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To: hlpinout who wrote (89598)	2/9/2001 6:22:33 PM
From: hlpinout	Respond to of 97611

Compaq Offers Financing For Internet Infrastructure SPs By E.B. Flanagan, VARBusiness 4:34 PM EST Thurs., Feb. 08, 2001 Compaq Financial Services (CFS), the wholly owned subsidiary of Compaq Computer, announced the formation of a $300 million financing facility to serve the IT equipment financing needs of mature service providers in the United States. Banc One Capital and Heller Financial round out the list of leading financial backers of the facility. The fund uses an innovative risk-sharing structure to provide large-ticket financing to support Internet infrastructure development. The facility is designed to extend CFS' support of Compaq's leadership position in the service provider marketplace. "Recent developments in the financial markets may have limited traditional funding sources for Internet-related companies. Nonetheless, significant opportunities still exist for forward-thinking lenders to support well-managed service providers that will be the Internet backbone of tomorrow," says Irv Rothman, Compaq financial services president and CEO. Eligible service providers are generally in the post-IPO development stages and include ASPs, hosting service providers (HSPs) and Network Service Providers (NSPs) that use Internet technology to provide 24/7 access and hosting services from centrally managed facilities to other service providers and/or end customers. Since announcing its financial offerings to this market in March 2000, CFS has established more than $700 million in credit lines to qualified SPs.

To: hlpinout who wrote (89598)	2/9/2001 6:24:27 PM
From: hlpinout	Respond to of 97611

February 9, 2001 Dow Jones Newswires Compaq Sees FY01 Captial Expenditures Totaling $1B Dow Jones Newswires WASHINGTON -- Compaq Computer Corp. (CPQ) expects to spend about $1 billion during 2001 for capital expenditures, including land, buildings and equipment, according to the company's annual report filed late Friday with the Securities and Exchange Commission. The company also expects to spend about $475 million to purchase equipment for lease to third parties and about $630 million to repurchase Compaq common shares. Compaq said in the filing it expects to fund capital expenditures with available cash balances, internally generated funds and financing arrangements. Compaq spent $1.1 billion on capital expenditures during 2000. Compaq also spent about $673 million last year to repurchase about 32 million shares of its common stock. About $370 million, or 22 million shares, of the total amount were repurchased under the company's new $1 billion plan, authorized by the company's board on Dec. 1. Compaq's previous repurchase program, initiated in 1998, has been suspended while the new program is in effect. As of Jan. 31, Compaq had about 1.7 billion common shares outstanding. Houston-based Compaq develops, makes and markets computer hardware, software and services. -Carrie DeLeon; Dow Jones Newswires/Federal Filings Business News; 202-628-7663

To: hlpinout who wrote (89598)	2/9/2001 6:34:37 PM
From: hlpinout	Respond to of 97611

2/09/01 - ALBERTA SECURITIES COMMISSION: COMPAQ COMPUTER CORP - ASC Re Compaq Computer Exemptive Relief Applications Vancouver, BC, Feb 09, 2001 (Market News Publishing via COMTEX) -- IN THE MATTER OF THE SECURITIES LEGISLATION OF ALBERTA, BRITISH COLUMBIA, SASKATCHEWAN, MANITOBA, ONTARIO, NEWFOUNDLAND, NEW BRUNSWICK AND NOVA SCOTIA AND IN THE MATTER OF THE MUTUAL RELIANCE REVIEW SYSTEM FOR EXEMPTIVE RELIEF APPLICATIONS AND IN THE MATTER OF COMPAQ COMPUTER CORPORATION MRRS DECISION DOCUMENT WHEREAS the local securities regulatory authority or regulator (the "Decision Maker") in each of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Newfoundland, New Brunswick and Nova Scotia (the "Jurisdictions") has received an application from Compaq Computer Corporation ("Compaq" or the "Company") for a decision pursuant to the securities legislation of the Jurisdictions (the "Legislation") that trades to, by, with or on behalf of employees (the "Employees") (including in certain circumstances former Employees and their representatives, and including Employees' immediate family members and related trusts ("Permitted Transferees")) of Compaq or its affiliates (collectively, the "Compaq Companies") resident in the Jurisdictions in options ("Options") and stock appreciation rights ("SARs" and, together with Options, the "Awards") on shares of common stock of Compaq ("Common Shares") and Common Shares in connection with the Compaq 1985 Stock Option Plan, 1989 Equity Incentive Plan, 1998 Stock Option Plan and Employee Stock Purchase Plan (collectively, the "Plans"), including first trades in Common Shares acquired pursuant to the Plans, shall not be subject to the requirements contained in the Legislation to be registered to trade in a security (the "Registration Requirements") and to file and obtain a receipt for a preliminary prospectus and a prospectus (the "Prospectus Requirements") (collectively, the "Registration and Prospectus Requirements"); AND WHEREAS pursuant to the Mutual Reliance Review System for Exemptive Relief Applications (the "System"), the Nova Scotia Securities Commission is the principal regulator for this application; AND WHEREAS Compaq has represented to the Decision Makers as follows: 1. Compaq is a corporation incorporated under the laws of the state of Delaware, is not a reporting issuer or its equivalent under the Legislation and has no present intention of becoming a reporting issuer or its equivalent under the Legislation. The majority of the directors and senior officers of Compaq reside outside of Canada. 2. Compaq currently has and in the future will have affiliates ("Affiliates") in Canada participating in the Plans. The current Affiliates are Compaq Canada Incorporated and Compaq Financial Services Canada. None of the Affiliates is a reporting issuer or its equivalent in any of the Jurisdictions nor has any present intention of becoming a reporting issuer or its equivalent. 3. The authorized share capital of Compaq consists of 3 billion Common Shares, par value US$0.01 per share and 10 million shares of preferred stock ("the "Preferred Shares"), par value US$0.01. As of June 30, 2000, there were 1,728 million Common Shares and no Preferred Shares issued and outstanding. 4. Compaq is subject to the requirements of the Securities Exchange Act of 1934, as amended, of the United States, including the reporting requirements. The Common Shares are listed for trading on the New York Stock Exchange. 5. Common Shares offered under the Plans are registered with the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933. 6. The Compaq Companies will identify the Canadian Employees who will be granted Awards under the 1998 Stock Option Plan ("1998 SOP") and will distribute plan related materials to them. 7. Compaq proposes to use the services of an agent (the "Agent") in connection with the Plans. The current Agent under the Plans is Salomon Smith Barney, Inc. ("SSB"). The current Agent is, and, if replaced, will be, a corporation registered under applicable U.S. securities or banking legislation to trade in securities and has been or will be authorized by Compaq to provide services under the Plans. SSB is not a registrant in any of the Jurisdictions and, if replaced, the Agent is not expected to be a registrant in any of the Jurisdictions. 8. The Agent's role in the Plans will involve various administrative functions and may include: (i) assisting Employees, including former Employees ("Former Employees") and their representatives and Permitted Transferees with the exercise of Awards, including cashless exercises; (ii) holding Common Shares issued by Compaq upon the exercise of Awards or otherwise; and (iii) facilitating the resale of Common Shares acquired under the Plans outside of Canada. 9. Former Employees are Employees who participated in the Plans when employed by a Compaq Company but have left the employment of the Compaq Company. 10. Former Employees are permitted under the Plans to keep the Common Shares acquired under the Plans in the accounts maintained by the Agent and to use the services of the Agent to assist in the resale of Common Shares acquired under the Plans even though they are no longer employed by a Compaq Company. 11. As of October 18, 2000, there were approximately 1,703 Employees resident in Canada eligible to participate in the Plans. 12. The purpose of the 1998 SOP is to assist the Compaq Companies in attracting, retaining and motivating Employees. Employees eligible to participate in the 1998 SOP (the "Eligible Employees") will be granted Awards under the 1998 SOP. 13. Subject to the discretion of Compaq to permit transfers to Permitted Transferees, Awards are not transferable otherwise than by will or the laws of descent and distribution. Transfers to Permitted Transferees can only be made for estate planning purposes. 14. The consideration to be paid for Common Shares issued upon the exercise of Awards granted under the 1998 SOP may consist of cash or its equivalent, including consideration received by the Company under a cashless exercise program implemented by the Company in connection with this Plan. 15. Eligible Employees may exercise their Awards and resell Common Shares acquired under the 1998 SOP through the Agent. Former Employees who voluntarily or involuntarily had their employment with the Compaq Companies terminated and whose Awards vest under the 1998 SOP may exercise their Awards and resell their Common Shares through the Agent. 16. Compaq has also made grants of options under two plans, the 1985 Stock Option Plan ("1985 SOP") and 1989 Equity Incentive Plan ("1989 EIP") which have now been discontinued in Canada. However, options are still outstanding and may be exercised to acquire Common Shares under the 1985 SOP and 1989 EIP. Common Shares obtained under the 1985 SOP and 1989 EIP will in the future be sold by Employees, Former Employees or their representatives and these sales may be made through the Agent. 17. The purpose of the Employee Stock Purchase Plan (the "ESPP") is to provide an opportunity for Employees eligible to participate in the ESPP (the "ESPP Participants") to purchase Common Shares at a discount and to provide an additional incentive to such Employees. 18. An ESPP Participant may authorize payroll deductions of 1% to 10% of eligible compensation; such payroll deductions will be credited to the ESPP Participant's account and will be used to purchase Common Shares at the end of each purchase period. The purchase price will generally be the lower of 85% of the fair market value of the Common Shares at the commencement of the purchase period and the purchase date. 19. All cash dividends paid with respect to Common Shares held in an ESPP Participant's account maintained by the Agent will be automatically reinvested to purchase additional Common Shares. 20. Rights to purchase Common Shares under the ESPP are not transferable other than by will or the laws of descent and distribution. 21. Canadian Employees, including Former Employees, and their representatives, who wish to sell Common Shares acquired under the ESPP may do so through the Agent. 22. A prospectus prepared according to U.S. securities laws describing the terms and conditions of the 1998 SOP and ESPP will be delivered electronically to all Eligible Employees who are granted Awards under the 1998 SOP and to all ESPP Participants, respectively. The annual reports, proxy materials and other materials Compaq is required to file with the SEC will be provided or made available to all participants under the Plans (the "Plans Participants") who become shareholders of Compaq at the same time and in the same manner as such materials are provided or made available to U.S. resident shareholders of Compaq. 23. Participation in the Plans is voluntary and the Plans Participants are not induced to participate in the Plans or acquire Common Shares under the Plans by expectation of employment or continued employment. 24. At the time of the grant or issuance, as the case may be, of Awards and Common Shares under the Plans, holders of Common Shares whose last address as shown on the books of Compaq was in Canada will not hold more than 10% of the outstanding Common Shares and will not represent in number more than 10% of the total number of holders of Common Shares. 25. Because there is no market for the Common Shares in Canada and none is expected to develop, any resale of the Common Shares acquired under the Plans will be effected through the facilities of, and in accordance with the rules and laws applicable to, a stock exchange or organized market outside of Canada on which the Common Shares may be listed or quoted for trading. 26. The Legislation of certain of the Jurisdictions does not contain exemptions from the Registration and Prospectus Requirements for certain trades in Awards and Common Shares to, by and on behalf of Canadian Employees, Former Employees, their representatives, and Permitted Transferees, including trades carried out with or through the Agent. 27. When the Agent sells Common Shares on behalf of holders of the Common Shares, such persons and the Agent, as applicable, are not able to rely on the exemption from the Registration Requirements contained in the Legislation for trades made by a person or company acting solely through a registered dealer under the Legislation. AND WHEREAS pursuant to the System, this MRRS Decision Document evidences the decision of each Decision Maker (collectively, the "Decision"); AND WHEREAS each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the Decision has been met; THE DECISION of the Decision Makers pursuant to the Legislation is that: a) the Registration and Prospectus Requirements shall not apply to: (i) the issuance by Compaq of Awards to Eligible Employees under the 1998 SOP; (ii) the issuance by Compaq of Common Shares on the exercise of Awards or otherwise under the Plans to Canadian Employees, Former Employees, their representatives or Permitted Transferees, as the case may be, including the exercise of Awards and other options by their holders directly to Compaq or through the Agent; and (iii) other trades, including the transfer of Awards by their holders to Permitted Transferees, which may be made in connection with (i) or (ii) above, provided that the first trade in Common Shares acquired pursuant to this Decision shall be deemed a distribution or a primary distribution to the public under the Legislation unless such first trade is executed through the facilities of, and in accordance with the rules and laws applicable to, a stock exchange outside of Canada on which the Common Shares may be listed or quoted for trading or on the Nasdaq Stock Market; and b)the Registration Requirements shall not apply to the Compaq Companies or the Agent in connection with trades in Awards and Common Shares under the Plans or to first trades in Common Shares acquired under the Plans made through the Agent. DATED AT Halifax, Nova Scotia this 31st day of October , 2000. "Robert B. MacLellan" CONTACT: TEL: (403) 427-5201 Alberta Securities Commission MarketbyFax(tm) - To get the NEWS as it happens, call (604) 689-3041.

