to add processors, memory, storage and other devices to a DIGITAL
server without interrupting ongoing processes.
In a recent review of cluster computing, an independent research
organization, Technology Business Research, examined various
features including scalability, availability, configuration
flexibility, connectivity and applications support. The survey
concluded that DIGITAL OpenVMS clusters continue to lead over
Hewlett-Packard, IBM, NCR and Sun Microsystem clusters.
VERY LARGE MEMORY, VERY LARGE DATABASE APPLICATIONS As corporate
networks embrace desktop systems throughout the enterprise and
link to the worldwide Internet, there is an explosive growth in
the forest of data residing within the enterprise. Unfortunately,
growth in raw data is not always matched by growth in
information. It becomes a case of not being able to see the trees
(information) for the forest.
--------------------------------------------------------------------------------
---------------------------
THE PAUL SCHERRER INSTITUTE
---------------------------
--------------------------------------------------------
Supporting 70 to 80 concurrent research programs that
reach beyond the capabilities of a university department
--------------------------------------------------------
----------
www.psi.ch
----------
Under the auspices of the Board of Swiss Federal Institutes of Technology, the
Paul Scherrer Institute in Villigen, Switzerland provides the computer
infrastructure to support the research activities of its 1,100-person staff,
including 370 scientists plus 500 to 800 guest scientists each year.
Unlike many commercial environments where applications and workloads are
constant, research calls for maximum flexibility. Systems are constantly
reconfigured and reprogrammed. This places a premium on systems that are
modular, scalable and easy to program and configure.
Research also places a premium on high-capacity, flexible data storage. For
example, the data generated from the Institute's proton therapy facility for
cancer treatment must be retained and protected for at least a decade--as one
program may open an avenue that spurs further research in a never-ending cycle.
Realtime data collection for nuclear physics and material science investigations
conducted on the Institute's particle accelerator also produce massive volumes
of raw data that require online storage.
The Paul Scherrer Institute's DIGITAL UNIX, OpenVMS Cluster and DIGITAL
StorageWorks systems provide the capacity and flexibility needed in a scientific
environment. This type of interoperability, high-availability and raw
performance is critical in realtime and large-scale research programs.
22
[Photograph of Digital Personal Workstation]
DIGITAL Personal Workstations offer outstanding performance, a choice of
operating systems, leading 3-D graphics and the industry's only
CISC-to-RISC upgrade. For Windows NT users, DIGITAL offers the i-Series, which
features Intel Pentium Pro processors, or the a-Series, which is built on the
super-powerful DIGITAL Alpha processors. For the most demanding UNIX
applications, the au-Series features DIGITAL Alpha processors running DIGITAL
UNIX.
Our business partners are addressing this problem. Oracle, Sybase, Informix,
Software AG and other database software companies have developed database
solutions that capitalize on DIGITAL 64-bit Very Large Memory (VLM) and Very
Large Database (VLDB) technology. These applications run at blinding speed. For
example, with Oracle 64-bit database software, some applications will run up to
200 times faster on an AlphaServer system than they can on the fastest 32-bit
systems.
WINDOWS NT INTEGRATION Through the DIGITAL Windows NT integration program,
corporate customers and software developers can converge on a source code base,
an interoperable middleware base and a single developmental tool set for all
DIGITAL UNIX, OpenVMS and Windows NT applications.
WORLDWIDE SERVICE AND SUPPORT Planning, designing, implementing, managing and
maintaining high-performance enterprise systems and networks can be a daunting
task requiring the ability and patience to deal with multiple systems, software
and communications vendors.
In many cases, business solutions must be deployed around the world. This
requires sophisticated software and worldwide support services. DIGITAL and
Computer Associates formed the Alliance for Enterprise Management to create a
standard, unified, enterprise management environment across DIGITAL UNIX,
OpenVMS, Windows NT and legacy mainframe systems.
DIGITAL and MCI formed a formal alliance to help businesses utilize Internet
technology and communications and build corporate intranets.
Like a growing number of customers, our business partners recognize that
DIGITAL's strengths in Internet connectivity, Windows NT integration and
high-performance computing are key to "Winning in a Networked World."
--------------------------------------------------------------------------------
-------------------
BEST WESTERN HOTELS
-------------------
----------------------------------------
Building a reservation system that knows
your personal preferences
----------------------------------------
-------------------
www.bestwestern.com
-------------------
Best Western International, Inc. knows how personal service can attract and keep
customers. They've built a reservation system that knows your personal
preferences and keeps track of every reservation and every one of the nearly
300,000 rooms throughout the Brand. This is a big job. Best Western
International, Inc. operates almost 3,700 hotels in 73 countries and territories
throughout the world.
The reservation system is based on DIGITAL AlphaServer systems using VLM (Very
Large Memory) technology and an Oracle7 database.
With this new system, any desk clerk or travel agent can instantly book and
confirm room reservations at any Best Western Hotel.
The system provides business and leisure travelers with the kind of personal
service that translates into a higher occupancy rate--and high occupancy means
higher revenue. In fact, Best Western International, Inc. expects that their new
reservation system will generate $50 million in additional revenue.
23
DELIVERING ON THE PROMISE:
THE INTERNET, OUR CHILDREN AND
THE ENVIRONMENT
AS A LEADER IN THE DEVELOPMENT OF THE INTERNET, DIGITAL HAS A
RESPONSIBILITY TO HELP CREATE A WORLD WHERE INFORMATION AND IDEAS
CAN BE FREELY EXCHANGED.
This past year, we took a leadership role in NetDay, an
innovative program to provide students and teachers with access
to the Internet. We donated servers, PCs and networking packages
to schools where DIGITAL volunteers invested their own time and
energy wiring and installing systems.
This kind of involvement is not new. As we celebrate our 40th
Anniversary, we continue to support innovative programs designed
to make this a better world for the next generation. This past
year, through our Worldwide Children and Youth Initiative, we
awarded cash grants to 70 local children's charities in 27
countries.
But our responsibility goes beyond helping children achieve their
potential. We want every child to enjoy a healthy environment.
DIGITAL's corporate Environment, Health and Safety (EHS) policy
statement, "Earth Vision," provides the framework for action. For
example, we operate Materials Recovery facilities in Contoocook,
New Hampshire and Nijmegen, the Netherlands to demanufacture 28
million pounds of discarded electronic equipment every year.
Intact parts are removed, tested and stocked as spares. Gold,
platinum and silver are extracted and resold. Plastic, glass and
other materials are recycled. Less than one-tenth of one percent
of the material ends up in landfills. The Contoocook facility is
one of the first 20 organizations in the U.S. to win ISO 14001
certification for demanufacturing.
Another example of DIGITAL's commitment to the environment was
our part in establishing a unique, free-access educational Web
site (http://www.endangeredzone.com) with high-quality images and
searchable information about endangered species around the world.
Developed in partnership with Oracle and Virage Inc., the Web
site incorporates an Oracle8 database to create dynamic pages so
children can build a personalized field journal of information
for research reports, study guides or extracurricular projects.
Programs like these demonstrate our belief that we can make a
difference; that as individuals and as a company we can use our
talents and technology to make this a better world.
[Photograph of several people who volunteered for the City Year service
project.]
DIGITAL is a national founder of City Year, a service corps that brings young
adults from diverse cultural, educational and socioeconomic backgrounds together
for full-time community service. During its annual conference held in Boston,
DIGITAL employees (in maroon shirts, left to right: Kathy Coyle, Kate Seibert,
Lew Karabatsos and Jim Gray) joined City Year corps members to help landscape
the grounds of an inner-city school.
(Photo credit: Chris Johnson)
24
FINANCIAL STATEMENTS
26 Eleven-year financial summary
28 Management's discussion and analysis of
financial condition and results of operations
33 Report of management
33 Report of independent accountants
CONSOLIDATED FINANCIAL STATEMENTS
34 Consolidated statements of operations
35 Consolidated balance sheets
36 Consolidated statements of cash flows
37 Consolidated statements of stockholders' equity
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
38 Note A: Significant accounting policies
39 Note B: Geographic operations
41 Note C: Income taxes
42 Note D: Capitalized computer software development
costs
43 Note E: Restructuring actions
44 Note F: Debt
45 Note G: Postretirement and other postemployment
benefits
48 Note H: Commitments, contingencies and risk factors
48 Note I: Financial instruments
50 Note J: Investing and divesting activities
51 Note K: Stock plans
53 Note L: Stockholders' equity
54 Note M: Subsequent event
SUPPLEMENTARY INFORMATION
54 Quarterly financial data
55 Operating Management and Staff Officers
56 Directors
57 Committees of the Board
58 Corporate Consulting Engineers
59 Investor information
Digital Equipment Corporation 25
ELEVEN-YEAR FINANCIAL SUMMARY
[Enlarge/Download Table]
(dollars in millions except per share data and stock prices) 1997 1996 1995 1994
---------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS(1)
Product sales $ 7,197 $ 8,362 $ 7,616 $ 7,191
Service revenues 5,850 6,200 6,197 6,260
---------------------------------------------------------------------------------------------------------------------------
Total operating revenues 13,047 14,563 13,813 13,451
---------------------------------------------------------------------------------------------------------------------------
Cost of product sales and service expense 8,725 9,756 9,392 8,912
Research and engineering expenses 1,014 1,062 1,040 1,301
Selling, general and administrative expenses(2) 3,177 3,859 3,266 5,234
---------------------------------------------------------------------------------------------------------------------------
Operating income/(loss) 130 (115) 115 (1,996)
---------------------------------------------------------------------------------------------------------------------------
Other (income)/expense, net(3) (48) (48) 40 24
---------------------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes and cumulative
effect of changes in accounting principles 178 (68) 76 (2,020)
---------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 37 44 18 85
---------------------------------------------------------------------------------------------------------------------------
Net income/(loss)(4) $ 141 $ (112) $ 122 $ (2,156)
---------------------------------------------------------------------------------------------------------------------------
Net income/(loss) applicable per common share(4) $ .68 $ (.97) $ .59 $ (15.80)
---------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (in millions) 155 152 146 137
---------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Inventories $ 1,503 $ 1,821 $ 2,054 $ 2,064
Accounts receivable, net of allowances 2,930 3,223 3,219 3,319
Working capital 3,035 3,188 3,026 1,832
Net property, plant and equipment 2,104 2,223 2,269 3,129
Total assets 9,693 10,075 9,947 10,580
Long-term debt 743 999 1,013 1,011
Stockholders' equity 3,545 3,606 3,528 3,280
Stockholders' equity per common share 20.81 20.62 20.89 20.24
---------------------------------------------------------------------------------------------------------------------------
RATIOS AND OTHER INFORMATION
Current ratio 1.7:1 1.8:1 1.7:1 1.4:1
Quick ratio 1.3:1 1.2:1 1.1:1 .9:1
Debt/debt plus equity 22.1% 22.0% 22.5% 24.1%
Operating income/(loss) as a percentage of revenues 1.0% (.3)% .8% (14.8)%
Net income/(loss) as a percentage of revenues 1.1% (.8)% .9% (16.0)%
Return on equity 3.9% (3.1)% 3.6% (52.8)%
Return on assets 1.4% (1.1)% 1.2% (20.0)%
Non-U.S. revenues as a percentage of total revenues 67% 66% 65% 62%
Days sales outstanding 76 78 77 76
Number of employees at year-end 54,900 59,100 61,700 77,800
Number of shares outstanding at year-end (in millions) 151 156 150 142
Common stock yearly high and low sales prices $ 47-25 $ 76-35 $ 49-18 $ 43-18
---------------------------------------------------------------------------------------------------------------------------
(1) Amounts may not be additive due to rounding.
(2) Includes restructuring charges of $492M in 1996, $1,206M in 1994, $1,500M
in 1992, $1,100M in 1991 and $550M in 1990. Includes reduction in carrying
value of intangible assets of $310M in 1994.
26 Digital Equipment Corporation
[Enlarge/Download Table]
1993 1992 1991 1990 1989 1988 1987
-------------------------------------------------------------------------------------------------------------------------
$ 7,588 $ 7,696 $ 8,299 $ 8,146 $ 8,190 $ 7,541 $ 6,254
6,783 6,235 5,612 4,797 4,552 3,934 3,135
-------------------------------------------------------------------------------------------------------------------------
14,371 13,931 13,911 12,943 12,742 11,475 9,389
-------------------------------------------------------------------------------------------------------------------------
8,631 8,132 7,278 6,795 6,242 5,468 4,514
1,530 1,754 1,649 1,614 1,525 1,306 1,010
4,447 6,181 5,572 4,521 3,639 3,066 2,253
-------------------------------------------------------------------------------------------------------------------------
(237) (2,136) (588) 13 1,336 1,635 1,612
-------------------------------------------------------------------------------------------------------------------------
(13) (57) (68) (111) (85) (106) (77)
-------------------------------------------------------------------------------------------------------------------------
(224) (2,078) (520) 124 1,421 1,741 1,689
-------------------------------------------------------------------------------------------------------------------------
27 232 97 50 348 435 552
-------------------------------------------------------------------------------------------------------------------------
$ (251) $ (2,796) $ (617) $ 74 $ 1,073 $ 1,306 $ 1,137
-------------------------------------------------------------------------------------------------------------------------
$ (1.93) $ (22.39) $ (5.08) $ .59 $ 8.45 $ 9.90 $ 8.53
-------------------------------------------------------------------------------------------------------------------------
130 125 122 125 127 132 133
-------------------------------------------------------------------------------------------------------------------------
$ 1,755 $ 1,614 $ 1,595 $ 1,538 $ 1,638 $ 1,575 $ 1,453
3,020 3,594 3,317 3,207 2,965 2,592 2,312
2,964 2,015 3,777 4,332 4,501 4,516 4,377
3,178 3,570 3,778 3,868 3,646 3,095 2,127
10,950 11,284 11,875 11,655 10,668 10,112 8,407
1,018 42 150 150 136 124 269
4,885 4,931 7,624 8,182 8,036 7,510 6,294
36.19 38.58 61.18 66.76 66.12 59.47 49.87
-------------------------------------------------------------------------------------------------------------------------
1.8:1 1.4:1 2.0:1 2.3:1 2.9:1 2.9:1 3.4:1
1.2:1 1.0:1 1.4:1 1.6:1 1.9:1 2.0:1 2.4:1
17.5% 1.8% 2.2% 2.0% 2.0% 3.6% 4.2%
(1.7)% (15.3)% (4.2)% .1% 10.5% 14.2% 17.2%
(1.7)% (20.1)% (4.4)% .6% 8.4% 11.4% 12.1%
(5.1)% (44.5)% (7.8)% .9% 13.8% 18.9% 18.9%
(2.3)% (24.1)% (5.2)% .7% 10.3% 14.1% 14.6%
64% 63% 60% 56% 55% 50% 47%
69 83 76 86 76 75 78
89,900 107,900 115,100 116,900 118,400 113,900 103,000
135 128 125 123 122 126 126
$ 49-30 $ 72-33 $ 87-45 $ 103-70 $ 122-86 $ 199-99 $ 174-82
-------------------------------------------------------------------------------------------------------------------------
(3) See Note A of Notes to consolidated financial statements.
