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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER: 1-4423
------------------------
HEWLETT-PACKARD COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 94-1081436
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3000 HANOVER STREET, PALO ALTO, CALIFORNIA 94304
(Address of principal executive offices) (Zip Code)
(650) 857-1501
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT FEBRUARY 28, 2002
Common Stock, $0.01 par value 1,942,865,000 shares together with
Preferred Share Purchase Rights associated Preferred Share Purchase Rights
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Condensed Statement of Earnings
Three months ended January 31, 2002 and 2001 (Unaudited).... 3
Consolidated Condensed Balance Sheet
January 31, 2002 (Unaudited) and October 31, 2001........... 4
Consolidated Condensed Statement of Cash Flows
Three months ended January 31, 2002 and 2001 (Unaudited).... 5
Notes to Consolidated Condensed Financial Statements
(Unaudited)................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 39
Part II. Other Information
Item 1. Legal Proceedings........................................... 40
Item 6. Exhibits and Reports on Form 8-K............................ 41
Signature...................................................................... 42
Exhibit Index.................................................................. 43
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
JANUARY 31,
-----------------------
2002 2001
-------- --------
Net revenue:
Products................................................ $ 9,432 $10,470
Services................................................ 1,855 1,825
Financing income........................................ 96 103
------- -------
Total net revenue..................................... 11,383 12,398
------- -------
Cost of sales:
Products................................................ 7,058 7,807
Services................................................ 1,235 1,175
Financing interest...................................... 37 77
------- -------
Total cost of sales................................... 8,330 9,059
------- -------
Gross margin................................................ 3,053 3,339
Operating expenses:
Research and development................................ 678 704
Selling, general and administrative..................... 1,750 1,763
Restructuring charges................................... -- 102
------- -------
Total operating expenses.............................. 2,428 2,569
------- -------
Earnings from operations.................................... 625 770
Interest and other, net..................................... 10 97
Net investment losses....................................... -- (365)
------- -------
Earnings before extraordinary item, cumulative effect of
change in accounting principle and taxes.................. 635 502
Provision for taxes......................................... 157 112
------- -------
Net earnings before extraordinary item and cumulative effect
of change in accounting principle......................... 478 390
Extraordinary item--gain on early extinguishment of debt,
net of taxes.............................................. 6 23
Cumulative effect of change in accounting principle, net of
taxes..................................................... -- (272)
------- -------
Net earnings................................................ $ 484 $ 141
======= =======
Basic net earnings per share:
Net earnings before extraordinary item and cumulative
effect of change in accounting principle.............. $ 0.25 $ 0.20
Extraordinary item--gain on early extinguishment of
debt, net of taxes.................................... -- 0.01
Cumulative effect of change in accounting principle, net
of taxes.............................................. -- (0.14)
------- -------
Net earnings............................................ $ 0.25 $ 0.07
======= =======
Diluted net earnings per share:
Net earnings before extraordinary item and cumulative
effect of change in accounting principle.............. $ 0.25 $ 0.20
Extraordinary item--gain on early extinguishment of
debt, net of taxes.................................... -- 0.01
Cumulative effect of change in accounting principle, net
of taxes.............................................. -- (0.14)
------- -------
Net earnings............................................ $ 0.25 $ 0.07
======= =======
Cash dividends declared per share........................... $ 0.16 $ 0.16
Weighted-average shares used to compute net earnings per
share:
Basic................................................... 1,941 1,930
Diluted................................................. 1,963 1,996
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
HEWLETT-PACKARD COMPANY AND SUBSIDIAIRES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN MILLIONS, EXCEPT PAR VALUE)
JANUARY 31, OCTOBER 31,
2002 2001
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,983 $ 4,197
Short-term investments.................................... 158 139
Accounts receivable, net.................................. 4,134 4,488
Financing receivables, net................................ 2,231 2,183
Inventory................................................. 4,458 5,204
Other current assets...................................... 5,272 5,094
------- -------
Total current assets.................................... 23,236 21,305
Property, plant and equipment (net of accumulated
depreciation of $5,505 and $5,411 at January 31, 2002 and
October 31, 2001, respectively)........................... 4,388 4,397
Long-term investments and other assets...................... 5,964 6,882
------- -------
Total assets................................................ $33,588 $32,584
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and short-term borrowings................... $ 1,462 $ 1,722
Accounts payable.......................................... 3,602 3,791
Employee compensation and benefits........................ 1,554 1,477
Taxes on earnings......................................... 1,835 1,818
Deferred revenues......................................... 1,873 1,867
Other accrued liabilities................................. 3,555 3,289
------- -------
Total current liabilities............................... 13,881 13,964
Long-term debt.............................................. 4,528 3,729
Other liabilities........................................... 967 938
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value (300 shares authorized;
none issued)............................................ -- --
Common stock, $0.01 par value (9,600 shares authorized;
1,942 and 1,939 shares issued and outstanding at
January 31, 2002 and October 31, 2001, respectively).... 19 19
Additional paid-in capital................................ 204 200
Retained earnings......................................... 13,850 13,693
Accumulated other comprehensive income.................... 139 41
------- -------
Total stockholders' equity.............................. 14,212 13,953
------- -------
Total liabilities and stockholders' equity.................. $33,588 $32,584
======= =======
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
HEWLETT-PACKARD COMPANY AND SUBSIDIAIRES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
THREE MONTHS
ENDED
JANUARY 31,
-------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net earnings.............................................. $ 484 $ 141
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization........................... 315 286
Deferred taxes on earnings.............................. (92) (52)
Gain on early extinguishment of debt, net of taxes...... (6) (23)
Net investment losses................................... -- 365
Cumulative effect of change in accounting principle, net
of taxes.............................................. -- 272
Changes in assets and liabilities:
Accounts and financing receivables.................... 433 78
Inventory............................................. 746 (116)
Accounts payable...................................... (189) (958)
Taxes on earnings..................................... (7) (318)
Other current assets and liabilities.................. (132) (171)
Other, net............................................ 169 (27)
------ -------
Net cash provided by (used in) operating
activities........................................ 1,721 (523)
------ -------
Cash flows from investing activities:
Investment in property, plant and equipment............... (330) (484)
Proceeds from sale of property, plant and equipment....... 71 163
Purchases of investments.................................. (150) (173)
Maturities and sales of investments....................... 88 104
Cash acquired through business acquisitions, net.......... -- 163
Dissolution of an equity investee......................... 879 --
------ -------
Net cash provided by (used in) investing
activities........................................ 558 (227)
------ -------
Cash flows from financing activities:
(Decrease) increase in notes payable and short-term
borrowings.............................................. (212) 845
Issuance of long-term debt................................ 1,029 29
Payment of long-term debt................................. (106) (221)
Repurchase of zero-coupon subordinated convertible
notes................................................... (33) (320)
Issuance of common stock under employee stock plans....... 189 90
Repurchase of common stock................................ (204) (636)
Dividends................................................. (156) (155)
------ -------
Net cash provided by (used in) financing
activities........................................ 507 (368)
------ -------
Increase (decrease) in cash and cash equivalents............ 2,786 (1,118)
Cash and cash equivalents at beginning of period............ 4,197 3,415
------ -------
Cash and cash equivalents at end of period.................. $6,983 $ 2,297
====== =======
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
In the opinion of management, the accompanying Consolidated Condensed
Financial Statements for Hewlett-Packard Company and its consolidated
subsidiaries ("HP") contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly its financial position as of
January 31, 2002 and October 31, 2001, and its results of operations and cash
flows for the three-month periods ended January 31, 2002 and 2001. Certain
reclassifications have been made to prior year balances in order to conform to
the current year presentation.
The results of operations for the three-month period ended January 31, 2002
are not indicative of the results to be expected for the full year. The
information included in this Form 10-Q should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Quantitative and Qualitative Disclosures About Market Risk" and
the Consolidated Financial Statements and notes thereto included in Items 7, 7a
and 8, respectively, of the Hewlett-Packard Company Annual Report on Form 10-K,
as amended on January 30, 2002, for the fiscal year ended October 31, 2001.
The preparation of financial statements in accordance with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2: ACCOUNTING CHANGES
HP adopted Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements" in
the fourth quarter of fiscal 2001, retroactive to November 1, 2000. SAB 101
summarizes certain of the SEC's views in applying accounting principles
generally accepted in the United States to revenue recognition in financial
statements. The primary impact of HP's adoption of SAB 101 was to delay the
recognition of product revenue from the date of shipment until the date of
delivery, when title and risk of loss transfer to the customer, provided that no
significant obligations exist upon delivery. HP has restated its consolidated
results of operations for the first three quarters of fiscal 2001, including a
cumulative effect of a change in accounting principle of $272 million, net of
income taxes of $108 million, which was recorded as a reduction of net income as
of the beginning of the first quarter of fiscal 2001.
NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS 141 requires that all business combinations be accounted for by the
purchase method of accounting and changes the criteria for recognition of
intangible assets acquired in a business combination. The provisions of
SFAS 141 apply to all business combinations initiated after June 30, 2001.
SFAS 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized; however, these assets must be reviewed at least
annually for impairment. Intangible assets with finite useful lives will
continue to be amortized over their respective useful lives. The standard also
establishes specific guidance for testing for impairment of goodwill and
intangible assets with indefinite useful lives. The provisions of SFAS 142 will
be effective for HP's fiscal year 2003. However, goodwill and intangible assets
acquired after June 30, 2001 are subject immediately to the
6
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
non-amortization provisions of SFAS 142. HP is currently in the process of
evaluating the potential impact that the adoption of SFAS 142 will have on its
consolidated financial position and results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 amends existing
accounting guidance on asset impairment and provides a single accounting model
for long-lived assets to be disposed of. Among other provisions, the new rules
change the criteria for classifying an asset as held-for-sale. The standard also
broadens the scope of businesses to be disposed of that qualify for reporting as
discontinued operations, and changes the timing of recognizing losses on such
operations. The provisions of SFAS 144 will be effective for HP's fiscal year
2003 and will be applied prospectively. HP is currently in the process of
evaluating the potential impact that the adoption of SFAS 144 will have on its
consolidated financial position and results of operations.
NOTE 4: NET EARNINGS PER SHARE
HP's basic earnings per share ("EPS") is calculated based on net earnings
and the weighted-average number of shares outstanding during the reporting
period. Diluted EPS includes additional dilution from potential issuance of
common stock, such as stock issuable pursuant to the exercise of stock options
outstanding and the conversion of debt.
7
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4: NET EARNINGS PER SHARE (CONTINUED)
The following table includes a reconciliation of the numerators and
denominators of the basic and diluted EPS calculations.
THREE MONTHS ENDED
JANUARY 31,
-------------------------
2002 2001
-------- --------
(IN MILLIONS, EXCEPT PER
SHARE DATA)
Numerator:
Net earnings before extraordinary item and cumulative
effect of change in accounting principle................ $ 478 $ 390
Adjustment for interest expense on zero-coupon
subordinated convertible notes, net of income tax
effect.................................................. 3 6
------ ------
Net earnings before extraordinary item and cumulative
effect of change in accounting principle, adjusted...... 481 396
Extraordinary item--gain on early extinguishment of debt,
net of taxes............................................ 6 23
Cumulative effect of change in accounting principle, net
of taxes................................................ -- (272)
------ ------
Net earnings, adjusted.................................... $ 487 $ 147
====== ======
Denominator:
Weighted-average shares used to compute basic EPS......... 1,941 1,930
Effect of dilutive securities:
Dilutive options and other stock-based awards........... 11 40
Zero-coupon subordinated convertible notes.............. 11 26
------ ------
Dilutive potential common shares.......................... 22 66
------ ------
Weighted-average shares used to compute diluted EPS....... 1,963 1,996
====== ======
Basic net earnings per share:
Net earnings before extraordinary item and cumulative
effect of change in accounting principle................ $ 0.25 $ 0.20
Extraordinary item--gain on early extinguishment of debt,
net of taxes............................................ -- 0.01
Cumulative effect of change in accounting principle, net
of taxes................................................ -- (0.14)
------ ------
Net earnings.............................................. $ 0.25 $ 0.07
====== ======
Diluted net earnings per share:
Net earnings before extraordinary item and cumulative
effect of change in accounting principle................ $ 0.25 $ 0.20
Extraordinary item--gain on early extinguishment of debt,
net of taxes............................................ -- 0.01
Cumulative effect of change in accounting principle, net
of taxes................................................ -- (0.14)
------ ------
Net earnings.............................................. $ 0.25 $ 0.07
====== ======
NOTE 5: PENDING ACQUISITIONS
In September 2001, HP signed a definitive agreement ("Merger Agreement")
with Compaq Computer Corporation ("Compaq"), a leading provider of enterprise
technology and solutions, to
8
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5: PENDING ACQUISITIONS (CONTINUED)
acquire all of the outstanding stock of Compaq in exchange for 0.6325 shares of
HP common stock for each outstanding share of Compaq stock and the assumption of
options based on the same exchange ratio. In addition, upon completion of the
merger, HP will assume certain Compaq stock plans. The shares of HP common stock
issued in exchange for the shares of Compaq common stock in connection with the
merger will represent approximately 35.7% of the outstanding shares of HP common
stock immediately following the completion of the merger based on the number of
shares of HP and Compaq common stock outstanding on January 28, 2002. The
estimated purchase price is $24 billion, which includes the estimated fair value
of HP common stock issued and options assumed, as well as estimated direct
transaction costs. This estimate was derived using an average market price per
share of HP common stock of $20.92, which was based on an average of the closing
prices for a range of trading days (August 30, August 31, September 4, and
September 5, 2001) around the announcement date (September 3, 2001) of the
proposed merger. The final purchase price will be determined based upon the
number of Compaq shares and options outstanding at the closing date. Completion
of the Compaq merger is subject to customary closing conditions that include,
among others, receipt of required approvals from HP's shareowners and from
Compaq shareowners, and receipt of required regulatory approvals. The merger was
subject to review by the United States Federal Trade Commission under the
Hart-Scott-Rodino Improvements Act of 1976, the European Commission under
Council Regulation No. 4064/89 of the European Community and the Canadian
Competition Bureau under the Competition Act (Canada) and remains subject to
review by competition authorities in other jurisdictions. On December 20, 2001,
the Canadian Competition Bureau completed its review of the proposed merger and
found no issues of competitive concern. On January 31, 2002, the European
Commission issued a formal decision clearing the merger. On March 6, 2002, the
Federal Trade Commission closed its investigation into whether the merger may
substantially lessen competition.
