<PAGE>
______________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1994
Commission File Number 1-9026
COMPAQ COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 76-0011617
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20555 SH 249, Houston, Texas 77070
(713) 370-0670
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, $.01 par value New York Stock Exchange
Series A Participating Cumulative Preferred New York Stock Exchange
Stock Purchase Rights
Debt Securities None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ]
The aggregate market value of the voting stock held by non-
affiliates of the registrant on January 31, 1995 (based on the last
sale price on the New York Stock Exchange as of such date) was $9.3
billion.
The number of shares of the registrant's Common Stock, $.01 par
value, outstanding as of January 31, 1995 was 261,306,079.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference in Part III of this Annual
Report on Form 10-K the information contained in the registrant's
proxy statement for its annual meeting of stockholders to be held
April 26, 1995.
______________________________________________________________________
<PAGE>
PAGE 1
PART I
Item 1. Business
General
Compaq Computer Corporation, founded in 1982, designs, develops,
manufactures, and markets personal computers, PC systems, and related
products for sale primarily to business, home, government, and
education customers. The Company operates in one principal industry
segment across geographically diverse markets. As used herein, the
term "Company" means Compaq Computer Corporation and its consolidated
subsidiaries, unless the context indicates otherwise.
In 1994 Compaq became the largest supplier of personal computers
in the world. During that year it attained approximately 10% of the
worldwide market by focusing its business activities on expanding
sales to new customers while augmenting sales to its existing customer
base. Business customers account for the largest portion of the
Company's sales. Business customers are attracted to the Company's
products for a variety of reasons, including the Company's reputation
for reliability, price, product performance, and technological
excellence, the availability of a wide variety of application
software, ease of use, and connectivity solutions.
In the future the Company plans to capitalize on its leadership
position in integrating hardware and software to furnish the building
blocks of personal and corporate computing while participating in
software and communications markets either directly or through
business alliances. Through this strategy, the Company expects to
become a leading provider of enterprise-wide solutions for business as
well as information appliances for the home by offering the products
and services that customers need to easily access and manage
information. The Company believes its key to success is leveraging
the Company's engineering talent, purchasing power, manufacturing
capabilities, distribution strengths, and brand name to bring to
market high-quality cost-competitive products with different features
in different price ranges.
Compaq Products
The Company offers a wide range of personal computing products,
including desktop personal computers, portable computers, and tower PC
systems that store and manage data in network environments. The
Company's products are available with a broad variety of functions and
features designed to accommodate a wide range of user needs. Each of
the Company's PC CPU products is backed by a three-year worldwide
warranty, which is among the most comprehensive in the industry.
In 1994 sales of desktop personal computers and related options
accounted for 58% of the Company's sales. The Deskpro product line is
the Company's vehicle for delivering high-performance and advanced
features to the business user. In April the Company announced the
network-ready Deskpro/XL desktops, which included PCI and EISA bus
designs, QVision PCI graphics, improved business audio, and other
enhancements. The ProLinea value line products, the Company's leading
unit sellers in 1994, include the five models announced in April that
feature graphics performance improvements and selectable power
conservation choices. In September the Company introduced the next
generation of its Presario family of personal computers for the home
and small business market, which includes new stereo and television
features that can be accessed through the Company's animated graphics
MediaPilot program.
Sales of portable personal computers and related options
accounted for 25% of the Company's sales in 1994. The Company's most
popular portable product line in 1994 was the Compaq Contura family,
which includes the Contura Aero ultraportable computer, weighing less
than four pounds, and the Compaq Contura 400 with tilted keyboard and
wrist rest. In June the Company began shipping the LTE Elite family of
high performance notebook PCs that include a built-in AC adapter in a
full function notebook computer.
Sales of PC system products and related options accounted for 17%
of the Company's sales in 1994. In June the Company introduced the
Rack-Mountable ProLiant family of tower computers, a line of advanced
server products vertically packaged in easily serviceable modular rack
cabinets. The Company's leading unit seller in 1994 in its PC systems
products was the Compaq Prosignia line. In November the Company
announced the
<PAGE>
PAGE 2
Prosignia 500 server, featuring Intel Pentium microprocessors
and Compaq TriFlex/PCI architecture. The Company's server products
feature Compaq Insight Manager, a server management software
delivering intelligent monitoring and alerting, remote maintenance
and visual control of networked Compaq servers, and Compaq SmartStart,
a CD-ROM based utility that simplifies server configuration and
software installation.
The Company offers a number of options products for its desktop,
portable, and systems products, including add-on video display
monitors, memory upgrades, storage and backup devices, docking
stations, and communications products. In January 1995 the Company
announced five new monitors, each with energy conservation features
and low emissions (MPR-II) compliant as well as a Sony Trinitron
display tube, for graphics-intensive uses.
Product Development
The Company is actively engaged in the design and development of
additional products and enhancements to its existing products. During
1994, 1993, and 1992, the Company expended $226 million, $169 million,
and $173 million, respectively, on research and development. Since
personal computer technology develops rapidly, the Company's continued
success is dependent on the timely introduction of new products with
the right price and features. Its engineering effort focuses on new
and emerging technologies as well as design features that will
increase manufacturing efficiency and lower production costs. In 1994
the Company focused on technological developments for PC products
related to color and monochrome active matrix flat panels, power
conservation, communication devices, full-motion video and stereo
sound, full-duplex speaker telephone, television tuner, user-friendly
software, component densification, speech recognition technology, and
server management software. Many of the Company's products utilize
technology developed in alliances with third parties. Technological
and development alliances have become increasingly important in the
information management sector and the Company believes that its size
and technological skills give it an advantage in forming such
relationships. In 1994, for example, the Company announced strategic
alliances and projects with a number of companies, including Texas
Instruments, Oracle, Novell, Microsoft, PictureTel, AMD, KidSoft, and
Books-That-Work.
Manufacturing and Materials
The Company's manufacturing operations consist of manufacturing
finished products and various circuit boards from components and
subassemblies that the Company acquires from a wide range of vendors.
The Company has manufacturing operations located in Houston, Texas;
Erskine, Scotland; Singapore; Jaguariuna, Brazil; and Shenzhen, China.
The Brazilian and Chinese facilities were established in 1994.
Products sold in Europe are manufactured primarily in the Company's
facilities in Erskine, Scotland, and Singapore. Products sold in the
U.S. are primarily manufactured in the Company's facilities in
Houston, Texas, and Singapore. Products sold in Asia are primarily
manufactured in Singapore while products sold in Latin America are
primarily manufactured in Houston.
The Company believes that there is a sufficient number of
competent vendors for most components, parts, and subassemblies. A
significant number of components, however, are purchased from single
sources due to technology, availability, price, quality, or other
considerations. Key components and processes currently obtained from
single sources include certain of the Company's displays,
microprocessors, application specific integrated circuits and other
custom chips, and certain processes relating to construction of the
plastic housing for the Company's computers. In addition, new
products introduced by the Company often initially utilize custom
components obtained from only one source until the Company has
evaluated whether there is a need for additional suppliers. In the
event that a supply of a key single-sourced material, process, or
component were delayed or curtailed, the Company's ability to ship the
related product in desired quantities and in a timely manner could be
adversely affected. The Company attempts to mitigate these risks by
working closely with key suppliers on product plans, strategic
inventories, and coordinated product introductions.
Like other participants in the personal computer industry, Compaq
ordinarily acquires materials and components through purchase orders
typically covering the Company's requirements for periods averaging 90
to 120 days. From time to time the Company has experienced
significant price increases and limited availability of certain
components that are available from multiple sources, such as dynamic
random-access memory devices. At
<PAGE>
PAGE 3
times the Company has been constrained by parts availability in meeting
product orders. Any similar occurrences in the future could have an
adverse effect on the Company's operating results.
Marketing and Distribution
The Company distributes its products principally through third-
party computer resellers. The Company's products are sold to large
and medium-sized business and government customers primarily through
dealers, value-added resellers, and systems integrators and to small
business and home customers principally through dealers and consumer
channels. In response to changing industry practices and customer
preferences, the Company is continuing its expansion of distribution
establishments, especially mass merchandise stores, consumer
electronics outlets, and computer superstores. The Company also
sells directly to small business and home customers through the
Company's DirectPlus mail order business that features a variety of
personal computers, printers, and software products.
In 1994 North American sales constituted 50% of the Company's
total revenues and European sales constituted 35%. The Company's
North America Division markets its products in the United States and
Canada, while the Company's Europe, Middle East, and Africa Division,
based in Munich, Germany, focuses on opportunities in Europe as well
as in parts of Africa and the Middle East. The Company has
Asia/Pacific, Japan, and Latin America Divisions to focus on
opportunities in these high growth areas. The Company's products are
now sold by dealers in more than 100 countries. For further
geographic information for 1994, 1993, and 1992, see the Management's
Discussion and Analysis of Financial Results and Note 10 of Notes to
Consolidated Financial Statements.
Service and Support
The Company provides support and warranty repair to its customers
through full-service computer dealers and independent third-party
service companies. Compaq offers its customers CompaqCare, which
includes a number of customer service and support programs, most
notably a three-year warranty on PC products (excluding monitors and
batteries) and in the U.S. round-the-clock lifetime telephone
technical support for Compaq hardware products at no additional charge
to the customer.
Patents, Trademarks, and Licenses
The Company held 283 patents (including 37 design patents) and
had 373 patent applications (including 60 design patent applications)
pending with the United States Patent and Trademark Office at the
close of 1994. In addition, the Company has registered certain
trademarks in the United States and in a number of foreign countries.
While the Company believes that patent and trademark protection plays
an important part in its business, the Company relies primarily upon
the technological expertise, innovative talent, and marketing
abilities of its employees.
The Company has from time to time entered into cross-licensing
agreements with other companies holding patents to technology used in
the Company's products as well as companies using patents to
technology held by the Company. The Company holds a license from IBM
for all patents issuing on applications filed prior to July 1, 1993,
and has entered into a patent cross-license agreement with Texas
Instruments, Inc., for all patents issuing on applications filed prior
to December 31, 2005. In December 1994 the Company and Gateway 2000
entered into a patent cross-license agreement that resulted in
payments to the Company. The Company is in preliminary patent license
discussions with AT&T.
Seasonality
Although the Company does not consider its business to be highly
seasonal, the Company in general experiences seasonally higher sales
and earnings in the fourth quarter of the year. The Company
experienced an increase in the seasonality of its sales in the second
half of 1994 as it expanded the consumer retail portion of its
business and anticipates that this trend will continue.
<PAGE>
PAGE 4
Working Capital
Information regarding the Company's working capital position and
practices is set forth on page 10 of this Form 10-K under the caption
"Liquidity and Capital Resources."