(4) The cumulative effect of changes in accounting principles were: a one-time
benefit of $65M, or $.44 per share, on net income and net income per share
for fiscal 1995; a one-time charge of $71M, or $.51 per share, and a
one-time benefit of $20M, or $.14 per share, on net loss and net loss per
share for fiscal 1994; and a one-time charge of $485M or $3.89 per share on
net loss and net loss per share in fiscal 1992.
Digital Equipment Corporation 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REVENUES
--------------------------------------------------------------------------------
In fiscal 1997, total operating revenues were $13.1 billion, a decrease of $1.5
billion or 10% following an increase of $750 million or 5% and $362 million or
3% in fiscal 1996 and 1995, respectively. Non-U.S. revenues accounted for 67% of
total operating revenues in fiscal 1997, up from 66% and 65% in fiscal 1996 and
1995, respectively (see Note B).
[Download Table]
Revenues (dollars in billions)
--------------------------------------------------------------------------------
Fiscal year 1997 1996 1995
--------------------------------------------------------------------------------
Product sales $ 7.2 $ 8.4 $ 7.6
% of total revenues 55% 57% 55%
--------------------------------------------------------------------------------
Service revenues $ 5.9 $ 6.2 $ 6.2
% of total revenues 45% 43% 45%
--------------------------------------------------------------------------------
Total revenues $13.1 $14.6 $13.8
--------------------------------------------------------------------------------
Revenues from product sales for fiscal 1997 were $7.2 billion, compared with
$8.4 billion and $7.6 billion in fiscal 1996 and 1995, respectively. The decline
in product sales in fiscal 1997 reflects the adverse effects of currency rate
movements, the discontinuation of the retail personal computer and certain
component product lines, as well as an anticipated reduction in inventories in
distribution channels.
Alpha-based systems revenues represented 32% of fiscal 1997 product sales, up
from 29% in fiscal 1996 and 22% in fiscal 1995. For fiscal 1997, Alpha-based
systems revenues decreased 4%, compared with an increase of 46% and 76% in
fiscal 1996 and 1995, respectively. The decline was due principally to a
decrease in desktop product (client) sales, partially offset by an increase in
server revenues. Revenue from Intel-based computers represented 28% of fiscal
1997 product sales, up from 26% in both fiscal 1996 and 1995. The increase was
due principally to growth in server revenues. The Corporation's other product
businesses represented 40%, 45% and 52% of product sales in fiscal 1997, 1996
and 1995, respectively. These revenues continue to represent a smaller portion
of product sales, reflecting the withdrawal from certain non-strategic
businesses, the transition from VAX systems, and a decline in network products
sales in fiscal 1997 compared with fiscal 1996, partially offset by an increase
in storage subsystem revenues.
In fiscal 1997, service revenues were $5.9 billion, down from $6.2 billion for
both fiscal 1996 and 1995. The decline in service revenues was due principally
to the adverse effects of currency rate movements, an anticipated decline in the
Digital products maintenance business, as well as the strategic refocusing of
the Corporation's systems integration business, partially offset by growth in
multivendor services and operations management services.
The Corporation's operating results in fiscal 1997 were adversely impacted by
the continued strengthening of the U.S. dollar. Removing the effects of foreign
currency exchange rate movements, the decline in revenue for fiscal 1997 would
have been 7%, compared with 10% as reported. The net effect of foreign currency
exchange rate movements on revenues was insignificant in fiscal 1996 when
compared with fiscal 1995.
During fiscal 1997, the Corporation sold certain software products and other
assets. The Corporation continues to sell certain of these software products
under royalty agreements. Revenues from the software products sold by the
Corporation had an immaterial impact on consolidated operating revenues. During
fiscal 1996, the Corporation sold its learning services business and several
small businesses. During fiscal 1995, the Corporation sold portions of its
storage business, its relational database business, a software distribution
subsidiary, a contract manufacturing business and a semiconductor facility. In
addition, as part of the Corporation's restructuring actions, the Corporation
transferred part of its business in Germany to a new, independent,
employee-owned company, effective October 1, 1994. In fiscal 1994, the divested
businesses represented 8% of consolidated operating revenues and did not have a
material effect on the consolidated net loss from operations (see Note J).
--------------------------------------------------------------------------------
DOMESTIC AND NON-U.S. REVENUES
* Domestic @ Non-U.S.
Dollars in billions
[BAR CHART]
28 Digital Equipment Corporation
EXPENSES AND PROFIT MARGINS
--------------------------------------------------------------------------------
The Corporation's total gross margin for fiscal 1997 was 33% of total operating
revenues, unchanged from fiscal 1996 and up from 32% in fiscal 1995.
[Download Table]
Gross margin (dollars in billions)
--------------------------------------------------------------------------------
Fiscal year 1997 1996 1995
--------------------------------------------------------------------------------
Product sales $ 2.5 $ 2.8 $ 2.2
% of related revenues 35% 34% 29%
--------------------------------------------------------------------------------
Service revenues $ 1.8 $ 2.0 $ 2.2
% of related revenues 31% 32% 36%
--------------------------------------------------------------------------------
The Corporation's gross margin on fiscal 1997 product sales was 35%, compared
with 34% and 29% of product sales for fiscal 1996 and 1995, respectively. The
continued improvement in product gross margin was due principally to
manufacturing cost efficiencies and improved cycle times, an increased
proportion of higher-margin server revenues, and the effect of more competitive
product offerings.
Gross margin on service revenues was 31% in fiscal 1997, compared with 32% and
36% of service revenues for fiscal 1996 and 1995, respectively. The decline in
service gross margin in fiscal 1997 and fiscal 1996 compared with the prior year
was due principally to improved product reliability, investments in service
delivery capabilities and the continued shift in the mix of service revenues
toward lower-margin service offerings. During fiscal 1997, service gross margins
stabilized for the first time since fiscal 1994.
[Download Table]
Operating expenses (dollars in billions)
--------------------------------------------------------------------------------
Fiscal year 1997 1996 1995
--------------------------------------------------------------------------------
Research & engineering
expenses $ 1.0 $ 1.1 $ 1.0
% of total revenues 8% 7% 8%
--------------------------------------------------------------------------------
Selling, general and
administrative expenses $ 3.2 $ 3.4 $ 3.3
% of total revenues 24% 23% 24%
--------------------------------------------------------------------------------
Restructuring charges -- $ 0.5 --
% of total revenues -- 3% --
--------------------------------------------------------------------------------
Research and engineering (R&E) spending totaled $1.0 billion for fiscal 1997,
compared with $1.1 billion and $1.0 billion in fiscal 1996 and 1995,
respectively. The slight decrease in R&E expenses in fiscal 1997 was due
principally to the Corporation's withdrawal from certain non-strategic
businesses and the elimination of related development costs (see Note J). The
Corporation believes that its level of R&E spending is appropriate to support
current operations and to offer competitive, market-driven products.
Selling, general and administrative (SG&A) expenses totaled $3.2 billion, down
from $3.4 billion in fiscal 1996 and $3.3 billion in fiscal 1995. The decline in
fiscal 1997 SG&A expenses reflects reductions in population and facilities
expenditures, reduced variable costs and the positive effects of currency rate
movements, partially offset by increases in salaries and wages and investment in
demand generation activities. The Corporation's efforts to achieve a competitive
cost structure and further increase productivity are ongoing. For fiscal 1996,
SG&A expenses reflected increased variable costs associated with higher revenue
levels, increases in salaries and wages and administrative systems investments,
partially offset by the favorable effects of restructuring actions taken in the
first half of fiscal 1995.
During fiscal 1997, the Corporation amended its U.S. postretirement medical
plan, changing the eligibility requirement, and therefore the period over which
benefits are earned and accrued. As a result of the amendment, the Corporation
recognized a one-time curtailment gain of $52 million (see Note G). In addition,
the shift of employees to managed care and other factors had a significant
favorable impact on the Corporation's postretirement medical expense during
fiscal 1997. The impact of these items was substantially offset by the write-off
of certain intangible assets and other provisions.
At the end of fiscal 1996, the Corporation approved a restructuring plan
intended to increase sales productivity, further consolidate manufacturing
plants and distribution sites, improve service delivery and further reduce
overhead in support areas. The planned employee separations are expected to be
substantially complete in fiscal 1998. The number of involuntary separations is
expected to be lower than originally planned due principally to a higher than
anticipated level of voluntary separations. However, associated
restructuring-related cost savings are expected to be offset by an increase in
estimated separation costs for certain non-U.S. employees. The total estimated
cost of restructuring actions is unchanged. See Note E for a further description
of the Corporation's restructuring actions and related costs.
Total employee population decreased by 4,200 during fiscal 1997 to approximately
54,900. The Corporation had approximately 59,100 and 61,700 employees at the end
of fiscal 1996 and 1995, respectively.
Digital Equipment Corporation 29
EXPENSES AND PROFIT MARGINS (continued)
--------------------------------------------------------------------------------
Net other income was $48 million for fiscal 1997 and 1996, respectively,
compared with net other expense of $40 million in fiscal 1995. Net gains on
divestments were $18 million for fiscal 1997, compared with $72 million in
fiscal 1996 and a net loss of $7 million in fiscal 1995. The decrease in net
gains from divestments in fiscal 1997 was offset by increased interest income
resulting from significantly higher cash and short-term investment balances and
lower interest expense.
In fiscal 1997, income tax expense was $37 million on pre-tax income of $178
million. Income tax expense reflects several factors, including income taxes for
profitable operations, benefits taken from net operating loss carryforwards and
an inability to recognize currently certain tax benefits from operating losses.
Income tax expense was $44 million on a pre-tax loss of $68 million in fiscal
1996 and $18 million on pre-tax income of $76 million in fiscal 1995. See Note C
for a further explanation of income tax expense.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130--Reporting Comprehensive
Income. SFAS No. 130 requires the reporting and display, in a full set of
general-purpose financial statements, of all items that are required to be
recognized under accounting standards as components of comprehensive income.
SFAS No. 130 is effective for financial statements issued for periods beginning
after December 15, 1997 and reclassification of financial statements for earlier
periods for comparative purposes is required. The adoption of SFAS No. 130 will
have an immaterial impact on the consolidated financial statements.
In February 1997, the FASB issued SFAS No. 128--Earnings per Share. SFAS No. 128
establishes standards for computing and presenting earnings per share (EPS) and
requires a dual presentation of basic and dilutive EPS. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997 and earlier adoption is not permitted. Neither basic nor dilutive EPS as
calculated in accordance with SFAS No. 128 would be materially different from
primary EPS as presented in these financial statements.
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release No. 48 which expands disclosure requirements for certain
derivative and other financial instruments. The Corporation adopted the
sensitivity analysis approach effective in the fourth quarter of fiscal 1997.
The sensitivity analysis approach presents the hypothetical change in fair value
resulting from hypothetical changes in market rates. See Notes A and I for a
description of the Corporation's use of derivative and other financial
instruments and the related market risk.
--------------------------------------------------------------------------------
OPERATING EXPENSES
Dollars in billions, excluding restructuring charges
[BAR CHART]
--------------------------------------------------------------------------------
EMPLOYEES
Thousands of employees
[BAR CHART]
--------------------------------------------------------------------------------
U.S. DOLLAR RELATIVE TO MAJOR FOREIGN CURRENCIES
Fiscal 1991 equals 1.00
[BAR CHART]
30 Digital Equipment Corporation
AVAILABILITY OF FUNDS TO SUPPORT CURRENT AND FUTURE OPERATIONS AND SPENDING FOR
OPERATIONS
--------------------------------------------------------------------------------
Cash, cash equivalents and short-term investments totaled $2.5 billion, $2.0
billion and $1.6 billion at the end of fiscal 1997, 1996 and 1995, respectively
(see Note A).
[Download Table]
Cash flows from (in billions)
--------------------------------------------------------------------------------
Fiscal year 1997 1996 1995
--------------------------------------------------------------------------------
Operating activities $ 1.0 $ 0.6 $(0.3)
Investing activities (1.2) (0.5) 0.6
--------------------------------------------------------------------------------
Operating and investing
activities (0.2) 0.1 0.3
--------------------------------------------------------------------------------
Financing activities (0.2) 0.2 0.1
--------------------------------------------------------------------------------
Total cash flows $(0.4) $ 0.3 $ 0.4
--------------------------------------------------------------------------------
Net cash generated from operating activities was $1.0 billion in fiscal 1997,
compared with $602 million in fiscal 1996 and net cash used of $348 million in
fiscal 1995. The $424 million improvement in cash generated from operating
activities in fiscal 1997 was principally due to a $293 million decrease in
accounts receivable in fiscal 1997 compared with an increase of $4 million in
fiscal 1996 and a $318 million decrease in inventories in fiscal 1997 compared
with a decrease of $181 million in fiscal 1996. The $950 million improvement in
cash generated from operating activities in fiscal 1996 was principally due to a
$181 million decrease in inventories in fiscal 1996 compared with an increase of
$272 million in fiscal 1995, and a lower level of restructuring related
expenditures in fiscal 1996 compared with fiscal 1995.
Net cash used for investing activities was $1.2 billion in fiscal 1997, compared
with $492 million in fiscal 1996 and net cash generated (including divestments)
of $638 million in fiscal 1995. The increase in cash used for investing
activities was due principally to short-term investment activities (see Note A).
The Corporation increased its short-term investments by $913 million, $177
million and $31 million in fiscal 1997, 1996 and 1995, respectively. In fiscal
1997, the sale of property, plant and equipment and other assets generated
proceeds of approximately $120 million. Capital spending in fiscal 1997 was $396
million compared with $431 million and $366 million in fiscal 1996 and 1995,
respectively. In fiscal 1996, the Corporation sold its learning services
business and several small businesses generating proceeds of $156 million and
the sale of property, plant and equipment generated an additional $73 million in
cash. In fiscal 1995, the Corporation sold all of its shares of Ing. Olivetti &
C. S.p.A. common stock, portions of its storage business, its relational
database business, a software distribution subsidiary, a contract manufacturing
business, a semiconductor facility, property, plant and equipment and other
assets generating approximately $1.1 billion in cash proceeds (see Note J).
