SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 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 September 30, 1997, was 757.0 million.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
September 30, December 31,
1997 1996
------------- ------------
(in millions)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,840 $ 3,008
Short-term investments 1,118 1,073
Accounts receivable, net 2,888 3,718
Inventories 2,007 1,267
Deferred income taxes 869 836
Other current assets 184 187
------------- ------------
Total current assets 11,906 10,089
Property, plant and equipment, less accumulated depreciation 1,819 1,753
Other assets 618 489
------------- ------------
$ 14,343 $ 12,331
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,026 $ 2,098
Income taxes payable 382 322
Other current liabilities 2,032 2,016
------------- ------------
Total current liabilities 5,440 4,436
------------- ------------
Long-term debt 76 375
------------- ------------
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:
757.0 million shares at September 30, 1997 and
746.1 million shares at December 31, 1996) 1,875 1,779
Retained earnings 6,706 5,507
Accumulated translation adjustments (13) 4
------------- ------------
Total stockholders' equity 8,568 7,290
------------- ------------
$ 14,343 $ 12,331
============= ============
</TABLE>
See accompanying notes to consolidated financial data.
<PAGE>
<TABLE>
<CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Nine months ended Quarter ended
September 30, September 30,
------------------- ------------------
1997 1996 1997 1996
-------- -------- -------- --------
(in millions, except per share amounts)
<S> <C> <C> <C> <C>
Sales $17,261 $14,044 $ 6,474 $ 4,947
Cost of sales 12,530 10,485 4,697 3,641
-------- -------- -------- --------
4,731 3,559 1,777 1,306
-------- -------- -------- --------
Selling, general and administrative expense 2,097 1,788 788 608
Research and development costs 600 513 213 175
Purchased in-process technology 208
Restructuring charge 52
Merger-related costs 44 44
Other income and expense, net (23) 9 (4) 9
-------- -------- -------- --------
2,926 2,362 1,041 792
-------- -------- -------- --------
Income before provision for income taxes 1,805 1,197 736 514
Provision for income taxes 617 366 219 149
-------- -------- -------- --------
Net income $ 1,188 $ 831 $ 517 $ 365
======== ======== ======== ========
Earnings per common and common equivalent share:
Primary $ 1.53 $ 1.10 $ 0.66 $ 0.48
======== ======== ======== ========
Assuming full dilution $ 1.50 $ 1.09 $ 0.65 $ 0.48
======== ======== ======== ========
Shares used in computing earnings per common
and common equivalent share:
Primary 778.1 754.7 789.3 758.5
======== ======== ======== ========
Assuming full dilution 791.6 759.5 792.0 760.5
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial data.
<PAGE>
<TABLE><CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
---------------------------------
1997 1996
--------------- ---------------
(in millions)
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 17,954 $ 14,539
Cash paid to suppliers and employees (14,644) (11,298)
Interest and dividends received 189 69
Interest paid (117) (78)
Income taxes paid (582) (496)
--------------- ---------------
Net cash provided by operating activities 2,800 2,736
--------------- ---------------
Cash flows from investing activities:
Purchases of property, plant, and equipment, net (462) (385)
Proceeds from sale of subsidiary 93
Purchases of short-term investments (2,083)
Proceeds from short-term investments 2,038 35
Acquisition of businesses, net of cash acquired (268) (22)
Other, net (106) (87)
--------------- ---------------
Net cash used in investing activities (788) (459)
--------------- ---------------
Cash flows from financing activities:
Issuance of long-term debt 90 88
Repayment of long-term debt (389) (63)
Issuance of common stock pursuant to stock option plans 124 82
Other, net (46) 5
--------------- ---------------
Net cash provided by (used in) financing activities (221) 112
--------------- ---------------
Effect of exchange rate changes on cash 1 23
--------------- ---------------
Net increase in cash and cash equivalents 1,792 2,412
Cash and cash equivalents at beginning of period 3,048 853
--------------- ---------------
Cash and cash equivalents at end of period $ 4,840 $ 3,265
=============== ===============
Reconciliation of net income to net cash provided by
Operating activities:
Net income $ 1,188 $ 831
Depreciation and amortization 386 350
Gain on sale of subsidiary (1) (31)
Provision for bad debts (27) 108
Purchased in-process technology 208
Deferred income taxes (17) (31)
Restructuring charge 52
Exchange rate effect 21 11
Decrease in accounts receivable 706 225
Decrease (increase) in inventories (721) 634
Decrease (increase) in other current assets (32) 7
Increase in accounts payable 920 505
Increase (decrease) in income taxes payable 68 (94)
Increase in other current liabilities 101 169
--------------- ---------------
Net cash provided by operating activities $ 2,800 $ 2,736
=============== ===============
</TABLE>
See accompanying notes to consolidated financial data.
<TABLE><CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(continued)
Supplemental Cash Flow Information
Nine months ended
September 30, 1997
------------------ (in millions)
<S> <C>
Acquisition (Note 4)
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
==================
</TABLE>
See accompanying notes to consolidated financial data.
