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 MARCH 31, 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 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 March 31, 1998, was approximately 1.5 billion.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
MARCH 31, DECEMBER 31,
1998 1997
---------- -------------
(IN MILLIONS)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,107 $ 6,418
Short-term investments - 344
Accounts receivable, net 2,743 2,891
Inventories 1,256 1,570
Deferred income taxes 594 595
Other current assets 207 199
---------- -------------
Total current assets 11,907 12,017
Property, plant and equipment, less accumulated depreciation 2,028 1,985
Other assets 645 629
---------- -------------
$ 14,580 $ 14,631
========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,812 $ 2,837
Income taxes payable 257 195
Other current liabilities 2,037 2,170
---------- -------------
Total current liabilities 5,106 5,202
---------- -------------
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 and outstanding:
1,526 million shares at March 31, 1998 and
1,519 million shares at December 31, 1997) 2,153 2,096
Retained earnings 7,321 7,333
---------- -------------
Total stockholders' equity 9,474 9,429
---------- -------------
$ 14,580 $ 14,631
========== =============
<FN>
See accompanying notes to consolidated financial data.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
QUARTER ENDED
MARCH 31,
------------------------------
1998 1997
-------------- --------------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Sales $ 5,687 $ 5,272
Cost of sales 4,664 3,855
--------------- --------------
1,023 1,417
--------------- --------------
Selling, general and administrative expense 785 639
Research and development costs 245 189
Other income and expense, net ( 30) ( 15)
--------------- --------------
1,000 813
--------------- --------------
Income before provision for income taxes 23 604
Provision for income taxes 7 190
--------------- --------------
Net income $ 16 $ 414
=============== ==============
Earnings per common share:
Basic $ 0.01 $ 0.28
=============== ==============
Diluted $ 0.01 $ 0.27
=============== ==============
Shares used in computing earnings per common share:
Basic 1,523 1,494
=============== ==============
Diluted 1,584 1,541
=============== ==============
<FN>
See accompanying notes to consolidated financial data.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
QUARTER ENDED
MARCH 31,
--------------------------------
1998 1997
-------------- ---------------
(IN MILLIONS)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16 $ 414
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 151 127
Changes in operating assets and liabilities:
Accounts receivable 119 317
Inventories 314 ( 97)
Other current assets (9) 29
Accounts payable ( 23) 223
Income taxes payable 62 ( 72)
Other current liabilities ( 195) 6
--------------- ---------------
Net cash provided by operating activities 435 947
--------------- ---------------
Cash flows from investing activities:
Purchases of property, plant and equipment, net ( 157) ( 140)
Purchases of short-term investments - ( 158)
Proceeds from short-term investments 344 1,037
Other, net ( 27) 77
--------------- ---------------
Net cash provided by investing activities 160 816
--------------- ---------------
Cash flows from financing activities:
Issuance of common stock pursuant to stock option plans 58 23
Dividend paid ( 23) -
Other, net - ( 37)
--------------- ---------------
Net cash provided by (used in) financing activities 35 (14)
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents 59 14
--------------- ---------------
Net increase in cash and cash equivalents 689 1,763
Cash and cash equivalents at beginning of period 6,418 3,008
--------------- ---------------
Cash and cash equivalents at end of period $ 7,107 $ 4,771
=============== ===============
<FN>
See accompanying notes to consolidated financial data.
</TABLE>
<PAGE>
COMPAQ COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL DATA
NOTE 1 - BASIS OF PRESENTATION
- - -----------------------------------
The accompanying unaudited financial data as of March 31, 1998 and December
31, 1997 and for the quarters ended March 31, 1998 and 1997 have been prepared
on substantially the same basis as Compaq's annual consolidated financial
statements. The financial information provided for the quarter ended March 31,
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.
NOTE 2 - INVENTORIES
- - -----------------------
Inventories consisted of the following components:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- -------------
(IN MILLIONS)
<S> <C> <C>
Raw materials and work-in-process $ 551 $ 767
Finished goods 705 803
---------- -------------
$ 1,256 $ 1,570
========== =============
</TABLE>
NOTE 3 - OTHER INCOME AND EXPENSE
- - ---------------------------------------
Other income and expense consisted of the following:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
-----------------------
1998 1997
--------------- ------
(IN MILLIONS)
<S> <C> <C>
Interest and dividend income $ ( 85) $( 59)
Interest income associated with hedging ( 1) ( 2)
Other interest expense 40 37
Currency losses, net 4 2
Other, net 12 7
--------------- ------
$ ( 30) $( 15)
=============== ======
</TABLE>
NOTE 4 - BUSINESS COMBINATIONS
- - ----------------------------------
On January 26, 1998, Compaq announced the execution of an agreement to
acquire Digital Equipment Corporation. Under the terms of the transaction,
shareholders of Digital will receive $30 in cash and 0.945 shares of Compaq
common stock for each share of Digital stock. Compaq will issue approximately
139 million shares of Compaq common stock and $4.4 billion in cash. This
transaction will be accounted for as a purchase. The transaction is subject to
approval of Digital's shareholders as well as other customary closing conditions
and is expected to be completed in the second quarter of 1998.
NOTE 5 - LITIGATION
- - ----------------------
On April 16, 1998, a class action lawsuit was filed in the United States
District Court for the Southern District of Texas, Houston Division. The action
is a purported class action 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
complaint alleges 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. The
plaintiffs seek monetary damages, interest, costs and expenses. The Company
intends to defend the suit vigorously.
NOTE 6 - COMPREHENSIVE INCOME
- - ---------------------------------
Compaq adopted Statement of Financial Accounting Standards No. 130 ("SFAS
130"), Reporting Comprehensive Income, beginning with Compaq's fourth quarter of
1997. SFAS 130 separates comprehensive income into 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 those subsidiaries not using the U.S. dollar as
their functional currency recognized during the quarter ended March 31, 1998 and
1997, respectively. Cumulative comprehensive income as of March 31, 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 are listed below:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
--------------
1998 1997
------ ------
(IN MILLIONS)
<S> <C> <C>
Net income $ 16 $ 414
Other comprehensive loss ( 3) (10)
------ ------
Comprehensive income $ 13 $ 404
====== ======
</TABLE>
NOTE 7 - EARNINGS PER COMMON SHARE
- - ----------------------------------------
Basic earnings per common share is computed using the weighted average
number of shares outstanding. 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.
Incremental shares of 61 million and 47 million in the first quarter of 1998 and
1997 respectively, were used in the calculation of diluted earnings per common
share. Options to purchase 9 million and 32 million shares of common stock in
the first quarter of 1998 and 1997 respectively, were 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 stock.
NOTE 8 - SUBSEQUENT EVENT
- - -----------------------------
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.