On February 5, 2002, HP filed a registration statement on Form S-4 with the
SEC containing a definitive joint proxy statement/prospectus regarding the
merger. A special meeting of HP shareowners will be held on March 19, 2002, to
vote upon the issuance of shares of HP common stock in connection with the
merger, and a special meeting of Compaq shareowners will be held on March 20,
2002, to vote upon the Merger Agreement and the merger. The transaction, while
expected to close in the first half of calendar year 2002, may not be completed
if any of the conditions is not satisfied. Under certain terms specified in the
merger agreement, HP or Compaq may terminate the agreement, and as a result
either HP or Compaq may be required to pay a $675 million termination fee to the
other party in certain circumstances. Unless otherwise indicated, the
discussions in this document relate to HP as a stand-alone entity and do not
reflect the impact of the pending business combination transaction with Compaq.
In September 2001, HP signed a definitive agreement with Indigo N.V.
("Indigo"), a leading provider of high performance digital color printing
systems, to commence an exchange offer (the "Exchange Offer") to acquire all of
the outstanding shares of Indigo not already owned by HP (the "Shares") in
exchange for a combination of shares of HP common stock and non-transferable
contingent value rights ("CVR") entitling the holder to a one-time contingent
cash payment of up to $4.50 per CVR, based on the achievement by the Indigo
business of certain cumulative revenue milestones over a three-year post-closing
period. Based on the terms of the agreement, current assumptions on the quantity
of each consideration alternative, and HP's average closing share price for the
20-day period ended February 28, 2002, the estimated consideration to acquire
the Shares is
9
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5: PENDING ACQUISITIONS (CONTINUED)
approximately $720 million plus approximately 56 million CVRs. The $720 million
consideration amount includes the estimated fair value of HP common stock issued
and options and warrants assumed, as well as estimated direct transaction costs.
The future cash pay-out, if any, of the CVRs will be determined and payable
after a three-year period commencing shortly after the closing of the Exchange
Offer. On February 21, 2002, HP commenced the Exchange Offer. Under the Exchange
Offer, the offer and withdrawal rights are scheduled to expire at noon (EST) on
March 22, 2002, unless extended by HP as further described in the definitive
prospectus filed with the SEC on February 21, 2002. Completion of the Exchange
Offer is subject to the tender for exchange of that number of Indigo shares
which, when added to Indigo shares currently owned by HP, will constitute at
least 95% of Indigo's outstanding shares (including Indigo common shares
issuable upon exercise of certain warrants), the receipt of required regulatory
approvals and customary closing conditions. The transaction, while expected to
close in the second quarter of fiscal year 2002, may not be completed if any of
the conditions are not satisfied.
NOTE 6: PENDING LITIGATION AND CONTINGENCIES
On or about March 23, 1998, an individual filed a lawsuit against HP in
federal court in California claiming HP's LaserJet printers infringe his U.S.
patent 5,424,780, which he asserts covers portions of the resolution enhancement
technology employed in these printers. HP believes, based on an opinion from
outside counsel, that it does not infringe the patent. HP has held discussions
with the plaintiff but has not resolved the matter. HP filed a lawsuit to obtain
a ruling that it does not infringe. Thereafter, the U.S. Patent Office agreed to
reexamine the patent based on prior art identified by HP. The litigation is
stayed pending the outcome of the Patent Office reexamination.
On or about July 31, 2000, HP was sued in an unfair business practices
consumer class action filed by three residents of San Bernardino, California in
federal court in California. The three claim to have purchased different models
of HP inkjet printers over the past three years. This action alleges that HP
printers were sold with half-full or "economy" ink cartridges instead of full
cartridges and that HP's advertising, packaging and marketing representations
for the printers led the plaintiffs to believe they would receive full
cartridges. It is the basic contention of this action that HP's advertising and
failure to advise specifically that "economy" cartridges were included
constitute false and misleading conduct in violation of both the California
Consumer Legal Remedies Act and Section 17200 of the California Business and
Professions Code. This action seeks injunctive relief, disgorgement of profits,
compensatory damages, punitive damages and attorney fees. When HP failed to
enter into an early settlement of this action, consumer class actions were
filed, in coordination with the original plaintiffs, in over 30 states.
On or about April 10, 2001, a nationwide defective product consumer class
action was filed against HP in a Texas state district court by a resident of
eastern Texas. This action is one of five similar suits filed against several
computer manufacturers on the same day. The basic allegation in the action
against HP is that it knowingly sold computers containing floppy disk controller
chips that fail to detect both overruns and underruns if either occurs on the
last byte of a read/write operation. That failure is alleged to result in data
loss, data corruption or system failure. This suit seeks injunctive relief,
declaratory relief, rescission and attorney fees. After filing this action the
plaintiff's counsel initiated a related action with the State of Illinois, the
State of California and the United States of America.
10
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6: PENDING LITIGATION AND CONTINGENCIES (CONTINUED)
On or about December 27, 2001, Cornell University and the Cornell Research
Foundation, Inc. filed an action against HP in federal court in New York
alleging that HP's PA-RISC 8000 family of microprocessors infringes a Cornell
patent that describes a way of executing microprocessor instructions. This
action seeks declaratory, injunctive and other relief. After reviewing the
pertinent materials, HP believes that it does not infringe the patent.
Furthermore, HP believes Cornell's patent is invalid.
HP is involved in lawsuits, claims, investigations and proceedings,
including those identified above, consisting of patent, commercial and
environmental matters, which arise in the ordinary course of business. Any
possible adverse outcome arising from these matters is not expected to have a
material adverse impact on the results of operations or financial position of
HP, either individually or in the aggregate. However, HP's evaluation of the
likely impact of these pending disputes could change in the future.
NOTE 7: NET INVESTMENT LOSSES
HP's investment portfolio includes equity and debt investments in public and
privately-held emerging technology companies. Many of these emerging technology
companies are still in the start-up or development stage. HP's investments in
these companies are inherently risky because the markets for the technologies or
products they have under development are typically in the early stages and may
never develop.
HP monitors its investment portfolio for impairment on a periodic basis. In
the event that the carrying value of an investment exceeds its fair value and
the decline in value is determined to be other-than-temporary, an impairment
charge is recorded and a new cost basis for the investment is established. Fair
values for investments in public companies are determined using quoted market
prices. Fair values for investments in privately-held companies are estimated
based upon one or more of the following: pricing models using historical and
forecasted financial information and current market rates, liquidation values,
the values of recent rounds of financing, or quoted market prices of comparable
public companies. In order to determine whether a decline in value is
other-than-temporary, HP evaluates, among other factors: the duration and extent
to which the fair value has been less than carrying value; the financial
condition of and business outlook for the company, including key operational and
cash flow metrics, current market conditions and future trends in the company's
industry, and the company's relative competitive position within the industry;
and HP's intent and ability to retain the investment for a period of time
sufficient to allow for any anticipated recovery in fair value.
Due to the economic downturn, the decline in value of certain investments in
emerging technology companies was determined to be other-than-temporary.
Accordingly, HP recorded impairment losses of $365 million on its investments in
both public and privately-held emerging technology companies in the first
quarter of fiscal 2001. HP did not record any impairment losses in the first
quarter of fiscal 2002. As of January 31, 2002, the carrying value of the
portion of HP's remaining investment portfolio related to emerging technology
companies was $300 million. Depending on market conditions, HP may incur
additional charges on this investment portfolio in the future.
11
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8: RESTRUCTURING CHARGES
In fiscal 2001, HP's management approved restructuring actions to respond to
the global economic downturn and to improve HP's cost structure by streamlining
operations and prioritizing resources in strategic areas of HP's business. The
company recorded a restructuring charge of $384 million in fiscal 2001 to
reflect these actions, including $102 million in the first quarter. The fiscal
2001 charge consisted of severance and other employee benefits related to the
planned termination of approximately 7,500 employees worldwide, across many
regions, business functions, and job classes, as well as costs related to the
consolidation of excess facilities. Included as an offset to the fiscal 2001
charge was $38 million of related net pension and post-retirement settlement and
curtailment gains. As of January 31, 2002, 7,000 employees were terminated and
HP had paid out $337 million of the accrued costs. Non-cash charges during the
first quarter of fiscal 2002 were related to stock based compensation. HP
expects to pay out the remainder of the accrual in fiscal 2002.
As of January 31, 2002, the balance of the accrued restructuring charges
recorded in fiscal 2001 consisted of the following:
EMPLOYEE
SERVERANCE AND FACILITY
OTHER RELATED CONSOLIDATIONS
BENEFITS AND OTHER TOTAL
-------------- -------------- --------
(IN MILLIONS)
Balance at October 31, 2001................................ $146 $12 $158
Cash payments............................................ (99) -- (99)
Non-cash charges......................................... (3) -- (3)
---- --- ----
Balance at January 31, 2002................................ $ 44 $12 $ 56
==== === ====
NOTE 9: INVENTORY
JANUARY 31, OCTOBER 31,
2002 2001
----------- -----------
(IN MILLIONS)
Finished goods.............................................. $3,245 $3,705
Purchased parts and fabricated assemblies................... 1,213 1,499
------ ------
$4,458 $5,204
====== ======
NOTE 10: INVESTMENTS
At October 31, 2001, HP held a 49.5% equity interest in Liquidity Management
Corporation ("LMC"), which was accounted for under the equity method of
accounting. The remaining 50.5% of equity interest was held by a third party
investor. On November 1, 2001, LMC redeemed the outstanding equity of the third
party investor, leaving HP as the remaining shareholder of LMC. Accordingly,
effective November 1, 2001, the assets, liabilities and results of operations of
LMC have been included in HP's consolidated financial statements. At
November 1, 2001, the assets of LMC consisted primarily of $879 million of cash
and cash equivalents.
12
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 11: BORROWINGS
In December 2000, the Board of Directors authorized a repurchase program for
HP's zero-coupon subordinated convertible notes due 2017. Under the repurchase
program, HP may repurchase the notes from time to time at varying prices. In the
first quarter of fiscal 2002, HP repurchased $69 million in face value of the
notes with a book value of $42 million, resulting in an extraordinary gain on
the early extinguishment of debt of $6 million (net of related taxes of
$3 million). As of January 31, 2002, the notes had a remaining book value of
$426 million. Between February 1 and March 8, 2002, HP repurchased $32 million
in face value of zero-coupon subordinated convertible notes with a book value of
$20 million, resulting in an extraordinary gain on the early extinguishment of
debt of $2 million (net of related taxes of $1 million). As of March 8, 2002,
the notes had a remaining book value of $407 million.
In February 2000, HP filed a shelf registration statement with the SEC to
register $3.0 billion of debt securities, common stock, preferred stock,
depositary shares and warrants. The registration statement was declared
effective in March 2000. In May 2001, HP filed a prospectus supplement to the
registration statement, which allowed HP to offer from time to time up to
$1.5 billion of Medium-Term Notes, Series A, due nine months or more from the
date of issue, in addition to the other types of securities described above. In
December 2001, HP offered under the March 2000 shelf registration statement
$1.0 billion of unsecured 5.75% Global Notes, which mature on December 15, 2006
unless previously redeemed. As of January 31, 2002, HP had the remaining
capacity to issue approximately $290 million of securities under the shelf
registration statement.
HP and Hewlett-Packard Finance Company, a wholly-owned subsidiary of HP
("HPFC"), have the ability to offer from time to time up to $3.0 billion of
Medium-Term Notes under a Euro Medium-Term Note Programme filed with the
Luxembourg Stock Exchange. These notes can be denominated in any currency
including the euro. However, these notes have not been and will not be
registered in the United States. As of January 31, 2002, HP and HPFC had the
remaining capacity to issue approximately $2.3 billion of Medium-Term Notes
under the program.
HP occasionally repurchases its debt prior to maturity based upon its
assessment of current market conditions and financing alternatives.
NOTE 12: INCOME TAXES
Income tax provisions for interim periods are based on estimated effective
annual income tax rates. The effective tax rate before extraordinary item was
approximately 25% in the first quarter of fiscal 2002. Excluding the impact of
non-deductible charges for amortization of goodwill and other
acquisition-related charges, the effective income tax rates in fiscal years 2002
and 2001 vary from the U.S. federal statutory income tax rate primarily because
of the mix of HP's pre-tax earnings in various tax jurisdictions throughout the
world.
NOTE 13: STOCKHOLDERS' EQUITY
HP repurchases shares of its common stock under a systematic program to
manage the dilution created by shares issued under employee stock plans and a
separate incremental plan. These plans authorize purchases in the open market or
in private transactions. At October 31, 2001, HP had authorization for future
repurchases of approximately $1.6 billion of common stock under the two
programs. In the first quarter of fiscal 2002, 9,402,000 shares were repurchased
for an aggregate price
13
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 13: STOCKHOLDERS' EQUITY (CONTINUED)
of $204 million. As of January 31, 2002, HP had authorization for remaining
future repurchases under the two programs of approximately $1.4 billion. In the
first three months of fiscal 2001, 18,600,000 shares were repurchased for
$636 million.
NOTE 14: COMPREHENSIVE INCOME
Comprehensive income includes net earnings as well as other comprehensive
income. HP's other comprehensive income consists of changes in unrealized gains
and losses on available-for-sale securities and derivative instruments.
Comprehensive income, net of taxes, for the three months ended January 31 was as
follows:
THREE MONTHS ENDED
JANUARY 31,
-------------------------
2002 2001
-------- --------
(IN MILLIONS)
Net earnings................................................ $484 $141
Change in net unrealized gains (losses) on
available-for-sale securities............................. 15 (39)
Change in net unrealized gains (losses) on derivative
instruments............................................... 83 (37)
---- ----
Comprehensive income........................................ $582 $ 65
==== ====
The components of accumulated other comprehensive income, net of taxes, were
as follows:
JANUARY 31, OCTOBER 31,
2002 2001
------------ ------------
(IN MILLIONS)
Net unrealized gains on available-for-sale securities....... $ 34 $19
Net unrealized gains on derivative instruments.............. 105 22
---- ---
Accumulated other comprehensive income...................... $139 $41
==== ===
NOTE 15: SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED
JANUARY 31,
---------------------------
2002 2001
-------- --------
(IN MILLIONS)
Non-cash transactions:
Net issuances (forfeitures) of common stock for employee
benefit plans:
Restricted stock and other.............................. $(7) $(15)
Employer matching contributions for 401(k) and employee
stock purchase plans................................... 9 22
Issuance of common stock and options assumed related to
business acquisition.................................... -- 528
NOTE 16: SEGMENT INFORMATION
DESCRIPTION OF SEGMENTS
HP is a leading global provider of computing, printing and imaging solutions
and services for business and home, and is focused on making technology and its
benefits accessible to all.
14
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 16: SEGMENT INFORMATION (CONTINUED)
As of January 31, 2002, HP organized its operations into five businesses:
Imaging and Printing Systems, Embedded and Personal Systems, Computing Systems,
IT Services and Financing. The segments were determined in accordance with how
management views and evaluates HP's businesses. The factors that management uses
to identify HP's separate businesses include customer base, homogeneity of
products, technology and delivery channels. A description of the types of
products and services provided by each reportable segment is as follows:
- IMAGING AND PRINTING SYSTEMS provides printer hardware, supplies, imaging
products and related professional and consulting services. Printer
hardware consists of laser and inkjet printing devices, which include
color and monochrome printers for the business and home, multi-function
laser devices and wide- and large-format inkjet printers. Supplies offer
laser and inkjet printer cartridges and other related printing media.