To: hlpinout who wrote (89598)	2/9/2001 6:35:52 PM
From: hlpinout	Respond to of 97611

2/09/01 - Management`s Discussions: 10-K, COMPAQ COMPUTER CORP 1 of 7 (Edgar Online via COMTEX) Company Name: COMPAQ COMPUTER CORP (SYMBOL:CPQ ) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Founded in 1982, Compaq Computer Corporation ("Compaq") is a leading global provider of enterprise technology and solutions. Compaq designs, develops, manufactures and markets hardware, software, solutions and services, including industry-leading enterprise computing solutions, fault-tolerant business-critical solutions, communciation products, and desktop and portable personal computers that are sold in more than 200 countries. The following discussion should be read in conjunction with the consolidated financial statements. Certain statements contained herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed more fully herein. RESULTS OF OPERATIONS Compaq completed the acquisitions 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 transactions 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 include the results of operations from the respective dates of acquisition through divestiture or December 31, 2000, as applicable. During 2000, Compaq realigned the operations of its Enterprise Solutions and Services segment, which resulted in the formation of two reportable segments: Enterprise Computing and Compaq Global Services. These two segments accounted for 50 percent of consolidated revenue and 86 percent of segment operating income in 2000. Compaq's other two reportable segments, Commercial Personal Computing and Consumer, were unaffected by the realignment. Enterprise Computing designs, develops, manufactures and markets advanced computing and telecommunication products, including business-critical servers, industry-standard servers and storage products. Compaq Global Services delivers worldwide infrastructure and solution design implementation, management, and support services through Professional and Customer Services. Commercial Personal Computing delivers standards-based computing emphasizing Internet access through workstations, desktops, portables, monitors, Internet access devices and life-cycle management products. The Consumer segment targets home users with Internet-ready desktops and portables, printers and related products, as well as Internet access and e-services. Financial data for prior periods has been restated to conform to the current presentation. Summary financial data by business segment follows: (In millions) 2000 1999 1998 -------- -------- -------- ENTERPRISE COMPUTING Revenue ....................... $ 14,316 $ 12,974 $ 10,498 Operating income .............. 2,140 1,201 948 COMPAQ GLOBAL SERVICES Revenue ....................... 6,993 7,162 3,990 Operating income .............. 944 1,148 776 COMMERCIAL PERSONAL COMPUTING Revenue ....................... 13,136 12,185 11,846 Operating income (loss) ....... 289 (448) (46) CONSUMER Revenue ....................... 7,586 5,994 4,932 Operating income .............. 170 262 183 OTHER Revenue ....................... 352 210 (97) Operating income (loss) ....... 27 (281) (115) CONSOLIDATED SEGMENT TOTALS Revenue ....................... $ 42,383 $ 38,525 $ 31,169 Operating income .............. $ 3,570 $ 1,882 $ 1,746 A reconciliation of Compaq's consolidated segment operating income to consolidated income (loss) before income taxes follows: Year ended December 31 (In millions) 2000 1999 1998 ------- ------- ------- Consolidated segment operating income ......... $ 3,570 $ 1,882 $ 1,746 Corporate and unallocated shared expenses ..... (1,117) (1,156) (888) Restructuring and related activities .......... 86 (868) (393) Purchased in-process technology ............... -- -- (3,196) Other income (expense), net ................... (1,664) 1,076 69 ------- ------- ------- Income (loss) before income taxes ............. $ 875 $ 934 $(2,662) ======= ======= ======= OVERVIEW Compaq reported 2000 consolidated revenue of $42.4 billion, an increase of $3.9 billion, or 10 percent, compared with the prior year. Strong growth in Consumer, Enterprise Computing and Commercial Personal Computing drove higher revenue. Consolidated revenue in 1999 increased $7.4 billion, or 24 percent, compared with 1998 primarily due to higher revenues from Compaq Global Services, Enterprise Computing and Consumer. Revenue in 1998 reflects the acquisition of Digital from June 1998 through the remainder of the year while 1999 and 2000 revenue reflects Digital amounts for the entire year. Consolidated gross margin of $10.0 billion (23.5 percent of revenue) in 2000 improved 0.9 percentage points compared with the prior year reflecting Compaq's strategy to drive profitable growth. Stronger margins in Commercial Personal Computing and Enterprise Computing led to the overall improvement in gross margin. Consolidated gross margin declined 0.4 percentage points in 1999 compared to 1998, primarily due to lower margins in Commercial Personal Computing. Consolidated operating expense was $7.5 billion in 2000, a decline of $488 million, or 6.1 percent, compared with 1999. As a percentage of revenue, operating expense declined significantly to 17.7 percent from 20.8 percent in the prior year due to solid execution of spending discipline. Operating expense increased $1.7 billion, or 26 percent, in 1999 compared with 1998 primarily as a result of the Digital acquisition. The effective tax rate was 32 percent for the year ended December 31, 2000 compared with 39.1 percent for 1999. The higher effective tax rate in 1999 was primarily due to the gain on sale of businesses and restructuring and related charges. Consolidated net income of $569 million was unchanged from the prior year. Earnings per diluted common share were $0.33 for the year ended December 31, 2000 compared to $0.34 in 1999. Consolidated net income included a $1.1 billion, net of tax, impairment charge for certain equity investments in 2000, while 1999 consolidated net income included a $670 million, net of tax, gain on sale of a business and a $600 million, net of tax, charge for restructuring and related activities. The consolidated net loss of $2.7 billion in 1998 included a one-time charge for purchased in-process technology of $3.2 billion related to the acquisition of Digital. Effective January 1, 2000, Compaq adopted Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, as amended ("SAB 101"), issued by the Securities and Exchange Commission in December 1999. Compaq's adoption of SAB 101 resulted in a change in the method of accounting for certain product shipments. The cumulative effect of this change was $38 million ($26 million, net of tax). This accounting change did not have a material effect on revenue or quarterly earnings during 2000. Compaq has restated its results for the first three quarters of the year ended December 31, 2000, as reflected in the Selected Quarterly Financial Data on page 50. ENTERPRISE COMPUTING Enterprise Computing revenue increased $1.3 billion, or 10 percent, in 2000 compared with the prior year and represented 34 percent of consolidated revenue. In 1999, revenue from this segment increased $2.5 billion, or 24 percent, compared with 1998. Enterprise Computing revenue consisted of the following: Year ended December 31 (In millions) 2000 1999 1998 -------- -------- -------- Industry Standard Servers(1) ............... $ 5,847 $ 4,604 $ 4,529 Storage Products ........................... 5,240 5,066 3,444 Business Critical Servers(1) ............... 3,226 3,225 2,334 Other ...................................... 3 79 191 -------- -------- -------- $ 14,316 $ 12,974 $ 10,498 ======== ======== ======== Industry Standard Servers revenue grew 27 percent during 2000 compared with the prior year. Revenue benefited from higher average unit prices, which were aided by mid-year component shortages and a richer server mix. Demand was strong across all regions as both corporate and Internet service provider customers continued to build out their data centers. Revenue growth was strongest in the Compaq PROLIANT(TM) dense rack-optimized server line as an increasing number of customers valued the simplicity and space-saving economies provided by dense servers. Also, higher-end server revenue was strong with solid sales in industry-leading 4-way and 8-way servers. In 1999, Industry Standard Servers revenue benefited from a higher market share in North America compared with 1998. Storage Products revenue increased 3 percent during the year. Strong growth in enterprise storage, which consisted of external storage, software and high-end tape, was offset by lower attached storage. Enterprise storage growth was driven by solid sales in software and strong acceptance of Compaq's Enterprise Network Storage Architecture solutions. Revenue benefited from an increase in overall storage capacity shipped of 67 percent to 70,000 terabytes during the year, partially offset by (1) Compaq ALPHASERVER(TM) and PROLIANT(TM) systems product revenue does not include attached and enterprise storage, which is captured in Storage Products. aggressive price declines per unit of capacity. Storage Products revenue growth in 1999 resulted primarily from the Digital acquisition. Business Critical Servers revenue was essentially unchanged in 2000 compared with the prior year due to product transition to the Compaq ALPHA(TM) GS Series and related component shortages which have since been resolved. The increase in Business Critical Servers revenue in 1999 was primarily due to the acquisition of Digital. Enterprise Computing operating income increased $939 million, or 78 percent, in 2000 compared with the prior year due to strong revenue growth and higher gross margins, as well as lower operating expenses. Margins improved due to a mix shift toward the high-end and increased enterprise storage. Strong demand for industry standard servers drove higher average unit prices. Operating expense declined in whole dollars and as a percentage of revenue in the Enterprise Computing segment due to a continued focus on cost control and expense reduction. Operating income improved in 1999 compared with 1998 due to stronger performance in Storage Products, a decline in operating expense as a percentage of revenue and a full year of Digital business. COMPAQ GLOBAL SERVICES Compaq Global Services revenue decreased $169 million, or 2 percent, in 2000 compared with the prior year and represented 16 percent of consolidated revenue. Compaq Global Services revenue consisted of the following: Year ended December 31 (In millions) 2000 1999 1998 -------- -------- -------- Customer Services(2) ....................... $ 4,336 $ 4,356 $ 2,462 Professional Services(2) ................... 