Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: OCTOBER 31, 1999
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 (I.R.S. Employer
incorporation or organization) Identification No.)
3000 HANOVER STREET, PALO ALTO, CALIFORNIA 94304
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (650) 857-1501
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
ON WHICH REGISTERED
TITLE OF EACH CLASS
Common Stock New York Stock Exchange, Inc.
par value $0.01 per share The Pacific Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the registrant's common stock held by
nonaffiliates as of December 31, 1999 was $92,443,435,858.
Indicate the number of shares outstanding of the issuer's common stock as of
December 31, 1999: 1,001,492,581 shares.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT DESCRIPTION 10-K PART
- -------------------- ---------
Pages 8-10 and 22-44 of the registrant's Notice of Annual
Meeting of Stockholders and Proxy Statement dated
January 18, 2000 III
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements that involve risks and
uncertainties that could cause the results of Hewlett-Packard Company and our
consolidated subsidiaries ("HP") to differ materially from those expressed or
implied by such forward-looking statements. These risks include the timely
development, production and acceptance of new products and services and their
feature sets; the challenge of managing asset levels, including inventory; the
flow of products into third-party distribution channels; the difficulty of
keeping expense growth at modest levels while increasing revenues; the impact of
Year 2000 issues on customers and suppliers; risks associated with the proposed
spin-off of Agilent Technologies, Inc. and the distribution of its shares; and
other risks detailed from time to time in HP's Securities and Exchange
Commission filings.
The words "anticipate," "believe," "estimate," "expect," "intend," "will,"
and similar expressions, as they relate to HP or our management, including such
items discussed in "Factors That Could Affect Future Results" set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 below, may identify forward-looking statements. Such
statements reflect the current views of HP with respect to future events and are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected. HP does not intend to update these
forward-looking statements.
PRESENTATION OF DISCONTINUED OPERATIONS--AGILENT TECHNOLOGIES, INC.
The following information relates to the continuing operations of HP and our
consolidated subsidiaries and does not discuss (other than briefly at the end of
Item 1 below) Agilent Technologies, Inc., which is reflected as a discontinued
operation in Item 6 and HP's audited consolidated financial statements as of and
for the fiscal year ended October 31, 1999 in Item 8 below (the "Consolidated
Financial Statements").
PART I
ITEM 1. BUSINESS
PRODUCTS AND SERVICES
HP was incorporated in 1947 under the laws of the State of California as the
successor to a partnership founded in 1939 by William R. Hewlett and David
Packard. Effective in May 1998, we changed our state of incorporation from
California to Delaware.
HP is a leading global provider of computing and imaging solutions and
services for business and home. We are focused on capitalizing on the
opportunities of the Internet and the proliferation of electronic services.
HP's major businesses include Imaging and Printing Systems, Computing
Systems and Information Technology Services ("IT Services"):
- IMAGING AND PRINTING SYSTEMS provides laser and inkjet printers (both
monochrome and color), mopiers, scanners, all-in-one devices, personal
color copiers and faxes, digital senders, wide- and large-format printers,
print servers, network-management software, networking solutions, digital
photography products, imaging and printing supplies, imaging and software
solutions, and related professional and consulting services.
- COMPUTING SYSTEMS provides a broad range of computing systems for the
enterprise, commercial and consumer markets. The products and solutions
range from mission-critical systems and software to personal computers for
the business and home. Major product lines include
UNIX-Registered Trademark-(1),
- ------------------------
(1) UNIX-Registered Trademark- is a registered trademark of the Open Group.
2
and PC servers, desktop and mobile personal computers, workstations,
software solutions and storage solutions.
- IT SERVICES provides consulting, education, design and installation
services, ongoing support and maintenance, proactive services like
mission-critical support, outsourcing and utility-computing capabilities.
Financing capabilities include leasing, automatic technology-refreshment
services, solution financing and venture financing.
A summary of HP's net revenue, earnings from operations and total assets as
contributed by our principal business segments is found in the "Segment
Information" note to the Consolidated Financial Statements, which is
incorporated herein by reference. A discussion of factors potentially affecting
our operations is set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That Could Affect Future
Results," "--Year 2000" and "--Adoption of the Euro" in Item 7, which is
incorporated herein by reference.
Following is a further description of HP's principal business segments:
IMAGING AND PRINTING SYSTEMS
HP offers a broad portfolio of printing and imaging products, professional
and consumer imaging services and imaging supplies, including the HP LaserJet
and DeskJet printer families, scanners, copiers, mopiers, fax machines, printing
and imaging services, large- and wide-format printers, PC photography products
and all-in-one products that perform multiple functions.
Key product introductions in fiscal 1999 included the LaserJet 4050 laser
printer; the LaserJet 2100 family of 1200 x 1200 dpi printers, designed for
individual users and small workgroups; the DeskJet 970C printer, based on HP's
thermal inkjet technology, which produces images true to the original photos as
well as creates everyday printing of text and graphics; and new families of
ScanJet scanners, ranging from the ScanJet 3300C scanner, designed for
price-sensitive families with simple scanning needs, to the ScanJet 6300 series
scanners, designed as communications tools for networked offices.
Additionally, in February 1999 HP successfully launched Apollo Consumer
Products, Inc., a separate subsidiary of HP ("Apollo"), to meet the demands of
the ultra or sub-$80 low-end consumer printer market. It also introduced the
industry's first co-branded product, the Barbie printer by Apollo, with Mattel,
Inc. Other new products include the PhotoSmart C500 digital camera, for wireless
image printing without a PC when used with the PhotoSmart P1000/P1100 printer;
the OfficeJet R 80 Series all-in-one products, combining printing, scanning,
copying and faxing in a versatile flatbed design; and the Jetdirect Autoswitch,
which allows more than one PC to share printers in a non-networked environment.
In 1999, HP introduced a new family of imaging supplies for non-HP copiers
under the Eliptica brand. We are also expanding our imaging and printing service
portfolio with Digital Workplace Services, providing customers with printing and
imaging consulting, systems integration, education and strategic outsourcing. We
are also providing imaging services to consumers through services such as HP
Cartogra, a web site allowing sharing of images across the world.
In June 1999, HP acquired DAZEL Corporation, whose enterprise software we
believe will allow our customers to use, share and deliver information taken
from a variety of sources and destinations and route it to multiple output
devices in the proper format and reliably in a timely manner, to be seen only by
the intended recipients.
In consumer sales and marketing, HP announced, in May 1999, the creation of
HPDirect, Inc., a new wholly-owned subsidiary, doing business as the HP Shopping
Village, a direct-to-consumers e-commerce website. At the same time, we also
announced our expansion of direct-to-consumer sales into Europe with a phased
launch into the United Kingdom and Sweden.