The shares will be purchased in open market or private transactions. The number
of shares to be purchased and the timing of purchases will be based on several
factors, including the level of stock issuance under the equity incentive plans,
the price of Compaq stock, general market conditions and other factors. Compaq
implemented this program on May 4, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated interim financial statements. Except as specifically indicated,
the forward-looking statements contained in this discussion do not take into
consideration the impact of Compaq's agreement to merge with Digital Equipment
Corporation as described in Item 1, Notes to Consolidated Financial Data. The
merger is subject to the approval of Digital's shareholders as well as certain
regulatory approvals. We expect to consummate the merger in the second quarter
of 1998.
RESULTS OF OPERATIONS
The following table presents, as a percentage of sales, certain selected
financial data for quarters ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
--------------
1998 1997
------ ------
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 82.0 73.1
------ ------
Gross margin 18.0 26.9
Selling, general and administrative expenses 13.8 12.1
Research and development costs 4.3 3.6
Other income and expense, net ( 0.5) (0.3)
------ ------
17.6 15.4
------ ------
Income before provision for income taxes 0.4% 11.5%
====== ======
</TABLE>
SALES
Sales increased 8% in the first quarter of 1998, over the comparable period
of 1997, as a result of an increase in the number of units sold of 40% and an
increase in option sales, partially offset by additional price reductions and
aggressive promotional activities on commercial products in North America. Due
to lower than expected sales out of the North American commercial channels,
these actions were taken to reduce channel inventories and accelerate the
implementation of our Optimized Distribution Model as well as to respond to
competitive pricing conditions. North America sales growth in absolute dollars
was approximately 5% when compared to the same period last year, reflecting the
pricing and promotional actions taken during the first quarter of 1998.
European sales increased 18% over the comparable period in 1997. Other
international sales decreased 8% over the comparable period in 1997 primarily
reflecting the continued adverse market conditions in the Asian and Japanese
regions. North American sales, including Canada, represented 49% of total sales
in the first three months of 1998 compared with 50% for the same period of 1997.
European sales represented 38% of total sales in the first three months of 1998
compared to 35% in the comparable period of 1997.
GROSS MARGIN
Gross margin as a percentage of sales decreased to 18.0% in the first
quarter of 1998, compared to 26.9% in the comparable period of 1997. The
decrease resulted primarily from significant pricing and promotional actions
taken in the North American market as discussed above.
OPERATING EXPENSES
Compaq's selling, general and administrative expense increased to 13.8% of
sales in the first quarter of 1998 as compared with 12.1% in the same period of
1997 due to the impact of the aforementioned pricing and promotional actions on
sales during the current quarter. Compaq anticipates that for the remainder of
1998, 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.
Research and development costs increased to 4.3% of sales in the first
quarter of 1998 compared to 3.6% in the corresponding period of 1997. Compaq is
committed to continuing a significant research and development program to
support current operations and meet the demands of new product introductions.
OTHER ITEMS
Compaq had other income of $30 million and $15 million in the first quarter
of 1998 and 1997, respectively. 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 $4 million in the first quarter of 1998, compared to a net loss of $2 million
in the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Compaq's working capital of $6.8 billion at March 31, 1998, remained
essentially unchanged compared to December 31, 1997.
Compaq's cash, cash equivalents, and short-term investments increased to
$7.1 billion at March 31, 1998, from $6.8 billion at December 31, 1997,
primarily due to positive cash flow from operating activities including improved
management of inventory, partially offset by a decrease in other current
liabilities. Approximately $1.0 billion of accounts receivable were sold in the
first quarter of 1998, compared to $1.1 billion in the quarter ended December
31, 1997. Inventory levels decreased to $1.3 billion compared to $1.6 billion
at December 31, 1997, primarily due to changes in production planning.
Cash used in the first quarter of 1998 for the purchase of property, plant,
and equipment totaled $157 million. Compaq estimates that capital expenditures
for land, buildings, and equipment during the remainder of 1998 will be $613
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 $4 billion
syndicated credit facility (of which $1 billion expires in September 1998 and $3
billion expires in September 2002) that was unused at March 31, 1998. Compaq has
established a commercial paper program, supported by the syndicated credit
facility, which was unused at March 31, 1998. 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.
Compaq will use approximately $4.4 billion in cash to acquire Digital
Equipment Corporation and expects to acquire approximately $2 billion in cash
from Digital. The transaction is subject to approval of Digital's shareholders
as well as other customary closing conditions and is expected to be completed in
the second quarter of 1998.
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 and the application of
antitrust laws. 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.
Market Environment. We expect the personal computer market to expand in
1998 in line with third party research organizations' forecasts of unit growth
in the range of 15% to 16%. We expect the enterprise market to expand with the
development of internet and intranet enterprise applications and the corporate
MIS migration from legacy systems to client/server systems. With our
acquisition of Tandem Computers Incorporated in the third quarter of 1997 and
the anticipated acquisition of Digital Equipment Corporation in the second
quarter of 1998, we confront a challenge in building the high-end UNIX solutions
market while continuing to advance the sphere of NT-based solutions to achieve
the lowest cost of ownership and the highest computing value for our customers.
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.
Competitive Environment. Competition remains fierce in the information
technology industry with a large number of competitors vying for market share.
Competition creates an aggressive pricing environment, which continues to put
pressure on gross margins. A number of PC companies sell directly to end users
and, particularly in the U.S., direct sales have increased as a percentage of
the total PC market. Compaq has established a variety of programs designed to
increase its manufacturing, distribution, and business process efficiencies to
enable it to compete more effectively. In early March 1998, Compaq announced
that its earnings in the first quarter would be at break even as a consequence
of pricing actions and aggressive promotions to reduce channel inventories due
to lower than expected channel sales during the quarter and to accelerate the
implementation of its Optimized Distribution Model. Compaq's outlook for the
second quarter remains cautious as it continues to evaluate the effectiveness of
these programs. In the second quarter, Compaq will implement additional
programs, particularly in North America, to further increase its competitiveness
against direct sellers. The success of these programs depends upon Compaq's
ability to continue its successful working relationship with its reseller
channel, the implementation of more efficient component supply, manufacturing,
and distribution strategies to increase overall efficiencies, and market
responses by our competitors.
Risks of Newly Acquired Businesses. Subject to approval by Digital
shareholders and certain regulatory approvals, Compaq will expand its service
offerings and enterprise solutions through its pending acquisition of Digital
Equipment Corporation. At that time, Compaq will confront a number of risks
associated with Digital's business. Compaq believes that the Digital
acquisition will enhance its operating results, but as with any significant
acquisition or merger, Compaq confronts challenges in retaining key employees,
maintaining key industry alliances, synchronizing product roadmaps and business
processes, and integrating logistics, marketing, product development, and
manufacturing operations to achieve greater efficiencies. Compaq plans to
continue to use strategic acquisitions and mergers to assist in the growth of
its business.
