<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: November 21, 1997
COMPAQ COMPUTER CORPORATION
(Exact Name of Registrant as Specified in Charter)
DELAWARE 1-9026 76-0011617
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
20555 SH 249, HOUSTON, TEXAS 77070-2698
(Address of Principal Executive Offices)
(281) 370-0670
(Registrant's telephone number, including area code)
<PAGE> 2
ITEM 5. OTHER EVENTS.
On August 29, 1997, Compaq Computer Corporation ("Compaq") merged with
Tandem Computers Incorporated ("Tandem") in a stock-for-stock transaction
accounted for as a pooling of interests. This Report on Form 8-K contains
Compaq's financial statements as restated to reflect the merger with Tandem.
This report may be incorporated by reference into other reports or registration
statements to be filed by Compaq with the Securities and Exchange Commission.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheet at December 31, 1996 and 1995
Consolidated Statement of Income for the three years ended
December 31, 1996
Consolidated Statement of Cash Flows for the three years ended
December 31, 1996
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 1996
Notes to Consolidated Financial Statements
Financial Statement Schedule:
For the three years ended December 31, 1996:
Schedule II - Valuation and Qualifying Accounts
EXHIBITS:
27.1 Financial Data Schedule-December 31, 1996
27.2 Financial Data Schedule-December 31, 1995
27.3 Financial Data Schedule-December 31, 1994
<PAGE> 3
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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, 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 21, 1997, except as to Note 12, which is as of November 21, 1997
<PAGE> 4
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, In millions, except par value 1996 1995
- -----------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,008 $ 853
Short-term investments 1,073
Accounts receivable, less allowance of $247 and $118 3,718 3,683
Inventories 1,267 2,283
Deferred income taxes 836 398
Other current assets 187 245
------- -------
Total current assets 10,089 7,462
Property, plant and equipment, less accumulated depreciation 1,753 1,707
Other assets 489 468
------- -------
$12,331 $ 9,637
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,098 $ 1,539
Income taxes payable 322 192
Other current liabilities 2,016 1,549
------- -------
Total current liabilities 4,436 3,280
------- -------
Long-term debt 375 376
------- -------
Deferred income taxes 230 224
------- -------
Commitments and contingencies (Note 11)
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:
746.0 million shares at December 31, 1996 and
729.0 million shares at December 31, 1995) 1,779 1,543
Retained earnings 5,507 4,197
Accumulated translation adjustments 4 17
------- -------
Total stockholders' equity 7,290 5,757
------- -------
$12,331 $ 9,637
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended December 31, In millions, except per share amounts 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $20,009 $16,675 $12,605
Cost of sales 14,855 12,291 8,885
------- ------- -------
5,154 4,384 3,720
------- ------- -------
Selling, general and administrative expense 2,507 2,186 1,859
Research and development costs 695 552 458
Purchased in-process technology 241
Restructuring charge 52
Other income and expense, net 17 79 50
------- ------- -------
3,271 3,058 2,367
------- ------- -------
Income before provision for income taxes 1,883 1,326 1,353
Provision for income taxes 565 433 365
------- ------- -------
Net income $ 1,318 $ 893 $ 988
------- ------- -------
Earnings per common and common equivalent share:
Primary $ 1.74 $ 1.20 $ 1.35
------- ------- -------
Assuming full dilution $ 1.72 $ 1.19 $ 1.34
------- ------- -------
Shares used in computing earnings per common and common equivalent share:
Primary 757.8 746.2 731.5
------- ------- -------
Assuming full dilution 765.7 749.7 735.6
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31, In millions 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 20,165 $ 16,145 $ 12,012
Cash paid to suppliers and employees (15,702) (14,508) (11,673)
Interest and dividends received 126 71 36
Interest paid (106) (113) (78)
Income taxes paid (953) (560) (341)
-------- -------- --------
Net cash provided by (used in) operating activities 3,530 1,035 (44)
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment, net (484) (565) (470)
Purchases of short-term investments (1,401)
Proceeds from short-term investments 328
Acquisition of businesses, net of cash acquired (22) (318)
Other, net (75) (29) (54)
-------- -------- --------
Net cash used in investing activities (1,654) (912) (524)
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock pursuant to stock option plans 131 123 126
Tax benefit associated with stock options 91 65 55
Issuance of debt 120 66 374
Repayments of debt (84) (68) (85)
-------- -------- --------
Net cash provided by financing activities 258 186 470
-------- -------- --------
Effect of exchange rate changes on cash 21 (42) (44)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,155 267 (142)
Cash and cash equivalents at the beginning of the year 853 586 728
-------- -------- --------
Cash and cash equivalents at the end of the year $ 3,008 $ 853 $ 586
-------- -------- --------
Reconciliation of net income to net cash provided by (used in) operating
activities:
Net income $ 1,318 $ 893 $ 988
Depreciation and amortization 483 384 332
Provision for bad debts 160 47 38
Deferred income taxes (405) (24) (135)
Loss (gain) on disposal of assets (9) 8 6
Purchased in-process technology 241
Restructuring charge 52
Exchange rate effect 14 33 46
Increase in accounts receivable (228) (910) (992)
Decrease (increase) in inventories 1,014 (144) (884)
Decrease (increase) in other current assets 29 (50) (78)
Increase in accounts payable 562 479 248
Increase (decrease) in income taxes payable 131 (66) 171
Increase in other current liabilities 409 144 216
-------- -------- --------
Net cash provided by (used in) operating activities $ 3,530 $ 1,035 $ (44)
-------- -------- --------
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year ended December 31, In millions 1995