3
COMPUTING SYSTEMS
Enterprise and Computer Products: HP's computer systems, computers, and
personal information products are used in a variety of applications, including
scientific and engineering computation and analysis; instrument control; and
business information management. HP's core computing products and technologies
include its PA-RISC architecture for systems and workstations; its Explicitly
Parallel Instruction Computing (EPIC) technology, jointly developed with Intel
Corporation, that will provide the foundation for next-generation, 64-bit
high-end systems; and software infrastructure for open systems. HP's
general-purpose computers and computer systems include scalable families of PCs,
servers and systems for use in homes, home offices and small offices, small
workgroups, larger departments and entire enterprises. Key product families
include the HP 9000 series, which runs HP-UX(2), HP's implementation of the
UNIX-Registered Trademark- operating system, and comprises multi-user computers
for both technical and commercial applications and workstations with powerful
computational and graphics capabilities; the HP Netserver series of PC servers;
the HP Kayak, HP Vectra, and HP Brio-series of desktop PCs for use in the
enterprise and small businesses, and for use in vertical applications such as
engineering, manufacturing and chemical analysis; and the HP Pavilion multimedia
consumer PCs. HP offers associated services in software programming, networking,
distributed systems and data management. Customers of HP's computers, computers
systems and software infrastructure products include original equipment
manufacturers, dealers, value-added resellers and retailers, as well as end
users for a variety of applications.
In fiscal 1999, as part of our e-services strategy to provide services,
personal information appliances and infrastructure to support the next phase of
the development of the Internet, HP unveiled e-speak technology, an interactive
Internet software technology platform developed in Hewlett-Packard Laboratories
that makes it possible to create, request and locate services on the Internet
from any device.
In the field of enterprise computing during fiscal 1999, we introduced a
wide variety of new products and systems, including two next generation HP 9000
UNIX-Registered Trademark- servers. The N-Class midrange
UNIX-Registered Trademark- server is a one-way to eight-way CPU server running
off the PA-RISC 8500 processor, targeted at enterprise and Internet service
providers ("ISPs") accounts. The L-Class is HP's next generation low-end
UNIX-Registered Trademark- one-way to four-way server also running off the
PA-RISC 8500 processor. It is targeted at ISPs as well as application service
providers (ASPs). HP also introduced the HP Netserver E60 low-end and LC2000 and
LH3000 midrange systems, which use Intel's Pentium-Registered Trademark-(3) III
microprocessor Xeon.
This year HP also introduced new HP Brio BA business PCs, which feature an
industry-first, subcompact "microtower" design and an Intel 400 MHz
Pentium-Registered Trademark-(3) III processor; a new class of products of HP
Jornada handheld PC, which weigh less than 3 pounds and have twelve-hour battery
life; and a new class of products of HP Kayak XU and XW PC workstations, which
deliver advanced 2-D and 3-D graphics capabilities for software developers,
design engineers, financial analysts and multimedia-authoring professionals. For
the first time, we introduced the HP Pavilion notebook computer targeted towards
small to medium-size business customers who purchase through retail stores. The
Pavilion notebook extends the HP OmniBook notebook computer family, consisting
of the 4150, 900 and XE series aimed at enterprise to small to medium-size
business customers.
Software: HP's OpenView network and systems management software business is
focused on managing service levels in the enterprise and sustaining strong
growth through the following: demonstrated ability to deliver rapid customer
deployments validating its "Works -- Right -- Now" approach to the distributed
management problem; introduction of new products focused on the expansion of
OpenView's value added ease-of-use approach to management, including Service
Navigator, Service Reporter and Smart Plug-Ins for PeopleSoft, Inc.; expansion
of the systems integrator relationships to include Ernst & Young International,
KPMG International and Unisys Corporation; partnerships with PeopleSoft, Inc.,
- ------------------------
(2) HP-UX Release 10.20 and later and HP-UX Release 11.00 and later on all HP
9000 computers are Open Group UNIX-Registered Trademark- 95 branded
products.
(3) Pentium is a U.S. registered trademark of Intel Corporation.
4
Microsoft Corporation, Cisco Systems, Inc., Oracle Corporation, and SAP
Corporation in its EarlyWatch-C- and GoingLive-C- services; establishment and
increase of sales through the channels of other hardware manufacturers which
have fueled OpenView's multi-platform growth; movement to an integrated support
and services model with a dedicated software support infrastructure at all
levels worldwide; and introduction of a number of new support and services
products including services, such as Developer Assist and Implementation Support
Services, directed at OpenView channel partners.
Storage: In the storage business, HP offers both enterprise computing and
information storage products and solutions.
In May 1999, the enterprise storage business launched the HP SureStore E
products and "Stress Free Storage...Guaranteed" brand promise with the
introduction of the HP SureStore E Disk Array XP 256. This was our product
designed to meet high-end, enterprise data center storage needs in an open
server environment. The XP256 can support up to 9 terabytes of Redundant Array
of Independent Disks (RAID) protected storage which is simultaneously connected
to a wide range of servers including UNIX-Registered Trademark-, Windows
NT-Registered Trademark-(4) and mainframe servers. The introduction of the XP256
represented a dramatic strategy change for HP's enterprise storage: we now
purchase Hitachi, Ltd. 256 high-end enterprise storage equipment instead of
reselling EMC Corporation storage equipment. Simultaneously, we announced our
open Storage Area Network ("SAN") strategy with HP Equation Architecture,
providing a non-proprietary, open storage environment which will allow customers
a choice in their storage vendor. Wide ranges of storage products have been
announced in the past year, which are parts of the HP Equation Architecture.
These include the Disk Array HP SureStore E FC60, HP SureStore E Switch F16, and
a new family of tape libraries. Also in May 1999, HP announced the acquisition
of Transoft Networks, Inc., which provides technology for the management of open
SAN environments. As a result of this acquisition, we introduced the HP
SANManager LM (LUN Management) product in September 1999, which provides for the
configuration of storage connected in an open SAN environment.
In the information storage business, HP introduced a number of CD-Rewritable
("CD-RW") read/ write CD-based solutions, which enable people to write, erase,
rewrite and update large files on CD-RW media. These include the spring 1999
introduction of the world's first portable CD-RW and the fall release of a new
music CD-RW, with artists' royalties pre-paid in the device and media price, for
legally copying music files onto CD.
Other significant introductions included, in July 1999, the HP SureStore
DAT-40 drive, with one-button disaster recovery (OBDR). In August, HP introduced
a new family of SureStore modular tape libraries, and in September we introduced
our first hard disk network-attached storage (NAS) systems, the SureStore HD
server 4000. In November, we announced the linear tape open (LTO) format tape
drives-SureStore Ultrium, which will extend the life of tape products and offer
increased performance over conventional formats.
