-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HJCYOwpxUt+LvrbWHX6NWUy+3JFkHAXp9NK18N8ZVXwqcunypq2bdWVPTUSklZWo bXORuc1Xz4ZTjeJQPjFUpw== 0000950129-97-000786.txt : 19970228 0000950129-97-000786.hdr.sgml : 19970228 ACCESSION NUMBER: 0000950129-97-000786 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970227 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPAQ COMPUTER CORP CENTRAL INDEX KEY: 0000714154 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 760011617 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09026 FILM NUMBER: 97545211 BUSINESS ADDRESS: STREET 1: 20555 S H 249 CITY: HOUSTON STATE: TX ZIP: 77070 BUSINESS PHONE: 7133700670 MAIL ADDRESS: STREET 1: POST OFFICE BOX 692000 MS 110701 STREET 2: POST OFFICE BOX 692000 MS 110701 CITY: HOUSTON STATE: TX ZIP: 77269-2000 10-K405 1 COMPAQ COMPUTER CORP. - 12/31/96 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1996 Commission File Number 1-9026 COMPAQ COMPUTER CORPORATION (Exact name of registrant as specified in its charter) Delaware 76-0011617 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20555 SH 249, Houston, Texas 77070 (281) 370-0670 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ Common Stock, $.01 par value New York Stock Exchange Debt Securities None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the registrant on January 31, 1997 (assuming all officers and directors are affiliates and based on the last sale price on the New York Stock Exchange as of such date) was $23.6 billion. The number of shares of the registrant's Common Stock, $.01 par value, outstanding as of January 31, 1997, was 274 million. DOCUMENTS INCORPORATED BY REFERENCE There is incorporated by reference in Part II and Part III of this Annual Report on Form 10-K certain of the information contained in the registrant's annual report to stockholders for the year ended December 31, 1996, and the registrant's proxy statement for its annual meeting of stockholders to be held April 24, 1997 which will be filed by the registrant within 120 days after December 31, 1996. - ----------------------------------------------------------------------------- 2 PART I Item 1. Business General Compaq Computer Corporation ("Compaq"), founded in 1982, designs, develops, manufactures and markets a wide range of computing products, including desktop computers, portable computers, workstations, communications products and tower PC servers and peripheral products that store and manage data in network environments. Compaq markets its products primarily to business, home, government and education customers, operating in one principal industry segment across geographically diverse markets. In 1996, Compaq reinforced its position as the largest supplier of personal computers in the world. It maintained approximately 10% of the expanding worldwide PC market by focusing its business activities on expanding sales to new customers while augmenting sales to its existing customer base. Business customers account for the largest portion of Compaq's sales. Business customers are attracted to Compaq's products for a variety of reasons, including Compaq's reputation for reliability, price, product performance and technological excellence, the availability of a wide variety of application software products, ease of use and connectivity solutions. Also in 1996, Compaq maintained its world leadership position in distributed enterprise solutions with an approximate 30% worldwide market share in PC server products. In November 1996, Compaq shipped its one-millionth server. Over the last few years, Compaq has expanded its servers to new levels of midrange class functionality, availability, fault tolerance and manageability for both mainstream and mission-critical applications. In the future, Compaq will continue to integrate hardware and software to furnish the building blocks of personal and corporate computing while participating in software and communications markets either directly or through business alliances. Through this strategy, Compaq expects to become a leading provider of enterprise-wide solutions for business as well as information appliances for the home by offering the products and services that customers need to easily access and manage information. Compaq believes its key to success is leveraging Compaq's marketing skills, engineering talent, purchasing power, manufacturing capabilities, distribution strengths and brand name to bring to market high-quality cost-competitive products in different price ranges with features that appeal to a wide variety of customers. Compaq Products Compaq's products are available with a broad variety of functions and features designed to accommodate a wide range of user needs. In 1996, Compaq formed a new organization by pulling new and existing divisions into four customer-focused, global product groups: PC Products, Enterprise Computing, Consumer Products and Communication Products. Compaq also consolidated its five geographic sales regions into a worldwide, sales, marketing, service and support organization, strengthening the focus on global sales, global marketing, global brand management and global service and support. PC Products Group. In 1996, the PC Products Group, responsible for desktop and portable PC products, accounted for 58% of Compaq's sales. In July 1996, Compaq redesigned and consolidated its commercial desktop PC line under a single brand name, Deskpro. In the summer of 1996, Compaq announced the broadest new range of products in its history, including three distinct families of new portable PCs under a single brand name, Armada. Compaq plans to continue its desktop leadership in 1997 with the continued delivery of Pentium Pro-based products that will address the high performance and graphic-display intensive needs of engineering and financial customers. In 1997, Compaq plans to introduce a new product family that will bring to market significant advances in sound quality, telephone and communications capabilities. Enterprise Computing Group. The Enterprise Computing Group had sales of PC system products and related options that 2 3 accounted for 26% of Compaq's sales in 1996. Compaq's powerful platforms deliver industry-leading price/performance ratios and are supported by new clustering and internetworking solutions, strategic partnerships with leading enterprise software vendors and world-class, seven days a week, 24 hour, global service and support. Beginning in February 1996, all of Compaq's servers were shipped with Internet server capabilities. In October 1996, Compaq introduced five models of workstations based on Intel Pentium Pro microprocessors and the Microsoft Windows NT operating system. In 1997, the Enterprise Computing Group plans to reinforce its strong position in the file server market and to expand its presence in the distributed enterprise market for complex enterprise-class networks. Compaq will continue its efforts in developing an industry standard for clustering, a technique that permits the resources of several computers to be linked. In addition, Compaq intends to be the Internet platform leader, both on the network server side and the client side. Consumer Products Group. In 1996, the Consumer Products Group, which markets computers and related options aimed at the consumer and home office market, accounted for 16% of Compaq's sales. In January 1996, Compaq introduced its spring lineup of home multimedia PCs that included the industry's first combination scanner/keyboard, "rewritable" CD-ROM drives and Pentium processors. Also in 1996, Compaq unveiled a new family of Presario home PCs designed for every member of the family. To meet the specific needs of five distinct market segments (Home and Family, Home Office, Multimedia Enthusiast, Design Conscious and Mobile Computing), each Presario product family has been engineered as a solution that will satisfy the needs of every aspect of the evolving home PC market. In addition, Compaq is currently evaluating technology developments such as videophone communications, arcade-level graphics, easier to use software interfaces and colorful new PC designs. In February 1997, Compaq announced the Presario 2000 series, a series of PCs that combine leading-edge technology and features at low prices. Communication Products Group. In March 1996, Compaq introduced the Compaq Netelligent networking product line, consisting of more than 100 individual networking products, including managed and unmanaged switches and repeaters and Ethernet and Token Ring controllers. The Compaq Netelligent product line is a range of scaleable, network solutions for smaller businesses and workgroups/departments in larger corporations. Some of the Communication Products Group's offerings include the industry's first Fast Ethernet controller optimized for use in Pentium Pro servers, Fast Ethernet stackable repeaters that break the $100 per port price barrier and the unique Smart Uplink option that allows Netelligent Fast Ethernet networks to scale beyond the physical distances supported by most competitive offerings. In 1997, the Communication Products Group will continue to deliver products focused on easing the migration to high-speed networks. Development efforts will center on switches, repeaters and options that lower the cost and complexity of Ethernet to Fast Ethernet migration, as well as access products for high performance remote/mobile office connectivity. Compaq offers a number of options through each of its product groups, including memory upgrades, storage and backup devices, docking stations, keyboards and communications products and is the world's leading seller of video display monitors. In 1996, Compaq launched a number of new server, desktop and portable option products, including five new monitors, an advanced modem PC card for its "Telephony-Ready" portable computers, a new 120MB diskette drive and other personal storage management solutions, such as a scanner keyboard and a rewriteable optical drive. Product Development Compaq is actively engaged in the design and development of additional products and enhancements to its existing products. During 1996, 1995 and 1994, Compaq expended $407 million, $270 million and $226 million, respectively, on research and development. Since personal computer technology develops rapidly, Compaq's continued success is dependent on the 3 4 timely introduction of new products with the right price and features. Its engineering effort focuses on new and emerging technologies as well as design features that will increase manufacturing efficiency and lower production costs. In 1996, Compaq focused significant attention on technological developments for enterprise computing, including SMP servers, high-availability and failover solutions, storage technology, enterprise systems management, integration and configuration optimization, Internet and Intranet technologies, as well as networking and communications products. In the portable area, Compaq focused on increasing commonality of subassemblies and incorporating testability features in order to reduce testing time and test equipment requirements. In desktops, Compaq focused on design innovations and new technologies to improve run rate and ease assembly and serviceability. Compaq's product development efforts are centered on aggressively developing new areas in which Compaq can differentiate its products and add value, focusing on innovative platform features, the integration of hardware and software, and new related products and services. Because Compaq's business now intersects with a number of areas in which other companies have significantly greater technological, marketing and service expertise, Compaq has focused on alliances with third parties that have complementary products and skills as well as acquisitions that target incremental business opportunities. Manufacturing and Materials Compaq's PC manufacturing operations consist of manufacturing finished products and various circuit boards from components and subassemblies that Compaq acquires from a wide range of vendors. Certain of Compaq's products are manufactured by third party original equipment manufacturers. Compaq has manufacturing operations located in Houston, Texas; Erskine, Scotland; Singapore; Jaguarina, Brazil; and Shenzhen, China. Products sold in Europe are manufactured primarily in Compaq's facilities in Erskine, Scotland, and Singapore. Products sold in the U.S. are primarily manufactured in Compaq's facilities in Houston, Texas, and Singapore. Products sold in Asia are primarily manufactured in Singapore, while products sold in Latin America are primarily manufactured in Houston, Texas, and Jaguarina, Brazil. In addition, Compaq manufactures hubs and high speed switches in Irving, Texas, and network interface cards in Austin, Texas. Compaq believes that there is a sufficient number of competent vendors for most components and subassemblies. A significant number of components, however, are purchased from single sources due to technology, availability, price, quality or other considerations. Order lead times and cancellation requirements vary by supplier and component. Key components and processes currently obtained from single sources include certain of Compaq's displays, operating systems, microprocessors, application-specific integrated circuits and other custom chips and certain processes relating to construction of the housing for Compaq's computers. Compaq will begin negotiation of a renewal of its operating system license agreement with Microsoft Corporation in 1997. 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, inventory management and coordinated product introductions. Like other participants in the personal computer industry, Compaq ordinarily acquires materials and components through purchase orders typically covering Compaq's requirements for periods averaging 90 to 120 days. From time to time Compaq has experienced significant price increases and limited availability of certain components that are available from multiple sources. At times Compaq has been constrained by parts availability in meeting product orders and future constraints could have an adverse effect on Compaq's operating results. On occasion, Compaq 4 5 acquires component inventory in anticipation of supply constraints. A restoration of component availability and resulting decline in component pricing more quickly than anticipated could have an adverse effect on Compaq's operating results. Marketing and Distribution Compaq distributes its products principally through third-party computer resellers. Compaq's products are sold to large and medium-sized business and government customers primarily through dealers, value-added resellers and systems integrators and to small business and home customers principally through dealers and consumer channels. In response to changing industry practices and customer preferences, Compaq is continuing its expansion of distribution establishments, especially mass merchandise stores, consumer electronics outlets and computer superstores. Compaq also sells directly to small business and home customers through Compaq's mail order business that features a variety of personal computers, printers and software products. In 1996, North American sales constituted 53% of Compaq's total sales and Europe, Middle East and Africa sales constituted 33%. Compaq's North America Division markets its products in the United States and Canada, while Compaq's Europe, Middle East and Africa Division, based in Munich, Germany, focuses on opportunities in Europe as well as in parts of Africa and the Middle East. The sales of Compaq's Asia/Pacific, Japan and Latin America Divisions, which focus on opportunities in these high growth areas, constitute the remaining 14% of Compaq's total sales. Compaq's products are now sold by dealers in more than 100 countries. For further geographic information for 1996, 1995 and 1994, see Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 10 of the Notes to Consolidated Financial Statements contained in Compaq's annual report to stockholders for the year ended December 31, 1996. In January 1997, Compaq announced its plans to provide financial product offerings for its end user customers that will provide more flexible financing alternatives for advanced information systems. These products are initially targeted for introduction in North America in 1997. Service and Support Compaq provides support and warranty repair to its customers through full-service computer dealers and independent third-party service companies. Compaq offers its customers CompaqCare, which includes a number of customer service and support programs, most notably one- to three-year limited warranties on PC products and in the U.S., round-the-clock telephone technical support for Compaq hardware products. Patents, Trademarks, and Licenses Compaq held 528 patents, had 87 patents accepted and awaiting issuance and had 671 patent applications pending with the United States Patent and Trademark Office at the close of 1996, as well as related international patents and patent applications. In addition, Compaq has registered certain trademarks in the United States and in a number of foreign countries. While Compaq believes that patent and trademark protection plays an important part in its business, Compaq relies primarily upon the technological expertise, innovative talent and marketing abilities of its employees. Compaq has from time to time entered into cross-licensing agreements with other companies holding patents to technology used in Compaq's products as well as with companies using patents to technology held by Compaq. Compaq holds a license from IBM for all patents issuing on applications filed prior to July 1, 1993, and has entered into a patent cross-license agreement with Texas Instruments, Inc., for all patents issuing on applications filed prior to December 31, 2005. In January 1996, Compaq and Intel Corporation entered into a ten-year patent cross-license agreement Because of rapid technological changes in the computer industry, extensive patent and 5 6 copyright coverage, and the rapid establishment of new copyright and patent rights, certain components of the products designed by Compaq or purchased from third parties may unknowingly infringe intellectual property rights of others. Compaq believes, based in part on industry practices, that if any infringements do exist, Compaq will be able to modify its products to avoid infringement, obtain components that are licensed or do not infringe, or obtain licenses or rights to such intellectual property on terms not having a material adverse effect on Compaq. There can be no assurance, however, that Compaq will be able to ensure that component supplies or that the cost of components are not adversely affected by legal proceedings in which an adverse determination is made with respect to intellectual property rights of Compaq or one of its suppliers. To minimize the impact of intellectual property claims by third parties, Compaq pursues an active patent portfolio development plan. Seasonality General economic conditions have an impact on Compaq's business and financial results. From time to time, the markets in which Compaq sells its products experience weak economic conditions that may negatively affect sales. Although Compaq does not consider its business to be highly seasonal, Compaq in general experiences seasonally higher sales and earnings in the second half of the year. Should Compaq's retail business expand relative to its other businesses, Compaq could experience an increase in the seasonality of its business and financial results could become more dependent on retail business fluctuations. Customers No customer of Compaq accounted for 10% or more of sales for 1996. In 1996, Compaq's five largest resellers represented approximately 27% of Compaq's 1996 sales. Backlog Compaq's resellers typically purchase products on an as-needed basis and resellers frequently change delivery schedules and order rates depending on market conditions. Unfilled orders can be, and often are, canceled at will and without penalties. In Compaq's experience, however, the actual amount of unfilled orders at any particular time is not a meaningful indication of its future business prospects since orders rapidly become balanced as soon as supply begins meeting demand. In 1996, Compaq was unable to produce certain products on a timely basis due to supply constraints on certain components. Forecasting demand for newly introduced products is complicated by the availability of different product models, which may include various types of built-in peripherals and software, and the configuration requirements, such as language localization, in certain markets. As a result, while overall demand may be in line with Compaq's projections and manufacturing implementation, local market variations can lead to differences between expected and actual demand and resulting delays in shipment. Should Compaq be unable to meet demand for its products on a timely basis, customer satisfaction and sales could be adversely affected. Competition The computer industry is intensely competitive with many U.S., Japanese and other international companies vying for market share. The market continues to be characterized by rapid technological advances in both hardware and software developments that have substantially increased the capabilities and applications of information management products and have resulted in the frequent introduction of new products. The principal elements of competition are price, product performance, product quality and reliability, service and support, marketing and distribution capability and corporate reputation. While Compaq believes that its products compete favorably based on each of these elements, Compaq could be adversely affected if its competitors introduce innovative or technologically superior products or offer their products at significantly lower prices than Compaq. Compaq's results could also be adversely affected should it be unable to implement effectively its technological and marketing alliances with other companies, such as 6 7 Microsoft, Intel, Novell, Oracle, SAP and Texas Instruments, among others, and to manage the competitive risks associated with these relationships. Environmental Laws and Regulations Compaq recognizes that operating in a manner that is compatible with the environment is good for its community, employees, customers and business. Compaq integrates numerous environmental features in the product design and manufacturing process that reduce the potential environmental impact during the lifecycle of its products and its products are designed and manufactured to meet a variety of the world's environmental standards and expectations. Compaq uses no chlorofluorocarbons (CFCs) in its worldwide manufacturing operations and undertakes ongoing environmental programs, including waste reduction, energy conservation, recycling and design for environment. Compaq maintains a worldwide environmental health and safety audit program. The audit program includes management system and compliance evaluations. Compliance with laws enacted for protection of the environment to date has had no material effect upon Compaq's capital expenditures, earnings or competitive position. Although Compaq does not anticipate any material adverse effects in the future based on the nature of its operations and the purpose of environmental laws and regulations, there can be no assurance that such laws or future laws will not have a material adverse effect on Compaq. Employees At December 31, 1996 Compaq had approximately 18,900 full-time regular employees and 7,500 temporary and contract workers engaged in manufacturing operations, engineering, research and development, marketing, sales, service and administrative activities. Compaq believes that its ability to attract and retain skilled personnel appropriately is critical to its success. Accordingly, Compaq has developed competitive human resources policies consistent with its business plan. Item 2. Properties Compaq's principal administrative facilities and a manufacturing facility are located in Houston, Texas. These facilities include 632,000 square feet of manufacturing space, 327,000 square feet of distribution center space and 250,000 square feet of warehouse space on Compaq's 1,000-acre Compaq Center in Houston. Compaq owns 13 administrative buildings with a total of 2,363,000 square feet of space at Compaq Center. Compaq leases sales offices in twelve cities in the United States as well as certain administrative and warehouse facilities. Compaq leases manufacturing facilities in Austin, Texas, and Irving, Texas, that are used in the manufacture of hubs, high speed switches and network interface cards. Compaq also owns or leases certain facilities abroad. Compaq owns a 43-acre tract in Erskine, Scotland, where it has 540,000 square feet of manufacturing space. In Singapore, Compaq owns 720,000 square feet of manufacturing space and leases 150,000 square feet. In Brazil, Compaq owns a 150,000 square foot manufacturing facility and in China, Compaq leases a 90,000 square foot manufacturing facility. Compaq leases sales and administrative offices in 40 European and African locations, 9 locations in Latin America, 21 locations in the Asia Pacific region, 3 locations in Japan and 5 locations in Canada. Compaq owns a 372,000 square foot European distribution center in Gorinchem, The Netherlands. Compaq also leases warehouse space in a number of locations. Item 3. Legal Proceedings Compaq is subject to legal proceedings and claims that arise in the ordinary course of its business. Management does not believe that the outcome of any of those matters will have a material adverse effect on Compaq's financial condition or results of operations. 7 8 Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of 1996. PART II Items 5 to 9 inclusive. These items have been omitted in accordance with the general instructions to Form 10-K Annual Report. Reference is made to the information provided on pages 24 through 54 and page 56 of Compaq's annual report to stockholders for the year ended December 31, 1996, which information is hereby incorporated by reference. PART III Items 10 to 13 inclusive. These items have been omitted in accordance with the general instructions to Form 10-K Annual Report. The Registrant will file with the Commission in March 1997, pursuant to Regulation 14A, a definitive proxy statement that will involve the election of directors. The information required by these items will be included in such proxy statement and are incorporated herein by reference. 8 9 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed as a part of this report: 1. Financial Statements. The financial statements listed below are incorporated by reference as part of this annual report: Report of Independent Accountants Consolidated Balance Sheet at December 31, 1996 and 1995 Consolidated Statement of Income for the three years ended December 31, 1996 Consolidated Statement of Cash Flows for the three years ended December 31, 1996 Consolidated Statement of Stockholders' Equity for the three years ended December 31, 1996 Notes to Consolidated Financial Statements Financial Statement Schedule; the following items are filed as part of this annual report. Report of Independent Accountants For the three years ended December 31, 1996: Schedule II: Valuation and Qualifying Accounts 3. Exhibits. Exhibit No. Description of Exhibits 3.1 Restated Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant's Form 10-Q for the quarter ended September 30, 1996). 3.2 Bylaws of Registrant, as amended (incorporated herein by reference to Exhibit No. 3.5 to the Registrant's Form 10-Q for the quarter ended June 30, 1992). 4.1 Senior Debt Indenture dated as of March 1, 1994, between the Registrant and NationsBank of Texas, National Association, Trustee (incorporated by reference to Exhibit 4.a to the Registrant's Registration Statement No. 33-63436 on Form S-3 (the "Form S-3")). 4.2 Specimen of the Registrant's 6 1/2% senior notes due March 1999 (incorporated by reference to the Registrant's Form 8-K dated March 10, 1994 (the "March 1994 Form 8-K")). 4.3 Specimen of the Registrant's 7 1/4% senior notes due March 15, 2004 (incorporated by reference to the March 1994 Form 8-K). 10.1 Registrant's 1982 Stock Option Plan, as amended (incorporated herein by reference to the corresponding exhibit in the Registrant's Form 10-Q for the quarter ended June 30, 1989 (the "1989 Second Quarter Form 10-Q")). * 10.2 Registrant's 1985 Stock Option Plan (incorporated herein by reference to Exhibit 10.3 to the Registrant's Form 10-K for the year ended December 31, 1991 (the "1991 Form 10-K")). * 10.3 Registrant's 1985 Executive and Key Employees Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10.3 to the 1989 Second Quarter Form 10-Q). * 10.4 Registrant's 1985 Nonqualified Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10.4 to the 1989 Second Quarter Form 10-Q). * 9 10 10.5 Forms of Stock Option Agreements relating to Exhibits 10.1 through 10.5 (incorporated herein by reference to Exhibit 10.6 to the Registrant's Form 10-K for the year ended December 31, 1987). * 10.6 Registrant's 1989 Equity Incentive Plan, as amended. * 10.7 Form of Stock Option Notice relating to Exhibit 10.6, as amended. * 10.8 Registrant's 1995 Equity Incentive Plan, as amended. * 10.9 Form of Stock Option Notice relating to Exhibit 10.8, as amended. * 10.10 Registrant's Bonus Incentive Plan (incorporated herein by reference to Exhibit 10.11 to the Registrant's Form 10-K for the year ended December 31, 1995).* 10.11 Registrant's Stock Option Plan for Non-Employee Directors, as amended. * 10.12 Registrant's Forms of Stock Option Notice relating to Exhibit 10.11. * 10.13 Registrant's Deferred Compensation and Supplemental Savings Plan, as amended (incorporated herein by reference to Exhibit 10.10 to the Registrant's Form 10-K for the year ended December 31, 1993). * 10.14 Employment Agreement dated as of January 1, 1992 between the Registrant and Eckhard Pfeiffer (incorporated by reference to Exhibit 10.15 to the 1991 Form 10-K). * 10.15 Form of letter agreement between Registrant and its executive officers (incorporated by reference to Exhibit 10.16 to the 1991 Form 10-K). * 10.16 $250,000,000 Credit Agreement dated as of October 31, 1995 among Compaq Computer Corporation, the banks signatory thereto, Bank of America National Trust and Savings Association as Administrative Agent (incorporated by reference to Exhibit 10.17 to the Registrant's From 10-K for the year ended December 31, 1995). 