Imaging products include all-in-one inkjet devices, scanners, digital
photography products, personal color copiers and faxes. Professional and
consulting services are provided to customers on the optimal use of
printing and imaging assets.
- EMBEDDED AND PERSONAL SYSTEMS provides commercial personal computers
("PCs"), home PCs, a range of handheld computing devices, digital
entertainment systems, calculators and other related accessories, software
and services for commercial and consumer markets. Commercial PCs include
the Vectra and e-PC desktop series, as well as OmniBook notebook PCs. Home
PCs include the Pavilion series of multi-media consumer desktop PCs and
notebook PCs. Digital entertainment systems offer the DVD+RW drives as
well as digital entertainment center products. Handheld computing devices
include the Jornada handheld products which run on Pocket
PC-Registered Trademark- software.
- COMPUTING SYSTEMS provides workstations, UNIX-Registered Trademark-
servers, PC servers, storage and software solutions. Workstations provide
UNIX-Registered Trademark-, Windows-Registered Trademark- and
Linux-Registered Trademark--based systems. The UNIX-Registered Trademark-
server offering ranges from low-end servers to high-end scalable systems
such as the Superdome line, all of which run on HP's PA-RISC architecture
and HP-UX operating system. PC servers offer primarily low-end and
mid-range products that run on the Windows-Registered Trademark- and
Linux-Registered Trademark- operating systems. Storage provides mid-range
and high-end array offerings, storage area networks and storage area
management and virtualization software, as well as tape and optical
libraries, tape drive mechanisms and tape media. The software category
offers OpenView and other solutions designed to manage large-scale systems
and networks. In addition, software includes telecommunications
infrastructure solutions and middleware.
- IT SERVICES provides customer support, consulting and outsourcing
delivered with the sales of HP solutions. Customer support offers a range
of high-value solutions from mission-critical and networking services that
span the entire IT environment to low-cost, high volume product support.
Consulting provides industry-specific business and IT consulting and
system integration services in areas such as financial services,
telecommunications and manufacturing, as well as cross-industry solution
expertise in Customer Relationship Management ("CRM"), e-commerce and IT
infrastructure. Consulting also includes complementary third-party
products delivered with the sales of HP Solutions. Outsourcing offers a
range of IT management services, both comprehensive and selective,
including transformational infrastructure services, client computing
managed services, managed web services and application services to medium
and large companies.
15
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 16: SEGMENT INFORMATION (CONTINUED)
- FINANCING supports and enhances HP's global product and services
solutions. As a strategic enabler to HP, Financing provides a broad range
of value-added financial services and computing and printing utility
offerings to large global and enterprise customers as well as small and
medium businesses. Financing offers innovative, personalized and flexible
alternatives to balance individual customer cash flow, technology
obsolescence and capacity needs.
Prior to 2002, HP's immaterial operating segments were aggregated to form an
"All Other" category. This category primarily included the VeriFone business
prior to its divestiture. The VeriFone operating segment, which was divested in
the third quarter of 2001, was included in "All Other" as it did not meet the
materiality threshold for a reportable segment.
In the first quarter of 2002, HP made certain strategic changes to its
organizational structure. These changes included the movement of the PC business
from the Computing Systems segment to the Embedded and Personal Systems segment
and movement of the Financing business from the IT Services segment to a
separate operating segment. Segment financial data for the quarter ended
January 31, 2001 have been restated to reflect these organizational changes.
The reportable segments disclosed in this Form 10-Q are based on HP's
management organizational structure as of January 31, 2002. Future changes to
this organizational structure may result in changes to the reportable segments
disclosed.
SEGMENT REVENUE AND PROFIT
The accounting policies used to derive reportable segment results are
generally the same as those described in Note 1 to the Notes to the Consolidated
Financial Statements in the Annual Report on Form 10-K, as amended on
January 30, 2002, for the fiscal year ending October 31, 2001. Intersegment net
revenue and earnings from operations include transactions between segments that
are intended to reflect an arm's length transfer at the best price available
from comparable external customers.
A significant portion of each segment's expenses arise from shared services
and infrastructure that HP has historically provided to the segments in order to
realize economies of scale and to use resources efficiently. These expenses
include costs of centralized research and development, legal, accounting,
employee benefits, real estate, insurance services, information technology
services, treasury and other corporate and infrastructure costs. In the first
quarter of fiscal 2002, HP revised its allocation methodology for shared
services and infrastructure. HP believes these allocation changes resulted in a
better reflection of the utilization of services provided to or benefits
received by the segments. Segment financial data for the quarter ended
January 31, 2001 have been restated to reflect these changes.
SEGMENT DATA
The results of the reportable segments are derived directly from HP's
management reporting system. The results are based on HP's method of internal
reporting and are not necessarily in conformity with accounting principles
generally accepted in the United States. Management measures the performance of
each segment based on several metrics, including earnings from operations. These
results are used, in part, to evaluate the performance of, and allocate
resources to, each of the segments. Certain operating expenses, which are
separately managed at the corporate level are not allocated to segments. These
unallocated costs include corporate infrastructure costs, restructuring
16
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 16: SEGMENT INFORMATION (CONTINUED)
charges, amortization of goodwill and purchased intangibles, charges for
purchased in-process research and development, and the amount by which
profit-dependent bonus expenses and certain employee-related benefit program
costs differ from a targeted level recorded by the segments.
The table below presents selected financial information for each reportable
segment:
IMAGING EMBEDDED
AND AND
PRINTING PERSONAL COMPUTING IT ALL
SYSTEMS SYSTEMS SYSTEMS SERVICES FINANCING OTHER TOTAL
-------- --------- --------- -------- --------- -------- --------
(IN MILLIONS)
FOR THE THREE MONTHS ENDED JANUARY 31, 2002:
Net revenue from external customers........... $5,096 $2,461 $1,963 $1,556 $342 $ -- $11,418
Intersegment net revenue...................... -- 5 36 2 -- -- 43
------ ------ ------ ------ ---- ---- -------
Total net revenue............................. $5,096 $2,466 $1,999 $1,558 $342 $ -- $11,461
====== ====== ====== ====== ==== ==== =======
Earnings (loss) from operations............... $ 742 $ (4) $ (160) $ 203 $ (7) $ -- $ 774
====== ====== ====== ====== ==== ==== =======
FOR THE THREE MONTHS ENDED JANUARY 31, 2001:
Net revenue from external customers........... $5,185 $2,831 $2,474 $1,526 $363 $ 88 $12,467
Intersegment net revenue...................... -- -- 67 -- -- -- 67
------ ------ ------ ------ ---- ---- -------
Total net revenue............................. $5,185 $2,831 $2,541 $1,526 $363 $ 88 $12,534
====== ====== ====== ====== ==== ==== =======
Earnings (loss) from operations............... $ 671 $ (66) $ 58 $ 155 $(17) $(28) $ 773
====== ====== ====== ====== ==== ==== =======
The following is a reconciliation of segment information to HP consolidated
totals:
THREE MONTHS
ENDED JANUARY 31,
-------------------
2002 2001
-------- --------
(IN MILLIONS)
NET REVENUE:
Total segments.............................................. $11,461 $12,534
Elimination of intersegment net revenue and other........... (78) (136)
------- -------
Total HP consolidated....................................... $11,383 $12,398
======= =======
EARNINGS BEFORE EXTRAORDINARY ITEM, CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE AND TAXES:
Total segment earnings from operations...................... $ 774 $ 773
Interest and other, net..................................... 10 97
Net investment losses....................................... -- (365)
Corporate and unallocated costs, and eliminations........... (149) (3)
------- -------
Total HP consolidated....................................... $ 635 $ 502
======= =======
NOTE 17: SUBSEQUENT EVENT
In February 2002, HP filed a shelf registration statement with the SEC to
register $3.0 billion of debt securities, common stock, preferred stock,
depositary shares and warrants. The registration statement was declared
effective on March 11, 2002.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THAT APPEAR ELSEWHERE IN
THIS DOCUMENT.
THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING "FACTORS THAT COULD AFFECT
FUTURE RESULTS" SET FORTH IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" IN ITEM 2, CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, AS WELL AS ASSUMPTIONS THAT, IF
THEY NEVER MATERIALIZE OR PROVE INCORRECT, COULD CAUSE THE RESULTS OF HP AND ITS
CONSOLIDATED SUBSIDIARIES TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED
BY SUCH FORWARD-LOOKING STATEMENTS. ALL STATEMENTS OTHER THAN STATEMENTS OF
HISTORICAL FACT ARE STATEMENTS THAT COULD BE DEEMED FORWARD-LOOKING STATEMENTS,
INCLUDING ANY PROJECTIONS OF EARNINGS, REVENUES OR OTHER FINANCIAL ITEMS; ANY
STATEMENTS OF THE PLANS, STRATEGIES AND OBJECTIVES OF MANAGEMENT FOR FUTURE
OPERATIONS; ANY STATEMENT CONCERNING PROPOSED NEW PRODUCTS, SERVICES OR
DEVELOPMENTS; ANY STATEMENTS REGARDING FUTURE ECONOMIC CONDITIONS OR
PERFORMANCE; ANY STATEMENTS OF BELIEF; AND ANY STATEMENTS OF ASSUMPTIONS
UNDERLYING ANY OF THE FOREGOING. THE RISKS, UNCERTAINTIES AND ASSUMPTIONS
REFERRED TO ABOVE INCLUDE THE CHALLENGE OF MANAGING ASSET LEVELS, INCLUDING
INVENTORY; THE DIFFICULTY OF KEEPING EXPENSE GROWTH AT MODEST LEVELS WHILE
INCREASING REVENUES; AND OTHER RISKS THAT ARE DESCRIBED FROM TIME TO TIME IN
HP'S SECURITIES AND EXCHANGE COMMISSION REPORTS, INCLUDING BUT NOT LIMITED TO
THE ITEMS DISCUSSED IN THE ANNUAL REPORT ON FORM 10-K, AS AMENDED ON
JANUARY 30, 2002, FOR THE FISCAL YEAR ENDED OCTOBER 31, 2001 AND SUBSEQUENTLY
FILED REPORTS.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon our Consolidated Condensed Financial Statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Management believes the following critical accounting policies affect its
more significant estimates and assumptions used in the preparation of its
consolidated financial statements.
REVENUE RECOGNITION
We record estimated reductions to revenue for customer and distributor
programs and incentive offerings including price protection, promotions, other
volume-based incentives and expected returns. We may take actions to increase
customer incentive offerings possibly resulting in an incremental reduction of
revenue at the time the incentive is offered. We recognize revenue and profit as
work progresses on long-term, fixed price contracts using the
percentage-of-completion method, which relies on estimates of total expected
contract revenue and costs. We follow this method since reasonably dependable
estimates of the revenue and costs applicable to various stages of a contract
can be made. Recognized revenues and profit are subject to revisions as the
contract progresses to completion.
18
Revisions in profit estimates are charged to income in the period in which the
facts that give rise to the revision become known.
BAD DEBT
We evaluate the collectibility of our trade and financing receivables based
on a combination of factors. When we become aware of a specific customer's
inability to meet its financial obligations to us, such as in the case of
bankruptcy filings or deterioration in the customer's operating results or
financial position, we record a specific reserve for bad debt to reduce the
related receivable to the amount we reasonably believe is collectible. We also
record reserves for bad debt for all other customers based on a variety of
factors including the length of time the receivables are past due and historical
experience. If circumstances related to specific customers change, our estimates
of the recoverability of receivables could be further adjusted.
INVENTORY
We perform a detailed assessment of inventory at each balance sheet date,
which includes a review of, among other factors, demand requirements, product
lifecycle and product development plans, and quality issues. Based on this
analysis, we record adjustments, when appropriate, to reflect inventory at net
realizable value.
INVESTMENT IN DEBT AND EQUITY SECURITIES
We monitor our investment portfolio for impairment on a periodic basis. Our
investment portfolio includes equity and debt investments in public and
privately-held emerging technology companies. Many of these emerging technology
companies are still in the start-up or development stage. Our investments in
these companies are inherently risky because the markets for the technologies or
products they have under development are typically in the early stages and may
never develop. In the event that the carrying value of an investment exceeds its
fair value and the decline in value is determined to be other-than-temporary, an
impairment charge is recorded and a new cost basis for the investment is
established. Fair values for investments in public companies are determined
using quoted market prices. Fair values for investments in privately-held
companies are estimated based upon one or more of the following: pricing models
using historical and forecasted financial information and current market rates,
liquidation values, the values of recent rounds of financing, or quoted market
prices of comparable public companies. In order to determine whether a decline
in value is other-than-temporary, we evaluate, among other factors: the duration
and extent to which the fair value has been less than the carrying value; the
financial condition of and business outlook for the company, including key
operational and cash flow metrics, current market conditions and future trends
in the company's industry, and the company's relative competitive position
within the industry; and our intent and ability to retain the investment for a
period of time sufficient to allow for any anticipated recovery in fair value.
RESULTS OF OPERATIONS
OVERVIEW
The following is a summary of operating results at the HP consolidated
level. This discussion is followed by a more detailed discussion of operating
results by segment. Product category fluctuations highlighted at the
consolidated level are more fully explained in the segment discussion.
NET REVENUE
Net revenue declined 8% in the first quarter ended January 31, 2002 to
$11.4 billion, down from $12.4 billion in the corresponding period of the prior
year. U.S. revenue declined 9% to $4.6 billion,
19
while international revenue decreased 8% to $6.8 billion compared to the same
period a year ago. The ongoing global economic downturn and a competitive
environment contributed significantly to the decline in both U.S. and
international revenue. On a foreign currency-adjusted basis, net revenue
declined 7% in the first quarter of fiscal 2002 for HP as a whole. The majority
of the foreign currency effect was due to the overall weakening of the Japanese
yen and other Asian currencies.
In the first quarter of fiscal 2002, Computing Systems, Embedded and
Personal Systems and the Imaging and Printing Systems business segments declined
21%, 13% and 2%, respectively. These declines were partially offset by an
increase of 2% in the IT Services business segment. Of the overall 8% net
revenue decline, on a weighted average basis, printer hardware, the PC business
(both desktop and notebook PCs) and servers (both PC servers and
UNIX-Registered Trademark- servers) each accounted for approximately
2 percentage points of the decline. Personal appliances, storage and
workstations each accounted for approximately 1 percentage point of the decline.
Partially offsetting these declines was net revenue growth in printer supplies
of approximately 2 percentage points on a weighted basis. Overall, in the first
quarter of 2002, net revenue was negatively impacted by a decline in sales
volume across many product categories due to the global economic downturn and a
competitive pricing environment. In addition, a shift to lower-priced products,
particularly in printer hardware, the PC business, PC servers and workstations,
affected net revenue. This was mitigated in part by net revenue growth in
supplies reflecting a rise in volume due to continued expansion of the printer
hardware installed base.
