ex99-3 - SEC.gov | HOME281) 370-0670 (Registrant's telephone number, including area code) (Former Name or Former Address, if Changed Since Last Report) 2 ITEM 5. OTHER EVENTS. In a

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0000950129-01-502149.txt : 200107270000950129-01-502149.hdr.sgml : 20010727ACCESSION NUMBER:0000950129-01-502149CONFORMED SUBMISSION TYPE:8-KPUBLIC DOCUMENT COUNT:19CONFORMED PERIOD OF REPORT:20010725ITEM INFORMATION:ITEM INFORMATION:FILED AS OF DATE:20010726

FILER:

COMPANY DATA:COMPANY CONFORMED NAME:COMPAQ COMPUTER CORPCENTRAL INDEX KEY:0000714154STANDARD INDUSTRIAL CLASSIFICATION:COMPUTER & OFFICE EQUIPMENT [3570]IRS NUMBER:760011617STATE OF INCORPORATION:DEFISCAL YEAR END:1231

FILING VALUES:FORM TYPE:8-KSEC ACT:SEC FILE NUMBER:001-09026FILM NUMBER:1689992

BUSINESS ADDRESS:STREET 1:20555 STATE HIGHWAY 249STREET 2:M/C 110701CITY:HOUSTONSTATE:TXZIP:77070BUSINESS PHONE:281-518-51732

MAIL ADDRESS:STREET 1:20555 STATE HIGHWAY 249STREET 2:M/C 110701CITY:HOUSTONSTATE:TXZIP:77070-2698

8-K1h89284e8-k.txtCOMPAQ COMPUTER CORPORATION - DATED JULY 25, 2001

1

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 25, 2001

COMPAQ COMPUTER CORPORATION (Exact Name of Registrant as Specified in its Charter)

DELAWARE 1-9026 76-0011617 (Sate or Other Jurisdiction of (Commission File No.) (IRS Employer Incorporation) Identification No.)

20555 SH 249 HOUSTON, TEXAS (Address of Principal Executive 77070 Offices) (Zip Code)

(281) 370-0670 (Registrant's telephone number, including area code)

(Former Name or Former Address, if Changed Since Last Report)

2

ITEM 5. OTHER EVENTS.

In a press release dated July 25, 2001, Compaq Computer Corporation ("Compaq")(NYSE: CPQ) reported revenue of $8.5 billion for the second quarter ended June30, 2001.

Net income from operations for the second quarter ended June 30, 2001 was $67million, or $0.04 per diluted common share. Results exclude a $493 millioncharge for restructuring actions. Including this charge, Compaq reported a netloss of $279 million, or $(0.17) per diluted common share for the second quarterended June 30, 2001. The press release, dated July 25, 2001, regarding itsfinancial results for the second quarter 2001, including unaudited consolidatedfinancial statements for the second quarter ended June 30, 2001, is attachedas Exhibit 99.1.

Following its earnings release, Compaq hosted a call with financial analysts andthe press, which was simultaneously webcast to the public. In that call, Compaqacknowledged the volatility of this economic market, and stated that in such anenvironment, it is focused on improving its business model and executing itsstrategic plans. Given the impact of general market conditions, in the thirdquarter ending September 30, 2001, Compaq expects revenue to be in the range of$8.0 billion to $8.4 billion and earnings per diluted common share to be in therange of $0.07 to $0.09.

On July 25, 2001, Compaq posted to its website: (i) Compaq's Chief ExecutiveOfficer, Michael D. Capellas' and Compaq's Chief Financial Officer, JeffClarke's second quarter 2001 earnings presentation to securities analysts onJuly 25, 2001, attached as Exhibit 99.2; (ii) its Second Quarter 2001 FinancialSlides, attached as Exhibit 99.3; and (iii) its Business Outlook and Discussionof Financial Results, Second Quarter 2001, which contains unaudited financialinformation, attached as Exhibit 99.4. Each of these posted materials supplementthe information in the press release containing Compaq's financial results forthe quarter ended June 30, 2001.

Compaq's web site (www.compaq.com) contains a significant amount of informationabout Compaq, including financial and other information for investors. Compaqencourages investors to visit its web site from time to time, as information isupdated and new information is posted.

ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.

(c) Exhibits

Exhibit 99.1 Press Release dated July 25, 2001. Exhibit 99.2 Executive Officers' Second Quarter 2001 Earnings Presentation to Securities Analysts on July 25, 2001. Exhibit 99.3 Second Quarter 2001 Financial Slides. Exhibit 99.4 Business Outlook and Discussion of Financial Results, Second Quarter 2001.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned hereunto duly authorized.

COMPAQ COMPUTER CORPORATION

Dated: July 26, 2001 By: /s/ Dick Smith ----------------------------------- Dick Smith, Vice President, Deputy General Counsel and Assistant Secretary

EX-99.12h89284ex99-1.txtPRESS RELEASE DATED JULY 25, 2001

1

Exhibit 99.1 PRESS RELEASE

[COMPAQ COMPUTER CORPORATION LETTERHEAD]

COMPAQ REPORTS 2001 SECOND QUARTER RESULTS

SOLID EXECUTION DELIVERS MEASURABLE BUSINESS MODEL IMPROVEMENTS COMPANY POSTS 13 PERCENT SERVICES GROWTH IN LOCAL CURRENCY

HOUSTON, JULY 25, 2001 -- Compaq Computer Corporation (NYSE: CPQ), aleading global provider of enterprise technology and solutions, today reportednet income from operations of $67 million, or $0.04 per diluted common share,for the second quarter ended June 30, 2001. Second quarter 2001 revenues totaled$8.5 billion. "I am pleased with the company's solid execution in this challengingenvironment," said Michael Capellas, chairman and chief executive officer. "Wedelivered on our commitments to improve the company's business model and builtmomentum behind our services and solutions-led strategy. A good example isCompaq Global Services which grew 7 percent year over year, or 13 percent inconstant currency." "We successfully balanced the need for stringent cost control -operating expenses are at their lowest level in three years - with continuedinvestments in product innovation and creative go-to-market approaches, such asthe recently announced Computing On Demand program," Capellas continued. "Inaddition, we met consensus EPS even as inventory levels were dramaticallyreduced across the entire supply chain. During the first half, inventory levelswere reduced by nearly $1 billion, including more than $500 million of channelinventory - while we also improved on-time delivery." Second quarter gross margin, as a percentage of revenue, was 21.5percent, down one point sequentially and two points on a year-over-year basis.This was due to an aggressive pricing environment and decreased volume, offsetby savings from improved inventory management and revenue mix. Second quarter2001 operating expenses were 2

$1.7 billion, a decrease of $102 million from the first quarter of 2001 and $120million from the same period last year. The company's operational results exclude a restructuring charge of$493 million. Including this charge, the company reported a net loss of $279million, or $(0.17) per diluted common share. In the same quarter last year, Compaq reported revenue of $10.1 billionand net income of $388 million, or $0.22 per diluted common share. Adjusted fora net after-tax gain of $25 million related to Compaq's investment portfolio,earnings per diluted common share were $0.21.

