SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 1-9026
COMPAQ COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 76-0011617
(State or other jurisdiction (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, 1998, was approximately 1.7 billion.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(IN MILLIONS)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,596 $ 6,418
Short-term investments - 344
Accounts receivable, net 5,431 2,891
Inventories 2,202 1,570
Deferred income taxes 1,981 595
Other current assets 578 199
------------ ------------
Total current assets 14,788 12,017
Property, plant and equipment, less accumulated depreciation 2,855 1,985
Deferred income taxes 862 -
Intangible and other assets 3,243 629
------------ ------------
$ 21,748 $ 14,631
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,614 $ 2,837
Income taxes payable 201 195
Accrued restructuring costs 1,734 -
Other current liabilities 5,017 2,170
------------ ------------
Total current liabilities 10,566 5,202
------------ ------------
Postretirement and other postemployment benefits 398 -
------------ ------------
Minority interest 422 -
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value
(authorized: 10 million shares; issued: none)
Common stock and capital in excess of $.01 par value
(authorized: 3 billion shares; issued:
1,671 million shares at June 30, 1998 and
1,519 million shares at December 31, 1997) 6,724 2,096
Retained earnings 3,664 7,333
Treasury stock (at cost) (26) -
------------ ------------
Total stockholders' equity 10,362 9,429
------------ ------------
$ 21,748 $ 14,631
============ ============
</TABLE>
See accompanying notes to consolidated financial data.
<PAGE>
<TABLE>
<CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, QUARTER ENDED JUNE 30,
------------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Product sales $10,947 $10,573 $ 5,372 $5,405
Service revenue 572 214 460 110
-------- -------- -------- -------
11,519 10,787 5,832 5,515
-------- -------- -------- -------
Cost of sales:
Cost of product sales 9,007 7,677 4,406 3,897
Cost of service revenue 379 156 316 81
-------- -------- -------- -------
9,386 7,833 4,722 3,978
-------- -------- -------- -------
Selling, general, and administrative expense 1,836 1,309 1,051 670
Research and development costs 494 387 249 198
Purchased in-process technology 3,234 208 3,234 208
Restructuring and asset impairment charges 393 - 393 -
Other income and expense, net (74) (19) (44) (4)
-------- -------- -------- -------
5,883 1,885 4,883 1,072
-------- -------- -------- -------
Income (loss) before provision for income taxes (3,750) 1,069 (3,773) 465
Provision (benefit) for income taxes (134) 398 (141) 208
-------- -------- -------- -------
Net income (loss) $(3,616) $ 671 $(3,632) $ 257
======== ======== ======== =======
Earnings (loss) per common share:
Basic $ (2.35) $ .45 $ (2.33) $ .17
======== ======== ======== =======
Diluted $ (2.35) $ .43 $ (2.33) $ .17
======== ======== ======== =======
Shares used in computing earnings (loss) per
common share:
Basic 1,539 1,497 1,556 1,500
======== ======== ======== =======
Diluted 1,539 1,547 1,556 1,552
======== ======== ======== =======
</TABLE>
See accompanying notes to consolidated financial data.
<PAGE>
<TABLE>
<CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
-------- -------
(IN MILLIONS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(3,616) $ 671
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 272 256
Purchased in-process technology 3,234 208
Restructuring and asset impairment charges 393 -
Changes in operating assets and liabilities, net of
effects of purchased businesses:
Accounts receivable (221) 893
Inventories 644 (409)
Other current assets 17 (23)
Accounts payable (9) 469
Income taxes payable (128) (124)
Accrued restructuring costs (10) -
Other current liabilities (43) 70
-------- -------
Net cash provided by operating activities 533 2,011
-------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment, net (257) (298)
Purchases of short-term investments - (968)
Proceeds from short-term investments 344 1,143
Acquisition of businesses, net of cash acquired (1,413) (268)
Other, net (314) 35
-------- -------
Net cash used in investing activities (1,640) (356)
-------- -------
Cash flows from financing activities:
Payments to retire debt (788) (293)
Purchase of treasury shares (26) -
Issuance of common stock pursuant to stock option plans 94 80
Dividends paid (46) -
Other, net - (37)
-------- -------
Net cash used in financing activities (766) (250)
-------- -------
Effect of exchange rate changes on cash and cash equivalents 51 29
-------- -------
Net increase (decrease) in cash and cash equivalents (1,822) 1,434
Cash and cash equivalents at beginning of period 6,418 3,008
-------- -------
Cash and cash equivalents at end of period $ 4,596 $4,442
======== =======
</TABLE>
See accompanying notes to consolidated financial data.