IT SERVICES
Our information technology services businesses provide: (1) rapid
implementation and globally available support of solutions based on HP products,
and (2) professional and financial services directly to customers, independent
of products. Capabilities in the first category include ongoing support and
maintenance services, as well as associated parts and supplies, for office and
information systems, computers and computer systems, and networking, imaging and
printing products. The second category of services includes consulting,
education, design and implementation services, mission-critical support,
outsourcing and "utility" computing services, such as messaging, which are paid
for on a subscription basis. The second category also comprises financing
capabilities, including product leasing, automatic technology-refreshment
services and solution financing. Key service introductions in 1999 included
rapid-implementation services for applications from SAP, BroadVision, Inc. and
i2 Technologies, Inc.; new
- ------------------------
(4) Windows NT is a U.S. registered trademark of Microsoft Corporation.
5
support services for the Linux operating environment and expanded services for
Windows NT-Registered Trademark-; the expansion of Web-based support services
(HP Customer Care and the IT Resource Center); expanded outsourcing services for
Enterprise Resource Planning ("ERP") applications from SAP and Baan Company
N.V.; and a full life cycle of network-availability services, a new suite of
business-recovery services and high-availability services for Windows
NT-Registered Trademark--based systems, telecom customers, Cisco products, and
popular e-commerce and ERP applications.
MARKETING
CUSTOMERS. HP has approximately 540 sales and support offices and
distributorships in more than 120 countries. Sales are made to industrial and
commercial customers, educational and scientific institutions, healthcare
providers and, in the case of our PCs, imaging and other personal-information
products, to individuals for personal use.
SALES ORGANIZATION. More than half of our net revenue is derived through
reseller channels, including retailers, dealers and original equipment
manufacturers. The remaining revenue results from the efforts of our own sales
organization, which is composed of direct field service engineers, sales
representatives, service personnel and administrative support staff. We
generated a higher proportion of our net revenue in fiscal 1999 than in fiscal
1998 from our PCs, printers and other personal-information products, which are
sold primarily through resellers.
INTERNATIONAL. A summary of HP's net revenue, and net property, plant and
equipment by geographic area is set forth in the "Segment Information" note to
Consolidated Financial Statements, which information is incorporated herein by
reference. A majority of our net revenue originating outside the United States
was from customers other than foreign governments. Approximately two-thirds of
our international revenue in each of the last three fiscal years was derived
from Europe, with most of the balance coming from Japan, other countries in Asia
Pacific, Latin America and Canada.
Most of HP's sales in international markets are made by foreign sales
subsidiaries. In countries with low sales volumes, sales are made through
various representatives and distributors. However, we make certain sales in
international markets directly from the United States.
For a discussion of risks attendant to HP's foreign operations, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors That Could Affect Future Results--International,"
"- --Market Risk" and "--Adoption of the Euro" in Item 7 below and the
"Financial Instruments" note to the Consolidated Financial Statements in Item 8
below, which are incorporated herein by reference.
We believe that our international diversification provides stability to our
worldwide operations and reduces the impact on us of adverse economic changes in
any single country.
MATERIALS
HP's manufacturing operations employ a wide variety of semiconductors,
electromechanical components and assemblies, and raw materials such as plastic
resins and sheet metal. We believe that the materials and supplies necessary for
our manufacturing operations are presently available in the quantities required.
We purchase materials, supplies and product subassemblies from a substantial
number of vendors. For many of our products, we have existing alternate sources
of supply, or such sources are readily available.
PATENTS
HP's general policy has been to seek patent protection for those inventions
and improvements likely to be incorporated into our products and services or to
give us a competitive advantage. While we believe that our patents and
applications have value, in general no single patent is in itself essential to
us as a
6
whole or any of our principal business segments. In addition, any of our
proprietary rights could be challenged, invalidated or circumvented, or may not
provide significant competitive advantages.
BACKLOG
HP believes that backlog is not a meaningful indicator of future business
prospects due to the large volume of products delivered from shelf inventories,
the shortening of product life cycles and the relative portion of net revenue
related to our service and support business. Therefore, we believe that backlog
information is not material to an understanding of our business.
COMPETITION
We encounter aggressive competition in all areas of our business activity.
Our competitors are numerous, ranging from some of the world's largest
corporations to many relatively small and highly specialized firms. HP competes
primarily on the basis of technology, performance, price, quality, reliability,
distribution and customer service and support. Our reputation, the ease of use
of our products and the ready availability of multiple software applications and
customer training are also important competitive factors.
The markets for our three principal segments are characterized by vigorous
competition among major corporations with long-established positions and, in the
case of the computing systems segment, a large number of new and rapidly growing
firms. Product life cycles are short, and to remain competitive we must develop
new products and services, periodically enhance our existing products and
services and compete effectively on the basis of the factors listed above. In
particular, we anticipate that we will have to continue to adjust prices on many
of our products and services to stay competitive, and thus effectively manage
financial returns with correspondingly reduced gross margins.
While the absence of reliable statistics makes it difficult to state HP's
relative position with certainty, we believe that on an overall basis we are the
second-largest U.S.-based manufacturer of general-purpose computers,
personal-information, imaging and printing products for industrial, scientific
and business applications and that our products in each of our principal
business segments are either the leader or among the leaders.
RESEARCH AND DEVELOPMENT
The process of developing new high-technology products and solutions is
inherently complex and uncertain. It requires, among other things, innovation
and accurate anticipation of customers' changing needs and emerging
technological trends. Without the introduction of new products, services and
enhancements, HP's products and services are likely to become technologically
obsolete over time, in which case revenues would be materially and adversely
affected. New products and services, if and when introduced, may not achieve
market acceptance. After the products and services are developed, HP must
quickly manufacture and deliver such products and services in sufficient volumes
at acceptable costs to meet demand.
Hewlett-Packard Laboratories, together with the various research and
development groups within the three principal business segments, are responsible
for our total research and development efforts. Hewlett-Packard Laboratories is
the second largest computer lab in the world and the fifth largest U.S. research
lab overall.
Expenditures for research and development, including by Hewlett-Packard
Laboratories and the three principal business segments, were $2.4 billion in
fiscal 1999, $2.4 billion in fiscal 1998 and $2.2 billion in fiscal 1997. In
fiscal 1999, total research and development expenditures were 5.8 percent of net
revenue, compared to 6.0 percent in fiscal 1998 and 6.2 percent in fiscal 1997.
We anticipate that we will continue to have significant research and development
expenditures in the future to maintain our competitive position with a
continuing flow of innovative, high-quality products and services.
7
ENVIRONMENT
Certain of HP's operations involve the use of substances regulated under
various federal, state and international laws governing the environment. It is
our policy to apply strict standards for environmental protection to sites
inside and outside the U.S., even if not subject to regulations imposed by local
governments. The liability for environmental remediation and related costs is
accrued when it is considered probable and the costs can be reasonably
estimated. Environmental costs are presently not material to our operations or
financial position.