BUSINESS OUTLOOK "The permanent improvements we are making in our business model arehaving a positive impact now, as well as positioning the company for long-termgrowth and profitability with increased financial leverage," Capellas said."Nonetheless, as you have heard from others in the industry, this economicenvironment continues to be challenging - coupled with the fact that, forCompaq, this quarter represents a tough year over year comparison." "We've seen some stabilization in the U. S. - with the exception of theconsumer retail segment - but the market has weakened in Europe and othergeographies," Capellas continued. "In this environment, we are focused onimproving our business model and executing our strategic plans. In theshort-term, the market remains volatile and thus difficult to predict with muchcertainty. However, we expect third quarter revenue to be in the range of $8.0billion to $8.4 billion and earnings per share of $0.07 to $0.09."

BUSINESS OVERVIEW Compaq Global Services revenue grew 7 percent year-over-year, or 13percent in constant currency. Global Services now represents 23 percent of thecompany's revenue, up from 21 percent in the first quarter of 2001, showingsteady progress towards the company's goal to grow services to more than 30percent of overall revenue. In certain countries - including Japan, the UnitedKingdom and Switzerland - services already represent in excess of 30 percent oftotal revenue. 3

The company's enterprise computing business was down 21 percent fromthe 2000 period due to weaker demand, an aggressive pricing environment andchannel inventory reductions. Enterprise computing includes the IndustryStandard Servers Group, Business Critical Solutions Group and Enterprise StorageGroup and represented 32 percent of second quarter revenue. Of significance in the quarter, Compaq announced the simplification ofits product roadmap through an agreement with Intel Corp. to standardize itshigh performance servers on the Intel Itanium(TM) processor family. The companyalso continued to invest in product innovation, introducing next-generationCompaq ProLiant(TM) DL380 and ML370 servers, as well as new TaskSmart(TM)appliance servers. In June, Gartner Dataquest reported that Compaq's EnterpriseStorage Group was named the world's number one supplier of storage area networks(SANs) based on sales in 2000. Revenue in the company's access business - which includes commercialand consumer personal computers - was down 22 percent. Unit shipments ofcommercial desktops were up 11 percent year over year, though revenue declineddue to aggressive pricing. Additionally, Compaq extended its leadership innext-generation Internet access devices, shipping approximately 450,000 iPAQ(TM)Pocket PCs during the quarter, 17 percent of total commercial unit shipments.Including iPAQ Pocket PCs, total commercial unit shipments in the second quarterwere up 21 percent year-over-year. Losses increased in the consumer PC segmentlargely due to the rapid fall of consumer demand, resulting in the need todramatically reduce prices in order to decrease inventory.

COMPANY BACKGROUND Founded in 1982, Compaq Computer Corporation ("Compaq") is a leadingglobal provider of enterprise technology and solutions. Compaq designs,develops, manufactures and markets hardware, software, solutions and services,including industry-leading enterprise storage and computing solutions,fault-tolerant business-critical solutions, communication products, and desktopand portable personal computers that are sold in more than 200 countries.Information on Compaq and its products and services is available atwww.compaq.com. 4

Compaq will host a live audio Webcast at 4:30 p.m. Eastern (3:30 p.m.Central) regarding its second quarter financial results. Details and links tothe Webcast can be found at http://www.compaq.com/corporate/ir/. This conferencecall is the property of Compaq Computer Corporation and any recording,reproduction, or rebroadcast of this conference call is expressly prohibited byCompaq.

# # # #

Compaq, the Compaq logo, ProLiant, TaskSmart, and iPAQ are trademarksof Compaq Information Technologies Group, L.P. Product names mentioned hereinmay be trademarks and/or registered trademarks of their respective companies.This press release may contain forward-looking statements based on currentexpectations that involve a number of risks and uncertainties. The potentialrisks and uncertainties that could cause actual results to differ materiallyinclude: worsening global economic conditions, increased competitive environmentand pricing pressures, disruptions related to restructuring actions and delaysin the expansion of Compaq's solutions business model. Further information onthese factors and other factors that could affect Compaq's financial results isincluded in Compaq's Securities and Exchange Commission (SEC) filings, includingthe latest Annual Report on Form 10-K and the Quarterly Report on Form 10-Q,which will be filed shortly. 5

COMPAQ COMPUTER CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET

JUNE 30, DECEMBER 31,(In millions, except par value) 2001 2000- -------------------------------------------------------------------------------- (UNAUDITED) ASSETS

Current assets: Cash and cash equivalents $ 3,829 $ 2,569 Trade accounts receivable, net 5,104 6,715 Leases and other accounts receivable 1,858 1,677 Inventories 1,731 2,161 Other assets 2,148 1,989 -------- -------- Total current assets 14,670 15,111

Property, plant and equipment, net 3,300 3,431Other assets, net 6,019 6,314 -------- -------- Total assets $ 23,989 $ 24,856 ======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities: Short-term borrowings $ 1,209 $ 711 Accounts payable 3,434 4,233 Deferred income 1,249 1,089 Other liabilities 4,835 5,516 -------- -------- Total current liabilities 10,727 11,549 -------- --------Long-term debt 875 575 -------- --------Postretirement and other postemployment benefits 645 652 -------- --------Commitments and contingenciesStockholders' equity: Preferred stock, $.01 par value Shares authorized: 10 million; shares issued: none -- -- Common stock and capital in excess of $.01 par value Shares authorized: 3 billion Shares issued: June 30, 2001 - 1,753 million December 31, 2000 - 1,742 million 8,196 8,039 Retained earnings 5,062 5,347 Accumulated other comprehensive income (loss) (95) 27 Treasury stock (shares: June 30, 2001 - 59 million December 31, 2000 - 53 million) (1,421) (1,333) -------- -------- Total stockholders' equity 11,742 12,080 -------- -------- Total liabilities and stockholders' equity $ 23,989 $ 24,856 ======== ========