2,657 2,806 1,528 -------- -------- -------- $ 6,993 $ 7,162 $ 3,990 ======== ======== ======== Adjusted for the effects of currency, Compaq Global Services revenue increased 3 percent. The decline in Compaq Global Services revenue during the year was primarily a result of lower Professional Services revenue. Adjusted for the effects of currency, Professional Services revenue was essentially unchanged. Compaq has narrowed its focus for Professional Services to target areas of opportunity that are consistent with its Internet-related service strategy and continues to realign its workforce to support growth plans. Customer Services revenue grew 5 percent adjusted for the effects of currency, in line with the market. Such growth was aided by strong attachment of services with product sales and continued penetration of business-critical services. Compaq Global Service revenue increased $3.2 billion, or 79 percent, in 1999 compared with 1998, benefiting from a full year of the Digital business acquired in June 1998. Customer Services benefited from significant growth in Asia-Pacific, Latin America and Greater China, reflecting recovery from Asian and Latin American economic crises. Revenue also improved as a result of growth in software support and business-critical services. Outsourcing business and e-business strengths favorably impacted Professional Services revenue. Compaq Global Services operating income declined $204 million, or 18 percent, in 2000 compared with the prior year. Given the substantial portion of international business within Compaq Global Services, currency declines significantly impacted operating income during 2000. While profitability in the Customer Services business remains strong, Professional Services operating results were lower primarily due to workforce rebalancing and reskilling. Operating expense increased primarily due to investment in direct sales capability. Operating income was higher in 1999 compared with 1998 primarily due to a full year of Digital business. (2) Compaq Global Services revenue includes revenue from the sale of products made in connection with providing solutions and services to customers. COMMERCIAL PERSONAL COMPUTING Commercial Personal Computing revenue increased $951 million, or 8 percent, in 2000 compared with the prior year and represented 31 percent of consolidated revenue. Revenue grew across all regions, benefiting from higher unit sales of portables and Compaq IPAQ(TM) products, offset in part by lower unit sales of desktops. In 1999, Commercial Personal Computing revenue increased $339 million, or 3 percent, compared with 1998. Overall unit sales growth in 1999 was partially offset by declining average unit prices, which were lower due to competitive pricing and a shift in product mix. Demand for portable products shifted from higher-end mobility and power to lower cost during 1999. Compaq completed the purchase of key assets from Inacom during the first quarter of 2000 and subsequently established Custom Edge Incorporated as a wholly owned subsidiary (also known as Compaq Direct). This purchase adds custom configuration capabilities and direct fulfillment logistics that enable Compaq to better meet customer needs in North America. Commercial Personal Computing operating income increased $737 million, from a loss of $448 million in 1999 to income of $289 million in 2000. Operating results strengthened dramatically due to continued improvement in the business model, including integration of Compaq Direct's fulfillment capacity, and successful reduction of operating costs. Profitability also benefited from a favorable shift in product mix to higher margin portables and supply chain efficiencies. Operating expense declined due to persistent focus on streamlining processes and increasing efficiencies. Commercial Personal Computing operating loss increased $402 million in 1999 as compared with 1998 due primarily to lower gross margins which resulted from average unit prices falling faster than costs. Costs for processors, memory and hard drives for desktops and portables declined during the year. Gross margin also suffered from aggressive competitive bidding. Operating expenses declined slightly in 1999 as a percentage of revenue due to an increased focus on sales and marketing spending as well as support costs. CONSUMER Consumer revenue increased $1.6 billion, or 27 percent, in 2000 compared with the prior year and accounted for 18 percent of consolidated revenue. Consumer revenue benefited from strong international sales growth, particularly in Asia-Pacific and Latin America. Higher unit sales of desktops and portables also contributed to revenue growth. The Consumer segment continues to hold the number one worldwide consumer PC market share position (according to International Data Corporation). The "beyond the box" business, which includes Internet access, Internet traffic, printers, software, financing and warranty upgrades, increased 86 percent compared with the prior year. Consumer revenue increased $1.1 billion, or 22 percent, in 1999 compared with 1998. Revenue benefited from high unit growth driven by strong consumer demand, partially offset by a decline in average unit prices. Component costs continued to decline, which allowed Compaq to reach lower price points, thus spurring consumer demand. An increase in international sales also drove total revenue higher, particularly in Latin America and Asia-Pacific. Higher revenue from Internet access and traffic benefited the Consumer segment in 1999. Consumer operating income declined $92 million, or 35 percent, in 2000 compared with the prior year. The decline in operating income was primarily due to a downturn in the U.S. consumer PC market that occurred late in the fourth quarter of 2000. Higher component costs also contributed to lower operating income. Operating expenses were relatively unchanged as a percentage of revenue. Consumer operating income increased $79 million, or 43 percent, in 1999 compared with 1998. The increase in operating income was attributable to higher revenue, which resulted in higher gross margin in absolute dollars, and slightly lower operating expenses as a percentage of revenue. CORPORATE AND UNALLOCATED SHARED EXPENSES The results of the business segments exclude separately managed corporate and unallocated shared expenses, which consisted primarily of general and administrative costs as well as other items not controlled by the business segments. Corporate and unallocated shared expenses declined from $1.2 billion in 1999 to $1.1 billion in 2000. Corporate and unallocated shared expenses increased $268 million in 1999 due to higher information management, acquisition integration and other general shared costs. RESTRUCTURING AND RELATED ACTIVITIES During 2000, Compaq substantially completed all of the actions contemplated under the 1998 and 1999 restructuring plans. In December 2000, Compaq reversed excess reserves of $86 million for employee separations, facility closure costs and other costs related to the 1999 plan. Accrued costs under both plans at December 31, 2000 included amounts for actions that have already been taken, but for which expenditures have not yet been made. In September 1999, Compaq's management approved a restructuring plan to realign Compaq's organization, reduce infrastructure and overhead, and eliminate excess and duplicative facilities. Restructuring and related charges of $868 million ($600 million, net of tax) were expensed. These charges were composed of $787 million of accrued restructuring costs, $58 million of related asset impairment charges and a $23 million pension curtailment loss to recognize a change in Compaq's projected pension benefit obligation in connection with employee separations. Costs for employee separations related to approximately 7,000 employees worldwide affecting the majority of business functions, job classes and regions, predominantly occurring in North America and Europe. Employee separation benefits include severance, medical and other benefits. In June 1998, Compaq recorded a restructuring charge of approximately $1.7 billion to integrate the operations of Compaq and Digital, consolidate duplicative facilities, improve service delivery and reduce overhead. Approximately $1.5 billion was related to the acquisition of Digital and recorded as a component of purchase accounting and $286 million related to Compaq and was charged to operations. During 1998, Compaq also recorded a $107 million charge related to asset impairments. An analysis of the accrued costs and amounts charged against the provision follows: EXPENDITURES BEGINNING DECEMBER 31, AND DECEMBER 31, (In millions) ACCRUAL EXPENDITURES 1999 ADJUSTMENTS 2000 --------- ------------ ------------ ------------- ------------ 1999 PLAN Employee separations .................................. $ 491 $ (68) $ 423 $ (321) $ 102 Facility closure costs ................................ 96 -- 96 (50) 46 Contract cancellation and other exit costs ............ 200 (167) 33 (28) 5 --------- ------------ ------------ ------------- ------------ $ 787 $ (235) $ 552 $ (399) $ 153 --------- ------------ ------------ ------------- ------------ 1998 PLAN Employee separations .................................. $ 1,131 $ (962) $ 169 $ (106) $ 63 Facility closure costs ................................ 414 (184) 230 (124) 106 Relocation ............................................ 99 (65) 34 (18) 16 Other exit costs ...................................... 100 (83) 17 (12) 5 --------- ------------ ------------ ------------- ------------ $ 1,744 $ (1,294) $ 450 $ (260) $ 190 --------- ------------ ------------ ------------- ------------ $ 2,531 $ (1,529) $ 1,002 $ (659) $ 343 ========= ============ ============ ============= ============ Employee separations related to the 1998 and 1999 restructuring plans were 1,100 and 4,900, respectively, during 2000. Total employee separations related to the 1998 and 1999 restructuring plans were 23,400 as of December 31, 2000. OTHER INCOME AND EXPENSE Other income and expense changed from income of $1.1 billion in 1999 to a $1.7 billion expense in 2000, primarily due to a gain on sale of businesses recorded in 1999 and an investment impairment charge recorded in 2000. In August 1999, Compaq sold an 81.5 percent equity interest in AltaVista for approximately 38 million CMGI common shares, CMGI preferred shares convertible into 3.6 million CMGI common shares and a $220 million three-year note receivable. Total consideration received from CMGI was valued at $1.8 billion. After adjusting for the net assets sold and for the expenses associated with the divestiture, Compaq realized a gain of approximately $1.2 billion ($670 million, net of tax). Compaq recor