Third Party Relationships. We work with third parties in strategic
alliances to facilitate product offerings, product development, and
compatibility, in various manufacturing, configuring and shipping capacities,
and as suppliers of components and services in non-core competencies. Although
we try to achieve strong working relationships with parties who share our
industry goals and have adequate resources to fulfill their responsibilities,
these relationships lead to a number of risks. First, these companies may suffer
financial, or operational difficulties that affect their performance, which
could lead to delays in product announcements and gaps in component supplies.
Second, major companies from which we purchase components or services (such as
Intel, Microsoft, Cisco and IBM) may be competitors in other areas, which could
affect pricing, new product development or future performance. Third,
difficulties in coordinating activities may lead to gaps in delivery and
performance of our products. Finally, companies from which we purchase
components may be subject to legal challenges that impede their ability to ship
their products in a timely manner. A number of regulatory authorities are
currently investigating allegations of violations of antitrust laws by Microsoft
and Intel. Any delays in shipments of new products resulting from such
investigations could delay shipments of our products as well as negatively
impact customer demand stemming from new product generations.
Inventory. In the event of a drop in worldwide demand for computer
products, lower-than-anticipated demand for one or more of Compaq's products,
difficulties in managing product transitions, or component pricing movements,
there could be an adverse impact on inventory levels, cash, and related
profitability.
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. In addition, as a result of the Tandem acquisition and the
anticipated Digital transaction, 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 exposes Compaq to risks
associated with customized specifications.
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 increase 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, should we not anticipate pricing actions that are necessary,
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. We continue to focus on making 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. We must
successfully manage and participate in the development of standards while
continuing to differentiate Compaq 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, we 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. There can be no assurance that
we will be able to negotiate terms that give us a competitive market advantage
under the license agreements that are necessary to operate our business in the
future.
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.
Furthermore, should prices for components increase unexpectedly, Compaq's gross
margin could be adversely affected.
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 manufacturing operations in developing countries, such
as Brazil and China, and the expansion of sales into economically volatile areas
such as Asia Pacific, Latin America and other emerging markets, subject Compaq
to a number of economic and other risks, such as financial instability among
resellers in these regions. Compaq generally has experienced longer accounts
receivable cycles in emerging markets, in particular Asia Pacific and Latin
America, when compared to U.S. and European markets. In addition, geographic
expansion subjects Compaq to political and financial instability of the
countries into which Compaq expands, including currency devaluation and interest
rate fluctuations. We continue to evaluate business operations in these regions
and attempt to take measures to limit risks in these areas.
Year 2000 Compliance. We believe the cost of administering Compaq's Year
2000 readiness program, exclusive of any customer claims, will not have a
material adverse impact on future earnings. Since there is no uniform
definition of Year 2000 "compliance" and since all customer situations cannot be
anticipated, particularly those involving third party products, Compaq may see
an increase in warranty and other claims as a result of the Year 2000
transition. Such claims, if successful, could have a material adverse impact on
future results. See "Item 1. Business - Year 2000 Transition" in Compaq's
Form 10-K for the year ended 1997 for additional information.
Projects to address Compaq's internal information systems currently are
underway, and Compaq is in the process of replacing some of its older systems
with new systems that are able to handle the Year 2000 transition. We will
continue to review internal system requirements and to correct further issues as
they are identified. Although our evaluation of these systems is still in
process, we believe that the impact of the Year 2000 transition on our internal
systems will not have a material adverse impact on future results. In addition,
Compaq's task force is evaluating the impact of Year 2000 compliance of
suppliers, is asking suppliers about compliance, and is establishing Year 2000
compliance requirements for suppliers. Since the compliance of suppliers
depends upon their cooperation, failures remain a possibility and could have a
material adverse impact on future results.
Tax Rate. Compaq currently has a 30% effective tax rate, before the effect
of non-deductible purchased in-process technology and merger-related costs and
expects this rate will continue at approximately the same level in 1998. Compaq
benefits from a tax holiday in Singapore that expires in 2001, with a potential
extension to August 2004 if certain cumulative investment levels and other
conditions are met. Compaq's tax rate is heavily dependent upon the proportion
of earnings that is 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.
Currency Fluctuations. Compaq's risks associated with currency
fluctuations are discussed in Item 3 below.
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.
ITEM 3. MARKET RISKS
Compaq is exposed to market risks, which include changes in U.S. and
international interest rates as wells as changes in currency exchange rates as
measured against the U.S. dollar and each other. We attempt to reduce these
risks by utilizing financial instruments, including derivative transactions,
pursuant to company policies.
Compaq uses market valuations and value-at-risk valuation methods to assess
market risk of its financial instruments and derivative portfolios. It uses J.P.
Morgan's RiskMetrics (TM) to estimate the value-at-risk based on
Estimates of volatility and correlation of market factors drawn from
J.P. Morgan's RiskMetrics (TM) data sets as of March 31, 1998. Our measured
value-at-risk from holding derivative and other financial instruments, using a
95% confidence level and assuming normal market conditions at March 31, 1998,
was immaterial.
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. Using primarily forward exchange contracts,
Compaq hedges those assets and liabilities that, when remeasured according to
generally accepted accounting principles, impact the income statement. 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, with the exception of Latin America.
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, Compaq's sales or costs are adversely affected.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 16, 1998, a class action lawsuit was filed in the United States
District Court for the Southern District of Texas, Houston Division. See Note 5
to Consolidated Financial Data.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
first quarter of 1998. At the annual meeting of stockholders of Compaq on April
23, 1998, the stockholders voted on two proposals. The first was a proposal to
elect Benjamin M. Rosen, Eckhard Pfeiffer, Lawrence T. Babbio, Jr., Robert Ted
Enloe, III, George H. Heilmeier, Peter N. Larson, Kenneth L. Lay, Thomas J.
Perkins, Kenneth Roman and Lucille S. Salhany as directors of Compaq. The
following table sets forth the votes in such election:
<TABLE>
<CAPTION>
VOTES AGAINST
DIRECTOR VOTES FOR OR WITHHELD
- - ----------------------- ------------- -----------
<S> <C> <C>
Benjamin M. Rosen 1,316,058,804 8,049,279
Eckhard Pfeiffer 1,316,037,723 8,070,360
Lawrence T. Babbio, Jr. 1,316,671,217 7,436,856
Robert Ted Enloe, III 1,316,221,367 7,886,716
George H. Heilmeier 1,316,230,101 7,877,982
Peter N. Larson 1,316,415,455 7,692,629
Kenneth L. Lay 1,316,115,676 7,992,407
Thomas J. Perkins 1,316,242,679 7,865,404
Kenneth Roman 1,316,194,326 7,913,757
Lucille S. Salhany 1,316,107,886 8,000,197
</TABLE>
The shareholders also voted on a proposal to approve the 1998 Stock Option
Plan. The following table sets forth the votes in such election:
Number of Shares:
Voted For: 611,418,972
Withheld 342,017,749
Abstentions 7,200,464
Broker Non-Votes 363,470,898
ITEM 5. OTHER INFORMATION
See Note 8 to Consolidated Financial Data.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description
10.20 1998 Stock Option Plan*
11 Statement regarding computation of per share earnings
27 EDGAR financial data schedule
* Indicates management contract or compensatory plan or arrangement.