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COMPAQ COMPUTER CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- -------------------(In millions, except per share amounts) 2001 2000 2001 2000- ------------------------------------------------------------------------------------------------------- Revenue: Products $ 6,720 $ 8,499 $ 14,216 $ 16,311 Services 1,733 1,636 3,434 3,329 -------- -------- -------- -------- Total revenue 8,453 10,135 17,650 19,640 -------- -------- -------- --------Cost of sales: Products 5,401 6,586 11,294 12,694 Services 1,234 1,161 2,446 2,374 -------- -------- -------- -------- Total cost of sales 6,635 7,747 13,740 15,068 -------- -------- -------- --------Selling, general and administrative 1,348 1,466 2,786 2,867Research and development 352 354 716 710Restructuring and related charges 493 -- 742 --Other (income) expense, net 23 (3) (47) (49) -------- -------- -------- -------- 2,216 1,817 4,197 3,528 -------- -------- -------- --------Income (loss) before income taxes (398) 571 (287) 1,044Provision (benefit) for income taxes (119) 183 (86) 334 -------- -------- -------- --------Income (loss) before cumulative effect of accounting change (279) 388 (201) 710Cumulative effect of accounting change, net of tax -- -- -- (26) -------- -------- -------- --------Net income (loss) $ (279) $ 388 $ (201) $ 684 ======== ======== ======== ========Earnings (loss) per common share:Basic: Before cumulative effect of accounting change $ (0.17) $ 0.23 $ (0.12) $ 0.42 Cumulative effect of accounting change, net of tax -- -- -- (0.02) -------- -------- -------- -------- $ (0.17) $ 0.23 $ (0.12) $ 0.40 ======== ======== ======== ========Diluted: Before cumulative effect of accounting change $ (0.17) $ 0.22 $ (0.12) $ 0.41 Cumulative effect of accounting change, net of tax -- -- -- (0.02) -------- -------- -------- -------- $ (0.17) $ 0.22 $ (0.12) $ 0.39 ======== ======== ======== ========Shares used in computing earnings (loss) per common share: Basic 1,688 1,722 1,687 1,699 ======== ======== ======== ======== Diluted 1,688 1,760 1,687 1,739 ======== ======== ======== ========

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COMPAQ COMPUTER CORPORATION SEGMENT INFORMATION (UNAUDITED)

THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- -------------------(In millions) 2001 2000 2001 2000- ----------------------------------------------------------------------------- Enterprise Computing Revenue $ 2,711 $ 3,441 $ 5,619 $ 6,394 Operating income 74 383 206 645Access Revenue 3,824 4,905 8,198 9,609 Operating income (loss) (155) 44 (237) 59Compaq Global Services Revenue 1,943 1,819 3,878 3,682 Operating income 271 214 525 426Segment Eliminations and Other Revenue (25) (30) (45) (45) Operating loss (23) (9) (3) (6)Consolidated Segment Totals Revenue $ 8,453 $ 10,135 $ 17,650 $ 19,640 Operating income $ 167 $ 632 $ 491 $ 1,124

A reconciliation of Compaq's consolidated segment operating income toconsolidated income (loss) before income taxes follows:

THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ----------------- (In millions) 2001 2000 2001 2000- ------------------------------------------------------------------------------ Consolidated segment operating income $ 167 $ 632 $ 491 $ 1,124Unallocated corporate expenses (49) (64) (83) (129)Restructuring and related charges (493) -- (742) --Other income (expense), net (23) 3 47 49 ------ ----- ------ -------Income (loss) before income taxes $ (398) $ 571 $ (287) $ 1,044 ====== ===== ====== =======

EX-99.23h89284ex99-2.txtEXECUTIVE OFFICERS' SECOND QUARTER EARNINGS

1COMPAQ Q2 FY01 EARNINGS CALL - JULY 25TH, 2001- ----------------------------------------------

Exhibit 99.2

MICHAEL CAPELLAS - CHAIRMAN, AND CHIEF EXECUTIVE OFFICER

Good afternoon, and thank you for joining us.

As you know from our press release today, Compaq reported second quarter revenueof $8.5 billion dollars, down 17 percent from the same quarter last year, or 13percent in constant currency.

On an operating basis, we earned 4 cents per share, consistent withexpectations.

It's an understatement to say that we're in the midst of an extremelychallenging global market. But I'm pleased with our success in executing theplans we've put in place to manage our business in this environment.

We met consensus EPS even as we accelerated inventory reductions and dealt withtough industry conditions.

We also delivered on our commitments to improve our business model and positionthe company for long-term growth and profitability.

In the process, we have taken some very tough actions.

Let me give you some examples.

We said we would REDUCE STRUCTURAL COSTS. We have now eliminated 5,100 of the8,500 positions in our restructuring plans. We also reduced operating expensesin Q2 by $100 million dollars sequentially to our lowest level in three years.You will continue to see the improvement flow to the bottom line.

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COMPAQ Q2 FY01 EARNINGS CALL - JULY 25TH, 2001- ----------------------------------------------

We said we would IMPROVE OUR SUPPLY CHAIN. During the first half of the year, wepermanently reduced inventory by nearly $1 billion dollars, including more than$500 million dollars of channel inventory. We did this while improving on-timedelivery and increasing inventory turns in our access business to 40.

You're starting to see the results in our P&L, and you will see the results inour cash flow as well.

We said we would continue to INVEST IN PRODUCT INNOVATION. We introduced aninnovative new family of commercial workstations and portables . . . as well asnew content caching and Web hosting appliance servers in our TaskSmart(TM)family.

We also SIMPLIFIED OUR PRODUCT ROADMAP through an agreement with Intel tostandardize our high performance servers on the Itanium processor family.

We said we would EXPAND OUR GLOBAL SERVICES capabilities. In a tough informationtechnology market, we grew revenue in Compaq Global Services by 7 percent yearover year, and by 13 percent in constant currency.

Finally, we said we would launch creative go-to-market approaches. The Computingon Demand initiative we announced last week is a good example of how we aredelivering superior customer value.

We are also continuing to focus on leading the industry in customersatisfaction. Collectively, this is all good news for our customers.

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It's also clear from our results that we have more work to do on the ACCESS sideof our business, particularly in the United States.

Sequentially, we lost less than half a point of market share worldwide, withlosses in the U.S. partially offset by gains in Europe and Asia.

Given current market conditions, we made good progress on the commercial side -on both our business model and product development.

Unit shipments of commercial desktops were up 11 percent year over year,although revenue was down because of aggressive pricing.

We continue to lead the NEXT GENERATION OF INTERNET ACCESS DEVICES. We shipped450,000 iPAQ(TM) Pocket PCs during the quarter - which, I should add, are notcounted in traditional measures of PC market share. This represented 17 percentof total commercial volume.

Just as important, we are winning the mind share of application developers. Moreand more of them consider the iPAQ handheld to be the platform of choice fordeveloping new mobile applications.

Even considering the brutal market conditions, I'm disappointed with ourperformance in the consumer market, particularly in our retail business.

Losses in consumer increased due to the rapid contraction of consumer demand . . . resulting in the need to cut prices dramatically to reduce inventory. Atthe same time, we launched our new products for the back to school market.