To: hlpinout who wrote (89598)	2/9/2001 6:37:01 PM
From: hlpinout	Respond to of 97611

2/09/01 - Management`s Discussions: 10-K, COMPAQ COMPUTER CORP 2 of 7 Net cash of $565 million provided by operating activities consisted primarily of net income adjusted for non-cash items of $3.1 billion, offset by $3.0 billion used in working capital and other activities. Net cash used in working capital and other activities resulted primarily from an increase in receivables and other assets as well as cash payments for restructuring activities, partially offset by an increase in other current liabilities. Days sales outstanding were 53 days and 52 days for 2000 and 1999, respectively. From time to time, Compaq may sell accounts receivable when it is economically beneficial. Accounts receivable sold were $328 million and $238 million at December 31, 2000 and 1999, respectively. Inventory turns were 14.4 and 14.8 in 2000 and 1999, respectively. Net cash of $1.2 billion used in investing activities resulted primarily from the following items. Compaq paid cash of $370 million for the acquisition of Inacom. Compaq also used cash of $1.1 billion for capital expenditures, net of disposals. Cash of $364 million was used in other investing activities. These items were partially offset by a $636 million decrease in short-term investments. Cash provided by financing activities of $298 million consisted primarily of increases in long-term debt and short-term borrowings of $575 million and $258 million, respectively, partially offset by common stock transactions of $365 million and dividends paid to stockholders of $170 million. Estimated future uses of cash in 2001 include capital expenditures for land, buildings and equipment of approximately $1.0 billion, purchases of equipment to be leased to third parties of approximately $475 million and approximately $630 million for the repurchase of Compaq common shares. Compaq also plans to use available liquidity to develop the purchased in-process technology related to the Digital acquisition into commercially viable products. At December 31, 2000, the estimated costs to be incurred to develop the purchased in-process technology into commercially viable products totaled approximately $1.4 billion in the aggregate through the year 2004 ($430 million in 2001, $420 million in 2002, $380 million in 2003 and $200 million in 2004). 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 has a $2.2 billion revolving credit facility that expires in September 2001 and a $3.0 billion revolving credit facility that expires in October 2002. The facilities bear interest at LIBOR plus 0.625 percent and LIBOR plus 0.325 percent, respectively. Both of these facilities were unused at December 31, 2000 and 1999. Compaq also operates two short-term commercial paper programs: a $1.5 billion program in the name of Compaq Computer Corporation and a $1.0 billion program in the name of Compaq Financial Services Corporation ("CFS"). Both programs are supported by the $3.0 billion credit facility. Outstanding commercial paper reduces available borrowings under this credit facility. At December 31, 2000, Compaq had $418 million and $218 million in commercial paper outstanding under the Compaq and CFS programs, respectively, with a weighted average interest rate of 7.5 percent. The carrying amounts of the borrowings under the commercial paper programs approximate their fair value. Additionally, Compaq maintains various uncommitted lines of credit, which totaled approximately $275 million at December 31, 2000. There were no outstanding borrowings against these lines at December 31, 2000 and 1999. 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 its needs and market conditions. Compaq filed a $2.0 billion shelf registration statement for debt securities with the Securities and Exchange Commission during the second quarter of 2000. In August 2000, Compaq placed under the registration statement $300 million of unsecured 7.65 percent notes that mature on August 1, 2005, and $275 million of unsecured 7.45 percent notes that mature on August 1, 2002 (collectively, the "Notes"), unless previously redeemed. Interest will be paid on the Notes on February 1 and August 1 of each year, beginning on February 1, 2001. The fair value of the Notes approximates carrying value. The financing is for general corporate purposes (including investments in CFS and other subsidiaries), capital expenditures, and repayment of outstanding indebtedness (including commercial paper issued for working capital purposes). Compaq has the capacity to issue an additional $1.4 billion of debt securities under the shelf registration statement. FACTORS THAT MAY AFFECT FUTURE RESULTS Compaq participates in a highly volatile industry that is characterized by intense industry-wide competition. Industry participants confront aggressive pricing practices by competitors, continually changing customer demand patterns and rapid technological developments. The following cautionary statements discuss important factors that could cause actual results to differ materially from the projected results contained in the forward-looking statements in this Annual Report. COMPONENT SHORTAGES COULD CURTAIL PRODUCTION. From time to time, supply for key components in Compaq's products lags behind worldwide demand. In the event that supply of a key material component is delayed or curtailed, Compaq's ability to ship the related product in desired quantities and in a timely manner could be adversely affected. Compaq attempts to mitigate the risks of component shortages by working closely with key suppliers on product plans, coordinated product introductions, purchases on the spot market and selected strategic purchases. DELAYS IN IMPLEMENTATION OF CHANGES IN DELIVERY MODELS COULD NEGATIVELY AFFECT FINANCIAL RESULTS. Compaq sells directly to end users in all market sectors, but the largest proportion of direct sales is in large enterprise accounts. Products in Commercial Personal Computing are sold primarily through third-party resellers while products in Consumer are sold principally through retail outlets. As compared to Compaq, many Compaq competitors sell a higher percentage of their personal computer products directly to end user customers. Direct sales may afford such competitors an advantage that will allow them to price products lower than Compaq's products are priced or to compete on terms of service that Compaq cannot match. Compaq has established a variety of programs designed to achieve similar operational capabilities by simplifying its product-set and pricing model, re-engineering the channel delivery model and more rapidly expanding e-commerce capabilities for large, medium and small businesses. COMPETITIVE ENVIRONMENT PLACES PRESSURE ON REVENUE, GROSS MARGINS AND MARKET SHARE. Competition remains intense in the information technology industry with a large number of competitors vying for customers and market share, domestically and internationally. Competition creates an aggressive pricing environment, which continues to put pressure on revenue, gross margins and market share, which is particularly acute during market slowdowns. UNANTICIPATED DELAYS IN PRODUCT SCHEDULES COULD AFFECT PRODUCT DEMAND. The process of developing new high-technology products and services is complex and often uncertain. Successful product transitions and deployment of new products requires accurate predictions of the product development schedule as well as volumes, product mix, customer demand and configuration. Compaq may also anticipate demand and perceived market acceptance that differs from the product's realizable customer demand and revenue stream. Further, in the face of intense competition in the industry, any delay in a new product rollout could decrease any advantage Compaq may have to be the first to market. A failure on the part of Compaq to carry out a product rollout in the time frame anticipated and in the quantities appropriately matching current customer demand could directly affect the future demand for the product and the profitability of Compaq's operations. NEW FORM FACTORS INTRODUCE UNCERTAINTY INTO THE MARKET. The increasing reliance on the Internet is creating new dynamics in the computer industry. As businesses and consumers turn to the Internet, speed and connectivity may become more critical than stand-alone power for client devices. Compaq is introducing a new generation of Internet devices built around simple form factors, customized functions and wireless mobility. Compaq's products will vie for customer acceptance and market share against those of computer companies as well as consumer electronics and telecommunications companies. Hardware products, which are Compaq's traditional area of strength, may become less important than service offerings in attracting and retaining customers. In addition, as new form factors are adopted, sales of traditional personal computers may decline. CHANGES IN THE SERVICES BUSINESS COULD ADVERSELY AFFECT EARNINGS. Compaq's Global Services business has traditionally provided services that included the design and implementation of high-end proprietary systems. If the trend for design and implementation of systems continues to move from proprietary environments to industry standard products, Compaq will need to continue and accelerate retraining its services personnel to compete in the new environment. There can be no assurance that Compaq will be able to successfully continue training, attracting and retaining the necessary personnel to achieve this transition as Compaq adapts its service practices to changing conditions. COMPETITION FOR TALENTED EMPLOYEES COULD HAMPER BUSINESS OPERATIONS. Compaq, like all technology companies, must compete for talented employees in a market where the demand for such individuals exceeds the number of qualified candidates. As a result, Compaq's human resources organization focuses significant efforts on attracting and retaining individuals in key technology positions internationally. These efforts have generated positive results in terms of both reducing attrition rates and filling openings created by prior employee losses. Declining stock market prices, however, make retention more difficult as prior equity grants contain less value and key employees pursue equity opportunities elsewhere. Should Compaq experience a substantial loss of talent or an inability to attract talent for key openings, particularly in critical markets, the resulting talent gaps could impact Compaq's ability to meet its business objectives. CREDIT RISKS COULD INCREASE IF FINANCIAL CONDITION OF RESELLERS OR EQUIPMENT LESSEES ERODES. Much of Compaq's revenue results from selling products through distributors and resellers. Compaq continually monitors and manages the credit it extends