<PAGE>
<TABLE>
<CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
-------- -----
(IN MILLIONS)
<S> <C> <C>
Acquisitions (Note 2)
Fair value of:
Assets acquired $16,029 $362
Liabilities assumed (7,014) (74)
Stock issued (4,284) -
Options issued (249) (10)
-------- -----
Cash paid 4,482 278
Less: cash acquired (3,069) (10)
-------- -----
Net cash paid for acquisition $ 1,413 $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 consolidated financial data as of June 30, 1998
and December 31, 1997 and for the three and six-month periods ended June 30,
1998 and 1997 have been prepared on substantially the same basis as Compaq's
annual consolidated financial statements. Compaq completed its acquisition of
Digital Equipment Corporation ("Digital") during the second quarter of 1998.
This acquisition was accounted for under the purchase method of accounting. The
financial information provided for the three-month and six-month periods ended
June 30, 1997 has been restated to reflect the acquisition of Tandem Computers
Incorporated in August 1997, which was accounted for as a pooling of interests.
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. Certain prior
year amounts have been reclassified to conform to current year presentation.
NOTE 2 - ACQUISITION OF DIGITAL
- ------------------------------------
On June 11, 1998, Compaq consummated its acquisition of Digital. Digital
is an industry leader in implementing and supporting networked business
solutions in multi-vendor environments based on high performance platforms with
an established global service and support team. The aggregate purchase price of
$9.1 billion consisted of approximately $4.5 billion in cash, the issuance of
approximately 141 million shares of Compaq common stock valued at approximately
$4.3 billion and the issuance of approximately 25 million options to purchase
Compaq common stock valued at approximately $249 million. The cash component of
the purchase price was paid through the use of Compaq's general corporate funds.
The results of operations of Digital and the estimated fair value of the assets
acquired and liabilities assumed are included in Compaq's financial statements
from the date of acquisition.
The purchase price was preliminarily allocated to the assets acquired and
liabilities assumed based on Compaq's estimates of fair value. Compaq is
awaiting additional information related to the fair value of certain assets
acquired and liabilities assumed and the finalization of the Digital-related
restructuring plans. Management does not expect the finalization of these
matters to have a material effect on the purchase price allocation. The fair
value assigned to intangible assets acquired was based on a valuation prepared
by an independent third-party appraisal company and consists of purchased
in-process technology, proven research and development, the installed customer
base and trademarks. The amounts allocated to tangible and intangible assets
acquired less liabilities assumed exceeded the purchase price by approximately
$4.1 billion. This excess value over the purchase price was allocated to reduce
proportionately the values assigned to long-term assets and purchased in-process
technology in determining their ultimate fair values. As a result of the change
in fair values of the long-term assets, the deferred tax liability associated
with these assets was also adjusted.