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According to Gartner Dataquest, the worldwide PC market declined in the secondquarter for the first time since 1986 - and the weakest part of the market wasthe consumer business.

We will address this business aggressively by reviewing profitability account byaccount and by evaluating our entire consumer distribution model.

Our ENTERPRISE COMPUTING BUSINESS was down year over year due to weaker demand,an aggressive pricing environment and reductions in channel inventories.

While we maintained our worldwide market share leadership in industry standardservers, revenue was down significantly from the same period last year. Thisreflected weakness in key high-end markets like telecommunications and financialservices. The result was a mix shift to low-end servers where price sensitivityis high.

On the storage side, we continued to lead the shift to storage utilities andstorage area networks. Gartner Dataquest reported in June that Compaq was No. 1in SAN shipments, with market share of more than 48 percent.

Now I want to turn it over to Jeff to talk in more detail about our financialresults and the strength of Compaq's balance sheet.

Then I'll come back and talk about our continued investment in productinnovation, the expansion of services and our solutions focus.

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JEFF CLARKE - SVP FINANCE & ADMINISTRATION, AND CHIEF FINANCIAL OFFICER

Good afternoon everyone. We entered the second quarter with clear objectivesaround:

o Aggressive cost reduction o The rapid completion of our restructuring program o The dramatic reduction of inventory across the supply chain, and o The further strengthening of our balance sheet

These actions set the foundation for significant financial leverage when themarket turns.

In today's call I would like to take you through our progress on all fronts. Letme start however by taking you through our second quarter results.

Revenue for the quarter was $8.5 billion, a decrease of 17 percent year overyear, or 13 percent when adjusted for currency. Weakness in the U.S. market,coupled with worsening economic conditions in Europe and channel inventoryreductions led to the decline. Inventory reductions reduced growth by 5percentage points.

Aggressive cost containment measures and solid execution of our restructuringprogram helped offset the top line decline and allowed us to meet reducedearnings consensus. Net income on an operational basis was $67 million, downfrom $363 million in the prior year period. Earnings per diluted common sharewere $0.04.

Our operational results exclude restructuring charges of $493 million andrelated tax effects.

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Gross margin for the quarter was 21.5 percent of revenue, down only one pointsequentially in a very tough market, reflecting improved inventory managementand revenue mix.

Operating expense totaled $1.7 billion for the quarter, down approximately $120million over the prior year period and a decrease of over $100 millionsequentially. The expense reduction was driven by the solid execution of ourrestructuring program, reductions in discretionary spending and some expensereduction associated with the revenue decline. In today's environment, it isimperative to rapidly cut costs ... and that is exactly what we've been doing.This is our lowest quarterly level of operating expense in three years and therapid execution of our restructuring program will ensure further reductions inthe third quarter.

On a regional view, North America remained weak, with revenue down 28 percentover the prior year period and 8 percent sequentially. Europe declined 9 percenton a year-over-year basis, and was essentially flat in constant currency.Outside the U.S and Europe, we grew 10 percent over the prior year period whenadjusted for the effects of currency, with strongest performance being in AsiaPacific and Japan, where we grew 19 percent and 14 percent respectively.

On a segment view, strength in services helped mitigate revenue declines in ourproduct segments. Our services business is our most profitable segment anddriving top line growth in this business is therefore key.

COMPAQ GLOBAL SERVICES revenue was $1.9 billion for the quarter, up 7 percentyear over year, or 13 percent in constant currency. Global Services now accountsfor 23 percent of total company revenue, up 2 points sequentially.

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Revenue growth was strong across all service divisions and we expect to makeshare gains in the quarter. On a year-over-year basis:

o Customer Services grew 2 percent, or 7 percent when adjusted for the effects of currency o Professional Services grew 7 percent, or 15 percent in constant currency, and o Compaq Financial Services grew almost 50 percent.

Top line Global Services momentum was coupled with strong operational andexpense control, resulting in segment profit of $271 million, up 27 percent overthe prior year period.

Let me now address the ACCESS segment, which posted revenue of $3.8 billion,down 22 percent year over year. The segment posted a loss of $155 million forthe quarter, compared with a loss of $82 million in the first quarter.

Second quarter results differed by market, with better performance in ourCommercial business. Here units grew 6 percent over the prior year period, withdouble-digit growth in desktops. Our continued focus on product innovation andsupply chain improvements, both in terms of inventory management anddistribution, allowed us to maintain double-digit gross margins, despite rapidlydeclining average selling prices.

During the quarter we shipped approximately 450 thousand Compaq iPAQ(TM) PocketPCs, with margins strengthening sequentially.

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As in the first quarter, our greatest weakness was in the Consumer market,particularly in U.S. retail, which accounted for the largest portion of thesegment loss. Consumer units declined 30 percent over the prior year period,with desktops being weakest. Consumer gross margins fell below 5 percent as weheavily discounted products to make room for newer models.

Our U.S. retail performance is unacceptable, and driving better economics in thebusiness is one of our priorities in the third quarter. We are aggressivelyimplementing cost containment measures and expect a substantial sequentialreduction in losses. We continue to anticipate a return to profitability for theAccess segment in the fourth quarter.

Revenue in the ENTERPRISE COMPUTING segment was $2.7 billion, down 21 percentyear over year, again resulting primarily from continued weakness and anaggressive pricing environment in the U.S., and channel inventory reductions.Excluding the U.S., revenue was flat in constant currency.

Segment operating income was $74 million, or 3 percent of revenue.

Within the Enterprise Computing segment, INDUSTRY STANDARD SERVER revenue was$1.6 billion, a decrease of 26 percent year over year. On a sales-out basis,unit sales were flat indicating continued solid acceptance of our products.Revenue growth was negatively affected by channel inventory reductions andintensified price competition. In addition, telecommunications and finance,traditionally some of our strongest high-end server markets, remain weak.

We expect increased momentum later in the year as our pricing actions and supplychain improvements, coupled with our ongoing focus on customer satisfaction andproduct innovation, kick-in.

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BUSINESS CRITICAL SOLUTIONS revenue was $660 million, down 13 percent over theprior year period. We expect market share gains in UNIX, with double-digitserver growth. However, we remain cautious as we enter the second half due toweakness in key verticals and tough year-over-year compares.

ENTERPRISE STORAGE revenue was $418 million, down 10 percent year over year as aresult of channel inventory reductions that reduced growth by 13 points. Weexpect further share gains across all segments of the market, including StorageArea Networks and Storage SW. Overseas momentum continued, with growth outsidethe U.S. of 15 percent in constant currency.

With that, let me now turn your attention to the two key OPERATIONAL OBJECTIVESwe set for ourselves for the second quarter, namely:

o The rapid completion of our restructuring program, and o The dramatic reduction of inventory across the supply chain

First, let me address the RESTRUCTURING PROGRAMS.