to distributors and resellers and attempts to limit credit risks by utilizing risk transfer arrangements and obtaining security interests. The industry's trend from indirect sales models to direct sales models may reduce the market opportunities for the number of distributors or resellers in the market. Compaq's business could be adversely affected in the event that the financial condition of its distributors and resellers erodes. Upon the financial failure of a distributor or reseller, Compaq could experience disruptions in distribution as well as a loss associated with the unsecured portion of any outstanding accounts receivable. Additionally, through its wholly owned subsidiary, CFS, Compaq provides information technology leasing and financing solutions to customers. As a consequence, Compaq is exposed to the risk that lessees will be unable to make required lease payments and to the risk that leased equipment will be worth less upon its return to Compaq than was estimated at lease inception. While Compaq believes that its allowances for credit losses are adequate and that its estimates of the residual value of leased equipment are reasonable, there can be no assurance that such allowances will cover actual losses or that estimated residual values will be realized. DELAYS IN NEW SYSTEMS IMPLEMENTATION COULD HAMPER OPERATIONAL EFFICIENCY. Compaq continues to focus on increasing the effectiveness and efficiency of its business and information management processes to increase customer satisfaction, improve productivity and lower costs. In 2001, Compaq is focusing on improvements required to support more direct sales and changes in manufacturing supply chain operations. Efforts to improve systems infrastructure and increase system security could be hampered by the need to balance increased operational efficiency against budgetary constraints. Delays in implementing further improvements could adversely affect inventory levels, cash and related profitability. QUARTERLY SALES CYCLE MAKES PLANNING AND OPERATIONAL EFFICIENCIES DIFFICULT. Compaq, like other computer companies, generally sells more products in the third month of each quarter than in the first and second months. This sales pattern places pressure on manufacturing and logistics systems based on internal forecasts and may adversely affect Compaq's ability to predict its financial results accurately. In addition, to rationalize manufacturing utilization, Compaq may build products early in the quarter in anticipation of demand late in the quarter. Developments late in a quarter, such as lower-than-anticipated product demand, a systems failure, or component pricing movements, can adversely impact inventory levels, cash and related profitability in a manner that is disproportionate to the number of days in the quarter affected. MINORITY INVESTMENTS COULD ADVERSELY AFFECT LIQUIDITY AND EARNINGS. Compaq holds minority interests in companies having operations or technology in areas within Compaq's strategic focus. Some of these investments are in research and development, start-up or development stage companies or companies where operations are not yet sufficient to establish them as going concerns. As a result, Compaq may be called upon under contractual or other terms to provide funding for operations of such companies and may share in the losses of such entities. Certain investments are in publicly traded companies whose share prices are highly volatile. Adverse changes in market conditions or poor operating results of underlying investments could result in Compaq incurring losses or an inability to recover the carrying value of its investments. DOING BUSINESS IN CERTAIN LOCATIONS CREATES ADDITIONAL RISKS. 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 and the volatility of economic conditions in countries that are dependent on exports from the U.S. and European markets. Compaq generally has experienced longer accounts receivable cycles in emerging markets, in particular Asia-Pacific and Latin America, when compared with U.S. and European markets. Compaq is also subject to any political and financial instability in the countries in which it operates, including inflation, recession, currency devaluation and interest rate fluctuations. Compaq continues to monitor its business operations in these regions and takes various measures to manage risks in these areas. EXPENSE CONSTRAINTS COULD IMPEDE OPERATIONS. Compaq is focused on bringing its operational expense to appropriate levels for each of its businesses while simultaneously implementing extensive new programs. The significant risks associated with these actions include the failure to expend sufficient revenue generating advertising and marketing funds, unanticipated consequences of reductions in personnel devoted to ongoing programs, and the failure to meet operating expense targets by not matching commitments in new programs to reductions in ongoing programs. INCOME TAXES. Compaq anticipates an effective tax rate of 30 percent for 2001. Compaq's manufacturing entity in Singapore is subject to a tax holiday that is not expected to extend beyond 2001. Compaq's tax rate has historically been heavily dependent upon the proportion of earnings derived from its Singaporean manufacturing subsidiary and its ability to reinvest those earnings permanently outside the United States. If Compaq's intercompany transfer pricing with respect to its Singaporean manufacturing subsidiary for prior years require significant adjustment due to audits or regulatory changes, Compaq's overall tax rate could increase. At December 31, 2000, Compaq had a deferred tax asset of $379 million related to net operating loss carryforwards which, if not utilized, will generally expire between 2001 and 2020 and credit carryforwards of approximately $1.1 billion, which, if not utilized, will generally expire between 2001 and 2014. Compaq had a valuation allowance of $434 million as of December 31, 2000 against the net operating loss and credit carryforwards. Compaq has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event Compaq were to determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. CURRENCY FLUCTUATIONS. Compaq's risks associated with currency fluctuations are discussed in Item 7A below. ITEM 7A. MARKET RISKS Compaq is exposed to market risks, which include changes in U.S. and international interest rates as well as changes in currency exchange rates as measured against the U.S. dollar and each other. Compaq attempts to reduce these risks by utilizing derivatives and other financial instruments. Compaq uses market valuations and value-at-risk valuation methods to assess the market risk of its financial instruments and derivative portfolios. It uses software by RiskMetrics to estimate the value-at-risk of its financial instruments and derivative portfolios based on estimates of volatility and correlation of market factors drawn from RiskMetrics data sets for the dates calculated. RiskMetrics defines loss as a reduction in the value of a portfolio in the event of adverse market conditions, using a predetermined confidence interval, over a specified period of time. Compaq included all fixed income investments, interest rate swaps, and foreign exchange contracts in the value-at-risk calculation. See Note 1 and Note 13 in the Notes to the Consolidated Financial Statements for further information regarding these instruments. The holding period for these instruments varies from one day to nine months, with the exception of instruments held by CFS which have holding periods up to four years. The measured value-at-risk from holding derivative and other financial instruments, using a 95 percent confidence level and assuming normal market conditions during the years ended December 31, 2000 and 1999, 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 revenues, gross margins, operating expenses and retained earnings as expressed in U.S. dollars. Compaq engages in hedging programs aimed at limiting in part the impact of currency fluctuations. Compaq primarily uses forward exchange contracts to hedge those assets and liabilities that impact the income statement when remeasured according to accounting principles generally accepted in the United States. For some markets, 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 if a significant and sudden decline occurs in the value of local currencies. Compaq purchases foreign currency option contracts from time to time as well as short-term forward exchange contracts to protect against currency exchange risks associated with the anticipated revenues of Compaq's international marketing subsidiaries, with the exception of certain subsidiaries that reside in countries in which such activity would not be cost effective or local regulations preclude this type of activity. 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, Compaq's revenues or costs are adversely affected when the U.S. dollar sustains a strengthening position against currencies in which Compaq sells products and services or a weakening exchange rate against currencies in which Compaq incurs costs. Changes in interest rates affect interest income earned on Compaq's cash equivalents and short-term investments, and interest expense on short-term borrowings. Compaq does not enter into derivative transactions related to its cash, cash equivalents or short-term investments. Compaq does periodically enter into interest rate swap transactions for the purpose of hedging existing or anticipated liabilities. All interest rate swaps entered into by Compaq are for the sole purpose of hedging existing or anticipated interest rate sensitive positions, not for speculation. Compaq is exposed to equity price risks on the marketable portion of investments in publicly traded equity securities. These investments are generally in companies having operations or technology in areas within Compaq's strategic focus. Compaq does not attempt to reduce or eliminate its market exposure on these securities. As of December 31, 2000, the fair value of Compaq's available-for-sale investments was $461 million. A 20 percent adverse change in equity prices would result in an approximate $92 million decrease in the fair value of Compaq's available-for-sale securities as of December 31, 2000. Because of the foregoing factors (Factors That May Affect Future Results and Market Risks), 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements PAGE Consolidated Financial Statements: Audit Reports 24 Consolidated Balance Sheet at December 31, 2000 and 1999 26 Consolidated Statement of Income for each of the three years in the period ended December 31, 2000 27 Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2000 28 Consolidated Statement of Stockholders' Equity for each of the three years in the period ended December 3