Customers
No customer of the Company accounted for 10% or more of sales for
1994. Intelligent Electronics, Inc. and MicroAge accounted for 8% and
5% of 1994 sales, respectively.
Backlog
The Company's resellers typically purchase products on an as-
needed basis and resellers frequently change delivery schedules and
order rates depending on market conditions. Unfilled orders can be,
and often are, canceled at will and without penalties. In the
Company's experience, however, the actual amount of unfilled orders at
any particular time is not a meaningful indication of its future
business prospects since orders rapidly become balanced as soon as
supply begins meeting demand. In 1994 the Company was unable to
produce certain products on a timely basis due to supply constraints
on certain components resulting from an unanticipated mix of demand
for the Company's products. Should the Company be unable to meet
demand for its products on a timely basis, customer satisfaction and
sales could be adversely affected.
Competition
The computer industry is intensely competitive with many U.S.,
Japanese, and other international companies vying for market share.
The market continues to be characterized by rapid technological
advances in both hardware and software developments that have
substantially increased the capabilities and applications of
information management products and have resulted in the frequent
introduction of new products. The principal elements of competition
are price, product performance, product quality and reliability,
service and support, marketing and distribution capability, and
corporate reputation. While the Company believes that its products
compete favorably based on each of these elements, the Company could
be adversely affected if its competitors introduce innovative or
technologically superior products or offer their products at
significantly lower prices than the Company. No assurance can be
given that the Company will have the financial resources, marketing
and service capability, or technological knowledge to continue to
compete successfully. The Company's results could also be adversely
affected should it be unable to implement effectively its
technological and marketing alliances with other companies, such as
Microsoft, Intel, Sharp, Novell, Texas Instruments, AMD, and VLSI,
among others, and to manage the competitive risks associated with these
relationships.
Environmental Laws and Regulations
The Company uses no chlorofluorocarbons (CFCs) in its worldwide
manufacturing operations and undertakes ongoing environmental
programs, including energy efficiency, recycling, design for
environment, waste reduction, and environmental auditing. Compliance
with laws enacted for protection of the environment to date has had no
material effect upon the Company's capital expenditures, earnings, or
competitive position. Although the Company does not anticipate any
material adverse effects in the future based on the nature of its
operations and the purpose of environmental laws and regulations,
there can be no assurance that such laws or future laws will not have
a material adverse effect on the Company.
Employees
At December 31, 1994, the Company had 14,372 full-time regular
employees and 6,765 temporary and contract workers.
Item 2. Properties
The Company's principal administrative facilities and a
manufacturing facility are located in Houston, Texas. These
facilities include 860,000 square feet of manufacturing space on the
Company's 1,000-acre Compaq
<PAGE>
PAGE 5
Center in Houston and an additional 680,000 square feet of manufacturing
space under lease. The Company owns 13 administrative buildings with a
total of 2,600,000 square feet of space at Compaq Center. The Company
leases sales offices in 12 cities in the United States.
The Company also owns or leases certain facilities abroad. The
Company owns a 43-acre tract in Erskine, Scotland, where it has
540,000 square feet of manufacturing space. In Singapore the Company
owns 360,000 square feet of manufacturing space, leases 150,000 square
feet, and has an additional 360,000 square feet under construction.
In Brazil the Company owns a 150,000 square foot manufacturing
facility and in China the Company leases a 90,000 square foot
manufacturing facility. The Company leases sales and administrative
offices in 37 European and African locations, six locations in Latin
America, 17 locations in the Asia Pacific region, and five locations
in Canada. The Company's 372,000 square foot European distribution
center is located in Gorinchem, The Netherlands. The Company also
leases warehouse space in a number of locations.
Item 3. Legal Proceedings
The Company has been named as a defendant in a number of
repetitive stress injury lawsuits, primarily in New York state courts
or federal district courts for the New York City area. In each of
these lawsuits the plaintiff alleges that he or she suffers from
symptoms generally known as repetitive stress injury, which allegedly
were caused by the design of the keyboard supplied with the computer
the plaintiff used. The suits naming the Company are similar to those
filed against other major suppliers of personal computers. Ultimate
resolution of the litigation against the Company may depend on
progress in resolving this type of litigation overall. The Company is
unable to determine at this time the outcome of these suits or the
likelihood of the Company being named in additional suits by
plaintiffs alleging similar injuries. The Company has denied these
claims and intends to defend vigorously the suits. The Company
believes that the claims will not have a material adverse effect on
the Company's financial results of operations or its financial
position.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders
during the fourth quarter of 1994.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Market for Common Stock
The Company's Common Stock is listed on the New York Stock
Exchange and trades under the symbol CPQ. The following table
presents the high and low sale prices for the Company's Common Stock
for each quarter of 1994 and 1993 (adjusted to reflect a three-for-one
stock split effective May 31, 1994), as reported by Dow Jones
Historical Stock Quote Reporter Service.
1994 1993
High Low High Low
------ ------ ------ ------
1st quarter $34.96 $24.17 $19.50 $13.92
2nd quarter 39.88 30.75 20.58 15.38
3rd quarter 39.38 29.50 19.88 14.38
4th quarter 42.12 30.75 25.25 19.00
Holders of Record
At January 31, 1995, there were 7,758 holders of record of the
Company's common stock.
<PAGE>
PAGE 6
Dividends
The Company has never paid cash dividends on its common stock.
It is the present policy of the Board of Directors to retain all
earnings for use in the Company's business.
Registration Statements on Form S-8
For the purposes of complying with the amendments to the rules
governing Form S-8 under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration Statements on
Form S-8 Nos. 33-44115, 33-31819, 33-23504, 33-7499, 2-89925, 33-
10106, 33-38044, and 33-16987.
That, insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to any provision or
arrangement whereby the Registrant may indemnify a director, officer,
or controlling person of the Registrant against liabilities arising
under the Securities Act, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
<PAGE>
PAGE 7
Item 6. Selected Consolidated Financial Data
The following data have been derived from consolidated financial
statements that have been audited by Price Waterhouse LLP, independent
accountants. The information set forth below is not necessarily
indicative of the results of future operations and should be read in
conjunction with the consolidated financial statements and notes
thereto appearing elsewhere in this Annual Report on Form 10-K.
Year ended December 31,
In millions,
except per share amounts 1994 1993 1992 1991 1990
- --------------------------------------------------------------------------
Consolidated Statement of Income Data:
Sales $10,866 $7,191 $4,100 $3,271 $3,599
Cost of sales 8,139 5,493 2,905 2,053 2,058
-------------------------------------------
2,727 1,698 1,195 1,218 1,541
-------------------------------------------
Research and development costs 226 169 173 197 186
Selling, general, and
administrative expense 1,235 837 699 722 706
Unrealized gain on investment
in affiliated company (34)
Other income and expenses, net 94 76 28 145 42
-------------------------------------------
1,555 1,082 900 1,064 900
-------------------------------------------
Income from consolidated
companies before provision
for income taxes 1,172 616 295 154 641
Provision for income taxes 305 154 97 43 216
-------------------------------------------
Income from consolidated
companies 867 462 198 111 425
Equity in net income of
affiliated company 15 20 30
-------------------------------------------
Net income $ 867 $ 462 $ 213 $ 131 $ 455
===========================================
Earnings per common and
common equivalent share:
Primary 3.23 1.82 .86 .50 1.71
Assuming full dilution 3.21 1.78 .84 .50 1.71
December 31,
In millions 1994 1993 1992 1991 1990
- --------------------------------------------------------------------------
Consolidated Balance Sheet Data:
Total assets $ 6,166 $4,084 $3,142 $2,826 $2,718
Long-term debt 300 73 74
Stockholders' equity 3,674 2,654 2,006 1,931 1,859
<PAGE>
PAGE 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the
consolidated financial statements.
Results of Operations
The following table presents, as a percentage of sales, certain
selected consolidated financial data for each of the three years in
the period ended December 31, 1994.
Year ended December 31, 1994 1993 1992
- -----------------------------------------------------------------------
Sales 100.0% 100.0% 100.0%
Cost of sales 74.9 76.4 70.9
-------------------------
Gross margin 25.1 23.6 29.1
-------------------------
Research and development costs 2.1 2.3 4.2
Selling, general, and
administrative expense 11.4 11.6 17.0
Other income and expense, net .8 1.1 .7
-------------------------
14.3 15.0 21.9
-------------------------
Income from consolidated companies before
provision for income taxes 10.8% 8.6% 7.2%
=========================
Sales
Sales for 1994 increased approximately $3.6 billion or 51% over
the prior year as compared with an increase of $3.1 billion or 75% in
1993 from 1992. In 1994 the geographic mix of sales shifted as sales
in Latin America, the Asia Pacific region, and Japan increased at a
faster pace than in Europe and North America. North American sales,
which include Canada, increased 49% during 1994, compared with an
increase of 100% in 1993 from 1992. International sales, excluding
Canada, represented 50% of total sales in 1994 as compared with 49% in
1993 and 55% in 1992. European sales increased 41% during 1994
compared to an increase of 44% in 1993 from 1992. Other international
sales, excluding Canada, increased 95% during 1994, compared with an
increase of 111% in 1993 from 1992. The Company believes that the
higher rates of growth in Asia and Latin America in 1994 were related
to the rapid expansion of the personal computer market in these areas
as well as the Company's successful efforts to increase its market
share.
The personal computer industry is highly competitive and marked
by frequent product introductions, continual improvement in product
price/performance characteristics, and a large number of competitors.
Approximately 50% of the Company's CPU sales in 1994 were derived from
products introduced in 1994. These new products have been designed to
allow the Company to achieve low product costs while maintaining the
quality and reliability for which the Company's products have been
known, thereby increasing the Company's ability to compete on price
and value.
The significant increase in sales in 1994 stemmed primarily from
an increase in the number of units sold. In 1994 the Company's
worldwide unit sales increased 54% while they increased 98% in 1993.
The 1994 increase included a 64% expansion in unit sales of the
Company's desktop CPU products, a 28% increase for the Company's
portable CPU products, and a 55% increase for the Company's systems
products. Unit sales growth primarily resulted from the Company's
aggressively priced Compaq ProLinea line and Compaq Presario line in
its desktop products, the Compaq Prosignia line in its tower systems
products, and the Compaq Contura notebook and subnotebook lines in its
portable products. The Company believes that its 1994 sales increased
at significantly higher rates than the personal computer industry as a
whole. According to third-party estimates worldwide unit sales of
personal computers increased approximately 23% in 1994 in contrast to
a 20% increase in 1993. Third-
<PAGE>
PAGE 9
party estimates also indicate that industry revenue increased by
approximately 22% worldwide in 1994, compared to a 16% increase in 1993.