<PAGE>
NOTE 2 - ACQUISITION OF DIGITAL (CONTINUED)
- -------------------------------------------------
The following table shows the amounts allocated to the long-term assets,
the allocation of the excess value over purchase price and the resulting
assigned values for the assets acquired as of June 11, 1998:
<TABLE>
<CAPTION>
EXCESS VALUE VALUE ASSIGNED
INITIAL OVER PURCHASE TO NET ASSETS
BALANCE SHEET CATEGORY VALUATION PRICE ACQUIRED
- ----------------------------------- -------------- ---------------- ---------------
<S> <C> <C> <C>
Property, plant and equipment $ 1,465 $ (637) $ 828
Purchased in-process technology 5,722 (2,488) 3,234
Intangible assets:
Proven research and development 1,055 (459) 596
Installed customer base 2,150 (935) 1,215
Trademarks 391 (170) 221
Other assets 662 (288) 374
Deferred tax liability (1,073) 871 (202)
</TABLE>
Management estimates that $3.2 billion of the purchase price represents
purchased in-process technology that has not yet reached technological
feasibility and has no alternative future use. Accordingly, this amount was
immediately expensed in the Consolidated Statement of Income upon consummation
of the acquisition. The value assigned to purchased in-process technology,
based on a valuation prepared by an independent third-party appraisal company,
was determined by identifying research projects in areas for which technological
feasibility has not been established, including UNIX/Open VMS ($1.6 billion), NT
Systems ($800 million), storage ($2.7 billion) and Internet and others ($600
million). The value was determined by estimating the costs to develop the
purchased in-process technology into commercially viable products, estimating
the resulting net cash flows from such projects, and discounting the net cash
flows back to their present value. The discount rate includes a factor that
takes into account the uncertainty surrounding the successful development of the
purchased in-process technology. If these projects are not successfully
developed, future revenue and profitability of Compaq may be adversely affected.
Additionally, the value of other intangible assets acquired may become impaired.
The following table represents unaudited consolidated pro forma information
as if Compaq and Digital had been combined as of the beginning of the periods
presented. The pro forma data are presented for illustrative purposes only and
are not necessarily indicative of the combined financial position or results of
operations of future periods or the results that actually would have resulted
had Compaq and Digital been a combined company during the specified periods.
The pro forma results include the effects of the purchase price allocation on
depreciation of property, plant and equipment and amortization of intangible
assets, adjustments to reflect the reversal of interest income resulting from
the use of cash related to the acquisition of Digital, and preferred stock
dividends paid. The pro forma combined results exclude acquisition-related
charges for purchased in-process technology related to Digital.
<PAGE>
NOTE 2 - ACQUISITION OF DIGITAL (CONTINUED)
- -------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
-------- -------
PRO FORMA UNAUDITED
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Revenue:
Product sales $13,596 $14,403
Service revenue 3,263 3,161
-------- -------
Total revenue $16,859 $17,564
Net income (loss) $ (525) $ 696
======== =======
Earnings (loss) per common share:
Basic $ (.32) $ .42
======== =======
Diluted $ (.32) $ .41
======== =======
Shares used in computing earnings per common share:
Basic 1,652 1,638
======== =======
Diluted 1,652 1,692
======== =======
</TABLE>
The net loss for the six months ended June 30, 1998, includes $291 million, net
of tax, in restructuring and asset impairment charges as described in Note 3 to
the Consolidated Financial Data.
NOTE 3 - RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
- ----------------------------------------------------------
In June 1998, Compaq's management approved restructuring plans, which
include initiatives to integrate the operations of Compaq and Digital,
consolidate duplicative facilities, improve service delivery and reduce
overhead. Total accrued restructuring costs of $1.7 billion have been recorded
in the second quarter related to these initiatives, $1.4 billion of which
relates to Digital and was recorded as a component of the purchase price
allocation and $286 million relates to Compaq, which was charged to operations.
Management is in the process of finalizing its restructuring plans related to
Digital, and accordingly, the amounts recorded related to Digital are based on
management's current estimate of those costs. Management expects the Digital
restructuring plans to be finalized by the end of the year. Areas where
management estimates may be revised primarily relate to Digital employee
relocation costs, facility closure costs and other exit costs. Adjustments to
accrued restructuring costs related to Digital will be recorded as an adjustment
to the preliminary purchase price allocation.
