____________________________________________________________
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
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)
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 [ ]
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of September 30, 1996, was 270.8 million.
____________________________________________________________
<PAGE>
P A R T I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMPAQ COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
September 30, December 31,
1996 1995
--------- ------------
(in millions)
Current assets:
Cash and cash equivalents $ 3,191 $ 745
Accounts receivable, net 2,828 3,141
Inventories 1,489 2,156
Deferred income taxes 364 365
Prepaid expenses and other current assets 124 120
------- -------
Total current assets 7,996 6,527
Property, plant, and equipment,
less accumulated depreciation 1,174 1,110
Other assets 174 181
------- -------
$ 9,344 $ 7,818
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,882 $ 1,379
Income taxes payable 95 190
Other current liabilities 1,306 1,111
------- -------
Total current liabilities 3,283 2,680
------- -------
Long-term debt 300 300
------- -------
Deferred income taxes 224 224
------- -------
Stockholders' equity:-
Preferred stock, $.01 par value
(authorized: 10 million shares; issued: none)
Common stock and capital in excess of $.01 par value
(authorized: 1 billion shares; issued and outstanding:
270.8 million shares at September 30, 1996
and 267.1 million shares at December 31, 1995) 962 890
Retained earnings 4,575 3,724
------- -------
Total stockholders' equity 5,537 4,614
------- -------
$ 9,344 $ 7,818
======= =======
See accompanying notes to consolidated financial data
<PAGE>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Nine months Quarter ended
ended
September 30, September 30,
1996 1995 1996 1995
------- ------- ------ ------
(in millions, except per share amounts)
Sales $12,687 $10,054 $4,481 $3,594
Cost of sales 9,814 7,685 3,414 2,775
------- ------- ------ ------
2,873 2,369 1,067 819
------- ------- ------ ------
Selling, general, and
administrative expense 1,340 1,125 469 406
Research and development costs 302 189 105 65
Other income and expense, net 16 74 (6) 8
------- ------- ------ ------
1,658 1,388 568 479
------- ------- ------ ------
Income before provision for
income taxes 1,215 981 499 340
Provision for income taxes 364 274 149 95
------- ------- ------ ------
Net income $ 851 $ 707 $ 350 $ 245
======= ======= ====== ======
Earnings per common and common
equivalent share:
Primary $ 3.07 $ 2.59 $ 1.26 $ 0.89
======= ======= ====== ======
Assuming full dilution $ 3.05 $ 2.57 $ 1.25 $ 0.89
======= ======= ====== ======
Shares used in computing
earnings per common
and common equivalent share:
Primary 277.1 272.8 278.4 275.2
======= ======= ====== ======
Assuming full dilution 278.8 274.5 279.1 275.2
======= ======= ====== ======
See accompanying notes to consolidated financial data
<PAGE>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine months
ended September 30,
1996 1995
-------- --------
(in millions)
Cash flows from operating activities:
Cash received from customers $12,860 $ 9,698
Cash paid to suppliers and employees (9,731) (8,459)
Interest and dividends received 57 35
Interest paid (67) (83)
Income taxes paid (461) (269)
-------- --------
Net cash provided by operating activities 2,658 922
-------- --------
Cash flows from investing activities:
Purchases of property, plant, and equipment, net (281) (288)
Acquisition of businesses (22)
Other, net (8) 12
-------- --------
Net cash used in investing activities (311) (276)
-------- --------
Cash flows from financing activities:
Issuance of stock pursuant to stock option plans 71 64
-------- --------
Net cash provided by financing activities 71 64
-------- --------
Effect of exchange rate changes on cash 28 (61)
-------- --------
Net increase in cash and cash equivalents 2,446 649
Cash and cash equivalents at beginning of period 745 471
-------- --------
Cash and cash equivalents at end of period $ 3,191 $ 1,120
======== ========
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 851 $ 707
Depreciation and amortization 203 160
Provision for bad debts 106 23
Deferred income taxes 1
Exchange rate effect 11 28
Decrease (increase) in accounts receivable 170 (372)
Decrease (increase) in inventories 668 (339)
Increase in prepaid expenses and
other current assets (6) (51)
Increase in accounts payable 505 684
Increase (decrease) in income taxes payable (94) 11
Increase in other current liabilities 243 71
-------- --------
Net cash provided by operating activities $ 2,658 $ 922
======== ========
See accompanying notes to consolidated financial data
<PAGE>
COMPAQ COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL DATA
Note 1 - Basis of presentation
The accompanying unaudited financial data as of September 30, 1996 and
December 31, 1995 and for the three month and nine month periods ended
September 30, 1996 and 1995 have been prepared on substantially the same
basis as the annual consolidated financial statements. In the opinion of the
Company, the data reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the
results for those periods and the financial condition at those dates.