The Company's average sales price per unit decreased slightly in
1994 from 1993, primarily as a result of the lower prices of the
Company's products aimed at the small business and consumer markets as
well as pricing actions undertaken by the Company on existing
products. The relative stability in the Company's average sales price
per unit in 1994 resulted from a more stabilized pricing environment,
a higher sales mix of units using 486 microprocessors, and currency
fluctuations. Price competition continues to have a significant
impact on prices of the Company's products, especially those aimed at
the consumer market, and additional pricing actions may occur as the
Company attempts to maintain its competitive mix of price and
performance characteristics. The Company attempts to mitigate the
effect of any pricing actions through implementation of effective
design-to-cost goals, the aggressive pursuit of reduced component
costs, manufacturing efficiencies, and control of operating expenses.
Gross Margin
Gross margin as a percentage of sales was 25.1% in 1994, up from
23.6% in 1993 and down from 29.1% in 1992. The increase from 1993
primarily resulted from a rising proportion of sales of the Company's
higher margin products, particularly the mix of systems and options in
the first and fourth quarters of the year, and currency fluctuations,
partially offset by pricing actions as well as promotional activities
and manufacturing related costs associated with product transitions.
Gross margins fell from 27.1% in the first quarter of 1994 to 23.0% in
the third quarter and then rose to 24.4% in the fourth quarter as a
result of variations in product mix, pricing and promotional actions,
manufacturing related costs associated with product transitions, and
currency fluctuations. The Company anticipates continued fluctuations
in its gross margin levels and an overall decline in gross margin
levels in 1995 when compared to 1994. The Company maintains a
strategy designed to increase its market share and continues to expand
its presence in the price sensitive consumer market segment. This
strategy, along with the expectation of a continued aggressive pricing
environment and scheduled product transitions, will continue to put
pressure on the Company's gross margins.
Operating Expenses
Research and development costs increased 34% in absolute dollars
(to $226 million from $169 million) while declining slightly as a
percentage of sales in 1994 as compared to 1993. Because the personal
computer industry is characterized by rapid product cycles and price
cuts on older products, the Company believes that its long-term
success is directly related to its ability to bring new products to
market on a timely basis and to reduce the costs of new and existing
products. Accordingly, it is committed to continuing a significant
research and development program and research and development costs
are likely to increase in absolute dollars in 1995.
Selling, general, and administrative expense increased 48% in
amount in 1994 while declining slightly as a percentage of sales. The
decrease as a percentage of sales reflects the Company's ongoing
efforts to manage operating expense growth relative to sales and gross
margin levels. The increase in the amount of expense resulted from
domestic and international selling expense associated with higher unit
volumes as well as expense incurred in connection with the
introduction of new products, the entry into new markets (both
domestically and internationally), the expansion of distribution
channels, and a greater emphasis on advertising, customer service, and
technical support. The Company anticipates that in 1995 selling,
general, and administrative expense will increase in absolute dollars
as it expands into new markets, supports significant new product
introductions, and increases its investment in the area of service and
support, especially in support of its systems business. The Company
strives to manage total operating expenses in line with revenue growth
and gross margin levels.
Other Items
Interest expense, net of interest and dividend income from
investment of excess funds, was $49 million, $43 million, and $12
million in 1994, 1993, and 1992, respectively. Net interest expense
was higher in 1994 when compared to 1993 primarily due to interest
costs associated with the Company's issuance of $300 million in debt
securities in March 1994, an increase in interest expense in
connection with borrowings under the Company's lines of credit, and an
increase in interest expense in connection with financing resellers'
inventories, partially offset by
<PAGE>
PAGE 10
lower interest expense associated with foreign exchange hedging program.
Net interest expense was higher for 1993 than 1992 for similar reasons.
The translation gains and losses relating to the financial
statements of the Company's international subsidiaries, net of
offsetting gains and losses associated with hedging activities related
to the net monetary assets of these subsidiaries, are included in
other income and expense and resulted in net losses of $46 million,
$15 million, and $11 million in 1994, 1993, and 1992, respectively.
Currency losses in 1994 were particularly high when compared to 1993
due to losses in connection with a December devaluation of the Mexican
peso and increases in the overall size of non-U.S. dollar assets.
In 1993 the Company recorded charges associated with its plans to
withdraw from the printer business, including costs related to
certain contractual liabilities and the write-downs of the carrying
value of certain assets. The charge, net of the reversal of previously
recorded restructuring reserves, totaled $10 million. In 1992 the
Company recorded a restructuring charge of $73 million associated
principally with reducing the number of employees and consolidating
and streamlining operations. In addition, in 1992 the Company had a
charge related to the disposition or write-downs of the carrying value
of certain fixed assets.
In the third quarter of 1992 the Company sold its equity interest
in Conner Peripherals, Inc. ("Conner") realizing a gain of $86
million. The Company's ownership in Conner created an after-tax
contribution to the Company's net income of $10 million in 1992.
The Company's effective tax rate was 26% in 1994, 25% in 1993,
and 33% in 1992. The increase from 1993 to 1994 is attributable to a
decline in the ratio of earnings derived from the Company's
Singaporean manufacturing subsidiary to total earnings. The Company
anticipates that the proportion of its Singaporean earnings will
continue to decline in 1995 and, as a result, estimates that its tax
rate in 1995 will increase to approximately 28%. The Company's tax
rate is heavily dependent upon the mix of earnings of its Singaporean
manufacturing subsidiary due to this subsidiary's earnings not being
subject to taxes in Singapore until September 1997 (with potential
extension to September 2004 if certain cumulative investment levels
and other conditions are met) and the Company's decision to
invest a portion of the undistributed earnings of this
subsidiary, up to $1 billion, indefinitely in operations outside the
United States. These earnings would become subject to U.S. tax if
they were actually or deemed to be remitted to the Company as
dividends or if the Company should sell its stock in this subsidiary.
As a result, the Company does not provide tax on these earnings, which
lowers its effective tax rate. The Company invested $376 million in
this program during 1993 and 1994, and anticipates that the investment
will reach $1 billion during 1996. Should the Company choose
not to invest more than $1 billion in this program, the Company's
effective tax rate will increase at that time.
Liquidity and Capital Resources
During 1994 the Company's working capital increased to $3.1
billion compared to $2.0 billion at December 31, 1993.
The Company's cash, cash equivalents, and short-term investments
decreased to $471 million at December 31, 1994, from $627 million at
December 31, 1993, primarily because of increases in inventories and
accounts receivable related to the Company's support of higher production
and sales volumes, partially offset by the Company's issuance of $300
million in debt securities during the first quarter, and cash received
in connection with the exercise of employee stock options. Accounts
receivable increased to $2.3 billion at December 31, 1994, from $1.4
billion at December 31, 1993, primarily as a result of higher sales
levels. Inventory levels increased to $2.0 billion from $1.1 billion
during that period. The increase in inventory resulted from
production planning associated with higher sales levels, opening
manufacturing operations in Brazil and China, and a different sales
mix than anticipated.
Cash used in 1994 for the purchase of property, plant, and
equipment totaled $357 million. The Company estimates that capital
expenditures for land, buildings, and equipment during 1995 will be
$400 million. The Company has commitments for only a small portion of
such amounts and the actual level of spending will depend on a variety
of factors, including general economic conditions and the Company's
business. The Company currently expects to fund expenditures for
capital requirements as well as liquidity needs created by changes in
<PAGE>
PAGE 11
working capital from a combination of available cash balances,
internally generated funds, and financing arrangements. The Company
from time to time may borrow funds for actual or anticipated funding
needs or because it is economically beneficial to borrow funds for the
Company's needs instead of repatriating funds in the form of dividends
from its foreign subsidiaries. In August the Company entered into
agreements for a $500 million syndicated credit facility, of which
$200 million expires in July 1995 and $300 million expires in July 1997,
which facility remains unused as of the end of 1994. The Company
expects to renew the $200 million expiring in 1995. In December the
Company established a commercial paper program which is supported by
the $300 million portion of the syndicated credit facility. This
program, which provides the Company with additional sources of working
capital, remains unused as of the end of 1994. Various uncommitted
bank lines of credit established in 1994 were used in the second half
of 1994, with usage levels ranging from a high of $346 million at the
end of the third quarter to $17 million at year end. Although the
Company believes that these sources of credit provide sufficient
financial flexibility to meet future funding requirements, the Company
continually evaluates the need to establish other sources of working
capital and will pursue those it considers appropriate based upon
Company needs and market conditions.
Factors That May Affect Future Results
The Company participates in a highly volatile industry that is
characterized by rapidly changing customer demand patterns and fierce
industry-wide competition for market share resulting in aggressive
pricing practices. In anticipation of continued growth and expansion
of its market share, the Company continues to expand manufacturing and
distribution capacity as well as reengineer its internal processes.
The Company's operating results could be adversely affected should the
Company be unable to anticipate customer requirements accurately, to
maintain short design cycles while meeting evolving industry
performance standards, to manage its product transitions, inventory
levels, and manufacturing processes, or to distribute its products
quickly and efficiently in response to customer demand.
In 1994 the Company made significant investments in inventory
levels in support of higher sales. The Company expects the PC market
to continue to expand significantly in 1995 and is putting in place
programs and products focused on expanding its market share. In 1995
the Company anticipates that its inventory levels will stabilize as it
focuses on improving inventory turns; however, in the event of a drop
in worldwide demand for PC products or lower than anticipated demand
for one or more of the Company's products, there could be an adverse
impact on sales and profitability related to its inventory levels. In
the first quarter of 1995 the Company confronts the challenges of
significant product transitions and it has adopted a conservative
inventory stance for that period, which would limit the Company's
ability to meet higher than expected demand. During this period the
Company will continue the investments necessary to expand its
business, including information system improvements, the expansion of
its service and support infrastructure, and research and development
programs. Accordingly, Compaq expects continued solid growth in sales
but relatively flat earnings in the first quarter of 1995 compared to
1994, particularly in view of the unusually high margins that the
Company experienced in the first quarter of 1994.
In order to maintain or increase its market share, the Company
must continue to price its products competitively and from time to
time may use various incentive programs to increase sales. Some of
these strategies lower the average sales price per unit and may cause
declines in gross margin and profitability. Other sales incentives
increase operating expenses and may lower profitability. To
compensate for the impact of reduced prices and sales incentives on
its sales, gross margins, and profitability, the Company must increase
unit shipments, aggressively reduce costs, and maintain tight control
over operating expenses. If the Company takes pricing actions and
does not achieve significant unit shipment increases, however, there
could be an adverse impact on sales, gross margins, and profitability.