10.17 Amended and Restated Credit Agreement dated as of October 29, 1996 relating to the Credit Agreement identified in Exhibit 10.16 above (and increasing such facility to $500,000,000). 10.18 $1,000,000,000 Credit Agreement dated as of October 31, 1995 among Compaq Computer Corporation, the banks signatory thereto, Bank of America National Trust and Savings Association as Administrative Agent (incorporated by reference to Exhibit 10.18 to the Registrant's From 10-K for the year ended December 31, 1995). 10.19 Amended and Restated Credit Agreement dated as of October 29, 1996 relating to the $1,000,000,000 Credit Agreement identified in Exhibit 10.18 above. 11 Statement regarding the computation of per share earnings. 13 Pages 24 through 54 and page 56 of the Registrant's annual report to stockholders for the year ended December 31, 1996. 21 Subsidiaries of Registrant. 23 Consent of Price Waterhouse LLP, independent accountants. 27 Financial Data Schedule (EDGAR version only). * Indicates management contract or compensatory plan or arrangement. (b) Reports on Form 8-K. Current Report on Form 8-K dated October 16, 1996. Current Report on Form 8-K dated January 22, 1996. Compaq, the Compaq logo, ProLiant, Deskpro, Compaq Insight Manager, LTE, Presario, ProSignia, SmartStart, and Smart Uplink are registered trademarks of Compaq Computer Corporation. DirectPlus and CompaqCare are registered service marks of Compaq Computer CorporationOther product names mentioned herein may be trademarks or registered trademarks of their respective companies. 10 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 26th day of February, 1997. Compaq Computer Corporation By: /s/ ECKHARD PFEIFFER -------------------------------- Eckhard Pfeiffer, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ ECKHARD PFEIFFER President and Director February 26,1997 - ------------------------------- (principal executive officer) (Eckhard Pfeiffer) /s/ EARL L. MASON Senior Vice President February 26,1997 - ------------------------------- and Chief Financial Officer (Earl L. Mason) (principal financial officer) /s/ BENJAMIN M. ROSEN Chairman of the February 26,1997 - ------------------------------- Board of Directors (Benjamin M. Rosen) /s/ LAWRENCE T. BABBIO, JR. Director February 26,1997 - ------------------------------- (Lawrence T. Babbio, Jr.) /s/ ROBERT TED ENLOE, III Director February 26,1997 - ------------------------------- (Robert Ted Enloe, III) /s/ GEORGE H. HEILMEIER Director February 26,1997 - ------------------------------- (George H. Heilmeier) /s/ GEORGE E.R. KINNEAR II Director February 26,1997 - ------------------------------- (George E.R. Kinnear II) /s/ PETER N. LARSON Director February 26,1997 - ------------------------------- (Peter N. Larson) /s/ KENNETH L. LAY Director February 26,1997 - ------------------------------- (Kenneth L. Lay) 11 12 /s/ KENNETH ROMAN Director February 26,1997 - ------------------------------- (Kenneth Roman) /s/ LUCILLE S. SALHANY Director February 26,1997 - ------------------------------- (Lucille S. Salhany) 12 13 COMPAQ COMPUTER CORPORATION REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Compaq Computer Corporation Our audits of the consolidated financial statements referred to in our report dated January 21, 1997 appearing in the 1996 Annual Report to Stockholders of Compaq Computer Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Houston, Texas January 21, 1997 14 SCHEDULE II COMPAQ COMPUTER CORPORATION VALUATION AND QUALIFYING ACCOUNTS Allowance for Doubtful Accounts - ------------------------------------------------------------------------------- Year ended December 31, In millions 1996 1995 1994 - ------------------------------------------------------------------------------- Balance, beginning of period $ 100 $ 75 $ 49 Additions charged to expense 155 43 36 Reductions (28) (18) (10) ---------------------------------------- Balance, end of period $ 227 $ 100 $ 75 ======================================== 15 INDEX TO EXHIBITS Exhibit No. Description of Exhibits 10.6 Registrant's 1989 Equity Incentive Plan, as amended. * 10.7 Form of Stock Option Notice relating to Exhibit 10.6, as amended. * 10.8 Registrant's 1995 Equity Incentive Plan, as amended. * 10.9 Form of Stock Option Notice relating to Exhibit 10.8, as amended. * 10.11 Registrant's Stock Option Plan for Non-Employee Directors, as amended. * 10.12 Registrant's Forms of Stock Option Notice relating to Exhibit 10.11. * 10.17 Amended and Restated Credit Agreement dated as of October 29, 1996 relating to the Credit Agreement identified in Exhibit 10.16 above (and increasing such facility to $500,000,000). 10.19 Amended and Restated Credit Agreement dated as of October 29, 1996 relating to the $1,000,000,000 Credit Agreement identified in Exhibit 10.18 above. 11 Statement regarding the computation of per share earnings. 13 Pages 24 through 54 and page 56 of the Registrant's annual report to stockholders for the year ended December 31, 1996. 21 Subsidiaries of Registrant. 23 Consent of Price Waterhouse LLP, independent accountants. 27 Financial Data Schedule (EDGAR version only). * Indicates management contract or compensatory plan or arrangement. EX-10.6 2 REGISTRANT'S 1989 EQUITY INCENTIVE PLAN 1 EXHIBIT 10.6 Amended December 12, 1996 COMPAQ COMPUTER CORPORATION 1989 EQUITY INCENTIVE PLAN SECTION 1. Purpose. The purposes of the Compaq Computer Corporation 1989 Equity Incentive Plan (the "Plan") are to encourage eligible employees of Compaq Computer Corporation (the "Company") and its Affiliates to acquire a proprietary and vested interest in the growth and performance of the Company, to generate an increased incentive to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of its stockholders, and to enhance the ability of the Company and its Affiliates to attract and retain talented and highly competent individuals upon whom, in large measure, the sustained progress, growth, and profitability of the Company depend. SECTION 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below: (a) "Affiliate" shall mean (i) any Person that directly, or through one or more intermediaries, controls, or is controlled by, or is under common control with, the Company or (ii) any entity in which the Company has a significant equity interest, as determined by the Committee. (b) "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock Award, or any other right, interest, or option relating to Shares granted pursuant to the provisions of the Plan. (c) "Award Notice" shall mean any written notice, agreement, or other instrument or document evidencing any Award granted by the Committee hereunder signed by the Company and delivered to the Participant. (d) "Board" shall mean the Board of Directors of the Company. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" shall mean the Human Resources Committee of the Board of Directors, composed of not less than two directors each of whom is a Non-Employee Director. (g) "Common Stock" shall mean the common stock, $.01 par value, of the Company. (h) "Company" shall mean Compaq Computer Corporation. (i) "Employee" shall mean any employee of the Company or of any Affiliate. (j) "Exchange Act" shall mean the Securities Exchange Act of 1934 as amended. (k) "Fair Market Value" shall mean (i) with respect to the Common Stock, the last sale price of the Common Stock on the date on which such value is determined, as reported on the consolidated tape of New York Stock Exchange issues or, if there shall be no trades on such date, on the date nearest preceding such date; (ii) with respect to any other property, or with respect to the Common Stock if it is not then listed for trading on the New York Stock Exchange, the market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. (l) "Incentive Stock Option" shall mean an Option granted under Section 6 hereof that is intended to meet the requirements of Section 422A of the Code or any successor provision thereto. (m) "Net After-Tax Amount" shall mean the net amount of compensation, assuming for this purpose only that all vested options are exercised upon such Change in Control, to be received (or deemed to have been received) by such optionee in connection with such Change of Control under any Award Agreement and under any other 2 plan, arrangement or contract of the company to which such optionee is a party, after giving effect to all income and excise taxes applicable to such payments. (n) "Non-Employee Director" shall have the meaning set forth in Rule 13e-3(b)(3)(i) promulgated by the Securities and Exchange Commission under the Exchange Act. (o) "Nonqualified Stock Option" shall mean an Option granted under Section 6 hereof that is not intended to be an Incentive Stock Option. (p) "Option" shall mean any right granted to a Participant allowing such Participant to purchase Shares at such price or prices and during such period or periods as the Committee shall determine. (q) "Participant" shall mean an Employee who is selected by the Committee to receive an Award under the Plan. (r) "Person" shall mean any natural person, corporation, partnership, association, joint stock company, trust, unincorporated organization, or government or political subdivision thereof. (s) "Restricted Stock" shall mean any share of capital stock of the Company issued with the restriction that the holder may not sell, transfer, pledge, or assign such share and with such other restrictions as the Committee, in its sole discretion, may impose (including, without limitation, any restriction on the right to vote such shares and the right to receive any cash dividends), which restrictions may lapse separately or in combination at such time or times, in installments or otherwise, as the Committee may deem appropriate. (t) "Restricted Stock Award" shall mean an Award of Restricted Stock under Section 8 hereof. (u) "Shares" shall mean the Common Stock and such other securities of the Company as the Committee may from time to time determine. (v) "Stock Appreciation Right" shall mean any right granted to a Participant pursuant to Section 7 hereof to receive, upon exercise by the Participant, the excess of (i) the Fair Market Value of one Share on the date of exercise or, if the Committee shall so determine in the case of any such right other than one related to any Incentive Stock Option, at any time during a specified period before the date of exercise over (ii) the grant price of the right as specified by the Committee, in its sole discretion, on the date of grant. The grant price of a right granted to an individual subject to Section 16 of the Exchange Act shall not be less than 50% of the Fair Market Value of one Share on the date of grant. Any payment by the Company in respect of such right may be made in cash, Shares, other property, or any combination thereof, as the Committee, in its sole discretion, shall determine. SECTION 3. Administration. The Plan shall be administered by the Committee. The Committee shall have full power and authority, subject to such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be adopted by the Board, to: (i) select the Employees of the Company and its Affiliates to whom Awards may from time to time be granted hereunder; (ii) determine the type or types of Awards to be granted to each Participant hereunder; (iii) determine the number of Shares to be covered by each Award granted hereunder; (iv) determine the terms and conditions, not inconsistent with the provisions of the Plan, of any Award granted hereunder; (v) determine whether, to what extent, and under what circumstances Awards may be settled in cash, canceled, or suspended; (vi) determine whether, to what extent, and under what circumstances Shares and other amounts payable with respect to an Award under this Plan shall be deferred either automatically or at the election of the Participant; (vii) interpret and administer the Plan and any instrument or agreement entered into under the Plan; (viii) establish such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for administration of the Plan. Decisions of the Committee shall be final, conclusive, and binding upon all persons, including the Company, any Participant, any stockholder of the Company, and any Employee. A majority of the members of the Committee may determine its actions and fix the time and place of its meetings. The Committee may delegate its power and authority under this Plan to a Chief Executive Officer of the Company who is a director of the Company with respect to the administration of the Plan for grants to persons other than executive officers. In the case of such delegation, the term "Committee" as used in this Plan shall be deemed to refer to the Chief Executive Officer of the Company. 2 3 SECTION 4. Shares Subject to the Plan. (a) Total Number. Subject to adjustment as provided in this Section, the total number of Shares available for grant under the Plan shall be 16,600,000 Shares. (b) Reduction of Shares Available. (i) The grant of an Option or Restricted Stock Award will reduce the Shares available for grant by the number of Shares subject to such Award. (ii) The grant of Stock Appreciation Rights related to an Option will reduce the number of Shares available for grant only to the extent that the number of Stock Appreciation Rights granted exceeds the number of Shares subject to the related Option. (iii) The grant of Stock Appreciation Rights not related to an Option will reduce the number of Shares available for grant by the number of Stock Appreciation Rights granted. (iv) Any Shares issued by the Company through the assumption or substitution of outstanding grants from an acquired company shall not reduce the Shares available for grants under the Plan. (c) Increase of Shares Available. (i) The lapse, cancellation, or other termination of an Option that has not been fully exercised shall increase the available Shares by the number of Shares that have not been issued upon exercise of such Option; provided that in the event the cancellation of an Option is due to the exercise of Stock Appreciation Rights related to such Option, the cancellation of such Option shall only increase the Shares available by the excess, if any, of the number of Shares subject to such Option over the number of Stock Appreciation Rights exercised. (ii) The lapse, cancellation, or other termination of Stock Appreciation Rights that have not been exercised shall increase the available Shares by the number of Stock Appreciation Rights so lapsed, canceled, or terminated; provided that in the event the cancellation of Stock Appreciation Rights is due to the exercise of an Option related to such Stock Appreciation Rights, the lapse, cancellation, or termination of such Stock Appreciation Rights shall only increase the Shares available by the excess, if any, of the number of Stock Appreciation Rights so lapsed, canceled, or terminated over the number of Shares for which such Option is exercised. (iii) Any Restricted Shares forfeited by a Participant shall increase the available Shares by the number of Shares so forfeited. (d) Other Adjustments. The total number of shares of Common Stock available for Awards under the Plan or which may be allocated to any one Participant, the number of shares of Common Stock subject to outstanding Options, the exercise price for such Options, the number of outstanding Stock Appreciation Rights, the base value of such rights, and the number of outstanding shares of Restricted Stock shall be appropriately adjusted by the Committee for any increase or decrease in the number of outstanding Shares resulting from a stock dividend, subdivision, or combination of Shares or reclassification, as may be necessary to maintain the proportionate interest of the Award holder. In the event of a merger or consolidation of the Company or a tender offer for shares of Common Stock, the Committee may make such adjustments with respect to Awards under the Plan and take such other action as it deems necessary or appropriate to reflect or in anticipation of such merger, consolidation, or tender offer including, without limitation, the substitution of new Awards, the termination or adjustment of outstanding Awards, the acceleration of Awards, or the removal of restrictions on outstanding Awards. The payment to the Participant of an amount in cash equal to the excess, if any, of the Fair Market Value of the number of shares subject to any Award over the aggregate grant price thereof, in consideration of the cancellation thereof pursuant to this Section 4(d), shall extinguish any rights of the Participant in connection with such Award. SECTION 5. Eligibility. Any Employee (excluding any member of the Committee) shall be eligible to be selected as a Participant. SECTION 6. Stock Options. Options may be granted hereunder to Participants either alone or in addition to other Awards granted under the Plan. The Company shall deliver an Award Notice to each Participant receiving an Option. Any such Option shall be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable: 3 4 (a) Option Price. The purchase price per Share purchasable under an Option shall be determined by the Committee in its sole discretion and set forth in the applicable Award Notice; provided that such purchase price shall not be less than (i) 100% of the Fair Market Value of the Share on the date of the grant of the Option in the case of any Incentive Stock Option, or (ii) 50% of such Fair Market Value in the case of any Nonqualified Stock Option granted to an individual subject to Section 16 of the Exchange Act. (b) Option Period. The term of each Option shall be fixed by the Committee in its sole discretion and set forth in the applicable Award Notice; provided that no Option shall be exercisable after the expiration of ten years from the date the Option is granted. (c) Exercisability. Options shall be exercisable at such time or times as determined by the Committee in its sole discretion and set forth in the applicable Award Notice. An executive officer of the Company may not exercise an Option for a period of six months from the date of grant. (d) Method of Exercise. Any Option may be exercised by the Participant in whole or in part at such time or times and by such methods as the Committee may specify. Unless otherwise specified in the applicable grant and Award Notice, the Participant may make payment in cash or by certified check, bank draft, or postal or express money order payable to the order of the Company, or, with the consent of the Board (or the Committee, if established by the Board), in whole or in part in Common Stock owned by the Optionee, valued at Fair Market Value. (e) Incentive Stock Options. In accordance with rules and procedures established by the Committee, the aggregate Fair Market Value (determined as of the time of grant) of the Shares with respect to which Incentive Stock Options held by any Participant become exercisable for the first time by such Participant during any calendar year under the Plan (and under any other benefit plans of the Company or of any parent or subsidiary corporation of the Company) shall not exceed $100,000 or, if different, the maximum limitation in effect at the time of grant under Section 422A of the Code, or any successor provision, and any regulations promulgated thereunder. The terms of any Incentive Stock Option granted hereunder shall comply in all respects with the provisions of Section 422A of the Code, or any successor provision, and any regulations promulgated thereunder. (f) Form of Settlement. In its sole discretion, the Committee may provide, at the time of grant, that the Shares to be issued upon an Option's exercise shall be in the form of Restricted Stock or other similar securities. (g) Certificates. Upon the Company's determination that an Option has been validly exercised as to any of the Shares, the Secretary of the Company shall issue certificates in the Participant's name for such Shares. However, the Company shall not be liable to the Participant for damages relating to any delays in issuing the certificates to him, any loss of the certificates, or any mistakes or errors in the issuance of the certificates or in the certificates themselves. SECTION 7. Stock Appreciation Rights. Stock Appreciation Rights may be granted hereunder to Participants either alone or in addition to other Awards granted under the Plan and may, but need not, relate to a specific Option granted under Section 6. The provisions of Stock Appreciation Rights need not be the same with respect to each recipient. Any Stock Appreciation Right related to a Nonqualified Stock Option may be granted at the same time such Option is granted or at any time thereafter before exercise or expiration of such Option. Any Stock Appreciation Right related to an Incentive Stock Option must be granted at the same time such Option is granted. In the case of any Stock Appreciation Right related to any Option, the Stock Appreciation Right Award or applicable portion thereof shall terminate and no longer be exercisable upon the termination or exercise of the related Option, except that a Stock Appreciation Right Award granted with respect to fewer than the full number of Shares covered by a related Option shall not be reduced until the number of Shares issued upon exercise or canceled upon termination of the related Option exceeds the number of shares not covered by the Stock Appreciation Right Award. Any Option related to any Stock Appreciation Right shall no longer be exercisable to the extent the related Stock Appreciation Right has been exercised. No Stock Appreciation Right unrelated to any Option shall be exercisable after the expiration of ten years from the date such Award is granted. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate. The Company shall deliver an Award Notice to each Participant receiving a Stock Appreciation Right. 4 5 SECTION 8. Restricted Stock. (a) Issuance. Restricted Stock Awards may be issued hereunder to Participants, for no cash consideration or for such nominal consideration as may be required by applicable law, either alone or in addition to other Awards granted under the Plan. The provisions of Restricted Stock Awards need not be the same with respect to each recipient. The Company shall deliver an Award Notice to each Participant receiving a Restricted Stock Award. (b) Registration. Any Restricted Stock issued hereunder may be evidenced in such manner as the Committee in its sole discretion shall deem appropriate, including, without limitation, book entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of shares of Restricted Stock awarded under the Plan, such certificate shall be registered in the name of the Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award. Promptly after the lapse of restrictions with respect to any shares of Restricted Stock, the lapse of such restrictions shall be evidenced in such manner as the Committee shall deem appropriate. SECTION 9. Termination or Suspension of Employment. (a) Nonqualified Stock Options and Stock Appreciation Rights. (i) If the Participant's employment with the Company or its Affiliates is terminated for any reason other than death, disability, or retirement, the Participant's right to exercise any Nonqualified Stock Option or Stock Appreciation Right shall terminate, and such Option or Stock Appreciation Right shall expire, on the earlier of (A) the first anniversary of such termination of employment or (B) the date such Option or Stock Appreciation Right would have expired had it not been for the termination of employment. The Participant shall have the right to exercise such Option or Stock Appreciation Right prior to such expiration to the extent it was exercisable at the date of such termination of employment and shall not have been exercised. (ii) If the Participant's employment with the Company or its Affiliates is terminated by reason of death, disability, or retirement, the Participant or his successor (if employment is terminated by death) shall have the right to exercise any Nonqualified Stock Option or Stock Appreciation Right to the extent it was exercisable at the date of such termination of employment and shall not have been exercised, but in no event shall such option be exercisable later than the date the Option would have expired had it not been for the termination of such employment. (iii) Notwithstanding the foregoing, the Committee may, in its discretion, provide (a) that an Option granted to a Participant may terminate at a date earlier than that set forth above, and (b) that an Option granted to a Participant not subject to Section 16 of the Exchange Act may terminate at a date later than that set forth above, provided such date shall not be beyond the date the Option would have expired had it not been for the termination of the Participant's employment. (iv) Any time spent by a Participant in the status of "leave without pay" shall be disregarded for purposes of determining the extent to which an Option or any portion thereof has vested. (b) Incentive Stock Options. Except as otherwise determined by the Committee at the time of grant, if the Participant's employment with the Company is terminated for any reason, the Participant shall have the right to exercise any Incentive Stock Option and any related Stock Appreciation Right during the 90 days after such termination of employment to the extent it was exercisable at the date of such termination, but in no event later than the date the Option would have expired had it not been for the termination of such employment. If the Participant does not exercise such Option or related Stock Appreciation Right to the full extent permitted by the preceding sentence, the remaining exercisable portion of such Option automatically will be deemed a Nonqualified Stock Option, and such Option and the related Stock Appreciation Right will be exercisable during the period set forth in Section 9(a) of the Plan, provided that in the event that employment is terminated because of death or the Participant dies in such 90 day period the Option will continue to be an Incentive Stock Option to the extent provided by Section 421 or Section 422A of the Code, or any successor provision, and any regulations promulgated thereunder. (c) Restricted Stock. Except as otherwise determined by the Committee at the time of grant, upon termination of employment for any reason during the restriction period, all shares of Restricted Stock still subject to restriction shall be forfeited by the Participant and reacquired by the Company at the price (if any) paid by the 5 6 Participant for such Restricted Stock; provided that in the event of a Participant's retirement, permanent disability, or death, or in cases of special circumstances, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interests of the Company, waive, in whole or in part, any or all remaining restrictions with respect to such Participant's shares of Restricted Stock. (d) Disability and Retirement. The term "disability" means total and permanent disability. The meaning of the terms "total and permanent disability" and "retirement" shall be determined by the Committee. (e) Acceleration of Exercisability. Nothing contained herein shall in any way limit the authority of the Committee in its sole discretion to cause any outstanding Option or Stock Appreciation Right to become immediately exercisable when it finds that such acceleration would be in the best interests of the Company. SECTION 10. Change in Control. (a) Immediate Vesting. Notwithstanding any other provision of the Plan to the contrary, upon a Change in Control, as defined below, all outstanding Awards shall vest, become immediately exercisable or payable, or have all restrictions lifted as may apply to the type of Award; provided, however, that unless otherwise determined by the Committee at the time of award or thereafter, if it is determined that the Net After-Tax Amount to be realized by any optionee, taking into account the accelerated vesting provided for by this paragraph 10(a) as well as all other payments to be received by such optionee in connection with such Change in Control, would be higher if options did not vest in accordance with the foregoing paragraph 10(a), then, and to such extent, the options shall not vest. The determination of whether any such option should not vest shall be made by a nationally recognized accounting firm selected by the Company, which shall be instructed to consider that (i) stock options shall be vested in the order in which they were granted and within each grant in the order in which they would otherwise have vested and (ii) unless and to the extent any other plan, arrangement or contract of the Company pursuant to which any such payment is to be received provides to the contrary, any other payment contingent upon a Change of Control shall be deemed to have occurred after any acceleration of options. Further, no outstanding Stock Appreciation Right may be terminated, amended, or suspended upon or after a Change in Control. (b) Change in Control. A "Change in Control" shall be deemed to have occurred if: (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d 3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years (not including any period prior to the adoption of the Plan), individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has entered into an agree ment with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 10(b)) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 30% of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 6 7 SECTION 11. Amendments and Termination. (a) The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made that would impair the rights of a Participant under an Award theretofore granted, without the Participant's consent, or that without the approval of the stockholders would: (i) except as is provided in Section 4(b) of the Plan, increase the total number of Shares reserved for the purpose of the Plan; or (ii) change the employees or class of employees eligible to participate in the Plan. (b) The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any Participant without his consent. The Committee may also substitute new Awards for previously granted Awards, including without limitation previously granted Options and Stock Appreciation Rights having higher option prices. (c) Employee Status Change to Part-Time. At such time as a full-time employee becomes a part-time employee of the Company, on the next vesting date following such status change, all Awards previously granted to such employee will be automatically amended to reflect the vesting of all such Awards to be reduced by one-half with respect to any portion of the Awards not yet vested. SECTION 12. General Provisions. (a) Nontransferability. No Award shall be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant, except by will or the laws of descent and distribution, provided, however, that an Award may be transferable, to the extent set forth in the applicable Award Notice and in accordance with procedures adopted by the Committee, (i) if such Award Notice provisions do not disqualify such Award for exemption under Rule 16b-3 or (ii) if such Award is not intended to qualify for exemption under such rule. (b) No Claims. No Employee or Participant shall have any claim to be granted any Award under the Plan and there is no obligation for uniformity of treatment of Employees or Participants under the Plan. (c) Notices. Any notice necessary under this Plan or any Award hereunder shall be addressed to the Company in care of its Secretary at the principal executive office of the Company in Houston, Texas and to the Participant at the address appearing in the personnel records of the Company for such Participant or to either party at such other address as either party hereto may hereafter designate in writing to the other. Any such notice shall be deemed effective upon receipt thereof by the addressee. (d) Unusual Events. The Committee shall be authorized to make adjustments in the terms and conditions of Awards in recognition of unusual or nonrecurring events affecting the Company or its financial statements or changes in applicable laws, regulations, or accounting principles. The Committee may correct any defect, supply any omission, or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry it into effect. In the event the Company shall assume outstanding employee benefit awards or the right or obligation to make such future awards in connection with the acquisition of another corporation or business entity, the Committee may, in its discretion, make such adjustments in the terms of Awards under the Plan as it shall deem appropriate. (e) Compliance Requirements. All certificates for Shares delivered under the Plan pursuant to any Award shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. The Company shall not be required to issue or deliver any Shares under the Plan prior (i) to the completion of any registration or qualification of such Shares under any federal or state law, or under any ruling or regulation of any governmental body or national securities exchange that the Committee in its sole discretion shall deem to be necessary or appropriate and (ii) to the Participant's entering into such written representations, warranties, and agreements as the Company may reasonably request in order to comply with applicable securities laws or with this Plan. 7 8 (f) Dividends. Subject to the provisions of this Plan, the recipient of an Award may, if so determined by the Committee at the time of grant, be entitled to receive, currently or on a deferred basis, interest or dividends, or interest or dividend equivalents, with respect to the number of shares covered by the Award, as determined at the time of the Award by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Shares or otherwise reinvested. (g) No Other Consideration. Except as otherwise required in any applicable grant and Award Notice or by the terms of the Plan, recipients of Awards under the Plan shall not be required to make any payment or provide consideration other than the rendering of services. (h) Withholding. The Company shall be authorized to withhold from any Award granted or payment due under the Plan the amount of withholding taxes due in respect of an Award or payment hereunder and to take such other action as may be necessary in the opinion of the Company to satisfy any of its obligations with respect to the payment of such taxes. (i) Other Plans. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval, if such approval is required by applicable law, or the rules of any stock exchange on which the Common Stock is then listed; and such arrangements may be either generally applicable or applicable only in specific cases. (j) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan and any Award hereunder shall be determined in accordance with the laws of the State of Delaware and applicable federal law. (k) Conformity With Law. If any provision of this Plan is or becomes or is deemed invalid, illegal or unenforceable in any jurisdiction, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended in such jurisdiction to conform to applicable laws or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan, it shall be stricken and the remainder of the Plan shall remain in full force and effect. SECTION 13. Effective Date of Plan. The Plan shall be effective as of January 18, 1989 (the "Effective Date"), subject to approval by the Company's stockholders within one year thereafter. Awards may be granted at any time after the Effective Date and prior to termination of the Plan by the Board, except that no Incentive Stock Option shall be granted pursuant to the Plan after 10 years from the Effective Date, but any Award theretofore granted may extend beyond that date. The Plan will expire when no Shares are available for issuance. 8 EX-10.7 3 FORM OF STOCK OPTION NOTICE 1 KEY GRANT EXHIBIT 10.7 CONFIDENTIAL FORM OF NONQUALIFIED STOCK OPTION NOTICE 1989 EQUITY INCENTIVE PLAN
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We are pleased to inform you that you have been granted an option to purchase Compaq common stock. Your grant has been made under the Company's 1989 Equity Incentive Plan (the "1989 Plan"), which, together with the terms contained in this Notice, sets forth the terms and conditions of your grant and is incorporated herein by reference. A copy of the 1989 Plan is available on Inline. Please review it carefully; capitalized terms in this Notice have the same meaning as the 1989 Plan. 1. Vesting: Subject to the conditions set forth below and in the 1989 Plan, you may exercise this Option to purchase a number of Shares equal to the difference between A and B, where A = the product of the number of Shares subject to your Option multiplied by a fraction, the numerator of which is the number of whole months which have elapsed since the grant date set forth above (not to exceed 60) and the denominator of which is 60; and B = the number of Shares you previously acquired by the exercise of this Option. 2. Exercise: Your Option may be exercised to the extent vested at any time during the period beginning on the grant date and ending ten years from the date hereof; provided that you may only exercise this Option with respect to whole shares. 3. [Transferability: Your Option may be transferred to a member of your immediate family or to an estate planning vehicle in accordance with the policies adopted by the Human Resources Committee. No subsequent transfers are permitted other than by laws of descent and distribution.] 4. Termination or Suspension of Employment: The 1989 Plan sets forth the terms and conditions of this grant that apply in the event of your termination or suspension of employment. 5. To Exercise: You may exercise this grant by delivering to the Company at its principal office notice of intent to exercise and payment in full of the exercise price. This option is a nonqualified option. Please refer to the attached Prospectus for a description of the federal income tax treatment of nonqualified options. 6. Taxes and Withholding: Upon exercise, appropriate arrangements must be made with the Company must be made for satisfaction of any applicable federal, state, or local income tax withholding requirements or like requirements, including the payment to the Company at the time of exercise of all such required amounts. 7. Relevant Documents on Compaq Inline: An electronic copy of the 1989 Plan, a brochure relating to your stock options and other information about your options is available on Inline. Requests for paper copies of such documents may be made in writing to Shareholder Services. EX-10.8 4 REGISTRANT'S 1995 EQUITY INCENTIVE PLAN 1 EXHIBIT 10.8 AMENDED SEPTEMBER 26, 1996 COMPAQ COMPUTER CORPORATION 1995 EQUITY INCENTIVE PLAN SECTION 1. Purpose. The purposes of the Compaq Computer Corporation 1995 Equity Incentive Plan are to promote the interests of Compaq Computer Corporation and its stockholders by (i) attracting and retaining exceptional executive personnel and other key employees of the Company and its Affiliates, as defined below; (ii) motivating such employees by means of performance-related incentives to achieve long-range performance goals; and (iii) enabling such employees to participate in the long-term growth and financial success of the Company. SECTION 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below: "Affiliate" shall mean (i) any entity that, directly or indirectly, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, in either case as determined by the Committee. "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock Award, Performance Award or other Stock-Based Award. "Award Agreement" shall mean any written agreement, contract, or other instrument or document evidencing any Award, which may, but need not, be executed or acknowledged by a Participant. "Board" shall mean the Board of Directors of the Company. "Change in Control" shall be deemed to have occurred if: (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years (not including any period prior to the adoption of the Plan), individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this paragraph whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 30% of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. If any of the events enumerated in clauses (i) through (iv) occur, the Board shall determine the effective date of the Change in Control resulting therefrom, for purposes of the Plan. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. 2 "Committee" shall mean a committee of the Board designated by the Board to administer the Plan and composed of not less than the minimum number of persons from time to time required by Rule 16b-3, each of whom, to the extent necessary to comply with Rule 16b-3 only, is a "Non-Employee Director disinterested person" within the meaning of Rule 16b-3. Until otherwise determined by the Board, the Human Resources Committee designated by the Board shall be the Committee under the Plan. "Company" shall mean Compaq Computer Corporation, together with any successor thereto. "Employee" shall mean an employee of the Company or of any Affiliate. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Executive Officer" shall mean, at any time, an individual who is an executive officer of the Company within the meaning of Exchange Act Rule 3b-7 as promulgated and interpreted by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time, or who is an officer of the Company within the meaning of Exchange Act Rule 16a-1(f) as promulgated and interpreted by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time. "Fair Market Value" shall mean the fair market value of the property or other item being valued, as determined by the Committee in its sole discretion. "Incentive Stock Option" shall mean a right to purchase Shares from the Company that is granted under Section 6 of the Plan and that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. "Net After-Tax Amount" shall mean the net amount of compensation, assuming for this purpose only that all vested Awards and other forms of compensation subject to vesting upon such Change of Control are exercised upon such Change in Control, to be received (or deemed to have been received) by such Participant in connection with such Change of Control under any option agreement and under any other plan, arrangement or contract of the Company to which such Participant is a party, after giving effect to all income and excise taxes applicable to such payments. "Non-Qualified Stock Option" shall mean a right to purchase Shares from the Company that is granted under Section 6 of the Plan and that is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option and shall include a Restoration Option. "Other Stock-Based Award" shall mean any right granted under Section 10 of the Plan. "Participant" shall mean any Employee selected by the Committee to receive an Award under the Plan. "Performance Award" shall mean any right granted under Section 9 of the Plan. "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity. "Plan" shall mean this Compaq Computer Corporation 1995 Equity Incentive Plan. "QDRO" shall mean a domestic relations order meeting such requirements as the Committee shall determine, in its sole discretion. "Restoration Option" shall mean an Option granted pursuant to Section 6(e) of the Plan. "Restricted Stock" shall mean any Share granted under Section 8 of the Plan. "Restricted Stock Unit" shall mean any unit granted under Section 8 of the Plan. 2 3 "Rule 16b-3" shall mean Rule 16b-3 as promulgated and interpreted by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time. "SEC" shall mean the Securities and Exchange Commission or any successor thereto and shall include the staff thereof. "Shares" shall mean shares of the common stock, $.01 par value, of the Company, or such other securities of the Company as may be designated by the Committee from time to time. "Stock Appreciation Right" shall mean any right granted under Section 7 of the Plan. "Substitute Awards" shall mean Awards granted in assumption of, or in substitution for, outstanding awards previously granted by a company acquired by the Company or with which the Company combines. SECTION 3. Administration. (a) Authority of Committee. The Plan shall be administered by the Committee. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to an eligible Employee; (iii) determine the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited, or suspended and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent, and under what circumstances cash, Shares, other securities, other Awards, other property, and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (viii) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. (b) Committee Discretion Binding. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including the Company, any Affiliate, any Participant, any holder or beneficiary of any Award, any stockholder and any Employee. SECTION 4. Shares Available for Awards. (a) Shares Available. Subject to adjustment as provided in Section 4(b), the number of Shares with respect to which Awards may be granted under the Plan shall be 13 million. If, after the effective date of the Plan, any Shares covered by an Award granted under the Plan or by an award granted under any prior stock award plan of the Company, or to which such an Award or award relates, are forfeited, or if such an Award or award is settled for cash or otherwise terminates or is canceled without the delivery of Shares, then the Shares covered by such Award or award, or to which such Award or award relates, or the number of Shares otherwise counted against the aggregate number of Shares with respect to which Awards may be granted, to the extent of any such settlement, forfeiture, termination or cancellation, shall again become Shares with respect to which Awards may be granted. In the event that any Option or other Award granted hereunder or any award granted under any prior stock award plan of the Company is exercised through the delivery of Shares or in the event that withholding tax liabilities arising from such Award or award are satisfied by the withholding of Shares by the Company, the number of Shares available for Awards under the Plan shall be increased by the number of Shares so surrendered or withheld. Notwithstanding the foregoing and subject to adjustment as provided in Section 4(b), no Executive Officer of the Company may receive Awards under the Plan in any calendar year that relate to more than 500,000 Shares; 3 4 provided, however, a new employee who begins service as Chief Executive Officer may receive Awards that relate to up to 1,000,000 Shares in the calendar year in which employment with the Company begins. (b) Adjustments. In the event that the Committee determines that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number of Shares or other securities of the Company (or number and kind of other securities or property) with respect to which Awards may be granted, (ii) the number of Shares or other securities of the Company (or number and kind of other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award, or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, in each case, that (A) with respect to Awards of Incentive Stock Options no such adjustment shall be authorized to the extent that such authority would cause the Plan to violate Section 422(b)(1) of the Code, as from time to time amended and (B) with respect to any Award no such adjustment shall be authorized to the extent that such authority would be inconsistent with the Plan's meeting the requirements of Section 162(m) of the Code, as from time to time amended. (c) Substitute Awards. Any Shares underlying Substitute Awards shall not, except in the case of Shares with respect to which Substitute Awards are granted to Employees who are officers or directors of the Company for purposes of Section 16 of the Exchange Act or any successor section thereto, be counted against the Shares available for Awards under the Plan. (d) Sources of Shares Deliverable Under Awards. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of treasury Shares. SECTION 5. Eligibility. Any Employee, including any officer or employee-director of the Company or any Affiliate, who is not a member of the Committee, shall be eligible to be designated a Participant. SECTION 6. Stock Options. (a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom Options shall be granted, the number of Shares to be covered by each Option, the option price therefor and the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options, or to grant Non-Qualified Stock Options, or to grant both types of options. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code, as from time to time amended, and any regulations implementing such statute. (b) Exercise Price. Subject to the requirement set forth in Section 6(e) the Committee in its sole discretion shall establish the exercise price at the time each option is granted. (c) Exercise. Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Award Agreement or thereafter. The Committee may impose such conditions with respect to the exercise of options, including without limitation, any relating to the application of federal or state securities laws, as it may deem necessary or advisable. An executive officer of the Company may not exercise an Option for a period of six months from the date of grant. (d) Payment. No Shares shall be delivered pursuant to any exercise of an Option until payment in full of the option price therefor is received by the Company. Such payment may be made in cash, or its equivalent, or, if and to the extent permitted by the Committee, by exchanging Shares owned by the optionee (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of 4 5 all cash and cash equivalents and the Fair Market Value of any such Shares so tendered to the Company as of the date of such tender is at least equal to such option price. (e) Restoration Options. In the event that any Participant delivers Shares in payment of the exercise price of any Option granted hereunder in accordance with Section 6(d) or of any option granted under a prior stock award plan of the Company, or in the event that the withholding tax liability arising upon exercise of any such Option or option by a Participant is satisfied through the withholding by the Company of Shares otherwise deliverable upon exercise of the Option or option, the Committee shall have the authority to grant or provide for the automatic grant of a Restoration Option to such Participant. The grant of a Restoration Option shall be subject to the satisfaction of such conditions or criteria as the Committee in its sole discretion shall establish from time to time. A Restoration Option shall entitle the holder thereof to purchase a number of Shares equal to the number of such Shares so delivered or withheld upon exercise of the original Option or option. A Restoration Option shall have a per share exercise price of not less than 100% of the per Share Fair Market Value on the date of grant of such Restoration Option and such other terms and conditions as the Committee in its sole discretion shall determine. SECTION 7. Stock Appreciation Rights. (a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom Stock Appreciation Rights shall be granted, the number of Shares to be covered by each Stock Appreciation Right Award, the grant price thereof and the conditions and limitations applicable to the exercise thereof. Stock Appreciation Rights may be granted in tandem with another Award, in addition to another Award, or freestanding and unrelated to another Award. Stock Appreciation Rights granted in tandem with or in addition to an Award may be granted either at the same time as the Award or at a later time. Stock Appreciation Rights shall not be exercisable earlier than six months after grant, and shall have a grant price as determined by the Committee on the date of grant. (b) Exercise and Payment. A Stock Appreciation Right shall entitle the Participant to receive an amount equal to the excess of the Fair Market Value of a Share on the date of exercise of the Stock Appreciation Right over the grant price thereof, provided that the Committee may for administrative convenience determine that, with respect to any Stock Appreciation Right that is not related to an Incentive Stock Option and that can only be exercised for cash during limited periods of time in order to satisfy the conditions of Rule 16b-3, the exercise of such Stock Appreciation Right for cash during such limited period shall be deemed to occur for all purposes hereunder on the day during such limited period on which the Fair Market Value of the Shares is the highest. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted prior to such determination as well as Stock Appreciation Rights thereafter granted. The Committee shall determine whether a Stock Appreciation Right shall be settled in cash, Shares or a combination of cash and Shares. (c) Other Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine, at or after the grant of a Stock Appreciation Right, the term, methods of exercise, methods and form of settlement, and any other terms and conditions of any Stock Appreciation Right. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted or exercised prior to such determination as well as Stock Appreciation Rights granted or exercised thereafter. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate. SECTION 8. Restricted Stock and Restricted Stock Units. (a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom Shares of Restricted Stock and Restricted Stock Units shall be granted, the number of Shares of Restricted Stock and/or the number of Restricted Stock Units to be granted to each Participant, the duration of the period during which, and the conditions under which, the Restricted Stock and Restricted Stock Units may be forfeited to the Company, and the other terms and conditions of such Awards. 5 6 (b) Transfer Restrictions. Shares of Restricted Stock and Restricted Stock Units may not be sold, assigned, transferred, pledged or otherwise encumbered, except, in the case of Restricted Stock, as provided in the Plan or the applicable Award Agreements. Certificates issued in respect of Shares of Restricted Stock shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Company. Upon the lapse of the restrictions applicable to such Shares of Restricted Stock, the Company shall deliver such certificates to the Participant or the Participant's legal representative. (c) Payment. Each Restricted Stock Unit shall have a value equal to the Fair Market Value of a Share. Restricted Stock Units shall be paid in cash, Shares, other securities or other property, as determined in the sole discretion of the Committee, upon the lapse of the restrictions applicable thereto, or otherwise in accordance with the applicable Award Agreement. (d) Dividends and Distributions. Dividends and other distributions paid on or in respect of any Shares of Restricted Stock may be paid directly to the Participant, or may be reinvested in additional Shares of Restricted Stock or in additional Restricted Stock Units, as determined by the Committee in its sole discretion. SECTION 9. Performance Awards. (a) Grant. The Committee shall have sole and complete authority to determine the Employees who shall receive a "Performance Award," which shall consist of a right that is (i) denominated in cash or Shares, (ii) valued, as determined by the Committee, in accordance with the achievement of such performance goals during such performance periods as the Committee shall establish, and (iii) payable at such time and in such form as the Committee shall determine. (b) Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award and the amount and kind of any payment or transfer to be made pursuant to any Performance Award. (c) Payment of Performance Awards. Performance Awards may be paid in a lump sum or in installments following the close of the performance period or, in accordance with procedures established by the Committee, on a deferred basis. SECTION 10. Other Stock-Based Awards. The Committee shall have authority to grant to eligible Employees an "Other Stock-Based Award," which shall consist of any right that is (i) not an Award described in Sections 6 through 9 above and (ii) an Award of Shares or an Award denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as deemed by the Committee to be consistent with the purposes of the Plan; provided that any such rights must comply, to the extent deemed desirable by the Committee, with Rule 16b-3 and applicable law. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of any such Other Stock-Based Award. SECTION 11. Termination or Suspension of Employment. The following provisions shall apply in the event of the Participant's termination of employment unless the Committee shall have provided otherwise, either at the time of the grant of the Award or thereafter. (a) Nonqualified Stock Options and Stock Appreciation Rights. (i) Termination of Employment. If the Participant's employment with the Company or its Affiliates is terminated for any reason other than death, permanent and total disability, or retirement, the Participant's right to exercise any Nonqualified Stock Option or Stock Appreciation Right shall terminate, and such Option or Stock Appreciation Right shall expire, on the earlier of (A) the first anniversary of such termination of employment or (B) the date such Option or Stock Appreciation Right would have 6 7 expired had it not been for the termination of employment. The Participant shall have the right to exercise such Option or Stock Appreciation Right prior to such expiration to the extent it was exercisable at the date of such termination of employment and shall not have been exercised. (ii) Death, Disability or Retirement. If the Participant's employment with the Company or its Affiliates is terminated by death, permanent and total disability, or retirement, the Participant or his successor (if employment is terminated by death) shall have the right to exercise any Nonqualified Stock Option or Stock Appreciation Right to the extent it was exercisable at the date of such termination of employment and shall not have been exercised, but in no event shall such option be exercisable later than the date the Option would have expired had it not been for the termination of such employment. The meaning of the terms "total and permanent disability" and "retirement" shall be determined by the Committee. (iii) Acceleration and Extension of Exercisability. Notwithstanding the foregoing, the Committee may, in its discretion, provide (A) that an Option granted to a Participant may terminate at a date earlier than that set forth above, (B) that an Option granted to a Participant not subject to Section 16 of the Exchange Act may terminate at a date later than that set forth above, provided such date shall not be beyond the date the Option would have expired had it not been for the termination of the Participant's employment, and (C) that an Option or Stock Appreciation Right may become immediately exercisable when it finds that such acceleration would be in the best interests of the Company. (b) Incentive Stock Options. Except as otherwise determined by the Committee at the time of grant, if the Participant's employment with the Company is terminated for any reason, the Participant shall have the right to exercise any Incentive Stock Option and any related Stock Appreciation Right during the 90 days after such termination of employment to the extent it was exercisable at the date of such termination, but in no event later than the date the option would have expired had it not been for the termination of such employment. If the Participant does not exercise such Option or related Stock Appreciation Right to the full extent permitted by the preceding sentence, the remaining exercisable portion of such Option automatically will be deemed a Nonqualified Stock Option, and such Option and any related Stock Appreciation Right will be exercisable during the period set forth in Section 11(a) of the Plan, provided that in the event that employment is terminated because of death or the Participant dies in such 90-day period, the option will continue to be an Incentive Stock Option to the extent provided by Section 421 or Section 422 of the Code, or any successor provision, and any regulations promulgated thereunder. (c) Restricted Stock. Except as otherwise determined by the Committee at the time of grant, upon termination of employment for any reason during the restriction period, all shares of Restricted Stock still subject to restriction shall be forfeited by the Participant and reacquired by the Company at the price (if any) paid by the Participant for such Restricted Stock, provided that in the event of a Participant's retirement, permanent and total disability, or death, or in cases of special circumstances, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interests of the Company, waive in whole or in part any or all remaining restrictions with respect to such participant's shares of Restricted Stock. (d) Leave Without Pay. Any time spent by a Participant in the status of "leave without pay" shall be disregarded for purposes of determining the extent to which any Award or portion thereof has vested or otherwise becomes exercisable or nonforfeitable. SECTION 12. Change in Control. Notwithstanding any other provision of the Plan to the contrary, upon a Change in Control all outstanding Awards shall vest, become immediately exercisable or payable or have all restrictions lifted as may apply to the type of Award and no outstanding Stock Appreciation Right may be terminated, amended, or suspended upon or after a Change in Control; provided, however, that unless otherwise determined by the Committee at the time of award or thereafter, if it is determined that the Net After-Tax Amount to be realized by any Participant, taking into account the accelerated vesting provided for by this Section as well as all other payments to be received by such Participant in connection with such Change in Control, would be higher if Awards did not vest in accordance with this Section, then and to such extent the Awards shall not vest. The determination of whether any such Award should not vest shall be made by a nationally recognized accounting firm 7 8 selected by the Company, which shall be instructed to consider that (i) Awards and other forms of compensation subject to vesting upon a Change of Control shall be vested in the order in which they were granted and within each grant in the order in which they would otherwise have vested and (ii) unless and to the extent any other plan, arrangement or contract of the Company pursuant to which any such payment is to be received provides to the contrary, such other payment shall be deemed to have occurred after any acceleration of Awards or other forms of compensation subject to vesting upon a Change of Control. SECTION 13. Amendment and Termination. (a) Amendments to the Plan. The Board may amend, alter, suspend, discontinue, or terminate the Plan or any portion thereof at any time; provided that no such amendment, alteration, suspension, discontinuation or termination shall be made without stockholder approval if such approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement that is a prerequisite for exemptive relief from Section 16(b) of the Exchange Act, for which or with which the Board deems it necessary or desirable to qualify or comply. Notwithstanding anything to the contrary herein, the Committee may amend the Plan in such manner as may be necessary so as to have the Plan conform with local rules and regulations in any jurisdiction outside the United States. (b) Amendments to Awards. The Committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate, any Award theretofore granted, prospectively or retroactively; provided that any such waiver, amendment, alteration, suspension, discontinuance, cancellation, or termination that would adversely affect the rights of any Participant or any holder or beneficiary of any Award theretofore granted shall not to that extent be effective without the consent of the affected Participant, holder, or beneficiary. (c) Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee is hereby authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4(b) hereof) affecting the Company, any Affiliate, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan; provided that no such adjustment shall be authorized to the extent that such authority would be inconsistent with the Plan's meeting the requirements of Section 162(m) of the Code, as from time to time amended. (d) Cancellation. Any provision of this Plan or any Award Agreement to the contrary notwithstanding, the Committee may cause any Award granted hereunder to be canceled in consideration of a cash payment or alternative Award made to the holder of such canceled Award equal in value to the Fair Market Value of such canceled Award. (e) Employee Status Change to Part-Time. At such time as a full-time employee becomes a part-time employee of the Company, on the next vesting date following such status change, all Awards previously granted to such employee will be automatically amended to reflect the vesting of all such Awards to be reduced by one-half with respect to any portion of the Awards not yet vested. SECTION 14. General Provisions. (a) Dividend Equivalents. In the sole and complete discretion of the Committee, an Award, whether made as an Other Stock-Based Award under Section 10 or as an Award granted pursuant to Sections 6 through 9 hereof, may provide the Participant with dividends or dividend equivalents, payable in cash, Shares, other securities or other property on a current or deferred basis. (b) Nontransferability. No Award shall be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant, except by will or the laws of descent and distribution or pursuant to a QDRO, provided, however, that an Award may be transferable, to the extent set forth in the applicable Award Agreement and in 8 9 accordance with procedures adopted by the Committee, (i) if such Award Agreement provisions do not disqualify such Award for exemption under Rule 16b-3 or (ii) if such Award is not intended to qualify for exemption under such rule. (c) No Rights to Awards. No Employee, Participant or other Person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Employees, Participants, or holders or beneficiaries of Awards. The terms and conditions of Awards need not be the same with respect to each recipient. (d) Share Certificates. All certificates for Shares or other securities of the Company or any Affiliate delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares or other securities are then listed, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (e) Delegation. Subject to the terms of the Plan and applicable law, the Committee may delegate to one or more officers or managers of the Company or any Affiliate, or to a committee of such officers or managers, the authority, subject to such terms and limitations as the Committee shall determine, to grant Awards to, or to cancel, modify or waive rights with respect to, or to alter, discontinue, suspend, or terminate Awards held by, Employees who are not officers or directors of the Company for purposes of Section 16 of the Exchange Act, or any successor section thereto, or who are otherwise not subject to such Section. (f) Withholding. A participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any Award, from any payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, other Awards or other property) of any applicable withholding taxes in respect of an Award, its exercise, or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. The Committee may provide for additional cash payments to holders of Awards to defray or offset any tax arising from the grant, vesting, exercise, or payments of any Award. (g) Award Agreements. Each Award hereunder shall be evidenced by an Award Agreement that shall be delivered to the Participant and shall specify the terms and conditions of the Award and any rules applicable thereto. (h) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other compensation arrangements, which may, but need not, provide for the grant of options, restricted stock, Shares and other types of Awards provided for hereunder (subject to stockholder approval if such approval is required), and such arrangements may be either generally applicable or applicable only in specific cases. (i) No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. (j) No Rights as Stockholder. Subject to the provisions of the applicable Award, no Participant or holder or beneficiary of any Award shall have any rights as a stockholder with respect to any Shares to be distributed under the Plan until he or she has become the holder of such Shares. Notwithstanding the foregoing, in connection with each grant of Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Participant shall not be entitled to the rights of a stockholder in respect of such Restricted Stock. (k) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan and any Award Agreement shall be determined in accordance with the laws of the State of Delaware. 9 10 (l) Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect. (m) Other Laws. The Committee may refuse to issue or transfer any Shares or other consideration under an Award if, acting in its sole discretion, it determines that the issuance or transfer of such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder, or beneficiary. Without limiting the generality of the foregoing, no Award granted hereunder shall be construed as an offer to sell securities of the Company, and no such offer shall be outstanding, unless and until the Committee in its sole discretion has determined that any such offer, if made, would be in compliance with all applicable requirements of the U.S. federal securities laws and any other laws to which such offer, if made, would be subject. (n) No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate. (o) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated, or otherwise eliminated. (p) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. SECTION 15. Term of the Plan. (a) Effective Date. The Plan shall be effective as of January 26, 1995, subject to approval by the stockholders of the Company within one year thereafter. (b) Expiration Date. No Incentive Stock Option shall be granted under the Plan after January 25, 2005. Unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award granted hereunder may, and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or terminate any such Award or to waive any conditions or rights under any such Award shall, continue after the authority for grant of new Awards hereunder has been exhausted. 10 EX-10.9 5 FORM OF STOCK OPTION NOTICE RELATING TO EX-10.8 1 EXHIBIT 10.9 KEY GRANT CONFIDENTIAL FORM OF NONQUALIFIED STOCK OPTION NOTICE 1989 EQUITY INCENTIVE PLAN
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We are pleased to inform you that you have been granted an option to purchase Compaq common stock. Your grant has been made under the Company's 1995 Equity Incentive Plan (the "1995 Plan"), which, together with the terms contained in this Notice, sets forth the terms and conditions of your grant and is incorporated herein by reference. A copy of the 1995 Plan is available on Inline. Please review it carefully; capitalized terms in this Notice have the same meaning as the 1995 Plan. 1. Vesting: Subject to the conditions set forth below and in the 1995 Plan, you may exercise this Option to purchase a number of Shares equal to the difference between A and B, where A = the product of the number of Shares subject to your Option multiplied by a fraction, the numerator of which is the number of whole months which have elapsed since the grant date set forth above (not to exceed 60) and the denominator of which is 60; and B = the number of Shares you previously acquired by the exercise of this Option. 2. Exercise: Your Option may be exercised to the extent vested at any time during the period beginning on the grant date and ending ten years from the date hereof; provided that you may only exercise this Option with respect to whole shares. 3. [Transferability: Your Option may be transferred to a member of your immediate family or to an estate planning vehicle in accordance with the policies adopted by the Human Resources Committee. No subsequent transfers are permitted other than by laws of descent and distribution.] 4. Termination or Suspension of Employment: The 1995 Plan sets forth the terms and conditions of this grant that apply in the event of your termination or suspension of employment. 5. To Exercise: You may exercise this grant by delivering to the Company at its principal office notice of intent to exercise and payment in full of the exercise price. This option is a nonqualified option. Please refer to the attached Prospectus for a description of the federal income tax treatment of nonqualified options. 6. Taxes and Withholding: Upon exercise, arrangements must be made with the Company for satisfaction of any applicable federal, state, or local income tax withholding requirements or like requirements, including the payment to the Company at the time of exercise of all such required amounts. 7. Relevant Documents on Compaq Inline: An electronic copy of the 1995 Plan, a brochure relating to your stock options and other information about your options is available on Inline. Requests for paper copies of such documents may be made in writing to Shareholder Services. EX-10.11 6 REGISTRANT'S STOCK OPTION PLAN FOR NON-EMPLOYEE 1 EXHIBIT 10.11 Amended December 12, 1996 COMPAQ COMPUTER CORPORATION NONQUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS SECTION 1. Amendment and Restatement. The Compaq Computer Corporation Nonqualified Stock Option Plan for Non-Employee Directors (the "Plan") amends and restates in its entirety the Compaq Computer Corporation 1987 Nonqualified Stock Option Plan for Non-Employee Directors. SECTION 2. Purpose. The purposes of the Plan are to attract and retain the services of experienced and knowledgeable non-employee directors, to encourage eligible directors of Compaq Computer Corporation (the "Company") to acquire a proprietary and vested interest in the growth and performance of the Company, and to generate an increased incentive for directors to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of its stockholders. SECTION 3. Definitions. As used in the Plan, the following terms shall have the meanings set forth below: (a) "Amendment Date" shall mean December 12, 1996, the effective date of the amendment and restatement of the Plan. (b) "Annual Retainer" shall mean the amount that an Eligible Director would be entitled to receive for serving as a director in the year following an Election Date, but shall not include fees associated with service on any committee of the Board, any meeting fees, or any fees associated with other services to be provided to the Company. (c) "Board" shall mean the Board of Directors of the Company. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (e) "Company" shall mean Compaq Computer Corporation. (f) "Election Date" shall mean with respect to an Option hereunder the date of the appointment, election, or re-election of the Director that prompted the grant of such Option. 2 (g) "Eligible Director" shall mean each director of the Company who is not an employee of the Company or any of the Company's subsidiaries (as defined in Section 425(f) of the Code). (h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (i) "Fair Market Value" shall mean with respect to the Common Stock (i) the last sale price of the Common Stock on the date on which such value is determined, as reported on the consolidated tape of New York Stock Exchange issues or, if there shall be no trades on such date, on the date nearest preceding such date; (ii) if the Common Stock is not then listed for trading on the New York Stock Exchange, the last sale price of the Common Stock on the date on which such value is determined, as reported on another recognized securities exchange or on the NASDAQ National Market System if the Common Stock shall then be listed and traded upon such exchange or system or, if there shall be no trades on such date, on the date nearest preceding such date; or (iii) the mean between the bid and asked quotations for such stock on such date (as reported by a recognized stock quotation service) or, in the event that there shall be no bid or asked quotations on such date, then upon the basis of the mean between the bid and asked quotations on the date nearest preceding such date. (j) "Grant Notice" shall mean a written notice evidencing an Option granted hereunder. (k) "Option" shall mean any right granted to a Participant allowing such Participant to purchase Shares at such price or prices and during such period or periods as set forth under the Plan. All Options shall be nonqualified options not entitled to special tax treatment under Section 422A of Code. (l) "Participant" shall mean an Eligible Director who receives an Option under the Plan. (m) "Price Percentage" shall mean 50 percent unless adjusted in accordance with Section 8(e). (n) "Release Date" shall mean the fifth business day occurring after the Company's earnings release for the preceding fiscal period. In calculating the Release Date, the day of an earnings release shall be counted if the earnings release is made before the opening of trading on the New York Stock Exchange and shall not be counted if such release is made after the opening of trading. (o) "Share Percentage" shall be 50 percent unless adjusted in accordance with Section 8(e). (p) "Shares" shall mean shares of the common stock, $.01 par value, of the Company. 2 3 (q) "Window" shall mean a period of time beginning on a Release Date and ending at the end of the second month of the fiscal quarter in which such Release Date occurs. SECTION 4. Administration. The Plan shall be administered by the Board. Subject to the terms of the Plan, the Board shall have the power to interpret the provisions and supervise the administration of the Plan. SECTION 5. Shares Subject to the Plan. (a) Total Number. Subject to adjustment as provided in this Section, the total number of Shares as to which Options may be granted under the Plan shall be 1,500,000 Shares. Any Shares issued pursuant to Options hereunder may consist, in whole or in part, of authorized and unissued shares or treasury shares. (b) Reduction of Shares Available. (i) The grant of an Option will reduce the Shares as to which Options may be granted by the number of Shares subject to such Option. (ii) Any Shares issued by the Company through the assumption or substitution of outstanding grants from an acquired company shall not reduce the Shares available for grants under the Plan. (c) Increase of Shares Available. The lapse, cancellation, or other termination of an Option that has not been fully exercised shall increase the available Shares by the number of Shares that have not been issued upon exercise of such Option. (d) Other Adjustments. The total number and kind of shares available for Options under the Plan or which may be allocated to any one Participant, the number and kind of shares of Common Stock subject to outstanding Options, and the exercise price for such Options shall be appropriately adjusted by the Board for any increase or decrease in the number of outstanding Shares resulting from a stock dividend, subdivision, combination of Shares, reclassification, or other change in corporate structure affecting the Shares or for any conversion of the Shares into or exchange of the Shares for other shares as a result of any merger or consolidation (including a sale of assets) or other recapitalization as may be necessary to maintain the proportionate interest of the Option holder. SECTION 6. Initial Options. Initial Options shall be granted to Eligible Directors as follows: (a) Initial Grants. Each Eligible Director who is first elected or appointed to the Board on or after April 25, 1996, shall be granted one Option to acquire 12,500 Shares. In the event that the Election Date occurs during the Window, such Option shall be granted on the Election Date with respect to such Option. In the event that such Director's election or appointment does not occur during the Window, then such Option shall be granted on the next Release Date. 3 4 (b) Terms and Conditions. Any Option granted under this Section 6 shall be subject to the following terms and conditions: (i) Option Price. The purchase price per Share purchasable under an Option granted under Section 6 shall be 100% of the Fair Market Value of a Share on the date of the grant of the Option. (ii) Exercisability. An Option granted under Section 6(a) shall be exercisable on the first anniversary of the Election Date. SECTION 7. Annual Options. Annual Options shall be granted to Eligible Directors as follows: (a) Reelected Directors. Each Eligible Director who is reelected to the Board at an annual meeting of the Company's stockholders on or after the Amendment Date and who has not received a grant under Section 6 during the period since the most recent previous annual meeting of the Company's stockholders shall be granted an Option to acquire 10,000 Shares on each Election Date on which he is reelected. (b) Chairman of the Board. Each Eligible Director who is elected or re-elected Chairman of the Board by the Board at its meeting following an annual meeting of the Company's stockholders on or after the Amendment Date and who has not received a grant under Section 6 during the period since the most recent annual meeting of the Company's stockholders shall be granted on each Election Date on which he is elected or reelected Chairman of the Board an Option to acquire 2,500 Shares in addition to any applicable Option granted under Section 7(a). (c) Terms and Conditions. Any Option granted under this Section 7 shall be subject to the following terms and conditions: (i) Option Price. The purchase price per Share purchasable under an Option shall be 100% of the Fair Market Value of a Share on the date of the grant of the Option. (ii) Exercisability. An Option granted under this Section 7 shall be exercisable (A) with respect to 50% of the Shares thereunder on the first anniversary of the Election Date related to such Option and (B) with respect to the remaining 50% of the Shares thereunder on the second anniversary of such Election Date. SECTION 8. Options in Lieu of Cash Compensation. Options shall be granted to Directors in lieu of cash compensation as follows: (a) Election to Receive Option. An option shall be granted automatically to any Eligible Director who prior to an Election Date on which such director is re-elected to the Board by the Company's stockholders, files with the Secretary of the Company an irrevocable election to 4 5 receive an Option in lieu of all or a portion of his or her Annual Retainer. On the following Election Date, each Eligible Director making such a filing under this Section 8(a) shall be granted an Option for the number of Shares determined under Section 8(b) below. (b) Option Formula. The number of Option shares granted on an Election Date to any Eligible Director under this Section 8 shall be equal to the nearest number of whole shares determined in accordance with the following formula: (Elected Portion) (Annual Retainer) = Number of (Share Percentage) (Fair Market Value) Shares where Elected Portion refers to the portion of Annual Retainers elected under Section 8(a) and Fair Market Value refers to the Fair Market Value of a Share on the date of grant. (c) Option Price. The purchase price per Share covered by each Option granted under this Section 8 shall be the Fair Market Value of a Share on the date of grant multiplied by the Price Percentage. (d) Exercisability. An Option granted under this Section 8 shall be exercisable one year from the date of grant. (e) Adjustment. In the event that any law, ruling, or regulation shall be proposed, promulgated, or adopted after the Amendment Date that provides that a higher Option price shall be required so that Options granted under Section 8 of the Plan will be treated as options for tax purposes, the Share Percentage and Price Percentage of Options granted hereafter under this Section 8 shall be automatically adjusted to comply therewith; provided, however, the sum of the Share Percentage and the Price Percentage shall remain 100 percent. SECTION 9. General Terms. The following provisions shall apply to any Option granted under the Plan. (a) Option Period. Each Option shall expire ten years from its date of grant. Each Option shall be subject to termination before its date of expiration as hereinafter provided. (b) Termination of Service as Director. If a Participant's service as a Director is terminated for any reason other than death or disability, the Participant or his beneficiary shall have the right to exercise any Option to the extent it was exercisable at the date of such termination of service and shall not have been exercised. The right to exercise such Option to the extent set forth herein shall continue until the expiration of the Option. (c) Death or Disability. If the Participant's service as a Director is terminated by death or disability, the Participant shall have the right to exercise a prorated number of the Shares under any Option that is not fully exercisable prior to such event, such number to be determined by multiplying (i) the total number of Shares subject to such Option by (ii) a fraction equal to (A) the total of number of completed months of service since the Election Date related to such Option divided by (B) the total number of completed months of service from the Election Date related to such 5 6 Option until such Option would have become fully exercisable. The right to exercise such Option to the extent set forth herein shall continue until the expiration of the Option. (d) Method of Exercise. Any Option may be exercised by the Participant in whole or in part at such time or times and by such methods as the Board may specify. The applicable Option Agreement may provide that the Participant may make payment of the Option price in cash, Shares, or such other consideration as the Board may specify, or any combination thereof, having a Fair Market Value on the exercise date equal to the total option price. SECTION 10. Change in Control. (a) Immediate Vesting. Notwithstanding any other provision of the Plan to the contrary, upon a Change in Control, as defined below, all outstanding Options shall vest and become immediately exercisable. (b) Change in Control. A "Change in Control" shall be deemed to have occurred if: (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years (not including any period prior to January 18, 1989), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 10(b)) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 30% of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 6 7 SECTION 11. Amendments and Termination. (a) Board Authority. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made (i) that would impair the rights of a Participant under an Option theretofore granted, without the Participant's consent, or (ii) without the approval of the stockholders if such approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement which is a prerequisite for exemptive relief from Section 16(b) of the Exchange Act, or (iii) to Section 6, Section 7 or Section 8 more often than once every six months. (b) Prior Stockholder and Participant Approval. Anything herein to the contrary notwithstanding, in the event that amendments to the Plan are required in order that the Plan or any other stock-based compensation plan of the Company comply with the requirements of Rule 16b-3 issued under the Exchange Act as amended from time to time or any successor rules promulgated by the Securities and Exchange Commission related to the treatment of benefit and compensation plans under Section 16 of the Exchange Act, the Board is authorized to make such amendments without the consent of Participants or the stockholders of the Company. SECTION 12. General Provisions. (a) Nontransferability. No Option shall be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant, except by will or the laws of descent and distribution, provided, however, that an Option may be transferable, to the extent set forth in the applicable Grant Notice or agreement and in accordance with procedures adopted by the Board, if such provisions do not disqualify such Option for exemption under Rule 16b-3. (b) Compliance Requirements. All certificates for Shares delivered under the Plan pursuant to any Option shall be subject to such stock-transfer orders and other restrictions as the Board may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable federal or state securities law, and the Board of Directors may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. The Company shall not be required to issue or deliver any Shares under the Plan prior to the completion of any registration or qualification of such Shares under any federal or state law, or under any ruling or regulation of any governmental body or national securities exchange that the Board in its sole discretion shall deem to be necessary or appropriate. (c) Other Plans. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required by applicable law or the rules of any stock exchange on which the Common Stock is then listed; and such arrangements may be either generally applicable or applicable only in specific cases. 7 8 (d) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Delaware and applicable federal law. (e) Conformity With Law. If any provision of this Plan is or becomes or is deemed invalid, illegal, or unenforceable in any jurisdiction, or would disqualify the Plan or any Option under any law deemed applicable by the Board, such provision shall be construed or deemed amended in such jurisdiction to conform to applicable laws or if it cannot be construed or deemed amended without, in the determination of the Board, materially altering the intent of the Plan, it shall be stricken and the remainder of the Plan shall remain in full force and effect. SECTION 13. Expiration. The Plan will expire when no Shares are available for issuance. 8 EX-10.12 7 REGISTRANT'S FORMS OF STOCK OPTION NOTICE 1 EXHIBIT 10.12 DIRECTOR KEY GRANT CONFIDENTIAL FORM OF NONQUALIFIED STOCK OPTION NOTICE NONQUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