Note 2 - Inventories
Inventories consisted of the following components:
September 30, December 31,
1996 1995
------- -------
(in millions)
Raw materials and work-in-process $ 677 $ 1,043
Finished goods 812 1,113
------- -------
$ 1,489 $ 2,156
======= =======
Note 3 - Other income and expense
Other income and expense consisted of the following components:
Nine months Three months
ended ended
September 30, September 30,
1996 1995 1996 1995
----- ----- ----- -----
(in millions)
Interest and dividend income $(57) $(35) $(33) $(15)
Interest expense associated with hedging 14 3
Other interest expense 60 58 23 21
Currency exchange (gains) losses, net 11 28 5 (5)
Other, net 2 9 (1) 4
----- ----- ----- -----
$ 16 $ 74 $ (6) $ 8
===== ===== ===== =====
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the consolidated
interim financial statements.
Results of Operations
The following table presents, as a percentage of sales, certain
selected financial data for the nine months and quarters ended September
30, 1996 and 1995.
Nine months ended September 30, Quarter ended September 30,
1996 1995 1996 1995
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 77.3 76.4 76.2 77.2
______ ______ ______ ______
Gross margin 22.7 23.6 23.8 22.8
Selling, general, and
administrative expense 10.6 11.2 10.5 11.3
Research and
development costs 2.4 1.9 2.4 1.8
Other income and
expense, net .1 .7 (.2) .2
______ ______ ______ ______
13.1 13.8 12.7 13.3
______ ______ ______ ______
Income before provision
for income taxes 9.6% 9.8% 11.1% 9.5%
______ ______ ______ ______
Sales
Sales increased 25% and 26% in the third quarter and first
nine months of 1996, respectively, over the comparable periods of
1995, and 12% over the second quarter of 1996. North American
sales represented 59% and 54% of total sales in the third quarter and
first nine months of 1996, respectively, as compared with 52% and
49% in the corresponding periods of 1995. European sales
represented 29% and 32% of total sales in the third quarter and first
nine months of 1996, respectively, as compared with 32% and 36% in
the corresponding periods of 1995. Other international sales,
excluding Canada, represented 12% and 14% of the total sales in the
third quarter and first nine months of 1996 as compared with 16% and
15% in the comparable periods of 1995. The Company's increase in
consolidated sales in the third quarter of 1996 in comparison to the
same period of 1995 stemmed primarily from an increase in the
number of units and options sold. Total computer sales in units
increased 28% in the third quarter of 1996 over the comparable period
of 1995.
Gross Margin
Gross margin as a percentage of sales was 23.8% and 22.7%
in the third quarter and first nine months of 1996, respectively,
compared to 22.8% and 23.6% in the third quarter and first nine
months of 1995, and 23.0% in the second quarter of 1996. The
increase in gross margin from the second quarter 1996 and from the
third quarter 1995 primarily resulted from the introduction of
significant new products at better margins, improvements in logistics,
and better asset management. The Company operates in a very
aggressive pricing environment that will continue to put pressure on
the Company's gross margins. Despite this pressure, the Company
expects that the combination of changes in product mix, reductions in
the cost of materials, and higher margins on new products will allow
the Company maintain its current gross margin levels for the
remainder of 1996.