The Company's product strategy focuses in part on marketing
products with distinctive features that comply with evolving industry
performance standards, meet customer quality expectations, and are
available at prices appealing to a variety of purchasers. Because of
the pace of technological advances in the personal computer industry,
the Company must introduce on a timely basis new products that offer
customers the latest competitive technologies while managing the
production and marketing cycles of its existing products. In 1994 the
Company experienced difficulty in certain of its product transitions,
particularly in its portables products. If the Company is unable to
manage its product transitions successfully or to meet customer
quality expectations, it could
<PAGE>
PAGE 12
experience an adverse impact on sales and manufacturing and materials
related costs, including product obsolescence, which would negatively
affect profitability.
Although the Company designs many of its own components for its
products, across the Company's product range certain elements of
product strategy are dependent on technological developments by, and
manufacturing capacities of, third parties. In managing its
production levels, product transitions, and developments in
microprocessor and other component technology, the Company must
develop and implement effective strategies that anticipate component
availability and pricing by suppliers as well as forecast customer
demand for its products. The Company attempts to select suppliers
that can provide sufficient and timely supplies of high quality
components. There can be no assurance, however, that the Company will
obtain the delivery of the technology needed to introduce new products
in a timely manner, will acquire a sufficient supply of components
utilizing such technology to deliver its products in volume, will
manage the lead times required to obtain components to respond to
rapid shifts in customer demand, or will be able to obtain any
competitive advantage in access to new technology. If the Company
were unable to develop and launch new products in a timely fashion or
unable to produce its products in significant unit volumes, this
failure could have a material adverse effect on the Company's
business.
Because of rapid technological changes in the computer industry,
extensive patent and copyright coverage, and the rapid establishment
of new copyright and patent rights, certain components of the
Company's products designed by the Company or purchased from third
parties may unknowingly infringe intellectual property rights of
others. The Company believes, based in part on industry practices,
that if any infringements do exist, the Company will be able to modify
its products to avoid infringement, obtain components that do not
infringe, or obtain licenses or rights to such intellectual property
rights on terms not having a material adverse effect on the Company.
There can be no assurance, however, that the Company will be able to
ensure that component supplies and the cost of components are not
adversely affected by legal proceedings in which an adverse
determination is made with respect to intellectual property rights.
In order to minimize the impact to the Company of claims of
infringement, the Company pursues an active patent portfolio
development plan.
During 1994 the Company continued to broaden its product
distribution. Offering its products in an increasing number of
geographic locations and through a variety of distribution channels,
including dealers, distributors, mail order, mass merchandise stores,
consumer electronic outlets, and computer superstores, requires the
Company to increase its geographic presence and to provide increased
levels of sales and support interface with customers. There can be no
assurance, however, that this direction will be effective, or that the
requisite service and support to ensure the success of the Company's
operations in new locations or through new channels can be achieved in
a cost effective manner. While the Company anticipates that its
geographic expansion will continue and the number of outlets for its
products will continue to increase in 1995, a reduction in the pace of
this growth could affect sales and profitability. Geographic
expansion, particularly the expansion of manufacturing operations in
developing countries, such as Brazil and China, and the expansion of
sales into economically volatile areas such as Latin America and
Eastern Europe also subjects the Company to a number of political and
economic risks, such as currency devaluation and expropriation.
The Company's primary means of distribution remains third-party
resellers. The Company continuously monitors and manages the credit
it extends to resellers and attempts to limit credit risks by
broadening its distribution channels, utilizing certain risk transfer
instruments, and obtaining security interests in property owned by its
debtors. The Company's business could be adversely affected, however,
in the event that the generally weak financial condition of third-
party computer resellers worsens. Upon the financial failure of a
major reseller, the Company could experience disruptions in its
distribution as well as the loss of the unsecured portion of any
outstanding accounts receivable. The Company believes that the
continued expansion of its distribution outlets and geographic growth
will help mitigate any potential impact on its sales.
During 1995 the Company will focus on making its business
processes more efficient in order to increase customer satisfaction,
increase productivity, and lower costs. In connection with these
efforts the Company will move many of its systems from a legacy
environment of proprietary systems to client-server architectures.
Should the Company's transition to these new systems not occur in a
smooth and orderly manner, the Company could experience disruptions in
the operations of its business, which could have an adverse financial
impact.
<PAGE>
PAGE 13
The value of the U.S. dollar continues to affect the Company's
financial results. The functional currency for the Company's
international subsidiaries is the U.S. dollar. When the U.S. dollar
strengthens against other currencies, sales made in those currencies
translate into lower sales in U.S. dollars; and when the U.S. dollar
weakens, sales made in local currencies translate into higher sales in
U.S. dollars. Correspondingly, costs and expenses incurred in non-
U.S. dollar currencies increase when the U.S. dollar weakens and
decline when the U.S. dollar strengthens. Accordingly, changes in
exchange rates may positively or negatively affect the Company's sales
(as expressed in U.S. dollars), gross margins, and operating expenses,
and the Company's results of operations can be significantly affected
in the short term by fluctuations in foreign currency exchange rates.
The Company engages in hedging programs aimed at limiting in part the
impact of currency fluctuations. Through these programs the Company
hedges its non-U.S. dollar net monetary assets and its Japanese yen
denominated purchase commitments primarily through the use of forward
exchange and option contracts. From time to time the Company also
purchases foreign currency option contracts as well as short-term
forward exchange contracts to protect against currency exchange risks
associated with the anticipated sales of its international marketing
subsidiaries, principally in Europe. These instruments provide only
limited protection against currency exchange risks. The Company
varies the percentage of anticipated sales that it attempts to protect
against currency exchange risks based upon its judgment of currency
markets and the costs of these instruments, and in some markets,
particularly in developing areas, its ability to utilize such
instruments is limited. If the Company overestimates the hedging
amount needed to protect anticipated sales during a period in which
the dollar weakens, the Company could incur a significant expense that
would not be balanced by the impact of favorable exchange rates on
sales. Although the Company maintains these programs to reduce the
impact of changes in currency exchange rates, when the U.S. dollar
sustains a strengthening position against currencies in which the
Company sells its products or a weakening exchange rate against
currencies in which the Company incurs costs, particularly the
Japanese yen, the Company's sales or its costs are adversely affected.
Due to the Company's 1995 projected tax rate being heavily
dependent upon the mix of earnings from its Singaporean manufacturing
subsidiary and the ability to reinvest those earnings permanently
outside the U.S., should the earnings of this subsidiary as a
percentage of the Company's total earnings decline, or should the
Company's ability to reinvest these earnings be reduced, the Company's
tax rate would likely increase beyond the estimated 28%.
General economic conditions have an impact on the Company's
business and financial results. From time to time the markets in
which the Company sells its products experience weak economic
conditions that may negatively affect sales of the Company's products.
Although the Company does not consider its business to be highly
seasonal, it has experienced seasonally higher sales and earnings in
the fourth quarter of the year. The continued expansion of its retail
business is likely to result in the increased seasonality of the
Company's business, particularly in the second half of the year, and
its financial results being more dependent on retail business
fluctuations.
Certain of the Company's operations, including its European
distribution center in Gorinchem, The Netherlands, and critical suppliers
are located in areas that are at risk for natural disasters such as
floods, tornadoes, and earthquakes. The Company's operating results
and financial condition could be adversely affected should its ability
to manufacture or distribute its products be impaired by such an
event.
Because of the foregoing factors, as well as other variables
affecting the Company's operating results, past financial performance
should not be considered a reliable indicator of future performance,
and investors should not use historical trends to anticipate results
or trends in future periods. In addition, the Company's participation
in a highly dynamic industry often results in significant volatility
of the Company's common stock price.
<PAGE>
PAGE 14
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
----
Financial Statements:
Report of Independent Accountants 15
Consolidated Balance Sheet at
December 31, 1994 and 1993 16
Consolidated Statement of Income for
the three years ended December 31, 1994 17
Consolidated Statement of Cash Flows for
the three years ended December 31, 1994 18
Consolidated Statement of Stockholders'
Equity for the three years ended
December 31, 1994 19
Notes to Consolidated Financial Statements 20
Financial Statement Schedules:-
For the three years ended December 31, 1994:
Schedule VIII - Valuation and Qualifying Accounts S-1
Item 9. Disagreements on Accounting and Financial Disclosure
None.