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We are pleased to inform you have been granted you an option to purchase Compaq common stock under the Company's Nonqualified Stock Option plan for Non-Employee Directors (the "Director Plan"), which, together with the terms contained in this Notice, sets forth the terms and conditions of your grant is incorporated herein by reference. a copy of the director Plan has been provided to you. Please review it carefully; capitalized terms in this Notice have the same meaning as the Director Plan. 1. Vesting: Subject to the conditions set forth below and in the Director 1995 Plan, you may exercise this Option in whole or in part (i) with respect to 50% of the Shares, one year from the date of grant and (ii) with respect to the remaining 50% of the Shares, two years from the date of grant to purchase a number of Shares equal to the difference between A and B, where 2. Exercise: Your Option may be exercised to the extent vested at any time during the period beginning on the grant date and ending ten years from the date hereof; provided that you may only exercise this Option with respect to whole shares. 3. Transferability: Your Option may be transferred to a member of your immediate family or to an estate planning vehicle in accordance with the policies adopted by Board of Directors. No subsequent transfers are permitted other than by laws of descent and distribution. 4. Termination of Service as Director Suspension of Employment: The Director Plan sets forth the terms and conditions of this grant that apply in the event of your termination of service as Director. employment. 5. To Exercise: You may exercise this grant by delivering to the Company at its principal office notice of intent to exercise and payment in full of the exercise price. This option is a nonqualified option. 2 DIRECTOR GRANT IN LIEU OF RETAINER CONFIDENTIAL FORM OF NONQUALIFIED STOCK OPTION NOTICE NONQUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
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You have elected to receive all or a portion of your retainer for acting as a director of Compaq in the form of options to purchase Compaq common stock under the Company's Nonqualified Stock Option Plan for Non-Employee Directors (the "Director Plan"), which, together with the terms contained in this Notice, sets forth the terms and conditions of your options and is incorporated herein by reference. A copy of the Director Plan has been provided to you. Please review it carefully; capitalized terms in this Notice have the same meaning as the Director Plan. 1. Vesting: Subject to the conditions set forth below and in the Director Plan, you may exercise this Option in whole or in part one year from the date of grant. 2. Exercise: Your Option may be exercised to the extent vested at any time during the period beginning on the grant date and ending ten years from the date hereof; provided that you may only exercise this Option with respect to whole shares. 3. Transferability: Your Option may be transferred to a member of your immediate family or to an estate planning vehicle in accordance with the policies adopted by the Board of Directors. No subsequent transfers are permitted other than by laws of descent and distribution. 4. Termination of Service as Director: The Director Plan sets forth the terms and conditions of this grant that apply in the event of your termination of service as Director. 5. To Exercise: You may exercise this grant by delivering to the Company at its principal office notice of intent to exercise and payment in full of the exercise price. This option is a nonqualified option. EX-10.17 8 AMENDED AND RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.17 AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT ARRANGED BY BA SECURITIES, INC. THIS AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT (this "Amendment and Restatement") dated as of October 29, 1996, by and among COMPAQ COMPUTER CORPORATION, a Delaware corporation (the "Company"), the several financial institutions from time to time party hereto (the "Banks"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as administrative agent for the Banks (the "Agent"). RECITALS A. The Company, Banks, and Agent are parties to a U.S. $250,000,000 Revolving Credit Agreement dated as of October 31, 1995 (the "Credit Agreement"). B. The parties hereto desire to amend such Credit Agreement as set forth herein and to restate such Credit Agreement in its entirety to read as set forth in the Credit Agreement with the amendments specified below. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree that the Credit Agreement shall be amended and restated in its entirety to read as set forth in the Credit Agreement with the following amendments, and agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings, if any, assigned to them in the Credit Agreement. 2. Amendments to Credit Agreement. (a) Section 1.01 of the Credit Agreement shall be amended by amending the following defined terms to read in their entirety as follows: "Agreement" means this Amended and Restated Revolving Credit Agreement. "Applicable Fee Amount" means, for any date, 0.060% per annum. "5-Year Credit Agreement" means that U.S. $1,000,000,000 Amended and Restated Revolving Credit Agreement dated as of this date among the Company, BofA as Administrative Agent and the lenders party thereto, under which such lenders have agreed to extend credit to the Company on a five-year basis. "Interest Period" means (a) as to any Adjusted CD Rate Revolving Loan, the period commencing on the Borrowing Date or on the Conversion/Continuation Date on which a Revolving Loan is converted into or continued as an Adjusted CD Rate Revolving Loan, and ending on the date 30, 60, 90 or 180 days thereafter, as selected by the Company in its Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, (b) as to any LIBOR Revolving Loan, the period commencing on the Borrowing Date or on the Conversion/Continuation Date on which a Revolving Loan is converted into or continued as a LIBOR Revolving Loan, and ending on the day which numerically corresponds to such date one, 2 two, three or six months thereafter (or if such month has no numerically corresponding day, on the last Business Day of such month), as selected by the Company in its Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, and (c) as to any Swingline Loan, the period commencing on the Borrowing Date of such Loan and ending on such date, not more than 10 days later, as agreed upon by the Company and the Swingline Bank at the time of the Borrowing of such Loan; provided that: (i) if any Interest Period pertaining to a CD Loan would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day; (ii) if any Interest Period pertaining to an Offshore Loan would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding business Day; and (iii) no Interest Period for any Loan shall extend beyond the date set forth in clause (a) of the definition of "Revolving Termination Date." "Revolving Termination Date" means the earlier to occur of: (a) October 28, 1997; and (b) the date on which the commitments of the Banks to make Loans terminate in whole in accordance with Section 2.07, Section 2.09(b) or 2.09(c) or Section 8.02. (b) Section 2.06 of the Credit Agreement shall be amended to read in its entirety as follows: 2.06 Increase of Commitments. The Company shall have the right, without the consent of the Banks but subject to the approval of the Agent (which approval shall not be unreasonably withheld), to effectuate from time to time an increase in the total Commitments under this Agreement by adding to this Agreement one or more Persons that are Eligible Assignees (who shall, upon completion of the requirements stated in this Section, constitute "Banks" hereunder), or by allowing one or more Banks to increase their Commitments hereunder, so that such added and increased Commitments shall equal the increase in Commitments effectuated pursuant to this Section; provided that (a) no increase in Commitments pursuant to this Section shall result in the total Commitments exceeding $550,000,000 or shall result in the aggregate amount of the increases in the Commitments effectuated pursuant to this Section since the date of this Agreement being in excess of the sum of $50,000,000 plus the aggregate amount (but not greater than $50,000,000) of all non-ratable reductions and terminations of Commitments effectuated pursuant to Section 2.08; (b)no Bank's Commitment shall be increased without the consent of such Bank; (c) there has occurred and is continuing no Default or Event of Default, and (d) there has been no ratable reduction of Commitments pursuant to Section 2.07. The Company shall deliver or pay, as applicable, to the Agent each of the following items prior to 11:00 a.m. (Houston time) (i) three Business Days prior to the requested effective date of such increase in the Commitments, if such date is a No Loan Date, or (ii) five Business Days prior to the requested effective date of such increase in the Commitments, if such date is not a No Loan 2 3 Date: (A) a written notice of the Company's intention to increase the total Commitments pursuant to this Section, which shall specify each new Eligible Assignee, if any, the changes in amounts of Commitments that will result, and such other information as is reasonably requested by the Agent; (B) a document in form and substance as may be reasonably required by the Agent, executed and delivered by each new Eligible Assignee and each Bank agreeing to increase its Commitment, pursuant to which it becomes a party hereto or increases its Commitment, as the case may be, which document, in the case of a new Eligible Assignee, shall (among other matters) specify the CD Lending Office, Domestic Lending Office and LIBOR Lending Office of such new Eligible Assignee; (C) a Note in the principal amount of the Commitment of each new Eligible Assignee, or a replacement Note in the principal amount of the increased Commitment of each Bank agreeing to increase its Commitment, as the case may be, executed and delivered by the Company, which Note shall be in form and substance as may be reasonably required by Agent; and (D) a non-refundable processing fee of $3,500, for the sole account of the Agent. Upon receipt of any notice referred to in clause (A) above, the Agent will promptly notify each Bank thereof. Upon execution and delivery of such documents and the payment of such fee, such new Eligible Assignee shall constitute a "Bank" hereunder with a Commitment as specified therein, or such Bank's Commitment shall increase as specified therein, as the case may be. The Company agrees to pay to the Banks any and all amounts to the extent payable pursuant to Section 3.02 as a result of any such increase in the Commitments. (c) With effect from and after the Effective Date (i) each Person listed on the signature pages hereof which is not a party to the Credit Agreement (a "New Bank") shall become a Bank party to the Credit Agreement, as amended and restated hereby, and (ii) the Commitment of each Bank shall be the amount set forth opposite the name of such Bank on the signature pages hereof. Any Bank which was a party to the Credit Agreement but is not listed on the signature pages hereof shall upon the Effective Date cease to be a Bank party to the Credit Agreement, as amended and restated hereby, and all accrued fees and other amounts payable under the Credit Agreement for the account of such Bank shall be due and payable on such date; provided that the provisions of the Credit Agreement which expressly survive payment of all Obligations shall inure to the benefit of, or, as applicable, shall continue to be binding on, such Bank with respect to the period prior to the Effective Date. 3. Representations and Warranties. The Company hereby represents and warrants to the Agent and the Banks as follows: (a) No Default or Event of Default has occurred and is continuing. (b) All representations and warranties of the Company contained in the Credit Agreement are true and correct as though made on and as of this date. 3 4 (c) The Company is entering into this Amendment and Restatement on the basis of its own investigation and for its own reasons, without reliance upon the Agent and the Banks or any other Person. 4. Effective Date. This Amendment and Restatement will become effective as of October 29, 1996 (the "Effective Date"), provided that each of the following conditions precedent is satisfied: (a) The Agent has received from the Company and each of the Banks a duly executed original (or, if elected by the Agent, an executed facsimile copy) of this Amendment and Restatement. (b) The Agent has received from the Company a copy of a resolution passed by the board of directors of the Company, certified by the Secretary or an Assistant Secretary of the Company as being in full force and effect on the date hereof, authorizing the execution, delivery and performance of this Amendment and Restatement. (c) The Agent shall have received an opinion of the General Counsel of the Company and another internal counsel of the Company licensed to practice law in the State of New York, substantially in the form of Exhibit D-1 and Exhibit D-2 to the Credit Agreement, with reference to this Amendment and Restatement, the Notes and the Credit Agreement as amended and restated hereby. (d) The Agent shall have received a certificate signed by a Responsible Officer of the Company, dated as of the Effective Date, stating that the representations and warranties set forth in Article V of the Credit Agreement are true and correct in all material respects and that no Default or Event of Default has occurred and is continuing or would result as a result of any Borrowing. (e) The Agent shall have received a duly executed Note for each of the New Banks (a "New Note") and a duly executed Amended and Restated Note (an "Amended Note") in the form of Exhibit A to this Amendment and Restatement, payable to the order of each of the Banks which is not a New Bank. 5. Reservation of Rights. The Company acknowledges and agrees that the execution and delivery by the Agent and the Banks of this Amendment and Restatement shall not be deemed to create a course of dealing or otherwise obligate the Agent or the Banks to execute any amendments or amendments and restatements in the future. 6. Miscellaneous. (a) Except as herein expressly amended, all terms, covenants and provisions of the Credit Agreement are and shall remain in full force and effect and all references therein and in the other Loan Documents to such Credit Agreement shall henceforth refer to the Credit Agreement as amended and restated hereby, and all references in the Credit Agreement and in the other Loan Documents to the Notes shall refer to the New Notes and the Amended Notes. The words "hereof", "herein", "hereunder" and similar words contained in the Credit Agreement shall refer to the Agreement as amended and restated hereby. (b) This Amendment and Restatement shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective successors and assigns. No third party beneficiaries are intended in connection with this Amendment and Restatement. (c) This Amendment and Restatement shall be governed by and construed in accordance 4 5 with the law of the State of New York. (d) This Amendment and Restatement may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Each of the parties hereto understands and agrees that this document (and any other document required herein) may be delivered by any party thereto either in the form of an executed original or an executed original sent by facsimile transmission to be followed promptly by mailing of a hard copy original, and that receipt by the Agent of a facsimile transmitted document purportedly bearing the signature of a Bank or the Company shall bind such Bank or the Company, respectively, with the same force and effect as the delivery of a hard copy original. Any failure by the Agent to receive the hard copy executed original of such document shall not diminish the binding effect of receipt of the facsimile transmitted executed original of such document of the party whose hard copy page was not received by the Agent. (e) The Company covenants to pay to or reimburse the Agent, upon demand, for all costs and expenses (including allocated costs of in house counsel) incurred in connection with the development, preparation, negotiation, execution and delivery of this Amendment and Restatement. 5 6 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment and Restatement as of the date first above written. COMPAQ COMPUTER CORPORATION By: --------------------------------------- Title: ------------------------------------ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Administrative Agent By: --------------------------------------- Title: ------------------------------------ Commitment: $44,761,905 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Swingline Bank and as a Bank By: --------------------------------------- Title: ------------------------------------ Commitment: $43,004,761 CITIBANK, N.A., as Co-Agent and as a Bank By: --------------------------------------- Title: ------------------------------------ Commitment: $43,004,761 NATIONSBANK TEXAS, N.A., as Co-Agent and as a Bank By: --------------------------------------- Title: ------------------------------------ 6 7 Commitment: $22,800,000 ABN AMRO BANK N.V. By: ABN AMRO North America, Inc., as agent By: --------------------------------------- Title: ------------------------------------ By: --------------------------------------- Title: ------------------------------------ Commitment: $22,857,143 BANQUE NATIONALE DE PARIS, HOUSTON AGENCY By: --------------------------------------- Title: ------------------------------------ Commitment: $22,857,143 COMMERZBANK AG, ATLANTA AGENCY By: --------------------------------------- Title: ------------------------------------ Commitment: $22,857,143 DEUTSCHE BANK AG NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By: --------------------------------------- Title: ------------------------------------ By: --------------------------------------- Title: ------------------------------------ Commitment: $22,857,143 DRESDNER BANK AG By: --------------------------------------- Title: ------------------------------------ By: --------------------------------------- Title: ------------------------------------ 7 8 Commitment: $22,857,143 FLEET NATIONAL BANK By: --------------------------------------- Title: ------------------------------------ Commitment: $22,857,143 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: --------------------------------------- Title: ------------------------------------ Commitment: $22,857,143 PNC BANK, N.A. By: --------------------------------------- Title: ------------------------------------ Commitment: $22,857,143 ROYAL BANK OF CANADA By: --------------------------------------- Title: ------------------------------------ Commitment: $22,857,143 SOCIETE GENERALE, SOUTHWEST AGENCY By: --------------------------------------- Title: ------------------------------------ 8 9 Commitment: $22,857,143 THE CHASE MANHATTAN BANK By: --------------------------------------- Title: ------------------------------------ Commitment: $22,857,143 THE FIRST NATIONAL BANK OF CHICAGO By: --------------------------------------- Title: ------------------------------------ Commitment: $22,857,143 THE FUJU BANK, LIMITED, HOUSTON AGENCY By: --------------------------------------- Title: ------------------------------------ Commitment: $15,000,000 THE SANWA BANK LIMITED, DALLAS AGENCY By: --------------------------------------- Title: ------------------------------------ Commitment: $22,857,143 THE SUMITOMO BANK, LIMITED, HOUSTON AGENCY By: --------------------------------------- Title: ------------------------------------ Commitment: $22,857,143 TORONTO DOMINION (TEXAS), INC. By: --------------------------------------- Title: ------------------------------------ 9 10 Commitment: $11,428,571 WELLS FARGO BANK, N.A. By: --------------------------------------- Title: ------------------------------------ 10 11 EXHIBIT A FORM OF AMENDED AND RESTATED PROMISSORY NOTE U.S. $__________ Dated: October 29, 1996 FOR VALUE RECEIVED, the undersigned, Compaq Computer Corporation, a Delaware corporation (the "Company"), HEREBY PROMISES TO PAY to the order of ____________________(the "Bank") for the account of its applicable Lending Office (as defined in the Credit Agreement referred to below) on the Revolving Termination Date (as defined in the Credit Agreement) the principal sum of ________ U.S. dollars (U.S. $__________) or, if less, the aggregate unpaid principal amount of the Revolving Loans (as defined in the $500,000,000 Amended and Restated Revolving Credit Agreement dated as of October 29, 1996 among the Company, the Bank, certain other lenders parties thereto and Bank of America National Trust and Savings Association, as Administrative Agent for the Bank and such other lenders; such Amended and Restated Revolving Credit Agreement, as amended or amended and restated from time to time being herein referred to as the "Credit Agreement") owing to the Bank outstanding on the Revolving Termination Date (as defined in the Credit Agreement), together with the principal amount of any outstanding Swingline Loans (as defined in the Credit Agreement) made by the Bank as Swingline Bank (as defined in the Credit Agreement). The Company promises to pay interest on the unpaid principal amount of each Loan owing to the Bank from the date of such Loan until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to Bank of America National Trust and Savings Association, as Administrative Agent, at the Agent's Payment Office (as defined in the Credit Agreement), in immediately available funds. Each Loan owed to the Bank by the Company pursuant to the Credit Agreement, and all payments made on account of principal thereof, shall be recorded by the Bank and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Amended and Restated Promissory Note; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Company hereunder or under the Credit Agreement. This Amended and Restated Promissory Note is one of the Notes referred to in, and is subject to and is entitled to the benefits of, the Credit Agreement. The Credit Agreement, among other things, (i) provides for the making of Revolving Loans by the Bank to the Company from time to time in an aggregate amount not to exceed the U.S. dollar amount first above mentioned and the making of Swingline Loans by the Bank as Swingline Bank to the Company from time to time in an aggregate amount not to exceed the Swingline Commitment (as such terms are defined in the Credit Agreement) the indebtedness of the Company resulting from each Loan owing to the Bank being evidenced by this Amended and Restated Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. This Amended and Restated Promissory Note is an amendment and restatement of, and has been issued by the Company in substitution for and not in satisfaction of, any Note held by the Bank under the Credit Agreement as in effect prior to the amendment and restatement thereof effective as of the date hereof. 11 12 This Amended and Restated Promissory Note shall be governed by, and construed in accordance with, the internal laws of the State of New York. COMPAQ COMPUTER CORPORATION By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- 12 13 LOANS AND PAYMENTS OF PRINCIPAL
Amount of Amount Principal Unpaid of Type of Paid or Principal Notation Date Loan Loan Prepaid Balance Made By - ---- ----- ----- ------- ------- -------
13 EX-10.19 9 AMENDED & RESTATED CREDIT AGREEMENT DATED-10/29/96 1 EXHIBIT 10.19 AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT ARRANGED BY BA SECURITIES, INC. THIS AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT (this "Amendment and Restatement") dated as of October 29, 1996, by and among COMPAQ COMPUTER CORPORATION, a Delaware corporation (the "Company"), the several financial institutions from time to time party hereto (the "Banks"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as administrative agent for the Banks (the "Agent"). RECITALS A. The Company, Banks, and Agent are parties to a U.S. $1,000,000,000 Revolving Credit Agreement dated as of October 31, 1995 (the "Credit Agreement"). B. The parties hereto desire to amend such Credit Agreement as set forth herein and to restate such Credit Agreement in its entirety to read as set forth in the Credit Agreement with the amendments specified below. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree that the Credit Agreement shall be amended and restated in its entirety to read as set forth in the Credit Agreement with the following amendments, and agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings, if any, assigned to them in the Credit Agreement. 2. Amendments to Credit Agreement. (a) Section 1.01 of the Credit Agreement shall be amended by amending the following defined terms to read in their entirety as follows: "Agreement" means this Amended and Restated Revolving Credit Agreement. "Applicable Fee Amount" means, for any date, the per annum percentage amount set forth below based on the Applicable Rating on such date:
Applicable Rating Fee Percentage ---------- -------------- A+/A1 (or higher) 0.0600% A/A2 0.0650% A-/A3 0.0725% BBB+/Baa1 0.0800% BBB/Baa2 0.1000% BBB /Baa3 0.1500% BB+/Ba1 0.2000% (or lower, or no Applicable Rating)
1 2 "Applicable Margin" means, on any date and with respect to each CD Loan or Offshore Loan outstanding on such date, the applicable margin (on a per annum basis) set forth below based on the Applicable Rating on such date:
Applicable CD Offshore Rating Loans Loans ---------- ----- -------- A+/A1 (or higher) 0.2000% 0.2000% A/A2 0.2250% 0.2250% A-/A3 0.2500% 0.2500% BBB+/Baa1 0.2800% 0.2800% BBB/Baa2 0.3750% 0.3750% BBB /Baa3 0.4000% 0.4000% BB+/Ba1 0.6250% 0.6250% (or lower, or no Applicable Rating)
Provided, that at any time as the aggregate outstanding principal amount of Revolving Loans, together with the aggregate outstanding principal amount of "Revolving Loans" under, and as that term is defined in, the 364-Day Credit Agreement, exceeds 50% of the combined Commitments of all the Banks, together with the combined "Commitments" (as that term is defined in the 364-Day Credit Agreement) of all the lenders under the 364-Day Credit Agreement (and any time after the termination of commitments to lend under clause (a) of Section 8.02 or under paragraph (b) or (c) of Section 2.09 hereof, or of the 364-Day Credit Agreement, as applicable), the Applicable Margin in respect of CD Loans and Offshore Loans hereunder shall be increased by an additional 0.125 percentage points. "Interest Period" means (a) as to any Adjusted CD Rate Revolving Loan, the period commencing on the Borrowing Date or on the Conversion/Continuation Date on which a Revolving Loan is converted into or continued as an Adjusted CD Rate Revolving Loan, and ending on the date 30, 60, 90 or 180 days thereafter, as selected by the Company in its Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, (b) as to any LIBOR Revolving Loan, the period commencing on the Borrowing Date or on the Conversion/Continuation Date on which a Revolving Loan is converted into or continued as a LIBOR Revolving Loan, and ending on the day which numerically corresponds to such date one, two, three or six months thereafter (or if such month has no numerically corresponding day, on the last Business Day of such month), as selected by the Company in its Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, and (c) as to any Swingline Loan, the period commencing on the Borrowing Date of such Loan and ending on such date, not more than 10 days later, as agreed upon by the Company and the Swingline Bank at the time of the Borrowing of such Loan; provided that: (i) if any Interest Period pertaining to a CD Loan would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day; 2 3 (ii) if any Interest Period pertaining to an Offshore Loan would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; and (iii) no Interest Period for any Loan shall extend beyond the date set forth in clause (a) of the definition of "Revolving Termination Date." "Revolving Termination Date" means the earlier to occur of: (a) October 31, 2001; and (b) the date on which the commitments of the Banks to make Loans terminate in whole in accordance with Section 2.07, Section 2.09(b) or 2.09(c) or Section 8.02. "Subordinated Debt" means any Debt of the Company (i) that expressly provides that it is subordinate in right of payment to the Loans made by the Banks hereunder, and (ii) under the terms of which no payments of principal shall be payable (whether by scheduled maturity, required prepayment, or otherwise, unless as a result of the acceleration of such Debt, in accordance with the terms thereof) prior to the date set forth in clause (a) of the definition of "Revolving Termination Date." "364-Day Credit Agreement" means that U.S. $500,000,000 Amended and Restated Revolving Credit Agreement dated as of this date among the Company, BofA as Administrative Agent and the lenders party thereto, under which such lenders have agreed to extend credit to the Company on a 364-day basis. (b) With effect from and after the Effective Date (i) each Person listed on the signature pages hereof which is not a party to the Credit Agreement (a "New Bank") shall become a Bank party to the Credit Agreement, as amended and restated hereby, and (ii) the Commitment of each Bank shall be the amount set forth opposite the name of such Bank on the signature pages hereof. Any Bank which was a party to the Credit Agreement but is not listed on the signature pages hereof shall upon the Effective Date cease to be a Bank party to the Credit Agreement, as amended and restated hereby, and all accrued fees and other amounts payable under the Credit Agreement for the account of such Bank shall be due and payable on such date; provided that the provisions of the Credit Agreement which expressly survive payment of all Obligations shall inure to the benefit of, or, as applicable, shall continue to be binding on, such Bank with respect to the period prior to the Effective Date. 3. Representations and Warranties. The Company hereby represents and warrants to the Agent and the Banks as follows: (a) No Default or Event of Default has occurred and is continuing. (b) All representations and warranties of the Company contained in the Credit Agreement are true and correct as though made on and as of this date. 3 4 (c) The Company is entering into this Amendment and Restatement on the basis of its own investigation and for its own reasons, without reliance upon the Agent and the Banks or any other Person. 