Accrued restructuring charges include $1.1 billion ($999 million for
Digital and $132 million for Compaq) representing the cost of involuntary
employee separation benefits related to approximately 19,700 employees worldwide
(approximately 14,700 Digital employees and 5,000 Compaq employees). Employee
separation benefits include severance, medical and other benefits. Employee
separations will affect the majority of business functions, job classes and
geographies, with a majority of the reductions in North America and Europe. The
restructuring plans also include costs totaling $414 million ($272 million
related to Digital and $142 million related to Compaq) associated with the
closure of 13.2 million square feet of office, distribution and manufacturing
space, principally in North America and Europe. Other restructuring costs
include $99 million related to the relocation of Digital employees, with the
majority of this amount attributable to relocations in North America and Europe,
and $100 million primarily related to costs of terminating certain Digital
contractual obligations. Compaq expects that most of the restructuring actions
related to the plans will be completed within the next year.
NOTE 3 - RESTRUCTURING AND ASSET IMPAIRMENT CHARGES (CONTINUED)
- ----------------------------------------------------------------------
The accrued restructuring costs and amounts charged against the provision as of
June 30, 1998, were as follows (dollars in millions):
<TABLE>
<CAPTION>
- --------------------------------- ------------- -------- ---------- ------
CURRENT
COMPAQ DIGITAL YEAR TOTAL
SPENDING
- --------------------------------- ------------- -------- ---------- ------
<S> <C> <C> <C> <C>
Employee separations $ 132 $ 999 $ (4) $1,127
Facility closure costs 142 272 (6) 408
Relocation - 99 - 99
Other exit costs 12 88 - 100
- --------------------------------- ------------- -------- ---------- ------
Total accrued restructuring costs $ 286 $ 1,458 $ (10) $1,734
- --------------------------------- ------------- -------- ---------- ------
Number of employee separations
due to restructuring actions 46
- --------------------------------- ------------- -------- ---------- ------
</TABLE>
During the quarter, Compaq also recorded a $107 million charge related to asset
impairments. The asset impairments resulted from the writedown to fair market
value less costs to sell for assets taken out of service and held for sale or
disposal. The majority of this charge relates to the impairment of $74 million
of intangible assets associated with the acquisition of a company during 1995
that developed, manufactured, and supplied fast ethernet hubs, switches and
related products. In May 1998, management decided to close the manufacturing
facility and abandon the technologies acquired through this acquisition and
discontinue all related products.
NOTE 4 - CERTAIN BALANCE SHEET COMPONENTS
- -----------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------ ------
(IN MILLIONS)
<S> <C> <C>
INVENTORIES:
Raw materials and work-in-process $ 943 $ 767
Finished goods 1,259 803
------ ------
$2,202 $1,570
====== ======
PROPERTY, PLANT & EQUIPMENT:
Land $ 355 $ 185
Buildings and leasehold improvements 1,480 1,076
Machinery and equipment 2,738 2,392
Construction-in-process and other 452 373
------ ------
5,025 4,026
Less accumulated depreciation 2,170 2,041
------ ------
$2,855 $1,985
====== ======
</TABLE>
<PAGE>
NOTE 4 - CERTAIN BALANCE SHEET COMPONENTS (CONTINUED)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- -------------
<S> <C> <C>
INTANGIBLES AND OTHER ASSETS:
Installed customer base, net $ 1,212 $ -
Proven research and development, net 591 -
Trademarks, net 221 3
Other intangibles and goodwill, net 490 139
Other assets 729 487
--------- -------------
$ 3,243 $ 629
========= =============
OTHER CURRENT LIABILITIES:
Salaries, wages and related items $ 770 $ 123
Deferred revenue 929 31
Accrued warranty 680 423
Accrued royalties 216 132
Other accrued expenses 2,158 1,280
Current portion of long-term debt 264 181
--------- -------------
$ 5,017 $ 2,170
========= =============
</TABLE>
The estimated lives for property, plant and equipment are 30 years for
buildings and range from 3 to 10 years for machinery and equipment. Leasehold
improvements are amortized over the shorter of the useful life of the
improvement or the life of the related lease. The estimated lives of proven
research and development, installed customer base, and trademarks are 5 years,
15 years and 5 years, respectively.
NOTE 5 - TENDER OFFER FOR NOTES AND DEBENTURES
- ------------------------------------------------------
In June 1998, Compaq completed a cash tender offer for Digital debt
securities with a fair value of $879 million, including accrued interest.