- -------------------------------------------------------------------
<S> <C>
Acquisitions (Note 2)
Fair value of assets acquired $ 432
Liabilities assumed (69)
Stock issued (12)
Options assumed (14)
--------
Cash paid 337
Less cash acquired (19)
--------
Net cash paid for acquisitions $ 318
--------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
-----------------------------
Par Value Accumulated
Number of and Capital Translation Retained
In millions, except number of shares in thousands Shares in Excess of Par Adjustment Earnings Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 691,921 $ 1,160 $ 3 $ 2,306 $ 3,469
Issuance pursuant to stock option plans 21,335 126 126
Tax benefit associated with stock options 55 55
Translation adjustments 6 6
Net income 988 988
------- ------- --- ------- -------
Balance, December 31, 1994 713,256 1,341 9 3,294 4,644
Issuance pursuant to stock option plans 16,356 123 123
Issuance pursuant to business acquired 602 12 12
Tax benefit associated with stock options 65 65
Translation adjustments 8 8
Other (1,260) 2 10 12
Net income 893 893
------- ------- --- ------- -------
Balance, December 31, 1995 728,954 1,543 17 4,197 5,757
Issuance pursuant to stock option plans 17,048 145 145
Tax benefit associated with stock options 91 91
Translation adjustments (13) (13)
Other (8) (8)
Net income 1,318 1,318
------- ------- --- ------- --------
Balance, December 31, 1996 746,002 $ 1,779 $ 4 $ 5,507 $ 7,290
------- ------- --- ------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Description of business - Founded in 1982, Compaq Computer Corporation is a
worldwide information technology company. Compaq is the fifth largest computer
company in the world and the largest global supplier of personal computers.
Compaq develops and markets hardware, software, solutions and services,
including industry-leading enterprise computing solutions, fault-tolerant
business-critical solutions, networking and communication products, commercial
desktop and portable products and consumer PCs. Compaq products are sold and
supported in more than 100 countries through a network of authorized Compaq
marketing partners. Compaq markets its products primarily to business, home,
government, and education customers. References to the "Company" mean Compaq and
its subsidiaries.
Principles of consolidation - The consolidated financial statements include the
accounts of Compaq and its subsidiaries. In August 1997, Compaq merged with
Tandem Computers Incorporated ("Tandem") in a pooling of interests transaction.
The financial data included in these financial statements have been restated to
reflect the merger with Tandem. All significant intercompany transactions have
been eliminated.
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the related reported amounts of sales and expenses during the
reporting period. Actual results could differ from those estimates. Management
believes that the estimates are reasonable.
Cash and cash equivalents - Cash and cash equivalents include cash on hand,
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. Cash equivalents are stated at cost
which approximates fair value.
Short-term investments - Short-term investments include certificate of deposits,
commercial paper and other investments having maturities longer than three
months at date of acquisition. For reporting purposes, such investments 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.
Long-lived assets - In accordance with Statement of Financial Accounting
Standards No. 121 ("FAS 121"), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, the Company reviews for the
impairment of long-lived assets and certain identifiable intangibles whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Under FAS 121, an impairment loss would be recognized
when estimated future cash flows expected to result from the use of the asset
and its eventual disposition is less than its carrying amount. No such
impairment losses have been identified by the Company.
<PAGE> 9
Software development costs, purchased technology, other intangible assets and
goodwill - The Company capitalizes software development costs when the resulting
products become "technologically feasible" and amortizes those costs when, and
as, the products are shipped. The annual amortization of the capitalized amounts
is the greater of the amount computed based on the estimated revenue
distribution over the products' remaining life or a straight-line method,
generally three years, from the date of product release. The amounts of
unamortized software development costs included in other assets at December 31,
1996 and 1995, were $149 million and $129 million, respectively. The
amortization expense for 1996, 1995 and 1994 was $58 million, $44 million and
$34 million, respectively. Purchased technology, other intangible assets,
including licenses and trademarks, and goodwill are included in other assets and
are carried at cost less accumulated amortization, which is being provided on a
straight-line basis over the economic lives of the respective assets, generally
three to seven years. Accumulated amortization was $193 million and $159 million
at December 31, 1996 and 1995, respectively.
Sales recognition - The Company recognizes sales at the time products are
shipped to its customers. Provision is made currently for estimated product
returns and price protection which may occur under programs the Company has with
its customers and under floor planning arrangements with third-party finance
companies. When significant obligations remain after products are delivered,
revenue is recognized only after such obligations are fulfilled. Product support
and other revenues are recognized ratably over the contractual period or as the
services are provided.
Post sales support and warranty expense - The Company provides currently for the
estimated cost that may be incurred for post sales support and product
warranties.
Advertising costs - Advertising costs are charged to operations when incurred.
The cost of direct-response advertising is not significant. Advertising expenses
for 1996, 1995 and 1994 were $175 million, $224 million and $217 million,
respectively.