4. Effective Date. This Amendment and Restatement will become effective as of October 29, 1996 (the "Effective Date"), provided that each of the following conditions precedent is satisfied: (a) The Agent has received from the Company and each of the Banks a duly executed original (or, if elected by the Agent, an executed facsimile copy) of this Amendment and Restatement. (b) The Agent has received from the Company a copy of a resolution passed by the board of directors of the Company, certified by the Secretary or an Assistant Secretary of the Company as being in full force and effect on the date hereof, authorizing the execution, delivery and performance of this Amendment and Restatement. (c) The Agent shall have received an opinion of the General Counsel of the Company and another internal counsel of the Company licensed to practice law in the State of New York, substantially in the form of Exhibit D-1 and Exhibit D-2 to the Credit Agreement, with reference to this Amendment and Restatement, the Notes and the Credit Agreement as amended and restated hereby. (d) The Agent shall have received a certificate signed by a Responsible Officer of the Company, dated as of the Effective Date, stating that the representations and warranties set forth in Article V of the Credit Agreement are true and correct in all material respects and that no Default or Event of Default has occurred and is continuing or would result as a result of any Borrowing. (e) The Agent shall have received a duly executed Note for each of the New Banks (a "New Note") and a duly executed Amended and Restated Note (an "Amended Note") in the form of Exhibit A to this Amendment and Restatement, payable to the order of each of the Banks which is not a New Bank. 5. Reservation of Rights. The Company acknowledges and agrees that the execution and delivery by the Agent and the Banks of this Amendment and Restatement shall not be deemed to create a course of dealing or otherwise obligate the Agent or the Banks to execute any amendments or amendments and restatements in the future. 6. Miscellaneous. (a) Except as herein expressly amended, all terms, covenants and provisions of the Credit Agreement are and shall remain in full force and effect and all references therein and in the other Loan Documents (including the Notes) to such Credit Agreement shall henceforth refer to the Credit Agreement as amended and restated hereby, and all references in the Credit Agreement and in the other Loan Documents to the Notes shall refer to the New Notes and the Amended Notes. The words "hereof", "herein", "hereunder" and similar words contained in the Credit Agreement shall refer to the Agreement as amended and restated hereby. (b) This Amendment and Restatement shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective successors and assigns. No third party beneficiaries are intended in connection with this Amendment and Restatement. (c) This Amendment and Restatement shall be governed by and construed in accordance with the law of the State of New York. 4 5 (d) This Amendment and Restatement may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Each of the parties hereto understands and agrees that this document (and any other document required herein) may be delivered by any party thereto either in the form of an executed original or an executed original sent by facsimile transmission to be followed promptly by mailing of a hard copy original, and that receipt by the Agent of a facsimile transmitted document purportedly bearing the signature of a Bank or the Company shall bind such Bank or the Company, respectively, with the same force and effect as the delivery of a hard copy original. Any failure by the Agent to receive the hard copy executed original of such document shall not diminish the binding effect of receipt of the facsimile transmitted executed original of such document of the party whose hard copy page was not received by the Agent. (e) The Company covenants to pay to or reimburse the Agent, upon demand, for all costs and expenses (including allocated costs of in house counsel) incurred in connection with the development, preparation, negotiation, execution and delivery of this Amendment and Restatement. 5 6 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment and Restatement as of the date first above written. COMPAQ COMPUTER CORPORATION By: --------------------------------- Title: ------------------------------ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Administrative Agent By: --------------------------------- Title: ------------------------------ Commitment: $71,619,048 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Swingline Bank and as a Bank By: --------------------------------- Title: ------------------------------ Commitment: $63,333,333 CITIBANK, N.A., as Co-Agent and as a Bank By: --------------------------------- Title: ------------------------------ Commitment: $63,333,333 NATIONSBANK TEXAS, N.A., as Co-Agent and as a Bank By: --------------------------------- Title: ------------------------------ 6 7 Commitment: $36,571,851 ABN AMRO BANK N.V. By: ABN AMRO North America, Inc., as agent By: --------------------------------- Title: ------------------------------ By: --------------------------------- Title: ------------------------------ Commitment: $36,571,429 BANQUE NATIONALE DE PARIS, HOUSTON AGENCY By: --------------------------------- Title: ------------------------------ Commitment: $20,000,000 BARCLAYS BANK PLC By: --------------------------------- Title: ------------------------------ Commitment: $36,571,429 COMMERZBANK AG, ATLANTA AGENCY By: --------------------------------- Title: ------------------------------ Commitment: $20,000,000 DEN DANSKE BANK AKTIESELSKAB, CAYMAN ISLANDS BRANCH By: --------------------------------- Title: ------------------------------ By: --------------------------------- Title: ------------------------------ 7 8 Commitment: $36,571,429 DEUTSCHE BANK AG NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By: --------------------------------- Title: ------------------------------ By: --------------------------------- Title: ------------------------------ Commitment: $36,571,000 DRESDNER BANK AG By: --------------------------------- Title: ------------------------------ By: --------------------------------- Title: ------------------------------ Commitment: $10,000,000 FIRST NATIONAL BANK OF BOSTON By: --------------------------------- Title: ------------------------------ Commitment: $36,571,429 FLEET NATIONAL BANK By: --------------------------------- Title: ------------------------------ Commitment: $36,571,429 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: --------------------------------- Title: ------------------------------ 8 9 Commitment: $20,000,000 NATIONAL AUSTRALIA BANK LIMITED By: --------------------------------- Title: ------------------------------ Commitment: $20,000,000 NATIONAL WESTMINSTER BANK PLC, NEW YORK BRANCH By: --------------------------------- Title: ------------------------------ By: --------------------------------- Title: ------------------------------ NATIONAL WESTMINSTER BANK PLC, NASSAU BRANCH By: --------------------------------- Title: ------------------------------ By: --------------------------------- Title: ------------------------------ Commitment: $36,571,429 PNC BANK, N.A. By: --------------------------------- Title: ------------------------------ Commitment: $46,571,429 ROYAL BANK OF CANADA By: --------------------------------- Title: ------------------------------ 9 10 Commitment: $36,571,429 SOCIETE GENERALE, SOUTHWEST AGENCY By: --------------------------------- Title: ------------------------------ Commitment: $20,000,000 BANK OF TOKYO-MITSUBISHI TRUST COMPANY By: --------------------------------- Title: ------------------------------ Commitment: $56,571,429 THE CHASE MANHATTAN BANK By: --------------------------------- Title: ------------------------------ Commitment: $36,571,429 THE FIRST NATIONAL BANK OF CHICAGO By: --------------------------------- Title: ------------------------------ Commitment: $36,571,429 THE FUJI BANK, LIMITED, HOUSTON AGENCY By: --------------------------------- Title: ------------------------------ Commitment: $20,000,000 THE LONG-TERM CREDIT BANK OF JAPAN, LTD., NEW YORK BRANCH By: --------------------------------- Title: ------------------------------ 10 11 Commitment: $20,000,000 THE NORTHERN TRUST COMPANY By: --------------------------------- Title: ------------------------------ Commitment: $36,571,429 THE SANWA BANK LIMITED, DALLAS AGENCY By: --------------------------------- Title: ------------------------------ Commitment: $36,571,429 THE SUMITOMO BANK, LIMITED, HOUSTON AGENCY By: --------------------------------- Title: ------------------------------ Commitment: $36,571,429 TORONTO DOMINION (TEXAS), INC. By: --------------------------------- Title: ------------------------------ Commitment: $36,571,429 WELLS FARGO BANK, N.A. By: --------------------------------- Title: ------------------------------ 11 12 EXHIBIT A FORM OF AMENDED AND RESTATED PROMISSORY NOTE U.S. $_________ Dated: October 29, 1996 FOR VALUE RECEIVED, the undersigned, Compaq Computer Corporation, a Delaware corporation (the "Company"), HEREBY PROMISES TO PAY to the order of __________________________________________________ (the "Bank") for the account of its applicable Lending Office (as defined in the Credit Agreement referred to below) on the Revolving Termination Date (as defined in the Credit Agreement) the principal sum of _________________ U.S. dollars (U.S. $__________) or, if less, the aggregate unpaid principal amount of the Revolving Loans (as defined in the $1,000,000,000 Amended and Restated Revolving Credit Agreement dated as of October 29, 1996 among the Company, the Bank, certain other lenders parties thereto and Bank of America National Trust and Savings Association, as Administrative Agent for the Bank and such other lenders; such Amended and Restated Revolving Credit Agreement, as amended or amended and restated from time to time being herein referred to as the "Credit Agreement") owing to the Bank outstanding on the Revolving Termination Date (as defined in the Credit Agreement), together with the principal amount of any outstanding Swingline Loans (as defined in the Credit Agreement) made by the Bank as Swingline Bank (as defined in the Credit Agreement). The Company promises to pay interest on the unpaid principal amount of each Loan owing to the Bank from the date of such Loan until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to Bank of America National Trust and Savings Association, as Administrative Agent, at the Agent's Payment Office (as defined in the Credit Agreement), in immediately available funds. Each Loan owed to the Bank by the Company pursuant to the Credit Agreement, and all payments made on account of principal thereof, shall be recorded by the Bank and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Amended and Restated Promissory Note; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Company hereunder or under the Credit Agreement. This Amended and Restated Promissory Note is one of the Notes referred to in, and is subject to and is entitled to the benefits of, the Credit Agreement. The Credit Agreement, among other things, (i) provides for the making of Revolving Loans by the Bank to the Company from time to time in an aggregate amount not to exceed the U.S. dollar amount first above mentioned and the making of Swingline Loans by the Bank as Swingline Bank to the Company from time to time in an aggregate amount not to exceed the Swingline Commitment (as such terms are defined in the Credit Agreement), the indebtedness of the Company resulting from each Loan owing to the Bank being evidenced by this Amended and Restated Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. This Amended and Restated Promissory Note is an amendment and restatement of, and has been issued by the Company in substitution for and not in satisfaction of, any Note held by the Bank under the Credit Agreement as in effect prior to the amendment and restatement thereof effective as of the date hereof. 12 13 This Amended and Restated Promissory Note shall be governed by, and construed in accordance with, the internal laws of the State of New York. COMPAQ COMPUTER CORPORATION By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- 13 14 LOANS AND PAYMENTS OF PRINCIPAL
Amount of Amount Principal Unpaid of Type of Paid or Principal Notation Date Loan Loan Prepaid Balance Made By - ---- ------ ------- --------- --------- --------
14 EX-11 10 STATEMENT REGARDING THE COMPUTATION OF PER SHARE 1 EXHIBIT 11 COMPAQ COMPUTER CORPORATION STATEMENT RE COMPUTATION OF PER SHARE EARNINGS Year ended December 31, In millions, except per share amounts 1996 1995 1994 - ------------------------------------------------------------------------------- Primary earnings per share: Shares used in computing earnings per share: Weighted average number of shares outstanding 269.7 264.0 257.5 Incremental shares attributed to outstanding options 8.6 9.6 11.1 ----------------------------- 278.3 273.6 268.6 ============================= Earnings: Net income $ 1,313 $ 789 $ 867 ----------------------------- Earnings per common and common equivalent share $ 4.72 $ 2.88 $ 3.23 ============================= Earnings per share - assuming full dilution: Shares used in computing earnings per share: Weighted average number of shares outstanding 269.7 264.0 257.5 Incremental shares attributed to outstanding options 11.7 11.0 12.6 ----------------------------- 281.4 275.0 270.1 ============================= Earnings: Net income $ 1,313 $ 789 $ 867 ============================= Earnings per common and common equivalent share $ 4.66 $ 2.87 $ 3.21 ============================= EX-13 11 PAGES 24 THROUGH 54 & PAGE 56 OF ANNUAL REPORT 1
1996 1995 1994 1993 1992 1991 1990 ================================================================================== STATEMENT OF INCOME Sales $18,109 $14,755 $ 10,866 $ 7,191 $ 4,100 $ 3,271 $ 3,599 Cost of sales 13,913 11,367 8,139 5,493 2,905 2,053 2,058 ---------------------------------------------------------------------------------- 4,196 3,388 2,727 1,698 1,195 1,218 1,541 ---------------------------------------------------------------------------------- Selling, general and administrative expense 1,912 1,594 1,235 837 699 722 706 Research and development costs 407 270 226 169 173 197 186 Purchased in-process technology (1) 241 Unrealized gain on investment in affiliated company (34) Other income and expense, net (2) 1 95 94 76 28 145 42 ---------------------------------------------------------------------------------- 2,320 2,200 1,555 1,082 900 1,064 900 ---------------------------------------------------------------------------------- Income before provision for income taxes 1,876 1,188 1,172 616 295 154 641 Provision for income taxes (3) 563 399 305 154 97 43 216 ---------------------------------------------------------------------------------- Income from consolidated companies 1,313 789 867 462 198 111 425 Equity in net income of affiliated company 15 20 30 ---------------------------------------------------------------------------------- Net income $ 1,313 $ 789 $ 867 $ 462 $ 213 $ 131 $ 455 ================================================================================== Earnings per share (4) $ 4.66 $ 2.87 $ 3.21 $ 1.78 $ 0.84 $ 0.50 $ 1.71 ================================================================================== Shares used in computing earnings per share (4) 281.4 275.0 270.1 258.9 254.1 264.3 268.8 ================================================================================== FINANCIAL POSITION Current assets $ 9,169 $ 6,527 $ 5,158 $ 3,291 $ 2,318 $ 1,782 $ 1,688 Total assets 10,526 7,818 6,166 4,084 3,142 2,826 2,718 Current liabilities 3,852 2,680 2,013 1,244 960 638 644 Long-term debt 300 300 300 73 74 Stockholders' equity 6,144 4,614 3,674 2,654 2,006 1,931 1,859 OTHER INFORMATION Income before provision for income taxes as a percentage of sales 10.4% 9.7%* 10.8% 8.6% 7.2% 4.7% 17.8% Effective tax rate (3) 30.0% 28.0%* 26.0% 25.0% 33.0% 28.0% 34.0% Net income as a percentage of sales 7.2% 7.0%* 8.0% 6.4% 5.2% 4.0% 12.6% Net income as a percentage of average total assets 14.3% 14.7%* 16.9% 12.8% 7.1% 4.7% 18.9% Net income as a percentage of average stockholders' equity 24.4% 24.9%* 27.4% 19.8% 10.8% 6.9% 30.0% Current ratio 2.4 2.4 2.6 2.6 2.4 2.8 2.6 Working capital $ 5,317 $ 3,847 $ 3,145 $ 2,047 $ 1,358 $ 1,144 $ 1,044 Number of employees 18,863 17,055 14,372 10,541 9,559 10,059 11,420
(1) Represents a $241 million ($.87 per share) non-recurring, non-tax deductible charge for purchased in-process technology in connection with acquisitions in 1995. (2) Includes restructuring charges of $12 million, $87 million and $139 million in 1993, 1992 and 1991, respectively, and a realized gain on investment in affiliated company of $86 million in 1992. (3) The Company's effective tax rate in 1996, 1995, 1994 and 1993 reflects the Company's decision to reinvest indefinitely a portion of the undistributed earnings of its Singaporean manufacturing subsidiary. (4) All share and per share data have been adjusted to reflect the company's three-for-one and two-for-one stock splits in 1994 and 1990, respectively. * Excludes a $241 million ($.87 per share) non-recurring, non-tax deductible charge for purchased in-process technology in connection with acquisitions in 1995. C O M P A Q 24 2 Compaq Computer Corporation
1989 1988 1987 1986 ================================================ STATEMENT OF INCOME Sales $ 2,876 $ 2,066 $ 1,224 $ 625 Cost of sales 1,715 1,234 717 360 ------------------------------------------------ 1,161 832 507 265 ------------------------------------------------ Selling, general and administrative expense 539 397 226 152 Research and development costs 132 75 47 27 Purchased in-process technology (1) Unrealized gain on investment in affiliated company (13) (10) (4) Other income and expense, net (2) 19 3 10 9 ------------------------------------------------ 677 465 279 188 ------------------------------------------------ Income before provision for income taxes 484 367 228 77 Provision for income taxes (3) 165 119 93 32 ------------------------------------------------ Income from consolidated companies 319 248 135 45 Equity in net income of affiliated company 14 7 1 (2) ------------------------------------------------ Net income $ 333 $ 255 $ 136 $ 43 ================================================ Earnings per share (4) $ 1.29 $ 1.04 $ 0.59 $ 0.22 ================================================ Shares used in computing earnings per share (4) 264.3 252.9 235.8 210.0 ================================================ FINANCIAL POSITION Current assets $ 1,312 $ 1,114 $ 681 $ 260 Total assets 2,090 1,590 901 378 Current liabilities 563 479 342 119 Long-term debt 274 275 149 73 Stockholders' equity 1,172 815 400 183 OTHER INFORMATION Income before provision for income taxes as a percentage of sales 16.8% 17.8% 18.6% 12.3% Effective tax rate (3) 34.0% 32.0% 41.0% 42.0% Net income as a percentage of sales 11.6% 12.3% 11.1% 6.9% Net income as a percentage of average total assets 18.1% 20.5% 21.3% 12.5% Net income as a percentage of average stockholders' equity 33.5% 42.0% 46.7% 26.9% Current ratio 2.3 2.3 2.0 2.2 Working capital $ 749 $ 635 $ 339 $ 141 Number of employees 9,539 6,503 4,052 2,209
C O M P A Q 25 3 Compaq Computer Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements. RESULTS OF OPERATIONS The following table presents, as a percentage of sales, selected consolidated financial data for each of the three years in the period ended December 31.
Year ended December 31, 1996 1995 1994 =============================================================================== Sales 100.0% 100.0% 100.0% Cost of sales 76.8 77.0 74.9 ------------------------------- Gross margin 23.2 23.0 25.1 ------------------------------- Selling, general and administrative expense 10.6 10.8 11.4 Research and development costs 2.2 1.8 2.1 Purchased in-process technology (1) 1.6 Other income and expense, net 0.7 0.8 ------------------------------- 12.8 14.9 14.3 ------------------------------- Income before provision for income taxes 10.4% 8.1% 10.8% ===============================
(1) Represents impact of a $241 million ($.87 per share) non-recurring, non-tax deductible charge for purchased in-process technology in connection with acquisitions in 1995. SALES Sales for 1996 increased approximately $3.4 billion or 23% over the prior year as compared with an increase of $3.9 billion or 36% in 1995 from 1994. North American sales, which include Canada, increased 33% during 1996, compared with an increase of 33% in 1995 from 1994. International sales, excluding Canada, represented 47% of total sales in 1996 as compared with 51% in 1995 and 50% in 1994. European sales increased 12% during 1996 compared to an increase of 40% in 1995 from 1994. Other international sales, excluding Canada, increased 17% during 1996, compared with an increase of 37% in 1995 from 1994. We believe that the lower rates of growth in Europe were related to lower market growth in this region. Certain other international markets also experienced adverse market conditions. The Japanese market in particular experienced a very aggressive pricing environment throughout 1996. The personal computer industry is highly competitive and marked by frequent product introductions, continual improvement in product price/performance characteristics and a large number of competitors. Approximately C O M P A Q 26 4 Compaq Computer Corporation 76% of Compaq's CPU sales in 1996 were derived from products introduced in 1996. These new products have been designed to allow us to achieve low product costs while maintaining the quality and reliability for which our products have been known, thereby increasing our ability to compete on price and value. The significant increase in sales in 1996 stemmed primarily from an increase in the number of units sold and an increase in sales of options associated with CPU products. In 1996 Compaq's worldwide unit sales increased 22% while they increased 20% in 1995. The 1996 increase included a 25% expansion in unit sales of commercial CPU products, an 11% increase for consumer CPU products and a 33% increase for enterprise CPU products. According to third-party estimates, worldwide unit sales of personal computers increased approximately 16% to 18% in 1996 in contrast to a 25% to 26% increase in 1995. Competition continues to have a significant impact on prices of our products, especially those aimed at the consumer market, and additional pricing actions may occur as we attempt to maintain our competitive mix of price/performance characteristics. We attempt to mitigate the effect of any pricing actions through implementation of design-to-cost goals, the aggressive pursuit of reduced component costs, manufacturing efficiencies and control of operating expenses. GROSS MARGIN Gross margin as a percentage of sales was 23.2% in 1996, up slightly from 23.0% in 1995 and down from 25.1% in 1994. The increase in gross margins from 1995 primarily resulted from the introduction of significant new products with higher margins, cost savings due to improvements in logistics and overall better asset management. Compaq operates in a very aggressive pricing environment that will continue to put pressure on gross margins. Despite this pressure, we expect that the combination of changes in product mix, continued improvements in logistics and asset management, reductions in the cost of materials, and higher margins on new products should allow Compaq to improve its gross margin levels in 1997. OPERATING EXPENSES Research and development costs increased 51% in absolute dollars (to $407 million from $270 million) and as a percentage of sales (to 2.2% from 1.8%) in 1996 as compared to 1995. Because the personal computer industry is characterized by rapid product cycles and price cuts on older products, we believe that our long-term success is directly related to our ability to bring new products to market on a timely basis and to reduce the costs of new and existing products. Accordingly, we are committed to continuing a significant research and development program, and research and development costs are likely to increase in absolute dollars in 1997. Selling, general and administrative expense increased 20% in absolute dollars in 1996 while slightly declining as a percentage of sales. The decrease as a percentage of sales reflects our ongoing efforts to manage operating expense growth relative to sales and gross margin levels. The increase in the amount of expense resulted from domestic and international selling expense associated with higher unit volumes as well as expense incurred in connection with the introduction of new products, the entry into new markets, the expansion of distribution channels and a greater emphasis on customer service and technical support.We anticipate that in 1997 selling, general and administrative expense will increase in absolute dollars as Compaq supports significant new product C O M P A Q 27 5 Compaq Computer Corporation introductions, expands into new markets and increases investment in the area of service and support, especially in support of Compaq's enterprise business. OTHER ITEMS In 1996, interest and dividend income, net of interest expense, was $22 million, compared to net interest expense of $46 million and $49 million in 1995 and 1994, respectively. Compaq had net interest income in 1996 compared to net interest expense in 1995 due to an increase in interest and dividend income associated with higher cash balances throughout 1996. The translation gains and losses relating to the financial statements of Compaq's international subsidiaries, net of offsetting gains and losses associated with hedging activities relating to the net monetary assets of these subsidiaries, are included in other income and expense and resulted in net losses of $14 million, $33 million and $46 million in 1996, 1995 and 1994, respectively. In 1995, Compaq recorded a charge associated with its purchase of NetWorth, Inc., Thomas-Conrad Corporation and another smaller company. The aggregate non-recurring, non-tax deductible charge for purchased in-process technology totaled $241 million. Compaq's effective tax rate was 30% in 1996, 34% in 1995 and 26% in 1994. Compaq's tax rate increased in 1995 due to a non-tax deductible charge associated with acquisitions and a decline in the ratio of earnings derived from Singaporean manufacturing activities to total earnings. The proportion of Compaq's Singaporean earnings continued to decline in 1996, bringing the rate to 30%.We anticipate that Compaq's worldwide profits will increase and the proportion of our Singaporean earnings will continue to decline in 1997 and, as a result, we estimate that Compaq's effective tax rate in 1997 will be approximately 32%. Note 8 of the Notes to Consolidated Financial Statements describes the dependence of Compaq's effective tax rate on the mix of earnings from its Singaporean manufacturing subsidiary. LIQUIDITY AND CAPITAL RESOURCES During 1996, Compaq's working capital increased to $5.3 billion compared to $3.8 billion at December 31, 1995. Compaq's cash, cash equivalents and short-term investments increased to $4.0 billion at December 31, 1996, from $745 million at December 31, 1995, primarily due to positive cash flow from operating activities and better management of inventory, accounts receivable and accounts payable. Accounts receivable increased to $3.2 billion at December 31, 1996, from $3.1 billion at December 31, 1995, primarily as a result of higher sales levels offset by improved accounts receivable management. C O M P A Q 28 6 Compaq Computer Corporation Inventory levels decreased to $1.2 billion from $2.2 billion during that period. The decrease in inventory resulted from improvements in production planning and continuing logistical reengineering. Inventory turns increased to 8.4 in 1996, from 5.5 in 1995. Cash used in 1996 for the purchase of property, plant and equipment totaled $342 million. We estimate that capital expenditures for land, buildings and equipment during 1997 will be $505 million. Compaq has committed for only a small portion of such amounts and the actual level of spending will depend on a variety of factors, including general economic conditions and Compaq's business. We currently expect to fund expenditures for capital requirements as well as liquidity needs from a combination of available cash balances, internally generated funds and financing arrangements. Compaq from time to time may borrow funds for actual or anticipated funding needs or because it is economically beneficial to borrow funds instead of repatriating funds in the form of dividends from Compaq's foreign subsidiaries. In October 1996, Compaq entered into agreements for a $1.5 billion syndicated credit facility (of which $500 million expires in October 1997 and $1 billion expires in October 2001) that remains unused at December 31, 1996. Compaq has established a commercial paper program, supported by the syndicated credit facility, which was unused at December 31, 1996. We believe that these sources of credit provide sufficient financial flexibility to meet future funding requirements. We continually evaluate the need to establish other sources of working capital and will pursue those we consider appropriate based upon Compaq's needs and market conditions. FACTORS THAT MAY AFFECT FUTURE RESULTS Compaq participates in a highly volatile industry that is characterized by fierce industry-wide competition for market share. Industry participants confront aggressive pricing practices, continually changing customer demand patterns, growing competition from well-capitalized high technology and consumer electronics companies and rapid technological development carried out in the midst of legal battles over intellectual property rights. In accordance with the provisions of the Private Securities Litigation Reform Act of 1995, the cautionary statements set forth below discuss important factors that could cause actual results to differ materially from the projected results contained in the forward-looking statements in this report. COMPETITIVE ENVIRONMENT. We expect the computer market in 1997 to expand in line with third party research organizations' forecasts of unit growth in the range of 17% to 20%.We have programs and products focused on meeting market demand and gaining market share profitably. Competition remains fierce with a large number of competitors vying for market share. We will build on our profitable PC market share growth by continuing to expand our product offerings. Several of our suppliers also manufacture and market computers or motherboards, which contain the microprocessor and other internal operating components of industry-standard architecture computers. In addition, a