<PAGE>
COMPAQ COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL DATA
Note 1 - Basis of Presentation
- ------------------------------
The accompanying unaudited financial data as of September 30, 1997 and
December 31, 1996 and for the quarters and nine-month periods ended September
30, 1997 and 1996 have been prepared on substantially the same basis as
Compaq's annual consolidated financial statements. In the opinion of Compaq,
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>
September 30, December 31,
1997 1996
------------- ------------
(in millions)
<S> <C> <C>
Raw materials and work-in-process $ 975 $ 634
Finished goods 1,032 633
------------- ------------
$ 2,007 $ 1,267
============= ============
</TABLE>
Note 3 - Other Income and Expense
- ---------------------------------
Other income and expense consisted of the following:
<TABLE><CAPTION>
Nine months ended Quarter ended
September 30, September 30
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Interest and dividend income $ (189) $ (69) $ (63) $ (37)
Interest income associated with hedging (4) (1)
Other interest expense 118 71 46 27
Currency losses, net 21 11 9 5
Other, net 31 (4) 5 14
--------- -------- -------- --------
$ (23) $ 9 $ (4) $ 9
========= ======== ======== ========
</TABLE>
Note 4 - Business Combinations
- ------------------------------
On August 29, 1997, Compaq merged with Tandem Computers Incorporated
("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 approximately 62.8 million shares of
Compaq 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
$44.3 million were incurred as a result of the transaction.
The financial data included herein 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. In connection with the merger,
Tandem's year-end was changed from September 30 to December 31. The
consolidated financial data for the quarter and nine-month period ended
September 30, 1996 includes the results of Tandem for the quarter and
nine-month period ended June 30, 1996. As permitted by the Securities and
Exchange Commission regulations, Tandem's quarter ended December 31, 1996 has
been omitted from the 1997 consolidated statements of income and cash flows to
effect the change in year-end. Tandem's sales and net income were $436
million and $12 million, respectively, for such quarter. Tandem also
generated a $40 million increase in cash and cash equivalents during the
quarter ended December 31, 1996.
The following information presents certain income statement data of the
separate companies for the periods preceding the acquisition:
<TABLE><CAPTION>
Six months ended Nine months ended
June 30, 1997 September 30, 1996
-------------------- --------------------
(in millions)
<S> <C> <C>
Sales:
Compaq $ 9,817 $ 12,687
Tandem 970 1,357
-------------------- --------------------
$ 10,787 $ 14,044
==================== ====================
Net Income:
Compaq $ 601 $ 851
Tandem 68 (40)
Adjustments 20
-------------------- --------------------
$ 669 $ 831
==================== ====================
</TABLE>
The consolidated financial results presented above for the nine months
ended September 30, 1996 include adjustments to record deferred tax assets
related to Tandem's federal net operating loss carryforwards and other
book/tax differences not previously recognizable by Tandem.
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 Compaq'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 Compaq's consolidated statement of income during the second
quarter of 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.
Note 5 - Tender Offer for Notes
- -------------------------------
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
million 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. The untendered
balance of the notes is included in other current liabilities.
Note 6 - Stock Split
- -------------------
On July 28, 1997, Compaq 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 Compaq 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.
Note 7 - Credit Facilities
- --------------------------
On September 22, 1997, Compaq 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, Compaq retired its two existing secured revolving credit
facilities totaling $1.5 billion. Compaq currently has no borrowings
outstanding under either of the new facilities.
Note 8 -Subsequent Events
- -------------------------
On October 16, 1997, Compaq 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 Compaq common
stock. 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 on January 20, 1998.
On October 16, 1997, Compaq announced that the Board of Directors approved
a cash dividend of $.03 per share ($.015 per share post split) of Compaq common
stock. Shareholders of record as of December 31, 1997 will receive the cash
dividend. Compaq anticipates that the cash dividend will be paid on a
quarterly basis. Compaq also announced the establishment of a dividend
reinvestment plan and a direct purchase plan.
Note 9 - Recent Pronouncements
- ------------------------------
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, Compaq 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>
Nine months ended Quarter ended
September 30, September 30,
----------------- -----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Pro forma earnings per share:
Earnings per common share $ 1.58 $ 1.13 $ .68 $ .50
======= ======= ======= =======
Earnings per common share - assuming dilution $ 1.53 $ 1.10 $ .65 $ .48
======= ======= ======= =======
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
consolidated interim financial statements.
Results of Operations
- ---------------------
The following table presents, as a percentage of sales, certain selected
financial data for the quarters and nine-month periods ended September 30,
1997 and 1996.
