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Digital Equipment Corporation

1996 Annual report

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 1996, 1995 or 1994. 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 since fiscal 1994 reflects the positive effects of restructuring activities and increased returns on invested pension assets.

The net periodic pension cost for defined contribution pension plans was $32,382,000, $6,816,000 and $12,585,000 for the fiscal years ended June 29, 1996, July 1, 1995 and July 2, 1994, 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.

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.

In fiscal 1996, net periodic postretirement benefits cost before curtailment gains declined when compared to fiscal 1995 and 1994, reflecting the positive effects of restructuring activities and lower U.S. health care cost trends.

The Corporation's postretirement benefit plans other than pensions are funded as costs are incurred.

Postemployment benefits In the fourth quarter of fiscal 1994, the Corporation adopted Statement of Financial Accounting Standards (SFAS)No. 112 - Employers' Accounting for Postemployment Benefits, effective as of the beginning of the fiscal year. This standard requires the accrual of benefits provided to former or inactive employees, after employment but before retirement. These benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits and continuation of benefits such as health care and life insurance coverage.

The cumulative effect of adopting this standard resulted in a one-time charge to income of $71,068,000 (the "transition obligation"), or $.51 per common share. This transition obligation represents principally the cost of providing medical, dental and life insurance benefits to individuals in the U.S. currently on long-term disability, during the estimated remaining period in which they will receive disability benefits. The annual expense under the standard, exclusive of the transition obligation, is not significantly different than the annual expense under the Corporation's former practice. There was no cash flow impact from the adoption of SFAS No. 112.