EMPLOYEES
HP had approximately 84,400 employees worldwide at October 31, 1999.
Information regarding the executive officers of HP is set forth in Part III
below.
DISCONTINUED OPERATIONS
On March 2, 1999, HP announced a plan to create a separate company,
subsequently named Agilent Technologies, Inc. ("Agilent Technologies"), which
would comprise HP's test and measurement, semiconductor products, healthcare
solutions and chemical analysis businesses. On November 23, 1999, HP sold
approximately 16 percent of Agilent Technologies' stock to the public in an
initial public offering and retained the balance of the shares, which we plan to
distribute to our stockholders by July 31, 2000. HP's Consolidated Financial
Statements set forth in Item 8 below reflect the planned spin-off of Agilent
Technologies' businesses as a discontinued operation. Following is a brief
description of Agilent Technologies' businesses.
Agilent Technologies is a global, diversified technology company that
provides enabling solutions to high growth markets within the communications,
healthcare and life sciences industries. Agilent Technologies includes the
following four primary businesses:
- TEST AND MEASUREMENT, the largest of the four businesses, which provides
standard and customized test, measurement and monitoring instruments and
systems, as well as software for the design, manufacture and support of
high frequency electronics and communications devices;
- SEMICONDUCTOR PRODUCTS, which provides fiber optic communications devices
and assemblies, integrated circuits for wireless applications,
application-specific integrated circuits, optoelectronic devices and image
sensors;
- HEALTHCARE SOLUTIONS, which provides patient monitoring, ultrasound
imaging and cardiology products and systems; and
- CHEMICAL ANALYSIS, which provides analytical instruments, systems and
services for chromatography, spectroscopy and bio-instrumentation.
Agilent Technologies sells such products primarily through its direct sales
force, but it also utilizes distributors, resellers, telesales and electronic
commerce. It employs approximately 42,000 people worldwide. It has major
research and development and manufacturing sites in California, Colorado,
Delaware, Massachusetts and Washington in the United States and in China,
Germany, Japan, Korea, Malaysia, Singapore and the United Kingdom.
ITEM 2. PROPERTIES.
The principal executive offices of HP are located at 3000 Hanover Street,
Palo Alto, California 94304. As of October 31, 1999, we owned or leased a total
of approximately 45.3 million square feet of space
8
worldwide, including 2 million square feet currently occupied by Agilent
Technologies. We believe that our existing properties are in good condition and
suitable for the conduct of our business.
Our plants are equipped with machinery, most of which is owned and is in
part developed by us to meet the special requirements for manufacturing
computers, peripherals and systems. At the end of fiscal 1999, we were
productively utilizing the vast majority of the space in our facilities, while
actively disposing of space determined to be excess.
We anticipate that most of the capital necessary for expansion will continue
to be obtained from internally generated funds. Investment in new property,
plant and equipment from continuing operations amounted to $1.1 billion in
fiscal 1999, $1.6 billion in fiscal 1998 and $1.8 billion in fiscal 1997.
As of October 31, 1999, our sales and support operations occupied
approximately 13.1 million square feet, of which approximately 3.6 million
square feet were located within the United States. We own 45% of the space used
for marketing activities and lease the remaining 55%.
HP's manufacturing plants, research and development facilities and warehouse
and administrative facilities occupied approximately 30.2 million square feet,
of which approximately 22 million square feet were located within the United
States. We own 62% of our manufacturing, research and development, warehouse and
administrative space and lease the remaining 38%. None of the property owned by
us is held subject to any major encumbrances.
As indicated above, HP has three principal business segments: Imaging and
Printing Systems, Computing Systems and IT Services. Because of the
interrelation of these three segments, substantially all of the properties are
used at least in part by each of these segments, and we retain the flexibility
to use each of the properties in whole or in part for each of the segments.
The locations of HP's headquarters of geographic operations are listed
below:
HEADQUARTERS OF GEOGRAPHIC OPERATIONS
AMERICAS EUROPE, AFRICA, MIDDLE EAST ASIA PACIFIC
Cupertino, California Geneva, Switzerland Hong Kong
The locations of HP's major product development and manufacturing facilities
and Hewlett-Packard Laboratories are listed below:
PRODUCT DEVELOPMENT AND MANUFACTURING
AMERICAS Richardson, Texas Barcelona, Spain
Cupertino, Costa Mesa, Salt Lake City, Utah Bristol, United Kingdom
Mountain View, Palo Alto, Chester, Richmond and ASIA PACIFIC
Roseville, San Diego, Sandston, Virginia Melbourne, Australia
Santa Clara, Santa Monica, Vancouver, Washington Shanghai, China
Sunnyvale and Sao Paulo, Brazil Bangalore, India
Woodland, California Guadalajara, Mexico Hachioji, Kobe and
Fort Collins and EUROPE Komiya, Japan
Greeley, Colorado Grenoble and Singapore
Boise, Idaho Isle D'Abeau, France Taiwan
Corvallis, Oregon Boeblingen, Germany HEWLETT-PACKARD LABORATORIES
Aguadilla, Puerto Rico Dublin, Ireland Palo Alto, California
Memphis, Tennessee Amsterdam and Haifa, Israel
Amersfoort, The Netherlands Bristol, United Kingdom
9
ITEM 3. LEGAL PROCEEDINGS.
There are presently no pending legal proceedings, other than routine
litigation incidental to HP's business, to which we are a party or to which any
of our property is subject.
HP is a party to, or otherwise involved in, proceedings brought by federal
or state environmental agencies under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), known as "Superfund," or state laws
similar to CERCLA. We are also conducting environmental investigations or
remediations at several of its current or former operating sites pursuant to
administrative orders or consent agreements with state environmental agencies.
Any liability from such proceedings, in the aggregate, is not expected to be
material to the operations or financial position of HP.
In November 1999, in settlement of an administrative complaint filed in 1998
that alleged violations of the Toxic Substances Control Act ("TSCA"), HP entered
into a consent agreement with the United States Environmental Protection Agency
under which we agreed to pay a civil penalty of $112,500, to have a ten-month
post-enforcement audit of specified operations conducted by a third party and to
pay civil penalties in stipulated amounts for any violations that may be
discovered in that audit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
Information regarding the market prices of HP's common stock and the markets
for that stock may be found in the "Quarterly Summary" in Item 8 below and the
cover page of this Form 10-K, which is incorporated herein by reference,
respectively. We have paid cash dividends each year since 1965. The current rate
is $0.16 per share per quarter. As of November 30, 1999, there were
approximately 127,900 shareholders of record. Additional information concerning
dividends may be found in the following sections of this Form 10-K, which are
incorporated herein by reference: "Selected Financial Data" in Item 6 below and
"Consolidated Statement of Cash Flows," "Consolidated Statement of Stockholders'
Equity" and "Quarterly Summary" in Item 8 below.