Gross margin, operating expenses and earnings as a percentage of net revenue
were as follows:
THREE MONTHS ENDED
JANUARY 31,
-------------------
2002 2001
-------- --------
Gross margin................................................ 26.8% 26.9%
Research and development.................................... 6.0% 5.7%
Selling, general and administrative......................... 15.4% 14.2%
Restructuring charges....................................... -- 0.8%
Earnings from operations.................................... 5.5% 6.2%
Earnings before extraordinary item, cumulative effect of
change in accounting principle and taxes.................. 5.6% 4.0%
GROSS MARGIN
Gross margin as a percentage of net revenue was 26.8% in the first quarter
of 2002, compared to 26.9% in the same period of the prior year. The
0.1 percentage point decrease in gross margin in the first quarter of fiscal
2002 resulted primarily from a decline in the Computing Systems segment, which
was moderated by improvements in the Imaging and Printing Systems, the Embedded
and Personal Systems and the IT Services business segments. Margin declines in
printer hardware, UNIX-Registered Trademark- servers, and storage totaling
approximately 1 percentage point on a weighted basis were substantially offset
by margin improvements in supplies and the PC business.
Overall, in the first quarter of 2002, gross margins were negatively
impacted by a decline in sales volumes across many product categories due to the
global economic downturn, particularly in the Computing Systems segment, and a
continued shift to lower-priced products in printer hardware. Partially
offsetting these declines were lower component costs in printer hardware, due
primarily to the weakening of the Japanese yen, growing revenue in printer
supplies, which have gross margins that exceed the company average, and cost
reductions resulting from restructuring activities which took place in fiscal
2001.
20
OPERATING EXPENSES
Research and Development
Research and development expense as a percentage of net revenue was 6.0% in
the first quarter of fiscal 2002, compared to 5.7% in the first quarter of
fiscal 2001. In the first quarter of fiscal 2002, research and development
expense in dollars decreased by 4% compared to the corresponding period of the
prior year. Research and development expense decreased in every business
segment. The most significant decreases were in the Embedded and Personal
Systems and Computing Systems business segments, which decreased by 24% and 3%,
respectively. The decrease in research and development expense in dollars was
primarily the result of the fiscal 2001 workforce reduction program and
controlled expense management.
Selling, General and Administrative
Selling, general and administrative expense as a percentage of net revenue
was 15.4% in the first quarter of fiscal 2002, compared to 14.2% in the first
quarter of fiscal 2001. In the first quarter of fiscal 2002, selling, general
and administrative expense in dollars decreased by 1% as compared to the
corresponding period of the prior year. Overall, the decrease in selling,
general and administrative expenses in dollars for the first quarter of fiscal
2002 was attributable mainly to an adjusted spending plan to correspond to
revised revenue expectations.
Restructuring Charges
In fiscal 2001, we approved restructuring actions to respond to the global
economic downturn and to improve our cost structure by streamlining operations
and prioritizing resources in strategic areas of our business. We recorded a
restructuring charge of $384 million in fiscal 2001 to reflect these actions,
including $102 million in the first quarter of that year. The fiscal 2001 charge
consisted of severance and other employee benefits related to the planned
termination of approximately 7,500 employees worldwide, across many regions,
business functions, and job classes, as well as costs related to the
consolidation of excess facilities. Included as an offset to the fiscal 2001
charge was $38 million of related net pension and post-retirement settlement and
curtailment gains. As of January 31, 2002, 7,000 employees were terminated and
we had paid out $337 million of the accrued costs. Non-cash charges during the
first quarter of fiscal 2002 were related to stock based compensation. We expect
to pay out the remainder of the accrual in fiscal 2002.
INTEREST AND OTHER, NET
Interest and other, net, decreased $87 million in the first quarter of
fiscal 2002. The decline in interest and other, net, for the first quarter of
fiscal 2002 was attributable primarily to losses on unhedged foreign currency
exposure on balance sheet remeasurement and, to a lesser extent, decreased
interest income due to lower interest rates on cash and investments.
NET INVESTMENT LOSSES
HP reported no net investment losses in the first quarter of fiscal 2002,
compared to $365 million in the first quarter of fiscal 2001.
Our investment portfolio includes equity and debt investments in public and
privately-held emerging technology companies. Many of these emerging technology
companies are still in the start-up or development stage. Our investments in
these companies are inherently risky because the markets for the technologies or
products they have under development are typically in the early stages and may
never develop. As of January 31, 2002, the carrying value of the portion of our
remaining investment portfolio related to emerging technology companies was
$300 million. Depending on market conditions, we may incur additional charges on
our investment portfolio in the future.
21
EARNINGS BEFORE EXTRAORDINARY ITEM, CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE AND TAXES
Earnings before extraordinary item, cumulative effect of change in
accounting principle and taxes increased 26% to $635 million in the first
quarter of fiscal 2002. As a percentage of net revenue, earnings before
extraordinary item, cumulative effect of change in accounting principle and
taxes was 5.6% in the first quarter of fiscal 2002, compared to 4.0% for the
corresponding period in the prior year. The significant increase was due to the
fact that the first quarter of fiscal 2002 did not include net investment losses
of $365 million and restructuring charges of $102 million recorded in the first
quarter of 2001, partially offset by the effects of the continued global
economic downturn.
PROVISION FOR TAXES
HP's effective tax rate before the extraordinary item was approximately 25%
in the first quarter of fiscal 2002. Excluding the impact of non-deductible
charges for amortization of goodwill and other acquisition-related charges, our
effective tax rate was 22%, which was consistent with our tax rate for the first
quarter of fiscal 2001.
EXTRAORDINARY ITEM
In December 2000, the Board of Directors authorized a repurchase program for
HP's zero-coupon subordinated convertible notes. Under the repurchase program,
we may repurchase the notes from time to time at varying prices. In the first
quarter of fiscal 2002, we repurchased $69 billion in face value of the notes
with a book value of $42 million, resulting in an extraordinary gain on the
early extinguishment of debt of $6 million (net of related taxes of
$3 million).
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
HP adopted Securities and Exchange Commission Staff Accounting Bulletin
No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements" in the fourth
quarter of fiscal 2001, retroactive to November 1, 2000. Accordingly, we have
restated our consolidated results of operations for the first three quarters of
fiscal 2001, including a cumulative effect of change in accounting principle of
$272 million, which was recorded as a reduction of net income as of the
beginning of the first quarter of fiscal 2001.
SEGMENT INFORMATION
The following is a discussion of operating results for each of HP's business
segments. A description of the products and services, as well as quarterly
financial data, for each segment can be found in Note 16 to the Consolidated
Condensed Financial Statements. Segment financial data for the three-month
period ended January 31, 2001 has been restated to reflect changes in HP's
organizational structure and allocation methodology that occurred in first
quarter of fiscal 2002. These changes are more fully described in Note 16 to the
Consolidated Condensed Financial Statements. The reportable segments disclosed
in this Form 10-Q are based on HP's management organizational structure as of
January 31, 2002. Future changes to this organizational structure may result in
changes to the reportable segments disclosed.
22
IMAGING AND PRINTING SYSTEMS
THREE MONTHS ENDED
JANUARY 31,
-------------------
2002 2001
-------- --------
(IN MILLIONS)
Net revenue................................................. $5,096 $5,185
Earnings from operations.................................... $ 742 $ 671
Earnings from operations as a percentage of net revenue..... 14.6% 12.9%
Imaging and Printing Systems' net revenue declined 2% in the first quarter
of fiscal 2002 compared to the same period in fiscal 2001. Of the overall 2% net
revenue decrease for the quarter, home and business printer hardware revenue
represented 6 percentage points of the decline on a weighted basis, partially
offset by 4 percentage points of growth in printer supplies. Overall, continued
weakness in markets across all geographic regions due to the economic downturn
contributed to the decline in net revenue in the first quarter.
The decline in printer hardware revenue was attributable to a decrease in
average selling prices driven by a continued shift in demand to lower-priced
products, coupled with a competitive pricing environment. This revenue decline
was moderated by an increase in units in the business printer category of
approximately 9% due to strong acceptance of newly introduced products. Growth
in supplies revenue mitigated the overall segment revenue decline reflecting a
rise in volume due to continued expansion of the printer hardware installed
base, partially offset by a shift to lower-priced bundles.
Earnings from operations as a percentage of net revenue was 14.6% for the
first quarter of fiscal 2002 compared to 12.9% in the same period in fiscal
2001. This 1.7 percentage point increase reflected an improvement in gross
margin aided by a slight decrease in operating expenses as a percent of net
revenue. The increase in gross margin was attributable mainly to supplies, which
typically have gross margins that exceed the segment average, becoming a larger
portion of the segment's product mix, and lower component costs related to the
weaker Japanese yen. Partially offsetting the gross margin improvement was a
continued shift to lower-priced products, particularly in printer hardware. The
slight decrease in the operating expense ratio was driven by conservative
spending.
EMBEDDED AND PERSONAL SYSTEMS
THREE MONTHS ENDED
JANUARY 31,
-------------------
2002 2001
-------- --------
(IN MILLIONS)
Net revenue................................................. $2,466 $2,831
Earnings from operations.................................... $ (4) $ (66)
Earnings (loss) from operations as a percentage of net
revenue................................................... (0.2)% (2.3)%
Embedded and Personal Systems' net revenue decreased 13% in the first
quarter of fiscal 2002 compared to the same period in fiscal 2001. Of the
segment's 13% revenue decline in the first quarter, CD writers and commercial
desktop PCs each accounted for 5 percentage points of the decline on a weighted
basis, while home desktop PCs and commercial notebook PCs contributed 4 and
1 percentage points of the decrease, respectively. The overall decrease in
segment revenue was offset in part by revenue growth of 2 percentage points in
retail notebook PCs on a weighted basis. Overall, segment net revenue was
favorably impacted by seasonal consumer spending, but was softened by the
continuing effects of the economic downturn.
23
The decline in CD writers was due to our exit from this business and
transition into the DVD+RW drive market. The revenue decline within the PC
business resulted from decreases in commercial and home desktop PCs and
commercial notebook PCs, offset in part by growth in retail notebook PCs.
Overall, net revenue in the PC business was unfavorably impacted by declining
average selling prices as a result of decreasing component costs, which are
generally passed on to the customer, a continued competitive pricing environment
and a mix shift to the low-end. The revenue decline in the PC business was
moderated by the favorable effects of launching Windows XP-Registered Trademark-
before our competitors. Three-fourths of the revenue decrease in commercial and
home desktop PCs was the result of declining average selling prices of 13% and
7%, respectively. The remaining one-fourth of the revenue decline in commercial
and home desktop PCs was attributable to a decline in unit sales. Commercial
desktop PC volumes declined due to the continued shift toward mobile computing,
while home desktop PC volumes decreased as a result of weakened market
conditions in North America. The decrease in commercial notebook PC revenue was
driven by an ongoing decrease in average selling prices of 26%, mitigated an
increase in volumes. The revenue growth in retail notebook PCs was driven by a
strong year-over-year increase in unit sales of 50%, while average selling
prices remained essentially flat. The solid increase in volumes for the overall
notebook PC business reflected the previously noted Windows
XP-Registered Trademark- launch and shift toward mobile computing in commercial
PCs.
Earnings (loss) from operations as a percentage of net revenue was (0.2)% in
the first quarter of fiscal 2002 compared to (2.3)% in the same period in fiscal
2001. An increase in gross margin accounted for 1.6 of the 2.1 percentage point
increase in the earnings from operations ratio, while the remaining
0.5 percentage point increase was due to a decrease in operating expenses as a
percentage of net revenue. The gross margin improvement was fueled by home PCs,
moderated by a gross margin decline in commercial PCs. The gross margin
improvement in home PCs reflected strong demand for retail notebook PCs and
better inventory management. A mix shift toward lower-margin products,
particularly in notebooks, drove the gross margin decline in commercial PCs. The
improvement in the operating expense ratio was driven by cost savings due to the
workforce reductions in fiscal 2001 and controlled expense management.
COMPUTING SYSTEMS
THREE MONTHS ENDED
JANUARY 31,
-------------------
2002 2001
-------- --------
(IN MILLIONS)
Net revenue................................................. $1,999 $2,541
Earnings (loss) from operations............................. $ (160) $ 58
Earnings (loss) from operations as a percentage of net
revenue................................................... (8.0)% 2.3%
Computing Systems' net revenue declined 21% in the first quarter of fiscal
2002 compared to the same period in fiscal 2001. Of the overall 21% revenue
decline in the first quarter, UNIX-Registered Trademark- servers and
workstations respectively accounted for 7 and 5 percentage points of the decline
on a weighted basis, PC servers and storage each accounted for 4 percentage
points of the decrease, and software contributed 2 percentage points toward the
decline. Overall segment net revenue in the first quarter was unfavorably
impacted by weak demand in the enterprise markets due to the continuing effects
of the economic downturn and competitive pricing pressures.
The decline in UNIX-Registered Trademark- server revenue reflected a
decrease in mid-range and low-end server revenue, partially offset by an
increase in high-end server revenue. An ongoing decline in enterprise capital
spending drove the revenue decline in mid-range and low-end servers and
moderated growth in the high-end category. The growth in high-end server revenue
was due mainly to solid sales of our Superdome server, which did not begin
shipping in volume until January of 2001. The decrease in revenue from
workstations was driven by declining average selling prices resulting from a mix
shift from
24
UNIX-Registered Trademark- workstations to lower-priced Windows
NT-Registered Trademark- workstations, partially offset by an increase in
volumes. The economic downturn continued to unfavorably impact our installed
UNIX-Registered Trademark- base in workstations, particularly in the electronics
and telecommunications industries, as did a transition into a new product line.
The decline in PC server revenue was driven by a decrease in average selling
prices moderated by an increase in volumes. The decrease in average selling
prices resulted from ongoing competitive pricing pressures and a mix shift to
the low-end. Continued pricing pressures on high-end enterprise storage products
and the transition into a new product line accounted for the decline in storage
revenue, partially offset by an increase in tape automation libraries. Revenue
from software decreased mainly as a result of weakness in the enterprise and
telecommunications markets.
Earnings (loss) from operations as a percentage of net revenue was (8.0)% in
the first quarter of fiscal 2002 compared to 2.3% in the same period of fiscal
2001. An increase in operating expenses as a percentage of net revenue accounted
for 8.5 points of the 10.3 percentage point decrease in the earnings from
operations ratio, while the remaining 1.8 percentage points were due to a
decline in gross margin. Although operating expenses decreased in total,
operating expenses as a percentage of net revenue for the segment increased as
the decrease in revenues exceeded the rate of decrease in operating expenses.
