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 June 30, 1997
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
(281) 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 June 30, 1997, was 691.2 million (as adjusted to reflect
a five-for-two stock split).
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
June 30, December 31,
1997 1996
------------ ------------
(in millions)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,215 $ 2,920
Short-term investments 898 1,073
Accounts receivable, net 2,172 3,168
Inventories 1,598 1,152
Deferred income taxes 791 761
Other current assets 121 95
------------ ------------
Total current assets 9,795 9,169
Property, plant, and equipment, less accumulated depreciation 1,223 1,172
Other assets 262 185
------------ ------------
$ 11,280 $ 10,526
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,421 $ 1,962
Income taxes payable 192 322
Other current liabilities 1,591 1,568
------------ ------------
Total current liabilities 4,204 3,852
------------ ------------
Long-term debt 300
------------ ------------
Deferred income taxes 259 230
------------ ------------
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:
691.2 million shares at June 30, 1997 and
683.9 million shares at December 31, 1996) 1,179 1,107
Retained earnings 5,638 5,037
------------ ------------
Total stockholders' equity 6,817 6,144
------------ ------------
$ 11,280 $ 10,526
============ ============
<FN>
See accompanying notes to consolidated financial data
</TABLE>
<TABLE>
<CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Six Months Quarter
ended June 30, ended June 30,
----------------- ----------------
1997 1996 1997 1996
------- ------- ------- -------
(in millions, except
per share amounts)
<S> <C> <C> <C> <C>
Sales $9,817 $8,206 $5,012 $4,001
Cost of sales 7,370 6,400 3,743 3,080
------- ------- ------- -------
2,447 1,806 1,269 921
------- ------- ------- -------
Selling, general, and administrative expense 1,021 871 522 440
Research and development costs 250 197 128 94
Purchased in-process technology 208 208
Other income and expense, net (14) 22 (2) 5
------- ------- ------- -------
1,465 1,090 856 539
------- ------- ------- -------
Income before provision for income taxes 982 716 413 382
Provision for income taxes 381 215 199 115
------- ------- ------- -------
Net income $ 601 $ 501 $ 214 $ 267
======= ======= ======= =======
Earnings per common and common
equivalent share:
Primary $ .85 $ .73 $ .30 $ .39
======= ======= ======= =======
Assuming full dilution $ .84 $ .72 $ .30 $ .39
======= ======= ======= =======
Shares used in computing earnings per common
and common equivalent share:
Primary 709.6 691.0 711.5 691.8
======= ======= ======= =======
Assuming full dilution 712.0 692.5 712.4 692.8
======= ======= ======= =======
<FN>
See accompanying notes to consolidated financial data
</TABLE>
<TABLE>
<CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six months ended June 30,
--------------------------
1997 1996
------------ ------------
(in millions)
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 10,757 $ 8,615
Cash paid to suppliers and employees (8,445) (6,924)
Interest and dividends received 116 24
Interest paid (64) (42)
Income taxes paid (535) (322)
------------ ------------
Net cash provided by operating activities 1,829 1,351
------------ ------------
Cash flows from investing activities:
Purchases of property, plant, and equipment, net (224) (201)
Purchases of short-term investments (968)
Proceeds from short-term investments 1,143
Acquisition of businesses, net of cash acquired (268) (22)
Other, net (23) (5)
------------ ------------
Net cash used in investing activities (340) (228)
------------ ------------
Cash flows from financing activities:
Repayment of long-term debt (293)
Issuance of common stock pursuant to stock option plans 62 32
------------ ------------
Net cash provided by (used in) financing activities (231) 32
------------ ------------
Effect of exchange rate changes on cash 37 27
------------ ------------
Net increase in cash and cash equivalents 1,295 1,182
Cash and cash equivalents at beginning of period 2,920 745
------------ ------------
Cash and cash equivalents at end of period $ 4,215 $ 1,927
============ ============
Reconciliation of net income to net cash provided by
Operating activities:
Net income $ 601 $ 501
Depreciation and amortization 166 131
Provision for bad debts (28) 14
Purchased in-process technology 208
Deferred income taxes 1
Loss on disposal of assets 1
Exchange rate effect 9 6
Decrease in accounts receivable 949 409
Decrease (increase) in inventories (431) 621
Increase in other current assets (26) (5)
Increase (decrease) in accounts payable 457 (236)
Decrease in income taxes payable (124) (106)
Increase in other current liabilities 47 15
------------ ------------
Net cash provided by operating activities $ 1,829 $ 1,351
============ ============
<FN>
See accompanying notes to consolidated financial data
</TABLE>
<TABLE>
<CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(continued)
Supplemental Cash Flow Information
Six months
ended June 30,
1997
---------------
(in millions)
<S> <C>
Acquisition (Note 5)
Fair value of assets acquired $ 362
Liabilities assumed (74)
Options assumed (10)
---------------
Cash paid 278
Less: cash acquired (10)
---------------
Net cash paid for acquisition $ 268
===============
<FN>
See accompanying notes to consolidated financial data
</TABLE>
COMPAQ COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL DATA
Note 1 - Basis of Presentation
- ------------------------------
The accompanying unaudited financial data as of June 30, 1997 and
December 31, 1996 and for the three- and six-month periods ended June 30, 1997
and 1996 have been prepared on substantially the same basis as the Company's
annual consolidated financial statements. In the opinion of the Company, the
data reflects 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:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
(in millions)
<S> <C> <C>
Raw materials and work-in-process $ 718 $ 552
Finished goods 880 600
------------ ------------
$ 1,598 $ 1,152
============ ============
</TABLE>
Note 3 - Other Income and Expense
- ---------------------------------
Other income and expense consisted of the following:
<TABLE>
<CAPTION>
Six months ended June 30, Quarter ended June 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(in millions)
<S> <C> <C> <C> <C>
Interest and dividend income $ (116) $ (24) $ (61) $ (18)
Interest income associated with hedging (3) (1) (1)
Other interest expense 66 37 32 22
Currency losses, net 12 6 9 1
Other, net 27 3 19 1
------------ ------------ ------------ ------------
$ (14) $ 22 $ (2) $ 5
============ ============ ============ ============
</TABLE>
Note 4 - Tender Offer for Notes
- -------------------------------
In May 1997, the Company completed a cash tender offer for all of its
outstanding $150 million 6 1/2% Senior Notes Due March 15, 1999 ("1999 Notes")
and $150 million 7 1/4% Senior Notes Due March 15, 2004 ("2004 Notes").
Ninety-eight percent or $148 million of the 1999 Notes were tendered and
ninety-seven percent or $145 million of the 2004 Notes were tendered. The
Company paid an aggregate of $298 million (excluding accrued interest) for the
notes tendered. The untendered balance of the notes is included in other
current liabilities.
Note 5 - Business Combinations
- ------------------------------
In May 1997, Compaq 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, 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 quarter. 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.
On June 23, 1997, the Company announced the execution of a definitive merger
agreement with Tandem Computers Incorporated in a stock-for-stock transaction.
Under the terms of the agreement, the Company will issue approximately 72.5
million shares of Compaq common stock, based on an exchange ratio of 0.525
shares of Compaq common stock (adjusted to take into consideration the
Company's five-for-two stock split in July 1997) for each share of Tandem
common stock in a transaction to be accounted for as a pooling of interests.
The agreement is subject to approval of Tandem's shareholders as well as
certain regulatory approvals. The agreement is expected to be consummated in
the third quarter of 1997.
Note 6 - Subsequent Event
- ------------------------
On July 1, 1997, Compaq announced that the Board of Directors approved a
five-for-two stock split in the form of a stock dividend. Shareholders of
record as of July 14, 1997 will receive three additional shares of common
stock for every two shares they own on that date, effective on July 28, 1997.
Share and per share data for all periods presented herein have been adjusted
to give effect to the five-for-two split.
Note 7 - Recent Pronouncement
- -----------------------------
In 1997, Financial Accounting Standards No. 128 ("FAS 128") Earnings Per
Share was issued. FAS 128 is effective for earnings per share calculations
for periods ending after December 15, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. The following table presents pro forma earnings
per share amounts computed using FAS 128.
<TABLE>
<CAPTION>
Six months ended June 30, Quarter ended June 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Pro forma earnings per share:
Earnings per common share $ .88 $ .75 $ .31 $ .40
============ ============ ============ ============
Earnings per common share - assuming
dilution $ .85 $ .73 $ .30 $ .39
============ ============ ============ ============
</TABLE>
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. Except as specifically indicated,
the forward-looking statements contained in this discussion do not take into
consideration the impact of Compaq's agreement to merge with Tandem Computers
Incorporated which is subject to the approval of Tandem shareholders as well
as certain regulatory approvals. The merger is expected to be consummated in
the third quarter of 1997.