Compaq paid an aggregate of $799 million (including accrued interest) for the
notes and debentures tendered. The untendered balance of the notes and
debentures is included in other current liabilities.
NOTE 6 - PENSION, POSTRETIREMENT AND OTHER POSTEMPLOYMENT BENEFITS
- --------------------------------------------------------------------------
Upon consummation of the Digital acquisition, Compaq assumed certain of
Digital's defined benefit and defined contribution plans. The Digital employees
who were eligible to participate in the Digital plans at the time of the
acquisition are eligible to participate in these plans. The benefits generally
are based on years of service and compensation during the employee's career.
Pension cost is based on estimated benefit formulas.
Additionally, Compaq assumed the defined benefit postretirement plans that
provide medical and dental benefits for Digital's retirees and their eligible
dependents in the U.S and certain other locations. The majority of Digital's
non-U.S. subsidiaries do not offer postretirement benefits other than pensions
to retirees.
<PAGE>
NOTE 7 - TREASURY STOCK
- ---------------------------
On April 23, 1998, the Board of Directors authorized a systematic stock
repurchase program to acquire up to 100 million shares of Compaq's common stock.
Compaq implemented this program on May 4, 1998. Compaq repurchased
approximately 892,000 shares through June 30, 1998, for approximately $26
million.
NOTE 8 - OTHER INCOME AND EXPENSE
- ---------------------------------------
Other income and expense consisted of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED QUARTER ENDED
JUNE 30, JUNE 30,
-------------- ------------
1998 1997 1998 1997
------ ------ ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Interest and dividend income $(171) $(119) $(86) $(63)
Interest (income) expense associated
With hedging 2 (3) 3 (1)
Other interest expense 75 66 35 32
Currency (gains) losses, net (2) 12 (6) 9
Minority interest dividend 1 - 1 -
Other, net 21 25 9 19
------ ------ ----- -----
$ (74) $ (19) $(44) $ (4)
====== ====== ===== =====
</TABLE>
NOTE 9 - COMPREHENSIVE INCOME
- ---------------------------------
Comprehensive income (loss) is comprised of two components: net income and
other comprehensive income. Other comprehensive income refers to revenues,
expenses, gains and losses that under generally accepted accounting principles
are recorded as an element of stockholders' equity and are excluded from net
income. Compaq's other comprehensive income is comprised of foreign currency
translation adjustments from certain subsidiaries. Comprehensive income for the
six months ended June 30, 1998 and 1997, respectively, is insignificant and
therefore is not disclosed in the balance sheet as a separate component of
stockholders' equity. The components of comprehensive income (loss) are listed
below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED QUARTER ENDED
JUNE 30, JUNE 30,
--------------- ---------------
1998 1997 1998 1997
-------- ----- -------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net income (loss) $(3,616) $671 $(3,632) $257
Other comprehensive loss (5) (13) (2) (3)
-------- ----- -------- -----
Comprehensive income (loss) $(3,621) $658 $(3,634) $254
======== ===== ======== =====
</TABLE>
NOTE 10 - EARNINGS PER COMMON SHARE
- -----------------------------------------
Basic earnings per common share is computed using the weighted average
number of shares outstanding during the period. Diluted earnings per common
share is computed using the weighted average number of shares outstanding
adjusted for the incremental shares attributed to outstanding options to
purchase common stock. Diluted loss per share is based only on the weighted
average number of shares outstanding during the period. Incremental common
stock equivalent shares of 60 million and 59 million were not used in the
calculation of diluted earnings per common share in the six and three months
ended June 30, 1998, respectively, due to the net loss for the periods.
Incremental common stock
NOTE 10 - EARNINGS PER COMMON SHARE (CONTINUED)
- ------------------------------------------------------
equivalent shares of 50 million and 52 million were used in the calculation of
diluted earnings per common share in the six and three months ended June 30,
1997, respectively.