The increase in the operating expense ratio was moderated by the effects of the
workforce reductions in fiscal 2001 as well as overall expense management. The
decline in gross margin was driven primarily by the storage business, partially
offset by gross margin improvement in PC servers. The gross margin decline in
storage was attributable to competitive pricing pressures in the high-end and a
mix shift toward lower-margin products. The gross margin improvement in PC
servers resulted from better inventory management.
IT SERVICES
THREE MONTHS ENDED
JANUARY 31,
-------------------
2002 2001
-------- --------
(IN MILLIONS)
Net revenue................................................. $1,558 $1,526
Earnings from operations.................................... $ 203 $ 155
Earnings from operations as a percentage of net revenue..... 13.0% 10.2%
IT Services' net revenue increased 2% in the first quarter of fiscal 2002
compared to the same period in fiscal 2001. On a foreign currency-adjusted
basis, revenue growth in the first quarter of fiscal 2002 was 4%. Continued
growth in customer support and outsourcing accounted for 4 and 2 percentage
points, respectively, of the segment's 2% revenue growth for the quarter on a
weighted basis. However, this revenue growth was moderated by a revenue decline
in consulting, which includes consulting services and complementary third-party
products delivered with sales of HP solutions, of 4 percentage points on a
weighted basis. Overall, our customer support and consulting businesses were
unfavorably impacted by the global economic downturn that continued into fiscal
2002, while our outsourcing business benefited from the slowdown as companies
reduced costs by outsourcing their IT functions.
Continued solid sales of mission-critical and storage services drove net
revenue growth in customer support in the first quarter. Revenue growth in
outsourcing was attributable to larger comprehensive deals where customers
outsource their entire IT operations to HP, as well as selective deals in which
customers outsource only part of their IT operations. The decrease in consulting
revenue reflected softened demand from the telecommunications industry and a
decline in complementary third-party products that resulted from softened demand
for networking solutions combined with the refocusing of this business on
customer critical solutions. This decrease in consulting revenue was partially
offset by strong demand for consulting services from the financial services
industry.
25
Earnings from operations as a percentage of net revenue was 13.0% in the
first quarter of fiscal 2002 compared to 10.2% in the same period in fiscal
2001. Improvement in gross margin and a decrease in operating expenses as a
percentage of net revenue each represented half of the 2.8 percentage point
increase in the earnings from operations ratio for the segment. The gross margin
improvement was fueled by customer support, partially offset by outsourcing and
consulting. The gross margin improvement in customer support was attributable to
operational improvement in labor delivery and supply chain costs. Outsourcing
had an unfavorable impact on the overall segment gross margin improvement
reflecting a shift in revenue mix towards outsourcing, which typically have
gross margins that are lower than the segment average. Additionally, a decline
in consulting revenue due to the economic downturn, moderated by cost savings
from workforce reductions in fiscal 2001, negatively impacted the segment's
gross margin improvement. The decrease in the operating expense ratio was driven
by conservative spending in all areas as well as controlled expense management.
FINANCING
THREE MONTHS ENDED
JANUARY 31,
-------------------
2002 2001
-------- --------
(IN MILLIONS)
Net revenue................................................. $342 $363
Earnings (loss) from operations............................. $ (7) $(17)
Earnings (loss) from operations as a percentage of net
revenue................................................... (2.0)% (4.7)%
Financing net revenue includes interest on financing receivables, rental
payments on operating leases and buyout revenue. Financing's net revenue
declined 6% in the first quarter of fiscal 2002 compared to the same period in
fiscal 2001. The decline in revenue was driven by a decrease in lease starts
over the course of fiscal 2001 as well as in the first quarter of fiscal 2002,
due mainly to the decline in IT spending as a result of the ongoing global
economic downturn as well as tightened credit controls in response to this
downturn. Revenue in fiscal 2002 was also impacted unfavorably by the decline in
operating leases as a percentage of new lease originations.
Earnings (loss) from operations as a percentage of net revenue was (2.0)% in
the first quarter of fiscal 2002 compared to (4.7)% in the same period in fiscal
2001. A decrease in operating expenses as a percentage of net revenue accounted
for 1.4 of the 2.7 percentage point increase in the earnings from operations
ratio in 2002, while the remaining 1.3 percentage points were due to an
improvement in gross margin. The decrease in the operating expense ratio was due
mainly to a decline in bad debt write-offs and additions to reserves, which were
unusually high in fiscal 2001 due to the economic downturn. Partially offsetting
this decline in write-offs and additions to reserve were amounts recorded in
response to the ongoing economic downturn, including the economic uncertainty in
Argentina. The gross margin improvement reflected the increase in sales-type
leases as a percentage of new lease originations.
LIQUIDITY AND CAPITAL RESOURCES
Our financial position remained strong in the first quarter of fiscal 2002
despite the continued weakness in the economy, with cash and cash equivalents
and short-term investments of $7.1 billion at January 31, 2002 compared to
$4.3 billion at October 31, 2001. During the first three months of fiscal 2002,
cash flows from operating activities and long-term borrowings were used mainly
to fund purchases of property, plant and equipment, repayment of our outstanding
borrowings, repurchases of our common stock, and payments of dividends.
26
Cash flows from operating activities were $1.7 billion during the first
quarter of fiscal 2002 compared to the use of $0.5 billion for the corresponding
period of fiscal 2001. The increase in cash flows from operating activities in
the first three months of fiscal 2002 resulted primarily from increased net
earnings and decreases in inventory and accounts and financing receivables.
Trade and current financing receivables as a percentage of the last twelve
months net revenue were 14.4%, down from 14.8% in the same period a year ago and
from 15.4% as of October 31, 2001. The year-over-year improvement in the ratio
is due primarily to a reduction in the number of days of sales outstanding in
accounts receivable as a result of increased effectiveness in collection efforts
from both the retail and business consumers. Inventory as a percentage of the
last twelve months net revenue was 10.1% at January 31, 2002, compared to 11.5%
as of January 31, 2001, and 13.0% as of October 31, 2001. The decreases in the
ratio year-over-year and from year end are attributable mainly to active
inventory management.
Capital expenditures for the first three months of fiscal 2002 were
$330 million, compared to $484 million for the corresponding period in fiscal
2001. Net property, plant and equipment as a percentage of the last twelve
months net revenue was 9.9% as of January 31, 2002, compared to 9.7% as of
January 31, 2001 and 9.2% at October 31, 2001. The increase in this ratio is due
mainly to a decrease in the current quarter's net revenue.
We invest excess cash in short- and long-term investments, depending on our
projected cash needs for operations, capital expenditures and other business
purposes. We also supplement our internally generated cash flow with a
combination of short- and long-term borrowings. Short- and long-term borrowings
in the first three months of fiscal 2002 increased by $678 million, as long-term
debt issuances, including the issuance of $1.0 billion of Global Notes in
December 2001, were partially offset by payments of our notes payable,
short-term borrowings and other long-term debt. Long-term debt totaling
$106 million matured as scheduled in the first three months of fiscal 2002. At
January 31, 2002, we had an unused committed borrowing facility in place
totaling $1.0 billion.
In December 2000, the Board of Directors authorized a repurchase program for
HP's zero-coupon subordinated convertible notes due 2017. Under the repurchase
program, we may repurchase the notes from time to time at varying prices. In the
first quarter of fiscal 2002, we repurchased notes with a book value of
$42 million for an aggregate price of $33 million, resulting in an extraordinary
gain on the early extinguishment of debt of $6 million (net of related taxes of
$3 million). Between February 1 and March 8, 2002, we repurchased $32 million in
face value of zero-coupon subordinated convertible notes with a book value of
$20 million, resulting in an extraordinary gain on the early extinguishment of
debt of $2 million (net of related taxes of $1 million). As of March 8, 2002,
the notes had a remaining book value of $407 million.
In February 2000, we filed a shelf registration statement with the SEC to
register $3.0 billion of debt securities, common stock, preferred stock,
depositary shares and warrants. The registration statement was declared
effective in March 2000. In May 2001, we filed a prospectus supplement to the
registration statement, which allowed us to offer from time to time up to
$1.5 billion of Medium-Term Notes, Series A, due nine months or more from the
date of issue, in addition to the other types of securities described above. In
December 2001, we offered under the March 2000 shelf registration statement
$1.0 billion of unsecured 5.75% Global Notes, which mature on December 15, 2006
unless previously redeemed. The net proceeds from the sale of the notes were or
will be used for general corporate purposes, which included repayment of
existing indebtedness, capital expenditures and working capital needs. As of
March 11, 2002, we had the remaining capacity to issue approximately
$290 million of securities under the March 2000 shelf registration statement.
In February 2002, we filed a shelf registration statement with the SEC to
register $3.0 billion of debt securities, common stock, preferred stock,
depositary shares and warrants. This registration statement was declared
effective on March 11, 2002.
27
At October 31, 2001, we held a 49.5% equity interest in LMC, which was
accounted for under the equity method of accounting. The remaining 50.5% of
equity interest was held by a third party investor. On November 1, 2001, LMC
redeemed the outstanding equity of the third party investor, leaving us as the
remaining shareholder of LMC. Accordingly, effective November 1, 2001, the
assets, liabilities and results of operations of LMC have been included in our
consolidated financial statements. At November 1, 2001, the assets of LMC
consisted primarily of $879 million of cash and cash equivalents.
HP and HPFC have the ability to offer from time to time up to $3.0 billion
of Medium-Term Notes under a Euro Medium-Term Note Programme filed with the
Luxembourg Stock Exchange. These notes can be denominated in any currency
including the euro. However, these notes have not been and will not be
registered in the United States. As of January 31, 2001, HP and HPFC had
remaining capacity to issue approximately $2.3 billion of Medium-Term Notes
under the program.
We repurchase shares of our common stock under a systematic program to
manage the dilution created by shares issued under employee stock plans and a
separate incremental plan. These plans authorize purchases in the open market or
in private transactions. In the first quarter of fiscal 2002, 9,402,000 shares
were repurchased for an aggregate price of $204 million. As of January 31, 2002,
we had authorization for remaining future repurchases under the two programs of
approximately $1.4 billion. In the first quarter of fiscal 2001, 18,600,000
shares were repurchased for $636 million.
PENDING ACQUISITIONS
In September 2001, we signed the Merger Agreement with Compaq, a leading
provider of enterprise technology and solutions, to acquire all of the
outstanding stock of Compaq in exchange for 0.6325 shares of HP common stock for
each outstanding share of Compaq stock and the assumption of options based on
the same exchange ratio. In addition, upon completion of the merger, we will
assume certain Compaq stock plans. The shares of HP common stock issued in
exchange for the shares of Compaq common stock in connection with the merger
will represent approximately 35.7% of the outstanding shares of HP common stock
immediately following the completion of the merger based on the number of shares
of HP and Compaq common stock outstanding on January 28, 2002. The estimated
purchase price is $24 billion, which includes the estimated fair value of HP
common stock issued and options assumed, as well as estimated direct transaction
costs. This estimate was derived using an average market price per share of HP
common stock of $20.92, which was based on an average of the closing prices for
a range of trading days (August 30, August 31, September 4 and September 5,
2001) around the announcement date (September 3, 2001) of the proposed merger.
The final purchase price will be determined based upon the number of Compaq
shares and options outstanding at the closing date. Completion of the Compaq
merger is subject to customary closing conditions that include, among others,
receipt of required approvals from our shareowners and from Compaq shareowners,
and receipt of required regulatory approvals. The merger was subject to review
by the United States Federal Trade Commission under the Hart-Scott-Rodino
Improvements Act of 1976, the European Commission under Council Regulation
No. 4064/89 of the European Community and the Canadian Competition Bureau under
the Competition Act (Canada) and remains subject to review by competition
authorities in other jurisdictions. On December 20, 2001, the Canadian
Competition Bureau completed its review of the proposed merger and found no
issues of competitive concern. On January 31, 2002, the European Commission
issued a formal decision clearing the merger. On March 6, 2002, the Federal
Trade Commission closed its investigation into whether the merger may
substantially lessen competition.
On February 5, 2002, we filed a registration statement on Form S-4 with the
SEC containing a definitive joint proxy statement/prospectus regarding the
merger. A special meeting of HP shareowners will be held on March 19, 2002, to
vote upon the issuance of shares of HP common stock in connection with the
merger, and a special meeting of Compaq shareowners will be held on March 20,
2002, to vote upon the Merger Agreement and the merger. The transaction, while
expected to close in the first half
28
of calendar year 2002, may not be completed if any of the conditions is not
satisfied. Under certain terms specified in the merger agreement, HP or Compaq
may terminate the agreement, and as a result either HP or Compaq may be required
to pay a $675 million termination fee to the other party in certain
circumstances. Unless otherwise indicated, the discussions in this document
relate to HP as a stand-alone entity and do not reflect the impact of the
pending business combination transaction with Compaq.
In September 2001, we signed a definitive agreement with Indigo, a leading
provider of high performance digital color printing systems, to commence an
Exchange Offer to acquire all of the outstanding shares of Indigo not already
owned by us in exchange for a combination of shares of HP common stock and
non-transferable CVRs entitling the holder to a one-time contingent cash payment
of up to $4.50 per CVR, based on the achievement by the Indigo business of
certain cumulative revenue milestones over a three-year post-closing period.
Based on the terms of the agreement, current assumptions on the quantity of each
consideration alternative, and HP's average closing share price for the 20-day
period ended February 28, 2002, the estimated consideration to acquire the
Shares is approximately $720 million plus approximately 56 million CVRs. The
$720 million consideration amount includes the estimated fair value of HP common
stock issued and options and warrants assumed, as well as estimated direct
transaction costs. The future cash pay-out, if any, of the CVRs will be
determined and payable after a three-year period commencing shortly after the
closing of the Exchange Offer. On February 21, 2002, HP commenced the Exchange
Offer. Under the Exchange Offer, the offer and withdrawal rights are scheduled
to expire at noon (EST) on March 22, 2002, unless extended by HP as further
described in the definitive prospectus filed with the SEC on February 21, 2002.
Completion of the Exchange Offer is subject to the tender for exchange of that
number of Indigo shares which, when added to Indigo shares currently owned by
HP, will constitute at least 95% of Indigo's outstanding shares (including
Indigo common shares issuable upon exercise of certain warrants), the receipt of
required regulatory approvals and customary closing conditions. The transaction,
while expected to close in the second quarter of fiscal year 2002, may not be
completed if any of the conditions is not satisfied.
FACTORS THAT COULD AFFECT FUTURE RESULTS
THE COMPETITIVE PRESSURES WE FACE COULD HARM OUR REVENUES, GROSS MARGINS AND
PROSPECTS.
We encounter aggressive competition from numerous and varied competitors in
all areas of our business, and compete primarily on the basis of technology,
performance, price, quality, reliability, brand, distribution, customer service
and support. If we fail to develop new products, services and support,
periodically enhance our existing products, services and support, or otherwise
compete successfully, it could harm our operations and prospects. Further, we
may have to continue to lower the prices of many of our products, services and
support to stay competitive, while at the same time trying to maintain or
improve gross margins. If we cannot proportionately decrease our cost structure
in response to competitive price pressures, our gross margins and therefore our
profitability could be adversely affected.