<TABLE><CAPTION>
Nine months ended Quarter ended
September 30, September 30,
----------------- -----------------
1997 1996 1997 1996
------- ------- ------- -------
(in millions)
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 72.6 74.7 72.6 73.6
------- ------- ------- -------
Gross margin 27.4 25.3 27.4 26.4
Selling, general and administrative expenses 12.1 12.7 12.2 12.3
Research and development costs 3.5 3.7 3.3 3.5
Purchased in-process technology (1) 1.2
Restructuring charge (2) .3
Merger-related costs (3) .3 .7
Other income and expense, net (.1) .1 (.1) .2
------- ------- ------- -------
17.0 16.8 16.1 16.0
------- ------- ------- -------
Income before provision for income taxes 10.4% 8.5% 11.3% 10.4%
======= ======= ======= =======
<FN>
________________
(1) Represents a $208 million non-recurring, non-tax deductible charge for
purchased in-process technology in connection with the Microcom acquisition
during the second quarter of 1997.
(2) Represents a $52 million charge related to restructuring actions taken by
Tandem during the second quarter of 1996.
(3) Represents a $44 million non-recurring, non-tax deductible charge related
to costs associated with the Tandem merger.
</TABLE>
Sales
Sales increased 30.9% and 22.9% in the third quarter and first nine
months of 1997, respectively, over the comparable periods of 1996, primarily
as a result of increased unit and option sales. Sales grew in the third
quarter and the first nine months of 1997 in all regions with North American
sales increasing 32.0% and 24.9%, respectively, European sales increasing
28.5% and 20.4%, respectively, and other international sales increasing 31.3%
and 21.2%, respectively, over the comparable periods in 1996. North American
sales, including Canada, represented 58.3% and 54.0% of total sales in the
third quarter and first nine months of 1997 compared with 57.8% and 53.2% in
each of the comparable periods of 1996. European sales represented 28.2% and
31.3% of total sales in the third quarter and first nine months of 1997
compared to 28.7% and 32.0% in the comparable periods of 1996.
Gross Margin
Gross margin as a percentage of sales increased to 27.4% in the third
quarter of 1997, compared to 26.4% in the comparable period of 1996. Gross
margin increased to 27.4% in the first nine months of 1997 from 25.3% in the
comparable 1996 period. These increases resulted primarily from a higher
portion of sales of enterprise products (including Tandem) and options,
production and logistics cost savings, and overall asset management
improvements.
Operating Expenses
Compaq's selling, general, and administrative expense remained relatively
flat at 12.2% of sales in the third quarter of 1997 as compared with the same
period of 1996. Compaq anticipates that for 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, and increases its investment in the area of service and
support. Compaq expects to manage total operating expenses in line with sales
growth and gross margin levels.
Research and development costs increased in absolute dollars but
decreased to 3.3% of sales in the third quarter of 1997 compared to 3.5% in
the corresponding period of 1996. Compaq is committed to continuing a
significant research and development program and these costs in absolute
dollars are likely to remain at current levels or increase slightly for the
remainder of the year.
Other Items
Compaq had other income of $4 million in the third quarter of 1997,
compared to other expense of $9 million in the third quarter of 1996. This
difference was primarily due to an increase in interest and dividend income
related to higher combined cash and short-term investment balances, partially
offset by increased interest expense.
The translation gains and losses relating to the financial statements of
certain 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 third quarter of 1997, compared to a net loss of $5
million in the third quarter of 1996.
Liquidity and Capital Resources
Compaq's working capital increased to $6.5 billion at September 30, 1997,
compared to $5.7 billion at December 31, 1996.
Compaq's cash, cash equivalents, and short-term investments increased to
$6.0 billion at September 30, 1997, from $4.1 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 $2.9 billion at September 30, 1997, compared to $3.7
billion at December 31, 1996, due to improved asset management and the sale of
$735 million of accounts receivable in the third quarter of 1997. Inventory
levels increased to $2.0 billion compared to $1.3 billion at December 31,
1996, primarily due to increased unit volumes.
Cash used in the third quarter of 1997 for the purchase of property,
plant, and equipment totaled $183 million. Compaq estimates that capital
expenditures for land, buildings, and equipment during the remainder of 1997
will be $230 million.
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 new $4
billion syndicated credit facility (of which $1 billion expires in September
1998 and $3 billion expires in September 2002) that was unused at September
30, 1997. Compaq has established a commercial paper program, supported by the
syndicated credit facility, which was unused at September 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.
<PAGE>
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 personal computer market to
continue to expand in 1997 in line with third party research organizations'
forecasts of unit growth in the range of 17 to 20%. We expect the enterprise
market to expand in line with the development of internet and intranet
enterprise applications, the corporate MIS migration from legacy systems to
client/server systems and the transition from RISC to NT applications.
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 and mergers to assist in the growth of its business. During the
third quarter 1997, Compaq completed its merger with Tandem. Tandem's core
competencies have historically centered around providing reliable, scaleable
hardware and software solutions for business critical applications, such as
online transaction processing. With the advent of the internet and expanding
corporate intranets, Compaq believes that computer applications will emerge
that will result in media-rich high volume transactions, causing online
transaction processing to be expanded to include internet transaction
processing. As a result of the Tandem merger, Compaq is engaged in direct
sales of computer systems with software developed to meet customers specific
needs. The longer term nature of fulfilling such contracts may expose Compaq
to new risks associated with customized specifications. Compaq believes that
through its Tandem and enterprise products, it is well positioned to provide
computing solutions to meet this demand as well as other needs for enterprise
computing. Compaq believes that the Tandem merger will enhance its operating
results, but as with any significant acquisition or merger, 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.