Foreign currency - The Company's foreign subsidiaries (other than those acquired
in the merger with Tandem) have the U.S. dollar designated as their functional
currency. Financial statements of these 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 that approximate the rates in effect on the transaction
dates. Gains and losses from this process are included in the Company's
consolidated statement of income. The Tandem foreign subidiaries have designated
the local currency as their functional currency. For these subsidiaries, the
assets and liabilities are translated into U.S. dollars for consolidation
purposes at current exchange rates. Sales and other expense elements are
translated at average rates of exchange prevailing during the period. In
addition, all ongoing adjustments resulting from the process of translating such
subsidiaries' financial statements into U.S. dollars have been accumulated and
recorded within a separate component of stockholders' equity.
<PAGE> 10
The Company hedges 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 either to income or to accumulated translation adjustments depending
upon the functional currency, 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.
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, the Company sometimes utilizes
forward contracts to protect the Company from the effects of currency
fluctuations on anticipated but not firmly committed sales which are expected to
occur within a three-month period. These forward contracts generally do not
extend beyond the end of any quarter or year.
Income taxes - The provision for income taxes is computed based on the pretax
income included in the consolidated statement of income. 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 pursuant to the treasury stock method.
Stock-based compensation - The Company adopted Statement of Financial Accounting
Standard No. 123 ("FAS 123"), Accounting for Stock-Based Compensation beginning
with the Company's first quarter of 1996. Upon adoption of FAS 123, the Company
continued to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB No. 25,
Accounting for Stock Issued to Employees, and has provided in Note 9 pro forma
disclosures of the effect on net income and earnings per share as if the fair
value-based method prescribed by FAS 123 had been applied in measuring
compensation expense.
Recent pronouncement - In 1996 Financial Accounting Standard No. 125 ("FAS 125")
Accounting for Transfer and Servicing of Financial Assets and Extinguishments of
Liabilities was issued. FAS 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996. The Company will adopt FAS 125 in 1997. Adoption of FAS 125 is not
expected to have a material effect on the Company's consolidated financial
position or operating results.
Reclassifications - Certain amounts have been reclassified to conform to the
1996 presentation.
<PAGE> 11
NOTE 2 - ACQUISITIONS:
During 1995 the Company acquired two companies that develop, manufacture, and
supply fast ethernet hubs, switches and related products, and a small software
company. The aggregate purchase price of $386 million consisted of the
assumption of certain stock options, the issuance of 601,555 shares of Compaq
common stock and $359 million in cash of which $22 million was paid in 1996.
The acquisitions were accounted for as purchases and, accordingly, the operating
results of the acquired businesses and the estimated fair market values of the
acquired assets and liabilities were included in the Company's consolidated
financial statements from the dates of acquisition. The aggregate purchase price
plus $5 million of costs directly attributable to the completion of the
acquisitions, has been allocated to the assets and liabilities acquired. The
aggregate purchase price included $241 million which represented the value of
in-process technology that had not yet reached technological feasibility and had
no alternative future use. This amount was expensed in the Company's
consolidated statement of income during the fourth quarter of 1995. In addition,
the aggregate purchase price included $126 million representing purchased
technology, other identifiable intangibles and goodwill which has been included
in other assets.
The following summary, prepared on a pro forma basis, reflects the Company's
operating results as if these entities had been acquired as of the beginning of
the periods presented. The summary includes the impact of certain adjustments
such as goodwill amortization and estimated changes in interest income due to
cash outlays associated with the transactions and the related income tax effects
thereof:
<TABLE>
<CAPTION>
Year ended December 31, In millions 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales $16,769 $12,717
Net income 1,096 958
Net income per share 1.46 1.30
</TABLE>
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisitions had been in effect for the periods presented.
NOTE 3 - INVENTORIES:
Inventories consisted of the following components:
<TABLE>
<CAPTION>
December 31, In millions 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw material and work-in-process $ 634 $1,122
Finished goods 633 1,161
------ ------
$1,267 $2,283
------ ------
</TABLE>
<PAGE> 12
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are summarized below:
<TABLE>
<CAPTION>
December 31, In millions 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $212 $222
Buildings 879 814
Machinery and equipment 2,010 1,835
Furniture and fixtures 145 133
Leasehold improvements 123 116
Construction-in-progress 127 159
------ ------
3,496 3,279
Less accumulated depreciation 1,743 1,572
------ ------
$1,753 $1,707
------ ------
</TABLE>
Interest aggregating $8 million, $7 million and $3 million was capitalized and
added to the cost of the Company's property, plant and equipment in 1996, 1995
and 1994, respectively.
Depreciation expense totaled $387 million, $326 million and $278 million in
1996, 1995 and 1994, respectively.
NOTE 5 - OTHER CURRENT LIABILITIES:
The estimated costs which may be incurred for post sales support and product
warranties of $478 million and $355 million and deferred revenue of $136 million
and $171 million were included in other current liabilities at December 31, 1996
and 1995, respectively.
During 1992, 1993 and 1996, Tandem took separate restructuring actions including
a reduction of headcount, consolidation of facilities and disposal of assets.
The 1996 restructuring action resulted in a charge to income of $52 million. At
December 31, 1996, the Company had remaining restructuring accruals of $40
million included in other current liabilities and $16 million reflected as a
reduction of net property, plant and equipment.