IF WE CANNOT CONTINUE TO DEVELOP, MANUFACTURE AND MARKET INNOVATIVE PRODUCTS AND
SERVICES RAPIDLY THAT MEET CUSTOMER REQUIREMENTS FOR PERFORMANCE AND
RELIABILITY, WE MAY LOSE MARKET SHARE AND OUR REVENUES MAY SUFFER.
The process of developing new high technology products and services is
complex and uncertain, and failure to anticipate customers' changing needs and
emerging technological trends accurately and to develop or obtain appropriate
intellectual property could significantly harm our results of operations. We
must make long-term investments and commit significant resources before knowing
whether our predictions will eventually result in products that the market will
accept. After a product is developed, we must be able to manufacture sufficient
volumes quickly and at low costs. To accomplish this, we
29
must accurately forecast volumes, mix of products and configurations that meet
customer requirements, and we may not succeed.
IF WE DO NOT EFFECTIVELY MANAGE THE TRANSITION FROM EXISTING PRODUCTS TO NEW
PRODUCTS, OUR REVENUES MAY SUFFER.
If we do not make an effective transition from existing products to new
products, our revenues may be seriously harmed. Among the factors that make a
smooth transition from current products to new products difficult are delays in
product development or manufacturing, variations in product costs, delays in
customer purchases of existing products in anticipation of new product
introductions and customer demand for the new product. Our revenues and gross
margins also may suffer due to the timing of product or service introductions by
our suppliers and competitors. This is especially challenging when a product has
a short life cycle or a competitor introduces a new product just before our own
product introduction. Furthermore, sales of our new products may replace sales
of some of our current products, offsetting the benefit of even a successful
product introduction. There may also be overlaps in the current products of HP
and product portfolios acquired through mergers and acquisitions that must be
managed. Given the competitive nature of our industry, if we incur delays in new
product introductions or do not accurately estimate the market effects of new
product introductions, future demand for our products and our revenues may be
seriously harmed.
OUR REVENUES AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES WILL SUFFER IF WE
CANNOT CONTINUE TO LICENSE OR ENFORCE THE INTELLECTUAL PROPERTY RIGHTS ON WHICH
OUR BUSINESS DEPENDS OR IF THIRD PARTIES ASSERT THAT WE VIOLATE THEIR
INTELLECTUAL PROPERTY RIGHTS.
We generally rely upon patent, copyright, trademark and trade secret laws in
the United States and similar laws in other countries, and agreements with our
employees, customers, partners and other parties, to establish and maintain our
intellectual property rights in technology and products used in our operations.
However, any of our intellectual property rights could be challenged,
invalidated or circumvented, or our intellectual property rights may not provide
competitive advantages, which could significantly harm our business. Also,
because of the rapid pace of technological change in the information technology
industry, much of our business and many of our products rely on key technologies
developed by third parties, and we may not be able to obtain or to continue to
obtain licenses and technologies from these third parties at all or on
reasonable terms. Third parties also may claim that we are infringing upon their
intellectual property rights. Even if we do not believe that our products or
business are infringing upon third parties' intellectual property rights, the
claims can be time-consuming and costly to defend and divert management's
attention and resources away from our business. Claims of intellectual property
infringement also might require us to enter into costly settlement or license
agreements. If we cannot or do not license the infringed technology at all or on
reasonable terms or substitute similar technology from another source, our
operations could suffer. In addition, it is possible that as a consequence of
mergers and acquisitions some of our intellectual property rights may be
licensed to a third party that had not been licensed prior to the transaction or
that certain restrictions could be imposed on our business that had not been
imposed prior to the transaction. Consequently, we may lose a competitive
advantage with respect to these intellectual property rights or we may be
required to enter into costly arrangements in order to terminate or limit these
agreements.
IF WE FAIL TO MANAGE DISTRIBUTION OF OUR PRODUCTS AND SERVICES PROPERLY, OR IF
OUR DISTRIBUTORS' FINANCIAL CONDITION OR OPERATIONS WEAKEN, OUR REVENUES AND
GROSS MARGINS COULD BE ADVERSELY AFFECTED.
We use a variety of different distribution methods to sell our products and
services, including third-party resellers and distributors and both retail and
direct sales to both enterprise accounts and consumers. Since each distribution
method has distinct risks and gross margins, the failure to
30
implement the most advantageous balance in the delivery model for our products
and services could adversely affect our gross margins and therefore
profitability. For example:
- AS WE CONTINUE TO INCREASE OUR COMMITMENT TO DIRECT SALES, WE COULD RISK
ALIENATING CHANNEL PARTNERS AND ADVERSELY AFFECTING OUR DISTRIBUTION
MODEL.
Since direct sales may compete with the sales made by third-party
resellers and distributors, these third-party resellers and distributors
may elect to use other suppliers that do not directly sell their own
products. Because not all of our customers will prefer to or seek to
purchase directly, any increase in our commitment to direct sales in order
to increase our gross margins could alienate some of our channel partners.
As a result, we may lose some of our customers who purchase from
third-party resellers or distributors.
- SOME OF OUR WHOLESALE AND RETAIL DISTRIBUTORS MAY BE UNABLE TO WITHSTAND
CHANGES IN BUSINESS CONDITIONS.
Some of our wholesale and retail distributors may have insufficient
financial resources and may not be able to withstand changes in business
conditions, including the recent economic downturn. Revenues from indirect
sales could suffer if our distributors' financial condition or operations
weaken.
- OUR INVENTORY MANAGEMENT WILL BE COMPLEX AS WE WILL CONTINUE TO SELL A
SIGNIFICANT MIX OF PRODUCTS THROUGH DISTRIBUTORS
We must manage inventory effectively, particularly with respect to sales
to distributors. Distributors may increase orders during periods of
product shortages, cancel orders if their inventory is too high, or delay
orders in anticipation of new products. Distributors also may adjust their
orders in response to the supply of our products and the products of our
competitors that are available to the distributor and seasonal
fluctuations in end-user demand. If we have excess inventory, we may have
to reduce our prices and write down inventory, which in turn could result
in lower gross margins.
WE DEPEND ON THIRD PARTY SUPPLIERS, AND OUR REVENUES AND GROSS MARGINS COULD BE
ADVERSELY AFFECTED IF WE FAIL TO RECEIVE TIMELY DELIVERY OF QUALITY COMPONENTS
OR IF WE FAIL TO MANAGE INVENTORY LEVELS PROPERLY.
Our manufacturing operations depend on our ability to anticipate our needs
for components and products and our suppliers' ability to deliver quality
components and products in time to meet critical manufacturing and distribution
schedules. Given the wide variety of systems, products and services that we
offer and the large number of our suppliers and contract manufacturers that are
dispersed across the globe, problems could arise in planning production and
managing inventory levels that could seriously harm us. Among the problems that
could arise are component shortages, excess supply and risks related to
fixed-price contracts that would require us to pay more than the open market
price.
- SUPPLY SHORTAGES. We occasionally may experience a short supply of certain
component parts as a result of strong demand in the industry for those
parts or problems experienced by suppliers. If shortages or delays
persist, the price of these components may increase, or the components may
not be available at all. We may not be able to secure enough components at
reasonable prices or of acceptable quality to build new products in a
timely manner in the quantities or configurations needed. Accordingly, our
revenues and gross margins could suffer until other sources can be
developed.
- OVERSUPPLY. In order to secure components for the production of new
products, at times we may make advance payments to suppliers, or we may
enter into non-cancelable purchase commitments with vendors. If we fail to
anticipate customer demand properly, a temporary
31
oversupply of parts could result in excess or obsolete components which
could adversely affect our gross margins.
- LONG-TERM PRICING COMMITMENTS. As a result of binding price or purchase
commitments with vendors, we may be obligated to purchase components at
prices that are higher than those available in the current market. In the
event that we become committed to purchase components for prices in excess
of the current market price, we may be at a disadvantage to competitors
who have access to components at lower prices, and our gross margins could
suffer.
IN ORDER TO BE SUCCESSFUL, WE MUST RETAIN AND MOTIVATE KEY EMPLOYEES, AND
FAILURE TO DO SO COULD SERIOUSLY HARM US.
In order to be successful, we must retain and motivate executives and other
key employees, including those in managerial, technical, marketing and
information technology support positions. In particular, our product generation
efforts depend on hiring and retaining qualified engineers. Attracting and
retaining skilled solutions providers in the IT support business and qualified
sales representatives is also critical to our future. Experienced management and
technical, marketing and support personnel in the information technology
industry are in high demand and competition for their talents is intense. This
is particularly the case in Silicon Valley, where HP's headquarters and certain
key research and development facilities are located. The loss of key employees
could have a significant impact on our operations. We also must continue to
motivate employees and keep them focused on HP's strategies and goals, which may
be particularly difficult due to morale challenges posed by workforce reductions
and general uncertainty.
THE ECONOMIC DOWNTURN COULD ADVERSELY AFFECT OUR REVENUES, GROSS MARGINS AND
EXPENSES.
Our revenues and gross margins depend significantly on the overall demand
for computing and imaging products and services, particularly in the product and
service segments in which we compete. Softening demand for our products and
services caused by the ongoing economic downturn may result in decreased
revenues, earnings levels or growth rates and problems with the saleability of
inventory and realizability of customer receivables. The global economy has
weakened and market conditions continue to be challenging. As a result,
individuals and companies are delaying or reducing expenditures, including those
for information technology. We have observed effects of the global economic
downturn in many areas of our business. The downturn has contributed to reported
net revenue declines during fiscal 2001 and during the first quarter of fiscal
2002. We have also experienced gross margin declines, reflecting the effect of
competitive pressures as well as inventory writedowns and charges associated
with the cancellation of planned production line expansion. Our selling, general
and administrative expense also was impacted due in part to an increase in bad
debt write-offs and additions to reserves in our receivables portfolio. The
economic downturn also has led to restructuring actions and contributed to
writedowns to reflect the impairment of certain investments in our investment
portfolio. Further delays or reductions in information technology spending could
have a material adverse effect on demand for our products and services, and
consequently, our results of operations, prospects and stock price.
DUE TO THE INTERNATIONAL NATURE OF OUR BUSINESS, POLITICAL OR ECONOMIC CHANGES
COULD HARM OUR FUTURE REVENUES, COSTS AND EXPENSES AND FINANCIAL CONDITION.
Sales outside the United States make up more than half of our revenues. Our
future revenues, costs and expenses and financial condition could be adversely
affected by a variety of international factors, including:
- changes in a country's or region's political or economical conditions;
- longer accounts receivable cycles;
32
- trade protection measures;
- import or export licensing requirements;
- overlap of different corporate structures;
- unexpected changes in regulatory requirements;
- differing technology standards and/or customer requirements;
- import or export licensing requirements, which could affect our ability to
obtain favorable terms for components or lead to penalties or
restrictions;
- problems caused by the conversion of various European currencies to the
euro and macroeconomic dislocations that may result; and
- natural disasters.
A portion of our product and component manufacturing, along with key
suppliers, also is located outside of the United States, and also could be
disrupted by some of the international factors described above. In particular,
along with most other PC vendors, we have engaged manufacturers in Taiwan for
the production of notebook computers. In 1999, Taiwan suffered a major
earthquake, and in 2000 it suffered a typhoon, both of which resulted in
temporary communications and supply disruptions. In addition, we procure
components from Japan, which also suffers from earthquakes periodically.
Moreover, we are in the process of acquiring Indigo, N.V., which has research
and development and manufacturing operations located in Israel, which may be
more subject to disruptions in light of recent world events.
IMPAIRMENT OF INVESTMENT AND FINANCING PORTFOLIOS COULD HARM OUR NET EARNINGS.
We have an investment portfolio that includes minority equity and debt
investments and financing for the purchase of our products and services. In most
cases, we do not attempt to reduce or eliminate our market exposure on these
investments and may incur losses related to the impairment of these investments
and therefore charges to net earnings. Some of our investments are in public and
privately held companies that are still in the start-up or development stage,
which have inherent risks because the markets for the technologies or products
they have under development are typically in the early stages and may never
develop. Furthermore, the values of our investments in publicly-traded companies
are subject to significant market price volatility. Our investments in
technology companies often are coupled with a strategic commercial relationship.
Our commercial agreements with these companies may not be sufficient to allow us
to obtain and integrate such products into our technology or product lines or
otherwise benefit from the relationship, and these companies may be subsequently
acquired by third parties, including competitors. Moreover, due to the economic
downturn and difficulties that may be faced by some of the companies to which we
have supplied financing, our investment portfolio could be further impaired.
IN ORDER TO MANAGE OUR PORTFOLIO OF PRODUCTS AND TECHNOLOGY AND FURTHER OUR
COMPETITIVE OBJECTIVES, WE MUST SUCCESSFULLY COMPLETE ACQUISITIONS AND ALLIANCES
THAT ENHANCE OUR STRATEGIC BUSINESSES AND PRODUCT LINES AND DIVEST NON-STRATEGIC
BUSINESSES AND PRODUCT LINES.
As part of our business strategy, we frequently engage in discussions with
third parties regarding, and enter into agreements relating to, possible
acquisitions, strategic alliances, joint ventures and divestitures in order to
manage our product and technology portfolios and further strategic objectives.
In order to pursue this strategy successfully, we must identify suitable
acquisition, alliance or divestiture candidates, complete these transactions,
some of which may be large and complex, and integrate acquired companies.
Integration and other risks of acquisitions and strategic alliances can be more
pronounced for larger and more complicated transactions, or if multiple
acquisitions are pursued
33
simultaneously. However, if we fail to identify and complete these transactions,
we may be required to expend resources to develop products and technology
internally, may be at a competitive disadvantage or may be adversely affected by
negative market perceptions, which may have a material effect on our revenues
and selling, general and administrative expenses.
Integration issues are complex, time-consuming and expensive and, without
proper planning and implementation, could significantly disrupt our business.
The challenges involved in integration include:
- demonstrating to customers that the transaction will not result in adverse
changes in client service standards or business focus and helping
customers conduct business easily;
- consolidating and rationalizing corporate IT and administrative
infrastructures;
- consolidating manufacturing operations;
- combining product offerings;
- coordinating sales and marketing efforts to communicate our capabilities
effectively;
- coordinating and rationalizing research and development activities to
enhance introduction of new products and technologies with reduced cost;
- preserving distribution, marketing or other important relationships and
resolving potential conflicts that may arise;
- minimizing the diversion of management attention from ongoing business
concerns;
- persuading employees that business cultures are compatible, maintaining
employee morale and retaining key employees;
- coordinating and combining overseas operations, relationships and
facilities, which may be subject to additional constraints imposed by
local laws and regulations; and
- managing integration issues shortly after or pending the completion of
other independent reorganizations.