Net cash used for financing activities was $254 million in fiscal 1997, compared
with net cash generated of $150 million and $100 million in fiscal 1996 and
1995, respectively. The principal financing activity for fiscal 1997 was the
open market purchase of 10 million shares of the Corporation's common stock for
$354 million and the payment of dividends on preferred stock, partially offset
by the issuance of stock under the Corporation's employee stock plans. In July
1997, the Corporation's Board of Directors authorized the repurchase, as
conditions warrant, of up to 15 million shares of the Corporation's common
stock.
Long-term debt was $743 million at the end of fiscal 1997, compared with
approximately $1.0 billion at the end of fiscal 1996 and 1995. During fiscal
1997, $250 million of five-year notes due in November 1997 were reclassified
from long-term debt to current portion of long-term debt. At the end of fiscal
1997, substantially all of the Corporation's available lines of credit and
accounts receivable securitization facilities were unused (see Note F).
For fiscal 1997, cash expenditures for restructuring activities were $184
million, net of proceeds of $67 million from the sale of properties. Future cash
expenditures for currently planned restructuring activities are estimated to be
$360 million for fiscal 1998 and beyond, the majority of which will be used in
fiscal 1998. While expected total cash expenditures for restructuring actions
remain unchanged, actual cash outlays have been delayed due to the timing of
certain employee separations, principally in Europe (see Note E).
The Corporation's need for, cost of and access to funds are dependent on future
operating results, as well as conditions external to the Corporation. The
Corporation historically has maintained a conservative capital structure, and
believes that its cash position and its sources of and access to capital markets
are adequate to support current operations.
Digital Equipment Corporation 31
FACTORS THAT MAY AFFECT FUTURE RESULTS
---------------------------------------------------------------------------
From time to time, information provided by the Corporation or statements
made by its employees may contain "forward-looking" information, as that
term is defined in the Private Securities Litigation Reform Act of 1995
(the "Act"). The Corporation cautions investors that there can be no
assurance that actual results or business conditions will not differ
materially from those projected or suggested in such forward-looking
statements as a result of various factors, including but not limited to the
following:
* The Corporation's future operating results are dependent on its ability to
develop, produce and market new and innovative products and services. There
are numerous risks inherent in this complex process, including rapid
technological change, the Corporation's ability to access components and
related technical information from other companies and the requirement that
the Corporation bring to market in a timely fashion new products and
services which meet customers' changing needs.
* Historically, the Corporation has generated a disproportionate amount of
its operating revenues toward the end of each quarter, making precise
prediction of revenues and earnings particularly difficult and resulting in
risk of variance of actual results from those forecast at any time. In
addition, the Corporation's operating results historically have varied from
fiscal period to fiscal period; accordingly, the Corporation's financial
results in any particular fiscal period are not necessarily indicative of
results for future periods.
* The Corporation offers a broad variety of products and services to
customers around the world. Changes in the mix of products and services
comprising revenues could cause actual operating results to vary from those
expected.
* The Corporation's success is partly dependent on its ability to
successfully predict and adjust production capacity to meet demand, which
is partly dependent upon the ability of external suppliers to deliver
components at reasonable prices and in a timely manner; capacity or supply
constraints, or unexpected increases or decreases in the prices of
components, could adversely affect future operating results.
* While the Corporation believes that the materials required for its
manufacturing operations are presently available in quantities sufficient
to meet demand, the failure of a significant supplier to deliver certain
components or technical information on a timely basis or in sufficient
quantities could adversely affect the Corporation's future results of
operations.
* The Corporation operates in a highly competitive environment which includes
significant competitive pricing pressures and intense competition for
skilled employees. Particular business segments may from time to time
experience unanticipated intense competitive pressure, possibly causing
operating results to vary from those expected.
* The Corporation offers its products and services directly and through
indirect distribution channels. Changes in the financial condition of, or
the Corporation's relationship with, distributors and other indirect
channel partners, as well as fluctuations in end-user sales by indirect
sales channel partners, could cause actual operating results to vary from
those expected.
* The Corporation does business worldwide in over 100 countries. Global
and/or regional economic factors and potential changes in laws and
regulations affecting the Corporation's business, including without
limitation, currency fluctuations, changes in monetary policy and tariffs,
and federal, state and international laws regulating the environment, could
impact the Corporation's financial condition or future results of
operations.
* As the Corporation continues to implement its strategic plan and respond to
external market conditions, there can be no assurance that additional
restructuring actions will not be required. With regard to completion of
planned restructuring actions, there can be no assurance that the estimated
cost of such actions will not change.
* The market price of the Corporation's securities could be subject to
fluctuations in response to quarter to quarter variations in operating
results, changes in analysts' earnings estimates, market conditions in the
information technology industry, as well as general economic conditions and
other factors external to the Corporation.
32 Digital Equipment Corporation
REPORT OF MANAGEMENT
--------------------------------------------------------------------------------
The Corporation's management is responsible for the preparation of the financial
statements in accordance with generally accepted accounting principles and for
the integrity of the financial data included in this annual report. In preparing
the financial statements, management makes informed judgments and estimates of
the expected effects of events and transactions that are currently being
reported.
Management maintains a system of internal accounting controls that is designed
to provide reasonable assurance that assets are safeguarded and that
transactions are executed and recorded in accordance with the Corporation's
policies. This system includes policies which require adherence to ethical
business standards and compliance with all laws to which the Corporation is
subject. The internal controls process is continuously monitored by direct
management review and an internal audit program under which periodic independent
reviews are made.
The Corporation's independent accountants annually review the accounting and
control systems of the Corporation. Their audit includes a review of the
internal control structure to the extent they consider necessary and selective
tests of transactions to support their report.
The Board of Directors, through its Audit Committee, which is composed of four
Board members who are independent of management, is responsible for determining
that management fulfills its responsibility with respect to the Corporation's
financial statements and the system of internal accounting controls.
The Audit Committee meets regularly with representatives of management, the
independent accountants and the Corporation's internal auditors to review
audits, financial reporting and internal control matters, and when appropriate,
meets with the Corporation's outside counsel on relevant matters. The
independent accountants and the internal auditors have full and free access to
the Audit Committee and regularly meet privately with the Audit Committee.
Coopers & Lybrand L.L.P., independent accountants, have been engaged by the
Audit Committee of the Board of Directors, with the approval of the
stockholders, to audit the Corporation's financial statements. Their report
follows.
/s/ Robert B. Palmer
----------------------------------------------------
Robert B. Palmer
Chairman of the Board,
President and Chief Executive Officer
/s/ Vincent J. Mullarkey
----------------------------------------------------
Vincent J. Mullarkey
Vice President, Finance and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Stockholders and Directors,
Digital Equipment Corporation
We have audited the accompanying consolidated balance sheets of Digital
Equipment Corporation as of June 28, 1997 and June 29, 1996, and the related
consolidated statements of operations, cash flows, and stockholders' equity for
each of the three fiscal years in the period ended June 28, 1997. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Digital Equipment
Corporation as of June 28, 1997 and June 29, 1996, and the consolidated results
of its operations and cash flows for each of the three fiscal years in the
period ended June 28, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note J to the consolidated financial statements, the Corporation
changed its method of accounting for certain investments in debt and equity
securities in fiscal 1995.
/s/ Coopers & Lybrand L.L.P.
----------------------------------------------------
Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 24, 1997
Digital Equipment Corporation 33
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
(in thousands except per share data)
-------------------------------------------------------------------------------------------------------------
Year ended JUNE 28, 1997 June 29, 1996 July 1, 1995
-------------------------------------------------------------------------------------------------------------
REVENUES (Notes A and B)
Product sales $ 7,197,116 $ 8,362,423 $ 7,616,441
Service revenues 5,849,716 6,200,352 6,196,621
-------------------------------------------------------------------------------------------------------------
Total operating revenues 13,046,832 14,562,775 13,813,062
-------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES (Notes A, D, G, H and K)
Cost of product sales 4,697,438 5,541,792 5,397,723
Service expense 4,027,690 4,214,412 3,993,970
Research and engineering expenses (Note J) 1,014,044 1,062,253 1,040,028
Selling, general and administrative expenses (Note J) 3,177,428 3,367,806 3,265,743
Restructuring charge (Note E) -- 492,000 --
-------------------------------------------------------------------------------------------------------------
Operating income/(loss) 130,232 (115,488) 115,598
Other (income)/expense, net (Notes A, F, I and J) (47,818) (47,961) 39,941
-------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes and cumulative effect
of change in accounting principle 178,050 (67,527) 75,657
Provision for income taxes (Note C) 37,175 44,285 18,342
-------------------------------------------------------------------------------------------------------------
Income/(loss) before cumulative effect of change in
accounting principle 140,875 (111,812) 57,315
Benefit due to cumulative effect of change in
accounting principle, net of tax (Note J) -- -- (64,503)
-------------------------------------------------------------------------------------------------------------
NET INCOME/(LOSS) 140,875 (111,812) 121,818
Dividends on preferred stock (Note L) 35,500 35,500 35,500
-------------------------------------------------------------------------------------------------------------
Net income/(loss) applicable to common stock $ 105,375 $ (147,312) $ 86,318
-------------------------------------------------------------------------------------------------------------
PER COMMON SHARE (Note A)
Income/(loss) applicable before cumulative effect of change
in accounting principle $ .68 $ (.97) $ .15
Benefit due to cumulative effect of change in
accounting principle -- -- .44
-------------------------------------------------------------------------------------------------------------
NET INCOME/(LOSS) APPLICABLE PER COMMON SHARE (Note A) $ .68 $ (.97) $ .59
-------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding (Note A) 155,458 152,052 146,331
-------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
34 Digital Equipment Corporation
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
(dollars in thousands)
---------------------------------------------------------------------------------------------------------------
JUNE 28, 1997 June 29, 1996
---------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents (Note A) $1,358,750 $ 1,791,754
Short-term investments (Note A) 1,160,265 247,404
Accounts receivable, net of allowances of $263,763 and $182,033 2,930,014 3,223,293
Inventories (Note A) 1,503,145 1,820,811
Prepaid expenses, deferred income taxes and other current assets (Note C) 324,122 336,836
---------------------------------------------------------------------------------------------------------------
Total current assets 7,276,296 7,420,098
Net property, plant and equipment (Note A) 2,103,647 2,222,920
Other assets (Notes A, C, and D) 312,951 432,363
---------------------------------------------------------------------------------------------------------------
Total assets $9,692,894 $10,075,381
---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans and current portion of long-term debt (Note F) $ 262,835 $ 17,896
Accounts payable 871,760 903,618
Income taxes payable (Note C) 101,286 79,528
Salaries, wages and related items 637,587 632,413
Deferred revenues and customer advances (Note A) 1,079,003 1,099,328
Accrued restructuring costs (Note E) 382,559 619,416
Other current liabilities 905,900 879,434
---------------------------------------------------------------------------------------------------------------
Total current liabilities 4,240,930 4,231,633
Long-term debt (Note F) 743,440 999,131
Postretirement and other postemployment benefits (Note G) 1,163,568 1,238,411
---------------------------------------------------------------------------------------------------------------
Total liabilities 6,147,938 6,469,175
---------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note H)
---------------------------------------------------------------------------------------------------------------
Stockholders' equity (Notes K, L and M):
Preferred stock, $1.00 par value (liquidation preference of $100 per share);
authorized 25,000,000 shares; 4,000,000 shares of Series A 8 7/8%
Cumulative Preferred Stock issued and outstanding 4,000 4,000
Common stock, $1.00 par value; authorized 450,000,000 shares;
157,232,104 shares issued and 155,504,284 shares issued and outstanding 157,232 155,504
Additional paid-in capital 3,835,697 3,764,224
Retained deficit (234,841) (317,522)
Treasury stock at cost; 6,132,201 shares and 0 shares (217,132) -
---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,544,956 3,606,206
---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $9,692,894 $10,075,381
---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Digital Equipment Corporation 35
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
(in thousands)
-------------------------------------------------------------------------------------------------------------------------------
Year ended JUNE 28, 1997 June 29, 1996 July 1, 1995
-------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 140,875 $ (111,812) $ 121,818
-------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income/(loss) to net cash from operating
activities:
Depreciation 406,895 405,859 507,966
Amortization 53,828 74,346 67,624
(Gain)/loss on disposition and write-down of
other assets (Notes A and J) 33,664 (71,941) (57,333)
Other adjustments to income/(loss) 66,668 10,708 (34,576)
(Increase)/decrease in accounts receivable 293,279 (4,211) 42,862
(Increase)/decrease in inventories 317,666 180,761 (272,037)
(Increase)/decrease in prepaid expenses and other current assets 16,447 47,002 (17,862)
Decrease in accounts payable (31,858) (209,542) (49,517)
Increase in taxes (Note C) 15,428 23,609 16,813
Increase/(decrease) in salaries, wages, benefits
and related items (Note G) (69,669) 151,370 31,306
Increase/(decrease) in deferred revenues and customer advances (20,325) (123,028) 544
Increase/(decrease) in accrued restructuring costs (Note E) (236,857) 127,370 (859,029)
Increase in other current liabilities 40,412 101,724 153,911
-------------------------------------------------------------------------------------------------------------------------------
Total adjustments 885,578 714,027 (469,328)
-------------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 1,026,453 602,215 (347,510)
-------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment (395,691) (431,307) (365,551)
Proceeds from the disposition of property, plant and
equipment (Notes E and J) 87,769 73,083 208,505
Purchases of short-term investments (3,684,299) (340,415) (117,050)
Maturities of short-term investments 2,771,438 163,310 85,924
Investment in other assets (16,913) (112,532) (37,687)
Proceeds from the disposition of other assets (Note J) 32,222 155,971 863,468
-------------------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities (1,205,474) (491,890) 637,609
-------------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating and investing activities (179,021) 110,325 290,099
-------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt 6,240 -- 13,253
Payments to retire debt (18,080) (11,241) (29,336)
Purchase of treasury shares (354,111) -- --
Issuance of common and treasury
shares, including tax effects 147,468 196,321 151,643
Dividends paid (35,500) (35,500) (35,500)
-------------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities (253,983) 149,580 100,060
-------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents (433,004) 259,905 390,159
Cash and cash equivalents at beginning of year 1,791,754 1,531,849 1,141,690
-------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year (Note A) $ 1,358,750 $ 1,791,754 $ 1,531,849
-------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
36 Digital Equipment Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
(dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------------
Additional Total
Preferred Common paid-in Retained Treasury stockholders'
stock stock capital deficit stock equity
------------------------------------------------------------------------------------------------------------------------------------
July 2, 1994 $ 4,000 $ 142,287 $ 3,390,040 $ (256,528) $ -- $ 3,279,799
------------------------------------------------------------------------------------------------------------------------------------
Shares issued under stock plans 7,491 143,993 151,484
Restricted stock plans, charge
to operations 10,679 10,679
Dividends declared--preferred stock (35,500) (35,500)
Net income--1995 121,818 121,818
------------------------------------------------------------------------------------------------------------------------------------
July 1, 1995 4,000 149,778 3,544,712 (170,210) -- 3,528,280
------------------------------------------------------------------------------------------------------------------------------------
Shares issued under stock plans 5,726 190,595 196,321
Restricted stock plans, charge
to operations 28,917 28,917
Dividends declared--preferred stock (35,500) (35,500)
Net loss--1996 (111,812) (111,812)
------------------------------------------------------------------------------------------------------------------------------------
June 29, 1996 4,000 155,504 3,764,224 (317,522) -- 3,606,206
------------------------------------------------------------------------------------------------------------------------------------
PURCHASE OF 10,000,000 SHARES
OF TREASURY STOCK (354,111) (354,111)
SHARES ISSUED UNDER STOCK PLANS
(5,595,619 SHARES ISSUED, OF WHICH
3,867,799 ISSUED FROM TREASURY) 1,728 31,455 (22,694) 136,979 147,468
RESTRICTED STOCK PLANS, CHARGE
TO OPERATIONS 40,018 40,018
DIVIDENDS DECLARED--PREFERRED STOCK (35,500) (35,500)
NET INCOME--1997 140,875 140,875
------------------------------------------------------------------------------------------------------------------------------------
JUNE 28, 1997 $ 4,000 $ 157,232 $ 3,835,697 $ (234,841) $ (217,132) $ 3,544,956
------------------------------------------------------------------------------------------------------------------------------------
See Notes K, L and M of Notes to consolidated financial statements.