Operating Expenses
The Company strives to manage total operating expenses in
line with sales growth and gross margin levels. The Company's
selling, general, and administrative expense increased in amount while
declining as a percentage of sales in the third quarter of 1996 as
compared with the same period of 1995. The increase in expenses
resulted from domestic and international selling expense associated
with higher unit volumes as well as expense incurred in connection
with the entry into new markets and the expansion of distribution
channels. The Company anticipates that in the remainder of 1996
selling, general, and administrative expense will increase in amount as
it supports significant new product introductions, steps up its
advertising and promotion programs, expands into new markets, and
increases its investment in the area of service and support, especially
in support of its systems business.
Research and development costs increased to 2.4% in the
third quarter of 1996 compared to 1.8% in the corresponding period of
1995. The Company is committed to continuing a significant research
and development program and research and development costs are
likely to increase for the remainder of the year.
Other Items
Other income and expense in the third quarter of 1996 was
income of $6 million. Interest income and interest expense in the third
quarter was a net gain of $10 million compared to a net expense of $9
million in the corresponding period of 1995. The net interest income
resulted primarily from higher interest income due to significantly
higher cash balances.
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 were a net loss of $5 million in the third
quarter of 1996, compared to a net gain of $5 million in the third
quarter of 1995.
Provision for Income Taxes
The Company estimates the effective tax rate for 1996 will be
30%, a decline from 34% in 1995. The Company's tax rate in 1995
increased from 26% in 1994 due to a non-tax deductible charge
associated with the Company's acquisitions and 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
1996, bringing the rate to 30%. 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 August 2001 (with potential extension to August
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 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. Should the Company choose to
discontinue its permanent reinvestment policy, the Company's
effective tax rate would increase at that time.
Liquidity and Capital Resources
The Company's working capital increased to $4.7 billion at
September 30, 1996, compared to $3.8 billion at December 31, 1995.
The Company's cash and cash equivalents increased to $3.2
billion at September 30, 1996, from $745 million at December 31,
1995, primarily because of positive cash flow from operating activities
and better management of costs, inventory, and accounts receivable.
Accounts receivable decreased to $2.8 billion from $3.1 billion at
December, 31, 1995, primarily as a result of lower sales in third
quarter 1996 versus fourth quarter 1995 and better overall
management of accounts receivable as evidenced by lower days sales
outstanding. Accounts payable increased to $1.9 billion at September
30, 1996, from $1.4 billion at December 31, 1995, primarily as a result
of material purchases to support higher anticipated sales in fourth
quarter 1996. Inventory decreased to $1.5 billion at September 30,
1996, from $2.2 billion at December 31, 1995, as a result of better
overall management of inventories. Inventory turns increased to 9.0 at
the quarter ending September 30, 1996 from 6.5 at the quarter ending
December 31, 1995.
Cash used in the third quarter of 1996 for the purchase of
property, plant and equipment totaled $80 million. The Company
estimates that capital expenditures for land, buildings, and equipment
during the remainder of 1996 will be approximately $95 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
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. The Company has a $1 billion
syndicated credit facility, which will expire in October 2001, which
was unused at September 30, 1996. In October, the Company put in
place a $500 million syndicated credit facility, which will expire in
October 1997. The Company has established a commercial paper
program, supported by the syndicated credit facility, which was unused
at September 30, 1996. In the U.S. and various international locations
the Company has uncommitted bank lines of credit, of which $10
million was outstanding at September 30, 1996. 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 fierce industry-wide competition for market share
resulting in aggressive pricing practices, continually changing
customer demand patterns, growing competition from well-capitalized
high technology and consumer electronics companies, and rapid
technological development carried out in the midst of legal battles over
intellectual property rights. In developing strategies to achieve
continued increases in sales and operating profits, the Company
anticipates the continued expansion of the computer market and
spending on information technology. In this environment the
Company seeks profitable PC market share growth while expanding its
product offerings in high-end servers, workstations, and networking
and communications products and further developing its options
business. The Company's operating results could be adversely affected
should the Company be unable to anticipate customer demand
accurately, to maintain short design cycles while meeting evolving
industry performance standards, to manage its product transitions,
inventory levels, and manufacturing processes efficiently, to distribute
its products quickly in response to customer demand, to differentiate
its products from those of its competitors, or to compete successfully in
the markets for its new products. In accordance with the provisions of
the Private Securities Litigation Reform Act of 1995, the cautionary
statements set forth below identify important factors that could cause
actual results to differ materially from the projected results contained
in the forward-looking statements in this report.