We may not successfully address these integration challenges in a timely
manner, or at all, and we may not realize the anticipated benefits or synergies
of the transaction to the extent, or in the timeframe, anticipated. Currently,
we have several acquisitions that are pending completion, including the proposed
merger with Compaq, or that recently have been completed and are still being
integrated. In addition to the pending Compaq transaction, we have pending a
proposed acquisition of Indigo N.V., a leading commercial and industrial
printing systems company. The number of pending transactions and the size and
scope of the proposed merger with Compaq increase both the scope and consequence
of ongoing integration risks.
34
Even if an acquisition or alliance is successfully integrated or a business
is divested, we may not receive the expected benefits of the transaction.
Managing acquisitions, alliances, joint ventures and divestitures requires
varying levels of management resources, which may divert our attention from
other business operations. These transactions also may result in significant
costs and expenses and charges to earnings. As a result, any completed, pending
or future transactions may contribute to financial results of the combined
company that differ from the investment community's expectations in a given
quarter.
TERRORIST ACTS AND ACTS OF WAR MAY SERIOUSLY HARM OUR BUSINESS AND REVENUES,
COSTS AND EXPENSES AND FINANCIAL CONDITION.
Terrorist acts or acts of war (wherever located around the world) may cause
damage or disruption to HP, our employees, facilities, partners, suppliers,
distributors, resellers, or customers, which could significantly impact our
revenues, costs and expenses and financial condition. The terrorist attacks that
took place in the United States on September 11, 2001 were unprecedented events
that have created many economic and political uncertainties, some of which may
materially harm our business and results of operations. The long-term effects on
our business of the September 11, 2001 attacks are unknown. The potential for
future terrorist attacks, the national and international responses to terrorist
attacks, and other acts of war or hostility have created many economic and
political uncertainties, which could adversely affect our business and results
of operations in ways that cannot presently be predicted. In addition, as a
major multi-national company with headquarters and significant operations
located in the United States, we may be impacted by actions against the United
States. We are predominantly uninsured for losses and interruptions caused by
terrorist acts and acts of war.
BUSINESS DISRUPTIONS COULD SERIOUSLY HARM OUR FUTURE REVENUES AND FINANCIAL
CONDITION AND INCREASE OUR COSTS AND EXPENSES.
Our worldwide operations could be subject to natural disasters and other
business disruptions, which could seriously harm our revenues and financial
condition and increase our costs and expenses. Our corporate headquarters, a
portion of our research and development activities, other critical business
operations and some of our suppliers are located in California, near major
earthquake faults. The ultimate impact on us, our significant suppliers and our
general infrastructure of being located near major earthquake faults is unknown,
but our revenues and financial condition and our costs and expenses could be
significantly impacted in the event of a major earthquake. In addition, some
areas, including California, have experienced, and may continue to experience,
ongoing power shortages, which have resulted in "rolling blackouts." These
blackouts could cause disruptions to our operations or the operations of our
suppliers, distributors and resellers, or customers. We are predominantly
uninsured for losses and interruptions caused by earthquakes, power outages and
other natural disasters.
THE REVENUES AND PROFITABILITY OF OUR OPERATIONS HAVE HISTORICALLY VARIED.
Our revenues and profit margins vary among our products, customer groups and
geographic markets. Our revenue mix in future periods will be different than our
current revenue mix. Overall profitability in any given period is dependent
partially on the product, customer and geographic mix reflected in that period's
net revenue, and therefore revenue and gross margin trends cannot be reliably
predicted. Actual trends may cause us to adjust our operations, which could
cause period-to-period fluctuations in our results of operations.
FAILURE TO EXECUTE PLANNED COST REDUCTIONS SUCCESSFULLY COULD RESULT IN TOTAL
COSTS AND EXPENSES THAT ARE GREATER THAN EXPECTED.
Historically, we have undertaken restructuring plans to bring operational
expenses to appropriate levels for each of our businesses, while simultaneously
implementing extensive new company-wide
35
expense-control programs. In addition to previously announced workforce
reductions, we may have additional workforce reductions in the future. The
proposed merger with Compaq contemplates workforce reductions that are expected
to involve approximately 15,000 employees of the combined company worldwide,
representing approximately 10% of the combined company's workforce and workforce
reductions would also be expected if the proposed merger is not completed.
Significant risks associated with these actions that may impair our ability to
achieve anticipated cost reductions or that may otherwise harm our business
include delays in implementation of anticipated reductions in force in highly
regulated locations outside of the United States, particularly in Europe and
Asia, redundancies among restructuring programs, and the failure to meet
operational targets due to the loss of employees or decreases in employee
morale.
HP'S STOCK PRICE HAS HISTORICALLY FLUCTUATED AND MAY CONTINUE TO FLUCTUATE.
HP's stock price, like that of other technology companies, can be volatile.
Some of the factors that can affect our stock price are:
- the announcement of new products, services or technological innovations by
HP or our competitors;
- quarterly increases or decreases in HP's revenue or earnings;
- changes in quarterly revenue or earnings estimates by the investment
community; and
- speculation in the press or investment community about HP's strategic
position, financial condition, results of operations, business or
significant transactions.
General market conditions or domestic or international macroeconomic and
geopolitical factors unrelated to HP's performance also may affect HP's stock
price. For these reasons, investors should not rely on recent trends to predict
future stock prices or financial results. In addition, following periods of
volatility in a company's securities, securities class action litigation against
a company is sometimes instituted. This type of litigation could result in
substantial costs and the diversion of management time and resources.
UNFORESEEN ENVIRONMENTAL COSTS COULD IMPACT OUR FUTURE NET EARNINGS.
Some of our operations use substances regulated under various federal, state
and international laws governing the environment. We could be subject to
liability for remediation if we do not handle these substances in compliance
with applicable laws. It is our policy to apply strict standards for
environmental protection to sites inside and outside the United States, even
when not subject to local government regulations. We record a liability for
environmental remediation and related costs when we consider the costs to be
probable and the amount of the costs can be reasonably estimated. We have not
incurred environmental costs that are presently material, and we are not
presently subject to known environmental liabilities that we expect to be
material.
SOME ANTI-TAKEOVER PROVISIONS CONTAINED IN HP'S CERTIFICATE OF INCORPORATION,
BYLAWS AND SHAREOWNER RIGHTS PLAN, AS WELL AS PROVISIONS OF DELAWARE LAW, COULD
IMPAIR A TAKEOVER ATTEMPT.
HP has provisions in its certificate of incorporation and bylaws, each of
which could have the effect of rendering more difficult or discouraging an
acquisition deemed undesirable by the HP Board of Directors. These include
provisions:
- authorizing blank check preferred stock, which could be issued with
voting, liquidation, dividend and other rights superior to its common
stock;
- limiting the liability of, and providing indemnification to, directors and
officers;
36
- limiting the ability of HP shareowners to call special meetings;
- requiring advance notice of shareowner proposals for business to be
conducted at meetings of HP shareowners and for nominations of candidates
for election to the HP Board of Directors;
- controlling the procedures for conduct of Board and shareowner meetings
and election and removal of directors; and
- specifying that shareholders may take action only at a duly called annual
or special meeting of shareowners.
These provisions, alone or together, could deter or delay hostile takeovers,
proxy contests and changes in control or management of HP.
In addition, HP has adopted a shareowner rights plan. The rights are not
intended to prevent a takeover of HP. However, the rights may have the effect of
rendering more difficult or discouraging an acquisition of HP deemed undesirable
by the HP Board of Directors. The rights will cause substantial dilution to a
person or group that attempts to acquire HP on terms or in a manner not approved
by the HP Board of Directors, except pursuant to an offer conditioned upon
redemption of the rights.
As a Delaware corporation, HP also is subject to provisions of Delaware law,
including Section 203 of the Delaware General Corporation law, which prevents
some shareowners from engaging in certain business combinations without approval
of the holders of substantially all of HP's outstanding common stock.
Any provision of HP's certificate of incorporation or bylaws, HP's
shareowner rights plan or Delaware law that has the effect of delaying or
deterring a change in control could limit the opportunity for HP shareowners to
receive a premium for their shares of HP common stock, and could also affect the
price that some investors are willing to pay for HP common stock.
HP FACES NUMEROUS ADDITIONAL RISKS IN CONNECTION WITH THE PROPOSED TRANSACTION
WITH COMPAQ, WHICH MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS WHETHER OR NOT
THE MERGER IS COMPLETED, AND THE MERGER MAY NOT BE COMPLETED ON A TIMELY BASIS
OR AT ALL.
In response to the pending merger transaction involving Compaq, customers
and distributors of HP may defer purchasing decisions or elect to switch to
other suppliers due to uncertainty about the direction of our product offerings
following the merger and our willingness to support and service existing
products. In order to address customer uncertainty, we may incur additional
obligations. Uncertainty surrounding the proposed transaction also may have an
adverse effect on employee morale and retention, and result in the diversion of
management attention and resources. In addition, the market values of HP common
stock and Compaq common stock will continue to vary prior to completion of the
merger transaction due to changes in the business, operations or prospects of HP
or Compaq, market assessments of the merger, regulatory considerations, market
and economic considerations, or other factors. However, there will be no
adjustment to the exchange ratio between HP and Compaq shares in connection with
the merger, and the parties do not have a right to terminate the merger
agreement based upon changes in the market price of either HP common stock or
Compaq common stock.
Completion of the merger also is subject to numerous risks and
uncertainties. HP and Compaq may be unable to obtain shareowner or other
regulatory approvals required to complete the merger in a timely manner or at
all. In order to obtain regulatory approval, we may be required to comply with
material restrictions or conditions, which could include a complete or partial
license, divestiture, spin-off or the holding separate of assets or businesses.
HP and Compaq also are required to obtain separate shareowner approvals in
connection with the merger. Walter B. Hewlett, Eleanor Hewlett Gimon, Mary
Hewlett Jaffe and The William R. Hewlett Revocable Trust have announced that
they
37
intend to vote against the proposal to approve the issuance of HP common stock
in connection with the Compaq merger. In addition, each of the William and Flora
Hewlett Foundation and the David and Lucile Packard Foundation has announced its
intention to vote against the proposal to approve the issuance of HP common
stock in connection with the Compaq merger. Mr. Hewlett (co-trustee of the
William R. Hewlett Revocable Trust and Chairman of the Hewlett Foundation),
Edwin van Bronkhorst (co-trustee of the William R. Hewlett Revocable Trust and
trustee of certain Hewlett family trusts) and The William R. Hewlett Revocable
Trust have filed a proxy statement with the Securities and Exchange Commission
stating that they intend to solicit, and are now soliciting, proxies from HP
shareowners against the proposal to approve the issuance of shares of HP common
stock in connection with the Compaq merger and have disseminated to HP
shareowners soliciting materials encouraging HP shareowners to vote against the
Compaq merger. If the merger is not completed, the price of HP common stock may
decline to the extent that the current market price of HP common stock reflects
a market assumption that the merger will be completed. Moreover, HP would not
derive the strategic benefits expected to result from the merger, such as
creating a more complete and balanced product and services portfolio and
providing economies of scale in businesses such as PCs. In addition, our
business may be harmed to the extent that customers, suppliers or others believe
that we cannot effectively compete in the marketplace without the merger or
there is customer and employee uncertainty surrounding the future direction of
the product and service offerings and strategy of HP on a standalone basis. We
also will be required to pay significant costs incurred in connection with the
merger, including legal, accounting and a portion of the financial advisory
fees, whether or not the merger is completed. Moreover, under specified
circumstances, HP may be required to pay Compaq a termination fee of
$675 million in connection with the termination of the merger agreement.
If the merger is completed, we will continue to face risks associated with
integration of the businesses and operations of HP and Compaq, and we may not
realize the anticipated benefits or synergies of the merger (primarily
associated with anticipated restructurings and other operational efficiencies)
to the extent, or in the timeframe, anticipated. In addition to the integration
risks previously discussed, our ability to realize these benefits and synergies
could be impacted adversely by practical or legal constraints on combining
operations or implementing workforce reductions. In addition to the costs and
expenses previously discussed, we will be required to make payments to executive
officers and key employees under a retention plan adopted in connection with the
merger. Also, any prior or future downgrades in our credit rating associated
with the merger could adversely affect our ability to borrow and result in more
restrictive borrowing terms, including increased borrowing costs, more
restrictive covenants and the extension of less open credit. This in turn could
affect our internal cost of capital estimates and therefore operational
decisions. In addition, the effective tax rate of HP following the merger is
uncertain and could exceed HP's currently reported tax rate and the weighted
average of the pre-merger tax rates of HP and Compaq. Moreover, charges to
earnings resulting from the application of the purchase method of accounting may
affect the market value of HP's common stock adversely following the merger, as
HP will incur additional depreciation and amortization expense over the useful
lives of certain of the net tangible and intangible assets acquired in
connection with the merger, and, to the extent the value of goodwill or
intangible assets with indefinite lives acquired in connection with the merger
becomes impaired, HP may be required to incur material charges relating to the
impairment of those assets. The foregoing risks are described in more detail in
the joint proxy statement/prospectus related to the merger included in HP's
registration statement on Form S-4 dated February 5, 2002.
ADOPTION OF THE EURO
In 1997, we established a dedicated task force to address the issues raised
by the introduction of a European single currency, the euro. The euro's initial
implementation was effective as of January 1, 1999, and the transition period
continued through January 1, 2002 when the euro was adopted as the physical
currency and legal tender in twelve European countries, the final step of the
transition. In
38
2000, our task force implemented a comprehensive euro program to manage the
changeover of all operational aspects of our business in preparation for the
final transition in January 2002. We experienced no significant operational
issues upon the final implementation date.
The introduction and use of the euro has not had a material effect on our
foreign exchange and hedging activities, use of derivative instruments or
overall foreign currency risk, and we do not presently expect that it will. We
have not experienced a material impact on product pricing, but we will continue
to monitor this aspect of the change going forward. All costs associated with
the conversion to the euro were expensed to operations as incurred. The use of
the euro currency has not had nor do we expect it to have a material adverse
impact on our consolidated financial condition, cash flows or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For quantitative and qualitative disclosures about market risk affecting HP,
see Item 7A "Quantitative and Qualitative Disclosures about Market Risk" of our
Annual Report on Form 10-K, as amended on January 30, 2002, for the fiscal year
ended October 31, 2001. Our exposure to market risks has not changed materially
since October 31, 2001.
39
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth under Note 5 contained in the "Notes to
Consolidated Condensed Financial Statements" of this Quarterly Report on
Form 10-Q is incorporated herein by reference.
In addition, HP is involved in, and or has indemnification obligations with
respect to, the litigation described below.