<PAGE> 13
NOTE 6 - CREDIT AGREEMENTS AND FINANCING ARRANGEMENTS:
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31, In millions 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Notes (6.5% and 7.25%) $300 $300
Installment notes due through 2001, collaterized by lease
receivables (8.5%) 127 120
Other (2.2%-14.5%) 42 21
---- ----
469 441
Less current portion 94 65
---- ----
$375 $376
---- ----
</TABLE>
In October 1996, the Company entered into agreements for a $1.5 billion
syndicated credit facility (of which $500 million expires in October 1997 and $1
billion expires in October 2001) that remained unused at December 31, 1996. The
Company has a $750 million commercial paper program, which is supported by the
$1.0 billion portion of the syndicated credit facility. No commercial paper was
outstanding at December 31, 1996.
Repayments on long-term debt are scheduled as follows (in millions): $94 (1997),
$42 (1998), $177 (1999), $5 (2000) and $151 (thereafter).
NOTE 7 - OTHER INCOME AND EXPENSE:
Other income and expense consisted of the following components:
<TABLE>
<CAPTION>
Year ended December 31, In millions 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income $(126) $ (71) $ (36)
Interest expense (income) associated with hedging (3) 18 9
Other interest expense 106 94 72
Currency losses, net 14 33 46
Other, net 26 5 (41)
----- ----- -----
$ 17 $ 79 $ 50
----- ----- -----
</TABLE>
<PAGE> 14
NOTE 8 - PROVISION FOR INCOME TAXES:
The components of income before provision for income taxes were as follows:
<TABLE>
<CAPTION>
Year ended December 31, In millions 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ 929 $ 504 $ 685
Foreign 954 822 668
------ ------ ------
$1,883 $1,326 $1,353
------ ------ ------
</TABLE>
The provision for income taxes charged to operations was as follows:
<TABLE>
<CAPTION>
Year ended December 31, In millions 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense
U.S. federal $ 672 $ 274 $ 304
State and local 34 12 8
Foreign 238 183 142
------- ------- -------
Total current 944 469 454
------- ------- -------
Deferred tax expense
U.S. federal (332) (8) (69)
State and local (19) (2) (1)
Foreign (28) (26) (19)
------- ------- -------
Total deferred (379) (36) (89)
------- ------- -------
Total provision $ 565 $ 433 $ 365
------- ------- -------
</TABLE>
Total income tax expense for 1996, 1995 and 1994 resulted in effective tax rates
of 30%, 33% and 27%, respectively. The reasons for the differences between these
effective tax rates and the U.S. statutory rate of 35% are as follows:
<TABLE>
<CAPTION>
Year ended December 31, In millions 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at U.S. statutory rate $ 659 $ 464 $ 474
Foreign tax effect, net (105) (73) (92)
Non-deductible purchased in-process technology 85
Other, net 11 (43) (17)
----- ----- -----
$ 565 $ 433 $ 365
----- ----- -----
In connection with the Company's 1995 acquisitions, the Company recorded a $241
million non-recurring, non-tax deductible charge for purchased in-process
technology which resulted in an increase in the 1995 effective tax rate from 26%
to 33%.
</TABLE>
<PAGE> 15
The Company benefits from a tax holiday in Singapore which expires in 2001, with
a potential extension to August 2004 if certain cumulative investment levels and
other conditions are met. During the first quarter of 1993, the Company
determined that a portion of the undistributed earnings of its Singaporean
manufacturing subsidiary would be reinvested indefinitely. As a result of this
determination, no provision for U.S. income tax was made on $335 million, $337
million and $218 million of earnings of this subsidiary during 1996, 1995 and
1994, respectively. 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. The Company estimates an additional
tax provision of $367 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 $0.15, $0.16 and $0.10 on a fully diluted basis in 1996, 1995 and 1994,
respectively.
Deferred tax assets (liabilities) at December 31, 1996 and 1995 are comprised of
the following:
<TABLE>
<CAPTION>
Year ended December 31, In millions 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Post sales support and warranty accruals $ 159 $ 131
Receivable allowances 239 85
Stock option compensation 84 56
Difference arising from different tax and financial reporting year ends 34
Inventory adjustments 137 49
Restructuring 27 32
Deferred income 13 17
Loss carryforwards 121 107
Credit carryforwards 107 97
Depreciation and property, plant and equipment basis differences 20 17
Other 124 86
------- -------
Gross deferred tax assets 1,065 677
------- -------
Unremitted earnings of foreign subsidiaries (225) (213)
Difference arising from different tax and financial reporting year ends (33)
Depreciation and property, plant and equipment basis differences (25) (30)
Capitalized software (54) (43)
Other (50) (54)
------- -------
Gross deferred tax liabilities (354) (373)
------- -------
Deferred tax asset valuation allowance (121) (119)
------- -------
$ 590 $ 185
------- -------
</TABLE>
<PAGE> 16
NOTE 9 - STOCKHOLDERS' EQUITY AND EMPLOYEE BENEFIT PLANS:
Equity incentive plans - At December 31, 1996, there were 129,068,000 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. Options granted under the plans must be exercised not later than ten
years from the date of grant. Options on 35,167,000, 37,005,000 and 35,234,000
shares were exercisable at December 31, 1996, 1995 and 1994 with a weighted
average exercise price of $11.13, $9.63 and $9.15, respectively.