Competitive Environment. The Company expects the PC market in
1996 to expand in line with third party research organizations'
forecasts of unit growth in the range of 17% to 20%. The Company is
putting in place programs and products focused on meeting market
demand and gaining market share profitably. Competition for PC
market share remains fierce with a large number of competitors vying
for market share. Several of the Company's suppliers also manufacture
and market PCs or motherboards, which contain the microprocessor
and other internal operating components of the PC. In addition, a
number of consumer electronics companies are entering the PC market
as it expands into the consumer sector and consumer models expand
multimedia features. Each of these companies may be willing to accept
lower profit margins to win market share.
Fourth Quarter Outlook. For the fourth quarter 1996, the Company is
targeting sales above third quarter levels. This level of sales is
dependent on continued strong demand across all customer segments
and the availability of new products. The Company expects higher
sales in combination with changes in product mix, reductions in the
cost of materials, higher margins on new products, and ongoing
expense controls to enable it to achieve fourth quarter earnings that
exceed the same period of 1995 and third quarter 1996. The
Company's ability to achieve targeted sales and earnings levels
depends upon a number of competitive and market factors and is
subject to the risks set forth in this report.
Gross Margin Pressures and Operating Expenses. In order to maintain
or increase its market share, the Company must continue to price its
products competitively, to design products at lower price points with
attractive price/performance characteristics, and, from time to time, to
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 lower prices and sales incentives on its
sales, gross margins, and profitability, the Company must increase
unit shipments, aggressively reduce costs, maintain tight control over
operating expenses, and continue to pursue gross-margin enhancing
opportunities. Despite quarterly fluctuations, the Company remains
focused on achieving gross margin between 23% and 24%. The
Company's ability to continue to achieve this gross margin target and
to hold its operating expense as a percentage of sales at the current
level in the remainder of the year and in 1997 depends upon a variety
of competitive and market factors and is subject to the other risks set
forth in this report.
Inventory. The Company anticipates that its inventory turns, which
increased to 5.5 in 1995 from 5.2 in 1994, will continue to increase in
1996. In the third quarter of 1996, the Company achieved inventory
turns of 9.0 in comparison to 5.1 in the third quarter of 1995 as a
result of improved product cycle management and other efficiencies
accompanying the reengineering of certain internal processes. In the
event of a drop in worldwide demand for PC products, lower than
anticipated demand for one or more of the Company's products,
difficulties in managing product transitions, or component pricing
movements that affect the value of raw material inventory, there could
be an adverse impact on inventory, cash, and related profitability.
