2/09/01 - Management`s Discussions: 10-K, COMPAQ COMPUTER
CORP 3 of 7
In our opinion, the consolidated balance sheet as of December 31, 1999 and the
related consolidated statements of income, of cash flows and of stockholders'
equity for each of the two years in the period ended December 31, 1999 present
fairly, in all material respects, the financial position, results of operations and
cash flows of Compaq Computer Corporation and its subsidiaries at December 31,
1999 and for each of the two years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. We have not audited the
consolidated financial statements of Compaq Computer Corporation for any
period subsequent to December 31, 1999.
/s/ PricewaterhouseCoopers LLP Houston, Texas January 25, 2000
COMPAQ COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
December 31 (In millions, except par value)
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents
........................................... $ 2,569 $ 2,666
Short-term investments
.............................................. -- 636
Trade accounts receivable, net
...................................... 6,715 5,622
Leases and other accounts receivable
................................ 1,677 1,063
Inventories
......................................................... 2,161 2,008
Other assets
........................................................ 1,989 1,854
-------- --------
Total current assets
............................................ 15,111 13,849
Property, plant and equipment, net
..................................... 3,431 3,249
Other assets, net
...................................................... 6,314 10,179
-------- --------
$ 24,856 $ 27,277
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings
............................................... $ 711 $ 453
Accounts payable
.................................................... 4,233 4, 380
Deferred income
..................................................... 1,089 972
Other liabilities
................................................... 5,516 6, 033
-------- --------
Total current liabilities
....................................... 11,549 11,838
-------- --------
Long-term debt
......................................................... 575 --
-------- --------
Postretirement and other postemployment benefits
....................... 652 605
-------- --------
Commitments and contingencies
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value
Shares authorized: 10 million shares; shares issued: none
....... -- --
Common stock and capital in excess of $.01 par value
Shares authorized: 3 billion
Shares issued: 2000 - 1,742 million; 1999 - 1,715 million
...... 8,039 7,627
Retained earnings
................................................... 5,347 4, 948
Accumulated other comprehensive income
.............................. 27 2,919
Treasury stock (shares:2000 - 53 million; 1999 - 21 million)
...... (1,333) (660)
-------- --------
Total stockholders' equity
...................................... 12,080 14,834
-------- --------
$ 24,856 $ 27,277
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31 (In millions, except per share amounts)
2000 1999 1998
-------- -------- --------
Revenue:
Products ................................................... $
35,667 $ 31,902 $ 27,372
Services ...................................................
6,716 6,623 3,797
-------- -------- --------
Total revenue ..........................................
42,383 38,525 31,169
-------- -------- --------
Cost of sales:
Products ...................................................
27,624 25,263 21,383
Services ...................................................
4,793 4,535 2,597
-------- -------- --------
Total cost of sales ....................................
32,417 29,798 23,980
-------- -------- --------
Selling, general and administrative expense ....................
6,044 6,341 4,978
Research and development .......................................
1,469 1,660 1,353
Restructuring and related activities ...........................
(86) 868 393
Purchased in-process technology ................................
-- -- 3,196
Other (income) expense, net ....................................
1,664 (1,076) (69)
-------- -------- --------
9,091 7,793 9,851
-------- -------- --------
Income (loss) before income taxes ..............................
875 934 (2,662)
Provision for income taxes .....................................
280 365 81
-------- -------- --------
Income (loss) before cumulative effect of accounting change ....
595 569 (2,743)
Cumulative effect of accounting change, net of tax .............
(26) -- --
-------- -------- --------
Net income (loss) .............................................. $
569 $ 569 $ (2,743)
======== ======== ========
Earnings (loss) per common share:
Basic:
Before cumulative effect of accounting change .............. $
0.35 $ 0.35 $ (1.71)
Cumulative effect of accounting change, net of tax .........
(0.02) -- --
-------- -------- --------
$
0.33 $ 0.35 $ (1.71)
======== ======== ========
Diluted:
Before cumulative effect of accounting change .............. $
0.34 $ 0.34 $ (1.71)
Cumulative effect of accounting change, net of tax .........