Inventory. In the event of a drop in worldwide demand for computer
products, 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 levels, 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 at the speed and volumes required
by Compaq's business, which could lead to delays in product development and
gaps in component supplies. Second, 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. 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 levels, 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 as well as integrating
systems from newly acquired businesses. 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, distribution, 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 erodes. 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 volatile areas such as Asia and Latin America, subjects
Compaq to a number of economic and other risks, such as financial instability
among resellers in these regions and currency devaluation. 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. Changes in exchange rates may positively or negatively
affect Compaq's sales (as expressed in U.S. dollars), gross margins, operating
expenses, and retained earnings. Compaq engages in hedging programs aimed at
limiting in part the impact of currency fluctuations. Through these programs,
Compaq hedges those assets and liabilities that, when remeasured according to
generally accepted accounting principles, impact the income statement 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 currently estimates a 30% effective tax rate for 1997,
before the effect of non-deductible purchased in-process technology and merger
related costs. 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 current estimate. 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
Compaq'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.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
3.2 Bylaws of Compaq Computer Corporation
11 Statement regarding computation of per share earnings
27 EDGAR financial data schedule
(b) (i) Report on Form 8-K dated July 1, 1997, containing Compaq's
news release dated July 1, 1997, relating to a five-for-two
stock split.
(ii) Report on Form 8-K dated July 10, 1997, containing Compaq's news
release dated July 10, 1997, with respect to its earnings release
for the second quarter of 1997.
(iii) Report on Form 8-K dated August 29, 1997, containing Compaq's
news release dated August 29, 1997, with respect to Compaq's
merger with Tandem Computers Incorporated.
(iv) Report on Form 8-K dated October 16, 1997, containing Compaq's
news release dated October 16, 1997, with respect to its earnings
release for the third quarter of 1997, a proposed two-for-one stock
split, and the implementation of a cash dividend.
All other items specified by Part II of this report are inapplicable and
accordingly have been omitted.
<PAGE>
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.
October 31, 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)
EXHIBIT 3.2
Amended and Restated
September 25, 1997
BYLAWS
OF
COMPAQ COMPUTER CORPORATION
ARTICLE I - OFFICES
SECTION 1.1. Registered Office. The registered office of the
-----------------
Corporation in the State of Delaware shall be in the City of Wilmington,
County of New Castle, and the name of its registered agent shall be The
Corporation Trust Company.
SECTION 1.2. Other Offices. The Corporation may also have offices at
-------------
such other places both within and without the State of Delaware as the Board
of Directors may from time to time determine or the business of the
Corporation may require.
ARTICLE II - MEETINGS OF STOCKHOLDERS
SECTION 2.1. Place of Meeting. All meetings of stockholders shall be
----------------
held at such place, either within or without the State of Delaware, as shall
be designated from time to time by the Board of Directors.
SECTION 2.2. Annual Meeting. The annual meeting of stockholders for
--------------
the election of directors shall be held at such date and time as shall be
designated from time to time by the Board of Directors.
SECTION 2.3. Special Meeting. Special meetings of the stockholders,
----------------
for any purpose or purposes, unless otherwise prescribed by the General
Corporate Law of the State of Delaware as the same may be amended from time to
time ("Delaware Law") or the certificate of incorporation of the Corporation
(the "Certificate of Incorporation"), may be called by the Board of Directors.
The Board of Directors shall fix the time and place, either within or without
the State of Delaware, for such meeting and shall state the purpose of such
meeting.
SECTION 2.4. Notice of Meeting. Unless otherwise provided by Delaware
-----------------
Law, written notice of any meeting of stockholders, stating the time, place
and purpose, shall be given to each stockholder entitled to vote at the
meeting not less than 10 nor more than 60 days before the meeting.
SECTION 2.5. Quorum. The holders of a majority of the shares of
------
capital stock entitled to vote at the meeting, present in person or
represented by proxy, shall constitute a quorum at any meeting of stockholders
except as otherwise provided by Delaware Law. The holders of a majority of
the shares of capital stock present in person or represented by proxy and
entitled to vote, whether or not a quorum is present, shall have power to
adjourn the meeting from time to time.
SECTION 2.6. Voting. Directors shall be elected by a plurality of the
------
votes of the shares present in person or represented by proxy at a meeting of
stockholders and entitled to vote on the election of directors. When a quorum
is present at any meeting of stockholders, the vote of the holders of a
majority of the shares of capital stock entitled to vote at the meeting,
present in person or represented by proxy, shall decide any other question
brought before such meeting, unless the question is one upon which, by express
provision of Delaware Law, a different vote is required, in which case such
express provision shall govern such question.
SECTION 2.7. Consent of Stockholders. Any action required to be taken
-----------------------
at any annual or special meeting of stockholders, or any action which may be
taken at any annual or special meeting of stockholders, may be taken without a
meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding capital stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote were present and voted and shall be delivered to
the Corporation as required by Delaware Law. The record date for a consent in
writing shall be established in accordance with Section 2.8 of these Bylaws.