In connection with the Company's 1995 acquisitions, the Company assumed certain
outstanding options to purchase common stock of the acquired companies and
exchanged them for options to acquire 1,323,000 shares of the Company's common
stock at exercise prices of $2.60 to $13.10 per share.
The following table summarizes activity under the employee stock option plans
for each of the three years ended December 31, 1996:
<TABLE>
<CAPTION>
Shares Weighted Average
In Thousands Price Per Share Price Per Share
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding, December 31, 1993 92,057 $ 7.75
Options granted 14,337 $11.46 - 35.48 15.28
Options lapsed or canceled (3,640) 11.40
Options exercised (20,540) 0.31 - 36.20 5.66
---------
Options outstanding, December 31, 1994 82,214 9.45
Options granted 17,850 2.60 - 37.62 19.28
Options lapsed or canceled (3,604) 13.43
Options exercised (15,880) 0.39 - 36.20 7.03
---------
Options outstanding, December 31, 1995 80,580 11.93
Options granted 23,358 15.45 - 44.77 28.36
Options lapsed or canceled (7,810) 17.21
Options exercised (16,255) 0.75 - 26.91 7.02
---------
Options outstanding, December 31, 1996 79,873 17.19
---------
</TABLE>
There were 49,195,000, 63,960,000 and 44,505,000 shares available for grant
under the plans at December 31, 1996, 1995 and 1994, respectively.
Compaq has a Stock Option Plan for Non-Employee Directors (the "Director Plan").
At December 31, 1996, there were 2,945,000 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
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 common 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
<PAGE> 17
ten years after the grant date. Options on 1,357,000, 1,155,000 and 906,000
shares were exercisable under the Director Plan at December 31, 1996, 1995 and
1994 with a weighted average exercise price of $9.18, $6.85 and $5.42,
respectively. The expense resulting from options granted at 50% of the price of
the Company's common stock at the grant date is charged to operations over the
vesting period.
Activity under the Director Plan for each of the three years ended December 31,
1996 was as follows:
<TABLE>
<CAPTION>
Weighted
Shares Average
In Thousands Price Per Share Price Per Share
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding, December 31, 1993 1,218 5.29
Options granted 284 7.25 - 25.00 13.75
Options exercised (233) 1.02 - 8.13 4.18
-----
Options outstanding, December 31, 1994 1,269 7.38
Options granted 317 7.80 - 34.77 16.08
Options exercised (18) 1.02 - 7.25 3.24
-----
Options outstanding, December 31, 1995 1,568 9.18
Options granted 345 9.42 - 20.48 18.30
Options exercised (105) 1.02 - 13.40 2.35
-----
Options outstanding, December 31, 1996 1,808 11.32
-----
</TABLE>
There were 1,137,000, 1,420,000 and 1,735,000 shares available for grant under
the Director Plan at December 31, 1996, 1995 and 1994, respectively.
The following table summarizes significant ranges of outstanding and exercisable
options at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Ranges of Shares Remaining Exercise Shares Exercise
Exercise Prices In thousands Life in Years Price In thousands Price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Under $4.00 6,905 3.9 $3.41 6,828 $3.41
4.01 to 8.00 16,292 5.0 5.91 13,205 5.83
8.01 to 12.00 6,800 6.7 9.56 3,735 9.47
12.01 to 16.00 10,172 7.8 15.22 3,843 15.18
16.01 to 20.00 15,778 8.6 19.17 3,936 19.05
20.01 to 24.00 3,340 8.1 22.31 1,488 22.79
24.01 to 28.00 6,670 7.5 25.87 2,301 26.57
28.01 to 32.00 14,691 9.7 31.76 386 30.91
Over 32.00 1,033 4.0 36.96 802 36.51
</TABLE>
Prior to the merger with the Company, Tandem had an employee stock purchase plan
which entitled employees to purchase Tandem common stock at 85% of fair market
value as of the first or last trading day for each quarterly participating
period. Employees purchased 676,000, 460,000 and 583,000 shares as converted
into the Company's common stock for aggregate proceeds of $11 million, $11
million and $10 million, respectively in 1996, 1995 and 1994.
<PAGE> 18
The weighted average fair value per share of stock based compensation issued
during 1996, 1995 and 1994 was $13.09, $10.17 and $7.79, respectively. The fair
value was estimated using the Black-Scholes model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected life (in years) 5 5 5
Interest rate 6.12% 5.76% 7.58%
Volatility 43.97% 46.40% 46.30%
Dividend yield 0% 0% 0%
</TABLE>
Stock based compensation costs would have reduced pretax income by $47.9 million
and $11.6 million in 1996 and 1995 ($31.1 million and $7.5 million after tax and
$.03 and $.01 per share) if the fair values of such compensation in that year
had been recognized as compensation expense on a straight-line basis over the
vesting period of the grant. The pro forma effect on net income for 1996 and
1995 is not representative of the pro forma effect on net income in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995.
Investment Plans - The Company has investment plans available to all domestic
employees and intended to qualify as deferred compensation plans under Section
401(k) of the Internal Revenue Code of 1986. Compaq employees may contribute to
the plan up to 14% of their salary with a yearly maximum not to exceed the
maximum allowable by the Internal Revenue Service. The Company will match
employee contributions for an amount up to 6% of each employee's base salary.