Product Transitions. In the summer of 1996 the Company announced
major new products in each of its product groups and the Company
will continue to have rapid product transition cycles. In each product
transition cycle the Company confronts the risk of delays in production
that could impact sales of its newer PCs while it manages the
inventory of its older products and facilitates the sale of older Compaq
inventory held by resellers. The Company provides currently for
estimated product returns and price protection that may occur under
programs the Company has with its resellers and under floor planning
arrangements with third-party finance companies. To facilitate smooth
product transitions, the Company carries out pricing actions and
marketing programs to raise sales in reseller channels. The success of
the Company's product transition strategy depends upon a variety of
competitive and market factors. Should the Company be unable to sell
its inventory of older products at anticipated prices or if dealers hold
higher than expected amounts of inventory subject to price protection
at the time of planned price reductions, there could be a resulting
adverse impact on sales, gross margins, and profitability. In planning
product transitions the Company evaluates the speed at which
customers are likely to switch to newer products. The contrast between
the prices of old and new products, which is related to component
costs, is a critical variable in predicting customer decisions to move to
the next generation of products. Technology transitions may occur
more quickly or more slowly than anticipated based on pricing
decisions by industry component suppliers, particularly microprocessor
prices set by Intel Corporation. Because of the lead times associated
with the Company's volume production, should the Company be
unable to predict the rate of a product transition accurately, the
Company's inventory levels, cash and profitability could be negatively
affected. Forecasting demand for newly-introduced products is
complicated by the availability of different product models, which may
include various types of built-in peripherals and software, and the
configuration requirements, such as language localization, in certain
markets. As a result, while overall demand may be in line with the
Company's projections and manufacturing implementation, local
market variations can lead to differences between expected and actual
demand and resulting delays in shipment, which can affect the
Company's financial results.
Reengineering Implementation. The Company continues to expand its
manufacturing capacity as well as reengineer its internal processes to
support continued growth. During 1996 the Company continues to
focus on making its business processes more efficient in order to
increase customer satisfaction, improve productivity, and lower costs.
In the event of a delay in reengineering implementation, there could be
an adverse impact on inventory, cash, and related profitability. As the
Company has grown, it has outstripped the ability of certain of its
systems to support continued expansion. In connection with its
reengineering efforts, the Company is moving many of its systems
from a legacy environment of proprietary systems to client-server
architectures. Should the Company's transition to new systems not
occur in a smooth and orderly manner, the Company could experience
disruptions in the operation of its business, which could have an
adverse financial impact.
Alliance and Acquisition Strategy. Because of the rapid pace of
technological advances in information technology, the Company must
introduce on a timely basis new products offering competitive features
that appeal to a wide variety of customers. The Company's product
development efforts are centered on aggressively developing new areas
in which the Company can differentiate its products and add value,
focusing on innovative platform features, the integration of hardware
and software, and new related products and services. Because the
Company's business now intersects with a number of areas in which
other companies have significantly greater technological, marketing,
and service expertise, the Company has focused on alliances with third
parties that have complementary products and skills as well as
acquisitions that target incremental business opportunities. The
Company believes that its alliance and acquisition strategies enable it
to provide best-in-class solutions while expanding its offerings of
complementary products. Each of these approaches, however, carries
significant risks. In its acquisition activities, the Company confronts
significant challenges in retaining key employees and reconciling
diverse corporate cultures, synchronizing product roadmaps and
business processes, and integrating logistics, marketing, product
development, and manufacturing operations to achieve greater
efficiencies. In developing business plans based on an alliance model,
the Company must rely on the performance of third parties, many of
whom may compete with the Company in other parts of their
businesses. In addition, particularly in attempting to expand into
offering full enterprise computing solutions for its customers through
an alliance model, the Company competes against businesses that are
vertically integrated and offer customers the convenience of dealing
with only one vendor for their enterprise-wide systems. Customers'
willingness to adopt the Company's more cost-effective solution will
depend upon the reputation for reliability and support that it and its
business allies earn in this area.
Technology Standards. Participants in the PC industry generally rely
on the creation and implementation of technology standards to win the
broadest market acceptance for their products. The Company must
successfully manage and participate in the development of standards
while continuing to differentiate its products in a manner valued by
customers. While industry participants generally accept, and may
encourage, the use of their intellectual property by third parties under
license, when intellectual property owned by competitors or suppliers
becomes accepted as an industry standard, the Company must obtain a
license, purchase components utilizing such technology from the
owners of such technology or their licensees, or otherwise acquire
rights to use such technology, which could result in increased
Company costs. In addition, delays in access to technology developed
by competitors and suppliers could slow the Company's design and
manufacture of components and subsystems that distinguish its
products.