Stock options to purchase 11 million shares and 50 million shares of common
stock for the six-month periods and 13 million shares and 53 million shares of
common stock for the three-month periods ended June 30, 1998 and 1997,
respectively, were outstanding but not included in the computation of diluted
earnings per common share because the option exercise price was greater than the
average market price of the common shares, and therefore, the effect would be
antidilutive.
NOTE 11 - LITIGATION
- -----------------------
Five class action lawsuits have been filed in the United States District
Court for the Southern District of Texas, Houston Division. The actions are
purported class actions of all persons who purchased Compaq common stock from
July 10, 1997 through March 6, 1998, and the named defendants include the
Company and certain of its current and former officers and directors. The
complaints allege that the defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by, among
other things, withholding information and making misleading statements about
channel inventory and factoring of receivables in order to inflate the market
price of Compaq's common stock, and further alleges that certain of the
individual defendants sold Compaq common stock at these inflated prices. A
motion for the appointment of lead counsel and the consolidation of the
purported class action lawsuits is pending. The plaintiffs seek monetary
damages, interest, costs and expenses. The Company intends to defend the suits
vigorously.
Several purported class action lawsuits were filed against Digital during
1994 alleging violations of the federal securities laws arising from alleged
misrepresentations and omissions in connection with Digital's issuance and sale
of Series A 8-7/8% Cumulative Preferred Stock and Digital's financial results
for the quarter ended April 2, 1994. During 1995, the lawsuits were
consolidated into three cases, which were pending before the United States
District Court for the District of Massachusetts. On August 8, 1995, the
Massachusetts federal court granted the defendants' motion to dismiss all three
cases in their entirety. On May 7, 1996, the United States Court of Appeals for
the First Circuit affirmed in part and reversed in part the dismissal of the two
cases, and remanded for further proceedings.
NOTE 12 - DIGITAL SUMMARIZED UNAUDITED FINANCIAL INFORMATION (DIGITAL
- -----------------------------------------------------------------------------
STAND-ALONE)
- ------------
In March 1994, Digital sold to the public 16 million Depositary shares
under a shelf registration, each representing a one-fourth interest in a share
of the Series A Preferred Stock, par value $1.00 per share. Dividends on the
Series A Preferred Stock accrue at the annual rate of 8-7/8%, or $35.5 million
per year. The Series A Preferred Stock is not convertible into, or exchangeable
for, shares of any other class or classes of stock. The Series A Preferred
Stock is not redeemable prior to April 1, 1999. On or after April 1, 1999,
Compaq, at its option, may redeem shares of the Series A Preferred Stock, for
cash at the redemption price per share of $100 ($25 per depository share), plus
accrued and unpaid dividends. Compaq has guaranteed the dividend payments,
redemption price and liquidation preference of the Digital Series A Preferred
Stock. At June 30, 1998, there were declared and unpaid dividends of $8.9
million. The minority interest of $422 million on the balance sheet represents
the fair value of the Series A Preferred Stock as of the date of the Digital
acquisition.
The summarized unaudited financial information for Digital and its
consolidated subsidiaries on a stand-alone basis is presented below. The
financial information for the period subsequent to the acquisition is based on
the new basis of accounting reflecting the amounts included in the preliminary
purchase price allocation resulting from Compaq's acquisition of Digital (see
Notes 2 and 3), and is presented in accordance with generally accepted
accounting principles. The amounts previously
<PAGE>
NOTE 12 - DIGITAL SUMMARIZED UNAUDITED FINANCIAL INFORMATION (DIGITAL
- -----------------------------------------------------------------------------
STAND-ALONE) (CONTINUED)
- -------------------------
presented have been revised to reflect this new basis of accounting, as
recommended in Securities and Exchange Commission Staff Accounting Bulletin No.
54. The new basis of accounting adjustments include (i) fair value adjustments
to the historical basis of assets and liabilities acquired, (ii) the fair value
assigned to intangible assets, including purchased in-process technology and
(iii) accrued restructuring charges. In addition, the Digital stand-alone
financial information includes an allocation of certain costs incurred by Compaq
including (i) costs for administrative functions and services performed on
behalf of Digital by centralized staff groups within Compaq, and (ii) Compaq's
general corporate expenses. The costs of these functions and services have been
allocated to Digital using methods that Compaq management believes are
reasonable. Such allocations are not necessarily indicative of the costs that
would have been incurred if Digital had been a separate entity.