ITEM 6. SELECTED FINANCIAL DATA.
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
SELECTED FINANCIAL DATA
FOR THE YEARS ENDED OCTOBER 31
IN MILLIONS EXCEPT PER SHARE AMOUNTS 1999 1998 1997 1996 1995
- ------------------------------------ -------- -------- -------- -------- --------
Net revenue.................................... $42,370 $39,419 $35,465 $31,613 $25,381
Earnings from operations....................... $ 3,688 $ 3,399 $ 3,405 $ 2,926 $ 2,818
Net earnings from continuing operations........ $ 3,104 $ 2,678 $ 2,515 $ 2,085 $ 1,973
Net earnings per share, continuing operations
Basic........................................ $ 3.08 $ 2.59 $ 2.45 $ 2.05 $ 1.93
Diluted...................................... $ 2.97 $ 2.52 $ 2.38 $ 1.98 $ 1.87
Cash dividends per share....................... $ .64 $ .60 $ .52 $ .44 $ .35
At year-end:
Assets--continuing operations................ $31,764 $28,624 $26,681 $22,934 $19,950
Assets--total................................ $35,297 $31,708 $29,852 $25,977 $22,802
Long-term debt............................... $ 1,764 $ 2,063 $ 3,158 $ 2,579 $ 663
- ------------------------
Note:
HP's consolidated financial statements and notes for all periods present Agilent
Technologies' businesses as a discontinued operation. See further discussion in
notes to the consolidated financial statements.
10
ITEM 7. 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
UNAUDITED
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES THAT APPEAR ELSEWHERE IN THIS
DOCUMENT.
HP's Consolidated Financial Statements for all periods present Agilent
Technologies as a discontinued business segment in accordance with Accounting
Principles Board Opinion No. 30. Unless otherwise indicated, the following
discussion relates to HP's continuing operations.
RESULTS OF OPERATIONS
In 1999, HP reported net revenue growth of 7% following 11% growth in 1998.
HP continued to experience favorable market acceptance of its personal computer
and imaging and printing products. However, continued aggressive pricing in
personal computer and printer products and sluggish performance in
UNIX-Registered Trademark- servers and enterprise storage impacted 1999 net
revenue growth and related operating margins. Net revenue grew 4% during the
first half of 1999 reflecting continued weakness in Asia; however, net revenue
grew 11% during the second half, driven by strong product positions in most of
our businesses and economic improvement in Asia. Cost and expense controls
implemented by HP during the second half of 1998 had a favorable impact on
operating results in 1999, offsetting the impact of the slowdown in full-year
revenue growth. As a result, full-year operating and net profit margins were
higher than in 1998 and net earnings from continuing operations increased 16% in
1999 compared with a 6% increase in 1998.
Net revenue growth of 7% in 1999 was driven primarily by growth in the
Imaging and Printing Systems segment, while the 11% revenue growth in 1998
resulted primarily from strong performance in the Computing Systems and Imaging
and Printing Systems segments.
Compared to 1998, international revenue increased 9% in 1999 to
$23.4 billion, while U.S. revenue grew 6% to $19.0 billion. In 1998,
international revenue increased 10% and U.S. revenue increased 13% compared to
1997. Fluctuations in currency rates had minimal impact on net revenue growth in
1999, while they adversely impacted net revenue growth in 1998 by approximately
4 percentage points.
Costs, expenses and earnings as a percentage of net revenue were as follows
for the years ended October 31:
1999 1998 1997
-------- -------- --------
Cost of products sold and services.................. 70.1% 70.5% 69.1%
Research and development............................ 5.8% 6.0% 6.2%
Selling, general and administrative................. 15.4% 14.8% 15.1%
Earnings from operations............................ 8.7% 8.6% 9.6%
Net earnings from continuing operations............. 7.3% 6.8% 7.1%
Cost of products sold and services as a percentage of net revenue was 70.1%
in 1999, compared with 70.5% in 1998 and 69.1% in 1997. The decrease in the cost
of sales percentage in 1999 versus 1998 was driven by the Computing Systems
segment; however, this decrease was partially offset by an increase in cost of
sales in the IT Services segment. The increase in the 1998 cost of sales
percentage versus 1997 was attributable primarily to the Computing Systems and
Imaging and Printing Systems segments. HP expects
11
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
UNAUDITED
some continued upward pressure on cost of sales as a result of factors such as
ongoing competitive pricing pressures.
Total operating expenses, composed of research and development and selling,
general and administrative expenses, increased 9% in both 1999 and 1998. In both
years, expense growth was moderated as a result of hiring controls implemented
in 1998 and increased use of outsourcing where appropriate and cost effective.
Research and development expense increased 3% in 1999 versus 1998 and 9% in 1998
when compared to 1997. The increase in spending reflects our continuing
investment in design and development for new computing systems and new
technologies in imaging and printing systems. Selling, general and
administrative expenses increased 11% in 1999 versus 1998 and 9% in 1998 when
compared to 1997. In both 1999 and 1998, the growth is due primarily to
increased selling costs related to revenue growth as well as increased marketing
costs from the continued introduction of new products and spending to support
our e-services initiatives. In addition, in 1999, selling, general and
administrative expenses increased as a result of costs incurred to realign HP
into two separate companies. These costs consisted primarily of expenses to
effect the spin-off of Agilent Technologies that were incurred prior to the
July 31, 1999 measurement date for discontinued operations accounting and other
expenses composed primarily of retention incentives given to continuing HP
employees involved in effecting the spin-off. These costs had approximately a
one percentage point impact on the overall selling, general and administrative
expense growth rate in 1999 when compared to 1998.
Interest income and other, net, increased $178 million in 1999 versus 1998
following a $152 million increase in 1998 when compared to 1997. The increase in
both years was attributable primarily to an increase in interest income
associated with higher average cash and investment balances.
HP's tax rate was 26% in 1999, 27.5% in 1998 and 29.5% in 1997. The
year-to-year decreases are the result of changes in the mix of our pre-tax
earnings in various tax jurisdictions throughout the world.
As reported, net earnings from continuing operations increased 16% to
$3.1 billion in 1999, compared to a 6% increase to $2.7 billion in 1998. As a
percentage of net revenue, net earnings from continuing operations were 7.3% in
1999, compared to 6.8% in 1998 and 7.1% in 1997.
Earnings from discontinued operations include the results of the businesses
that comprise Agilent Technologies. Earnings from discontinued operations
through the July 31, 1999 measurement date for discontinued operations
accounting were $387 million for the nine months ended July 31, 1999,
$267 million in 1998 and $604 million in 1997. For the period from August 1,
1999 through the spin-off, net earnings from Agilent Technologies are expected
to exceed the estimated costs to effect the spin-off. The excess net earnings
over these costs will be recognized once the net earnings realized exceed the
total estimated costs of the spin-off.