Prompt notice of the taking of any corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have
not consented in writing.
SECTION 2.8. Fixing Record Date for Action By Consent of Stockholders.
--------------------------------------------------------
In order that the Corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the Board of
Directors shall fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date is adopted by the Board
of Directors, and which date shall not be more than 10 days after the date
upon which the resolution fixing the record date is adopted by the Board of
Directors. Any stockholder of record seeking to have the stockholders
authorize or take corporate action by written consent shall, by written notice
to the Secretary, request the Board of Directors to fix a record date. The
Board of Directors shall promptly, but in all events within 10 days after the
date on which such a request is received, adopt a resolution fixing the record
date. If the Board of Directors shall fail to establish a record date in a
timely manner and prior action by the Board of Directors is not required by
Delaware Law, the record date for determining stockholders entitled to consent
to corporate action in writing without a meeting shall be the first date on
which a signed written consent setting forth the action taken or proposed to
be taken is delivered to the Corporation as required by Delaware Law. If no
record date has been fixed by the Board of Directors and prior action by the
Board of Directors is required by Delaware Law, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the day on which the
Board of Directors adopts the resolution taking such prior action.
SECTION 2.9. Nomination of Directors. Only persons who are nominated
------------------------
in accordance with the procedures set forth in this Section shall be eligible
to serve as directors. Nominations of persons for election to the Board of
Directors of the Corporation may be made at a meeting of stockholders (a) by
or at the direction of the Board of Directors or (b) by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice
provided for in this Section, who shall be entitled to vote for the election
of directors at the meeting and who complies with the notice procedures set
forth in this Section. For any nomination to be properly brought before a
stockholder meeting by a stockholder, the stockholder must have given timely
notice of the nomination in writing to the Secretary of the Corporation. To
be timely, a stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the Corporation not less than 90 days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders (or, if the date of the meeting is more than 30 days before or
after such anniversary date, not less than 90 days prior to the date of such
meeting; provided, however, that in the event that public disclosure of the
date of the meeting is made less than 100 days before the date of the meeting,
notice by the stockholder must be received not later than the close of
business on the 10th day following such public disclosure. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934 (including such person's written
consent to serving as a director if elected); and (b) as to the stockholder
giving the notice (i) the name and address, as they appear on the
Corporation's books of such stockholder, (ii) the class and number of shares
of the Corporation which are beneficially owned by such stockholder and (iii)
a description of all arrangements or understandings between each such
stockholder and any nominee or any other person or persons (naming such person
or persons) in connection with or relating to the making of the nomination or
nominations to serve on the Board of Directors if elected. At the request of
the Board of Directors, any person nominated by the Board of Directors for
election as a director shall furnish to the Secretary of the Corporation the
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee. Notwithstanding anything in these bylaws to
the contrary, no person shall be eligible to serve as a director of the
Corporation unless nominated in accordance with the procedures set forth in
this Section. If the Chairman of the meeting shall determine, based on the
facts, that a nomination was not made in accordance with the procedures
prescribed by this Section, he shall so declare to the meeting and the
defective nomination shall be disregarded. Notwithstanding the foregoing
provisions of this Section, a stockholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, and the rules
and regulations thereunder, with respect to the matters set forth in this
Section.
SECTION 2.10. Notice of Business. At any meeting of the stockholders,
------------------
only such business shall be conducted as shall have been brought before the
meeting (a) by or at the direction of the Board of Directors or (b) by any
stockholder of the Corporation who is a stockholder of record at the time of
giving of the notice provided for in this Section, who shall be entitled to
vote at such meeting and who complies with the notice procedures set forth in
this Section. For business to be properly brought before a stockholder
meeting by a stockholder, the stockholder must have given timely notice of the
business in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 90 days prior to
the anniversary date of the immediately preceding annual meeting of
stockholders (or if the date of the meeting is more than 30 days before or
after such anniversary date, not less than 90 days prior to the date of such
meeting; provided, however, that in the event that public disclosure of the
date of the meeting is made less than 100 days before the date of the meeting,
notice by the stockholder must be received not later than the close of
business on the 10th day following such public disclosure). Such
stockholder's notice shall set forth as to each matter the stockholder
proposes to bring before the meeting (a) a brief description of the business
desired to be brought before the meeting and the reasons for conducting such
business at the meeting, (b) the name and address, as they appear on the
Corporation's books of the stockholder proposing such business, (c) the class
and number of shares of the Corporation which are beneficially owned by the
stockholder and (d) any material interest of the stockholder in such business.
Notwithstanding anything in these bylaws to the contrary, no business shall be
conducted at a stockholder meeting except in accordance with the procedures
set forth in this Section. If the Chairman of the meeting shall determine,
based on the facts, that business was not properly brought before the meeting
in accordance with the provisions of this Section, he shall so declare to the
meeting and any such business not properly brought before the meeting shall
not be transacted. Notwithstanding the foregoing provisions of this Section,
a stockholder shall also comply with all applicable requirements of the
Securities Exchange Act of 1934, and the rules and regulations thereunder,
with respect to the matters set forth in this Section.