Although Digital financial information is presented on a stand-alone basis,
the companies are being managed on a consolidated basis. The stand-alone
Digital information does not necessarily reflect the results that Digital would
have realized had the acquisition not occurred and is not necessarily indicative
of the future results of Digital. Separate financial information and other
disclosures concerning Digital are not deemed by management to be meaningful to
holders of the Series A Preferred Stock.
<TABLE>
<CAPTION>
NEW BASIS OLD BASIS
JUNE 27, 1998 DECEMBER 27, 1997
--------------- -------------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C>
Current assets $ 4,955 $ 6,428
Noncurrent assets 7,911 2,365
Current liabilities 5,213 3,487
Noncurrent liabilities 1,198 1,910
Stockholders' equity 6,455 3,396
</TABLE>
<TABLE>
<CAPTION>
NEW BASIS OLD BASIS
--------------------- -------------------------------------
FOR THE PERIOD FROM FOR THE PERIOD FROM QUARTER
JUNE 12, 1998 MARCH 29, 1998 ENDED
THROUGH THROUGH JUNE 28, 1997
JUNE 27, 1998 JUNE 11, 1998
--------------------- --------------------- --------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C>
Product sales $ 749 $ 968 $ 1,994
Service revenues 295 1,222 $ 1,469
--------------------- --------------------- --------------
Total revenues $ 1,044 $ 2,190 $ 3,463
Gross margin - product sales $ 295 $ 192 $ 742
Gross margin - service revenues 94 347 457
--------------------- --------------------- --------------
Total gross margin $ 389 $ 539 $ 1,199
Net income (loss) $ (3,073)(1) $ (355) $ 124
===================== ===================== ==============
</TABLE>
<PAGE>
NOTE 12 - DIGITAL SUMMARIZED UNAUDITED FINANCIAL INFORMATION (DIGITAL
- -----------------------------------------------------------------------------
STAND-ALONE) (CONTINUED)
- -------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE PERIOD FROM SIX MONTHS
JUNE 12, 1998 DECEMBER 28, 1997 ENDED
THROUGH THROUGH JUNE 28, 1997
JUNE 27, 1998 JUNE 11, 1998
--------------------- --------------------- --------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C>
Product sales $ 749 $ 2,650 $ 3,830
Service revenues 295 2,731 $ 2,947
--------------------- --------------------- --------------
Total revenues $ 1,044 $ 5,381 $ 6,777
Gross margin - product sales $ 295 $ 779 $ 1,390
Gross margin - service revenues 94 834 915
--------------------- --------------------- --------------
Total gross margin $ 389 $ 1,613 $ 2,305
Net income (loss) $ (3,073)(1) $ (13) $ 175
===================== ===================== ==============
<FN>
(1) Net loss includes $3.2 billion for the write-off of purchased in-process technology
resulting from Compaq's acquisition of Digital.
</TABLE>
<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.
November 11, 1998 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> <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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4596
<SECURITIES> 0
<RECEIVABLES> 5431
<ALLOWANCES> 0
<INVENTORY> 2202
<CURRENT-ASSETS> 14788
<PP&E> 2855
<DEPRECIATION> 0
<TOTAL-ASSETS> 21748
<CURRENT-LIABILITIES> 10566
<BONDS> 0
<COMMON> 6724
0
0
<OTHER-SE> 3638
<TOTAL-LIABILITY-AND-EQUITY> 21748
<SALES> 10947
<TOTAL-REVENUES> 11519
<CGS> 9007
<TOTAL-COSTS> 9386
<OTHER-EXPENSES> 5957
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (74)
<INCOME-PRETAX> (3750)
<INCOME-TAX> (134)
<INCOME-CONTINUING> (3616)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3616)
<EPS-PRIMARY> (2.35)
<EPS-DILUTED> (2.35)
</TABLE>