During the second quarter we completed 3,500 of the 4,500 reductions outlined inthe first quarter charge, resulting in savings of approximately $40 million.

On July 10th we told you that given the tough economic and market environment,we planned to move even more swiftly and go even deeper in our structural costreduction programs, and accordingly began further restructuring actions in thesecond quarter, resulting in a charge of $493 million.

The plans result in a charge of $742 million year to date, and involve areduction of some 8,500 positions through severance. By the end of this week, wewill have completed 5,100 reductions, of which 1,500 occurred in July.

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We expect to have substantially completed the combined restructuring programs byyear-end and anticipate the payback, upon completion, to be approximately $900million on an annualized basis.

I would now like to address our INVENTORY REDUCTION PROGRAM.

During the second quarter we exceeded our inventory reduction goals on bothfronts, by reducing Compaq owned inventory by almost $300 million, and channelinventories by approximately $400 million. In the first half of the year supplychain inventory has therefore been reduced by almost $1 billion.

We are targeting further reductions of approximately $100 million from Compaqowned inventory and $200 million from the channel in the third quarter. Withthese reductions, our inventory program will be further optimized, reinforcingour competitiveness in the market, and improving margins and cash flow.

We closed the second quarter with commercial channel inventory of 2.7 weeks andretail inventory of 6 weeks.

During our last quarter's earnings call we also spoke about furtherstrengthening our BALANCE SHEET. Let me now update you against this goal.

In the second quarter we again demonstrated our ability to generate cash fromoperations. Improved inventory management helped generate operating cash flow of$584 million. In the first half of the year we generated approximately $1.1billion in cash from operations.

We closed the quarter with a cash position of $3.8 billion, up $1.2 billion fromthe first quarter. Major uses of cash included capital spending of $200 million,restructuring of $75 million and dividend payments of $42 million.

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Debt closed the quarter at $2.1 billion with just under half being long term innature and related to Compaq Financial Services, which now has $2.8 billion inassets. During the quarter we borrowed $300 million to fund further expansion ofCompaq Financial Services at attractive rates.

A further $600 million was borrowed to match timing differences between inflowsand outflows of onshore and offshore cash ... again, a cost efficient form offinancing operations.

As noted earlier, we reduced Compaq owned inventory by almost $300 millionsequentially. At the same time we increased turns to 15, a 2-turn improvementover the prior year period. In our Access business, inventory turns were 40, upfrom 23 in the prior year period and 36 sequentially.

Our product inventory levels fell below $1 billion, with sequential reductionsacross all regions and all segments. This is our lowest level of productinventory in several years.

Days sales outstanding were 55 days, an improvement of 4 days sequentially. Dayspayable were 47 days, down one day sequentially.

Compaq's balance sheet continues to be one of the strongest in the industry andthe results of this past quarter only strengthen it further.

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To conclude, given the economic and market environment, our second quarterperformance reflects solid execution in a number of areas, namely:

o Stringent cost control o The aggressive execution of our restructuring plan o The dramatic reduction of inventory across the supply chain, and o The further strengthening of our Balance Sheet

With that, I'd like to now pass you back to Michael who will conclude the calland provide guidance on the third quarter.

MICHAEL CAPELLAS - CHAIRMAN, AND CHIEF EXECUTIVE OFFICER

Thank you, Jeff.

Jeff talked in detail about the steps we're taking to reduce structural costsand improve our supply chain . . . so I want to use the next few minutes to talkabout the progress we've made in three other initiatives I outlined in April:

o One, continued investment in technology and product innovation

o Two, expansion of our global services capabilities

o And, three, creative go-to-market approaches with a focus on solutions

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INVEST IN INNOVATION

As we've discussed in recent weeks, Compaq is shifting to a services andsolutions-led business model.

But I want to underscore the fact that innovative, world-class technologyremains the important foundation for our solutions.

That's why America Online awarded Compaq a three-year, $150 million dollarcontract as its preferred provider of high-end computing products.

It was also a key factor in Compaq's partnership with Starbucks.

During the second quarter, Starbucks named Compaq its preferred ITinfrastructure provider for its retail stores and corporate headquarters. We areworking with Starbucks and Microsoft to create a high-speed connectedenvironment in Starbucks locations around the world.

A good example of our continuing innovation is the new Evo(TM) family ofcommercial access products that I mentioned earlier.

Innovations include a notebook with integrated wireless connectivity thatsupport both Bluetooth and 802.11b . . . a 2.5 pound ultra-thin notebook thatprovides up to eight hours of battery life . . . and new, high-performanceworkstations.

Each of these products provides significant new functionality at lower pricesAND lower costs.

Page 13 14


We also introduced an integrated smart card terminal for secure Internetpurchases on select Presario(TM) products. We are partnering with Visa and FleetCredit Card Services to providers customers with a complete solution.

On the infrastructure side, we introduced two new appliance servers in ourTaskSmart family. One is a content caching appliance that incorporates softwarefrom Inktomi to help customers deliver complex information more effectively tousers.

The other is a Web hosting appliance that enables customers to rapidly deploylarge numbers of fixed-configuration Web servers. This dramatically reducesimplementation time for complex, Web-based solutions.

As you know, we announced an agreement with Intel last month to consolidate ourentire 64-bit family of servers onto the Itanium architecture by 2004.

Together, Compaq and Intel will accelerate the availability of next generationenterprise servers based on the Itanium processor family.

This agreement enables us to offer our customers the best of both worlds:systems engineering expertise, clustering technology and manageability toolsfrom Compaq . . . and leading microprocessor design and world-class volumemanufacturing from Intel.

It also provides customers with the clearest and most complete roadmap forimproved performance, software compatibility and growth.

The result will be a broad range of 64-bit servers that deliver unparalleledperformance and price/performance - all on a single microprocessor architecture.

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The response from our customers has been very positive.

We have reinforced our commitment to execute and even accelerate the currentAlpha(TM) roadmap to advance systems performance . . . and we will work closelywith our customers to make a smooth transition to Itanium-based systems.

EXPANDING SERVICES

I've talked before about expanding Compaq Global Services, and the secondquarter was a clear demonstration of why this is so important.

Services was an area of solid growth - with momentum accelerating from the firstquarter.

In an uncertain economy, customers are focused on services and solutions thatreduce costs and complexity. This is fueling growth in outsourcing, utility andsupport services.

A good example is the expansion of our relationship with GE Aircraft Engines. Werecently signed a 5-year, $95 million dollar agreement to provide complete ITinfrastructure outsourcing for their North and South American regions.

Our services capabilities were also a key factor in winning a global SAPconsolidation project at Ericsson.