Tandem employees may contribute up to 18% of their salary with a company match
ranging from 63% to 100% of the employee's contribution with a maximum match of
2.5% of the employee's earnings. 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 over
their vesting period. Amounts charged to expense were $36 million, $30 million
and $27 million in 1996, 1995 and 1994, respectively.
Incentive compensation plan - Compaq has an incentive compensation plan for the
majority of its employees. Payments under the plan are based on 6% of net income
from operations, as defined, and are made semiannually. The amount expensed
under the plan was $76 million, $59 million and $51 million in 1996, 1995 and
1994, respectively.
<PAGE> 19
NOTE 10 - CERTAIN MARKET AND GEOGRAPHICAL DATA:
The Company has subsidiaries in various foreign countries that manufacture and
sell the Company's products in their respective geographic areas. Summary
information with respect to the Company's geographic operations in 1996, 1995
and 1994 follows:
<TABLE>
<CAPTION>
United States Other
In millions and Canada Europe Countries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Sales to customers $ 10,654 $ 6,480 $ 2,875 $ 20,009
Intercompany transfers 2,467 380 1,674 $ (4,521)
-------- -------- -------- -------- --------
$ 13,121 $ 6,860 $ 4,549 $ (4,521) $ 20,009
-------- -------- -------- -------- --------
Income from operations $ 1,162 $ 396 $ 332 $ 18 $ 1,908
-------- -------- -------- --------
Corporate expenses, net (25)
--------
Pretax income $ 1,883
--------
Identifiable assets $ 4,532 $ 2,241 $ 1,570 $ (93) $ 8,250
-------- -------- -------- --------
General corporate assets 4,081
--------
Total assets $ 12,331
--------
1995
Sales to customers $ 8,256 $ 5,890 $ 2,529 $ 16,675
Intercompany transfers 2,009 330 1,681 $ (4,020)
-------- -------- -------- -------- --------
$ 10,265 $ 6,220 $ 4,210 $ (4,020) $ 16,675
-------- -------- -------- -------- --------
Income from operations $ 687 $ 740 $ 295 $ 8 $ 1,730
-------- -------- -------- --------
Corporate expenses, net (1) (404)
--------
Pretax income $ 1,326
--------
Identifiable assets $ 4,980 $ 2,215 $ 1,686 $ (97) $ 8,784
-------- -------- -------- --------
General corporate assets 853
--------
Total assets $ 9,637
--------
1994
Sales to customers $ 6,424 $ 4,287 $ 1,894 $ 12,605
Intercompany transfers 1,930 198 1,666 $ (3,794)
-------- -------- -------- -------- --------
$ 8,354 $ 4,485 $ 3,560 $ (3,794) $ 12,605
-------- -------- -------- -------- --------
Income from operations $ 668 $ 498 $ 300 $ 9 $ 1,475
-------- -------- -------- --------
Corporate expenses, net (122)
--------
Pretax income $ 1,353
--------
Identifiable assets $ 4,020 $ 1,913 $ 1,453 $ (110) $ 7,276
-------- -------- -------- --------
General corporate assets 586
--------
Total assets $ 7,862
--------
</TABLE>
(1) Includes a $241 million non-recurring, non-tax deductible charge for
purchased in-process technology in connection with acquisitions in 1995.
<PAGE> 20
NOTE 11 - COMMITMENTS, CONTINGENCIES, FINANCIAL INSTRUMENTS AND FACTORS THAT MAY
AFFECT FUTURE OPERATIONS:
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.
The Company may, from time to time, hedge commitments for inventory purchases
and capital expenditures and other items constituting firm commitments. Any gain
or loss, if realized, or cost related to these contracts are recorded as part of
inventory or capital items upon acquisition. At December 31, 1996, the Company
had $92 million in forward contracts related to these commitments. At December
31, 1995, the Company had $108 million in forward contracts, $26 million in
purchased options and $72 million in yen-denominated investments related to
hedge commitments for inventory purchases.
The Company's program to reduce currency exposure associated with the net
monetary assets of the Company's international subsidiaries using the U.S.
dollar as the functional currency includes agreements to exchange various
foreign currencies for U.S. dollars. At December 31, 1996 and 1995, such
agreements to sell foreign currencies included forward contracts aggregating
$1.2 billion and $1.4 billion, respectively. Unrealized and realized gains and
losses resulting from those contracts designated as net monetary asset hedges
are included in other income and expense in the Company's consolidated statement
of income 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
consolidated balance sheet and approximate the fair value of such contracts at
December 31, 1996 and 1995. The maturity dates of the forward contracts which
were outstanding at December 31, 1996 extended from two days to five 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. Option contracts aggregating $63 million and $323 million were
outstanding at December 31, 1996 and 1995, respectively, related to the hedge of
such sales for a nine-month period. The unrealized gains deferred on these
contracts were not material. In addition, 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 some of
its international marketing subsidiaries which are expected to occur within a
three-month period. For the Tandem subsidiaries, forward contracts aggregating
$64 million and $49 million were outstanding at December 31, 1996 and 1995,
respectively. Gains, losses and premium costs associated with such purchased
currency option contracts and forward contracts are reflected as a component of
sales in the Company's consolidated statement of income.
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.
<PAGE> 21
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, 1996 and 1995
consolidated balance sheets approximate carrying value at these dates. The fair
value of the Company's long-term debt at December 31, 1996 and 1995 was
estimated to be $377 million and $388 million, respectively, compared with its
carrying value of $375 million and $376 million, respectively.