12
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
UNAUDITED
SEGMENT INFORMATION
The following is a discussion of operating results for each of HP's business
segments. A description of products and services as well as financial data for
each segment can be found in the "Segment Information" note to consolidated
financial statements.
IMAGING AND PRINTING SYSTEMS
YEARS ENDED OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
Net revenue................................................. $18,902 $17,046 $15,986
Earnings from operations.................................... $ 2,305 $ 2,050 $ 2,037
Imaging and Printing Systems' net revenue grew 11% in 1999 from 1998,
following a 7% increase in 1998 when compared to 1997. Net revenue growth in
both years benefited from strong sales of printer hardware and supplies. Despite
very strong unit growth, dollar growth was constrained by declines in average
selling prices and shifts to low-end products.
Net revenue growth in printer hardware in 1999 was driven by strong sales of
newly introduced home printers, personal/workgroup office printers and scanning
devices. Home printers benefited from positive acceptance of low-end desktop
printers, while color lasers drove strong growth in personal/workgroup office
printers and made solid inroads in the office department category. Higher unit
shipments of new products fueled the increase in scanning devices, despite a
sharp decline in average selling prices. Growth in printer hardware in 1998
versus 1997 benefited from strong sales of personal/workgroup office printers as
a result of the successful introduction of new monochrome and wide format
printers. Growth in printer supplies in both years was attributable to the
continued growth in the installed base, the growth of the Internet and a shift
to the next generation of printer supply technologies.
Earnings from operations as a percentage of net revenue were 12.2% in 1999,
compared to 12.0% in 1998 and 12.7% in 1997. In 1998, Imaging and Printing
Systems incurred approximately $120 million of charges primarily for voluntary
employee severance programs and fixed asset write-downs related to outsourcing
certain production operations. The decision to outsource these operations was
made to provide flexibility in manufacturing in the future. Adjusting for these
charges, earnings from operations as a percentage of net revenue would have been
12.7% in 1998.
The adjusted 0.5 percentage point decrease in earnings from operations as a
percentage of net revenue in 1999 was driven by higher component costs
attributable to the strengthening Japanese yen and a shift toward lower-margin
personal/workgroup office printers. This decrease was partially offset by strong
sales of higher-margin printer supplies and high volume shipments of newly
introduced home printers. The unchanged performance in the adjusted earnings
from operations ratio in 1998 when compared to 1997 reflected lower average
selling prices of home printers offset by strong sales of higher-margin supplies
and lower component costs associated with the weakening Japanese yen when
compared to 1997. In both years, earnings from operations as a percentage of net
revenue were favorably impacted by expense controls implemented beginning in the
second half of 1998. However, the impact of these controls were offset by
investments made to develop next generation technologies and additional selling
and marketing expenses to promote new Imaging and Printing products.
13
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
UNAUDITED
COMPUTING SYSTEMS
YEARS ENDED OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
Net revenue................................................. $18,435 $17,775 $15,500
Earnings from operations.................................... $ 856 $ 515 $ 581
Computing Systems' net revenue increased 4 percent in 1999 versus 1998,
following a 15 percent increase in 1998 when compared to 1997. Strong unit
shipments in a number of PC and information storage products drove revenue
growth in both years. However, actions designed to maintain market share against
intense competition, particularly in 1998, contributed to declines in the
average selling prices in these products, resulting in unit volume growth that
outpaced revenue growth. UNIX-Registered Trademark- server and enterprise
storage revenue growth in 1999 was unfavorably impacted by the change in
high-end storage strategy and certain product transitions, while 1998 revenue
growth benefited from strong market acceptance of new product introductions.
Computing Systems' revenue growth in 1999 reflected strong unit shipments of
home PCs and increased sales of information storage products and mobile PCs.
High-end UNIX-Registered Trademark- servers introduced in prior years also
contributed to revenue growth in 1999. However, weakness in sales of low-end and
mid-range servers, primarily in North America, and a transition to a new
high-end enterprise storage strategy in mid-1999 had a moderating impact on
overall revenue growth in 1999.
Revenue growth of 15% in 1998 was due to strong unit shipments of home and
business desktop PCs. New high-end UNIX-Registered Trademark- server products
introduced in 1997 and 1998 also contributed to revenue growth in 1998. Sales of
these new products also favorably impacted sales of mid-range
UNIX-Registered Trademark- servers and enterprise storage products in 1998.
Earnings from operations as a percentage of net revenue were 4.6% in 1999,
compared to 2.9% in 1998 and 3.7% in 1997. The 1.7 percentage point increase in
1999 versus 1998 was attributable primarily to favorable component prices for
business desktop PCs and some enterprise storage products, improved PC inventory
management and a shift towards higher-margin enterprise storage products. This
was partially offset by the continued decline in average selling prices and a
shift towards low-end PC products. The 0.8 percentage point decline in 1998
earnings from operations as a percentage of net revenue reflected a higher sales
mix of low-end home PCs, a shift toward lower-margin PC servers and intense
competitive pricing on several PC products. This impact was partially offset by
declines in component costs and increased sales of higher-margin
UNIX-Registered Trademark- servers and enterprise storage products. Expense
controls implemented during the second half of 1998 and improved operational
efficiencies had a favorable impact on the earnings from operations ratio in
both years.
IT SERVICES
YEARS ENDED OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
Net revenue................................................. $5,916 $5,242 $4,804
Earnings from operations.................................... $ 636 $ 785 $ 797
14
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
UNAUDITED
IT Services net revenue increased 13% in 1999 versus 1998, following a 9%
increase in 1998 when compared to 1997. In both years, strong growth in support
revenue was moderated by lower growth rates in professional services, which
include consulting and outsourcing services, and financing which represents our
leasing portfolio.
The 13% growth in 1999 revenue was driven primarily by support services. The
growth in support revenue reflected the strong performance of mission critical,
a customer service program that provides support for mission critical systems,
and networking services. Outsourcing revenue growth was strong; however,
consulting revenue grew nominally versus 1998. Financing revenue growth in 1999
was unfavorably impacted by lower rental starts and a more competitive
UNIX-Registered Trademark- environment.
Revenue growth in 1998 was also attributable to strong growth in support
revenue due primarily to success in mission critical and NT customer service
programs. Revenue growth from professional services was moderate, reflecting
economic weakness in Asia and management's efforts to focus on profitable
revenue growth. An increase in sales-type leases also resulted in moderate
financing revenue growth in 1998.