And Bank of America chose Compaq as the single source of services, support andhardware to the bank's corporate offices and banking center locations across theUnited States. During the three-year contract, Compaq will deploy up to 120,000desktops, 4,000 workstations and 6,000 ProLiant(TM) servers.

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This services-led solution will help the bank save 25 percent during the nextthree years.

We continued to invest in the resources that are so critical to this business.During the second quarter, we hired 750 service professionals to help supportour growth.

CREATIVE GO-TO-MARKET APPROACHES AND SOLUTIONS

One of the primary reasons that we are shifting our strategic focus is becausecustomers are changing the way they buy information technology.

Business customers are looking for increased value above the core technologycomponents. They also want technology partners who can put all the piecestogether and deliver integrated solutions.

So we're looking at creative ways to provide greater value for our customers andgrow our business.

A good example is the launch last week of Compaq's Computing on Demandinitiative.

The idea is to treat key IT resources almost as a utility so that customers candeploy the computing resources they need, when and where they need them . . . ata predictable price and performance level.

Computing on Demand is a suite of offerings that combines our strengths intechnology - including servers, storage and access - with the architecture,management and support capabilities of Compaq Global Services.

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For example, the Richardson Independent School District in Texas chose Compaq toprovide a complete lifecycle solution . . . including installation, softwaremanagement and system maintenance for more than 16,000 Compaq desktops,notebooks and servers.

The Computing on Demand program is a prime example of our increased focused onIT services and solutions.

One of our clear competitive advantages is our ability to put all the piecestogether - hardware, software, services and partners - and deliver integratedsolutions to our customers.

Just last week, for example, Daimler Chrysler gave Compaq its Global SuppliersAward. The award recognized Compaq for supplying the company with innovative andcreative solutions, enabling it to lower its IT costs.

Compaq also received the Quality Supplier Award from the U.S. Postal Service inJune - for the fourth time. It recognizes our commitment to quality andcontinuous improvement.

Building and expanding on those capabilities is now at the heart of ourcorporate strategy.

Although we have not been perceived as a solutions company, the fact is that wehave a solid solutions portfolio today.

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Compaq is already a leader in solutions for the telecommunications and financialservices markets. We have a strong position in key segments of themanufacturing, e-government and health care markets. And we're building on ourstrengths in such emerging areas as wireless, media and entertainment, and lifesciences.

OUTLOOK AND GUIDANCE

Before we take your questions, I want to talk briefly about the market outlookand provide some guidance for the current quarter.

As you've heard from others in our industry, the market continues to be verydifficult. We've seen some stabilization in the U.S., but the market hasweakened in Europe and other parts of the world. We also anticipate increasingweakness in Latin America.

In this environment, our focus continues to be on improving our business model,executing the plans we have laid out and providing superior customer value.

We have announced very tough action, and we have executed them quickly andeffectively. This will help us improve profitability.

We also believe that our services and solutions-led strategy will position usfor even stronger growth and profitability over the long term.

The initial acceptance of our Computing on Demand program demonstrates theeffectiveness of our strategy to integrate world-class products and servicesinto comprehensive solutions.

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In the short term, the market remains volatile and thus difficult to predictwith much certainty. We expect Q3 revenue to be in the range of $8.0 to $8.4billion dollars. This includes a further reduction of $200 million dollars inchannel inventory . . . as well as a substantial year over year decline inconsumer retail.

We expect earnings per share in the range of 7 to 9 cents.

Now we would be happy to take your questions.

********************************************************************************

FORWARD-LOOKING STATEMENT

These prepared remarks may contain forward-looking statements based on currentexpectations that involve a number of risks and uncertainties. The potentialrisks and uncertainties that could cause actual results to differ materiallyinclude: worsening global economic conditions, increased competitive environmentand pricing pressures, disruptions related to restructuring actions and delaysin the expansion of Compaq's solutions business model. Further information onthese factors and other factors that could affect Compaq's financial results isincluded in Compaq's Securities and Exchange Commission (SEC) filings, includingthe latest Annual Report on Form 10-K and the Quarterly Report on Form 10-Q,which will be filed shortly.

Page 19

EX-99.34h89284ex99-3.htmSECOND QUARTER 2001 FINANCIAL SALES

ex99-3

EX-99.45h89284ex99-4.txtBUSINESS OUTLOOK & DISCUSSION OF FINANCIAL RESULTS

1

Exhibit 99.4

COMPAQ COMPUTER CORPORATION BUSINESS OUTLOOK AND DISCUSSION OF FINANCIAL RESULTS SECOND QUARTER 2001

BUSINESS OUTLOOK

Compaq believes that the permanent improvements it is making in its businessmodel are having a positive impact currently, as well as positioning the companyfor long-term growth and profitability with increased financial leverage.Nonetheless, the economic environment continues to be challenging. While therehas been some stabilization in the United States - with the exception of theconsumer retail segment - the market has weakened in Europe and othergeographies. In this environment, Compaq is focused on improving its businessmodel and executing its strategic plans. Although in the short-term the marketremains volatile and thus difficult to predict with much certainty, Compaqexpects third quarter revenue to be in the range of $8.0 billion to $8.4billion, which includes targeting a further reduction of $200 million in channelinventory, and earnings per diluted common share of $0.07 to $0.09.

DISCUSSION OF FINANCIAL RESULTS

REVENUE

Compaq reported second quarter and six month consolidated revenue of $8.5billion and $17.7 billion, respectively, a decrease of 17 percent and 10 percentcompared with the prior year periods, or a decrease of 13 percent and 6 percent,respectively, adjusted for the effects of currency. Higher revenue from CompaqGlobal Services was more than offset by lower revenue from Access and EnterpriseComputing. The decline in consolidated revenue resulted primarily from continuedweakness in the United States economy and worsening economic conditions inEurope, as well as actions to reduce inventory levels across Compaq's supplychain.

Consolidated revenue by business segment was as follows:

THREE MONTHS ENDED SIX MONTHS ENDED(In millions) JUNE 30, JUNE 30, -------------------- --------------------- 2001 2000 2001 2000 ------- -------- -------- -------- Enterprise Computing $ 2,711 $ 3,441 $ 5,619 $ 6,394Access 3,824 4,905 8,198 9,609Compaq Global Services 1,943 1,819 3,878 3,682Segment Eliminations and Other (25) (30) (45) (45) ---------------------------------------------- $ 8,453 $ 10,135 $ 17,650 $ 19,640 ==============================================

1 2

Consolidated revenue by geographic region was as follows:

THREE MONTHS ENDED SIX MONTHS ENDED(In millions) JUNE 30, JUNE 30, -------------------- --------------------- 2001 2000 2001 2000 ------- -------- -------- -------- North America $ 3,575 $ 4,964 $ 7,455 $ 9,534Europe, Middle East and Africa 2,994 3,288 6,486 6,592Asia-Pacific 639 600 1,230 1,111Japan 537 541 1,103 1,037Latin America 484 508 938 926Greater China 224 234 438 440 ---------------------------------------------- $ 8,453 $ 10,135 $ 17,650 $ 19,640 ==============================================

GROSS MARGIN

Consolidated gross margin of 21.5 percent of revenue ($1.8 billion) and 22.2percent of revenue ($3.9 billion) for the three and six months ended June 30,2001, respectively, declined by 2.1 and 1.1 percentage points from thecomparable periods in 2000. Savings from improved inventory management andimproved revenue mix were more than offset by weakening demand resulting in anaggressive pricing environment.