number of large consumer electronics companies are entering the PC market. Each of these companies may be willing to accept lower profit margins to win market share. C O M P A Q 29 7 Compaq Computer Corporation GROSS MARGIN PRESSURES AND OPERATING EXPENSES. Despite quarterly fluctuations, we remain focused on achieving annual gross margins between 23% and 25%. Our ability to continue to achieve this gross margin target and to hold operating expense as a percentage of sales at the 1996 level depends upon a variety of competitive and market factors and is subject to the other risks set forth in this report. INVENTORY. We anticipate that Compaq's inventory turns, which increased to 8.4 in 1996 from 5.5 in 1995, will continue to increase in 1997. These increases are a result of improved product cycle management and other efficiencies accompanying the reengineering of certain internal processes. In the event of a drop in worldwide demand for PC products, lower than anticipated demand for one or more of our products, difficulties in managing product transitions or component pricing movements that affect the value of raw material inventory, there could be an adverse impact on inventory, cash and related profitability. RAPID TECHNOLOGY CYCLES. We believe the computer industry will continue to drive rapid technology cycles. In planning product transitions, we evaluate the speed at which customers are likely to switch to newer products. The contrast between prices of old and new products, which is related to component costs, is a critical variable in predicting customer decisions to move to the next generation of products. Because of the lead times associated with Compaq's volume production, should we be unable to gauge the rate of product transitions accurately, inventory levels, cash and profitability could be negatively affected. PRODUCT TRANSITIONS. In each product cycle, we confront the risk of delays in production that could impact sales of newer products while we manage the inventory of older products and facilitate the sale of older inventory held by resellers. To ease product transitions, we carry out pricing actions and marketing programs to raise sales in reseller channels. Compaq provides currently for estimated product returns and price protection that may occur under programs Compaq has with its resellers and under floor planning arrangements with third-party finance companies. Should we be unable to sell the inventory of older products at anticipated prices or if dealers hold higher than expected amounts of inventory subject to price protection at the time of planned price reductions, there could be a resulting adverse impact on sales, gross margins and profitability. REENGINEERING IMPLEMENTATION. We continue to expand manufacturing capacity as well as reengineer internal processes to support continued growth. During 1997, we continue to focus on making our business processes more efficient in order to increase customer satisfaction, improve productivity and lower costs. In the event of a delay in reengineering implementation, there could be an adverse impact on inventory, cash and related profitability. In connection with our reengineering efforts, we are moving many of our systems from a legacy environment of proprietary systems to client-server architectures. Should our transition to new systems not occur in a smooth and orderly manner, Compaq could experience disruptions in operations, which could have an adverse financial impact. C O M P A Q 30 8 Compaq Computer Corporation ALLIANCE AND ACQUISITION STRATEGY. Because of the rapid pace of technological advances in information technology, Compaq must introduce on a timely basis new products offering competitive features that appeal to a wide variety of customers. We believe that our alliance and acquisition strategies enable us to provide best-in-class solutions while expanding offerings of complementary products. In our acquisition activities, we confront significant challenges in retaining key employees and reconciling diverse corporate cultures, synchronizing product roadmaps and business processes and integrating logistics, marketing, product development and manufacturing operations to achieve greater efficiencies. In developing business plans based on an alliance model, we must rely on the performance of third parties, many of whom may compete with Compaq in other parts of their businesses. In addition, particularly in offering full enterprise computing solutions for our customers through an alliance model, we compete against businesses that are vertically integrated and offer customers the convenience of dealing with only one vendor for their enterprise-wide systems. Customers' willingness to adopt Compaq's more cost-effective solution will depend upon the reputation for reliability and support that we and our business allies earn in this area. TECHNOLOGY STANDARDS. Participants in the computer industry generally rely on the creation and implementation of technology standards to win the broadest market acceptance for their products. We must successfully manage and participate in the development of standards while continuing to differentiate our products in a manner valued by customers. While industry participants generally accept, and may encourage, the use of their intellectual property by third parties under license, when intellectual property owned by competitors or suppliers becomes accepted as an industry standard, Compaq must obtain a license, purchase components utilizing such technology from the owners of such technology or their licensees or otherwise acquire rights to use such technology, which could result in increased costs. In addition, delays in access to technology developed by competitors and suppliers could slow the design and manufacture of components and subsystems that distinguish our products. PRODUCTION FORECASTS. In managing production, we must forecast customer demand for our products. Should we underestimate the supplies needed to meet demand, Compaq could be unable to meet customer demand. Should we overestimate the supplies needed to meet customer demand, Compaq's cash and profitability could be adversely affected. Many of the components used in our products, particularly microprocessors and memory, experience steep price declines over their product lives. If we are unable to manage purchases and utilization of such components efficiently to maintain low inventory levels immediately prior to major price declines, Compaq could be unable to take immediate advantage of such declines to lower product costs, which could adversely affect Compaq's sales and gross margins. In addition, certain of our products are manufactured by third-party original equipment manufacturers, which could fail to respond in a timely manner to purchase orders or could fail to meet quality standards. We attempt to maintain tight control over production by third-party original equipment manufacturers to ensure that these products comply with Compaq's standards and schedule. PRODUCT DISTRIBUTION. Certain of our competitors focus their efforts on direct end user sales and support and are generating competitive pricing pressures on the traditional indirect model. Today, Compaq products are C O M P A Q 31 9 Compaq Computer Corporation manufactured at a lower cost than direct manufacturers, however, total delivered cost through the indirect channel is sometimes higher. We are addressing the issue of total delivered cost through several measures designed to reduce costs, including the implementation of "build to order" and "configure to order" delivery models and the modification of business processes to reduce finished goods inventories and speed product delivery to customers and other improvements to ensure that our products have the lowest cost of ownership in the computer industry. We are exploring a variety of ways to market our products to different types of customers. CREDIT RISKS. Compaq's primary means of distribution remains third-party resellers. We continually monitor and manage the credit Compaq extends to resellers and attempt to limit credit risks by broadening distribution channels, utilizing certain risk transfer instruments and obtaining security interests. Compaq's business could be adversely affected in the event that the financial condition of third-party computer resellers worsens. Upon the financial failure of a major reseller, Compaq could experience disruptions in distribution as well as the loss of the unsecured portion of any outstanding accounts receivable. Geographic expansion, particularly the expansion of manufacturing operations in developing countries, such as Brazil and China, and the expansion of sales into economically and politically volatile areas such as China, Hong Kong, Latin America and Eastern Europe, subjects Compaq to a number of economic and other risks, such as currency devaluation, expropriation and financial instability among resellers in these regions. Compaq generally has experienced longer accounts receivable cycles in emerging markets, in particular China and Latin America, when compared to U.S. and European markets. 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 fail, Compaq could be adversely affected. We continue to evaluate Compaq's business operations in these regions and attempt to take measures to limit risks in these areas. CURRENCY AND HEDGING RISKS. The value of the U.S. dollar continues to affect Compaq's financial results. The functional currency for Compaq's international subsidiaries is the U.S. dollar. When the U.S. dollar strengthens against other currencies, sales made in those currencies translate into lower sales in U.S. dollars; when the U.S. dollar weakens, sales made in local currencies translate into higher sales in U.S. dollars. Correspondingly, costs and expenses incurred in non-U.S. dollar currencies increase when the U.S. dollar weakens and decline when the U.S. dollar strengthens. Accordingly, changes in exchange rates may positively or negatively affect Compaq's sales (as expressed in U.S. dollars), gross margins and operating expenses, and Compaq's results of operations can be significantly affected in the short term by fluctuations in foreign currency exchange rates. Compaq engages in hedging programs aimed at limiting in part the impact of currency fluctuations. Through these programs, Compaq hedges its non-U.S. dollar net monetary assets primarily through the use of forward exchange contracts. For certain markets, particularly Latin America, we have determined that ongoing hedging of non-U.S. dollar net monetary assets is not cost effective and instead attempt to minimize currency exposure risk through working capital management. There can be no assurance that such an approach will be successful, especially in the event of a significant and sudden decline in the value of local currencies. From time to time Compaq purchases foreign currency option contracts as well as short-term forward exchange contracts to protect against currency exchange risks associated with the anticipated sales of Compaq's international marketing C O M P A Q 32 10 Compaq Computer Corporation subsidiaries, principally in Europe and Japan. These instruments provide only limited protection against currency exchange risks. We vary the percentage of anticipated sales that we attempt to protect against currency exchange risks based upon our judgment of currency markets and the costs of these instruments, and in some markets, particularly in developing areas, our ability to utilize such instruments is limited. If we overestimate the hedging amount needed to protect anticipated sales during a period in which the dollar weakens or underestimate the hedging amount during a period when the dollar strengthens, Compaq could incur expense that would not be balanced by the impact of exchange rate movements on sales. All currency contracts that are entered into by Compaq are components of our hedging programs and are entered into for the sole purpose of hedging an existing or anticipated currency exposure, not for speculation. Although Compaq maintains these programs to reduce the impact of changes in currency exchange rates, when the U.S. dollar sustains a strengthening position against currencies in which Compaq sells products or a weakening exchange rate against currencies in which Compaq incurs costs, particularly the Japanese yen, Compaq's sales or costs are adversely affected. TAX RATE. Compaq's tax rate is heavily dependent upon the proportion of earnings that are derived from its Singaporean manufacturing subsidiary and our ability to reinvest those earnings permanently outside the U.S. If the earnings of this subsidiary as a percentage of Compaq's total earnings were to decline significantly from anticipated levels, or should our ability to reinvest these earnings be reduced, Compaq's effective tax rate would exceed the currently estimated 32% rate for 1997. In addition, should Compaq's intercompany transfer pricing with respect to its Singaporean manufacturing subsidiary require significant adjustment due to audits or regulatory changes, Compaq's overall effective tax rate could increase. STOCK PRICE. Compaq's participation in a highly dynamic industry often results in significant volatility of its stock price. The factors identified in the preceding paragraphs, as well as changes in revenue or earnings estimates by the investment community and speculation in the press or investment community, are among the factors affecting Compaq's stock price. In addition, the stock price may be affected by general market conditions and other variables that are unrelated to Compaq's performance. Past financial performance should not be considered to be a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. C O M P A Q 33 11 Compaq Computer Corporation CONSOLIDATED BALANCE SHEET
December 31, In millions, except par value 1996 1995 ==================================================================================================== ASSETS Current assets: Cash and cash equivalents $ 2,920 $ 745 Short-term investments 1,073 Accounts receivable, less allowance of $227 and $100 3,168 3,141 Inventories 1,152 2,156 Deferred income taxes 761 365 Other current assets 95 120 ------------------ Total current assets 9,169 6,527 Property, plant and equipment, less accumulated depreciation 1,172 1,110 Other assets 185 181 ------------------ $10,526 $ 7,818 ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,962 $ 1,379 Income taxes payable 322 190 Other current liabilities 1,568 1,111 ------------------ Total current liabilities 3,852 2,680 ------------------ Long-term debt 300 300 ------------------ Deferred income taxes 230 224 ------------------ Commitments and contingencies (Note 11) Stockholders' equity: Preferred stock, $.01 par value (authorized: 10 million shares; issued: none) Common stock and capital in excess of $.01 par value (authorized: 1 billion shares; issued and outstanding: 273.6 million shares at December 31, 1996 and 267.1 million shares at December 31, 1995) 1,107 890 Retained earnings 5,037 3,724 ------------------ Total stockholders' equity 6,144 4,614 ------------------ $10,526 $ 7,818 ==================
The accompanying notes are an integral part of these financial statements. C O M P A Q 34 12 Compaq Computer Corporation CONSOLIDATED STATEMENT OF INCOME Year ended December 31, In millions, except per share amounts 1996 1995 1994 =============================================================================== Sales $18,109 $14,755 $10,866 Cost of sales 13,913 11,367 8,139 ---------------------------- 4,196 3,388 2,727 ---------------------------- Selling, general and administrative expense 1,912 1,594 1,235 Research and development costs 407 270 226 Purchased in-process technology 241 Other income and expense, net 1 95 94 ---------------------------- 2,320 2,200 1,555 ---------------------------- Income before provision for income taxes 1,876 1,188 1,172 Provision for income taxes 563 399 305 ---------------------------- Net income $ 1,313 $ 789 $ 867 ============================ Earnings per common and common equivalent share: Primary $ 4.72 $ 2.88 $ 3.23 ============================ Assuming full dilution $ 4.66 $ 2.87 $ 3.21 ============================ Shares used in computing earnings per common and common equivalent share: Primary 278.3 273.6 268.6 ============================ Assuming full dilution 281.4 275.0 270.1 ============================ The accompanying notes are an integral part of these financial statements. C O M P A Q 35 13 Compaq Computer Corporation CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, In millions 1996 1995 1994 =============================================================================================== Cash flows from operating activities: Cash received from customers $ 17,939 $ 13,910 $ 9,986 Cash paid to suppliers and employees (13,639) (12,437) (9,778) Interest and dividends received 110 53 22 Interest paid (91) (100) (65) Income taxes paid (911) (543) (319) --------------------------------- Net cash provided by (used in) operating activities 3,408 883 (154) --------------------------------- Cash flows from investing activities: Purchases of property, plant and equipment, net (342) (391) (357) Purchases of short-term investments (1,401) Proceeds from short-term investments 328 Acquisition of businesses, net of cash acquired (22) (318) Other, net (26) 6 (51) --------------------------------- Net cash used in investing activities (1,463) (703) (408) --------------------------------- Cash flows from financing activities: Issuance of common stock pursuant to stock option plans 112 79 100 Tax benefit associated with stock options 91 60 53 Issuance of long-term debt 300 --------------------------------- Net cash provided by financing activities 203 139 453 --------------------------------- Effect of exchange rate changes on cash 27 (45) (47) --------------------------------- Net increase (decrease) in cash and cash equivalents 2,175 274 (156) Cash and cash equivalents at beginning of year 745 471 627 --------------------------------- Cash and cash equivalents at end of year $ 2,920 $ 745 $ 471 ================================= Reconciliation of net income to net cash provided by (used in) operating activities: Net income $ 1,313 $ 789 $ 867 Depreciation and amortization 285 214 169 Provision for bad debts 155 43 36 Purchased in-process technology 241 Deferred income taxes (371) (17) (184) Loss on disposal of assets 5 2 2 Exchange rate effect 14 33 46 Increase in accounts receivable (210) (863) (926) Decrease (increase) in inventories 1,004 (135) (882) Decrease (increase) in other current assets 5 (41) (55) Increase in accounts payable 586 479 248 Increase (decrease) in income taxes payable 131 (61) 173 Increase in other current liabilities 491 199 352 --------------------------------- Net cash provided by (used in) operating activities $ 3,408 $ 883 $ (154) =================================
The accompanying notes are an integral part of these financial statements. C O M P A Q 36 14 Compaq Computer Corporation CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) Supplemental Cash Flow Information
Year ended December 31, In millions 1995 =============================================================================== Acquisitions (Note 2) Fair value of assets acquired $ 432 Liabilities assumed (69) Stock issued (12) Options assumed (14) ------- Cash paid 337 Less cash acquired (19) ------- Net cash paid for acquisitions $ 318 =======
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common stock -------------------------- Par value Number of and capital in Retained In millions, except number of shares in thousands shares excess of par earnings Total =============================================================================================== BALANCE, DECEMBER 31, 1993 253,043 $ 586 $2,068 $2,654 Issuance pursuant to stock option plans 7,994 100 100 Tax benefit associated with stock options 53 53 Net income 867 867 -------------------------------------------- BALANCE, DECEMBER 31, 1994 261,037 739 2,935 3,674 Issuance pursuant to stock option plans 5,792 79 79 Issuance pursuant to business acquired 241 12 12 Tax benefit associated with stock options 60 60 Net income 789 789 -------------------------------------------- BALANCE, DECEMBER 31, 1995 267,070 890 3,724 4,614 Issuance pursuant to stock option plans 6,502 126 126 Tax benefit associated with stock options 91 91 Net income 1,313 1,313 -------------------------------------------- BALANCE, DECEMBER 31, 1996 273,572 $1,107 $5,037 $6,144 ============================================
The accompanying notes are an integral part of these financial statements. C O M P A Q 37 15 Compaq Computer Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: DESCRIPTION OF BUSINESS - Compaq Computer Corporation (the "Company") designs, develops, manufactures and markets a wide range of computing products, including desktop computers, portable computers, workstations, communications products and tower PC servers and peripheral products that store and manage data in network environments. The Company markets its products primarily to business, home, government and education customers. The Company operates in one principal industry segment across geographically diverse markets. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Compaq Computer Corporation and its subsidiaries. All significant intercompany transactions have been eliminated. ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the related reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Management believes that the estimates are reasonable. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand, amounts due from banks, money market instruments, commercial paper and other investments having maturities of three months or less at date of acquisition and are reflected as such for purposes of reporting cash flows. Cash equivalents are stated at cost which approximates fair value. SHORT-TERM INVESTMENTS - Short-term investments include certificate of deposits, commercial paper and other investments having maturities longer than three months at date of acquisition. For reporting purposes, such investments are stated at cost 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. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current operations. Depreciation is computed by applying the straight-line method over the estimated useful lives of the related assets, which are 30 years for buildings and range from three to ten years for equipment. Leasehold improvements are amortized over the shorter of the useful life of the improvement or the life of the related lease. LONG-LIVED ASSETS - In accordance with Statement of Financial Accounting Standards No. 121 ("FAS 121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company reviews C O M P A Q 38 16 Compaq Computer Corporation for the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Under FAS 121, an impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. No such impairment losses have been identified by the Company. PURCHASED TECHNOLOGY, OTHER INTANGIBLE ASSETS AND GOODWILL - Purchased technology, other intangible assets including licenses and trademarks and goodwill are included in other assets and are carried at cost less accumulated amortization, which is being provided on a straight-line basis over the economic lives of the respective assets, generally three to seven years. Accumulated amortization was $26 million and $2 million at December 31, 1996 and 1995, respectively. SALES RECOGNITION - The Company recognizes sales at the time products are shipped to its customers. Provision is made currently for estimated product returns and price protection which may occur under programs the Company has with its customers and under floor planning arrangements with third-party finance companies. POST SALES SUPPORT AND WARRANTY EXPENSE - The Company provides currently for the estimated cost that may be incurred for post sales support and product warranties. ADVERTISING COSTS - Advertising costs are charged to operations when incurred. The cost of direct-response advertising is not significant. Advertising expenses for 1996, 1995 and 1994 were $156 million, $201 million and $193 million, respectively. FOREIGN CURRENCY - The Company uses the U.S. dollar as its functional currency. Financial statements of the Company's foreign subsidiaries are translated to U.S. dollars for consolidation purposes using current rates of exchange for monetary assets and liabilities and historical rates of exchange for nonmonetary assets and related elements of expense. Sales and other expense elements are translated at rates that approximate the rates in effect on the transaction dates. Gains and losses from this process are included in the Company's consolidated statement of income. The Company hedges certain portions of its foreign currency exposure primarily through the use of forward contracts and option contracts. Generally, gains and losses associated with currency rate changes on forward contracts are recorded currently, while the interest element is recognized over the life of each contract. However, to the extent such contracts hedge a commitment for capital expenditures or inventory purchases, no gains or losses are recognized and the rate at the time the hedge is made is, effectively, the rate used to determine the U.S. dollar value of the asset when it is recorded. From time to time the Company hedges 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 sales in the same period that the C O M P A Q 39 17 Compaq Computer Corporation related sales occur. In addition, at times the Company utilizes forward contracts to protect the Company 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 do not extend beyond the end of any quarter or year. INCOME TAXES - The provision for income taxes is computed based on the pretax income included in the consolidated statement of income. The asset and liability approach is used to recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. EARNINGS PER SHARE - Primary earnings per common and common equivalent share and earnings per common and common equivalent share assuming full dilution are computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock pursuant to the treasury stock method. STOCK-BASED COMPENSATION - The Company adopted Statement of Financial Accounting Standard No. 123 (FAS 123), Accounting for Stock-Based Compensation beginning with the Company's first quarter of 1996. Upon adoption of FAS 123, the Company continued to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by APB No. 25, Accounting for Stock Issued to Employees, and has provided in Note 9 pro forma disclosures of the effect on net income and earnings per share as if the fair value-based method prescribed by FAS 123 had been applied in measuring compensation expense. RECENT PRONOUNCEMENT - In 1996 Financial Accounting Standards No. 125 (FAS 125) Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities was issued. FAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. The Company will adopt FAS 125 in 1997. Adoption of FAS 125 is not expected to have a material effect on the Company's consolidated financial position or operating results. RECLASSIFICATIONS - Certain amounts have been reclassified to conform to the 1996 presentation. NOTE 2 - ACQUISITIONS: During 1995 the Company acquired two companies that develop, manufacture, and supply fast ethernet hubs, switches and related products, and a small software company. The aggregate purchase price of $386 million consisted of the assumption of certain stock options, the issuance of 240,622 shares of Compaq common stock and $359 million in cash of which $22 million was paid in 1996. The acquisitions were accounted for as purchases and, accordingly, the operating results of the acquired businesses and the estimated fair market values of the acquired assets and liabilities were included in the Company's consolidated financial statements from the dates of acquisition. The aggregate purchase price plus $5 million of costs directly attributable to the completion of the acquisitions, has been allocated to the assets and liabilities C O M P A Q 40 18 acquired. The aggregate purchase price included $241 million which represented the value of in-process technology that had not yet reached technological feasibility and had no alternative future use. This amount was expensed in the Company's consolidated statement of income during the fourth quarter of 1995. In addition, the aggregate purchase price included $126 million representing purchased technology, other identifiable intangibles and goodwill which have been included in other assets. The following summary, prepared on a pro forma basis, reflects the Company's operating results as if these entities had been acquired as of the beginning of the periods presented. The summary includes the impact of certain adjustments such as goodwill amortization and estimated changes in interest income due to cash outlays associated with the transactions and the related income tax effects thereof:
Year ended December 31, (unaudited) In millions, except per share amounts 1995 1994 ============================================================================= Sales $14,849 $10,978 Net income 992 837 Net income per share 3.61 3.10
The pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions had been in effect for the periods presented. In addition, they are not intended to be a forecast of future results and do not reflect any synergies that might be achieved from the combined operations. NOTE 3 - INVENTORIES: Inventories consisted of the following components:
December 31, In millions 1996 1995 ============================================================================ Raw material and work-in-process $ 552 $1,043 Finished goods 600 1,113 ------------------------ $1,152 $2,156 ========================
C O M P A Q 41 19 Compaq Computer Corporation NOTE 4 - PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are summarized below:
December 31, In millions 1996 1995 ============================================================================ Land $ 72 $ 72 Buildings 626 565 Machinery and equipment 1,257 1,067 Furniture and fixtures 91 78 Leasehold improvements 62 57 Construction-in-progress 111 142 ---------------------- 2,219 1,981 Less accumulated depreciation 1,047 871 ---------------------- $1,172 $1,110 ======================