To: hlpinout who wrote (89598)	2/9/2001 6:37:45 PM
From: hlpinout	Read Replies (1) \| Respond to of 97611

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. -0-

To: hlpinout who wrote (89598)	2/9/2001 6:39:56 PM
From: hlpinout	Respond to of 97611

2/09/01 - Management`s Discussions: 10-K, COMPAQ COMPUTER CORP 6 of 7 Compaq has defined contribution plans under which Compaq makes matching contributions based on employee contributions. These plans are intended to qualify as deferred compensation plans under Section 401(k) of the Internal Revenue Code of 1986. Contributions are invested at the direction of the employee in one or more funds, including a fund that consists of common stock of Compaq. Amounts charged to expense were $138 million, $121 million and $98 million in 2000, 1999 and 1998, respectively. Compaq has an incentive compensation plan for the majority of its employees. Payments under the plan are based on a uniform percentage of employees' base pay as determined by a matrix using financial performance as defined by the plan and customer satisfaction results. Payments are made semiannually. Amounts charged to expense were $106 million, $26 million and $68 million in 2000, 1999 and 1998, respectively. NOTE 11. RESTRUCTURING AND RELATED ACTIVITIES During 2000, Compaq substantially completed all of the actions contemplated under the 1998 and 1999 restructuring plans. In December 2000, Compaq reversed excess reserves of $86 million for employee separations, facility closure costs and other costs related to the 1999 plan. Accrued costs under both plans at December 31, 2000 include amounts for actions that have already been taken, but for which expenditures have not yet been made. In September 1999, Compaq's management approved a restructuring plan to realign Compaq's organization, reduce infrastructure and overhead, and eliminate excess and duplicative facilities. Restructuring and related charges of $868 million ($600 million, net of tax) were expensed. These charges were composed of $787 million of accrued restructuring costs, $58 million of related asset impairment charges and a $23 million pension curtailment loss to recognize a change in Compaq's projected pension benefit obligation in connection with employee separations. Costs for employee separations related to approximately 7,000 employees worldwide affecting the majority of business functions, job classes and regions, predominantly occurring in North America and Europe. Employee separation benefits include severance, medical and other benefits. In June 1998, Compaq recorded a restructuring charge of approximately $1.7 billion to integrate the operations of Compaq and Digital, consolidate duplicative facilities, improve service delivery and reduce overhead. Approximately $1.5 billion was related to the acquisition of Digital and recorded as a component of purchase accounting and $286 million related to Compaq and was charged to operations. During 1998, Compaq also recorded a $107 million charge related to asset impairments. An analysis of accrued costs and amounts charged against the provision follows: BEGINNING DECEMBER 31, EXPENDITURES DECEMBER 31, (In millions) ACCRUAL EXPENDITURES 1999 AND ADJUSTMENTS 2000 --------- ------------ ------------ --------------- ------------ 1999 PLAN Employee separations .................................... $ 491 $ (68) $ 423 $ (321) $ 102 Facility closure costs .................................. 96 -- 96 (50) 46 Contract cancellation and other exit costs .............. 200 (167) 33 (28) 5 --------- ------------ ------------ --------------- ------------ $ 787 $ (235) $ 552 $ (399) $ 153 --------- ------------ ------------ --------------- ------------ 1998 PLAN Employee separations .................................... $ 1,131 $ (962) $ 169 $ (106) $ 63 Facility closure costs .................................. 414 (184) 230 (124) 106 Relocation .............................................. 99 (65) 34 (18) 16 Other exit costs ........................................ 100 (83) 17 (12) 5 --------- ------------ ------------ --------------- ------------ $ 1,744 $ (1,294) $ 450 $ (260) $ 190 --------- ------------ ------------ --------------- ------------ $ 2,531 $ (1,529) $ 1,002 $ (659) $ 343 ========= ============ ============ =============== ============ Employee separations related to the 1998 and 1999 restructuring plans were 1,100 and 4,900, respectively, during 2000. Total employee separations related to the 1998 and 1999 restructuring plans were 23,400 as of December 31, 2000. NOTE 12. SEGMENT DATA During 2000, Compaq realigned the operations of its Enterprise Solutions and Services segment, which resulted in the formation of two reportable segments: Enterprise Computing and Compaq Global Services. Compaq's other two reportable segments, Commercial Personal Computing and Consumer, were unaffected by the realignment. Enterprise Computing designs, develops, manufactures and markets advanced computing and telecommunication products, including business-critical servers, industry-standard servers and storage products. Compaq Global Services delivers worldwide infrastructure and solution design implementation, management and support services through Professional and Customer Services. Commercial Personal Computing delivers standards-based computing emphasizing Internet access through workstations, desktops, portables, monitors, Internet access devices and life-cycle management products. The Consumer segment targets home users with Internet-ready desktops and portables, printers and related products, as well as Internet access and e-services. Business activities that do not qualify for separate segment reporting are aggregated in Other. Financial data for prior periods has been restated to conform to the current presentation. The accounting policies of the segments are the same as those used in the preparation of Compaq's consolidated financial statements. Compaq evaluates the performance of its operating segments based on segment operating income, which includes sales and marketing expenses, research and development costs and other overhead charges directly attributable to the operating segment. Certain expenses which are managed outside of the operating segments are excluded. These consist primarily of corporate and unallocated shared expenses, other income and expense items, and other non-recurring charges such as purchased in-process technology and restructuring and related activities. Corporate and unallocated shared expenses consist primarily of indirect information management expenses, certain costs related to business integration and other general and administrative expenses that are separately managed. Gains and losses associated with sale of businesses and investments are excluded from segment operating income. Compaq does not include inter-segment transfers for management reporting purposes. Asset information by operating segment is not reported since Compaq does not identify assets by segment. Summary financial data by operating segment was as follows: Year ended December 31 (In millions) 2000 1999 1998 -------- -------- -------- ENTERPRISE COMPUTING Revenue ....................... $ 14,316 $ 12,974 $ 10,498 Operating income .............. 2,140 1,201 948 COMPAQ GLOBAL SERVICES Revenue ....................... 6,993 7,162 3,990 Operating income .............. 944 1,148 776 COMMERCIAL PERSONAL COMPUTING Revenue ....................... 13,136 12,185 11,846 Operating income (loss) ....... 289 (448) (46) CONSUMER Revenue ....................... 7,586 5,994 4,932 Operating income .............. 170 262 183 OTHER Revenue ....................... 352 210 (97) Operating income (loss) ....... 27 (281) (115) CONSOLIDATED SEGMENT TOTALS Revenue ....................... $ 42,383 $ 38,525 $ 31,169 Operating income .............. $ 3,570 $ 1,882 $ 1,746 A reconciliation of Compaq's consolidated segment operating income to consolidated income (loss) before income taxes follows: Year ended December 31 (In millions) 2000 1999 1998 -------- -------- -------- Consolidated segment operating income ......... $ 3,570 $ 1,882 $ 1,746 Corporate and unallocated shared expenses ..... (1,117) (1,156) (888) Restructuring and related activities .......... 86 (868) (393) Purchased in-process technology ............... -- -- (3,196) Other income (expense), net ................... (1,664) 1,076 69 -------- -------- -------- Income (loss) before income taxes ............. $ 875 $ 934 $ (2,662) ======== ======== ======== Geographic revenue and long-lived assets related to operations as of and for the years ended December 31, were as follows: (In millions) 2000 1999 1998 -------- -------- -------- Revenue: United States .............................. $ 18,966 $ 17,351 $ 13,981 Europe, Middle East and Africa ............. 14,178 14,420 11,929 Other ...................................... 9,239 6,754 5,259 -------- -------- -------- $ 42,383 $ 38,525 $ 31,169 ======== ======== ======== Long-lived assets: United States .............................. $ 2,229 $ 2,332 $ 2,166 Other ...................................... 1,202 917 736 -------- -------- -------- $ 3,431 $ 3,249 $ 2,902 ======== ======== ======== NOTE 13. COMMITMENTS, CONTINGENCIES, FINANCIAL INSTRUMENTS AND FACTORS THAT MAY AFFECT FUTURE OPERATIONS DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS Compaq primarily utilizes forward contracts and purchased foreign currency options to reduce its exposure to potentially adverse changes in foreign currency exchange rates and simple interest rate swaps to reduce exposure to interest rate volatility. Compaq does not hold or issue financial instruments for trading purposes nor does it hold or issue leveraged derivative financial instruments. Compaq's program to reduce currency exposure associated with the net monetary assets of Compaq's international subsidiaries includes agreements to exchange various foreign currencies for U.S. dollars. At December 31, 2000 and 1999, such forward contracts to sell foreign currencies, net of forward contracts to purchase foreign currencies aggregated $4.2 billion and $2.6 billion, respectively. Generally, gains and losses associated with currency rate changes on these forward contracts are recorded currently to income and are reflected in accounts receivable or other current liabilities in Compaq's consolidated balance sheet, while the interest element is recognized over the life of each contract. The amount recorded in the consolidated balance sheet approximates the fair value of such contracts at December 31, 2000 and 1999. The maturity dates of the forward contracts which were outstanding at December 31, 2000 ranged from three days to nine months, except for CFS which had forward contracts with maturity dates up to three years. Compaq frequently utilizes forward contracts to protect Compaq from the effects of currency fluctuations on anticipated but not firmly committed sales which are expected to occur within a three-month period. These forward contracts generally do not extend beyond the end of any quarter or year. Any gains