ARTICLE III - BOARD OF DIRECTORS
SECTION 3.1. Powers. The business and affairs of the Corporation shall
------
be managed by or under the direction of its Board of Directors except as
otherwise provided by Delaware Law or the Certificate of Incorporation.
SECTION 3.2. Number, Election, and Term. The number of directors that
--------------------------
shall constitute the whole Board of Directors shall be not less than seven and
not more than twelve. Such number of directors shall from time to time be
fixed by resolution of the Board of Directors. The directors shall be
elected at the annual meeting of stockholders, except as provided in Section
3.3, and each director elected shall hold office until his successor shall be
elected and shall qualify or his earlier death, resignation or removal.
Directors need not be residents of Delaware or stockholders of the
Corporation.
SECTION 3.3. Vacancies, Additional Directors, Removal From Office. If
----------------------------------------------------
any vacancy occurs on the Board of Directors caused by death, resignation or
removal from office of any director or otherwise, or if any new directorship
is created by an increase in the authorized number of directors, a majority of
the directors then in office or the sole remaining director may choose a
successor or fill the newly created directorship; and a director so chosen
shall hold office until the next annual election and until his successor shall
be elected and shall qualify or his earlier death, resignation or removal.
SECTION 3.4. Chairman of the Board. The Board of Directors may, by
---------------------
resolution passed by a majority of the whole Board of Directors, appoint one
of its members to serve as Chairman of the Board and one or more of its
members to serve as a Vice Chairman. The Chairman of the Board shall preside
at all meetings of the Board of Directors of the Corporation. The Chairman
shall formulate and submit to the Board of Directors matters of general
policy for the Corporation and shall perform such other duties as may be
prescribed by the Board of Directors. In the absence of the Chairman of the
Board, or in the event of his inability or refusal to act, any Vice Chairman
designated by the Board of Directors shall perform the duties and exercise the
powers of the Chairman of the Board and in the absence of a Vice Chairman, the
President shall perform such duties and exercise such powers.
SECTION 3.5. Regular Meeting. A regular meeting of the Board of
---------------
Directors shall be held each year, without notice other than these bylaws, at
the place of, and immediately following, the annual meeting of stockholders,
and other regular meetings of the Board of Directors shall be held at such
time and place as the Board of Directors may provide, by resolution, either
within or without the State of Delaware, without other notice than such
resolution.
SECTION 3.6. Special Meeting. A special meeting of the Board of
---------------
Directors may be called by the Chairman of the Board or by the President and
shall be called by the Secretary on the written request of any two directors.
The Chairman or President so calling, or the two directors so requesting, any
such meeting shall fix the time and place, either within or without the State
of Delaware, for such meeting.
SECTION 3.7. Notice of Special Meeting. Written notice of special
-------------------------
meetings of the Board of Directors shall be given to each director at least 48
hours prior to the time of such meeting. Any director may waive notice of any
meeting. The attendance of a director at any meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting
for the purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any special meeting of the Board of
Directors need be specified in the notice or waiver of notice of such meeting.
SECTION 3.8. Quorum. A majority of the Board of Directors then in
------
office shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors, and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the
Board of Directors, except as may be otherwise specifically provided by
Delaware Law or the Certificate of Incorporation. The directors present at
any meeting of the Board of Directors, whether or not a quorum is present, may
adjourn the meeting from time to time, without notice other than announcement
at the meeting. At the adjourned meeting, the Board of Directors may transact
any business which might have been transacted at the original meeting.
SECTION 3.9. Action Without Meeting. Any action required or permitted
----------------------
to be taken at any meeting of the Board of Directors, or of any committee of
the Board of Directors, may be taken without a meeting, if all members of the
Board of Directors or of such committee, as the case may be, consent to the
action in writing and such written consent is filed with the minutes of
proceedings of the Board of Directors or committee.
SECTION 3.10. Telephonic Meetings. Members of the Board of Directors,
-------------------
or any committee of the Board of Directors, may participate in a meeting of
the Board of Directors, or such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at the meeting.
SECTION 3.11. Compensation. The Board of Directors shall have
------------
authority to fix the compensation of directors, including fees and
reimbursement of expenses.
SECTION 3.12. Committees of Directors. There shall be an Audit
-----------------------
Committee and a Human Resources Committee, each of which shall consist of not
less than three independent directors of the Corporation. The Board of
Directors may, by resolution passed by a majority of the whole Board,
designate one or more additional committees, including, if they shall so
determine, an Executive Committee, each such committee to consist of one or
more directors of the Corporation. To the extent provided in the resolution
and subject to limitations under Delaware Law, any such committee shall have
and may exercise such of the powers and authority of the Board of Directors in
the management of the business and affairs of the Corporation, and may
authorize the seal of the Corporation to be affixed to all papers which may
require it. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of such committee. Each committee of directors shall
keep regular minutes of its proceedings and report the same to the Board of
Directors when required.