Interest aggregating $8 million, $7 million and $3 million was capitalized and added to the cost of the Company's property, plant and equipment in 1996, 1995 and 1994, respectively. Depreciation expense totaled $262 million, $214 million and $168 million in 1996, 1995 and 1994, respectively. NOTE 5 - OTHER CURRENT LIABILITIES: The estimated costs which may be incurred for post sales support and product warranties of $469 million and $347 million were included in other current liabilities at December 31, 1996 and 1995, respectively. NOTE 6 - CREDIT AGREEMENTS AND FINANCING ARRANGEMENTS: In October 1996, the Company entered into agreements for a $1.5 billion syndicated credit facility (of which $500 million expires in October 1997 and $1 billion expires in October 2001) that remains unused at December 31, 1996. The Company has a $750 million commercial paper program, which is supported by the $1.0 billion portion of the syndicated credit facility. No commercial paper was outstanding at December 31, 1996. In March 1994, the Company issued $300 million in senior notes, including $150 million 6 1/2% notes due March 15, 1999 and $150 million 7 1/4% notes due March 15, 2004. Interest on the notes is payable semiannually on March 15 and September 15 of each year. The notes are not redeemable prior to maturity and are not entitled to any sinking fund. C O M P A Q 42 20 Compaq Computer Corporation NOTE 7 - OTHER INCOME AND EXPENSE: Other income and expense consisted of the following components:
Year ended December 31, In millions 1996 1995 1994 ================================================================================================= Interest and dividend income $(110) $ (53) $ (22) Interest expense (income) associated with hedging (3) 18 9 Other interest expense 91 81 62 Currency losses, net 14 33 46 Other, net 9 16 (1) -------------------------------------- $ 1 $ 95 $ 94 ======================================
NOTE 8 - PROVISION FOR INCOME TAXES: The components of income before provision for income taxes were as follows:
Year ended December 31, In millions 1996 1995 1994 ================================================================================================ Domestic $ 1,016 $ 500 $ 566 Foreign 860 688 606 ------------------------------------- $ 1,876 $ 1,188 $ 1,172 =====================================
The provision for income taxes charged to operations was as follows:
Year ended December 31, In millions 1996 1995 1994 ===================================================================================================== Current tax expense U.S. federal $ 672 $ 274 $ 303 State and local 33 11 7 Foreign 202 142 134 ------------------------------------------ Total current 907 427 444 ------------------------------------------ Deferred tax expense U.S. federal (308) (8) (114) State and local (15) (2) (6) Foreign (21) (18) (19) ------------------------------------------ Total deferred (344) (28) (139) ------------------------------------------ Total provision $ 563 $ 399 $ 305 ==========================================
C O M P A Q 43 21 Compaq Computer Corporation Total income tax expense for 1996, 1995 and 1994 resulted in effective tax rates of 30%, 34% and 26%, respectively. The reasons for the differences between these effective tax rates and the U.S. statutory rate of 35% are as follows:
Year ended December 31, In millions 1996 1995 1994 ========================================================================= Tax expense at U.S. statutory rate $ 656 $ 416 $ 410 Foreign tax effect, net (109) (79) (97) Non-deductible purchased in-process technology 85 Other, net 16 (23) (8) ------------------------ $ 563 $ 399 $ 305 ========================
In connection with the acquisitions that occurred during 1995, the Company expensed $241 million for a non-recurring, non-tax deductible charge for purchased in-process technology which resulted in an increase in the 1995 effective tax rate from 28% to 34%. The Company benefits from a tax holiday in Singapore which expires in 2001, with a potential extension to August 2004 if certain cumulative investment levels and other conditions are met. During the first quarter of 1993 the Company determined that a portion of the undistributed earnings of its Singaporean manufacturing subsidiary would be reinvested indefinitely. As a result of this determination, no provision for U.S. income tax was made on $335 million, $337 million and $218 million of earnings of this subsidiary during 1996, 1995 and 1994, respectively. These earnings would become subject to U.S. tax if they were actually or deemed to be remitted to the Company as dividends or if the Company should sell its stock in this subsidiary. The Company estimates an additional tax provision of $367 million would be required at such time if the full amount of these accumulated earnings became subject to U.S. tax. The decision to reinvest such earnings indefinitely had the effect of increasing earnings per share by $0.42, $0.43, and $0.28 on a fully diluted basis in 1996, 1995 and 1994, respectively. C O M P A Q 44 22 Compaq Computer Corporation Deferred tax liabilities (assets) at December 31, 1996 and 1995 are comprised of the following:
December 31, In millions 1996 1995 ========================================================================================= Unremitted earnings of foreign subsidiaries $ 239 $ 226 Difference arising from different tax and financial reporting year ends 33 Depreciation and property, plant and equipment basis differences 14 18 Unrealized currency gains 15 Other 2 13 --------------- Gross deferred tax liabilities 270 290 --------------- Post sales support and warranty accruals (149) (117) Receivable allowances (237) (84) Stock option compensation (84) (56) Difference arising from different tax and financial reporting year ends (34) Intercompany profit eliminations (17) (29) Inventory adjustments (118) (39) Loss carryforwards (45) (41) Unrealized currency losses (10) Depreciation and property, plant and equipment basis differences (20) (17) Other (78) (45) --------------- Gross deferred tax assets (782) (438) --------------- Deferred tax asset valuation allowance 7 --------------- $(512) $(141) ===============
NOTE 9 - STOCKHOLDERS' EQUITY AND EMPLOYEE BENEFIT PLANS: Equity incentive plans - At December 31, 1996, there were 47,638,000 shares of common stock reserved by the Board of Directors for issuance under the Company's employee stock option plans. Options are generally granted at the fair market value of the common stock at the date of grant and generally vest over four to five years. Options granted under the plans must be exercised not later than ten years from the date of grant. Options on 11,504,000, 12,421,000 and 11,494,000 shares were exercisable at December 31, 1996, 1995 and 1994 with a weighted average exercise price of $19.93, $15.89 and $13.02, respectively. In connection with acquisitions during 1995, the Company assumed certain outstanding options to purchase common stock of the acquired companies and exchanged them for options to acquire 529,000 shares of the Company's common stock at exercise prices of $6.49 to $32.75 per share. C O M P A Q 45 23 Compaq Computer Corporation The following table summarizes activity under the employee stock option plans for each of the three years in the period ended December 31, 1996:
Shares Weighted average In thousands Price per share price per share ======================================================================================== Options outstanding, December 31, 1993 32,743 $14.02 Options granted 5,567 $28.66 - 40.13 37.59 Options lapsed or cancelled (1,021) 15.14 Options exercised (7,901) .78 - 35.38 12.58 ------- Options outstanding, December 31, 1994 29,388 18.88 Options granted 6,469 6.49 - 55.63 45.81 Options lapsed or cancelled (1,116) 24.25 Options exercised (5,785) .97 - 40.13 13.60 ------- Options outstanding, December 31, 1995 28,956 25.76 Options granted 7,730 38.63 - 79.63 74.66 Options lapsed or cancelled (2,265) 34.39 Options exercised (6,460) 1.87 - 55.63 17.31 ------- Options outstanding, December 31, 1996 27,961 40.42 =======
There were 19,678,000, 25,584,000 and 17,802,000 shares available for grants under the plans at December 31, 1996, 1995 and 1994, respectively. The Company has a Stock Option Plan for Non-Employee Directors (the Director Plan). At December 31, 1996, there were 1,148,000 shares of common stock reserved for issuance under the Director Plan. Pursuant to the terms of the plan, each non-employee director is entitled to receive options to purchase common stock of the Company upon initial appointment to the Board (initial grants) and upon subsequent reelection to the Board (annual grants). Initial grants are exercisable during the period beginning one year after initial appointment to the Board and ending ten years after the date of grant. Annual grants vest over two years and are exercisable thereafter until the tenth anniversary of the date of grant. Both initial grants and annual grants have an exercise price equal to the fair market value of the Company's stock on the date of grant. Additionally, pursuant to the terms of the Director Plan, non-employee directors may elect to receive stock options in lieu of all or a portion of the annual retainer to be earned. Such options are granted at 50% of the price of the Company's common stock at the date of grant and are exercisable during the period beginning one year after the grant date and ending ten years after the date of grant. Options on 537,000, 458,000 and 359,000 shares were exercisable under the Director Plan at December 31, 1996, 1995 and 1994 with a weighted average exercise price of $22.40, $16.54 and $12.90, respectively. The expense resulting from options granted at 50% of the price of the Company's common stock at the date of grant is charged to operations over the vesting period. C O M P A Q 46 24 Compaq Computer Corporation Activity under the plan for each of the three years in the period ended December 31, 1996 was as follows:
Shares Weighted average In thousands Price per share price per share ======================================================================================== OPTIONS OUTSTANDING, DECEMBER 31, 1993 483 $12.65 Options granted 113 $18.12 - 36.25 34.28 Options exercised (93) 2.54 - 20.33 10.45 --------- OPTIONS OUTSTANDING, DECEMBER 31, 1994 503 17.90 Options granted 126 19.50 - 48.38 39.89 Options exercised (7) 2.54 - 18.12 8.09 --------- OPTIONS OUTSTANDING, DECEMBER 31, 1995 622 22.45 Options granted 113 23.56 - 47.13 44.68 Options exercised (42) 2.54 - 33.50 5.87 --------- OPTIONS OUTSTANDING, DECEMBER 31, 1996 693 27.10 =========
There were 454,000, 568,000 and 694,000 shares available for grants under the plan at December 31, 1996, 1995 and 1994, respectively. The following table summarizes significant ranges of outstanding and exercisable options at December 31, 1996:
Options Outstanding Options Exercisable --------------------------------------- ----------------------- Weighted Weighted Weighted Average Average Average Ranges of Shares Remaining Exercise Shares Exercise Exercise Prices In thousands Life in Years Price In thousands Price ================================================================================================ $3.95 to 10.00 2,762 3.9 $ 8.52 2,731 $ 8.52 10.01 to 20.00 6,517 5.0 14.78 5,282 14.57 20.01 to 30.00 2,720 6.7 23.89 1,494 23.68 30.01 to 40.00 4,069 7.8 38.05 1,537 37.95 40.01 to 50.00 5,167 8.9 48.28 982 48.30 50.01 to 60.00 220 9.1 53.76 15 53.48 60.01 to 70.00 1,529 9.7 63.63 70.01 to 79.63 5,670 9.9 79.51
C O M P A Q 47 25 Compaq Computer Corporation The weighted average fair value at date of grant for options granted during 1996, 1995 and 1994 was $35.16, $24.36 and $19.36 per option, respectively. The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
1996 1995 1994 =============================================================================== Expected life 5 5 5 Interest rate 6.18% 5.63% 7.78% Volatility 43.6% 46.8% 46.2% Dividend yield 0% 0% 0%
Stock based compensation costs would have reduced pretax income by $32.2 million and $4.7 million in 1996 and 1995 ($20.9 million and $3.1 million after tax and $.04 and $.01 per share) if the fair values of the options granted in that year had been recognized as compensation expense on a straight-line basis over the vesting period of the grant. The pro forma effect on net income for 1996 and 1995 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. Compaq Computer Corporation Investment Plan - The Company has an Investment Plan available to all domestic employees and intended to qualify as a deferred compensation plan under Section 401(k) of the Internal Revenue Code of 1986. Employees may contribute to the plan up to 14% of their salary with a yearly maximum not to exceed the maximum allowable by the Internal Revenue Service. The Company will match employee contributions for an amount up to 6% of each employee's base salary. Contributions are invested at the direction of the employee in one or more funds or can be directed to purchase common stock of the Company at fair market value. Company contributions generally vest over three years although Company contributions for those employees having five years of service vest immediately. Company contributions are charged to expense over their vesting period. Amounts charged to expense were $28 million, $22 million and $19 million in 1996, 1995 and 1994, respectively. Incentive compensation plan - The Company has an incentive compensation plan for the majority of its employees. Provision for payments to be made under the plan is based on 6% of net income from operations, as defined, and is payable semiannually. The amount expensed under the plan was $76 million, $59 million and $51 million in 1996, 1995 and 1994, respectively. C O M P A Q 48 26 Compaq Computer Corporation NOTE 10 - CERTAIN MARKET AND GEOGRAPHIC DATA: The Company has subsidiaries in various foreign countries that manufacture and sell the Company's products in their respective geographic areas. Summary information with respect to the Company's geographic operations in 1996, 1995 and 1994 follows:
United States Other In millions and Canada Europe countries Eliminations Consolidated =================================================================================================== 1996 Sales to customers .......... $ 9,681 $ 5,953 $ 2,475 $ 18,109 Intercompany transfers ...... 2,091 355 1,665 $ (4,111) ------------------------------------------------------------------ $ 11,772 $ 6,308 $ 4,140 $ (4,111) $ 18,109 ================================================================== Income from operations ...... $ 1,233 $ 340 $ 323 $ 5 $ 1,901 =================================================== Corporate expenses, net ..... (25) ---------- Pretax income ............... $ 1,876 ========== Identifiable assets ......... $ 3,253 $ 1,924 $ 1,382 $ (26) $ 6,533 =================================================== General corporate assets .... 3,993 ---------- Total assets ................ $ 10,526 ========== 1995 Sales to customers .......... $ 7,255 $ 5,370 $ 2,130 $ 14,755 Intercompany transfers ...... 1,632 307 1,676 $ (3,615) ------------------------------------------------------------------ $ 8,887 $ 5,677 $ 3,806 $ (3,615) $ 14,755 ================================================================== Income (loss) from operations $ 663 $ 672 $ 265 $ (8) $ 1,592 =================================================== Corporate expenses, net (1) . (404) ---------- Pretax income ............... $ 1,188 ========== Identifiable assets ......... $ 3,697 $ 1,898 $ 1,487 $ (9) $ 7,073 =================================================== General corporate assets .... 745 ---------- Total assets ................ $ 7,818 ========== 1994 Sales to customers .......... $ 5,473 $ 3,829 $ 1,564 $ 10,866 Intercompany transfers ...... 1,526 175 1,660 $ (3,361) ------------------------------------------------------------------ $ 6,999 $ 4,004 $ 3,224 $ (3,361) $ 10,866 ================================================================== Income (loss) from operations $ 533 $ 470 $ 292 $ (1) $ 1,294 =================================================== Corporate expenses, net ..... (122) ---------- Pretax income ............... $ 1,172 ========== Identifiable assets ......... $ 2,835 $ 1,591 $ 1,274 $ (5) $ 5,695 =================================================== General corporate assets .... 471 ---------- Total assets ................ $ 6,166 ==========
(1) Includes a $241 million non-recurring, non-tax deductible charge for purchased in-process technology in connection with acquisitions in 1995. C O M P A Q 49 27 Compaq Computer Corporation NOTE 11 - COMMITMENTS, CONTINGENCIES, FINANCIAL INSTRUMENTS AND FACTORS THAT MAY AFFECT FUTURE OPERATIONS: Derivative financial instruments and fair value of financial instruments - The Company utilizes primarily forward contracts and purchased foreign currency options to reduce its exposure to potentially adverse changes in foreign currency exchange rates. The Company does not hold or issue financial instruments for trading purposes nor does it hold or issue interest rate or leveraged derivative financial instruments. Additional discussion related to the Company's programs to reduce its foreign currency exposure is presented in Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company may, from time to time, hedge commitments for inventory purchases and capital expenditures. Any gain or losses, if realized, or costs related to these contracts are recorded as part of inventory or capital items upon acquisition. At December 31, 1996, the Company had no purchased options, yen denominated investments or forward contracts related to these commitments. However, at December 31, 1995, the Company had $26 million in purchased options and $72 million in yen denominated investments related to hedge commitments for inventory purchases. The Company's program to reduce the currency exposure associated with the net monetary assets of the Company's international subsidiaries includes agreements to exchange various foreign currencies for U.S. dollars. At December 31, 1996 and 1995, such agreements to sell foreign currencies included forward contracts aggregating $1.2 billion and $1.4 billion, respectively. Unrealized and realized gains and losses resulting from these contracts are included in other income and expense in the Company's consolidated statement of income and generally are recognized currently, while the interest element associated with forward contracts is recognized as interest expense over the life of each contract. Unrealized gains and losses on these contracts are reflected in accounts receivable or other current liabilities in the Company's consolidated balance sheet and approximate the fair value of such contracts at December 31, 1996 and 1995. The maturity dates of the forward contracts which were outstanding at December 31, 1996 extended from two days to five months. The Company has utilized purchased currency option contracts to hedge a portion of the anticipated but not firmly committed sales of its international marketing subsidiaries. Although no such contracts were outstanding at December 31, 1996, contracts aggregating $253 million were outstanding at December 31, 1995 related to the hedge of such sales for a six-month period. The unrealized gain deferred on these contracts at December 31, 1995 was $2 million. In addition, the Company has utilized forward contracts to protect the Company against potentially adverse changes in foreign currency exchange rates on anticipated but not firmly committed sales of its international marketing subsidiaries which are expected to occur within a three-month period. Gains, losses and premium costs associated with such purchased currency option contracts and forward contracts are reflected as a component of sales in the Company's consolidated statement of income. C O M P A Q 50 28 Compaq Computer Corporation In the event of a failure to honor one of these forward contracts by one of the banks with which the Company had contracted, management believes any loss would be limited to the exchange rate differential from the time the contract was made until the time it was compensated. To the extent the Company 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. The Company 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. Fair values of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities reflected in the December 31, 1996 and 1995 consolidated balance sheets approximate carrying value at these dates. The fair value of the Company's long-term debt at December 31, 1996 and 1995 was estimated to be $302 million and $312 million, respectively, compared with its carrying value of $300 million. Concentration of credit risk - The Company's cash, cash equivalents, short-term investments and accounts receivable are subject to potential credit risk. The Company's cash management and investment policies restrict investments to low risk, highly-liquid securities and the Company performs periodic evaluations of the relative credit standing of the financial institutions with which it deals. The Company 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, the Company's operating results could be adversely affected. At December 31, 1996 the receivable balances from the Company's five largest resellers represented approximately 25% of accounts receivable. The Company generally has experienced longer accounts receivable cycles in its emerging markets, in particular China 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 the Company's larger resellers in these regions fail, the Company could be adversely affected. Certain of the Company's resellers finance a portion of their inventories through third-party finance companies. Under the terms of the financing arrangements, the Company may be required, in limited circumstances, to repurchase certain products from the finance companies. Additionally, the Company 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 aggregating $40 million and $55 million were outstanding at December 31, 1996 and 1995, respectively. C O M P A Q 51 29 Compaq Computer Corporation Factors that may affect future operations - The Company participates in a highly volatile industry that is characterized by fierce industry-wide competition for market share resulting in aggressive pricing practices, continually changing customer demand patterns, growing competition from well-capitalized high technology and consumer electronics companies, and rapid technological development. The Company's operating results could be adversely affected should the Company be unable to anticipate customer demand accurately, to maintain short design cycles while meeting evolving industry performance standards, to manage its product transitions, inventory levels and manufacturing processes efficiently, to distribute its products quickly in response to customer demand, to differentiate its products from those of its competitors or to 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 the Company's displays, microprocessors, application specific integrated circuits and other custom chips, and certain processes relating to construction of the plastic housing for the Company's computers. In addition, new products introduced by the Company often initially utilize custom components obtained from only one source until the Company 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, the Company's ability to ship the related product in desired quantities and in a timely manner could be adversely affected. The Company attempts to mitigate these risks by working closely with key suppliers on product plans, strategic inventories and coordinated product introductions. Litigation - The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. Management does not believe that the outcome of any of those matters will have a material adverse effect on the Company's consolidated financial position, operating results or cash flows. Lease commitments - The Company leases certain manufacturing and office facilities and equipment under noncancelable operating leases with terms from one to 30 years. Rent expense for 1996, 1995 and 1994 was $81 million, $75 million and $48 million, respectively. The Company's minimum rental commitments under noncancelable operating leases at December 31, 1996, were $54 million in 1997, $41 million in 1998, $27 million in 1999, $21 million in 2000, $21 million in 2001 and $211 million thereafter. C O M P A Q 52 30 Compaq Computer Corporation SELECTED QUARTERLY UNAUDITED FINANCIAL DATA (NOT COVERED BY REPORT OF INDEPENDENT ACCOUNTANTS): The table below sets forth selected unaudited financial information for each quarter of the last two years.
1st 2nd 3rd 4th In millions, except per share amounts quarter quarter quarter quarter ============================================================================= 1996 Sales $4,205 $4,001 $4,481 $5,422 Gross margin 885 921 1,067 1,323 Net income 234 267 350 462 Earnings per common and common equivalent share Primary 0.85 0.97 1.26 1.64 Assuming full dilution 0.85 0.96 1.25 1.64 1995 Sales $2,959 $3,501 $3,594 $4,701 Gross margin 724 826 819 1,019 Net income (1) 216 246 245 82 Earnings per common and common equivalent share Primary (1) 0.80 0.90 0.89 0.30 Assuming full dilution 0.80 0.90 0.89 0.30
(1) Includes a $241 million ($.87 per share) non-recurring, non-tax deductible charge for purchased in-process technology in connection with acquisitions in the fourth quarter of 1995. Earnings per common and common equivalent share are computed independently for each of the quarters presented and therefore may not sum to the totals for the year. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. C O M P A Q 53 31 Compaq Computer Corporation REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Compaq Computer Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of stockholders' equity present fairly, in all material respects, the financial position of Compaq Computer Corporation and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 the opinion expressed above. /s/ PRICE WATERHOUSE, LLP Houston, Texas January 21, 1997 C O M P A Q 54 32 Compaq Computer Corporation MARKET FOR COMMON STOCK The Company's common stock is listed on the New York Stock Exchange and trades under the symbol CPQ. The following table presents the high and low sale prices for the Company's common stock for each quarter of 1996 and 1995, as reported by Dow Jones Historical Stock Quote.
1996 1995 =============================================================================== High Low High Low --------------------------- -------------------------- 1st Quarter $ 54.00 $ 35.88 $ 44.38 $ 31.75 2nd Quarter 50.38 36.75 46.25 30.38 3rd Quarter 66.38 40.50 54.75 42.75 4th Quarter 87.13 63.63 56.75 42.75
HOLDERS OF RECORD At January 31, 1997, there were 8,676 holders of record of the Company's common stock. DIVIDENDS The Company has never paid cash dividends on its common stock. C O M P A Q 56 EX-21 12 SUSIDIARIES OF REGISTRANT 1 EXHIBIT 21 COMPAQ COMPUTER CORPORATION SUBSIDIARIES
JURISDICTION OF NAME INCORPORATION - ------------------------------------------------------------------------------------ Bit Jugglers, Inc. California Compaq Asia Pte. Ltd. Singapore Compaq Canada Incorporated/Incorporee Canada Compaq Capital Corporation Delaware Compaq Cayman Islands, Ltd. Cayman Islands, BWI Compaq Computer (Malaysia) Sdn. Bhd. Malaysia Compaq Computer (Proprietary) Limited South Africia Compaq Computer (Thailand) Ltd. Thailiand Compaq Computer A/S Denmark Compaq Computer AB Sweden Compaq Computer AE Greece Compaq Computer AG Switzerland Compaq Computer Asia Pte. Ltd. Singapore Compaq Computer Asia/Pacific Pte. Ltd. Singapore Compaq Computer Australia Pty. Limited Australia Compaq Computer B.V. Netherlands Compaq Computer Brasil - Industria e Comercio LTDA Brazil Compaq Computer Comercializadora, S.A. de C.V. Mexico Compaq Computer de Argentina S.A. Argentina Compaq Computer de Colombia S.A. Colombia Compaq Computer de Mexico, S.A. de C.V. Mexico Compaq Computer de Venezuela, S.A. Venezuela COMPAQ Computer EMEA GmbH Germany Compaq Computer FZE United Arab Emirates Compaq Computer Gesmbh Austria Compaq Computer GmbH Germany Compaq Computer Group Limited United Kingdom Compaq Computer Hong Kong Limited Hong Kong Compaq Computer International Corporation Delaware Compaq Computer Trading Limited Liability Company Hungry Compaq Computer Korea Limited Korea Compaq Computer Limited United Kingdom Compaq Computer Manufacturing Limited United Kingdom Compaq Computer N.V./S.A. Belgium Compaq Computer New Zealand Limited New Zealand Compaq Computer Norway AS Norway Compaq Computer OY Finland Compaq Computer Portugal, Lda. Portugal Compaq Computer S.A.R.L. France Compaq Computer S.p.A. Italy Compaq Computer Taiwan Limited Republic of China Compaq Computer Technologies (China) Co. Ltd. China Compaq Computer, S.A. Spain Compaq Computer, Sp.zo.o. Poland Compaq Computer, spol. s.r.o. Czech Republic Compaq FSC (Barbados) Inc. Barbados Compaq Holdings B.V. Netherlands Compaq Holdings Pte. Ltd. Singapore Compaq Houston Investment Corporation Delaware Compaq Industrial, Comercial, Importadora E Exportadora Ltda. Brazil Compaq International Corporation Texas Compaq International Procurement Corporation Delaware Compaq Kabushiki Kaisha Japan Compaq Latin America Corporation Delaware Compaq Project, Inc. Delaware Compaq Technologies (Australia) Propietary Limited Australia Compaq Telecommunications Corporation/Inactive Texas Compaq Ventures Corporation Delaware Compaq Ventures, Pte. Ltd. Singapore Compaq-Austin, Inc. Texas Compaq-Dallas, Inc. Delaware CPQ Holdings, Inc. Delaware
EX-23 13 CONSENT OF PRICE WATERHOUSE LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-44115, 33-31819, 33-23504, 33-7499, 2-89925, 33-10106, 33-38044, 33-16987, and 33-62603) of Compaq Computer Corporation of our report dated January 21, 1997 appearing in the 1996 Annual Report to Stockholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears in this Form 10-K. PRICE WATERHOUSE LLP Houston, Texas February 26, 1997 EX-27 14 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COMPAQ COMPUTER CORPORATION'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATMENT OF INCOME FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1996 DEC-31-1996 2,920 1,073 3,395 227 1,152 9,169 2,219 1,047 10,526 3,852 300 0 0 1,107 5,037 10,526 18,109 18,109 13,913 13,913 407 155 91 1,876 563 1,313 0 0 0 1,313 4.72 4.66
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