Earnings from operations as a percentage of net revenue were 10.8% in 1999,
compared to 15.0% in 1998 and 16.6% in 1997. The decrease in 1999 reflected
lease portfolio recoverability costs related primarily to the transition to a
new high-end enterprise storage strategy, and reduced profitability attributable
to slower growth of new services, competitive pricing, and an increase in the
number of consultants to support future growth. Operating expenses also
increased as a result of investment in service and support technologies and
marketing expenses related to our e-services initiatives. The decrease in
earnings from operations as a percentage of net revenue in 1998 was due
primarily to higher costs of sales in consulting and outsourcing services and
competitive pricing pressures within support services.
LIQUIDITY AND CAPITAL RESOURCES
HP's financial position remained strong throughout 1999, with cash and cash
equivalents and short-term investments increasing to $5.6 billion at
October 31, 1999 compared to $4.1 billion at October 31, 1998. Long-term
investments, relatively low levels of debt compared to assets, and a large
equity base contribute to HP's financial flexibility. During 1999, cash flows
from operating activities and net proceeds from borrowings were used to fund
repurchases of HP's common stock and purchases of property, plant and equipment.
Additionally, HP increased dividends per share paid in both 1999 and 1998.
Operating activities generated $3.1 billion of cash in 1999, compared to
$4.8 billion in 1998 and $3.4 billion in 1997. The decrease in cash generated in
1999 resulted primarily from higher investments in receivables and inventories
due to growth, and from timing of tax payments. The increase in cash generated
in 1998 compared to 1997 was due primarily to the decrease in HP's inventory
levels during 1998.
Inventory as a percentage of net revenue decreased to 11.5% in 1999 from
11.9% in 1998 as progress in supply chain management continued. Accounts and
financing receivables as a percentage of net revenue were 18.5% in 1999 and
16.7% in 1998. The higher ratio in 1999 reflected primarily an increase in
sales-type lease financing receivables.
Capital expenditures were $1.1 billion in 1999, compared to $1.6 billion in
1998 and $1.8 billion in 1997. Net property, plant and equipment as a percentage
of net revenue was 10.2% in 1999 and 12.4% in
15
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
UNAUDITED
1998. The decreases in the fixed asset ratio and related capital expenditures in
1999 and 1998 reflect increased outsourcing of certain production processes,
consolidation of operations to improve space utilization, and HP's emphasis on
cost controls.
HP invests 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-term borrowings increased
in 1999 due to the use of short-term debt to meet short-term working capital
requirements. Maturities of long-term debt totaling $1.0 billion were repaid as
scheduled in 1999. In 1998, net receipts from maturities of short-term
investments were used to pay down both short- and long-term debt. At
October 31, 1999, HP had an unused committed borrowing facility in place
totaling $1.0 billion.
HP repurchases shares of its common stock under a systematic program to
manage the dilution created by shares issued under employee stock plans, and
under a separate incremental plan authorizing purchases in the open market or in
private transactions. In 1999, 31 million shares were repurchased under these
plans for an aggregate price of $2.6 billion. In 1998, 43 million shares were
repurchased under these plans for $2.4 billion. During 1999, HP's Board of
Directors authorized an additional $2.0 billion of future repurchases under
these two programs in the aggregate. As of October 31, 1999, HP had
authorization for remaining future repurchases under the two programs of
approximately $1.4 billion. In November 1999, the Board of Directors authorized
an additional $2.0 billion in future repurchases under the plans resulting in
remaining authorized repurchases totaling $3.4 billion.
On November 1, 1999, HP provided initial funding of approximately $1.1
billion to Agilent Technologies. On November 23, 1999, Agilent Technologies
closed an initial public offering of approximately 16% of its common stock and
distributed the net proceeds of $2.1 billion to HP.
FACTORS THAT COULD AFFECT FUTURE RESULTS
COMPETITION
We encounter aggressive competition in all areas of our business. We have
numerous competitors, ranging from some of the world's largest corporations to
many relatively small and highly specialized firms. We compete primarily on the
basis of technology, performance, price, quality, reliability, distribution and
customer service and support. Product life cycles are short. To remain
competitive, HP must be able to develop new products and periodically enhance
our existing products. In particular, we anticipate that we will have to
continue to lower the prices of many of our products to stay competitive and
effectively manage financial returns with resulting reduced gross margins. In
some of our markets, we may not be able to compete successfully against current
and future competitors, and the competitive pressures we face could harm our
business and prospects.
NEW PRODUCT INTRODUCTIONS
If we cannot continue to rapidly develop, manufacture and market innovative
products and services that meet customer requirements for performance and
reliability, we may lose market share and our future revenue and earnings may
suffer. The process of developing new high technology products and services is
complex and uncertain. We must accurately anticipate customers' changing needs
and emerging technological trends. We consequently 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
16
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
UNAUDITED
a product is developed, we must be able to manufacture sufficient volumes
quickly at low enough costs. To do this we must accurately forecast volumes, mix
of products and configurations. Additionally, the supply and timing of a new
product or service must match customers' demand and timing for the particular
product or service. Given the wide variety of systems, products and services
that HP offers, the process of planning production and managing inventory levels
becomes increasingly difficult.
RELIANCE ON THIRD PARTY DISTRIBUTION CHANNELS AND INVENTORY MANAGEMENT
We use third-party distributors to sell our products, especially printers
and personal computers, in order to accommodate changing customer preferences.
As a result, the financial soundness of our wholesale and retail distributors,
and our continuing relationships with these distributors, are important to HP's
success. Some of these distributors may have insufficient financial resources
and may not be able to withstand changes in business conditions. Our revenue and
earnings could suffer if our distributors' financial condition or operations
weaken or if our relationship with them deteriorates.
Additionally, inventory management becomes increasingly complex as we
continue to sell a significant mix of products through distributors. Third party
distributors constantly adjust their product orders from us in response to:
- The supply of our and our competitors' products available to the
distributor,
- The timing of new product introductions and relative features of the
products, and
- Seasonal fluctuations in end-user demand, such as back-to-school and
holiday buying.
Distributors may increase orders during times of product shortages, cancel
orders if their inventory is too high, or delay orders in anticipation of new
products. 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.
SHORT PRODUCT LIFE CYCLE
The short life cycles of many of our products pose a challenge for us to
manage effectively the transition from existing products to new products. If we
do not manage the transition effectively, our revenue and earnings could suffer.
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, and delays in customer purchases of existing
products in anticipation of new product introductions. Our revenue and earnings
could also suffer due to the timing of product or service introductions by our
suppliers and competitors. This is especially true when a competitor introduces
a new product just before our own product introduction. Further, our new
products may replace or compete with certain of our own current products.