Supplier Issues. In managing production levels, product transitions,
and developments in microprocessor and other component technology,
the Company must develop and implement effective strategies that
anticipate 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 material. There can be no assurance, however, that the
Company will acquire sufficient supplies of components, including
microprocessors, to deliver its products in volume in response to shifts
in customer demand. Order lead times and cancellation requirements
vary by supplier and component. Should the Company underestimate
the component supplies needed to meet demand, the Company could
be unable to meet customer demand. Should the Company
overestimate the component supplies needed to meet customer
demand, the Company's cash and profitability could be adversely
affected. Many of the components used in the Company's products,
particularly microprocessors and memory, experience steep price
declines over their product lives. If the Company is unable to manage
its purchases and utilization of such components efficiently to
maintain low inventory levels immediately prior to major price
declines, the Company could be unable to take immediate advantage of
such declines to lower its product costs, which could adversely affect
the Company's sales and gross margins. In addition, certain of the
Company's products are manufactured by third-party original
equipment manufacturers, which could fail to respond in a timely
manner to the Company's purchase orders or could fail to meet the
Company's quality standards. The Company attempts to maintain tight
control over production by third-party original equipment
manufacturers to ensure that these products comply with its standards
and schedule.
Intellectual Property Infringement. 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 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 or that the
cost of components are not adversely affected by legal proceedings in
which an adverse determination is made with respect to intellectual
property rights of the Company or one of its suppliers. To minimize
the impact of intellectual property claims by third parties, the
Company pursues an active patent portfolio development plan.
Product Distribution. During the first three quarters of 1996 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,
value-added resellers, mass merchandise stores, consumer electronic
outlets, computer superstores, and mail order, requires the Company to
increase its geographic presence and to provide increased levels of
sales and support interface with customers. The Company is exploring
with its resellers a variety of ways to market its products to different
types of customers. There can be no assurance, however, 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, particularly with respect to the levels of
service and support desired by customers to support systems products
in enterprise-wide computing solutions. While the Company
anticipates that its geographic expansion will continue and the number
of outlets for its products will continue to increase in the remainder of
1996 and in 1997, 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 and
politically volatile areas such as China, Hong Kong, Latin America,
and Eastern Europe, subject the Company to a number of economic
and other risks, such as currency devaluation, expropriation, and
financial instability among resellers in these regions. The Company
continues to evaluate its business operations in these regions and
attempts to take measures to limit its risks in these areas.
Credit Risks. 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 in the event that the 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 generally has experienced longer
accounts receivable cycles in its emerging markets, in particular China
and Latin America, when compared to its U.S. and European markets.
In the event that accounts receivable cycles in these developing
markets lengthen further or one or more of the Company's larger
resellers in these regions fail, the Company could be adversely
affected.
Currency and Hedging Risks. 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 primarily
through the use of forward exchange contracts. For certain of its
markets, particularly Latin America, the Company has determined that
ongoing hedging of its non-U.S. dollar net monetary assets is not cost
effective and instead attempts to minimize currency exposure risk
through working capital management. There can be no assurance that
such an approach will be successful, especially in the event of a
significant and sudden decline in the value of local currencies. From
time to time the Company 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 and Japan.
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,
the Company's 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 or
underestimates the hedging amount during a period when the dollar
strengthens, the Company could incur expense that would not be
balanced by the impact of exchange rate movements on its sales. All
currency contracts that are entered into by the Company are
components of its hedging programs and are entered into for the sole
purpose of hedging an existing or anticipated currency exposure, not
for speculation. 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.