or losses and the interest element on these forward contracts are recognized as a component of sales during each quarter. In prior years, Compaq hedged a portion of its anticipated but not firmly committed sales of its international marketing subsidiaries using purchased foreign currency options. Realized and unrealized gains and the net premiums on these options are deferred and recognized as a component of revenue in the same period that the related sales occur. Option contracts aggregating $660 million were outstanding at December 31, 1999, related to hedges of sales for the first half of the year. The unrealized gains deferred on these contracts were not material. Compaq does periodically enter into interest rate swap transactions for the purpose of hedging interest rate exposure on existing or anticipated liabilities. All interest rate swaps entered into by Compaq are for the sole purpose of hedging existing or anticipated interest rate sensitive positions, and not for speculation. At December 31, 1999, Compaq had entered into interest rate swaps with a notional value of $250 million with maturity dates of up to nine months. Amounts to be paid or received under interest rate swap agreements are accrued as interest rates change and are recognized over the life of the swap transactions as an adjustment to interest expense. In the event of a failure to honor one of these forward or swap contracts by one of the banks with which Compaq has contracted, management believes any loss, which could be material, would be limited to the exchange rate differential from the time the contract was made until the time it was compensated. In the case of a default by a counterparty to an interest rate swap transaction, management believes any loss would be limited to the interest rate differential between market rates and the rates contractually set in the swap contract. To the extent Compaq has option contracts outstanding, the amount of any loss resulting from a breach of contract would be limited to the amount of premiums paid for the options and the unrealized gain, if any, related to such contracts. Compaq enters into various other types of financial instruments in the normal course of business. Fair values for certain financial instruments are based on quoted market prices. For other financial instruments, fair values are based on the appropriate pricing models using current market information. The amounts ultimately realized upon settlement of these financial instruments will depend on actual market conditions during the remaining life of the instruments. Carrying values of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and other current liabilities reflected in the December 31, 2000 and 1999 consolidated balance sheet approximate fair value at these dates. CONCENTRATION OF CREDIT RISK Compaq's cash, cash equivalents, short-term investments and accounts receivable are subject to potential credit risk. Compaq's cash management and investment policies restrict investments to low risk, highly liquid securities and Compaq performs ongoing evaluations of the relative credit standing of the financial institutions with which it deals. Compaq distributes products primarily through third-party resellers and as a result, maintains individually significant accounts receivable balances from various major resellers. If the financial condition and operations of these resellers deteriorate, Compaq's operating results could be adversely affected. One such reseller, Ingram Micro, Inc., accounted for approximately 14 percent of consolidated revenue in 2000 and 11 percent of accounts receivable as of December 31, 2000, predominately in the Commercial Personal Computing segment. In 1999, Ingram Micro accounted for approximately 11 percent of consolidated revenue and 8 percent of accounts receivable at December 31, 1999. During these periods, no other customer of Compaq accounted for 10 percent or more of consolidated revenue. In 2000, Compaq's two largest resellers represented approximately 21 percent of consolidated revenue and 15 percent of accounts receivable at December 31, 2000. In 1999, Compaq's four largest resellers represented approximately 22 percent of consolidated revenue and 12 percent of accounts receivable at December 31, 1999. Compaq generally has experienced longer accounts receivable cycles in its emerging markets, in particular Asia-Pacific and Latin America, when compared to its U.S. and European markets. In the event that accounts receivable cycles in these developing markets lengthen further or one or more of Compaq's larger resellers in these regions fails, Compaq's operating results could be adversely affected. CONTINGENCIES Certain of Compaq's resellers finance a portion of their inventories through third-party finance companies. Under the terms of the financing arrangements, Compaq may be required, in limited circumstances, to repurchase certain products from the finance companies. Additionally, Compaq has on occasion guaranteed a portion of certain resellers' outstanding balances with third-party finance companies and financial institutions. Guarantees under these and other arrangements were not significant at December 31, 2000 or 1999. In January 2001, Compaq exercised an option to sell an investment in a limited liability corporation accounted for under the equity method. Once the sale of the investment closes and proceeds are received, Compaq expects to record a gain. FACTORS THAT MAY AFFECT FUTURE OPERATIONS Compaq participates in a highly volatile industry that is characterized by intense industry-wide competition for market share. Industry participants confront aggressive pricing practices, continually changing customer demand patterns and rapid technological developments. Compaq's operating results could be adversely affected should Compaq be unable to successfully anticipate customer demand accurately, manage its product transitions, inventory levels and manufacturing processes efficiently, distribute its products quickly in response to customer demand, differentiate its products from those of its competitors or compete successfully in the markets for its new products. Significant numbers of components are purchased from single sources due to technology, availability, price, quality or other considerations. Key components and processes currently obtained from single sources include certain of Compaq's displays, microprocessors, application specific integrated circuits and other custom chips, and certain processes relating to construction of the plastic housing for Compaq's computers. In addition, new products introduced by Compaq often initially utilize custom components obtained from only one source until Compaq has evaluated whether there is a need for additional suppliers. In the event that a supply of a key single-sourced material process or component were delayed or curtailed, Compaq's ability to ship the related product in desired quantities and in a timely manner could be adversely affected. Compaq attempts to mitigate these risks by working closely with key suppliers on product plans, strategic inventories and coordinated product introductions. LITIGATION Compaq is subject to legal proceedings and claims that arise in the ordinary course of business. Compaq does not believe that the outcome of any of those matters will have a material adverse effect on Compaq's consolidated financial position, operating results or cash flows. Compaq and certain of its current and former officers and directors are named in two consolidated class action lawsuits pending in the United States District Court for the Southern District of Texas, Houston Division. One lawsuit was filed in 1998 and the other in 1999. The 1998 litigation consolidates five class action lawsuits, brought by persons who purchased Compaq common stock from July 10, 1997 through March 6, 1998. It asserts claims under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act. Allegations in the 1998 lawsuit include the claim that the defendants withheld information and made 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 the inflated prices. The 1999 litigation also consolidates a number of class action lawsuits. The litigation is brought on behalf of purchasers of Compaq common stock between January 27, 1999 and April 9, 1999. It asserts claims for alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; Section 20(a) of the Exchange Act; and Sections 11 and 15 of the Securities Act. Allegations in the 1999 litigation include the claim that certain defendants and Compaq issued a series of materially false and misleading statements concerning Compaq's prospects in 1999 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 the inflated prices. Lead counsels for the plaintiffs have been appointed in both the 1998 and 1999 litigation. The plaintiffs seek monetary damages, interest, costs and expenses in both the 1998 and 1999 litigation. In the 1998 litigation, the court entered an order granting class certification on July 18, 2000. Compaq has appealed class certification and is awaiting a decision. Discovery has been stayed by order of the appellate court pending their decision on the class certification appeal. On December 12, 2000, the judge in the 1999 litigation dismissed the consolidated amended complaint after finding that it failed to comply with pleading requirements under the law. The plaintiffs filed a second amended complaint on January 31, 2001, which Compaq will move to dismiss. Compaq is vigorously defending both lawsuits. Several purported class action lawsuits were filed against Digital during 1994 alleging violations of the Federal Securities laws arising from alleged misrepresentations and omissions in connection with Digital's issuance and sale of Series A 87/8 percent Cumulative Preferred Stock and Digital's financial results for the quarter ended April 2, 1994. During 1995, the lawsuits were consolidated into three cases, which were pending before the United States District Court for the District of Massachusetts. On August 8, 1995, the Massachusetts federal court granted the defendants' motion to dismiss all three cases in their entirety. On May 7, 1996, the United States Court of Appeals for the First Circuit affirmed in part and reversed in part the dismissal of two of the cases, and remanded for further proceedings. The parties are proceeding with discovery. Compaq is vigorously defending consumer class action lawsuits alleging various defects in computers sold by Compaq. These lawsuits are pending in Texas, North Carolina, Illinois, California, Colorado and Washington. A class has been certified in the North Carolina case. All of these cases are in the discovery stage. Three of these class actions (Thurmond v. Compaq, LaPray v. Compaq, and Sprung v. Compaq) are part of a series of similar lawsuits filed against other major computer manufacturers, involving claims that the computer industry sold computers with allegedly defective floppy disk controllers. T

To: hlpinout who wrote (89598)	2/9/2001 6:40:41 PM
From: hlpinout	Respond to of 97611