(0.01) -- --
-------- -------- --------
$
0.33 $ 0.34 $ (1.71)
======== ======== ========
Shares used in computing earnings (loss) per common share:
Basic ......................................................
1,702 1,693 1,608
======== ======== ========
Diluted .................................................... 1,742 1, 735 1,608
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31 (In millions)
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income (loss)
................................................... $ 569 $ 569 $ (2,743)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization
................................. 1,407 1,402 893
Investment impairment
....................................... 1,756 -- --
Gain on sale of businesses
.................................. -- (1,182) --
Restructuring and related activities
.......................... (86) 868 393
Purchased in-process technology
............................... -- -- 3,196
Deferred income taxes and other
............................... (26) 21 (53)
Changes in assets and liabilities, net of effects of
acquired and divested businesses:
Receivables
................................................ (1,920) 185 (1,736)
Inventories
................................................ (72) (97) 857
Accounts payable
........................................... (228) 135 589
Other assets and liabilities
............................... (835) (598) (518)
-------- -------- --------
Net cash provided by operating activities
.............. 565 1,303 878
-------- -------- --------
Cash flows from investing activities:
Capital expenditures, net
.......................................... (1,133) (1,185) (600)
(Increase) decrease in short-term investments
...................... 636 (636) 344
Acquisition of businesses, net of cash acquired
.................... (370) (517) (1,413)
Other investing activities, net
.................................... (364) (131) (798)
-------- -------- --------
Net cash used in investing activities
.................. (1,231) (2,469) (2,467)
-------- -------- --------
Cash flows from financing activities:
Increase in short-term borrowings
.................................. 258 453 --
Issuance (repayment) of long-term debt
............................. 575 -- (788)
Common stock transactions, net
..................................... (365) (93) 23
Dividends to stockholders
.......................................... (170) (136) (95)
Payments to retire Digital preferred stock
......................... -- (400) --
Other financing activities
......................................... -- -- (18)
-------- -------- --------
Net cash provided by (used in) financing activities
.... 298 (176) (878)
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents
............. 271 (83) 140
-------- -------- --------
Net decrease in cash and cash equivalents
.............. (97) (1,425) (2,327)
Cash and cash equivalents at the beginning of the year
................... 2,666 4,091 6,418
-------- -------- --------
Cash and cash equivalents at the end of the year
......................... $ 2,569 $ 2,666 $ 4,091
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
Year ended December 31 (In millions) 2000 1999
1998
-------- --------
--------
Interest paid ........................ $ 288 $ 152
$ 175
Income taxes paid .................... $ 488 $ 415
$ 259
ACQUISITION OF BUSINESSES
Fair value of:
Assets acquired ................ $ 499 $ 811
$ 16,124
Liabilities assumed ............ (129) (201)
(7,109)
Stock issued ................... -- --
(4,284)
Options issued ................. -- (60)
(249)
-------- --------
--------
Cash paid ............................ 370 550
4,482
Less: Cash acquired .................. -- (33)
(3,069)
-------- --------
--------
Net cash paid for acquisitions ....... $ 370 $ 517
$ 1,413
======== ========
========
SALE OF BUSINESSES
Fair value of:
Equity proceeds ................ $ -- $ 1,597
$ --
Note receivable ................ -- 204
--
Cash received .................. -- 70
--
-------- --------
--------
-- 1,871
--
Less: Basis in net assets sold ....... -- (689)
--
-------- --------
--------
Gain on sale of businesses ........... $ -- $ 1,182
$ --
======== ========
======== The accompanying notes are an integral part of these
consolidated financial statements.
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON
STOCK
------------------------ ACCUMULATED
PAR
VALUE AND OTHER TOTAL
NUMBER OF
CAPITAL IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
(In millions) SHARES
EXCESS OF PAR EARNINGS INCOME (LOSS) STOCK EQUITY
---------
------------- -------- ------------- -------- -------------
Beginning balance, December 31, 1997 .............. 1,519 $
2,096 $ 7,351 $ (18) $ -- $ 9,429
Comprehensive income:
Net loss .......................................