Results of Operations
The following table presents, as a percentage of sales, certain selected
financial data for the three- and six-month periods ended June 30, 1997 and
1996.
<TABLE>
<CAPTION>
Six months Quarter
ended June 30, ended June 30,
---------------- ----------------
1997 1996 1997 1996
------- ------- ------- -------
(in millions, except
per share amounts)
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 75.1 78.0 74.7 77.0
------- ------- ------- -------
Gross margin 24.9 22.0 25.3 23.0
Selling, general and administrative expenses 10.4 10.6 10.4 11.0
Research and development costs 2.5 2.4 2.6 2.4
Purchased in-process technology (1) 2.1 4.1
Other income and expense, net (0.1) 0.3 0.1
------- ------- ------- -------
14.9 13.3 17.1 13.5
------- ------- ------- -------
Income before provision for income taxes 10.0% 8.7% 8.2% 9.5%
======= ======= ======= =======
<FN>
_______________
(1) Represents a $208 million ($ .29 per share) non-recurring, non-tax
deductible charge for purchased in-process technology in connection with the
Microcom acquisition during the second quarter of 1997.
</TABLE>
Sales
Sales increased 25% and 20% in the second quarter and first half of 1997,
respectively, over the comparable periods of 1996, primarily as a result of
increased unit and option sales. Sales grew in the second quarter and second
half of 1997 in all regions with North American sales increasing 30% and 21%,
respectively, European sales increasing 21% and 18%, respectively, and other
international sales increasing 19% and 20%, respectively, over the comparable
periods in 1996. Second quarter and first half 1997 North American sales,
including Canada, represented 53% and 52% of total sales compared with 51% in
each of the comparable periods of 1996. European sales represented 32% and 34%
of total sales in the second quarter and first half of 1997 compared to 33%
and 34% in the comparable periods of 1996.
Gross Margin
Gross margin as a percentage of sales increased to 25.3% in the second
quarter of 1997, compared to 23.0% in the comparable period of 1996. Gross
margin increased to 24.9% in the first half of 1997 from 22.0% in the
comparable 1996 period. These increases resulted primarily from a higher
portion of sales of enterprise products and options, production and logistics
cost savings, and overall asset management improvements.
Operating Expenses
Compaq's selling, general, and administrative expense declined as a
percentage of sales in the second quarter of 1997 as compared with the same
period of 1996 as a result of Compaq's ongoing efforts to manage operating
expenses relative to sales growth and gross margin levels. Compaq anticipates
that the remainder of 1997 selling, general, and administrative expense will
increase in absolute dollars 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.
Compaq strives to manage total operating expenses in line with sales growth
and gross margin levels.
Research and development costs increased to 2.6% in the second quarter of
1997 compared to 2.4% in the corresponding period of 1996. Compaq is committed
to continuing a significant research and development program and research and
development costs in absolute dollars are likely to remain at current levels
or increase slightly for the remainder of the year.
In addition, in the second quarter of 1997, Compaq incurred a
non-recurring, non-tax deductible charge of $208 million for purchased
in-process technology in connection with the purchase of Microcom, Inc.
Other Items
Compaq had other income of $2 million in the second quarter of 1997,
compared to other expense of $5 million in the second quarter of 1996. This
difference was primarily due to a significant increase in interest and
dividend income related to higher combined cash and short-term investment
balances.
The translation gains and losses relating to the financial statements of
Compaq'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
$9 million in the second quarter of 1997, compared to a net loss of $1 million
in the second quarter of 1996.
Provision for Income Taxes
Compaq estimates its effective tax rate for 1997 will be 32% (excluding
the $208 million non-deductible charge for purchased in-process technology),
an increase from 30% in 1996. This increase is primarily due to an
anticipated decline in the ratio of earnings derived from Singaporean
manufacturing activities to total earnings.
Liquidity and Capital Resources
Compaq's working capital increased to $5.6 billion at June 30, 1997,
compared to $5.3 billion at December 31, 1996.
Compaq's cash, cash equivalents, and short-term investments increased to
$5.1 billion at June 30, 1997, from $4.0 billion at December 31, 1996,
primarily due to positive cash flow from operating activities, including
improved management of accounts receivable and accounts payable. Accounts
receivable decreased to $2.2 billion at June 30, 1997, compared to $3.2
billion at December 31, 1996, reflecting Compaq's continued emphasis on
receivables management. Inventory levels increased to $1.6 billion compared
to $1.2 billion at December 31, 1996 primarily as a result of a strategic
build up of inventory.