(b) (i) Report on Form 8-K dated January 21, 1998, containing Compaq's
news release dated January 21, 1998, with respect to its earnings release for
the fourth quarter of 1997.
(ii) Report on Form 8-K dated January 25, 1998, containing Compaq's
news release dated January 26, 1998, with respect to Compaq's proposed
acquisition of Digital Equipment Corporation.
(iii) Report on Form 8-K dated January 25, 1998, containing the
Agreement and Plan of Merger regarding Compaq's proposed acquisition of Digital
Equipment Corporation.
(iv) Report on Form 8-K dated March 6, 1998, containing (A) Compaq's
news release dated March 6, 1998, with respect to its anticipated first quarter
results and (B) Compaq's news release dated March 9, 1998, with respect to the
Federal Trade Commission's request for additional information in connection with
Compaq's pending acquisition of Digital Equipment Corporation.
(v) Report on Form 8-K dated April 15, 1998, containing Compaq's news
release dated April 15, 1998, with respect to its earnings release for the first
quarter of 1998.
(vi) Report on Form 8-K dated May 6, 1998, containing Compaq's news
release dated May 6, 1998, with respect to its pending acquisition of Digital
Equipment Corporation.
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.
May 13, 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)
<PAGE>
EXHIBIT 10.20
ADOPTED JANUARY 22, 1998
COMPAQ COMPUTER CORPORATION
1998 STOCK OPTION PLAN
SECTION 1. Purpose. The Compaq Computer Corporation 1998 Stock Option Plan
-------
has been established to promote the interests of Compaq Computer Corporation and
its stockholders by (i) attracting and retaining exceptional employees and
directors of Compaq and its Affiliates, as defined below; (ii) motivating such
employees and directors by means of performance-related incentives to achieve
long-range performance goals; and (iii) enabling such employees and directors to
participate in the long-term growth and financial success of Compaq.
SECTION 2. Definitions. As used in the Plan, the following terms shall have
-----------
the meanings set forth below:
"Affiliate" shall mean (i) any entity that, directly or indirectly, is
controlled by Compaq and (ii) any entity in which Compaq has a significant
equity interest, in either case as determined by the Committee.
"Award" shall mean any Option or Stock Appreciation Right.
"Board" shall mean the Board of Directors of Compaq.
"Change in Control" shall be deemed to have occurred if: (i) any "person" as
such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than
Compaq, any trustee or other fiduciary holding securities under any Compaq
employee benefit plan, or any entity owned, directly or indirectly, by Compaq
stockholders in substantially the same proportions as their ownership of Compaq
voting securities), is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act, or any successor rule or regulation thereto as in
effect from time to time), directly or indirectly, of Compaq securities
representing 30% or more of the combined voting power of Compaq's then
outstanding securities; (ii) during any period of two consecutive years (not
including any period prior to the adoption of the Plan), individuals who at the
beginning of such period constitute the Board of Directors, and any new director
(other than a director designated by a person who has entered into an agreement
with Compaq to effect a transaction described in clause (i), (iii), or (iv) of
this paragraph) whose election by the Board of Directors or nomination for
election by Compaq's stockholders was approved by a vote of at least two-thirds
of the directors then still in office who either were directors at the beginning
of the two-year period or whose election or nomination for election was
previously so approved, cease for any reason to constitute at least a majority
of the Board of Directors; (iii) Compaq stockholders approve a merger or
consolidation of Compaq with any other corporation, other than a merger or
consolidation that would result in Compaq voting securities outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of voting securities of
Compaq or such surviving entity outstanding immediately after such merger or
consolidation; provided, however, that a merger or consolidation effected to
implement a recapitalization of Compaq (or similar transaction) in which no
person acquires more than 30% of the combined voting power of Compaq's then
outstanding securities shall not constitute a Change in Control; or (iv) Compaq
stockholders approve a plan of complete liquidation of Compaq or an agreement
for the sale or disposition by Compaq of all or substantially all of Compaq's
assets. If any of the events enumerated in clauses (i) through (iv) occur, the
Board shall determine the effective date of the Change in Control resulting
therefrom, for purposes of the Plan.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" shall mean a committee of the Board designated by the Board to
administer the Plan and composed of persons who (i) to the extent necessary to
comply with Rule 16b-3 are "Non-Employee Directors" within the meaning of Rule
16b-3 and (ii) to the extent any Award granted hereunder is intended to qualify
as performance-based compensation under Section 162(m) of the Code, constitute
"outside directors" within the meaning of Section 162(m) of the Code and the
regulations thereunder. Until otherwise determined by the Board, the Human
Resources Committee designated by the Board shall be the Committee under the
Plan.
"Compaq" shall mean Compaq Computer Corporation, together with any successor
thereto.
"Election Date" shall mean with respect to an Option hereunder the date of the
appointment, election, or re-election of the director that prompted the grant
of such Option.
"Eligible Director" shall mean each director of the Company who is not an
employee of the Company or any of the Company's subsidiaries (as defined in
Section 425(f) of the Code).
"Employee" shall mean an employee of Compaq or of any Affiliate.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Executive Officer" shall mean, at any time, an individual who is an executive
officer of Compaq within the meaning of Exchange Act Rule 3b-7 as promulgated
and interpreted by the SEC under the Exchange Act, or any successor rule or
regulation thereto as in effect from time to time, or who is an officer of
Compaq within the meaning of Exchange Act Rule 16a-1(f) as promulgated and
interpreted by the SEC under the Exchange Act, or any successor rule or
regulation thereto as in effect from time to time.
"Fair Market Value" shall mean the fair market value of the property or other
item being valued, as determined by the Committee in its sole discretion, and
for purposes of determining the exercise price of an Award shall be equal to the
Dow Jones composite close for the Shares as reported on the Dow Jones news
retrieval system on the date of the Award (or on the most recent business day
if the date of an Award is a holiday).
"Incentive Stock Option" shall mean a right to purchase Shares from Compaq that
is intended to meet the requirements of Section 422 of the Code or any successor
provision thereto.