(2,743) (2,743)
Foreign currency translation adjustment ........
20 20
Minimum pension liability adjustment ...........
(38) (38)
-------------
Total comprehensive loss ..........................
(2,761)
-------------
Issuance pursuant to stock option plans ........ 36
407 407
Issuance pursuant to acquisitions .............. 141
4,533 4,533
Stock option tax benefits and other ............ 2
234 234
Cash dividends .................................
(107) (107)
Repurchase treasury stock, at cost .............
(384) (384)
---------
------------- -------- ------------- -------- -------------
Ending balance, December 31, 1998 ................. 1,698 $
7,270 $ 4,501 $ (36) $ (384) $ 11,351
Comprehensive income:
Net income .....................................
569 569
Changes in unrealized gains and losses on
investments, net of reclassifications ........
2,978 2,978
Foreign currency translation adjustment ........
(26) (26)
Minimum pension liability adjustment ...........
3 3
-------------
Total comprehensive income ........................
3,524
-------------
Issuance pursuant to stock option plans ........ 17
183 183
Issuance pursuant to acquisitions ..............
32 32
Stock option tax benefits ......................
142 142
Gain on redemption of Digital preferred stock ..
22 22
Cash dividends .................................
(144) (144)
Repurchase of treasury stock, at cost ..........
(276) (276)
---------
------------- -------- ------------- -------- -------------
Ending balance, December 31, 1999 ................. 1,715 $
7,627 $ 4,948 $ 2,919 $ (660) $ 14,834
Comprehensive income:
Net income .....................................
569 569
Changes in unrealized gains and losses on
investments, net of reclassifications ........
(2,904) (2,904)
Foreign currency translation adjustment ........
(12) (12)
Minimum pension liability adjustment ...........
24 24
-------------
Total comprehensive loss ..........................
(2,323)
-------------
Issuance pursuant to stock plans ............... 27
308 308
Stock option tax benefits ......................
104 104
Cash dividends .................................
(170) (170)
Repurchase of treasury stock, at cost ..........
(673) (673)
---------
------------- -------- ------------- -------- -------------
Ending balance, December 31, 2000 ................. 1,742
8,039 $ 5,347 $ 27 $ (1,333) $ 12,080
=========
============= ======== ============= ======== =============
The accompanying notes are an integral part of these
consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS. Founded in 1982, Compaq Computer Corporation
("Compaq") is a leading global provider of enterprise technology and solutions.
Compaq designs, develops, manufacturers and markets hardware, software,
solutions and services, including industry-leading enterprise computing solutions,
fault-tolerant business-critical solutions, communication products, and desktop
and portable personal computers that are sold in more than 200 countries.
Compaq completed the acquisition of Digital Equipment Corporation ("Digital"),
Shopping.Com ("SDC") and Zip2 Corp. ("Zip2") and purchased certain assets and
liabilities of InaCom Corp. ("Inacom") in June 1998, February 1999, April 1999 and
February 2000, respectively. These acquisitions were accounted for as
purchases. In August 1999, Compaq sold a majority interest in SDC, Zip2 and the
AltaVista Company, a business acquired in the Digital acquisition (collectively
"AltaVista") to CMGI, Inc. ("CMGI"). Accordingly, Compaq's consolidated financial
statements included the results of operations from the respective dates of
acquisition through divestiture or December 31, 2000, as applicable.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Compaq and its controlled subsidiaries. All significant
intercompany transactions and balances have been eliminated.
USE OF ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS. Cash equivalents include
highly liquid, temporary cash investments having original maturity dates of three
months or less. Short-term investments include certificate of deposits,
commercial paper and other investments not qualifying as cash equivalents. For
reporting purposes, such cash equivalents and short-term investments are
stated at cost plus accrued interest which approximates fair value.
INVENTORIES. Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis.
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