Cash dividends on common stock have never been paid by the Corporation.
The accompanying notes are an integral part of these financial statements.
Digital Equipment Corporation 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the
Corporation include the financial statements of the parent and its
majority-owned U.S. and non-U.S. subsidiaries. All significant intercompany
accounts and profits have been eliminated. Certain prior years' amounts have
been reclassified to conform with the current year presentation.
USE OF ESTIMATES The preparation of the Corporation's financial statements
requires management to make estimates and judgments that affect the reported
consolidated statements of operations and consolidated balance sheets and
related disclosures. Actual results could differ from those estimates.
FISCAL YEAR The fiscal year of the Corporation is the 52/53 week period ending
the Saturday nearest the last day of June. The fiscal years ended June 28, 1997,
June 29, 1996 and July 1, 1995 included 52 weeks.
TRANSLATION OF FOREIGN CURRENCIES For non-U.S. operations, the U.S. dollar is
the functional currency. Monetary assets and liabilities of foreign subsidiaries
are translated into U.S. dollars at current exchange rates. Nonmonetary assets
and liabilities such as inventories, property, plant and equipment and deferred
revenues and customer advances are translated at historical rates. Income and
expense items are translated at average exchange rates prevailing during the
year, except that inventories and depreciation charged to operations are
translated at historical rates. Exchange gains and losses arising from
translation are included in current income.
REVENUE RECOGNITION Revenues from product sales are generally recognized at the
time the product is shipped. Provisions for product sales returns and allowances
are recorded in the same period as the related revenue. Service revenues are
recognized ratably over the contractual period or as the services are performed.
WARRANTY Warranty service revenues are recognized ratably over the warranty
period; warranty-related costs are recognized as incurred. The Corporation also
provides warranty coverage as a product attribute on certain products. Estimated
costs to repair such products are accrued as product cost when the product is
shipped.
NET INCOME/(LOSS) APPLICABLE PER COMMON SHARE Per common share amounts are
calculated based on the weighted average number of common shares and common
share equivalents outstanding during periods of net income, after deducting
applicable preferred stock dividends. Common share equivalents are attributable
to stock options. Per share amounts are calculated based only on the weighted
average number of common shares outstanding during periods of net loss, after
deducting applicable preferred stock dividends.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Corporation considers all
highly liquid temporary cash investments with maturities of three months or less
at date of acquisition to be cash equivalents. Cash equivalents are valued at
cost plus accrued interest, which approximates market. Investments with
maturities greater than three months mature within six months of the balance
sheet date and are classified as short-term investments. Short-term investments
are valued at cost plus accrued interest, which approximates market. The
Corporation's practice is to hold these investments to maturity.
INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories are routinely subject to changes in value, resulting from
rapid technological change, intense price competition and changes in customer
demand patterns. While the Corporation has provided for estimated declines in
market value of inventories, no estimate can be made of a range of amounts of
loss that are reasonably possible under various competitive conditions.
[Download Table]
(in thousands) JUNE 28, 1997 June 29, 1996
--------------------------------------------------------------------------------
Raw materials $ 421,984 $ 536,911
Work-in-process 350,421 439,318
Finished goods 730,740 844,582
--------------------------------------------------------------------------------
Total inventories $1,503,145 $1,820,811
--------------------------------------------------------------------------------
38 Digital Equipment Corporation
NOTE A: SIGNIFICANT ACCOUNTING POLICIES (continued)
--------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost,
subject to review of impairment for significant assets whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable.
[Download Table]
(in thousands) JUNE 28, 1997 June 29, 1996
--------------------------------------------------------------------------------
Land $ 193,722 $ 218,659
Buildings 1,381,568 1,384,819
Leasehold improvements 319,264 325,120
Machinery and equipment 2,973,994 3,191,512
--------------------------------------------------------------------------------
Total property, plant
and equipment 4,868,548 5,120,110
Less accumulated depreciation 2,764,901 2,897,190
--------------------------------------------------------------------------------
Net property, plant and
equipment $2,103,647 $2,222,920
--------------------------------------------------------------------------------
Depreciation expense is computed principally on the following bases:
[Download Table]
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 2 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.
OTHER ASSETS Other assets include long-term investments, capitalized software
development costs, goodwill, deferred taxes and other intangible assets.
Software development costs are capitalized at the time that technological
feasibility is established. These costs are amortized over no more than three
years from the date the products are available for general use and are subject
to periodic review of net realizable value.
Goodwill and other intangible assets are amortized using the straight-line
method over the estimated useful life of the asset, subject to periodic review
of impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable.
Long-term investments are subject to periodic review of impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable.
Events and circumstances arising during fiscal 1997 indicated that the carrying
value of certain intangible and other assets would not be recoverable.
Accordingly, unamortized balances of $40.0 million were written off as a charge
to operations.
[Enlarge/Download Table]
OTHER (INCOME)/EXPENSE, NET (in thousands)
-----------------------------------------------------------------------------------------------------
Year ended JUNE 28,1997 June 29, 1996 July 1, 1995
-----------------------------------------------------------------------------------------------------
Interest income $(116,151) $ (76,438) $ (57,497)
Interest expense 86,381 100,418 90,268
Net (gain)/loss on divestments and other assets (18,048) (71,941) 7,170
-----------------------------------------------------------------------------------------------------
Other (income)/expense, net $ (47,818) $ (47,961) $ 39,941
-----------------------------------------------------------------------------------------------------
NOTE B: GEOGRAPHIC OPERATIONS
--------------------------------------------------------------------------------
INDUSTRY The Corporation operates in one business segment: the design,
manufacture, sale and service of networked computer systems.
NON-U.S. OPERATIONS Sales and marketing operations outside the United States are
conducted primarily through sales subsidiaries throughout the world; by direct
sales from the parent corporation; and through various distributorship
Digital Equipment Corporation 39
NOTE B: GEOGRAPHIC OPERATIONS (continued)
--------------------------------------------------------------------------------
arrangements and value-added resellers. The Corporation's non-U.S. manufacturing
operations include plants in Canada, Europe and Asia-Pacific. The products of
these manufacturing plants are sold to the Corporation's sales subsidiaries, the
parent corporation or other manufacturing plants for further processing.
Intercompany transfers between geographic areas are accounted for at prices
which are intended to be representative of unaffiliated party transactions.
Sales to unaffiliated customers outside the United States, including U.S. export
sales, were $8.7 billion, $9.6 billion, and $9.0 billion for fiscal 1997, 1996
and 1995, respectively, which represented 67%, 66% and 65%, respectively, of
total operating revenues.
[Enlarge/Download Table]
(in thousands)
------------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
------------------------------------------------------------------------------------------------------------------------
NET REVENUES
United States:
Unaffiliated customer sales $ 4,396,636 $ 5,126,405 $ 4,816,024
Inter-area transfers 1,467,175 1,381,671 1,426,305
------------------------------------------------------------------------------------------------------------------------
5,863,811 6,508,076 6,242,329
------------------------------------------------------------------------------------------------------------------------
Europe:
Unaffiliated customer sales 5,484,767 6,137,495 5,973,188
Inter-area transfers 315,317 703,289 792,277
------------------------------------------------------------------------------------------------------------------------
5,800,084 6,840,784 6,765,465
------------------------------------------------------------------------------------------------------------------------
Canada, Latin America, Asia-Pacific:
Unaffiliated customer sales 3,165,429 3,298,875 3,023,850
Inter-area transfers 1,224,294 2,138,800 2,081,764
------------------------------------------------------------------------------------------------------------------------
4,389,723 5,437,675 5,105,614
------------------------------------------------------------------------------------------------------------------------
Eliminations (3,006,786) (4,223,760) (4,300,346)
------------------------------------------------------------------------------------------------------------------------
Net revenue $ 13,046,832 $ 14,562,775 $ 13,813,062
------------------------------------------------------------------------------------------------------------------------
INCOME/(LOSS)
United States $ 140 $ 45,707 $ (231,180)
Europe 142,280 (137,546) 236,641
Canada, Latin America, Asia-Pacific 35,630 24,312 70,196
Eliminations (47,818) (47,961) 39,941
------------------------------------------------------------------------------------------------------------------------
Operating income/(loss) 130,232 (115,488) 115,598
Other (income)/expense, net (47,818) (47,961) 39,941
------------------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes and cumulative effect of
change in accounting principle $ 178,050 $ (67,527) $ 75,657
------------------------------------------------------------------------------------------------------------------------
ASSETS
United States $ 3,752,689 $ 3,739,570 $ 3,924,941
Europe 2,985,397 3,174,933 3,321,429
Canada, Latin America, Asia-Pacific 2,058,492 2,002,943 2,335,236
Corporate assets 2,519,015 2,039,158 1,602,148
Eliminations (1,622,699) (881,223) (1,236,602)
------------------------------------------------------------------------------------------------------------------------
Total assets $ 9,692,894 $ 10,075,381 $ 9,947,152
------------------------------------------------------------------------------------------------------------------------
40 Digital Equipment Corporation
NOTE C: INCOME TAXES
--------------------------------------------------------------------------------
[Enlarge/Download Table]
Income/(loss) before income taxes and cumulative effect of change in accounting principle (in thousands)
------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
------------------------------------------------------------------------------------------------------------------
U.S. $ 140 $ 41,204 $(231,180)
Non-U.S 177,910 (108,731) 306,837
------------------------------------------------------------------------------------------------------------------
Total $ 178,050 $ (67,527) $ 75,657
------------------------------------------------------------------------------------------------------------------
Reconciliation of U.S. federal statutory rate to actual tax rate
------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
------------------------------------------------------------------------------------------------------------------
U.S. federal statutory tax (benefit) rate 35.0% (35.0)% 35.0%
Tax benefit of manufacturing operations in(1):
Ireland (6.6) (17.9) (40.2)
Singapore (9.4) (4.9) (12.6)
Tax impact due to net loss carryforward position:
U.S. 4.8 (10.2) 106.9
Non-U.S. 11.4 160.2 (93.2)
Non-U.S. tax rates (14.4) (24.9) 27.3
Other 0.1 (1.7) 1.0
------------------------------------------------------------------------------------------------------------------
Effective tax rate 20.9% 65.6% 24.2%
------------------------------------------------------------------------------------------------------------------
(1) The income from products manufactured for export by the Corporation's
manufacturing subsidiary in Ireland is subject to a 10% tax rate through
December 2010. The income from certain products manufactured by the
Corporation's manufacturing subsidiary in Singapore was taxed at 15%
through December 1995 and is taxed at 10% from January 1996 through
December 1998.
[Enlarge/Download Table]
Components of provisions for (benefits from) U.S. federal and non-U.S. income taxes (in thousands)
------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
------------------------------------------------------------------------------------------------------------------
U.S. federal:
Current $ 8,659 $ 6,104 $ --
Deferred (2,888) (1,971) (7,318)
------------------------------------------------------------------------------------------------------------------
Total 5,771 4,133 (7,318)
------------------------------------------------------------------------------------------------------------------
Non-U.S.:
Current 32,477 28,636 48,388
Deferred (4,144) 9,309 (26,260)
------------------------------------------------------------------------------------------------------------------
Total 28,333 37,945 22,128
------------------------------------------------------------------------------------------------------------------
State income taxes 3,071 2,207 3,532
------------------------------------------------------------------------------------------------------------------
Total income taxes $ 37,175 $44,285 $ 18,342
------------------------------------------------------------------------------------------------------------------
Digital Equipment Corporation 41
NOTE C: INCOME TAXES (continued)
--------------------------------------------------------------------------------
[Enlarge/Download Table]
Significant components of deferred tax assets and liabilities (in thousands)
---------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996
---------------------------------------------------------------------------------------------------------------
Assets Liabilities Assets Liabilities
---------------------------------------------------------------------------------------------------------------
Inventory-related transactions $ 120,296 $ 5,656 $ 113,663 $ 7,761
Depreciation 60,317 11,038 59,276 33,474
Deferred warranty revenue 93,611 - 96,943 1,343
Postretirement/postemployment benefits 398,757 5,729 468,662 12,528
Restructuring 166,426 31,538 296,296 20,680
Tax loss carryforwards 1,239,826 - 1,426,648 -
Tax credit carryforwards 202,204 - 192,928 -
Intangible assets 40,083 - 48,465 14,269
Research and engineering 659,733 - 503,826 -
Other 224,711 29,936 222,217 50,274
---------------------------------------------------------------------------------------------------------------
Gross deferred tax balances 3,205,964 83,897 3,428,924 140,329
Valuation allowance 3,006,425 - 3,179,283 -
---------------------------------------------------------------------------------------------------------------
Net deferred tax balances $ 199,539 $ 83,897 $ 249,641 $ 140,329
---------------------------------------------------------------------------------------------------------------
The gross deferred tax asset from tax loss carryforwards of $1.2 billion
represents $3.4 billion of net operating loss carryforwards on a tax return
basis which will generally expire as follows: $66.5 million in 1998, $162.2
million in 1999, $151.2 million in 2000, $144.3 million in 2001, $92.9 million
in 2002, $472.0 million in 2007, $577.0 million in 2008, and the remainder
thereafter.