"Net After-Tax Amount" shall mean the net amount of compensation, assuming for
this purpose only that all vested Awards and other forms of compensation subject
to vesting upon such Change of Control are exercised upon such Change in
Control, to be received (or deemed to have been received) by such Participant in
connection with such Change of Control under any agreement and under any other
plan, arrangement or contract of Compaq to which such Participant is a party,
after giving effect to all income and excise taxes applicable to such payments.
"Non-Qualified Stock Option" shall mean a right to purchase Shares from Compaq
that is granted under Section 5 or Section 7 of the Plan and that is not
intended to be an Incentive Stock Option.
"Notice" shall mean any written notice, contract, or other instrument or
document evidencing any Award, which may, but need not, be executed or
acknowledged by a Participant.
"Option" shall mean a Non-Qualified Stock Option or Incentive Stock Option.
"Participant" shall mean any Employee or Director selected to receive an Award
under the Plan.
"Person" shall mean any individual, corporation, partnership, association,
joint-stock company, trust, unincorporated organization, government or political
subdivision thereof or other entity.
"Plan" shall mean this Compaq Computer Corporation 1998 Stock Option Plan.
"Release Date" shall mean the third business day occurring after Compaq's
earnings release for the preceding fiscal period. In calculating the Release
Date, the day of an earnings release shall be counted if the earnings release is
made before the opening of trading on the New York Stock Exchange and shall not
be counted if such release is made after the opening of trading.
"Rule 16b-3" shall mean Rule 16b-3 as promulgated and interpreted by the SEC
under the Exchange Act, or any successor rule or regulation thereto as in effect
from time to time.
"SEC" shall mean the Securities and Exchange Commission or any successor thereto
and shall include the staff thereof.
"Shares" shall mean shares of the common stock, $.0l par value, of Compaq or
such other securities of Compaq as may be designated by the Committee from time
to time.
"Stock Appreciation Right" shall mean any right granted under Section 6 of the
Plan.
"Substitute Awards" shall mean Awards granted in assumption of, or in
substitution for, outstanding awards previously granted by a company acquired by
Compaq or with which Compaq combines.
"Window" shall mean a period of time beginning on a Release Date and ending at
the end of the second month of the fiscal quarter in which such Release Date
occurs.
SECTION 3. Administration.
--------------
(a) Authority of Committee. The Committee shall administer the Plan.
------------------------
Subject to the terms of the Plan and applicable law, the Committee shall have
full power and authority to: (i) designate Employee Participants; (ii) determine
the type or types of Awards to be granted to an eligible Employee; (iii)
determine the number of Shares to be covered by, or with respect to which
payments, rights, or other matters are to be calculated in connection with,
Awards to Employees; (iv) determine the terms and conditions of any Award to
Employees; (v) determine whether, to what extent, and under what circumstances
Awards may be settled or exercised in cash, Shares, other securities, other
Awards or other property, or canceled, forfeited, or suspended and the method or
methods by which Awards may be settled, exercised, canceled, forfeited, or
suspended; (vi) determine whether, to what extent, and under what circumstances
cash, Shares, other securities, other Awards, other property, and other amounts
payable with respect to an Award shall be deferred either automatically or at
the election of the holder thereof or of the Committee; (vii) interpret and
administer the Plan and any instrument or Notice relating to, or Award made
under, the Plan; (viii) establish, amend, suspend, or waive such rules and
regulations and appoint such agents as it shall deem appropriate for the proper
administration of the Plan; and (ix) make any other determination and take any
other action that the Committee deems necessary or desirable for the
administration of the Plan.
(b) Committee and Board Discretion Binding. Unless otherwise expressly
------------------------------------------
provided in the Plan, all designations, determinations, interpretations, and
other decisions under or with respect to the Plan or any Award shall be within
the sole discretion of the Committee or the Board, may be made at any time, and
shall be final, conclusive, and binding upon all Persons, including Compaq, any
Affiliate, any Participant, any holder or beneficiary of any Award, any
stockholder, any Employee, and any Director.
SECTION 4. Shares Available for Awards.
------------------------------
(a) Shares Available. Subject to adjustment as provided in Section 4(b),
-----------------
the number of Shares with respect to which Awards may be granted under the Plan
shall be 100 million; provided, however, if Compaq or its wholly owned
subsidiary merges with Digital Equipment Corporation the number of Shares with
respect to which Awards may be granted under the Plan shall be increased by 50
million, to a total of 150 million shares. If, after the effective date of the
Plan, any Shares covered by an Award granted under the Plan or to which such
Award relates, are forfeited, or if such an Award is settled for cash or
otherwise terminates or is canceled without the delivery of Shares, then the
Shares covered by such Award, or to which such Award relates, or the number of
Shares otherwise counted against the aggregate number of Shares with respect to
which Awards may be granted, to the extent of any such settlement, forfeiture,
termination or cancellation, shall again become Shares with respect to which
Awards may be granted. In the event that any Option or other Award granted
hereunder is exercised through the delivery of Shares or in the event that
withholding tax liabilities arising from such Award are satisfied by the
withholding of Shares by Compaq, the number of Shares available for Awards under
the Plan shall be increased by the number of Shares so surrendered or withheld.
(b) Adjustments. In the event that the Committee determines that any
-----------
dividend or other distribution (whether in the form of cash, Shares, other
securities, or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of Shares or other securities of Compaq, issuance of
warrants or other rights to purchase Shares or other securities of Compaq, or
other similar corporate transaction or event affects the Shares such that an
adjustment is determined by the Committee to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan, then the Committee shall, in such manner as it
may deem equitable, adjust any or all of (i) the number of Shares or other
securities of Compaq (or number and kind of other securities or property) with
respect to which Awards may be granted, (ii) the number of Shares or other
securities of Compaq (or number and kind of other securities or property)
subject to outstanding Awards, and (iii) the grant or exercise price with
respect to any outstanding Award, or, if deemed appropriate, make provision for
a cash payment to the holder of an outstanding Award; provided, however, that
such adjustments shall be made by the Board with respect to Awards to Eligible
Directors.
(c) Substitute Awards. Any Shares underlying Substitute Awards shall not be
-----------------
counted against the Shares available for Awards under the Plan.
(d) Sources of Shares Deliverable Under Awards. Any Shares delivered
-----------------------------------------------
pursuant to an Award may consist, in whole or in part, of authorized and
unissued Shares or of treasury Shares.
SECTION 5. Employee Stock Options.
------------------------
(a) Eligibility and Limits on Awards. Any Employee, including any officer
----------------------------------
or employee-director of the Company or any Affiliate, shall be eligible to be
designated a Participant. Subject to adjustment as provided in Section 4(b), no
Executive Officer may receive Awards under the Plan in any calendar year that
relate to more than 1,500,000 Shares. The limits on Awards to any Executive
Officer under this Plan shall be reduced by any other Award in the same calendar
year to such officer under any other Compaq equity incentive plan.