In May 1997, Compaq utilized approximately $298 million in cash to
complete a tender offer for its 1999 and 2004 Senior Notes payable. Also in
May 1997, Compaq completed a tender offer for Microcom, Inc. for $278 million
in cash. Cash used in the second quarter of 1997 for the purchase of
property, plant, and equipment totaled $120 million. Compaq estimates that
capital expenditures for land, buildings, and equipment during the remainder
of 1997 will be approximately $281 million. Compaq has commitments for only a
portion of such amounts and the actual level of spending will depend on a
variety of factors, including general economic conditions and Compaq's
business.
Compaq currently expects to fund expenditures for capital requirements as
well as liquidity needs from a combination of available cash balances,
internally generated funds and financing arrangements. Compaq from time to
time may borrow funds for actual or anticipated funding needs or because it is
economically beneficial to borrow funds instead of repatriating funds in the
form of dividends from Compaq's foreign subsidiaries. Compaq has a $1.5
billion syndicated credit facility (of which $500 million expires in October
1997 and $1 billion expires in October 2001) that remains unused at June 30,
1997. Compaq has established a commercial paper program, supported by the
syndicated credit facility, which was unused at June 30, 1997. Compaq believes
that these sources of credit provide sufficient financial flexibility to meet
future funding requirements. Compaq continually evaluates the need to
establish other sources of working capital and will pursue those it considers
appropriate based upon Compaq's needs and market conditions.
Factors That May Affect Future Results
Compaq 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. In
accordance with the provisions of the Private Securities Litigation Reform Act
of 1995, the cautionary statements set forth below discuss 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. We expect the computer market to expand in 1997
in line with third party research organizations' forecasts of unit growth in
the range of 17 to 20%. Competition remains fierce with a large number of
competitors vying for market share. This competition creates an aggressive
pricing environment which continues to put pressure on Compaq's gross margins.
Although Compaq has programs and products focused on meeting market demand,
gaining market share profitably and maintaining gross margins, Compaq's
ability to achieve these goals is subject to the risks set forth in this
discussion.
Risks of Newly Acquired Businesses. Compaq plans to use strategic
Acquisitions to assist in the growth of its business. During the second
quarter 1997, Compaq completed the acquisition of Microcom, Inc. and
announced the pending merger with Tandem Computers Incorporated. Compaq
believes that both acquisitions will enhance the Company's operating
results, but as with any significant acquisition, Compaq 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. Subject to certain regulatory
approvals and approval by Tandem shareholders, Compaq will expand its
enterprise computing through the merger with Tandem. At that time, Compaq
will confront a number of risks associated with Tandem's business,
including managing the transition from RISC-based enterprise computing
to industry standard enterprise computing.
Inventory. We anticipate that inventory turns, which were 10.4 at the
end of the second quarter 1997, will continue to increase in 1997. These
increases result from improved product cycle management and other efficiencies
accompanying the reengineering of certain internal processes. If worldwide
demand for PC products drops, demand for one or more of Compaq's products is
lower than anticipated, difficulties arise in managing product transitions, or
component pricing movements affect the value of raw material inventory, there
could be an adverse impact on inventory, cash, and related profitability.
Third Party Relationships. We work with third parties as suppliers, in
arrangements to provide services in areas other than core competencies and
ensure the service and support of our customers, and in strategic alliances to
facilitate product offerings, product development, compatibility, and the
adoption of industry standards. Although we try to achieve strong working
relationships with parties who share our industry goals and have adequate
resources to fulfill their responsibilities, these relationships lead to a
number of risks. First, these companies may suffer financial or operational
difficulties that affect their performance, which could lead to delays in
product development and gaps in component supplies. Second, certain major
companies from which we purchase components or services (such as Intel, Cisco,
IBM, and Digital) may be competitors in other areas, which could affect
pricing, new product development or future performance. Finally, difficulties
in coordinating activities may lead to gaps in delivery and performance of our
products.
Rapid Technology Cycles. We believe the computer industry will continue
to drive rapid technology cycles. In planning product transitions, we evaluate
the speed at which customers are likely to switch to newer products. The
contrast between 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. Because of the lead times associated with our
volume production, should we be unable to gauge the rate of product
transitions accurately, there could be an adverse impact on inventory levels,
cash, and profitability.