Tax credit carryforwards will generally expire as follows: $20.0 million in
2001, $50.0 million in 2002, $70.0 million in 2003, $20.0 million in 2004, and
the remainder thereafter.
The reduction in the valuation allowance of $172.9 million is primarily
attributed to the reduction in the gross deferred tax balances.
Tax benefit arising from previously unrecognized operating loss carryforwards
amounted to approximately $96.0 million and $190.0 million for fiscal 1997 and
1996, respectively.
The Corporation has recorded net deferred tax assets of approximately $116.0
million at June 28, 1997, reflecting primarily the benefit of net operating loss
carryforwards in certain countries. Realization is dependent on generating
sufficient future taxable income to utilize the assets. Although realization is
not assured, management believes it is more likely than not that the assets will
be realized.
In fiscal 1997, 1996 and 1995, net income taxes paid were approximately $32.1
million, $18.5 million and $3.0 million, respectively.
In general, the Corporation's practice is to reinvest the earnings of its
foreign subsidiaries in those operations, and repatriation of retained earnings
is done only when it is advantageous to do so. The accumulated retained earnings
for foreign subsidiaries aggregated $2.0 billion at June 28, 1997. Applicable
taxes are provided only on amounts planned to be remitted. It is not practicable
to estimate the amount of additional tax that might be payable on the foreign
earnings.
NOTE D: CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS
--------------------------------------------------------------------------------
Unamortized computer software development costs were $64.0 million and $93.4
million at June 28, 1997 and June 29, 1996, respectively. Amortization expense
was $39.4 million, $48.4 million and $59.3 million for fiscal 1997, 1996 and
1995, respectively. Accumulated amortization was $75.1 million and $160.8
million at June 28, 1997 and June 29, 1996, respectively.
42 Digital Equipment Corporation
NOTE E: RESTRUCTURING ACTIONS
--------------------------------------------------------------------------------
Accrued restructuring costs and charges include the cost of involuntary employee
separation benefits, facility closures and related costs associated with
restructuring actions. Employee separation benefits include severance, wage
continuation, notice pay, medical and other benefits. Facility closure and
related costs include disposal costs for property, plant and equipment, lease
payments and related costs. Restructuring costs were accrued and charged to
expense in accordance with approved management plans.
As a result of initiatives to increase sales productivity, further consolidate
manufacturing plants and distribution sites, improve service delivery and
further reduce overhead in support areas, the Corporation accrued a
restructuring charge of $492.0 million in the fourth quarter of fiscal 1996.
The cost of employee separations associated with the fiscal 1996 charge included
separation benefits then estimated for approximately 7,000 employees, as well as
employee separation benefits incurred in the fourth quarter of fiscal 1996. The
majority of the remaining employee separations will come from administrative and
overhead functions, located in Europe and the United States. Most other
organizations and functions also will be affected by the planned reduction in
employees. The fiscal 1996 charge also included costs associated with the
closure of an additional 3.5 million square feet of office and manufacturing
space, principally in the United States and Europe.
During fiscal 1997, restructuring actions resulted in approximately 2,100
employee separations. The number of involuntary separations was less than
originally planned due principally to a higher level of voluntary separations.
However, associated cost savings are expected to be offset by an increase in
estimated separation costs for certain non-U.S. employees. The total estimated
cost of restructuring actions is unchanged. The planned employee separations are
expected to be substantially complete in fiscal 1998.
The Corporation's experience in property dispositions has been consistent with
the restructuring plan provided for in fiscal 1996. In the past three fiscal
years, the Corporation has sold 7.4 million square feet of space and reduced
space under lease by 6.9 million square feet.
As the Corporation continues to implement its strategic plan and respond to
external market conditions, there can be no assurance that additional
restructuring actions will not be required. With regard to the completion of
planned restructuring actions, there can be no assurance that the estimated cost
of such actions will not change.
[Enlarge/Download Table]
Accrued restructuring costs (in thousands)
----------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
----------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 619,416 $ 492,046 $ 1,351,075
----------------------------------------------------------------------------------------------------------------
Charges to operations:
Employee separations - 363,000 -
Facility closures and related costs - 129,000 -
----------------------------------------------------------------------------------------------------------------
Total charges to operations - 492,000 -
----------------------------------------------------------------------------------------------------------------
Costs incurred:
Employee separations 119,997 153,025 507,816
Facility closures and related costs 104,683 177,593 323,029
Other 12,177 34,012 28,184
----------------------------------------------------------------------------------------------------------------
Total costs incurred 236,857 364,630 859,029
----------------------------------------------------------------------------------------------------------------
Balance, end of year $ 382,559 $ 619,416 $ 492,046
----------------------------------------------------------------------------------------------------------------
Cash expenditures:
Employee separations $ 135,373 $ 175,839 $ 562,629
Facility closures and related costs, net of proceeds 48,816 61,000 (38,850)
----------------------------------------------------------------------------------------------------------------
Net cash expenditures $ 184,189 $ 236,839 $ 523,779
----------------------------------------------------------------------------------------------------------------
Number of employee separations due to restructuring actions 2,100 2,400 7,400
----------------------------------------------------------------------------------------------------------------
Digital Equipment Corporation 43
NOTE F: DEBT
--------------------------------------------------------------------------------
[Enlarge/Download Table]
Long-term debt, exclusive of current maturities (in thousands)
----------------------------------------------------------------------------------------------------------------
Maturity date
(Calendar year) Interest rate June 28, 1997 June 29, 1996
----------------------------------------------------------------------------------------------------------------
Lease obligations 1998-2002 5.31%-10.95%(1) $ 5,337 $ 12,034
Notes(2) 1997 7% -- 250,000
Notes(2) 2002 7 1/8% 250,000 250,000
Debentures(2) 2012 8 5/8% 250,000 250,000
Debentures(2) 2023 7 3/4% 250,000 250,000
Unamortized discount and commissions(2) (12,050) (13,138)
Other debt obligations 153 235
----------------------------------------------------------------------------------------------------------------
Total long-term debt, exclusive of
current maturities $743,440 $999,131
----------------------------------------------------------------------------------------------------------------
(1) Weighted average interest rate of 7.6% at June 28, 1997 and June 29, 1996.
(2) The Notes and Debentures are not redeemable prior to maturity and are not
entitled to any sinking fund. The unamortized discount and commissions
relate to these Notes and Debentures.
Principal payments during the next five fiscal years are as follows: 1998 -
$255.9 million; 1999 - $0.9 million; 2000 - $0.9 million; 2001 - $2.9 million;
2002 - $0.8 million. During fiscal 1997, $250.0 million of five-year notes due
in November 1997 were reclassified from long-term debt to current portion of
long-term debt.
In fiscal 1997, 1996 and 1995, interest paid was $85.9 million, $116.2 million
and $86.2 million, respectively.
The Corporation had available lines of credit totaling $310.3 million and $315.4
million as of June 28, 1997 and June 29, 1996, respectively. Substantially all
of these lines of credit were unused at the end of fiscal 1997 and 1996.
Commitment fees on the unused lines of credit were immaterial.
In June 1994, the Corporation entered into a five-year agreement with a major
financial institution (i) providing for the transfer and sale by the Corporation
to a wholly-owned subsidiary of the Corporation of a designated pool of domestic
trade accounts receivable (the "Receivables"), and (ii) allowing the Corporation
to sell to a group of investors an undivided ownership interest in the
Receivables for proceeds of up to $600.0 million (the "Purchase Limit"). The
agreement includes annual commitment fees up to a maximum of 0.2% of the
Purchase Limit. During the third quarter of fiscal 1995, the Corporation elected
to amend the Purchase Limit under the agreement from $600.0 million to $500.0
million. As of June 28, 1997 and June 29, 1996, no interests in the Receivables
had been sold.
In May 1995, Digital Equipment Co. Limited, a wholly-owned subsidiary of the
Corporation incorporated in the United Kingdom, entered into a five-year
agreement with a major financial institution allowing it to sell an undivided
ownership interest in a designated pool of trade accounts receivable (the "UK
Receivables") to a group of investors for proceeds of up to approximately $133.8
million (80 million pounds sterling). Commitment fees under the agreement are
immaterial. As of June 28, 1997 and June 29, 1996, no interests in the
UK Receivables had been sold.
In October 1996, Digital Equipment France S.A.R.L., a wholly-owned subsidiary of
the Corporation incorporated in France, renewed for a second one-year period its
agreement with a major financial institution allowing it to sell an interest in
a designated pool of trade accounts receivable (the "France Receivables") to a
group of investors for proceeds of up to approximately $43.1 million (250
million French francs). Commitment fees under the agreement are immaterial. As
of June 28, 1997 and June 29, 1996, no interests in the France Receivables had
been sold.
44 Digital Equipment Corporation
NOTE G: POSTRETIREMENT AND OTHER POSTEMPLOYMENT BENEFITS
--------------------------------------------------------------------------------
PENSION PLANS The Corporation and its subsidiaries have defined benefit and
defined contribution pension plans covering substantially all employees. The
benefits are based on years of service and compensation during the employee's
career. Pension cost is based on estimated benefit payment formulas.
It is the Corporation's policy to make tax-deductible contributions to the plans
in accordance with plan provisions and local laws. For the U.S. pension plan,
there were no contributions in fiscal 1997, 1996 or 1995. The assets of the
plans include corporate equity and debt securities, government securities and
real estate.
In December 1995, the Board of Directors approved an amendment to the
Corporation's U.S. pension plan effective March 1, 1996. Pursuant to the
amendment to the plan, the defined pension benefit is based on an account
balance comprised of a percentage of pay for each year of service and interest
credited on the cumulative balance. Prior to March 1, 1996, the benefit plan was
calculated based on a percentage of the employee's earnings during service to
the Corporation.
As a result of the amendment, the vested and accumulated benefit obligations of
the pension plan more closely approximate the projected benefit obligation. The
amendment did not have a material effect on the consolidated statement of
operations or on the consolidated balance sheet. There was no cash flow impact
from the amendment to the U.S. plan.
The decline in pension cost before curtailment and settlement gains in fiscal
1997 reflects the positive effects of increased returns on invested pension
assets and restructuring activities.
The net periodic pension cost for defined contribution pension plans was
$33.7 million, $32.4 million and $6.8 million for fiscal 1997, 1996 and 1995,
respectively. The Corporation initiated contributions to the U.S. 401(k) plan
on July 1, 1995 which resulted in increased costs for the Corporation's defined
contribution plans in fiscal 1996.
The measurement dates for all plans were within 90 days of year-end.
[Enlarge/Download Table]
Components of net periodic pension cost (in thousands)
----------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
----------------------------------------------------------------------------------------------------------------------
Service cost for benefits earned during the period $ 131,008 $ 138,069 $ 156,112
Interest cost on projected benefit obligations 217,637 202,385 182,363
Actual return on plan assets (547,331) (512,244) (344,486)
Net amortization and deferral 258,166 256,324 91,251
----------------------------------------------------------------------------------------------------------------------
Net periodic pension cost before curtailment and settlement gains 59,480 84,534 85,240
Curtailment and settlement gains (1,280) (5,159) --
----------------------------------------------------------------------------------------------------------------------
Net periodic pension cost for defined benefit pension plans $ 58,200 $ 79,375 $ 85,240
----------------------------------------------------------------------------------------------------------------------
Total pension cost for all pension plans $ 92,822 $ 112,769 $ 95,249
----------------------------------------------------------------------------------------------------------------------
Significant actuarial assumptions for pension plans
----------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
----------------------------------------------------------------------------------------------------------------------
U.S. pension plan:
Discount rate 7.75% 8.00% 7.50%
Expected long-term rate of return on plan assets 9.50% 9.00% 9.00%
Rate of increase in future compensation levels 5.00% 5.00% 5.00%
----------------------------------------------------------------------------------------------------------------------
Non-U.S. pension plans:
Discount rate 3.50-8.50% 4.00- 9.30% 5.00- 9.50%
Expected long-term rate of return on plan assets 4.50-9.50% 4.00-10.00% 6.00-10.00%
Rate of increase in future compensation levels 2.00-6.50% 2.00- 7.00% 3.00- 7.00%
----------------------------------------------------------------------------------------------------------------------
Digital Equipment Corporation 45
NOTE G: POSTRETIREMENT AND OTHER POSTEMPLOYMENT BENEFITS (continued)
--------------------------------------------------------------------------------
[Enlarge/Download Table]
Funded status of pension plans as of the year-end measurement date (in thousands)
---------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996
---------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $ (2,695,564) $ (2,433,935)
---------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $ (2,867,883) $ (2,566,869)
---------------------------------------------------------------------------------------------------------------
Projected benefit obligation $ (3,109,380) $ (2,875,815)
Plan assets at fair value 3,637,062 3,305,529
---------------------------------------------------------------------------------------------------------------
Over-funded projected benefit obligation 527,682 429,714
Unrecognized net gain (1,006,745) (858,279)
Unrecognized prior service cost 44,747 54,454
Unrecognized net transition asset (71,167) (76,232)
---------------------------------------------------------------------------------------------------------------
Pension liability recognized on the balance sheet $ (505,483) $ (450,343)
---------------------------------------------------------------------------------------------------------------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Corporation has defined benefit
postretirement plans that provide medical and dental benefits for U.S. retirees
and their eligible dependents. Substantially all of the Corporation's U.S.
employees may become eligible for postretirement benefits if they reach
retirement age while working for the Corporation. The majority of the
Corporation's non-U.S. subsidiaries do not offer postretirement benefits other
than pensions to retirees.
The Corporation's postretirement benefit plans other than pensions are funded as
costs are incurred.
Unrecognized net gains in excess of the underlying accumulated postretirement
benefits obligation have been generated due to a shift to managed care and
declining health care cost trends and employee population. Unrecognized gains or
losses are amortized over the average expected service period of plan
participants, provided that the unrecognized gains or losses do not exceed a
certain percentage of the accumulated postretirement benefits obligation, after
which the gains and losses are recognized immediately.