(b) Grant. Subject to the provisions of the Plan, the Committee shall have
-----
sole and complete authority to determine the Employees to whom Options shall be
granted, the number of Shares to be covered by each Option, and the conditions
and limitations applicable to the exercise of the Option.
(c) Exercise Price. The exercise price for Options (other than Substitute
---------------
Awards) granted under the Plan shall be not less than the Fair Market Value of
the underlying Shares. Neither the Board nor the Committee may lower the
exercise price of outstanding options issued under the Plan. The Committee
shall determine the appropriate exercise prices for Substitute Awards based on
the terms and conditions of the transaction related to such Awards.
(d) Exercise. Each Employee Option shall be exercisable at such times and
--------
subject to such terms and conditions as the Committee may, in its sole
discretion, specify in the applicable Notice or thereafter; provided, however,
that no grant to an Executive Officer shall be exercisable until the earlier of
(i) six months after the date of grant or (ii) the Participant's ceasing to be
an Executive Officer. The Committee and the Board may impose such conditions
with respect to the exercise of options, including without limitation, any
relating to the application of federal or state securities laws, as it may deem
necessary or advisable.
(e) Payment. No Shares shall be delivered pursuant to any exercise of an
-------
Option until payment in full of the option price therefor is received by Compaq.
Such payment may be made (i) in cash, or its equivalent, (ii) if and to the
extent permitted by the Committee, by exchanging Shares owned by the optionee
(which are not the subject of any pledge or other security interest), (iii) if
and to the extent permitted by the Committee, by surrendering all or part of
that Option or any other Option, or (iv) by a combination of the foregoing,
provided that the combined value of all cash and cash equivalents and the Fair
Market Value of any such Shares so tendered to Compaq as of the date of such
tender is at least equal to such option price.
SECTION 6. Stock Appreciation Rights.
---------------------------
(a) Grant. The grant of Stock Appreciation Rights shall be limited to
------
Employees in those locations in which the law, including exchange control
regulations and taxation, unduly restricts the grant of Options. Subject to the
provisions of the Plan, the Committee shall have sole and complete authority to
determine the Employees to whom Stock Appreciation Rights shall be granted, the
number of Shares to be covered by each Stock Appreciation Right Award, and the
conditions and limitations applicable to the exercise thereof. Stock
Appreciation Rights shall have a grant price equal to the Fair Market Value of
the related Shares on the day of the Award, and if granted to Executive
Officers, shall not be exercisable earlier than six months after grant.
(b) Exercise and Payment. A Stock Appreciation Right shall entitle the
-----------------------
Participant to receive an amount equal to the excess of the Fair Market Value of
a Share on the date of exercise of the Stock Appreciation Right over the grant
price thereof. The Committee shall determine whether a Stock Appreciation Right
shall be settled in cash, Shares or a combination of cash and Shares.
(c) Other Terms and Conditions. Subject to the terms of the Plan, the
-----------------------------
Committee shall determine, at or after the grant of a Stock Appreciation Right,
the term, methods of exercise, methods and form of settlement, and any other
terms and conditions of any Stock Appreciation Right. Any such determination by
the Committee may be changed by the Committee from time to time and may govern
the exercise of Stock Appreciation Rights granted or exercised prior to such
determination as well as Stock Appreciation Rights granted or exercised
thereafter. The Committee may impose such conditions or restrictions on the
exercise of any Stock Appreciation Right as it shall deem appropriate.
SECTION 7. Termination or Suspension of Employment. The following
-------------------------------------------
provisions shall apply in the event of the Participant's termination of
employment unless the Committee shall have provided otherwise, either at the
time of the grant of the Award or thereafter.
(a) Termination of Employment. If a Participant's employment with Compaq or
-------------------------
its Affiliates is terminated for any reason other than death, permanent and
total disability, or retirement, the Participant's right to exercise any
Nonqualified Stock Option or Stock Appreciation Right shall terminate, and such
Option or Stock Appreciation Right shall expire, on the earlier of (i) the first
anniversary of such termination of employment or (ii) the date such Option or
Stock Appreciation Right would have expired had it not been for the termination
of employment. The Participant shall have the right to exercise such Option or
Stock Appreciation Right prior to such expiration to the extent it was
exercisable at the date of such termination of employment and shall not have
been exercised.
(b) Death, Disability or Retirement. If a Participant's employment with
- - --- ----------------------------------
Compaq or its Affiliates is terminated by death, permanent and total disability,
or retirement, the Participant or his successor (if employment is terminated by
death) shall have the right to exercise any Nonqualified Stock Option or Stock
Appreciation Right to the extent it was exercisable at the date of such
termination of employment and shall not have been exercised, but in no event
shall such option be exercisable later than the date the Option would have
expired had it not been for the termination of such employment. The meaning of
the terms "total and permanent disability" and "retirement" shall be determined
by the Committee.
(c) Acceleration and Extension of Exercisability. Notwithstanding the
- - --- ------------------------------------------------
foregoing, the Committee may, in its discretion, provide (i) that an Option
granted to an Employee Participant may terminate at a date earlier than that set
forth above, (ii) that an Option granted to an Employee Participant not subject
to Section 16 of the Exchange Act may terminate at a date later than that set
forth above, provided such date shall not be beyond the date the Option would
have expired had it not been for the termination of the Participant's
employment, and (iii) that an Option or Stock Appreciation Right may become
immediately exercisable when it finds that such acceleration would be in the
best interests of Compaq.
(d) Leave Without Pay. In the event that an employee Participant takes a
-------------------
"leave without pay," all of such Participant's Awards or any portion thereof
shall, to the extent unvested immediately prior to such leave, cease to vest
during the period of such leave, and to the extent exercisable immediately prior
to such leave, shall remain exercisable during the period of such leave in
accordance with the terms thereof.
SECTION 8. Director Options.
------------------
(a) Initial Grants. Each Eligible Director who is first elected or
- - --- ---------------
appointed to the Board shall be granted one Option to acquire 31,250 Shares. In
the event that the Election Date occurs during the Window, such Option shall be
granted on the Election Date with respect to such Option. In the event that
such Eligible Director's election or appointment does not occur during the
Window, then such Option shall be granted on the next Release Date.
(b) Annual Options.
----------------
(i) Each Eligible Director who is reelected to the Board at an annual
meeting of the Company's stockholders and who has not received a grant under
Section 8(a) during the period since the most recent previous annual meeting of
the Company's stockholders shall be granted an Option to acquire 25,000 Shares
on each Election Date on which he is reelected.