2/09/01 - Management`s Discussions: 10-K, COMPAQ COMPUTER CORP 7 of 7 The table below sets forth selected unaudited financial data for each quarter of the last two years. (In millions, except per share amounts) 1ST 2ND 3RD 4TH QUARTER(1) QUARTER(1) QUARTER(1) QUARTER ---------- ---------- ---------- -------- 2000 Revenue ............................................................. $ 9,505 $ 10,135 $ 11,217 $ 11,526 Gross margin ........................................................ 2,184 2,388 2,683 2,711 Income (loss) before cumulative effect of accounting change(2) ...... 322 388 557 (672) Basic earnings (loss) per common share(3) .................... $ 0.19 $ 0.23 $ 0.32 $ (0.39) Diluted earnings (loss) per common share(3) .................. $ 0.19 $ 0.22 $ 0.31 $ (0.39) Net income (loss) ................................................... 296 388 557 (672) Basic earnings (loss) per common share(3) .................... $ 0.17 $ 0.23 $ 0.32 $ (0.39) Diluted earnings (loss) per common share(3) .................. $ 0.17 $ 0.22 $ 0.31 $ (0.39) Revenue ............................................................. $ 9,419 $ 9,420 $ 9,208 $ 10,478 Gross margin ........................................................ 2,327 1,936 2,136 2,328 Net income (loss)(4) ................................................ 281 (184) 140 332 Earnings (loss) per common share(3) Basic ............................................................ $ 0.17 $ (0.10) $ 0.08 $ 0.20 Diluted .......................................................... $ 0.16 $ (0.10) $ 0.08 $ 0.19 ------------ (1) Effective January 1, 2000, Compaq adopted Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, as amended. Compaq has restated its results for the first three quarters of the year ended December 31, 2000. (2) Includes a $1.7 billion charge for impairment of investments in the fourth quarter of 2000. (3) Earnings (loss) per common share are computed independently for each of the quarters presented and therefore may not sum to the total for the year. (4) Includes a $1.2 billion gain on the sale of a business and an $868 million charge for restructuring and related charges to realign Compaq's organization, reduce infrastructure and overhead, and eliminate excess and duplicative facilities occurring in the third quarter of 1999. (c) 1995-1999 Cybernet Data Systems, Inc. All Rights Reserved. Received by Edgar Online: Feb. 09, 2001 CIK Code: 0000714154 SEC Accession Number: 0000890566-01-000112 -0-

To: hlpinout who wrote (89598)	2/9/2001 6:44:47 PM
From: hlpinout	Respond to of 97611

Four Leading Analysts Review Computer Hardware Sector Story Filed: Friday, February 09, 2001 10:28 AM EST NEW YORK, NY, Feb 09, 2001 (INTERNET WIRE via COMTEX) -- Four leading analysts and top management from nineteen sector firms examine Computer Hardware companies in this special 87-page issue from The Wall Street Transcript (212/952-7433) or www.twst.com/info/info271.htm In a vital review of this sector for investors and industry professionals, this valuable 87-page Special Issue features: 1) Computer Hardware - In an in-depth (10,200 words) Analyst Roundtable, David Bailey, Vice President at Gerard Klauer Mattison & Co., Kenneth Bolich, Vice President at Wachovia Asset Management, Eric Rothdeutsch, Principal at Robertson Stephens, and Vadim Zlotnikov, Senior Technology Analyst at Sanford C. Bernstein & Co., examine the outlook for the sector, including capital spending budgets, new entrants, and share specific stock recommendations. Bolich highlights EMC (NYSE:EMC). "We continue to like EMC as the market leader, and believe they will continue to execute. They have great management and a very aggressive sales force. They tend to test markets to understand what's going on, and then enter the market and become a market leader." Bailey reports on IBM (NYSE:IBM), "The new product that IBM just introduced has been extremely well-received. In addition, the other major player in the mainframe market, Hitachi Data Systems, has dropped out of the business, basically leaving IBM alone in this segment. There's still a great need for mainframes as database servers; the great majority of the data that's out there in business critical applications is still stored on mainframes. So I think that it's a very opportune time for IBM with their mainframes right now. There was pent-up demand as the product was released in late 2000, but really, it's just becoming available in volume right now." According to Rothdeutsch, "Compaq (NYSE:CPQ) has had a couple of years of transition since acquiring Digital, and, although it's been a challenging integration, the company has made long strides in turning it around, while at the same time executing much better. I think they have done a good job in throwing R&D dollars at the right problems. They've made a lot of internal changes in terms of product positioning and staffing, as well as ramping their international operations nicely. So I think that they are through the majority of the transition, and once their end markets do recover, I think Compaq is pretty well positioned." Zlotnikov asserts, "Dell (Nasdaq:DELL), historically, has been a great distributor. I never think of Dell as a great innovator; I think of them as a low-cost distributor of essentially quasi-commodity products. And I think they do it quite well. They built an extraordinarily successful business around that. Now they're trying to take that model further into the high-end products, and we'll see how successful they are at it. I think that in the area of servers, which will become more commoditized, they'll be quite successful." Zlotnikov comments on Gateway, Inc., "Their entire business model is focused on building brand equity in the consumer space. And I would say they are unmatched in achieving that. Again, they may not be as far along in innovation and corporate customer service -- like EMC -- but they are extremely good in their core competencies." Rothdeutsch recommends Palm, "I think there is a big opportunity for Palm to gain better penetration in the enterprise. The company is planning to introduce new versions of its e-mail solutions, which has been one of the check-off items for corporations to incorporate wireless handhelds into their infrastructure." This 87-page Special issue also features: 2) CEO interviews (average 2,500 words). Top management of nineteen sector firms examine the outlook for their firm and the sector. Firms include: Xybernaut, Cambex, Storage Computer, Ariel, E-Rex, Essex, Global Payment Technologies, Handspring, iBIZ Technology, InnovaCom, INRANGE Technologies, Mobility Electronics, ObjectSoft, Pacific Magtron International, Rimage, Sun Microsystems, Telebyte Technology, Wareforce.com, Iomega To obtain a copy of this 87-page Computer Hardware Issue, call (212) 952-7433 or see www.twst.com/info/info271.htm The Wall Street Transcript is a premier weekly investment publication interviewing market professionals for serious investors for over 37 years. The Wall Street Transcript has launched a new free service where investors can ask the above company (or any public company) a question at www.qawire.com The Wall Street Transcript does not endorse the views of any interviewee nor does it make stock recommendations. CONTACT: Peter McLaughlin The Wall Street Transcript 212- 952-7433 Copyright 2001 Internet Wire, All rights reserved.

To: hlpinout who wrote (89598)	2/9/2001 6:52:39 PM
From: hlpinout	Respond to of 97611

(Update1) 2/9/01 2:11 AM Source:Bloomberg News Bangalore, Feb. 9 (Bloomberg) -- Digital Equipment India Ltd., the Indian unit of Compaq Computer Corp., said it won an order to help maintain computers for Unilever and integrate the computer systems of Bestfoods with the Dutch-British Company. Digital will first execute the order for Unilever, the world's biggest maker of food and consumer goods, in Europe and then help set up the infrastructure in North America and later target Asia Pacific countries. It will also assist Unilever to combine the computer systems of Bestfoods, which it acquired for $24 billion last year. ''I don't think its technology intensive,'' said Chetan Shah, an analyst with DBS Securities Ltd. ''Still as they keep adding customers, revenue will go up.'' The move by Unilever to outsource its computer maintenance to Digital will help the company curb costs as the services offered by most Indian software makers are cheaper. U.S. and European companies are asking Indian companies such as Digital to develop software and maintain computers to lower costs. Unilever yesterday said its fourth-quarter profit fell 48 percent as expenses rose after 20 takeovers last year. ''We will assist Unilever to upload, manage and maintain different application packages for thousands of Unilever's computers,'' Ashish Basu, head of marketing at Digital, said in an interview. He didn't disclose the length or value of the contract. Digital shares rose 0.3 percent to 719 rupees on the Mumbai stock exchange.

To: hlpinout who wrote (89598)	2/9/2001 6:54:17 PM
From: hlpinout	Respond to of 97611

Source: The New York Times \| Section: Technology February 8, 2001 Compaq Cuts Frills and Price on iPAQ Personal Organizer By IAN AUSTEN I n an effort to distinguish their devices, the makers of hand-held computers using Microsoft's Pocket PC operating system often portray them as mini home-entertainment centers, with vivid color displays and the ability to play music. But Compaq Computer is aiming its new iPAQ Pocket PC H3150 at people who want their palmtop computers to act mainly as, well, palmtop computers. Its screen is dull, everyday black-and- white but in exchange, it offers buyers a lower price tag and longer battery life than its color-display counterparts. Some people are very much focused on the calendar and personal information things and don't really need full color, said John Brandewie, product marketing manager for the iPAQ Pocket PC. At $349, the H3150 costs $150 less than its nearest color counterpart, the H3650. However, the display is not the only area where the economy model scrimps. The H3150's 16 megabytes of memory is only half the amount found on the color version, and it connects to personal computers through a cable rather than a cradle. While the color-screen iPAQ's are constantly backlighted, the monochrome screen's bluish- green backlight is something probably best reserved for very dark rooms. But since the new model relies mostly on reflected light, Mr. Brandewie estimates that it will run considerably longer without recharging, about 14 hours. All Compaq iPAQ Pocket PC devices accommodate a folding keyboard. A new version of the $99 Targus Stowaway Portable Keyboard plugs into the bottom of the Compaq machines and includes special keys for common Pocket PC commands. The keyboard is currently available only through Compaq's online store (www.directplus.compaq.com).