<PAGE>
PAGE 15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Compaq Computer Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the
financial position of Compaq Computer Corporation and its subsidiaries
at December 31, 1994 and 1993, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted
auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
January 24, 1995
<PAGE>
PAGE 16
COMPAQ COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
December 31,
In millions, except par value 1994 1993
- ----------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 471 $ 627
Accounts receivable, less allowance of $75 and $49 2,287 1,377
Inventories 2,005 1,123
Deferred income taxes 303 126
Prepaid expenses and other current assets 92 38
---------------
Total current assets 5,158 3,291
---------------
Property, plant, and equipment,
less accumulated depreciation 944 779
Other assets 64 14
---------------
$6,166 $4,084
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 888 $ 637
Income taxes payable 246 69
Other current liabilities 879 538
---------------
Total current liabilities 2,013 1,244
---------------
Long-term debt 300
---------------
Deferred income taxes 179 186
---------------
Commitments and contingencies
Stockholders' equity:-
Preferred stock: $.01 par value; 10 million
shares authorized; none outstanding
Common stock and capital in excess of $.01 par value:
400 million shares authorized; 261 million shares
and 253 million shares issued and outstanding 739 586
Retained earnings 2,935 2,068
---------------
Total stockholders' equity 3,674 2,654
---------------
$6,166 $4,084
===============
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAGE 17
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31,
In millions, except per share amounts 1994 1993 1992
- ---------------------------------------------------------------------------
Sales $ 10,866 $ 7,191 $ 4,100
Cost of sales 8,139 5,493 2,905
-----------------------------------
2,727 1,698 1,195
-----------------------------------
Research and development costs 226 169 173
Selling, general, and
administrative expense 1,235 837 699
Other income and expense, net 94 76 28
-----------------------------------
1,555 1,082 900
-----------------------------------
Income from consolidated companies
before provision for income taxes 1,172 616 295
Provision for income taxes 305 154 97
-----------------------------------
Income from consolidated companies 867 462 198
Equity in net income of affiliated
company 15
-----------------------------------
Net income $ 867 $ 462 $ 213
===================================
Earnings per common and common
equivalent share:
Primary $ 3.23 $ 1.82 $ 0.86
===================================
Assuming full dilution $ 3.21 $ 1.78 $ 0.84
===================================
Shares used in computing earnings per
common and common equivalent share:
Primary 268.6 254.1 247.8
===================================
Assuming full dilution 270.1 258.9 254.1
===================================
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAGE 18
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31,
In millions 1994 1993 1992
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Cash received from customers $ 9,986 $ 6,731 $ 3,595
Cash paid to suppliers and employees (9,778) (6,331) (3,642)
Interest and dividends received 22 20 32
Interest paid (65) (64) (41)
Income taxes paid (266) (116) (3)
--------------------------------
Net cash provided by (used in)
operating activities (101) 240 (59)
--------------------------------
Cash flows from investing activities:
Purchases of property, plant,
and equipment, net (357) (145) (159)
Proceeds from sale of investment
in Conner Peripherals, Inc. 241
Proceeds from sale of investment
in Silicon Graphics, Inc. 135
Other, net (51) 13
--------------------------------
Net cash provided by (used in)
investing activities (408) (145) 230
--------------------------------
Cash flows from financing activities:
Purchases of treasury shares (216)
Issuance of common stock pursuant
to stock option plans 100 142 57
Issuance of long-term debt 300
Repayment of borrowings (73)
--------------------------------
Net cash provided by (used in)
financing activities 400 142 (232)
--------------------------------
Effect of exchange rate changes on cash (47) 33 (34)
--------------------------------
Net increase (decrease) in cash and
cash equivalents (156) 270 (95)
Cash and cash equivalents at beginning of year 627 357 452
--------------------------------
Cash and cash equivalents at end of year $ 471 $ 627 $ 357
================================
Reconciliation of net income to net cash
provided by (used in) operating activities:
Net income $ 867 $ 462 $ 213
Depreciation and amortization 169 156 160
Tax benefit associated with stock options 53 44 7
Provision for bad debts 36 33 14
Equity in net income of affiliated company (15)
Gain on sale of investment in
affiliated company (86)
Deferred income taxes (184) (38) 34
Loss on disposal of assets 2 2 14
Exchange rate effect 46 15 11
Income tax refund 51
Increase in accounts receivable (926) (484) (412)
Increase in inventories (882) (289) (396)
Decrease (increase) in prepaid expenses and
other current assets (55) 24 (53)
Increase in accounts payable 248 125 325
Increase in income taxes payable 173 34 31
Increase in other current liabilities 352 156 43
--------------------------------
Net cash provided by (used in)
operating activities $ (101) $ 240 $ (59)
================================
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAGE 19
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common stock
--------------------
Par value
Number and capital
In millions, of in excess Retained
except number of shares in thousands shares of par earnings Total
- -----------------------------------------------------------------------------
Balance, December 31, 1991 252,606 $ 538 $ 1,393 $ 1,931
Issuance pursuant to stock
option plans 7,884 57 57
Purchases of treasury shares (21,000) (202) (202)
Tax benefit associated with
stock options 7 7
Net income 213 213
----------------------------------------
Balance, December 31, 1992 239,490 400 1,606 2,006
Issuance pursuant to stock
option plans 13,553 142 142
Tax benefit associated with
stock options 44 44
Net income 462 462
----------------------------------------
Balance, December 31, 1993 253,043 $ 586 $ 2,068 $ 2,654
Issuance pursuant to stock
option plans 7,994 100 100
Tax benefit associated with
stock options 53 53
Net income 867 867
----------------------------------------
Balance, December 31, 1994 261,037 $ 739 $ 2,935 $ 3,674
========================================
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAGE 20
COMPAQ COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business and Significant Accounting Policies:
Description of business - Compaq Computer Corporation designs,
develops, manufactures, and markets personal computers, PC systems,
and related products for sale primarily to business, home, government,
and education customers. The Company operates in one principal
industry segment across geographically diverse markets.
Principles of consolidation - The consolidated financial statements
include the accounts of Compaq Computer Corporation and its wholly
owned subsidiaries. The investment in Conner Peripherals, Inc., which
represented a less than majority interest, was accounted for under the
equity method. All significant intercompany transactions have been
eliminated.
Cash and cash equivalents - Cash and cash equivalents include cash on
hand, amounts due from banks, money market instruments, commercial
paper, and other investments having maturities of three months or less
at date of acquisition and are reflected as such for purposes of
reporting cash flows and are stated at cost which approximates fair
value.
Inventories - Inventories are stated at the lower of cost or market,
cost being determined on a first-in, first-out basis.
Property, plant, and equipment - Property, plant, and equipment are
stated at cost. Major renewals and improvements are capitalized;
minor replacements, maintenance, and repairs are charged to current
operations. Depreciation is computed by applying the straight-line
method over the estimated useful lives of the related assets, which
are 30 years for buildings and range from three to ten years for
equipment. Leasehold improvements are amortized over the shorter of
the useful life of the improvement or the life of the related lease.
Intangible assets - Licenses and trademarks are carried at cost less
accumulated amortization, which is being provided on a straight-line
basis over the economic lives of the respective assets.
Post sales support and warranty expense - The Company provides
currently for the estimated cost which may be incurred for post sales
support and product warranties.
Sales recognition - The Company recognizes sales at the time products
are shipped to its customers. Provision is made currently for
estimated product returns which may occur under programs the Company
has with its customers and under floor planning arrangements with
third-party finance companies.
Foreign currency - The Company uses the U.S. dollar as its functional
currency. Financial statements of the Company's foreign subsidiaries
are translated to U.S. dollars for consolidation purposes using
current rates of exchange for monetary assets and liabilities and
historical rates of exchange for nonmonetary assets and related
elements of expense. Sales and other expense elements are translated
at rates which approximate the rates in effect on the transaction
dates. Gains and losses from this process are included in results of
operations.
The Company hedges certain portions of its foreign currency exposure
primarily through the use of forward contracts and option contracts.
Generally, gains and losses associated with currency rate changes on
forward contracts are recorded currently, while the interest element
is recognized over the life of each contract. However, to the extent
such contracts hedge a commitment for capital expenditures or
inventory purchases, no gains or losses are recognized, and the rate
at the time the hedge is made is, effectively, the rate used to
determine the U.S. dollar value of the asset when it is recorded.
<PAGE>
PAGE 21
From time to time the Company hedges a portion of its anticipated but
not firmly committed sales of its international marketing subsidiaries
using purchased foreign currency options. Realized and unrealized
gains and the net premiums on these options are deferred and
recognized as a component of sales in the same period that the related
sales occur. In addition, at times the Company utilizes forward
contracts to protect the Company from the effects of currency
fluctuations on anticipated but not firmly committed sales.
Income taxes - The provision for income taxes is computed based on the
pretax income included in the consolidated statement of income.
Research and development tax credits are recorded to the extent
allowable as a reduction of the provision for federal income taxes in
the year the qualified research and development expenditures are
incurred. The asset and liability approach is used to recognize
deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and
the tax bases of assets and liabilities.
Earnings per share - Primary earnings per common and common equivalent
share and earnings per common and common equivalent share assuming
full dilution are computed using the weighted average number of shares
outstanding adjusted for the incremental shares attributed to
outstanding options to purchase common stock.
Recent pronouncements - In 1994 the Company adopted Statement of
Financial Accounting Standards No. 115 (FAS 115), Accounting for
Certain Investments in Debt and Equity Securities. The adoption of
FAS 115 was not material to the Company's financial statements. The
Company adopted Statement of Financial Accounting Standards No. 119,
Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments, as of December 31, 1994.
Reclassifications - Certain amounts have been reclassified to conform
to the 1994 presentation.
Note 2 - Inventories:
Inventories consisted of the following components:
December 31,
In millions 1994 1993
- ------------------------------------------------------------------------
Raw material $ 1,013 $ 535
Work-in-process 266 90
Finished goods 726 498
----------------------
$ 2,005 $ 1,123
======================
Note 3 - Property, Plant, and Equipment:
Property, plant, and equipment are summarized below:
December 31,
In millions 1994 1993
- ------------------------------------------------------------------------
Land $ 71 $ 72
Buildings 556 542
Machinery and equipment 878 660
Furniture and fixtures 61 53
Leasehold improvements 35 23
Construction-in-progress 71 32
----------------------
1,672 1,382
Less-accumulated depreciation 728 603
----------------------
$ 944 $ 779
======================
Interest aggregating $3 million and $4 million was capitalized and
added to the cost of the Company's property, plant, and equipment in
1994 and 1992, respectively. No interest was capitalized during 1993.
Depreciation expense totaled $168 million, $155 million, and $159
million in 1994, 1993, and 1992, respectively.
<PAGE>
PAGE 22
Note 4 - Investment in Conner Peripherals, Inc.:
In 1992 the Company sold its equity interest in Conner Peripherals,
Inc. (Conner) realizing a gain of $86 million. The Company made disk
drive purchases from Conner during 1992 through the date it sold its
equity interest of $149 million. While the Company controlled
approximately 20% of the equity securities of Conner, the Company
believes that purchases from Conner were made at market prices.
Note 5 - Other Current Liabilities:
The estimated costs which may be incurred for post sales support and
product warranties of $306 million and $166 million were included in
other current liabilities at December 31, 1994 and 1993, respectively.
Note 6 - Credit Agreement and Financing Arrangements:
In August 1994 the Company entered into agreements for a $500 million
syndicated credit facility (of which $200 million expires in July 1995
and $300 million expires in July 1997) which remains unused at
December 31, 1994. In December 1994 the Company established a
commercial paper program, which is supported by the $300 million
portion of the syndicated credit facility. This facility remains
unused at December 31, 1994. Various uncommitted bank lines of credit
established in 1994 were used in the second half of 1994, with usage
levels ranging from a high of $346 million to $17 million at December
31, 1994.
In March 1994 the Company issued $300 million in senior notes,
including $150 million 6 1/2% notes due March 15, 1999 and $150
million 7 1/4% notes due March 15, 2004. Interest on the notes is
payable semiannually on March 15 and September 15 of each year. The
notes are not redeemable prior to maturity and are not entitled to any
sinking fund.
Note 7 - Other Income and Expense:
Other income and expense consisted of the following components:
Year ended December 31,
In millions 1994 1993 1992
- -----------------------------------------------------------------------------
Interest and dividend income $ (22) $ (20) $ (32)
Interest expense associated with hedging 9 22 15
Other interest expense 62 41 29
Currency (gains) losses, net 46 15 11
Restructuring charges and other asset write-downs 12 87
Realized gain on investment in affiliated company (86)
Other, net (1) 6 4
---------------------------
$ 94 $ 76 $ 28
===========================
In the third quarter of 1992 the Company recorded $73 million in
restructuring charges in conjunction with plans for consolidating and
streamlining operations. In the fourth quarter of 1993 the Company
recorded charges associated with its plans to withdraw from the
printer business, including costs related to certain contractual
liabilities and the write-downs of the carrying value of certain
assets. The charge, net of the reversal of previously recorded
restructuring reserves, totaled $10 million. Reserves related to
these restructurings of $26 million were included in other current
liabilities at December 31, 1993. No reserves related to these
restructurings remained at December 31, 1994.
In 1992 the Company sold its $135 million equity interest in Silicon
Graphics, Inc. (SGI) and discontinued the joint technical development
agreement with SGI. The transaction resulted in no material gain or
loss to the Company.