Product Transitions. In each product cycle, we confront the risk of
delays in production that could impact sales of newer products while we manage
the inventory of older products and facilitate the sale of older inventory
held by resellers. To ease product transitions, we carry out pricing actions
and marketing programs to raise sales in reseller channels. We provide
currently for estimated product returns and price protection that may occur
under reseller programs and under floor planning arrangements with third-party
finance companies. Should we be unable to sell the 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.
Systems Implementation. During 1997, Compaq continues to focus on making
its business and information management processes more efficient in order to
increase customer satisfaction, improve productivity, and lower costs. In the
event of a delay in implementing improvements, there could be an adverse
impact on inventory, cash and related profitability. In connection with these
efforts, we are moving many of our systems from a legacy environment of
proprietary systems to client-server architectures. Should the transition to
new systems not occur in a smooth and orderly manner, we could experience
disruptions in operations, which could have an adverse financial impact.
Technology Standards and Key Licenses. Participants in the computer
industry generally rely on the creation and implementation of technology
standards to win the broadest market acceptance for their products. Compaq
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, Compaq 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 costs.
Compaq has entered into license agreements with key industry participants,
including Intel, Texas Instruments, and Microsoft. Compaq is currently
negotiating with Microsoft and IBM for the successors to the current
agreements. There can be no assurance that Compaq will be able to negotiate
terms under such license agreements that offer it competitive market
advantages.
Production Forecasts. In managing production, we must forecast customer
demand for our products. Should we underestimate the supplies needed to meet
demand, we could be unable to meet customer demand. Should we overestimate the
supplies needed to meet customer demand, cash and profitability could be
adversely affected. Many of the components used in our products, particularly
microprocessors and memory, experience steep price declines over their product
lives. If we are unable to manage purchases and utilization of such components
efficiently to maintain low inventory levels immediately prior to major price
declines, we could be unable to take immediate advantage of such declines to
lower product costs, which could adversely affect our sales and gross margins.
In addition, should prices for components increase unexpectedly, Compaq's
gross margin could be adversely affected. Recently, Compaq has established a
variety of programs designed to increase its manufacturing and business
process efficiencies. The success of these programs depends upon the
implementation of more efficient component supply, manufacturing, and
distribution strategies to increase overall efficiencies, which will lead to
lower prices being offered to its end users.
Credit Risks. Compaq's primary means of distribution remains third-party
resellers. We continually monitor and manage the credit we extend to resellers
and attempt to limit credit risks by broadening distribution channels,
utilizing certain risk transfer arrangements and obtaining security interests.
Our 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, we could experience disruptions in distribution
as well as the loss of the unsecured portion of any outstanding accounts
receivable. 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, Latin America, and Eastern Europe, subjects Compaq to a number of
economic and other risks, such as currency devaluation, expropriation, and
financial instability among resellers in these regions. Compaq generally has
experienced longer accounts receivable cycles in emerging markets, in
particular China and Latin America, when compared to U.S. and European
markets. Compaq continues to evaluate its business operations in these regions
and attempts to take measures to limit risks in these areas.
Currency and Hedging Risks. The value of the U.S. dollar affects Compaq's
financial results. The functional currency for Compaq's international
subsidiaries is the U.S. dollar. Accordingly, changes in exchange rates may
positively or negatively affect Compaq's sales (as expressed in U.S. dollars),
gross margins, and operating expenses. Compaq engages in hedging programs
aimed at limiting in part the impact of currency fluctuations. Through these
programs, Compaq hedges its non-U.S. dollar net monetary assets using
primarily forward exchange contracts. For certain markets, particularly Latin
America, Compaq has determined that ongoing hedging of 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, Compaq 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 Compaq's international
marketing subsidiaries, principally in Europe and Japan. These hedging
activities provide only limited protection against currency exchange risks.
Factors that could impact the effectiveness of Compaq's hedging programs
include accuracy of sales forecasts, volatility of the currency markets, and
availability of hedging instruments. All currency contracts that are entered
into by Compaq are components of hedging programs and are entered into for the
sole purpose of hedging an existing or anticipated currency exposure, not for
speculation. Although Compaq 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 Compaq sells products or a
weakening exchange rate against currencies in which Compaq incurs costs,
particularly the Japanese yen, Compaq's sales or costs are adversely affected.