Tax Rate. The Company's tax rate is heavily dependent upon the
proportion of earnings that are derived from its Singaporean
manufacturing subsidiary and its ability to reinvest those earnings
permanently outside the U.S. If the earnings of this subsidiary as a
percentage of the Company's total earnings were to decline
significantly from anticipated levels, or should the Company's ability
to reinvest these earnings be reduced, the Company's tax rate would
increase above the estimated 30%. In addition, should the Company's
intercompany transfer pricing with respect to its Singaporean
manufacturing subsidiary require significant adjustment due to audits
or regulatory changes, the Company's overall tax rate could increase.
Seasonality. 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 fourth quarter of the year, and
its financial results being more dependent on retail business
fluctuations.
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.
P A R T II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
3.1 Restated Certificate of Incorporation of Registrant
11 Statement regarding computation of per share earnings
27 EDGAR financial data schedule
(b) Report on Form 8-K dated October 17, 1996, containing the Company's
news release dated October 17, 1996, with respect to its financial results
for the period ended September 30, 1996.
All other items specified by Part II of this report are inapplicable and
accordingly have been omitted.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
November 1, 1996 Compaq Computer Corporation
/s/ EARL L. MASON
----------------------------------------------------
Earl L. Mason, Senior Vice President,
Finance, and Chief Financial Officer
(as authorized officer and as
principal financial officer)
EXHIBIT 11
COMPAQ COMPUTER CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
FOR THE PERIODS ENDED SEPTEMBER 30
Primary earnings Fully diluted earnings
per share per share
Nine Three Nine Three
months months months months
-------- -------- -------- --------
(in millions, except per share amounts)
1996
----
Shares:
Weighted average number of
shares outstanding 268.8 270.1 268.8 270.1
Incremental shares attributed
to outstanding options 8.3 8.3 10.0 9.0
-------- -------- -------- --------
277.1 278.4 278.8 279.1
======== ======== ======== ========
Earnings:
Net income $ 851 $ 350 $ 851 $ 350
======== ======== ======== ========
Earnings per common and common
equivalent share $ 3.07 $ 1.26 $ 3.05 $ 1.25
======== ======== ======== ========
1995
----
Shares:
Weighted average number of
shares outstanding 263.2 265.3 263.2 265.3
Incremental shares attributed
to outstanding options 9.6 9.9 11.3 9.9
-------- -------- -------- --------
272.8 275.2 274.5 275.2
======== ======== ======== ========
Earnings:
Net income $ 707 $ 245 $ 707 $ 245
======== ======== ======== ========
Earnings per common and common
equivalent share $ 2.59 $ 0.89 $ 2.57 $ 0.89
======== ======== ======== ========
<TABLE> <S> <C>
<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 SEPTEMBER 30, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,191
<SECURITIES> 0
<RECEIVABLES> 2,828
<ALLOWANCES> 0
<INVENTORY> 1,489
<CURRENT-ASSETS> 7,996
<PP&E> 1,174
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,344
<CURRENT-LIABILITIES> 3,283
<BONDS> 300
<COMMON> 962
0
0
<OTHER-SE> 4,575
<TOTAL-LIABILITY-AND-EQUITY> 9,344
<SALES> 12,687
<TOTAL-REVENUES> 12,687
<CGS> 9,814
<TOTAL-COSTS> 9,814
<OTHER-EXPENSES> 302<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60
<INCOME-PRETAX> 1,215
<INCOME-TAX> 364
<INCOME-CONTINUING> 851
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 851
<EPS-PRIMARY> 3.07
<EPS-DILUTED> 3.05
<FN>
<F1> Includes research and development costs.
</FN>
</TABLE>
RESTATED CERTIFICATE OF INCORPORATION
OF
COMPAQ COMPUTER CORPORATION
COMPAQ Computer Corporation, originally incorporated as GATEWAY
TECHNOLOGY, INC., a corporation duly organized and existing under the
laws of the State of Delaware (the Corporation), does hereby certify
that:
FIRST: The name of the Corporation is COMPAQ Computer Corporation,
which was originally incorporated as GATEWAY TECHNOLOGY, Inc.
SECOND: The original Certificate of Incorporation of the Corporation
was filed with the Secretary of State of the State of Delaware on February
16, 1982.