OPERATING EXPENSE

Consolidated operating expense was $1.7 billion for the second quarter of 2001,a reduction of $120 million, or 7 percent, compared with the second quarter of2000. On a year to date basis, operating expense decreased $75 million, or 2percent. The decline in operating expense was driven by solid execution of therestructuring program, Compaq's intense focus on reducing its cost structure,and expense reductions associated with the decline in revenue. Second quarteroperating expense represented the lowest level in the past three years.

INCOME TAXES

The effective tax rate was 30 percent for the three and six months ended June30, 2001, compared with 32 percent for the three and six months ended June 30,2000.

CONSOLIDATED EARNINGS

For the second quarter of 2001, Compaq's net income (excluding special items)was $67 million, or $0.04 per diluted common share, compared with $363 million,or $0.21 per diluted common share, for the corresponding period in 2000. On areported basis, Compaq's consolidated net loss was $279 million, or $(0.17) perdiluted common share, in the second quarter of 2001, compared with consolidatednet income of $388 million, or $0.22 per diluted common share, in the prior yearquarter.

For the six months ended June 30, 2001, Compaq's net income (excluding specialitems) was $265 million, or $0.16 per diluted common share, compared with $615million, or $0.35 per diluted common share, for the corresponding period in2000. On a reported basis, Compaq's consolidated net loss was $201 million, or$(0.12) per diluted common share in the first half of 2001, compared withconsolidated net income of $684 million, or $0.39 per diluted common share, inthe prior year period.

The second quarter of 2001 included a restructuring charge of $493 million andrelated tax effect, while special items in the second quarter of 2000 includednet investment income of $38 million and related tax effect.

2 3

Special items in the first half of 2001 included restructuring charges of $742million, net investment income of $76 million, and related tax effects, whilethe first half of 2000 included net investment income of $106 million andrelated tax effect.

SEGMENTS

Segment financial data was as follows:

THREE MONTHS ENDED SIX MONTHS ENDED(In millions) JUNE 30, JUNE 30, ------------------- -------------------- 2001 2000 2001 2000 ------- -------- -------- -------- ENTERPRISE COMPUTING Revenue $ 2,711 $ 3,441 $ 5,619 $ 6,394 Operating income 74 383 206 645

ACCESS Revenue 3,824 4,905 8,198 9,609 Operating income (loss) (155) 44 (237) 59

COMPAQ GLOBAL SERVICES Revenue 1,943 1,819 3,878 3,682 Operating income 271 214 525 426

SEGMENT ELIMINATIONS AND OTHER Revenue (25) (30) (45) (45) Operating loss (23) (9) (3) (6)

CONSOLIDATED SEGMENT TOTALS Revenue $ 8,453 $ 10,135 $ 17,650 $ 19,640 Operating income $ 167 $ 632 $ 491 $ 1,124

A reconciliation of consolidated segment operating income to consolidated income(loss) before income taxes was as follows:

THREE MONTHS ENDED SIX MONTHS ENDED(In millions) JUNE 30, JUNE 30, ------------------- -------------------- 2001 2000 2001 2000 ------- -------- -------- -------- Consolidated segment operating income $ 167 $ 632 $ 491 $ 1,124Unallocated corporate expenses (49) (64) (83) (129)Restructuring and related charges (493) -- (742) --Other income (expense), net (23) 3 47 49 -------------------------------------------Income (loss) before income taxes $ (398) $ 571 $ (287) $ 1,044 ===========================================

ENTERPRISE COMPUTING

Enterprise Computing designs, develops, manufactures and markets advancedcomputing and telecommunication products, including business-critical servers,industry-standard servers and storage products.

REVENUE

Enterprise Computing revenue decreased $730 million, or 21 percent, comparedwith the second quarter of 2000 and represented 32 percent of consolidatedrevenue during the quarter. On a year to date basis, revenue from this segmentdecreased $775 million, or 12 percent. Outside the United States and adjustedfor the effects of currency, revenue was unchanged for the quarter and increased14 percent for the year to date period compared with the prior year. EnterpriseComputing revenue declined primarily due to continued weakness in the UnitedStates economy that spread to Europe toward the end of the second quarter. Theseconditions have led

3 4

to intense competitive pricing pressures, resulting in lower average unitprices. Compaq took significant actions during the quarter to reduce channelinventory levels, which also contributed to lower revenue.

OPERATING INCOME

Enterprise Computing operating income decreased $309 million, or 81 percent, inthe second quarter of 2001 compared with the corresponding period in 2000. Forthe six months ended June 30, 2001, operating income decreased $439 million, or68 percent, compared with the corresponding period in 2000. Lower operatingincome in this segment resulted from a weakening economy, pricing pressures andinventory reduction actions as discussed above.

ACCESS

The Access business delivers products and solutions targeting the convergence ofbusiness and home-user computing for the Internet-connected world.

REVENUE

Access revenue decreased $1.1 billion, or 22 percent, compared with the secondquarter of 2000 and represented 45 percent of consolidated revenue during thequarter. On a year to date basis, Access revenue decreased $1.4 billion, or 15percent. Outside the United States and adjusted for the effects of currency,revenue declined 4 percent for the quarter and increased 5 percent for the yearto date period compared with the prior year. While overall unit sales increasedover the prior periods in the Access business, weakening economic conditions inthe United States and Europe led to an aggressive pricing environment resultingin lower average unit prices. Lower revenue also resulted from strong actionstaken by Compaq to reduce channel inventory during the quarter.

OPERATING INCOME

The Access business incurred an operating loss of $155 million during thequarter compared with operating income of $44 million in the second quarter of2000. For the six months ended June 30, 2001, Access incurred an operating lossof $237 million compared with operating income of $59 million for thecorresponding period in 2000. The operating losses were primarily driven byweakening economic conditions and an aggressive pricing environment. Inaddition, operating losses resulted from falling margins in the consumer market,particularly in United States retail, where Compaq heavily discounted productsto make room for newer models, and reductions in channel inventory.