Concentration of credit risk - The Company's cash, cash equivalents, short-term
investments 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. If the financial condition and operations of these
resellers deteriorate, the Company's operating results could be adversely
affected. At December 31, 1996, the receivable balances from the Company's five
largest resellers represented approximately 22% of 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's operating results could be
adversely affected.
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 $40 million and $55
million were outstanding at December 31, 1996 and 1995, respectively.
Tandem offers lease financing of selected products to its customers. Sales-type
leases are originated by the Company and either sold on a nonrecourse basis or
used as collateral for borrowings from certain third-party financial
institutions. Generally, Tandem receives all proceeds at the inception of the
lease. The third-party financial institution assumes the credit risk and the
administrative responsibility for the collection of the lease receivables. In
the event of a default by a lessee, the financial institutions' only recourse is
generally limited to the collaterized computer equipment. Tandem may be required
to use its "best efforts" to remarket the computer equipment.
Tandem has pledged certain of its accounts receivable pursuant to a purchase
agreement with a group of financial institutions. Tandem retains collection and
servicing responsibilities and the risk of credit loss. The agreement allows for
maximum borrowings of up to $100 million and expires in October 1997. There were
no amounts outstanding at the end of the year.
<PAGE> 22
Factors that may affect future operations - The Company participates in a highly
volatile industry that is characterized by fierce industry-wide competition for
market share. Industry participants confront 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. The Company's operating results could be adversely
affected should the Company be unable to successfully integrate acquired
entities, anticipate customer demand accurately, maintain short design cycles
while meeting evolving industry performance standards, manage its product
transitions, inventory levels and manufacturing processes efficiently,
distribute its products quickly in response to customer demand, differentiate
its products from those of its competitors or compete successfully in the
markets for its new products.
Significant numbers of components 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.
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 consolidated financial position, operating results or cash flows.
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 1996, 1995 and 1994 was $128 million, $123
million and $102 million, respectively.
The Company's minimum rental commitments under noncancelable operating leases at
December 31, 1996, were $90 million in 1997, $70 million in 1998, $47 million in
1999, $35 million in 2000, $32 million in 2001 and $285 million thereafter.
<PAGE> 23
NOTE 12 -SUBSEQUENT EVENTS
On August 29, 1997, Compaq merged with Tandem in a stock for stock transaction
accounted for as a pooling of interests. Tandem provides its customers with
reliable, scaleable, fault-tolerant enterprise computer systems and
client/server solutions. In connection with the merger, Compaq issued 62.8
million shares of common stock, based upon an exchange ratio of 0.525 shares of
Compaq common stock for each share of Tandem common stock. Merger related costs
of $44 million were incurred as a result of the transaction. The financial data
included in this report have been restated to reflect the merger with Tandem.
There were no material transactions between Compaq and Tandem during the periods
prior to the merger. The consolidated financial data for the years ended
December 31, 1996, 1995 and 1994 includes the results of Tandem for the years
ended September 30, 1996, 1995 and 1994.
The following information presents certain income statement data of the separate
companies for the periods preceding the acquisition:
<TABLE>
<CAPTION>
Year ended December 31, In millions 1996 1995 1994
- -------------------------------------------------------------------------------
Sales:
<S> <C> <C> <C>
Compaq $ 18,109 $ 14,755 $ 10,866
Tandem 1,900 1,920 1,739
-------- -------- --------
$ 20,009 $ 16,675 $ 12,605
-------- -------- --------
Net Income:
Compaq $ 1,313 $ 789 $ 867
Tandem (22) 107 170
Adjustments 27 (3) (49)
-------- -------- --------
$ 1,318 $ 893 $ 988
-------- -------- --------
</TABLE>
The consolidated financial results presented above include adjustments to
Tandem's deferred tax valuation allowance related to realization of certain
deferred tax assets as a combined entity with Compaq.
In May 1997, the Company completed a tender offer for Microcom, Inc., a
manufacturer of remote access technologies and solutions. The aggregate purchase
price of $288 million consisted of $278 million in cash and the assumption of
certain employee stock options. The transaction was accounted for as a purchase.
Accordingly, the results of operations of the acquired business and the fair
market values of the acquired assets and liabilities were included in the
Company's financial statements from the date of acquisition. The aggregate
purchase price has been allocated to the assets and liabilities acquired. The
aggregate purchase price included $208 million, representing the value of
in-process technology that had not yet reached technological feasibility and had
no alternative future use. This amount was expensed in the Company's
consolidated statement of income during 1997. In addition, the aggregate
purchase price included approximately $58 million representing purchased
technology and other identifiable intangibles. Pro forma statements of
operations reflecting the acquisition of Microcom are not shown as they would
not differ materially from reported results.
<PAGE> 24
In May 1997, Compaq completed a cash tender offer for all of its outstanding
$150 million 6 1/2% Senior Notes Due March 15, 1999 and $150 million 7 1/4%
Senior Notes Due March 15, 2004. Ninety-eight percent or $148 of the 1999 Notes
were tendered and ninety-seven percent or $145 million of the 2004 Notes were
tendered. Compaq paid an aggregate of $298 million (excluding accrued interest)
for the notes tendered.
On July 28, 1997, the Company effected a five-for-two stock split in the form of
a stock dividend. Shareholders of record as of July 14, 1997 received three
additional shares of common stock for every two shares they owned on that date.