During the second quarter of fiscal 1997, the Corporation amended its U.S.
postretirement medical plan to provide full retiree medical benefits only to
employees working ten years after age 45. As a result of the amendment, the
Corporation recognized a one-time curtailment gain of $52.3 million. The change
to the plan had an immaterial cash flow impact to the Corporation.
46 Digital Equipment Corporation
NOTE G: POSTRETIREMENT AND OTHER POSTEMPLOYMENT BENEFITS (continued)
--------------------------------------------------------------------------------
[Enlarge/Download Table]
Components of net periodic postretirement benefits cost/(credit) (in thousands)
---------------------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
---------------------------------------------------------------------------------------------------------------------------------
Service cost for benefits earned during the period $ 11,593 $ 10,987 $ 18,455
Interest cost on accumulated postretirement benefits obligations 27,397 30,707 41,279
Actual return on plan assets -- -- --
Net amortization and deferral (94,274) (16,871) (9,919)
---------------------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefits cost before curtailment gains (55,284) 24,823 49,815
Curtailment gains (52,706) (2,230) (20,741)
---------------------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefits cost/(credit) $(107,990) $ 22,593 $ 29,074
---------------------------------------------------------------------------------------------------------------------------------
Significant actuarial assumptions for postretirement benefits plans (dollars in thousands)
---------------------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
---------------------------------------------------------------------------------------------------------------------------------
U.S. plans:
Discount rate 7.75% 8.00% 7.50%
Health care cost trend rate, current year 5.50% 5.50% 7.00%
Health care cost trend rate, ultimate year 5.00% 5.00% 5.50%
Trend rate decreases to the ultimate rate in the year 2004 2004 2005
Effect of a 1% increase in the trend rate:
Increase in accumulated postretirement benefits obligation 61,315 $ 64,819 $ 100,617
Increase in net periodic postretirement benefits cost $ 7,262 $ 7,326 $ 13,645
---------------------------------------------------------------------------------------------------------------------------------
Non-U.S. plans:
Discount rate 4.50- 8.50% 5.00- 8.50% 5.00- 8.50%
Health care cost trend rate, current year 0.00-12.00% 4.00-12.00% 4.00-11.00%
Health care cost trend rate, ultimate year 0.00- 7.00% 4.00- 7.00% 4.00- 7.00%
Trend rates decrease to the ultimate rates in the years 2003 1996-2004 1995-2006
Effect of a 1% increase in the trend rate:
Increase in accumulated postretirement benefits obligation $ 1,094 $ 2,196 $ 8,072
Increase in net periodic postretirement benefits cost $ 226 $ 407 $ 1,043
---------------------------------------------------------------------------------------------------------------------------------
[Enlarge/Download Table]
Funded status of postretirement benefits plans as of the year-end measurement date (in thousands)
---------------------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996
---------------------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefits obligations:
Retirees $(267,939) $(273,908)
Fully eligible plan participants (23,025) (6,582)
Other active plan participants (67,152) (142,617)
---------------------------------------------------------------------------------------------------------------------------------
Unfunded accumulated postretirement benefits obligation (358,116) (423,107)
Unrecognized net gain (147,972) (212,646)
Unrecognized prior service credit (74,558) (84,929)
---------------------------------------------------------------------------------------------------------------------------------
Other postretirement benefits liability recognized on the balance sheet $(580,646) $(720,682)
---------------------------------------------------------------------------------------------------------------------------------
Digital Equipment Corporation 47
NOTE H: COMMITMENTS, CONTINGENCIES AND RISK FACTORS
--------------------------------------------------------------------------------
LEASE COMMITMENTS Minimum annual rentals under noncancelable leases (which are
principally for leased real estate, vehicles and equipment) for the fiscal years
listed are as follows:
[Download Table]
Fiscal year (in thousands)
--------------------------------------------------------------------------------
1998 $ 239,094
1999 268,904
2000 124,968
2001 91,163
2002 71,993
Later years 289,794
--------------------------------------------------------------------------------
Total minimum lease payments $1,085,916
--------------------------------------------------------------------------------
Total rental expense for fiscal 1997, 1996 and 1995 was $199.9 million, $259.3
million and $282.1 million, respectively.
COMMITMENTS The Corporation has entered into agreements with another company to
provide the Corporation with services in support of its normal operations. The
minimum payments for these agreements approximate $96.0 million in fiscal 1998,
$88.0 million in fiscal 1999 and $67.0 million per annum in fiscal years 2000
through 2005.
LITIGATION Several purported class action lawsuits were filed against the
Corporation during the fourth quarter of fiscal 1994 alleging violations of the
Federal securities laws arising from alleged misrepresentations and omissions in
connection with the Corporation's issuance and sale of Series A 8 7/8%
Cumulative Preferred Stock (the "Series A Preferred Stock") and the
Corporation's financial results for the quarter ended April 2, 1994. During
fiscal 1995, the lawsuits were consolidated into three cases, which were pending
before the United States District Court for the District of Massachusetts. On
August 8, 1995, the Massachusetts federal court granted the defendants' motion
to dismiss all three cases in their entirety. On May 7, 1996, the United States
Court of Appeals for the First Circuit affirmed in part and reversed in part the
dismissal of the two cases, and remanded for further proceedings.
The Corporation and Intel Corporation ("Intel") are involved in litigation
commenced in the fourth quarter of fiscal 1997 in the U.S. District Courts of
Massachusetts and Northern California claiming, respectively, willful
infringement by Intel of certain of the Corporation's patents through the
manufacture, sale and use of Intel's families of Pentium microprocessors, and
breach of contract and various other unfair or unlawful business practices by
the Corporation. The two lawsuits are in an early stage, with the parties in the
process of answering the respective claims, asserting defenses and filing
counterclaims.
RISK FACTORS The broad diversity of the Corporation's products, service
offerings, customers and geographic operations mitigate the risk that a severe
impact will occur in the near term as a result of changes in its customer base,
competition, or composition of its markets.
While the Corporation believes that the materials required for its manufacturing
operations are presently available in quantities sufficient to meet demand, the
failure of a significant supplier to deliver certain components or technical
information on a timely basis or in sufficient quantities could adversely affect
the Corporation's future results of operations.
NOTE I: FINANCIAL INSTRUMENTS
--------------------------------------------------------------------------------
FOREIGN EXCHANGE OPTIONS In the ordinary course of business, the Corporation
purchases foreign exchange option contracts to limit potential losses from
adverse exchange rate movements on certain anticipated local currency
transactions. The contracts are primarily in weighted aggregates of European
currencies, Japanese yen and Australian dollars and generally have maturities
which do not exceed three months. Premiums to purchase foreign exchange option
contracts are amortized over the life of the contract and are included in
selling, general and administrative expenses. Unamortized premiums are included
in prepaid assets. Gains on option contracts, if any, are included in product
and service revenues in the period in which the related local currency revenues
are reported.
FOREIGN EXCHANGE FORWARDS In the ordinary course of business, the Corporation
enters into foreign exchange forward contracts to mitigate the effect of foreign
currency movements on the U.S. dollar value of monetary asset and liability
positions of non-U.S. subsidiaries. The contracts are primarily in European
currencies, Japanese yen and Australian dollars and generally have maturities
which do not exceed three months. Gains and losses on contracts are included in
selling, general and administrative expenses in the period in which the exchange
rates change.
With respect to foreign exchange option and forward contracts, there were no
deferred gains or losses at June 28, 1997. The Corporation does not hold or
issue foreign exchange option or forward contracts for trading purposes.
48 Digital Equipment Corporation
NOTE I: FINANCIAL INSTRUMENTS (continued)
--------------------------------------------------------------------------------
INTEREST RATE SWAPS During the first quarter of fiscal 1994, the Corporation
entered into interest rate swap agreements, with maturities of up to 10 years,
to manage its exposure to interest rate movements by effectively converting a
portion of its long-term debt from fixed to variable rates. The net face amount
of interest rate swaps subject to variable rates as of June 28, 1997 and June
29, 1996 was $250.0 million. These agreements involve the exchange of fixed rate
payments for variable rate payments without the effect of leverage and without
the exchange of the underlying face amount. Fixed interest rate payments are at
a weighted average rate of 5.73%. Variable rate payments are based on six month
U.S. dollar LIBOR. Interest rate differentials paid or received under these
agreements are recognized over the six month period as adjustments to interest
expense. Gains and losses on terminated swap agreements are amortized over the
original life of the agreements as adjustments to interest expense. Unamortized
deferred losses are included in prepaid assets and totaled $12.9 million as of
June 28, 1997. The Corporation does not hold or issue interest rate swap
agreements for trading purposes.
FAIR VALUE The carrying amounts reflected in the consolidated balance sheets for
cash, cash equivalents, short-term investments, accounts receivable, bank loans,
current portion of long-term debt and accounts payable approximate fair value
due to the short maturities of these instruments. The fair values for long-term
debt and hedging instruments are based on dealer quotes for those instruments.
The fair values represent estimates of possible value which may not be realized
in the future.
The face amount of hedging instruments does not necessarily represent amounts
exchanged by the parties and thus is not a direct measure of the exposure of the
Corporation through its use of hedging instruments. The amounts exchanged are
calculated on the basis of face amounts and other terms of the hedging
instruments, which relate to interest rates, foreign exchange rates or other
financial indexes.
The fair value of the Corporation's long-term debt and hedging instruments are
subject to change as a result of potential changes in market rates and prices.
The potential change in fair value for interest rate sensitive instruments is
based on a hypothetical immediate 1% point increase in interest rates across all
maturities; the potential loss in fair value for foreign exchange rate sensitive
instruments are based on a hypothetical immediate 10% increase in U.S. dollar
per local currency exchange rates across all maturities. The Corporation's use
of this methodology to quantify the market risk of such instruments should not
be construed as an endorsement of its accuracy or the accuracy of the related
assumptions. The quantitative information about market risk is necessarily
limited because it does not take into account operating transactions,
anticipated hedging instruments, pensions and other postretirement benefits. The
potential loss for purchased foreign exchange option contracts is limited to the
premium paid.
[Enlarge/Download Table]
Fair value of financial instruments (in thousands)
---------------------------------------------------------------------------------------------------
Hypothetical loss
in fair value(1)
Face amount(1) Carrying amount(1) Fair value(1) (Unaudited)
---------------------------------------------------------------------------------------------------
JUNE 28, 1997
LONG-TERM DEBT $ (755,490) $ (743,440) $ (717,380) $ 54,298
HEDGING INSTRUMENTS:
OPTION CONTRACTS 727,645 4,399 425 (297)
FORWARD CONTRACTS 1,322,236 (17,881) (10,732) (126,309)
INTEREST RATE SWAPS 250,000 12,940 (12,285) (11,313)
---------------------------------------------------------------------------------------------------
June 29, 1996
Long-term debt $(1,012,269) $ (999,131) $ (979,892) $ 60,518
Hedging instruments:
Option contracts 691,151 884 494 (385)
Forward contracts 886,015 (267) (1,952) (70,638)
Interest rate swaps 250,000 15,404 (16,540) (12,509)
---------------------------------------------------------------------------------------------------
(1) Asset/(liability)
CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the
Corporation to concentrations of credit risk consist principally of temporary
cash and short-term investments, trade receivables and hedging instruments.
Digital Equipment Corporation 49
NOTE I: FINANCIAL INSTRUMENTS (continued)
--------------------------------------------------------------------------------
The Corporation places its temporary cash and short-term investments with high
credit qualified financial institutions and, by policy, limits the amount of
credit exposure to any one financial institution.
The Corporation sells a significant portion of its products through third-party
resellers and as a result maintains individually significant accounts receivable
balances from various major resellers. If the financial condition and operations
of these resellers were to deteriorate, the Corporation's operating results
could be adversely affected. Total receivables for the ten largest resellers
approximated 10% of total accounts receivable at June 28, 1997.
Concentrations of credit risk with respect to other trade receivables are
limited due to the large number of customers comprising the Corporation's
customer base, and their dispersion across many different industries and
geographies. The Corporation performs ongoing credit evaluations of its
customers and generally does not require collateral.
The Corporation is exposed to credit-related losses in the event of
nonperformance by counterparties to hedging instruments. The counterparties to
these contracts are major financial institutions. The Corporation continually
monitors its positions and the credit ratings of its counterparties and limits
the amount of contracts it enters into with any one party.
NOTE J: INVESTING AND DIVESTING ACTIVITIES
--------------------------------------------------------------------------------
During fiscal 1997, the Corporation sold certain software products and other
assets generating $32.2 million of proceeds. The Corporation continues to sell
certain of the software products under royalty agreements. Revenue from sales of
divested software products represented an immaterial amount of the consolidated
operating revenues.
During fiscal 1996, the Corporation sold its learning services business and
several small businesses. During fiscal 1995, the Corporation sold portions of
its storage business, its relational database business, a software distribution
subsidiary, a contract manufacturing business and a semiconductor manufacturing
facility. Prior to sale and in total the divested businesses represented
approximately 8% of fiscal 1994 consolidated operating revenues and did not have
a material effect on the consolidated net loss from operations.
At the end of the second quarter of fiscal 1996, the Corporation sold its
learning services business to Welsh, Carson, Anderson & Stowe for proceeds of
approximately $80.0 million. Approximately 600 employees transferred with this
business.
In addition, during fiscal 1996 the Corporation sold several small businesses
for net proceeds of approximately $76.0 million.
At the end of the fourth quarter of fiscal 1995, the Corporation sold its South
Queensferry, Scotland semiconductor facility and related assets to a subsidiary
of Motorola, Inc. for net proceeds of approximately $128.0 million. Assets sold
included approximately $8.0 million of inventory and $127.0 million of net
property, plant and equipment. Approximately 530 employees were transferred to
Motorola at the time of sale.
At the end of the third quarter of fiscal 1995, the Corporation sold its
contract manufacturing business to SCI Systems, Inc. for net proceeds of
approximately $75.0 million. Assets sold included approximately $47.0 million of
inventory and $20.0 million of net property, plant and equipment, including a
manufacturing plant in Augusta, Maine. Approximately 700 employees were
transferred to SCI Systems, Inc. at the time of sale.