ARTICLE IV - OFFICERS
SECTION 4.1. Principal Officers. The principal officers of the
------------------
Corporation shall be a President, one or more Vice Presidents (any one or more
of whom may be designated Executive Vice President or Senior Vice President)
and a Secretary. The Corporation may also have such other principal
officers, which may include a Chief Financial Officer, as the Board of
Directors may in its discretion elect. Any two or more offices, other than
the offices of President and Secretary, may be held by the same person. None
of the officers need be a director, and none of the officers need be a
stockholder of the Corporation.
SECTION 4.2. Election and Term of Office. The principal officers of
---------------------------
the Corporation shall be elected annually by the Board of Directors at its
first regular meeting held after the annual meeting of stockholders or as soon
thereafter as conveniently possible. Each such principal officer shall hold
office until his successor shall have been chosen and shall have qualified or
until his earlier death, resignation or removal.
SECTION 4.3. Other Officers. In addition to the principal officers
--------------
enumerated in Section 4.1, the Corporation may have one or more other
officers, which may include staff or division officers, as the Board of
Directors may elect or the President shall in his discretion appoint. Each
such other officer shall hold office for such period and have such title and
responsibilities as the Board of Directors or the President shall determine
and may be removed in accordance with Section 4.4.
SECTION 4.4. Removal and Resignation. Any officer elected by the Board
-----------------------
of Directors or appointed by the President may be removed at any time with or
without cause by the Board of Directors. Any officer appointed by the
President may be removed at any time with or without cause by the President.
Any officer may resign at any time by giving written notice to the Board of
Directors or to the Secretary of the Corporation.
SECTION 4.5. Vacancies. Any vacancy occurring in any principal office
---------
of the Corporation by death, resignation, removal or otherwise, may be filled
by the Board of Directors for the unexpired portion of the term.
SECTION 4.6. Salaries. The salaries of all principal officers of the
--------
Corporation shall be fixed by the Board of Directors or pursuant to its
direction and the salaries of all other officers shall be fixed by the
President or pursuant to his direction and reviewed by the Board of Directors
or a committee of the Board of Directors. No officer shall be prevented from
receiving such salary by reason of his also being a director.
SECTION 4.7. President. The President shall be the chief executive
---------
officer of the Corporation and, subject to the control of the Board of
Directors, shall in general supervise and control the business and affairs of
the Corporation. The President shall preside at all meetings of the
stockholders and, in the absence of the Chairman of the Board or any Vice
Chairman, shall preside at all meetings of the Board of Directors. He may
also preside at any such meeting attended by the Chairman of the Board (or a
Vice Chairman) if he is so designated by the Chairman (or a Vice Chairman).
He or any officer designated by him may attend, vote at and grant proxies to
be used at any meeting of stockholders of any other corporation in which this
Corporation may hold stock. In general he shall perform all other duties
normally incident to the office of President and such other duties as may be
prescribed by the Board of Directors from time to time.
SECTION 4.8. Vice Presidents. In the absence of the President, or in
---------------
the event of his inability or refusal to act, any Vice President designated by
the Board of Directors shall perform the duties and exercise the powers of the
President. The Vice Presidents shall perform such other duties as from time
to time may be assigned to them by the President or the Board of Directors.
SECTION 4.9. Secretary. The Secretary shall (a) keep the minutes of
---------
the meetings of the stockholders, the Board of Directors and committees of the
Board of Directors; (b) see that all notices are duly given in accordance with
the provisions of these bylaws and as required by law; (c) be custodian of the
corporate records and of the seal of the Corporation; (d) have general charge
of the stock transfer books of the Corporation; and (e) in general, perform
all duties normally incident to the office of Secretary and such other duties
as from time to time may be assigned to him by the President or the Board of
Directors.
ARTICLE V - DIVIDENDS
SECTION 5.1. Declaration. Subject to limitations contained in Delaware
-----------
Law and the Certificate of Incorporation, the Board of Directors may declare
and pay dividends upon the shares of capital stock of the Corporation, which
dividends may be paid either in cash, securities of the Corporation or other
property.
ARTICLE VI - INDEMNIFICATION
SECTION 6.1. Third Party Actions. The Corporation shall indemnify any
-------------------
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he is or was a director,
nominee for director nominated by the Board of Directors (a "nominee"),
officer or employee of the corporation, or is or was serving at the request of
the Corporation as a director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement or conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a presumption
that the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Corporation,
and, with respect to any criminal action or proceeding, had reasonable cause
to believe that his conduct was unlawful.