<PAGE>
PAGE 23
Note 8 - Provision for Income Taxes:
The components of income before provision for income taxes were as
follows:
Year ended December 31,
In millions 1994 1993 1992
- -----------------------------------------------------------------------
Domestic $ 566 $ 284 $ 99
Foreign 606 332 196
---------------------------
$1,172 $ 616 $ 295
===========================
The provision for income taxes charged to operations was as follows:
Year ended December 31,
In millions 1994 1993 1992
- -----------------------------------------------------------------------
Current tax expense
U.S. federal $ 303 $ 130 $ 36
State and local 7 4
Foreign 134 58 27
---------------------------
Total current 444 192 63
---------------------------
Deferred tax expense
U.S. federal (114) (18) 30
State and local (6)
Foreign (19) (20) 4
---------------------------
Total deferred (139) (38) 34
---------------------------
Total provision $ 305 $ 154 $ 97
===========================
Total income tax expense for 1994, 1993, and 1992 resulted in
effective tax rates of 26%, 25%, and 33%, respectively. The reasons
for the differences between these effective tax rates and the U.S.
statutory rate of 35% in 1994 and 1993 and 34% in 1992 are as follows:
Year ended December 31,
In millions 1994 1993 1992
- -----------------------------------------------------------------------
Tax expense at U.S. statutory rate $ 410 $ 216 $ 100
Foreign tax effect, net (97) (64)
Provision for tax on equity in
net income of affiliated company 5
Other, net (8) 2 (8)
---------------------------
$ 305 $ 154 $ 97
===========================
The Company increased its U.S. deferred tax liability in 1993 as a
result of legislation enacted during 1993 which increased the
corporate tax rate to 35% from 34% retroactive to January 1, 1993.
The increase had an immaterial effect on the consolidated financial
statements.
The Company benefits from a tax holiday in Singapore which expires in
1997, subject to certain extensions. During the first quarter of 1993
the Company determined that a portion of the undistributed earnings of
its Singaporean manufacturing subsidiary will be reinvested
indefinitely. As a result of this determination, no provision for
U.S. income tax was made on $218 million and $158 million of earnings
of this subsidiary during 1994 and 1993, respectively. These earnings
would become subject to U.S. tax if they were actually or deemed to
<PAGE>
PAGE 24
be remitted to the Company as dividends or if the Company should sell its
stock in this subsidiary. The Company estimates an additional tax
provision of $132 million would be required at such time if the full
amount of these accumulated earnings became subject to U.S. tax. The
decision to reinvest such earnings indefinitely had the effect of
increasing earnings per share by $0.28 and $0.21 on a fully diluted
basis in 1994 and 1993, respectively.
Deferred tax liabilities (assets) at December 31, 1994 and 1993 are
comprised of the following:
December 31,
In millions 1994 1993
- -----------------------------------------------------------------------
Unremitted earnings of foreign subsidiaries $ 182 $ 178
Difference arising from different tax and
financial reporting year ends 19 12
Depreciation and property, plant, and
equipment basis differences 4 6
Unrealized currency gains 2 2
Other 17 9
----------------------
Gross deferred tax liabilities 224 207
----------------------
Post sales support and warranty reserves (103) (47)
Receivable valuation allowances (65) (22)
Stock option compensation (45)
Intercompany profit eliminations (40) (18)
Inventory valuation allowances (36) (26)
Loss carryforwards (20) (10)
Restructuring charges (10)
Compensatory absences accruals (5) (4)
Depreciation and property, plant, and
equipment basis differences (9) (2)
Other (25) (8)
----------------------
Gross deferred tax assets (348) (147)
----------------------
$ (124) $ 60
======================
Note 9 - Stockholders' Equity and Employee Benefit Plans:
Equity incentive plans - At December 31, 1994, there were 47,190,000
shares of common stock reserved by the Board of Directors for issuance
under the Company's employee stock option plans. Options are
generally granted at the fair market value of the common stock at the
date of grant and generally vest over four to five years. In limited
circumstances, options may be granted at prices less than fair market
value and may vest immediately. Options granted under the plans must
be exercised not later than ten years from the date of grant. Options
on 11,494,000 shares were exercisable at December 31, 1994.
<PAGE>
PAGE 25
The following table summarizes activity under the plans for each of
the three years in the period ended December 31, 1994:
Shares Price per share
(In thousands)
Options outstanding, December 31, 1991 43,602
Options granted 8,238 $ 7.88-14.13
Options lapsed or cancelled (2,109)
Options exercised (7,821) .08-15.73
-------
Options outstanding, December 31, 1992 41,910
Options granted 6,456 14.88-24.63
Options lapsed or cancelled (2,154)
Options exercised (13,469) .09-23.25
-------
Options outstanding, December 31, 1993 32,743
Options granted 5,567 28.66-40.13
Options lapsed or cancelled (1,021)
Options exercised (7,901) .78-35.38
-------
Options outstanding, December 31, 1994 29,388
=======
There were 17,802,000; 22,554,000; and 27,123,000 shares available for
grants under the plans at December 31, 1994, 1993, and 1992,
respectively.
In 1987 the stockholders approved the Stock Option Plan for Non-
Employee Directors (the Director Plan). At December 31, 1994, there
were 1,197,000 shares of common stock reserved for issuance under the
Director Plan. Pursuant to the terms of the plan, each non-employee
director is entitled to receive options to purchase common stock of
the Company upon initial appointment to the Board (initial grants) and
upon subsequent reelection to the Board (annual grants). Initial
grants are exercisable during the period beginning one year after
initial appointment to the Board and ending ten years after the date
of grant. Annual grants vest over two years and are exercisable
thereafter until the tenth anniversary of the date of grant. Both
initial grants and annual grants have an exercise price equal to the
fair market value of the Company's stock on the date of grant.
Additionally, pursuant to the terms of the Director Plan, non-employee
directors may elect to receive stock options in lieu of all or a
portion of the annual retainer to be earned. Such options are granted
at 50% of the price of the Company's common stock at the date of grant
and are exercisable during the period beginning one year after the
grant date and ending ten years after the date of grant. Options
totaling 359,000 were exercisable under the Director Plan at
December 31, 1994. Activity under the plan for each of the three
years in the period ended December 31, 1994 was as follows:
Shares Price per share
(In thousands)
Options outstanding, December 31, 1991 459
Options granted 81 $ 4.23-8.46
Options exercised (63) 13.42-14.33
----
Options outstanding, December 31, 1992 477
Options granted 105 8.13-16.25
Options lapsed or cancelled (15)
Options exercised (84) 4.23-13.35
----
Options outstanding, December 31, 1993 483
Options granted 113 18.12-36.25
Options exercised (93) 2.54-20.33
----
Options outstanding, December 31, 1994 503
====
<PAGE>
PAGE 26
There were 694,000; 807,000; and 897,000 shares available for grants
under the plan at December 31, 1994, 1993, and 1992, respectively.
Compaq Computer Corporation Investment Plan - The Company has an
Investment Plan available to all domestic employees and intended to
qualify as a deferred compensation plan under Section 401(k) of the
Internal Revenue Code of 1986. Employees may contribute to the plan
up to 14% of their salary with a yearly maximum of $9,240 in 1994 and
1995. The Company will match employee contributions for an amount up
to 6% of each employee's base salary. Contributions are invested at
the direction of the employee in one or more funds or can be directed
to purchase common stock of the Company at fair market value. Company
contributions generally vest over three years although Company
contributions for those employees having five years of service vest
immediately. Company contributions are charged to expense in
accordance with their vesting. Amounts charged to expense were $19
million, $16 million, and $13 million in 1994, 1993, and 1992,
respectively.
Incentive compensation plan - The Company adopted an incentive
compensation plan for the majority of its employees beginning in the
second half of 1992. Provision for payments to be made under the plan
is based on 6% of net income from operations, as defined, and is
payable semiannually. The amount expensed under the plan was $51
million, $27 million, and $8 million in 1994, 1993, and 1992,
respectively.
Stock repurchases - During 1992 the Company repurchased seven million
shares of its common stock at an aggregate cost of $202 million. The
repurchase of these shares has been accounted for using the par value
method.
Stockholder rights plan - The Board of Directors adopted a Stockholder
Rights Plan in May 1989 which in certain limited circumstances would
permit stockholders to purchase securities at prices which would be
substantially below market value.
Stock split - All share and per share information has been
retroactively restated in the accompanying financial data to reflect
the three-for-one stock split effected in the form of a stock dividend
effective May 31, 1994.
<PAGE>
PAGE 27
Note 10 - Certain Market and Geographic Data:
The Company has subsidiaries in various foreign countries which
manufacture and sell the Company's products in their respective
geographic areas. Summary information with respect to the Company's
geographic operations in 1994, 1993, and 1992 follows:
United
States & Other Elimin- Consol-
In millions Canada Europe countries nations idated
- ----------------------------------------------------------------------------
1994
- ----
Sales to customers $ 5,473 $ 3,829 $ 1,564 $ 10,866
Intercompany transfers 1,526 175 1,660 $ (3,361)
---------------------------------------------------
$ 6,999 $ 4,004 $ 3,224 $ (3,361) $ 10,866
===================================================
Income (loss) from
operations $ 533 $ 470 $ 292 $ (1) $ 1,294
=========================================
Corporate expenses, net (122)
---------
Pretax income $ 1,172
=========
Identifiable assets $ 2,835 $ 1,591 $ 1,274 $ (5) $ 5,695
=========================================
General corporate assets 471
---------
Total assets $ 6,166
=========
1993
- ----
Sales to customers $ 3,670 $ 2,718 $ 803 $ 7,191
Intercompany transfers 1,514 109 990 $ (2,613)
---------------------------------------------------
$ 5,184 $ 2,827 $ 1,793 $ (2,613) $ 7,191
===================================================
Income from operations $ 310 $ 183 $ 245 $ 5 $ 743
=========================================
Corporate expenses, net (127)
---------
Pretax income $ 616
=========
Identifiable assets $ 1,905 $ 970 $ 586 $ (4) $ 3,457
=========================================
General corporate assets 627
---------
Total assets $ 4,084
=========
1992
- ----
Sales to customers $ 1,833 $ 1,886 $ 381 $ 4,100
Intercompany transfers 899 50 537 $ (1,486)
---------------------------------------------------
$ 2,732 $ 1,936 $ 918 $ (1,486) $ 4,100
===================================================
Income (loss) from
operations $ 37 $ 74 $ 143 $ (2) $ 252
=========================================
Corporate income, net 43
---------
Pretax income $ 295
=========
Identifiable assets $ 1,567 $ 910 $ 315 $ (7) $ 2,785
=========================================
General corporate assets 357
---------
Total assets $ 3,142
=========
<PAGE>
PAGE 28
Note 11 - Commitments, Contingencies, and Financial Instruments:
Derivative financial instruments and fair value of financial
instruments - The Company utilizes primarily forward contracts and
purchased foreign currency options to reduce its exposure to
potentially adverse changes in foreign currency exchange rates. The
Company does not hold or issue financial instruments for trading
purposes nor does it hold or issue interest rate or leveraged
derivative financial instruments. Additional discussion related to
the Company's programs to reduce its foreign currency exposure is
presented in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
At December 31, 1994 and 1993, the Company had purchased currency
options outstanding aggregating $208 million and $179 million,
respectively, to buy Japanese yen related to commitments for inventory
purchases and certain capital expenditures. Although no forward
contracts related to these commitments were outstanding at December
31, 1994, the Company had forward contracts to buy Japanese yen
aggregating $325 million at December 31, 1993. Unrealized gains,
losses, and deferred costs related to forward and option contracts
associated with such commitments at these dates were not material.