At the beginning of the second quarter of fiscal 1995, the Corporation sold its
magnetic disk drive, tape drive, solid state disk and thin film heads businesses
(the "Business") to Quantum Corporation ("Quantum") for an aggregate purchase
price of $360.0 million, generating net proceeds of $348.0 million. Assets sold
included approximately $180.0 million of inventory and $154.0 million of net
property, plant and equipment, including facilities in Shrewsbury, Massachusetts
and Penang, Malaysia, as well as the Corporation's interest in Rocky Mountain
Magnetics, Inc. Quantum is leasing facilities owned by the Corporation in
Colorado Springs, Colorado and leased by the Corporation in Batam, Indonesia.
Approximately 3,100 employees were transferred to Quantum upon sale of the
Business.
Also during the second quarter of fiscal 1995, the Corporation sold its
relational database business and related assets to Oracle Corporation for net
proceeds of $107.0 million. Approximately 250 employees were transferred to
Oracle Corporation at the time of sale.
The Corporation adopted Statement of Financial Accounting Standards No.
115--Accounting for Certain Investments in Debt and Equity Securities, effective
July 3, 1994. In fiscal 1995, the Corporation recorded a one-time unrealized
gain of $64.5 million or $.44 per common share related to the value of Ing.
Olivetti & C. S.p.A. ("Olivetti") common stock. Subsequently, in the same year,
the Corporation sold all of its shares of Olivetti stock for approximately
$149.0 million, thereby realizing the gain. The cash flow effect is included in
the (gain)/loss on disposition and write-down of other assets in the Statement
of cash flows.
50 Digital Equipment Corporation
NOTE K: STOCK PLANS
--------------------------------------------------------------------------------
STOCK OPTIONS AND AWARDS Under its Equity Plans, the Corporation has awarded
restricted stock to certain officers and key employees. Under such Equity Plans
and its Restricted Stock Option Plans, the Corporation has granted options to
certain officers and key employees to purchase common stock at a price
determined by the Board of Directors. Shares purchased under the plans are
either subject to repurchase options and restrictions on sales which lapse over
an extended time period not exceeding 10 years, or become exercisable ratably
over periods of up to five years. At June 28, 1997, 5,515,234 options to
purchase shares were exercisable at prices ranging from $19.25 to $153.00.
The excess, if any, of the fair market value of shares on the measurement date
over the exercise price is charged to operations each year as the restrictions
lapse.
In May 1994, the Board of Directors approved a program to offer employees of the
Corporation (other than executive officers of the Corporation) the opportunity
to exchange their outstanding stock options for new options to purchase a
reduced number of shares of common stock at a per share exercise price equal to
the fair market value of the common stock on the date the program was approved
(the "Regrant Program"). Under the Regrant Program, outstanding options granted
between 1985 and 1993 to purchase up to 11,854,084 shares of common stock with
an average exercise price of $59.43 per share could be exchanged for new options
to purchase up to 4,554,870 shares with an exercise price of $22.88 per share.
The new options vest over four years and have a seven-year term. As of July 3,
1994 options to purchase 5,765,914 shares had been exchanged and cancelled for
new options to purchase a total of 2,328,910 shares. During fiscal 1995, an
additional 4,476,977 shares were exchanged and canceled for new options to
purchase a total of 1,663,430 shares. No further exchanges may occur under this
program. No compensation expense was reversed as a result of the Regrant
Program. Future expense associated with options canceled, and not replaced by
new options under the Regrant Program, will no longer be recognized, resulting
in an expense reduction of approximately $31.0 million over fiscal years 1995 to
1998.
[Download Table]
Employee stock options and awards
--------------------------------------------------------------------------------
Shares Average
reserved for price
future grants Shares per share
--------------------------------------------------------------------------------
July 2, 1994 3,037,373 14,934,229 $ 49.59
Additional shares
available for grant 2,134,306 -- --
Options granted (2,781,930) 2,781,930 25.42
Shares awarded (897,680) -- --
Options exercised -- (677,299) 26.58
Options canceled 3,278,129 (3,278,129) 35.73
Options terminated (1,748,323) -- --
Regrant program:
Canceled 4,476,977 (4,476,977) 59.26
Terminated (2,479,767) -- --
Regrant (1,663,430) 1,663,430 22.88
--------------------------------------------------------------------------------
July 1, 1995 3,355,655 10,947,184 $ 41.01
Additional shares
available for grant 2,246,664 -- --
Options granted (3,197,920) 3,197,920 44.11
Shares awarded (493,635) -- --
Shares forfeited 86,317 -- --
Options exercised -- (1,984,600) 29.62
Options canceled 865,196 (865,196) 41.93
Options terminated (233,542) -- --
--------------------------------------------------------------------------------
June 29, 1996 2,628,735 11,295,308 $ 43.81
Additional shares
available for grant 3,110,086 -- --
Options granted (3,750,800) 3,750,800 36.30
Shares awarded (654,105) -- --
Shares forfeited 151,114 -- --
Options exercised -- (647,222) 21.01
Options canceled 2,187,519 (2,187,519) 46.88
Options terminated (767,950) -- --
--------------------------------------------------------------------------------
June 28, 1997 2,904,599 12,211,367 $ 42.17
--------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLANS Under the Corporation's Employee Stock Purchase
Plans (ESPP), all U.S. and certain non-U.S. employees may be granted the
opportunity to purchase common stock at 85% of market value on the first or last
business day of the six-month payment period, whichever is lower. Common stock
reserved for future employee purchases aggregated 7,261,138 shares at June 28,
1997. There were 4,445,406 shares issued at an average price of $30.76 per share
during the year ended June 28, 1997; 3,341,316 shares issued at an average price
of $41.58 per share during the year ended June 29, 1996; and 6,085,154 shares
issued at an average price of $21.96 per share during the year ended July 1,
1995. There have been no charges to
Digital Equipment Corporation 51
NOTE K: STOCK PLANS (continued)
--------------------------------------------------------------------------------
income in connection with these Plans other than incidental expenses related to
the issuance of the shares. Federal income tax benefits relating to such Plans,
if any, have been credited to additional paid-in capital.
STOCK OPTION PLANS FOR NON-EMPLOYEE DIRECTORS The 1990 Stock Option Plan for
Non-Employee Directors provided for a one-time grant of an option to purchase
5,000 shares of the Corporation's common stock to non-employee directors. The
exercise price of an option is the fair market value per share of common stock
of the Corporation on the date the option is granted. An aggregate of 100,000
shares of common stock were authorized for issuance under the Plan, of which
55,000 are subject to options granted under the plan at an average purchase
price of $48.23 per share. The options become exercisable at the rate of 20% per
year, with credit given for past service. None of these options had been
exercised as of June 28, 1997. No additional options may be granted under this
plan subsequent to adoption of the 1995 Stock Option Plan for Non-Employee
Directors.
The 1995 Stock Option Plan for Non-Employee Directors, which was approved on
November 9, 1995, provides for annual grants to purchase 2,500 shares of the
Corporation's common stock to non-employee directors, who are initially elected
to office subsequent to January 1, 1995. The plan provides for annual grants to
purchase 1,000 shares of the Corporation's common stock to non-employee
directors elected to office prior to January 1, 1995. The exercise price of an
option is the fair market value per share of common stock of the Corporation on
the date the option is granted. An aggregate of 95,000 shares of common stock
are authorized for issuance under the Plan, of which 20,000 are subject to
options granted under the plan at an average purchase price of $45.14 per share.
The options become exercisable ratably over three years. None of these options
had been exercised as of June 28, 1997. Effective on the date of the 1997 Annual
Meeting of Stockholders, non-employee directors will receive an annual stock
option grant to purchase either 6,000 shares or 3,500 shares, depending upon the
age of the non-employee director and on the date of commencement of service as a
non-employee director.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123--Accounting for Stock-Based
Compensation. SFAS No. 123 encourages, but does not require, companies to
recognize compensation costs for all stock-based compensation arrangements using
a fair value method of accounting. Alternatively, SFAS No. 123 permits a company
to continue accounting for these arrangements under Accounting Principles Board
Opinion No. 25--Accounting for Stock Issued to Employees, accompanied by
footnote disclosure of the pro forma net income and earnings per share had the
new rules been applied. The Corporation adopted the alternative approach under
SFAS No. 123 as of the first day of fiscal 1997. Accordingly, no compensation
expense has been recognized for the Corporation's stock-based compensation plans
other than for restricted stock. If the Corporation had elected to recognize
compensation expense based on the fair value of the options at the date of grant
for awards granted in fiscal 1997 and 1996 the Corporation's net income/(loss)
and earnings/(loss) per common share would have approximated the pro forma
amounts indicated below:
[Download Table]
(in thousands, except per share data)
--------------------------------------------------------------------------------
Year ended June 28, June 29,
1997 1996
--------------------------------------------------------------------------------
Pro forma net income/(loss)
applicable to common stock $36,198 $(188,040)
Pro forma net income/(loss)
applicable per common share $ 0.23 $ (1.24)
--------------------------------------------------------------------------------
The weighted-average fair value of each option granted in fiscal 1997 and 1996
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
[Download Table]
Stock Option Employee Stock
Plans Purchase Plans
--------------------------------------------------------------------------------
Fiscal year 1997 1996 1997 1996
--------------------------------------------------------------------------------
Risk-free interest rate 6.3% 6.2% 5.3% 5.4%
Life in years 3.6 3.6 0.5 0.5
Volatility 35% 35% 35% 35%
Dividend yield 0% 0% 0% 0%
--------------------------------------------------------------------------------
The weighted average fair value at date of grant for awards granted in fiscal
1997 and 1996 are as follows:
[Download Table]
Fiscal year 1997 1996
--------------------------------------------------------------------------------
Stock options $12.63 $15.37
Stock awards $39.64 $47.96
ESPP $ 9.16 $12.62
--------------------------------------------------------------------------------
The pro forma net income/(loss) for fiscal 1997 and 1996 may not be
representative of the pro forma net income/(loss) of future years because the
SFAS No. 123 method of accounting for pro forma compensation expense has not
been applied to options granted prior to July 2, 1995.
52 Digital Equipment Corporation
NOTE K: STOCK PLANS (continued)
--------------------------------------------------------------------------------
[Enlarge/Download Table]
Stock options outstanding at June 28, 1997 Options outstanding Options exercisable
------------------------------------------ -------------------------------------------- ---------------------------
Weighted
average Weighted Weighted
remaining average average
Range of Shares contractual exercise Shares exercise
exercise prices outstanding life price exercisable price
---------------------------------------------------------------------------------------------------------------------------
$19.25 to $ 19.99 1,097,657 7.28 $19.65 637,603 $19.62
$20.00 to $ 29.99 2,395,118 5.32 $24.20 1,310,980 $22.91
$30.00 to $ 39.99 3,100,105 9.03 $37.52 108,499 $34.05
$40.00 to $ 49.99 3,230,377 7.70 $43.32 1,520,688 $43.68
$50.00 to $ 59.99 401,454 7.01 $55.90 238,820 $57.21
$60.00 to $ 69.99 33,500 8.61 $62.90 11,055 $62.90
$70.00 to $153.00 2,028,156 2.36 $78.03 1,687,589 $78.28
---------------------------------------------------------------------------------------------------------------------------
Total 12,286,367 6.63 $42.21 5,515,234 $46.98
---------------------------------------------------------------------------------------------------------------------------
NOTE L: STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
On January 21, 1994, the Corporation filed with the Securities and Exchange
Commission a shelf registration statement on Form S-3 under the Securities Act
of 1933, as amended, covering the registration of debt securities, preferred
stock, depositary shares, and warrants to purchase equity and debt securities,
in an aggregate amount of $1.0 billion. In March 1994, the Corporation issued
and sold 16 million Depositary Shares under the shelf registration statement,
each representing a one-fourth interest in a share of the Corporation's Series A
8 7/8% Cumulative Preferred Stock (the "Series A Preferred Stock"), par value
$1.00 per share. Dividends on the Series A Preferred Stock accrue at the annual
rate of 8 7/8%, or $35.5 million per year. At June 28, 1997, there were declared
and unpaid dividends of $8.9 million. These dividends were paid on July 15,
1997.
The Series A Preferred Stock was offered to the public at $100 per share ($25
per Depositary Share) for a total of $400.0 million, leaving a balance of $600.0
million available for future issuance under the shelf registration. The net
proceeds of $387.0 million from the Series A Preferred Stock offering was used
for working capital and other general corporate purposes. The Series A Preferred
Stock is not convertible into, or exchangeable for, shares of any other class or
classes of stock of the Corporation. The Series A Preferred Stock is not
redeemable prior to April 1, 1999. On or after April 1, 1999, the Corporation,
at its option, may redeem shares of the Series A Preferred Stock, as a whole or
in part, for cash at the redemption price per share of $100 ($25 per Depositary
Share), plus accrued and unpaid dividends to the redemption date. Upon
dissolution, liquidation or the winding up of the affairs of the Corporation,
the holders of the Series A Preferred Stock will be entitled to receive $100 per
share ($25 per Depositary Share), plus accrued and unpaid dividends, before any
distribution to holders of the Corporation's common stock.
The Corporation adopted a Stockholder Rights Plan in December 1989 pursuant to
which the Corporation authorized the distribution of one Common Stock Purchase
Right ("Right") for each share of outstanding common stock. Under certain
conditions, each Right may be exercised for one share of common stock at an
exercise price of $400, subject to adjustment. Under circumstances defined in
the Plan, the Rights entitle holders to purchase stock having a value of twice
the exercise price of the Rights. Until they become exercisable, the Rights are
not transferable apart from the common stock. The Rights may be redeemed by the
Corporation at any time prior to the occurrence of certain events at $.01 per
Right. The Plan will expire on December 21, 1999, unless the Rights are earlier
redeemed by the Corporation.
The Corporation purchased on the open market 10 million shares of its common
stock at an aggregate purchase price of $354.1 million. All of the acquired
shares were held as common stock in treasury, of which 3.9 million shares were
subsequently issued to employees under stock plans. The difference between the
average acquisition cost of the shares and the proceeds from issuance is charged
to retained earnings.
Digital Equipment Corporation 53
NOTE M: SUBSEQUENT EVENT
--------------------------------------------------------------------------------
In July 1997, the Board of Directors authorized the repurchase, as conditions
warrant, of up to 15 million shares of the Corporation's common stock.