COMPAQ GLOBAL SERVICES

Compaq Global Services delivers worldwide infrastructure and solution designimplementation, management and support services, as well as leasing and assetmanagement services.

REVENUE

Compaq Global Services revenue increased $124 million, or 7 percent, comparedwith the second quarter of 2000 and represented 23 percent of consolidatedrevenue. On a year to date basis, revenue from this segment increased $196million, or 5 percent. Adjusted for the effects of currency, revenue increased13 percent and 11 percent for the three and six months ended June 30, 2001,respectively, compared with the corresponding periods in 2000. Compaq GlobalServices' broad portfolio and geographic diversification contributed to revenuegrowth, despite a weak economy in the United States during the quarter and yearto date periods. Given current economic uncertainties, customers are focused onservice and solution expenditures that reduce costs and increase productivity,resulting in growth in revenue from outsourcing and support

4 5

services. Revenue also benefited from stronger service attach rates as well ashigher leasing revenues due to growth in Compaq's leased asset portfolio.

OPERATING INCOME

Compaq Global Services operating income increased $57 million, or 27 percent, inthe second quarter of 2001 compared with the corresponding period in 2000. Forthe six months ended June 30, 2001, operating income from this segment increased$99 million, or 23 percent, compared with the corresponding period in 2000. Theincrease in operating income resulted primarily from higher revenue as notedabove, improved profitability in Compaq's professional services organization dueto strategic actions taken over the past year and lower operating costsresulting from an aggressive focus on expense management.

UNALLOCATED CORPORATE EXPENSES

The results of the business segments exclude separately managed unallocatedcorporate expenses, which are comprised primarily of general and administrativecosts as well as other items not controlled by the business segments.Unallocated corporate expenses decreased 23 percent from $64 million in thesecond quarter of 2000 to $49 million in the second quarter of 2001. On a yearto date basis, unallocated corporate expenses decreased 36 percent from $129million to $83 million. Unallocated corporate expenses declined due to improvedspending discipline.

RESTRUCTURING AND RELATED CHARGES

In March 2001 and June 2001, Compaq's management approved restructuring plans torealign its organization and reduce operating costs. Compaq combined itscommercial and consumer personal computer operations into a single Accessbusiness. Compaq is also implementing significant changes in its business modeland supply chain operations. These actions are designed to simplify productofferings, derive greater internal operating efficiencies, lower order cycletime, reduce channel inventory and improve account and order management. Inaddition, Compaq plans to consolidate certain functions within the globalbusiness units and reduce administrative functions. Accordingly, Compaq plans toreduce associated employee positions by approximately 4,500 and 4,000 worldwidein connection with the first and second quarter plans, respectively.

Restructuring and related charges of $249 million and $493 million were expensedduring the first and second quarter of 2001, respectively. The first quartercharge was comprised of $173 million related to employee separations, $64million of related asset impairment charges and $12 million for other exitcosts. The second quarter charge was comprised of $303 million related toemployee separations, $138 million of related asset impairment charges, $40million for facility closure costs and $12 million for other exit costs.Employee separation benefits under each plan include severance, medical andother benefits. Employee separations related to the first quarter plan were3,600 as of June 30, 2001. Compaq expects to substantially complete theinitiatives contemplated under both restructuring plans by December 31, 2001.

Upon conclusion of its restructuring initiatives, Compaq expects to achieveannualized savings of approximately $900 million in cost of sales and operatingexpenses as a result of the first and second quarter restructuring actions.However, there can be no assurance that such cost reductions can be sustained orthat the estimated costs of such actions will not change.

5 6

BALANCE SHEET INFORMATION

Compaq's cash balance was $3.8 billion at the end of the quarter, an increase of$1.3 billion from December 31, 2000.

Cash flow from operating activities was $584 million during the quarter comparedto $139 million in the second quarter of 2000. The increase in operating cashflow was primarily due to a reduction in receivables and inventory, offset inpart by a reduction in payables and other current liabilities.

For the six months ended June 30, 2001, cash flow from operating activitiesincreased $1.5 billion to $1.1 billion, compared with an operating cash outflowof $431 million for the corresponding period in the prior year. Major uses ofcash during the six months ended June 30, 2001 included net capital expenditures($570 million), purchases of treasury stock ($88 million), dividends paid tostockholders ($84 million) and other working capital requirements.

Net trade accounts receivable was $5.1 billion at June 30, 2001, a decrease of$1.6 billion from December 31, 2000. The decline in receivables was primarilydue to lower revenue.

Net inventory was $1.7 billion at June 30, 2001, a decrease of $430 million fromDecember 31, 2000. The decrease in this balance resulted from aggressive actionstaken by Compaq to reduce inventory levels. In addition to reducing channelinventory, Compaq took substantial actions to reduce Compaq-owned inventory toits lowest level since before its acquisition of Digital Equipment Corporationin 1998.

Days sales outstanding and inventory turn data was as follows:

JUNE 30, MARCH 31, DECEMBER 31, JUNE 30, -------- --------- ------------ -------- 2001 2001 2000 2000 ---- ---- ---- ---- Days sales outstanding 55 59 53 54Inventory turns 15.2 13.9 16.3 13.1

At June 30, 2001, Compaq held $561 million of minority equity investments, adecrease of $303 million compared with December 31, 2000. The decrease in thisbalance was primarily due to declines in market value of certain investments.

Short-term borrowings were $1.2 billion at June 30, 2001, an increase of $498million compared with December 31, 2000.

Long-term debt increased $300 million to $875 million at June 30, 2001 due tothe issuance of $300 million of unsecured 6.2 percent debt securities maturingon May 15, 2003.

EMPLOYEES

Total regular employee headcount was approximately 68,200 at June 30, 2001.

6 7

---oOo---

Compaq is a trademark of Compaq Information Technologies Group, L.P. All otherproduct names mentioned herein may be trademarks or registered trademarks oftheir respective companies.

This financial discussion may contain forward-looking statements based oncurrent expectations that involve a number of risks and uncertainties. Thepotential risks and uncertainties that could cause actual results to differmaterially include: worsening global economic conditions, increased competitiveenvironment and pricing pressures, disruptions related to restructuring actionsand delays in the expansion of Compaq's solutions business model. Furtherinformation on these factors and other factors that could affect Compaq'sfinancial results is included in Compaq's Securities and Exchange Commission(SEC) filings, including the latest Annual Report on Form 10-K and the QuarterlyReport on Form 10-Q, which will be filed shortly.

7

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ex99-3 - SEC.gov | HOME281) 370-0670 (Registrant's telephone number, including area code) (Former Name or Former Address, if Changed Since Last Report) 2 ITEM 5. OTHER EVENTS. In a