Any gains or losses, if realized, or costs related to these contracts
are recorded as part of the cost of the inventory or capital item upon
acquisition. The maturity dates of the forward contracts and currency
option contracts which were outstanding at December 31, 1994 extended
from 27 days to two months.
The Company's program to reduce the currency exposure associated with
the net monetary assets of the Company's international subsidiaries
includes agreements to exchange various foreign currencies for U.S.
dollars. At December 31, 1994 and 1993, such agreements to sell
foreign currencies included forward contracts aggregating $1.2 billion
and $581 million, respectively, and purchased currency option
contracts aggregating $45 million and $12 million, respectively.
Unrealized and realized gains and losses resulting from these
contracts are included in other income and expense in the Company's
income statement and generally are recognized currently, while the
interest element associated with forward contracts is recognized as
interest expense over the life of each contract. Unrealized gains and
losses on these contracts are reflected in accounts receivable or
other current liabilities in the Company's balance sheet and
approximate the fair value of such contracts at December 31, 1994 and
1993. The maturity dates of the forward contracts and currency option
contracts which were outstanding at December 31, 1994 extended from
three days to six months.
The Company has utilized purchased currency option contracts to hedge
a portion of the anticipated but not firmly committed sales of its
international marketing subsidiaries. Although no such contracts were
outstanding at December 31, 1994, contracts aggregating $508 million
were outstanding at December 31, 1993 related to the hedge of such
sales for a three month period. The unrealized gain deferred on these
contracts at December 31, 1993 was $12 million. Gains and premium
costs associated with such purchased currency option contracts are
reflected as a component of sales in the Company's income statement.
The Company has utilized forward contracts to protect the Company
against potentially adverse changes in foreign currency exchange rates
on anticipated but not firmly committed sales of its international
marketing subsidiaries which are expected to occur within a three
month period. No such contracts were outstanding at December 31, 1994
and 1993. During 1994 and 1993 the amount of any gain or loss on
these contracts was immaterial.
In the event of a failure to honor one of these forward contracts by
one of the banks with which the Company had contracted, management
believes any loss would be limited to the exchange rate differential
from the time the contract was made until the time it was compensated.
To the extent the Company has option contracts outstanding, the amount
of any loss resulting from a breach of contract would be limited to
the amount of premiums paid for the options and the unrealized gain,
if any, related to such contracts.
The Company enters into various other types of financial instruments
in the normal course of business. Fair values for certain financial
instruments are based on quoted market prices. For other financial
instruments, fair values are based on the appropriate pricing models
using current market information. The amounts ultimately realized
upon settlement of these financial instruments will depend on actual
market conditions during the remaining life of the instruments. Fair
values of cash and cash equivalents, accounts receivable, accounts
payable, and other current liabilities reflected in the December 31,
1993 balance sheet approximate carrying value at that date. The fair
value of the Company's long-term debt at December 31, 1994 was
estimated to be $279 million, compared with its carrying value of $300
million.
<PAGE>
PAGE 29
Concentration of credit risk - The Company's cash and cash equivalents
and accounts receivable are subject to potential credit risk. The
Company's cash management and investment policies restrict investments
to low risk, highly-liquid securities and the Company performs
periodic evaluations of the relative credit standing of the financial
institutions with which it deals.
The Company distributes products primarily through third-party
resellers and as a result maintains individually significant accounts
receivable balances from various major resellers. The Company
evaluates the credit worthiness of its resellers on an ongoing basis
and may, from time to time, tighten credit terms to particular
resellers. Such tightening may take the form of shorter payment
terms, requiring security, reduction of credit availability, or the
deauthorization of a reseller. In addition, the Company uses various
risk transfer instruments such as credit insurance, factoring, and
floor planning with third-party finance companies and financial
institutions; however, there can be no assurance that these
arrangements will be sufficient to avoid significant accounts
receivable losses or will continue to be available. While the Company
believes that its distribution strategies will serve to minimize the
risk associated with the loss of a reseller or the decline in sales to
a reseller due to tightened credit terms, there can be no assurance
that disruption to the Company's sales and profitability will not
occur. If the financial condition and operations of these resellers
deteriorate, the Company's operating results could be adversely
affected. At December 31, 1994, the receivable balances from the
Company's five largest resellers represented approximately 15% of
accounts receivable.
The Company's resellers typically purchase products on an as-needed
basis through purchase orders. Certain of the Company's resellers
finance a portion of their inventories through third-party finance
companies. Under the terms of the financing arrangements, the Company
may be required, in limited circumstances, to repurchase certain
products from the finance companies. Additionally, the Company has on
occasion guaranteed a portion of certain resellers' outstanding
balances with third-party finance companies and financial
institutions. Guarantees under these and other arrangements
aggregating $28 million and $29 million were outstanding at
December 31, 1994 and 1993, respectively. During the years that the
Company has supported these financing programs, claims under these
arrangements have been negligible. The Company makes provisions for
estimated product returns and bad debts which may occur under these
programs.
Litigation - The Company is subject to legal proceedings and claims
which arise in the ordinary course of its business. Management does
not believe that the outcome of any of those matters will have a
material adverse effect on the Company's financial condition.
Additional discussion on legal proceedings is presented in Part I
(Item 3) of this Form 10-K.
Lease commitments - The Company leases certain manufacturing and
office facilities and equipment under noncancelable operating leases
with terms from one to 30 years. Rent expense for 1994, 1993, and
1992 was $48 million, $32 million, and $35 million, respectively.
The Company's minimum rental commitments under noncancelable operating
leases at December 31, 1994 were as follows:
Year Amount
(In millions)
------- ---------
1995 $ 44
1996 32
1997 25
1998 18
1999 15
Thereafter 113
---------
$ 247
=========
<PAGE>
PAGE 30
Note 12 - Selected Quarterly Financial Data (not covered by report of
independent accountants):
The table below sets forth selected financial information for each
quarter of the last two years.
In millions, 1st 2nd 3rd 4th
except per share amounts quarter quarter quarter quarter
- ------------------------------------------------------------------------------
1994
Sales $ 2,278 $ 2,499 $ 2,838 $ 3,251
Gross margin 617 663 653 794
Net income 213 210 201 243
Earnings per common and
common equivalent share
Primary 0.80 0.78 0.75 0.90
Assuming full dilution 0.80 0.78 0.75 0.90
1993
Sales $ 1,611 $ 1,632 $ 1,746 $ 2,202
Gross margin 370 393 413 522
Net income 102 102 107 151
Earnings per common and
common equivalent share
Primary 0.41 0.40 0.42 0.58
Assuming full dilution 0.41 0.40 0.42 0.58
Earnings per common and common equivalent share are computed
independently for each of the quarters presented and therefore may not
sum to the totals for the year.
<PAGE>
PAGE 31
PART III
Items 10 to 13 inclusive.
These items have been omitted in accordance with instructions to
Form 10-K Annual Report. The Registrant will file with the Commission
in March 1995, pursuant to Regulation 14A, a definitive proxy
statement that will involve the election of directors.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
Financial Statements and Financial Statement Schedules - See
Index to Consolidated Financial Statements at Item 8 of this report.
Exhibit
No. Description of Exhibits
3.1 Restated Certificate of Incorporation of Registrant
(incorporated herein by reference to the corresponding
exhibit in the Registrant's Registration Statement No.
2-96069 on Form S-1).
3.2 Amendment to Registrant's Certificate of Incorporation,
filed May 19, 1987 (incorporated herein by reference to
the corresponding exhibit in the Registrant's Form 10-K
for the year ended December 31, 1987 (the "1987 Form 10-K")).
3.3 Registrant's Certificate of Amendment to its Restated
Certificate of Incorporation dated July 26, 1991, along
with a complete copy of the Registrant's Restated
Certificate of Incorporation, as amended (incorporated
herein by reference to Exhibit 10.1 to the Registrant's
Form 10-Q for the quarter ended June 30, 1991).
3.4 Registrant's Certificate of Stock Designation filed June
28, 1989 (incorporated herein by reference to Exhibit
No. 3.1 to the Registrant's Form 10-Q for the quarter
ended June 30, 1989 (the "1989 Second Quarter Form 10-Q")).
3.5 Bylaws of Registrant, as amended (incorporated herein by
reference to Exhibit No. 3.5 to the Registrant's Form
10-Q for the quarter ended June 30, 1992).
4.1 Form of Rights Agreement dated as of May 18, 1989
between Registrant and Bank of America NT & SA, as
Rights Agent, including form of Right Certificate
(incorporated herein by reference to Exhibits 1 and 2 to
the Registrant's Form 8-A Registration Statement dated
May 30, 1989).
4.2 Successor Rights Agent Agreement dated as of September
17, 1991 between Registrant and First National Bank of
Boston (incorporated herein by reference to Exhibit 4.2
to the Registrant's Form 10-K for the year ended
December 31, 1991 (the "1991 Form 10-K")).
4.3 Senior Debt Indenture dated as of March 1, 1994, between
the Registrant and NationsBank of Texas, National
Association, Trustee (incorporated by reference to
Exhibit 4.a to the Registrant's Registration Statement
No. 33-63436 on Form S-3).
4.4 Subordinated Debt Indenture dated as of March 1, 1994,
between the Registrant and NationsBank of Texas,
National Association, Trustee (incorporated by reference
to Exhibit 4.b to the Registrant's Registration
Statement No. 33-63436 on Form S-3).
4.5 Specimen of the Registrant's 6 1/2% senior notes due
March 1999 (incorporated by reference to the
Registrant's Form 8-K dated March 10, 1994).
4.6 Specimen of the Registrant's 7 1/4% senior notes due
March 15, 2004 (incorporated by reference to the
Registrant's Form 8-K dated March 10, 1994).