A putative class action lawsuit was filed in the Superior Court of the State
of California, County of Santa Clara on December 11, 2001, against various
officers and directors of HP alleging that the defendants breached their
fiduciary duties to HP shareowners by, among other things, failing to conduct
reasonable due diligence into the propriety of the merger transaction involving
HP and Compaq Computer Corporation and by filing with the Securities and
Exchange Commission a false and misleading Registration Statement on Form S-4
and preliminary joint proxy statement/prospectus forming a part thereof in
connection with the merger transaction. The case seeks declaratory, injunctive
and other relief permitted by law and equity. On or about December 19, 2002,
defendants removed the case to the United States District Court for the Northern
District of California, and on January 7, 2002, defendants moved to dismiss the
action. On or about January 17, 2002, plaintiff moved to remand the case to
state court. On or about February 19, 2002, plaintiff moved for expedited
discovery. On March 1, 2002, the Magistrate Judge denied plaintiff's motion for
expedited discovery. The Court has scheduled a hearing on defendants' motion to
dismiss and plaintiff's motion to remand for April 26, 2002. HP believes that
the lawsuit is without merit and intends to defend the case vigorously.
A putative class action lawsuit was filed in the United States District
Court for the Northern District of California on February 11, 2002, against HP
and various directors of HP alleging that the proxy materials filed by HP in
connection with the merger transaction involving Compaq Computer Corporation are
false and misleading and fail to disclose material information in violation of
Section 14(a) of the Securities Exchange Act of 1934, SEC Rule 14a-9 and that
the named HP directors have breached their fiduciary duties to HP stockholders.
The case seeks declaratory relief, injunctive relief and damages. On
February 18, 2002, defendants moved to dismiss the action. On February 19, 2002,
plaintiff moved for expedited discovery. On March 1, 2002, the Magistrate Judge
denied plaintiff's motion. The hearing on defendants' motion to dismiss is
scheduled for April 26, 2002. HP believes that the lawsuit is without merit and
intends to defend the case vigorously.
A putative class action lawsuit was filed in the United States District
Court for the Northern District of California on February 15, 2002, against HP
and various directors of HP alleging that the proxy materials filed by HP in
connection with the merger transaction involving Compaq Computer Corporation are
false and misleading and fail to disclose material information in violation of
Section 14(a) of the Securities Exchange Act of 1934, SEC Rule 14a-9 and that
the named HP directors have breached their fiduciary duties to HP stockholders.
The case seeks declaratory relief, injunctive relief and damages. Defendants
intend to file a motion to dismiss the lawsuit promptly. HP believes that the
lawsuit is without merit and intends to defend the case vigorously.
On or about November 26, 2001, a securities class action was filed in
federal court in New York against various officers and directors of Agilent
Technologies, Inc. ("Agilent Technologies") and certain investment bank
underwriters concerning Agilent Technologies' initial public offering ("IPO") in
late 1999. The complaint alleges undisclosed and improper practices by the
underwriters concerning the allocation of Agilent Technologies IPO shares, in
violation of the federal securities laws, and seeks unspecified damages on
behalf of persons who purchased Agilent Technologies stock during the period
from November 17, 1999 through December 6, 2000. Other actions have been filed
making similar allegations regarding the IPOs of more than 300 other companies.
HP believes that Agilent Technologies has meritorious defenses to the claim and
will defend itself vigorously. While HP is not
40
named as a defendant in this action, HP has agreed to indemnify Agilent
Technologies for a substantial portion of IPO-related liabilities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
A list of exhibits is set forth in the Exhibit Index found on page 40 of
this report.
(b) Reports on Form 8-K:
On February 14, 2002, HP filed a report on Form 8-K, which reported under
Item 5 the issuance of a press release containing financial information for the
first quarter and guidance for fiscal year 2002, and under Item 9 related
scripts. The press release and scripts were filed as exhibits to the Form 8-K.
On February 14, 2002, HP filed a report on Form 8-K relating to the proposed
merger with Compaq Computer Corporation, which reported under Item 5 (i) the
historical consolidated financial statements of Compaq including Compaq's
consolidated balance sheet at December 31, 2001 and 2000, the consolidated
statements of income, cash flows and stockholders' equity for each of the three
years in the period ended December 31, 2001, and Compaq's Schedule II, Valuation
and Qualifying Accounts for each of the three years in the period ended
December 31, 2001, filed in accordance with Rule 3-05 of Regulation S-X (17
C.F.R. Section 210.3.05 (2000)), and (ii) the unaudited pro forma condensed
combined consolidated financial statements of HP for the period ended
October 31, 2001 and comparative historical and pro forma per share data giving
effect to the merger as a purchase of Compaq by HP in accordance with
Article 11 of Regulation S-X (17 C.F.R. Section 210.11 (2000)).
On February 27, 2002, HP filed a report on Form 8-K, which reported under
Item 5 that HP held a security analyst meeting on the same date in connection
with the proposed merger with Compaq Computer Corporation. The meeting was
hosted by Carleton S. Fiorina, HP Chairman of the Board, President and Chief
Executive Officer, and included presentations by Ms. Fiorina and other members
of the HP executive team. Certain of the speakers' slides used in connection
with the presentations are furnished as exhibits to the Form 8-K.
41
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEWLETT-PACKARD COMPANY
/s/ ROBERT P. WAYMAN
---------------------------------------------
Robert P. Wayman
EXECUTIVE VICE PRESIDENT,
FINANCE AND ADMINISTRATION, CHIEF FINANCIAL
OFFICER AND DIRECTOR (PRINCIPAL FINANCIAL
OFFICER)
Date: March 12, 2002
42
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
1 Not applicable.
2(a) Master Separation and Distribution Agreement between
Hewlett-Packard Company and Agilent Technologies, Inc.
effective as of August 12, 1999, which appears as Exhibit 2
to Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1999, which exhibit is incorporated
herein by reference.
2(b) Agreement and Plan of Reorganization by and among
Hewlett-Packard Company, Heloise Merger Corporation and
Compaq Computer Corporation dated as of September 4, 2001,
which appears as Exhibit 2.1 to Registrant's Form 8-K filed
on September 4, 2001, which exhibit is incorporated herein
by reference.
3(a) Registrant's Certificate of Incorporation, which appears as
Exhibit 3(a) to Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended April 30, 1998, which exhibit
is incorporated herein by reference.
3(b) Registrant's Amendment to the Certificate of Incorporation,
which appears as Exhibit 3(b) to Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended
January 31, 2001, which exhibit is incorporated herein by
reference.
3(c) Registrant's Amended and Restated By-Laws, which appears as
Exhibit 3.1 to Registrant's Form 8-K dated November 6, 2001,
which exhibit is incorporated herein by reference.
3(d) Registrant's Certificate of Designation of Rights,
Preferences and Privileges of Series A Participating
Preferred Stock, which appears as Exhibit 3.4 to
Registrant's Form 8-A dated September 4, 2001, which exhibit
is incorporated herein by reference.
4(a) Indenture dated as of October 14, 1997 among Registrant and
Chase Trust Company of California regarding Liquid Yield
Option Notes due 2017 which appears as Exhibit 4.2 to
Registrant's Registration Statement on Form S-3
(Registration No. 333-44113), which exhibit is incorporated
herein by reference.
4(b) Supplemental Indenture dated as of March 16, 2000 among
Registrant and Chase Trust Company of California regarding
Liquid Yield Option Notes due 2017, which appears as
Exhibit 4(b) to Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended July 31, 2000, which exhibit is
incorporated herein by reference.
4(c) Form of Registrant's 7.15% Global notes due June 15, 2005
and related Officers' Certificate, which appear as
Exhibits 4.1 and 4.3 to Registrant's Form 8-K filed on
June 15, 2000, which exhibits are incorporated herein by
reference.
4(d) Senior Indenture, which appears as Exhibit 4.1 to
Registrant's Registration Statement on Form S-3 dated
February 18, 2000, as amended by Amendment No. 1 thereto
dated March 17, 2000 (Registration No. 333-30786), which
exhibit is incorporated herein by reference.
4(e) Form of Registrant's Fixed Rate Note and Floating Rate Note
and related Officers' Certificate, which appear as
Exhibits 4.1, 4.2 and 4.4 to Registrant's Form 8-K filed on
May 24, 2001, which exhibits are incorporated herein by
reference.
43
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
4(f) Preferred Stock Rights Agreement, dated as of August 31,
2001, between Hewlett-Packard Company and Computershare
Investor Services, LLC., which appears as Exhibit 4.1 to
Registrant's Form 8-K dated August 31, 2001, which exhibit
is incorporated herein by reference.
4(g) Underwriting Agreement, dated December 3, 2001, between
Hewlett-Packard Company and Credit Suisse First Boston
Corporation and Salomon Smith Barney Inc., as
representatives of the several underwriters named therein,
which appears as Exhibit 1.1 to Registrant's Form 8-K dated
December 7, 2001, which exhibit is incorporated herein by
reference.
4(h) Form of 5.75% Global Note due December 15, 2006, which
appears as Exhibit 4.1 to Registrant's Form 8-K dated
December 7, 2001, which exhibit is incorporated herein by
reference.
5-8 Not applicable.
9 None.
10(a) Registrant's 1985 Incentive Compensation Plan, as amended,
which appears as Exhibit 10(a) to Registrant's Form 10-K
for the fiscal year ended October 31, 2001, which exhibit is
incorporated herein by reference.*
10(b) Registrant's 1985 Incentive Compensation Plan, as amended,
stock option agreement, which appears as Exhibit 10(b) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended October 31, 1999, which exhibit is incorporated herein
by reference.*
10(c) Registrant's Excess Benefit Retirement Plan, amended and
restated as of November 1, 1999, which appears as
Exhibit 10(c) to Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended July 31, 2000, which exhibit is
incorporated herein by reference.*
10(d) Registrant's 1990 Incentive Stock Plan, as amended, which
appears as Exhibit 10(d) to Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended April 30, 2001, which
exhibit is incorporated herein by reference.*
10(e) Registrant's 1990 Incentive Stock Plan, as amended, stock
option agreement, which appears as Exhibit 10(e) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended October 31, 1999, which exhibit is incorporated herein
by reference.*
10(f) Registrant's 1995 Incentive Stock Plan, as amended, which
appears as Exhibit 10(f) to Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended April 30, 2001, which
exhibit is incorporated herein by reference.*
10(g) Registrant's 1995 Incentive Stock Plan, as amended, stock
option and restricted stock agreements, which appears as
Exhibit 10(g) to Registrant's Annual Report on Form 10-K for
the fiscal year ended October 31, 1999, which exhibit is
incorporated herein by reference.*
10(h) Registrant's 1997 Director Stock Plan which appears as
Exhibit 99 to Registrant's Form S-8 filed on March 7, 1997,
which exhibit is incorporated herein by reference.*
10(i) Registrant's Executive Deferred Compensation Plan, Amended
and Restated effective November 1, 2000, which appears as
Exhibit 10(i) to Registrant's Annual Report on Form 10-K for
the fiscal year ended October 31, 2000, which exhibit is
incorporated herein by reference.*
44
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
10(j) VeriFone, Inc. Amended and Restated 1992 Non-Employee
Directors' Stock Option Plan which appears as Exhibit 99.1
to Registrant's Form S-8 filed on July 1, 1997, which
exhibit is incorporated herein by reference.*
10(k) VeriFone, Inc. Amended and Restated Incentive Stock Option
Plan and form of agreement which appears as Exhibit 99.2 to
Registrant's Form S-8 filed on July 1, 1997, which exhibit
is incorporated herein by reference.*
10(l) VeriFone, Inc. Amended and Restated 1987 Supplemental Stock
Option Plan and form of agreement which appears as Exhibit
99.3 to Registrant's Form S-8 filed on July 1, 1997, which
exhibit is incorporated herein by reference.*
10(m) Enterprise Integration Technologies Corporation 1991 Stock
Plan and form of agreement which appears as Exhibit 99.4 to
Registrant's Form S-8 filed on July 1, 1997, which exhibit
is incorporated herein by reference.*
10(n) VeriFone, Inc. Amended and Restated Employee Stock Purchase
Plan which appears as Exhibit 99.1 to Registrant's Form S-8
filed on July 1, 1997, which exhibit is incorporated herein
by reference.*
10(o) Registrant's 1998 Subsidiary Employee Stock Purchase Plan
and the Subscription Agreement which appear as Appendices E
and E-1 to Registrant's Proxy Statement dated January 12,
1998, respectively, which appendices are incorporated herein
by reference.*
10(p) Employment Agreement, dated July 17, 1999, between
Registrant and Carleton S. Fiorina which appears as
Exhibit 10(gg) to Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended July 31, 1999, which
exhibit is incorporated herein by reference.*
10(q) Incentive Stock Plan Stock Option Agreement (Non-Qualified),
dated July 17, 1999, between Registrant and Carleton S.
Fiorina which appears as Exhibit 10(ii) to Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
July 31, 1999, which exhibit is incorporated herein by
reference.*
10(r) Restricted Stock Agreement, dated July 17, 1999, between
Registrant and Carleton S. Fiorina which appears as
Exhibit 10(jj) to Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended July 31, 1999, which
exhibit is incorporated herein by reference.*
10(s) Restricted Stock Unit Agreement, dated July 17, 1999,
between Registrant and Carleton S. Fiorina which appears as
Exhibit 10(kk) to Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended July 31, 1999, which
exhibit is incorporated herein by reference.*
10(t) Registrant's 2000 Stock Plan amended as of October 27, 2000,
which appears as Exhibit 10(u) to Registrant's Form 10-K
for the fiscal year ended October 31, 2001, which exhibit is
incorporated herein by reference,.*
10(u) Registrant's 2000 Employee Stock Purchase Plan amended as of
March 29, 2001, which appears as Exhibit 10(v) to
Registrant's Form 10-K for the fiscal year ended
October 31, 2001, which exhibit is incorporated herein by
reference.*
10(v) Registrant's Executive Pay-For-Results Plan (Amended and
Restated as of November 1, 2000), which appears as
Exhibit 10(y) to Registrant's Annual Report on Form 10-K for
the fiscal year ended October 31, 2000, which exhibit is
incorporated herein by reference.*
10(w) Registrant's Pay-For-Results Short-Term Bonus Plan
(Effective November 1, 2000), which appears as
Exhibit 10(z) to Registrant's Annual Report on Form 10-K for
the fiscal year ended October 31, 2000, which exhibit is
incorporated herein by reference.*
45
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
10(x) StorageApps Inc. 2000 Stock Incentive Plan which appears as
Exhibit 4.1 to Registrant's Form S-8 filed on September 26,
2001, which exhibit is incorporated herein by reference.*
10(y) Registrant's 2001 Executive Transition Program, which
appears as Exhibit 10(z) to Registrant's Form 10-K for the
fiscal year ended October 31, 2001, which exhibit is
incorporated herein by reference.*
11 Not applicable.
12 Statement of Computation of Ratio of Earnings to Fixed
Charges.
13-17 Not applicable.
18-19 None.
20-21 Not applicable.
22 None.
23-27 Not applicable.
28 None.
99 Not applicable.
------------------------
* Indicates management contract or compensatory plan, contract or arrangement.
46