(ii) Each Eligible Director who is elected or re-elected Chairman of the
Board by the Board at its meeting following an annual meeting of the Company's
stockholders and who has not received a grant under Section 8(a) during the
period since the most recent annual meeting of Compaq's stockholders shall be
granted on each Election Date on which he is elected or reelected Chairman of
the Board an Option to acquire 6,250 Shares in addition to any applicable Option
granted under Section 8(b)(i).
(c) Terms and Conditions. Any Option granted under this Section 8 shall be
subject to the following terms and conditions:
(i) Any Options granted under this Section 8 shall be Non-Qualified Stock
Options and the exercise price shall be not less than the Fair Market Value of
the underlying Shares.
(ii) Each Option granted under this Section 8 shall be exercisable at such
times and subject to such terms and conditions as the Board may, in its sole
discretion, specify in the applicable Notice or thereafter; provided, however,
that no grant shall be exercisable for six months after the date of grant.
(iii) Notwithstanding the provisions of this Section 8, Options shall not be
granted under this Section 8 to any Eligible Director in any year in which such
director receives an initial grant or annual grant under the Compaq Computer
Corporation Non-Qualified Stock Option Plan for Non-Employee Directors.
SECTION 9. Change in Control. Notwithstanding any other provision of the
-------------------
Plan to the contrary, upon a Change in Control all outstanding Awards shall
vest, become immediately exercisable or payable or have all restrictions lifted
as may apply to the type of Award and no outstanding Stock Appreciation Right
may be terminated, amended, or suspended upon or after a Change in Control;
provided, however, that unless otherwise determined by the Committee at the time
of award or thereafter, if it is determined that the Net After-Tax Amount to be
realized by any Participant, taking into account the accelerated vesting
provided for by this Section as well as all other payments to be received by
such Participant in connection with such Change in Control, would be higher if
Awards did not vest in accordance with this Section, then and to such extent the
Awards shall not vest. The determination of whether any such Award should not
vest shall be made by a nationally recognized accounting firm selected by
Compaq, which shall be instructed to consider that (a) Awards and other forms of
compensation subject to vesting upon a Change of Control shall be vested in the
order in which they were granted and within each grant in the order in which
they would otherwise have vested and (b) unless and to the extent any other
plan, arrangement or contract of Compaq pursuant to which any such payment is to
be received provides to the contrary, such other payment shall be deemed to have
occurred after any acceleration of Awards or other forms of compensation subject
to vesting upon a Change of Control.
SECTION 10. Amendment and Termination.
---------------------------
(a) Amendments to the Plan. The Board may amend, alter, suspend,
-------------------------
discontinue, or terminate the Plan or any portion thereof at any time; provided
that no such amendment, alteration, suspension, discontinuation or termination
shall be made without stockholder approval if such approval is necessary to
comply with any tax or regulatory requirement, including for these purposes any
approval requirement that is a prerequisite for exemptive relief from Section
16(b) of the Exchange Act, for which or with which the Board deems it necessary
or desirable to qualify or comply. The Committee also may amend the Plan in such
manner as may be necessary so as to have the Plan conform with local rules and
regulations in any jurisdiction outside the United States.
(b) Amendments to Awards. The Committee may waive any conditions or rights
---------------------
under, amend any terms of, suspend, or terminate, any Award, prospectively or
retroactively; provided that any waiver, amendment, suspension, or termination
that would adversely affect the rights of any Participant or any holder or
beneficiary of any outstanding Award shall not to that extent be effective
without the consent of the affected Participant, holder, or beneficiary.
(c) Adjustment of Awards Upon the Occurrence of Certain Unusual or
------------------------------------------------------------------------
Nonrecurring Events. The Committee is hereby authorized to make adjustments in
the terms and conditions of, and the criteria included in, Awards in recognition
of unusual or nonrecurring events (including, without limitation, the events
described in Section 4(b) hereof) affecting Compaq, any Affiliate, or the
financial statements of Compaq or any Affiliate, or of changes in applicable
laws, regulations, or accounting principles, whenever the Committee determines
that such adjustments are appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan; provided that no such adjustment shall be authorized to the
extent that such authority would be inconsistent with the Plan's meeting the
requirements of Section 162(m) of the Code, as from time to time amended.
(d) Cancellation. Any provision of this Plan or any Notice to the contrary
------------
notwithstanding, the Committee may cause any Award granted hereunder to be
canceled in consideration of a cash payment or alternative Award made to the
holder of such canceled Award equal in value to the Fair Market Value of such
canceled Award as of the effective date of such cancellation.
(e) Employee Status Change to Part-Time. At such time as a full-time
---------------------------------------
Employee becomes a part-time Employee, on the next vesting date following such
status change, the vesting schedule for all Awards previously granted to such
employee and not yet vested will be automatically amended to reduce the number
of shares vesting each month by one-half during the time that such employee is
working on a part-time basis; provided, however, that any Shares that remain
unvested three months prior to the expiration of the term of such Award shall
vest as of such date three months prior to the expiration of such term.
SECTION 11. General Provisions.
-------------------
(a) Nontransferability. No Award shall be assigned, alienated, pledged,
------------------
attached, sold or otherwise transferred or encumbered by a Participant, except
by will or the laws of descent and distribution; provided, however, that an
Award may be transferable, to the extent set forth in the applicable Notice and
in accordance with procedures adopted by the Committee.
(b) No Rights to Awards. No Employee, Participant or other Person shall
----------------------
have any claim to be granted any Award, and there is no obligation for
uniformity of treatment of Employees, Participants, or holders or beneficiaries
of Awards. The terms and conditions of Awards need not be the same with respect
to each recipient.
(c) Share Certificates. All certificates for Shares or other securities of
-------------------
Compaq or any Affiliate delivered under the Plan pursuant to any Award or the
exercise thereof shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the Plan or the rules,
regulations, and other requirements of the Securities and Exchange Commission,
any stock exchange upon which such Shares or other securities are then listed,
and any applicable Federal or state laws, and the Committee may cause a legend
or legends to be put on any such certificates to make appropriate reference to
such restrictions.
(d) Delegation. Subject to the terms of the Plan and applicable law, the
----------
Committee may delegate to one or more officers or managers of Compaq or any
Affiliate, or to a committee of such officers or managers, the authority,
subject to such terms and limitations as the Committee shall determine, to grant
Awards to, or to cancel, modify or waive rights with respect to, or to alter,
discontinue, suspend, or terminate Awards held by, Employees other than
Executive Officers.