THIRD: This Restated Certificate of Incorporation has been duly
adopted in accordance with Section 245 of the General Corporation Law
of the State of Delaware.
FOURTH: This Restated Certificate of Incorporation of the Corporation
only restates and integrates and does not further amend the provisions of
the Corporations Certificate of Incorporation as heretofore amended or
supplemented, and there is no discrepancy between those provisions and the
provisions of this Restated Certificate of Incorporation.
FIFTH: The Restated Certificate of Incorporation is hereby restated
to read in its entirety as follows:
Article 1
The name of the corporation is: COMPAQ Computer Corporation.
Article 2
The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street in the City of Wilmington,
County of New Castle, Delaware 19801. The name of its registered agent
at such address is The Corporation Trust Company.
Article 3
The purpose for which the Corporation is organized is to engage
in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
Article 4
A. Authorized Shares and Classes of Stock:
The total number of shares of stock which the Corporation shall
have authority to issue is 1,010,000,000 shares composed of (i) 1,000,000,000
shares of Common Stock, par value $.01 per share (Common Stock); and (ii)
10,000,000 shares of Preferred Stock, par value $.01 per share (Preferred
Stock).
B. Designations, Rights, Preferences and Powers of Preferred Stock:
The designations, rights, preferences and powers in respect of the
shares of Preferred Stock shall be as follows:
1. Shares of Preferred Stock may be issued in one or more
series which may have such voting powers, full or limited, or no voting
power as the Board of Directors may determine.
2. Authority is hereby expressly granted to the Board of
Directors to fix from time to time, by resolution or resolutions providing
for the issuance of any series of Preferred Stock, the designations,
preferences and relative, participating, optional or other special rights
and qualifications, limitations or restrictions thereof.
3. Except as otherwise provided in any resolution or resolutions
of the Board of Directors providing for the issue of any particular series
of Preferred Stock, the number of shares of stock of any such series so set
forth in such resolution or resolutions may be increased or decreased (but
not below the number of shares of such series then outstanding) by a
resolution or resolutions adopted by the Board of Directors.
4. Except as otherwise provided in any resolution or resolutions
of the Board of Directors providing for the issue of any particular series of
Preferred Stock, Preferred Stock redeemed or otherwise acquired by the
Corporation shall assume the status of authorized but unissued Preferred
Stock and shall be unclassified as to series and may thereafter, subject to
the provisions of this Article 4 and to any restrictions contained in any
resolution or resolutions of the Board of Directors providing for the issue
of any such series of Preferred Stock, be reissued in the same manner as
other authorized but unissued Preferred Stock.
Article 5
The Board of Directors is authorized to adopt, amend or repeal the
by-laws of the Corporation. Election of directors need not be by written
ballot.
Article 6
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; provided, however, that the foregoing clause shall not
apply to any liability of a director (i) for any breach of the directors
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law, (iii) under Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which the director
derived an improper personal benefit. This Article 6 shall not eliminate
or limit the personal liability of a director for any act or omission
occurring prior to the date this Article 6 becomes effective. If the
Delaware General Corporation Law is hereafter amended to further eliminate
or limit the liability of a director of a corporation, then a director of
the Corporation, in addition to the circumstances set forth herein, shall
have no liability as a director (or such liability shall be limited) to the
fullest extent permitted by the Delaware General Corporation Law as so
amended. No repeal or modification of the foregoing provisions of this
Article 6 nor, to the fullest extent permitted by law, any modification of
law, shall adversely affect any right or protection of a director of the
Corporation existing at the time of such repeal or modification.
IN WITNESS WHEREOF, COMPAQ Computer Corporation has caused this
Certificate to be signed by Eckhard Pfeiffer, its President and Chief
Executive Officer, this 2nd day of October, 1996.
COMPAQ Computer Corporation
By: /s/ Eckhard Pfeiffer
Eckhard Pfeiffer, President
and Chief Executive Officer