10.1 Registrant's 1982 Stock Option Plan, as amended
(incorporated herein by reference to the corresponding
exhibit in the 1989 Second Quarter Form 10-Q). *
10.2 Registrant's 1983 Nonqualified Stock Option Plan, as
amended (incorporated herein by reference to the
corresponding exhibit in the Registrant's Form 10-K for
the year ended December 31, 1988). *
<PAGE>
PAGE 32
10.3 Registrant's 1985 Stock Option Plan (incorporated herein
by reference to Exhibit 10.3 to the 1991 Form 10-K). *
10.4 Registrant's 1985 Executive and Key Employees Stock
Option Plan, as amended (incorporated herein by
reference to Exhibit 10.3 to the 1989 Second Quarter
Form 10-Q). *
10.5 Registrant's 1985 Nonqualified Stock Option Plan, as
amended (incorporated herein by reference to Exhibit
10.4 to the 1989 Second Quarter Form 10-Q). *
10.6 Forms of Stock Option Agreements relating to Exhibits
10.1 through 10.5 (incorporated herein by reference to
Exhibit 10.6 to the 1987 Form 10-K). *
10.7 Registrant's 1989 Equity Incentive Plan, as amended
(incorporated herein by reference to Exhibit 10.7 to the
1991 Form 10-K). *
10.8 Form of Stock Option Notice relating to Exhibit 10.7
(incorporated herein by reference to Exhibit 10.8 to the
1991 Form 10-K). *
10.9 Registrant's Stock Option Plan for Non-Employee
Directors, as amended, and Form of Stock Option
Agreement (incorporated herein by reference to Exhibit
10.9 to the 1991 Form 10-K). *
10.10 Registrant's Deferred Compensation and Supplemental
Savings Plan as amended (incorporated herein by
reference to Exhibit 10.10 to the Registrant's Form 10-K
for the year ended December 31, 1993 (the "1993 Form
10-K")). *
10.11 Employment Agreement dated as of January 1, 1992 between
the Registrant and Eckhard Pfeiffer (incorporated by
reference to Exhibit 10.15 to the 1991 Form 10-K). *
10.12 Form of letter agreement between Registrant and its
executive officers (incorporated by reference to Exhibit
10.16 to the 1991 Form 10-K). *
10.13 $200,000 Revolving Credit Agreement dated as of August 1,
1994, among Compaq Computer Corporation, the banks
signatory thereto, and Bank of America National Trust
and Savings Association as Agent and NationsBank of
Texas, N.A. Co-agent (incorporated by reference to
Exhibit 10.14 to the Registrant's Form 10-Q for the
quarter ended September 30, 1994 (the "1994 Third
Quarter Form 10-Q")).
10.14 $300,000 Revolving Credit Agreement dated as of August
1, 1994, among Compaq Computer Corporation, the banks
signatory thereto, and Bank of America National Trust
and Savings Association as Agent and NationsBank of
Texas, N.A. Co-agent (incorporated by reference to
Exhibit 10.15 to 1994 Third Quarter Form 10-Q).
11. Statement regarding the computation of per share
earnings.
21. Subsidiaries of Registrant.
23. Consent of Price Waterhouse LLP, independent
accountants.
27. Financial Data Schedule
* Indicates management contract or compensatory plan or
arrangement.
(b) Reports on Form 8-K:
Report on Form 8-K dated January 25, 1995, containing the
Company's news release dated January 25, 1995, with respect to its
financial results for the period ended December 31, 1994, including an
unaudited consolidated balance sheet as of December 31, 1994, and an
unaudited consolidated statement of income for the periods ended
December 31, 1994.
Compaq, ProLinea, ProLiant, Prosignia, Deskpro, Contura, Compaq
Insight Manager, LTE, QVision, and Smartstart Registered United States
Patent and Trademark Office. Presario, Aero, LTE Elite, and MediaPilot
are trademarks and CompaqCare is a service mark of Compaq Computer
Corporation. Pentium is a registered trademark of Intel Corporation.
Other product names mentioned herein may be trademarks or registered
trademarks of their respective companies.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Compaq Computer Corporation
By: /s/ ECKHARD PFEIFFER
-------------------------------
Eckhard Pfeiffer, President and
Chief Executive Officer
Date: February 21, 1995
-----------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ ECKHARD PFEIFFER February 21, 1995
- ----------------------------- President and Director -----------------
(Eckhard Pfeiffer) (principal executive officer)
/s/ DARYL J. WHITE February 21, 1995
- ----------------------------- Senior Vice President-Finance -----------------
(Daryl J. White) and Chief Financial Officer
(principal financial officer)
/s/ BENJAMIN M. ROSEN February 21, 1995
- ----------------------------- Chairman of the -----------------
(Benjamin M. Rosen) Board of Directors
/s/ ROBERT TED ENLOE, III February 21, 1995
- ----------------------------- Director -----------------
(Robert Ted Enloe, III)
/s/ GEORGE H. HEILMEIER February 21, 1995
- ----------------------------- Director -----------------
(George H. Heilmeier)
/s/ GEORGE E.R. KINNEAR II February 21, 1995
- ----------------------------- Director -----------------
(George E.R. Kinnear II)
/s/ PETER N. LARSON February 21, 1995
- ----------------------------- Director -----------------
(Peter N. Larson)
/s/ KENNETH L. LAY February 21, 1995
- ----------------------------- Director -----------------
(Kenneth L. Lay)
/s/ KENNETH ROMAN February 21, 1995
- ----------------------------- Director -----------------
(Kenneth Roman)
<PAGE>
PAGE S-1
SCHEDULE VIII
COMPAQ COMPUTER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
Year ended December 31,
In millions 1994 1993 1992
- --------------------------------------------------------------------
Balance, beginning of period $ 49 $ 25 $ 18
Additions charged to expense 36 33 14
Reductions (10) (9) (7)
------------------------------
Balance, end of period $ 75 $ 49 $ 25
==============================
<PAGE>
EXHIBIT 11
COMPAQ COMPUTER CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Year ended December 31,
In millions, except per share amounts 1994 1993 1992
- -------------------------------------------------------------------------------
Primary earnings per share:-
Shares used in computing earnings per share:
Weighted average number of shares outstanding 257.5 246.0 253.8
Incremental shares attributed
to outstanding options 11.1 8.1 4.5
Weighted average number of shares repurchased (10.5)
------------------------------
268.6 254.1 247.8
==============================
Earnings:
Net income $ 867 $ 462 $ 213
==============================
Earnings per common and common equivalent share $ 3.23 $ 1.82 $ 0.86
==============================
Earnings per share - assuming full dilution:-
Shares used in computing earnings per share:
Weighted average number of shares outstanding 257.5 246.0 253.8
Incremental shares attributed to
outstanding options 12.6 12.9 10.8
Weighted average number of shares repurchased (10.5)
------------------------------
270.1 258.9 254.1
==============================
Earnings:
Net income $ 867 $ 462 $ 213
==============================
Earnings per common and common equivalent share $ 3.21 $ 1.78 $ 0.84
==============================
<PAGE>
EXHIBIT 21
COMPAQ COMPUTER CORPORATION
SUBSIDIARIES
Jurisdiction
Name of
incorporation
Compaq Computer Australia Pty. Ltd. Australia
Compaq Computer Gesmbh Austria
Compaq Computer WLL Bahrain
Compaq Computer N.V./S.A. Belgium
Compaq Computer Brasil - Industria e Comercio LTDA Brazil
Compaq Canada Incorporated/Incorporee
(dba Compaq Canada, Inc.) Canada
Compaq Computer Technologies (China) Ltd. China
Compaq Computer de Colombia S.A. Colombia
Compaq Computer, spol.sr.o. Czech Republic
Compaq Latin America Corporation Delaware
Compaq Computer International Corporation Delaware
Compaq Computer A/S Denmark
Compaq Computer Oy Finland
Compaq Computer S.A.R.L. France
Compaq Computer GmbH Germany
Compaq Computer EMEA GmbH Germany
Compaq Computer Hong Kong Limited Hong Kong
Compaq Computer KFT Hungary
Compaq Computer S.p.A. Italy
Compaq Kabushiki Kaisha Japan
Compaq Computer (Malaysia) SDN.BHD. Malaysia
Compaq Computer de Mexico, S.A. de C.V. Mexico
Compaq Computer B.V. Netherlands
Compaq Computer New Zealand Limited New Zealand
Compaq Computer Norway A.S. Norway
Compaq Computer, Sp.zo.o Poland
Compaq Computer Portugal, Lda Portugal
Compaq Computer Asia Pte. Ltd. Singapore
Compaq Asia Pte. Limited Singapore
Compaq Computer Asia/Pacific Pte. Ltd. Singapore
Compaq Computer (Proprietary) Limited South Africa
Compaq Computer S.A. Spain
Compaq Computer AB Sweden
Compaq Computer AG Switzerland
Compaq Computer (Thailand) Ltd. Thailand
Compaq Computer Taiwan Limited Taiwan
Compaq Computer Manufacturing Limited United Kingdom
Compaq Computer Limited United Kingdom
Compaq Computer de Venezuela, S.A. Venezuela
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-44115, No. 33-31819, No. 33-23504,
No. 33-7499, No. 2-89925, No. 33-10106, No. 33-38044, and No. 33-16987)
of Compaq Computer Corporation of our report dated January 24, 1995, which
appears on page 15 of this Form 10-K for the year ended December 31, 1994.
We also consent to the reference to us under the heading "Selected
Consolidated Financial Data" in this Form 10-K. However, it should be
noted that Price Waterhouse LLP has not prepared or certified such
"Selected Consolidated Financial Data."
PRICE WATERHOUSE LLP
Houston, Texas
February 21, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
COMPAQ COMPUTER CORPORATION'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED
STATEMENT OF INCOME FOR THE PERIOD ENDED DECEMBER 31, 1994 AND IS QUAILIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 471
<SECURITIES> 0
<RECEIVABLES> 2,362
<ALLOWANCES> 75
<INVENTORY> 2,005
<CURRENT-ASSETS> 5,158
<PP&E> 1,672
<DEPRECIATION> 728
<TOTAL-ASSETS> 6,166
<CURRENT-LIABILITIES> 2,013
<BONDS> 300
<COMMON> 739
0
0
<OTHER-SE> 2,935
<TOTAL-LIABILITY-AND-EQUITY> 6,166
<SALES> 10,866
<TOTAL-REVENUES> 10,866
<CGS> 8,139
<TOTAL-COSTS> 8,139
<OTHER-EXPENSES> 226<F1>
<LOSS-PROVISION> 36
<INTEREST-EXPENSE> 71
<INCOME-PRETAX> 1,172
<INCOME-TAX> 305
<INCOME-CONTINUING> 867
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 867
<EPS-PRIMARY> 3.23
<EPS-DILUTED> 3.21
<FN>
<F1> Includes research and development costs.
</FN>
</TABLE>