Tax Rate. Compaq'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 Compaq's total earnings were to
decline significantly from anticipated levels, or should Compaq's ability to
reinvest these earnings be reduced, Compaq's effective tax rate would exceed
the currently estimated 32% rate for 1997 (before the effect of non-deductible
purchased in-process technology). In addition, should Compaq's intercompany
transfer pricing with respect to its Singaporean manufacturing subsidiary
require significant adjustment due to audits or regulatory changes, Compaq's
overall effective tax rate could increase.
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.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders of Compaq on April 24, 1997, the
stockholders voted on the election of directors. The votes in this election
were set forth in Item 4 of the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, which results are incorporated herein by
reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
11 Statement regarding computation of per share earnings
27 EDGAR financial data schedule
(b) (i) Report on Form 8-K dated April 10, 1997, containing Compaq's
news release dated April 10, 1997, relating to the execution of a merger
agreement to acquire Microcom, Inc.
(ii) Report on Form 8-K dated April 16, 1997, containing Compaq's
news release dated April 16, 1997, with respect to its financial results
for the period ended March 31, 1997.
(iii) Report on Form 8-K dated May 14, 1997, containing Compaq's news
release dated May 14, 1997, relating to its successful tender offer for
Microcom, Inc.
(iv) Reports on Form 8-K dated June 22, 1997, with respect to
Compaq's proposed merger with Tandem Computers Incorporated.
(v) Report on Form 8-K dated July 1, 1997, containing Compaq's news
release dated July 1, 1997, relating to its five-for-two stock split in the
form of a stock dividend.
(vi) Report on Form 8-K dated July 10, 1997, containing Compaq's
news release dated July 10, 1997, with respect to its financial results for
the period ended June 30, 1997.
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.
July 23, 1997 COMPAQ COMPUTER CORPORATION
/s/ EARL L. MASON
---------------------------------------
Earl L. Mason, Senior Vice President
and Chief Financial Officer
(as authorized officer and as principal
financial officer)
<TABLE>
<CAPTION>
EXHIBIT 11
COMPAQ COMPUTER CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Six months Quarter
ended June 30, ended June 30,
---------------- ----------------
1997 1996 1997 1996
------- ------- ------- -------
(in millions, except
per share amounts)
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Shares used in computing earnings per share:
Weighted average number of shares outstanding 687.1 670.5 689.0 671.8
Incremental shares attributed
to outstanding options 22.5 20.5 22.5 20.0
------- ------- ------- -------
709.6 691.0 711.5 691.8
======= ======= ======= =======
Earnings:
Net income $ 601 $ 501 $ 214 $ 267
======= ======= ======= =======
Earnings per common and common equivalent share $ .85 $ .73 $ .30 $ .39
======= ======= ======= =======
EARNINGS PER SHARE ASSUMING FULL
DILUTION
Shares used in computing earnings per share:
Weighted average number of shares outstanding 687.1 670.5 689.0 671.8
Incremental shares attributed to
Outstanding options 24.9 22.0 23.4 21.0
------- ------- ------- -------
712.0 692.5 712.4 692.8
======= ======= ======= =======
Earnings:
Net income $ 601 $ 501 $ 214 $ 267
======= ======= ======= =======
Earnings per common and common equivalent share $ .84 $ .72 $ .30 $ .39
======= ======= ======= =======
<FN>
Note: All share and earnings per share information reflects a 5-for-2 stock split
effective July 28, 1997.
</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 JUNE 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<CAPTION>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,215
<SECURITIES> 898
<RECEIVABLES> 2,172
<ALLOWANCES> 0
<INVENTORY> 1,598
<CURRENT-ASSETS> 9,795
<PP&E> 1,223
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,280
<CURRENT-LIABILITIES> 4,204
<BONDS> 0
<COMMON> 1,179
0
0
<OTHER-SE> 5,638
<TOTAL-LIABILITY-AND-EQUITY> 11,280
<SALES> 9,817
<TOTAL-REVENUES> 9,817
<CGS> 7,370
<TOTAL-COSTS> 7,370
<OTHER-EXPENSES> 458<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> 982
<INCOME-TAX> 381
<INCOME-CONTINUING> 601
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 601
<EPS-PRIMARY> .85
<EPS-DILUTED> .84
<FN>
<F1> Includes research and development costs and costs for purchased
in-process
technology.
</FN>
</TABLE>