SECTION 6.2. Actions by or in the Right of the Corporation. The
---------------------------------------------
Corporation shall indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or suit by
or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, nominee, officer or employee
of the Corporation, or is or was serving at the request of the Corporation as
a director, officer or employee of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense
or settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
SECTION 6.3. Determination of Conduct. The determination that a
------------------------
director, nominee or officer met the applicable standard of conduct set forth
in Sections 6.1 and 6.2 (unless indemnification is ordered by a court) shall
be made (1) by a majority vote of the directors who are not parties to such
action, suit or proceeding (the "Disinterested Directors"), even though less
than a quorum, or (2) by a committee of Disinterested Directors designated by
majority vote of the Disinterested Directors, even though less than a quorum,
or (3) if there are no Disinterested Directors, or if the Disinterested
Directors so direct, by independent legal counsel in a written opinion, or (4)
by the stockholders. The determination that an employee met the applicable
standard of conduct set forth in Sections 6.1 and 6.2 (unless indemnification
is ordered by a court) shall be made by the President, or any other officer or
employee designated by the Board of Directors, or any of the persons
identified in clauses (1) - (4) of the preceding sentence.
SECTION 6.4. Payment of Expenses in Advance. Expenses (including
------------------------------
attorneys' fees) incurred in defending any civil, criminal or investigative
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the director, nominee, officer or employee to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Corporation as authorized in this Article.
SECTION 6.5. Definition. For purposes of this Article, references to
----------
"the Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed
in a consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, nominees,
officers, and employees, so that any person who is or was a director, officer
or employee of such constituent corporation, or is or was serving at the
request of such constituent corporation as director, officer or employee of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Article, with
respect to the resulting or surviving corporation as he would have with
respect to such constituent corporation if its separate existence had
continued.
SECTION 6.6. Indemnity Not Exclusive. The indemnification or
-----------------------
advancement of expenses provided under this Article shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any other bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in
his official capacity and as to action in another capacity while holding such
office. Notwithstanding anything in this Article to the contrary, the
Corporation shall indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal or investigative by reason of the fact
that he is or was a director, nominee, officer or employee of the Corporation,
or was serving at the request of the Corporation as a director, officer or
employee of another corporation, partnership, joint venture, trust or other
enterprise, to the fullest extent permitted by applicable law.
SECTION 6.7. Continuation. The indemnification and advancement of
------------
expenses provided by, or granted pursuant to, this Article for acts occurring
at the time such director, nominee, officer or employee was a director,
nominee, officer or employee of the Corporation shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased
to be a director, nominee, officer or employee and shall inure to the benefit
of the heirs, executors and administrators of such a person.
ARTICLE VII - MISCELLANEOUS
SECTION 7.1. Seal. The corporate seal shall have inscribed on it the
----
name of the Corporation, and the words "Corporate Seal, Delaware." The seal
may be used by causing it or a facsimile of the seal to be impressed or
affixed or otherwise reproduced.
SECTION 7.2. Books. The books of the Corporation may be kept (subject
-----
to any provision contained in Delaware Law) outside the State of Delaware at
the offices of the Corporation at Houston, Texas, or at such other place or
places as may be designated from time to time by the Board of Directors.
ARTICLE VIII - AMENDMENT
These bylaws may be amended or repealed, or new bylaws may be adopted, by
the stockholders entitled to vote on the matter at any annual or special
meeting or by the Board of Directors.
<TABLE>
COMPAQ COMPUTER CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Nine months ended Quarter ended
September 30, September 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 750.8 733.6 755.2 737.1
Incremental shares attributed
to outstanding options 27.3 21.1 34.1 21.4
------- ------- ------- -------
778.1 754.7 789.3 758.5
======= ======= ======= =======
Earnings:
Net income $ 1,188 $ 831 $ 517 $ 365
======= ======= ======= =======
Earnings per common and common equivalent share $ 1.53 $ 1.10 $ .66 $ .48
======= ======= ======= =======
EARNINGS PER SHARE ASSUMING FULL
DILUTION
Shares used in computing earnings per share:
Weighted average number of shares outstanding 750.8 733.6 755.2 737.1
Incremental shares attributed to
Outstanding options 40.8 25.9 36.8 23.4
------- ------- ------- -------
791.6 759.5 792.0 760.5
======= ======= ======= =======
Earnings:
Net income $ 1,188 $ 831 $ 517 $ 365
======= ======= ======= =======
Earnings per common and common equivalent share $ 1.50 $ 1.09 $ .65 $ .48
======= ======= ======= =======
</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 SEPTEMBER 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,840
<SECURITIES> 1,118
<RECEIVABLES> 2,888
<ALLOWANCES> 0
<INVENTORY> 2,007
<CURRENT-ASSETS> 11,906
<PP&E> 1,819
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,343
<CURRENT-LIABILITIES> 5,440
<BONDS> 76
<COMMON> 1,875
0
0
<OTHER-SE> 6,706
<TOTAL-LIABILITY-AND-EQUITY> 14,343
<SALES> 17,261
<TOTAL-REVENUES> 17,261
<CGS> 12,530
<TOTAL-COSTS> 12,530
<OTHER-EXPENSES> 852<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114
<INCOME-PRETAX> 1,805
<INCOME-TAX> 617
<INCOME-CONTINUING> 1,188
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,188
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.50
<FN>
<F1> Includes research and development costs, purchased in-process
technology, and merger related costs.
</FN>
</TABLE>