(e) Withholding. A participant may be required to pay to Compaq or any
-----------
Affiliate and Compaq or any Affiliate shall have the right and is hereby
authorized to withhold from any Award, from any payment due or transfer made
under any Award or under the Plan or from any compensation or other amount owing
to a Participant the amount (in cash, Shares, other securities, other Awards or
other property) of any applicable withholding taxes in respect of an Award, its
exercise, or any payment or transfer under an Award or under the Plan and to
take such other action as may be necessary in the opinion of Compaq to satisfy
all obligations for the payment of such taxes. The Committee may provide for
additional cash payments to holders of Awards to defray or offset any tax
arising from the grant, vesting, exercise, or payments of any Award.
(f) Notices. Each Award hereunder shall be evidenced by a Notice that shall
-------
be delivered to the Participant and shall specify the terms and conditions of
the Award and any rules applicable thereto.
(g) No Limit on Other Compensation Arrangements. Nothing contained in the
---------------------------------------------
Plan shall prevent Compaq or any Affiliate from adopting or continuing in effect
other compensation arrangements, which may, but need not, provide for the grant
of options, restricted stock, Shares and other types of Awards provided for
hereunder (subject to stockholder approval if such approval is required), and
such arrangements may be either generally applicable or applicable only in
specific cases.
(h) No Right to Employment. The grant of an Award shall not be construed as
----------------------
giving a Participant the right to be retained in the employ of Compaq or any
Affiliate. Further, Compaq or an Affiliate may at any time dismiss a
Participant from employment, free from any liability or any claim under the
Plan, unless otherwise expressly provided in the Plan or in any Notice.
(i) No Rights as Stockholder. Subject to the provisions of the applicable
--------------------------
Award, no Participant or holder or beneficiary of any Award shall have any
rights as a stockholder with respect to any Shares to be distributed under the
Plan until he or she has become the holder of such Shares.
(j) Governing Law. The validity, construction, and effect of the Plan and
--------------
any rules and regulations relating to the Plan and any Notice shall be
determined in accordance with the laws of the State of Delaware.
(k) Severability. Notwithstanding any other provision or section of the
------------
Plan, if any provision of the Plan or any Award is or becomes or is deemed to be
invalid, illegal, or unenforceable in any jurisdiction or as to any Person or
Award, or would disqualify the Plan or any Award under any law deemed applicable
by the Committee, such provision shall be construed or deemed amended to conform
to the applicable laws (but only to such extent necessary to comply with such
laws), or if it cannot be construed or deemed amended without, in the
determination of the Committee, materially altering the intent of the Plan or
the Award, such provision shall be stricken as to such jurisdiction, Person or
Award and the remainder of the Plan and any such Award shall remain in full
force and effect.
(l) Other Laws. The Committee may refuse to issue or transfer any Shares or
----------
other consideration under an Award if, acting in its sole discretion, it
determines that the issuance or transfer of such Shares or such other
consideration might violate any applicable law or regulation or entitle Compaq
to recover the same under Section 16(b) of the Exchange Act, and any payment
tendered to Compaq by a Participant, other holder or beneficiary in connection
with the exercise of such Award shall be promptly refunded to the relevant
Participant, holder, or beneficiary. Without limiting the generality of the
foregoing, no Award granted hereunder shall be construed as an offer to sell
securities of Compaq, and no such offer shall be outstanding, unless and until
the Committee in its sole discretion has determined that any such offer, if
made, would be in compliance with all applicable requirements of the U.S.
federal securities laws and any other laws to which such offer, if made, would
be subject.
(m) No Trust or Fund Created. Neither the Plan nor any Award shall create
--------------------------
or be construed to create a trust or separate fund of any kind or a fiduciary
relationship between Compaq or any Affiliate and a Participant or any other
Person. To the extent that any Person acquires a right to receive payments from
Compaq or any Affiliate pursuant to an Award, such right shall be no greater
than the right of any unsecured general creditor of Compaq or any Affiliate.
(n) No Fractional Shares. No fractional Shares shall be issued or delivered
--------------------
pursuant to the Plan or any Award, and the Committee shall determine whether
cash, other securities, or other property shall be paid or transferred in lieu
of any fractional Shares or whether such fractional Shares or any rights thereto
shall be canceled, terminated, or otherwise eliminated.
(o) Headings. Headings are given to the Sections and subsections of the
--------
Plan solely as a convenience to facilitate reference. Such headings shall not
be deemed in any way material or relevant to the construction or interpretation
of the Plan or any provision thereof.
SECTION 12. Term of the Plan.
-------------------
(a) Effective Date. The Plan shall be effective upon approval by the
---------------
stockholders of Compaq.
(b) Expiration Date. No Incentive Stock Option shall be granted under the
----------------
Plan more than ten years after the effective date of the Plan. Unless otherwise
expressly provided in the Plan or in an applicable Notice, any Award granted
hereunder may, and the authority of the Board or the Committee to amend, alter,
adjust, suspend, discontinue, or terminate any such Award or to waive any
conditions or rights under any such Award shall, continue after the authority
for grant of new Awards hereunder has been exhausted.
<PAGE>
Exhibit 11
<TABLE>
<CAPTION>
COMPAQ COMPUTER CORPORATION
STATEMENT REGARDING COMPUTATION OF EARNINGS PER COMMON SHARE
QUARTER ENDED
MARCH 31,
---------
1998 1997
---- ----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
BASIC EARNINGS PER COMMON SHARE
Shares used in computing basic earnings per common share:
Weighted average number of shares outstanding 1,523 1,494
====== ======
Earnings:
Net income $ 16 $ 414
====== ======
Basic earnings per common share $ 0.01 $ 0.28
====== ======
DILUTED EARNINGS PER COMMON SHARE
Shares used in computing diluted earnings per common share:
Weighted average number of shares outstanding 1,523 1,494
Incremental shares attributed to outstanding options 61 47
------ ------
1,584 1,541
====== ======
Earnings:
Net income $ 16 $ 414
====== ======
Diluted earnings per common share $ 0.01 $ 0.27
====== ======
<FN>
See accompanying notes to consolidated financial data.
</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 MARCH 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<CAPTION>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,107
<SECURITIES> 0
<RECEIVABLES> 2,743
<ALLOWANCES> 0
<INVENTORY> 1,256
<CURRENT-ASSETS> 11,907
<PP&E> 2,028
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,580
<CURRENT-LIABILITIES> 5,106
<BONDS> 0
<COMMON> 2,153
0
0
<OTHER-SE> 7,321
<TOTAL-LIABILITY-AND-EQUITY> 14,580
<SALES> 5,687
<TOTAL-REVENUES> 5,687
<CGS> 4,664
<TOTAL-COSTS> 4,664
<OTHER-EXPENSES> 245<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> 23
<INCOME-TAX> 7
<INCOME-CONTINUING> 16
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
<FN>
<F1> Includes research and development costs.
</FN>
</TABLE>