--------------------------------------------------------------------------------
SUPPLEMENTARY INFORMATION
[Enlarge/Download Table]
QUARTERLY FINANCIAL DATA (unaudited)
------------------------------------------------------------------------------------------------------------------------
Income/
(loss) Income/
Total before Net (loss) per
operating Gross income income/ common
(in millions except per share data)(1) revenues profit taxes (loss) share(2)
------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 28, 1997
FOURTH QUARTER $ 3,463 $1,199 $ 141 $ 124 $ .75
THIRD QUARTER 3,314 1,106 62 51 .27
SECOND QUARTER 3,358 1,104 37 32 .15
FIRST QUARTER 2,912 912 (62) (66) (.48)
------------------------------------------------------------------------------------------------------------------------
TOTAL YEAR $13,047 $4,322 $ 178 $ 141 $ .68
------------------------------------------------------------------------------------------------------------------------
For the year ended June 29, 1996
Fourth quarter $ 3,719 $1,212 $(432) $(433) $(2.87)
Third quarter 3,621 1,252 138 124 .74
Second quarter 3,951 1,288 170 149 .91
First quarter 3,271 1,054 57 48 .26
------------------------------------------------------------------------------------------------------------------------
Total year $14,563 $4,807 $ (68) $(112) $ (.97)
------------------------------------------------------------------------------------------------------------------------
(1) Amounts may not be additive due to rounding.
(2) The sum of the quarters' earnings per share does not equal the year-to-date
earnings per share due to changes in the weighted average share
calculations.
54 Digital Equipment Corporation
OPERATING MANAGEMENT AND STAFF OFFICERS
--------------------------------------------------------------------------------
*Robert B. Palmer
Chairman of the Board,
President and Chief Executive Officer
*Bruce L. Claflin
Senior Vice President
Worldwide Sales and Marketing
Bobby A. F. Choonavala
Vice President; President, Asia-Pacific
Hans W. Dirkmann
Vice President; President, Europe
Michael Gallup
Vice President; President, North America
Graham Long
Vice President, Global Accounts
Luis M. Zuniga
Vice President, Latin America
*Harold D. Copperman
Senior Vice President
DIGITAL Products Division
R.E. Caldwell
Vice President and General Manager,
DIGITAL Semiconductor
Howard Elias
Vice President and General Manager,
NT Systems Business Unit
Donald Z. Harbert
Vice President, Internet Products Business Unit
Ellen J. Lary
Vice President and General Manager,
Storage Products Business Unit
Jesse Lipcon
Vice President and General Manager,
UNIX and OpenVMS Systems Business Unit
John F. McClelland
Vice President, Manufacturing and Distribution
Mahendra R. Patel
Vice President, Systems Engineering
Robert J. Rennick
Vice President and General Manager,
Network Product Business Unit
Richard J. Fishburn
Vice President and Chief Information Officer
Charles B. Holleran
Vice President, Communications
*Ilene B. Jacobs
Vice President, Human Resources
*Vincent J. Mullarkey
Vice President, Finance and Chief Financial Officer
*Alexis Makris
Vice President and Corporate Controller
*Paul J. Milbury
Vice President and Treasurer
*John J. Rando
Senior Vice President
DIGITAL Services Division
Timothy M. Leisman
Vice President and General Manager,
Operations Management Services
Peter A. Mercury
Vice President and General Manager,
Multivendor Customer Services Business Unit
Kannankote S. Srikanth
Vice President and General Manager,
Network and Systems Integration Services
*Thomas C. Siekman
Vice President and General Counsel
Gail S. Mann
Vice President, Assistant General Counsel,
Secretary and Clerk
*William D. Strecker
Vice President, Corporate Strategy and Technology
and Chief Technical Officer
Samuel H. Fuller
Vice President and Chief Scientist
Robert M. Supnik
Vice President, Corporate Research and
Advanced Development
*"Executive Officer" under the Securities Exchange Act of 1934.
Digital Equipment Corporation 55
DIRECTORS
--------------------------------------------------------------------------------
Robert B. Palmer
Chairman of the Board,
President and Chief Executive Officer,
Digital Equipment Corporation
Vernon R. Alden
Director and Trustee of several organizations,
Former Chairman, The Boston Company, Inc.
Colby H. Chandler
Director of several corporations, Retired Chairman
of the Board and Chief Executive Officer,
Eastman Kodak Company
Arnaud de Vitry
Engineering consultant and Director and
Trustee of several organizations
Frank P. Doyle
Director of several corporations,
Retired Executive Vice President,
General Electric Company
Kathleen F. Feldstein
President of Economics Studies, Inc.
and Director of several corporations
Thomas P. Gerrity
Dean, Wharton School of the University of
Pennsylvania and Director of several corporations
Thomas L. Phillips
Director of several corporations,
Retired Chairman of the Board
and Chief Executive Officer,
Raytheon Company
Delbert C. Staley
Director of several corporations,
Retired Chairman of the Board
and Chief Executive Officer,
NYNEX Corporation
56 Digital Equipment Corporation
COMMITTEES OF THE BOARD
--------------------------------------------------------------------------------
AUDIT COMMITTEE NOMINATING COMMITTEE
Colby H. Chandler, Chairman Arnaud de Vitry, Chairman
Vernon R. Alden Vernon R. Alden
Frank P. Doyle Colby H. Chandler
Kathleen F. Feldstein Thomas L. Phillips
COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE STRATEGIC DIRECTION COMMITTEE
Thomas L. Phillips, Chairman Robert B. Palmer, Chairman
Thomas P. Gerrity Frank P. Doyle
Delbert C. Staley Thomas P. Gerrity
Delbert C. Staley
--------------------------------------------------------------------------------
[Photograph of members of Digital's Board of Directors]
Board of Directors, Digital Equipment Corporation (left to right):
VERNON R. ALDEN, KATHLEEN F. FELDSTEIN, ROBERT B. PALMER, COLBY H. CHANDLER,
ARNAUD DE VITRY, THOMAS L. PHILLIPS, DELBERT C. STALEY, THOMAS P. GERRITY, FRANK
P. DOYLE.
Digital Equipment Corporation 57
CORPORATE CONSULTING ENGINEERS
--------------------------------------------------------------------------------
[Enlarge/Download Table]
Andrew Birrell Alan G. Nemeth
Corporate Consulting Engineer Corporate Consulting Engineer
Corporate Research and Advanced Development UNIX and OpenVMS Systems
Corporate Strategy and Technology DIGITAL Products Division
Daniel W. Dobberpuhl Mahendra R. Patel
Senior Corporate Consulting Engineer Corporate Consulting Engineer
DIGITAL Semiconductor Vice President, Systems Engineering
DIGITAL Products Division DIGITAL Products Division
Richard B. Gillett Jeffrey A. Schriesheim
Corporate Consulting Engineer Corporate Consulting Engineer
UNIX and OpenVMS Systems Technology Strategy
DIGITAL Products Division Corporate Strategy and Technology
Richard B. Grove Robert E. Stewart
Corporate Consulting Engineer Corporate Consulting Engineer
UNIX and OpenVMS Systems NT Systems
DIGITAL Products Division DIGITAL Products Division
Richard J. Hollingsworth William D. Strecker
Senior Corporate Consulting Engineer Senior Corporate Consulting Engineer
Vice President, Semiconductor Manufacturing Vice President, Corporate Strategy and Technology
and Technology Chief Technical Officer
DIGITAL Products Division
Robert M. Supnik
William A. Laing Senior Corporate Consulting Engineer
Corporate Consulting Engineer Vice President, Corporate Research
Corporate Research and Advanced Development and Advanced Development
Corporate Strategy and Technology Corporate Strategy and Technology
Richard F. Lary Richard T. Witek
Corporate Consulting Engineer Corporate Consulting Engineer
Systems Architecture and Storage Products DIGITAL Semiconductor
DIGITAL Products Division DIGITAL Products Division
Jesse Lipcon
Corporate Consulting Engineer
Vice President and General Manager,
UNIX and OpenVMS Systems Business Unit
DIGITAL Products Division
Maurice P. Marks
Senior Corporate Consulting Engineer
Technical Director, DIGITAL Semiconductor
DIGITAL Products Division
58 Digital Equipment Corporation
INVESTOR INFORMATION
--------------------------------------------------------------------------------
INFORMATION ON COMMON STOCK
The Corporation's common stock (Ticker Symbol "DEC") is listed and traded on
the:
Chicago Stock Exchange
New York Stock Exchange
Pacific Stock Exchange
Swiss Exchange
German Stock Exchanges of Frankfurt, Munich and Berlin
Common stock price composite:
There were 53,911 shareholders of record as of June 28, 1997. The high and low
quarterly sales prices for the past three fiscal years were as follows:
[Download Table]
--------------------------------------------------------------------------------
Fiscal quarter High Low
--------------------------------------------------------------------------------
1997
FOURTH 38 1/2 25
THIRD 38 3/4 27
SECOND 41 1/2 28 3/8
FIRST 46 7/8 30 1/2
--------------------------------------------------------------------------------
1996
Fourth 63 1/4 41 1/2
Third 76 1/2 50 1/8
Second 65 40 3/4
First 45 7/8 35 1/8
--------------------------------------------------------------------------------
1995
Fourth 49 1/2 37 3/8
Third 38 7/8 31 1/8
Second 36 5/8 24 7/8
First 29 1/4 18 3/8
--------------------------------------------------------------------------------
Transfer Agent and Registrar for common stock:
First Chicago Trust Company of New York is the principal stock transfer agent
and registrar, and maintains the stockholder accounting records. For questions
on change of ownership, lost stock certificates, consolidation of accounts and
change of address, please contact:
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, New Jersey 07303-2500
Telephone: (201) 324-0498
(800) 519-3111
For change of address, send a signed and dated note or postcard to First Chicago
Trust Company of New York and include the name in which the stock is registered,
account number and social security number, as well as the old and new addresses.
Employee investor services:
Digital Equipment Corporation is also a stock transfer agent and registrar, and
maintains employee stockholder accounting records. Inquiries of an
administrative nature relative to employee stockholder accounting records and
employee purchases should be directed to:
Investor Services
Digital Equipment Corporation
111 Powdermill Road MSO1-1/L12
Maynard, Massachusetts 01754
(978) 493-3703, (978) 493-5213
Eliminate duplicate mailings:
To maintain more than one account, but eliminate duplicate mailings of annual
reports to the same address, send a copy of the label from a Corporate mailing
to the Investor Services Department (address above), indicating the names you
wish to keep on the mailing list and the names you wish to delete.
Digital Equipment Corporation 59
INVESTOR INFORMATION (continued)
--------------------------------------------------------------------------------
INFORMATION ON PREFERRED STOCK
The Corporation's Depositary Shares, each representing one-fourth of a share of
the Corporation's Series A 8 7/8% Cumulative Preferred Stock (the "Preferred
Stock") (Ticker Symbol DEC PRA), is listed and traded on the New York Stock
Exchange. The Preferred Stock carries an 8 7/8% cumulative annual dividend
payable quarterly on January 15, April 15, July 15, and October 15 of each year.
Depositary for the Series A 8 7/8% Cumulative Preferred Stock:
Citibank N.A.
Address correspondence to:
Citicorp Data Distributor
404 Sette Drive
Paramus, New Jersey 07653
(800) 422-2066
STOCKHOLDER COMMUNICATIONS
The Investor Relations Department is available to assist stockholders. Investor
inquiries regarding financial information are welcome by letter, telephone or
the Internet. The annual report on Form 10-K for the fiscal year ended June 28,
1997, including schedules thereto, which is filed with the Securities and
Exchange Commission, will be sent without charge upon written request to:
Investor Relations
Digital Equipment Corporation
111 Powdermill Road MSO2-3/B17
Maynard, Massachusetts 01754
Telephone: (978) 493-7182
Fax: (978) 493-7633
DIGITAL Shareholder Direct:
Financial results, quarterly and annual reports and news
on the Corporation's products and services is available via voice, fax or mail
by calling 1-800-998-9332 (U.S., Canada and Latin America only).
DIGITAL on the Internet:
Access to Corporate and financial information is also available through the
Corporation's home page on the Internet: http://www.digital.com and the Digital
Financial News & Investor Information home page at
http://www.digital.com/info/finance.
AUDITORS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Telephone: (617) 478-5000
60 Digital Equipment Corporation
DIGITAL believes the customer, market and product information in this
annual report is accurate as of its publication date. This information
is subject to change without notice. DIGITAL is not responsible for
any inadvertent errors.
DIGITAL will conduct its business in a manner that conserves the
environment. As a company we have a tradition of achievement in
protecting the environment and in ensuring the health and safety of
our fellow employees. A copy of our Environmental Health and Safety
Progress Report is accessible through DIGITAL's EHS homepage:
www.digital.com/info/ehs.
The following are trademarks of Digital Equipment Corporation:
AllConnect, Alpha, AlphaPowered, AlphaStation, AlphaServer, AltaVista,
ClientWORKS, DIGITAL, DIGITAL Logo, DIGITAL UNIX, FX!32, GIGAswitch,
HiNote, Millicent, OpenVMS, Powerstorm, Prioris, StorageWorks,
TruCluster, VAX, Venturis, and VLM.
The following are third-party trademarks:
Amazon.com is a trademark of Amazon.Com, Inc. Arbor is a registered
trademark of Kenan Systems Corporation. CELLworks is a registered
trademark of Fastech Integration, Inc. 1st Quote is a trademark of
Virtual Telecom, Inc. NetDay is a trademark of NetDay. NetPC is a
trademark of Hewlett-Packard Company. NetWare is a registered
trademark of Novell, Inc. Oracle, Oracle7, and Oracle8 are
trademarks of Oracle Corporation. Pentium Pro and Pentium II are
trademarks of Intel Corporation; Intel and Pentium are registered
trademarks of Intel Corporation. PointCast is a registered trademark
of PointCast Incorporated. Road Runner is a trademark of Time
Warner Entertainment Company, L.P. SAP is a trademark of SAP
Aktiengesellschaft. Solaris is a registered trademark of Sun
Microsystems, Inc. StrongARM is a trademark of Advance RISC Machines
Limited. Tandem is a registered trademark of Tandem Computers
Incorporated. UNIX is a registered trademark in the United States
and other countries, licensed exclusively through X/Open Company,
Ltd. Windows95 and Windows CE are trademarks and Windows, Windows NT,
BackOffice, and Microsoft are registered trademarks of Microsoft
Corporation.
All other trademarks are the property of their respective owners.
Printed in USA EA-B7894-87/97 09 19 200.0
Copyright 1997 Digital Equipment Corporation
All rights reserved
Printed on recycled paper
[Outside Back Cover: Photograph of three business people engaged
in a discussion.]
DIGITAL EQUIPMENT CORPORATION
111 Powdermill Road
Maynard, Massachusetts
01754-1418
Dates Referenced Herein and Documents Incorporated by Reference
↑Top
Filing Submission 0000950135-97-003873 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help —
Fri., Mar. 29, 4:20:00.1am ET