Share and per share data for all periods presented herein have been adjusted to
give effect to the five-for-two split.
On September 22, 1997, the Company entered into a five-year $3 billion unsecured
revolving credit facility and a one-year $1 billion unsecured revolving credit
facility. In conjunction with the closing of the new facilities, the Company
retired two existing secured revolving credit facilities totaling $1.5 billion.
On October 16, 1997, the Company announced that the Board of Directors approved
a two-for-one stock split in the form of a stock dividend, subject to
shareholder approval of an increase in authorized shares of common stock.
Subject to shareholder approval, shareholders of record as of December 31, 1997
will receive one additional share of common stock for every share they own on
that date, effective January 20, 1998. Share and per share data for all periods
presented herein have not been adjusted to give effect to the two-for-one split.
On October 16, 1997, the Company announced that the Board of Directors approved
a cash dividend of $0.03 per share ($0.015 per share post split) of common
stock. Shareholders of record as of December 31, 1997 will receive the cash
dividend. The Company anticipates that the cash dividend will be paid on a
quarterly basis. The Company also announced the establishment of a dividend
reinvestment plan and a direct purchase plan.
<PAGE> 25
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 hereunto duly authorized.
November 19, 1997 COMPAQ COMPUTER CORPORATION
By: /s/ EARL L. MASON
--------------------------------
Earl L. Mason
Senior Vice President and Chief
Financial Officer
<PAGE> 26
SCHEDULE II
COMPAQ COMPUTER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Year ended December 31,
In millions 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance, beginning of period $ 118 $ 93 $ 67
Additions charged to expense 160 47 38
Reductions (31) (22) (12)
--------- ---------- ----------
Balance, end of period $ 247 $ 118 $ 93
--------- ---------- ==========
DEFERRED TAX ASSET VALUATION ALLOWANCE
Balance, beginning of period $ 119 $ 107 $ 82
Additions charged to expense 9 12 25
Reductions (7)
--------- ---------- ----------
Balance, end of period $ 121 $ 119 $ 107
--------- ---------- ==========
</TABLE>
<PAGE> 27
EXHIBIT INDEX
EXHIBITS
NUMBER DESCRIPTION
-------- -----------
27.1 Financial Data Schedule-December 31, 1996
27.2 Financial Data Schedule-December 31, 1995
27.3 Financial Data Schedule-December 31, 1994
<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 DECEMBER 31, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,008
<SECURITIES> 1,073
<RECEIVABLES> 3,965
<ALLOWANCES> 247
<INVENTORY> 1,267
<CURRENT-ASSETS> 10,089
<PP&E> 3,496
<DEPRECIATION> 1,743
<TOTAL-ASSETS> 12,331
<CURRENT-LIABILITIES> 4,436
<BONDS> 375
0
0
<COMMON> 1,779
<OTHER-SE> 5,511
<TOTAL-LIABILITY-AND-EQUITY> 12,331
<SALES> 20,009
<TOTAL-REVENUES> 20,009
<CGS> 14,855
<TOTAL-COSTS> 14,855
<OTHER-EXPENSES> 695<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106
<INCOME-PRETAX> 1,883
<INCOME-TAX> 565
<INCOME-CONTINUING> 1,318
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,318
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.72
<FN>
<F1> Includes research and development costs.
</FN>
</TABLE>
<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 DECEMBER 31, 1995 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 853
<SECURITIES> 0
<RECEIVABLES> 3,801
<ALLOWANCES> 118
<INVENTORY> 2,283
<CURRENT-ASSETS> 7,462
<PP&E> 3,279
<DEPRECIATION> 1,572
<TOTAL-ASSETS> 9,637
<CURRENT-LIABILITIES> 3,280
<BONDS> 376
0
0
<COMMON> 1,543
<OTHER-SE> 4,214
<TOTAL-LIABILITY-AND-EQUITY> 9,637
<SALES> 16,675
<TOTAL-REVENUES> 16,675
<CGS> 12,291
<TOTAL-COSTS> 12,291
<OTHER-EXPENSES> 793<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94
<INCOME-PRETAX> 1,326
<INCOME-TAX> 433
<INCOME-CONTINUING> 893
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 893
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.19
<FN>
<F1> Includes research and development costs and purchased in-process
technology.
</FN>
</TABLE>
<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 DECEMBER 31, 1994 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 586
<SECURITIES> 0
<RECEIVABLES> 2,881
<ALLOWANCES> 93
<INVENTORY> 2,130
<CURRENT-ASSETS> 6,037
<PP&E> 2,851
<DEPRECIATION> 1,359
<TOTAL-ASSETS> 7,862
<CURRENT-LIABILITIES> 2,683
<BONDS> 356
0
0
<COMMON> 1,341
<OTHER-SE> 3,303
<TOTAL-LIABILITY-AND-EQUITY> 7,862
<SALES> 12,605
<TOTAL-REVENUES> 12,605
<CGS> 8,885
<TOTAL-COSTS> 8,885
<OTHER-EXPENSES> 458<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72
<INCOME-PRETAX> 1,353
<INCOME-TAX> 365
<INCOME-CONTINUING> 988
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 988
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.34
<FN>
<F1> Includes research and development costs.
</FN>
</TABLE>