INTELLECTUAL PROPERTY
We generally rely upon patent, copyright, trademark and trade secret laws in
the United States and in certain other countries, and agreements with our
employees, customers and partners, to establish and maintain our proprietary
rights in our technology and products. However, any of our intellectual
proprietary rights could be challenged, invalidated or circumvented. Our
intellectual property may not necessarily provide significant competitive
advantages. Also, because of the rapid pace of technological change in the
information technology industry, many of our products rely on key technologies
developed
17
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
UNAUDITED
by other third parties, and we may not be able to continue to obtain licenses
from these third parties. Third parties may claim that we are infringing their
intellectual property. Even if we do not believe that our products are
infringing 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
might also require us to enter into costly royalty or license agreements. If we
cannot or do not license the infringed technology or substitute similar
technology from another source, our business could suffer.
RELIANCE ON SUPPLIERS
Our manufacturing operations depend on our suppliers' ability to deliver
quality components and products in time for us to meet critical manufacturing
and distribution schedules. We sometimes experience a short supply of certain
component parts as a result of strong demand in the industry for those parts. If
shortages or delays persist, our operating results could suffer until other
sources can be developed. In order to secure components for the production of
new products, at times we make advance payments to suppliers, or we may enter
into noncancelable purchase commitments with vendors. If the prices of these
component parts then decrease after we have entered into binding price
agreements, our earnings could suffer. Further, we may not be able to secure
enough components at reasonable prices to build new products in a timely manner
in the quantities and configurations needed. Conversely, a temporary oversupply
of these parts could also affect our operating results.
INTERNATIONAL
Sales outside the United States make up more than half of our revenues. A
portion of our product and component manufacturing, along with key suppliers,
are also located outside of the United States. Our future earnings or financial
position could be adversely affected by a variety of international factors,
including:
- Changes in a country or region's political or economic conditions,
- Trade protection measures,
- Import or export licensing requirements,
- The overlap of different tax structures,
- Unexpected changes in regulatory requirements,
- Differing technology standards,
- Problems caused by the conversion of various European currencies to the
Euro (see "Adoption of the Euro" section which follows), and
- Natural disasters.
MARKET RISK
We are exposed to foreign currency exchange rate risk inherent in our sales
commitments, anticipated sales, and assets and liabilities denominated in
currencies other than the U.S. dollar. We are also exposed to interest rate risk
inherent in our debt and investment portfolios. Our risk management strategy
uses
18
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
UNAUDITED
derivative financial instruments, including forwards, swaps and purchased
options, to hedge certain foreign currency and interest rate exposures. Our
intent is to offset gains and losses that occur on the underlying exposures,
with gains and losses on the derivative contracts hedging these exposures. We do
not enter into derivatives for trading purposes. See also the "Financial
Instruments--Off-Balance-Sheet Foreign Exchange Risk" and "Borrowings" notes to
the consolidated financial statements for more detailed information.
We have performed a sensitivity analysis assuming a hypothetical 10% adverse
movement in foreign exchange rates applied to the hedging contracts and
underlying exposures described above, and a hypothetical 10% adverse movement in
interest rates applied to our debt and investment portfolios. As of October 31,
1999 and 1998, the analysis indicated that these hypothetical market movements
would not have a material effect on HP's consolidated financial position,
results of operations or cash flows. Actual gains and losses in the future may
differ materially from that analysis; however, based on changes in the timing
and amount of interest rate and foreign currency exchange rate movements and
HP's actual exposures and hedges.
ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES
In the normal course of business, HP frequently engages in discussions with
third parties relating to possible acquisitions, strategic alliances, joint
ventures and divestitures. Although completion of a transaction is unlikely to
have a material effect on our financial position, results of operations or cash
flows taken as a whole, it may contribute to our financial results differing
from the investment community's expectations in a given quarter. Divestiture of
a part of our business may result in the cancellation of orders and charges to
earnings. Acquisitions and strategic alliances may require us to integrate with
a different company culture, management team and business infrastructure. We may
also have to develop, manufacture and market products with our products in a way
that enhances the performance of the combined business or product line.
Depending on the size and complexity of an acquisition, our successful
integration of the entity into HP depends on a variety of factors, including:
- The hiring and retention of key employees,
- Management of facilities in separate geographic areas, and
- The integration or coordination of different research and development and
product manufacturing facilities.
All of these efforts require varying levels of management resources, which
may divert our attention from other business operations.
EARTHQUAKE
Our corporate headquarters, a portion of our research and development
activities, other critical business operations and certain of our suppliers are
located near major earthquake faults. The ultimate impact on HP, our significant
suppliers and our general infrastructure is unknown, but operating results could
be materially affected in the event of a major earthquake. We are predominantly
uninsured for losses and interruptions caused by earthquakes.
19
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
UNAUDITED
ENVIRONMENTAL
Some of our operations use substances regulated under various federal,
state, and international laws governing the environment. It is our policy to
apply strict standards for environmental protection to sites inside and outside
the U.S., 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.
Environmental costs are presently not material to our results of operations or
financial position.
PROFIT MARGIN
Our profit margins vary somewhat among our products, customer groups and
geographic markets. Consequently, our overall profitability in any given period
is partially dependent on the product, customer and geographic mix reflected in
that period's net revenue.
STOCK PRICE
HP's stock price, like that of other technology companies, can be volatile.
Some of the factors that can affect our stock price are:
- Our, or a competitor's, announcement of new products, services or
technological innovations,
- Quarterly increases or decreases in our earnings,
- Changes in revenue or earnings estimates by the investment community, and
- Speculation in the press or investment community.
General market conditions and domestic or international macroeconomic
factors unrelated to our performance may also affect HP's stock price. For these
reasons, investors should not rely on recent trends to reliably 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.
EARNINGS FLUCTUATIONS
Although we believe that we have the products and resources needed for
continuing success, we cannot reliably predict future revenue and margin trends.
Actual trends may cause us to adjust our operations, which could cause
period-to-period fluctuations in our earnings.
PLANNED SPIN-OFF OF AGILENT TECHNOLOGIES
HP has announced that it intends to distribute to its stockholders all of
the common stock of Agilent Technologies that HP owns by July 31, 2000, although
HP is not obligated to do so. This distribution may not occur by that date or at
all. Further, HP may not obtain the benefits we expect as a result of this
distribution, such as greater strategic focus on our core computing and imaging
and printing businesses. In addition, HP's consolidated financial statements do
not reflect what the financial position, results of operations and cash flows of
HP would have been had Agilent Technologies been a separate stand-alone entity
during the periods presented.
20
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
UNAUDITED
YEAR 2000
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure
Act.
JANUARY 2000 UPDATE
Through the first week of the year 2000, HP's operations around the world
are fully functioning and have not experienced any significant issues associated
with the Year 2000 problem (as described below). Our customer-support operations
continue to communicate to us that HP customers have not reported any
consequential Year 2000 incidents. The number of Year 2000-related telephone
calls from customers into HP's response centers and customer-care centers has
been much lower than anticipated. At HP sites worldwide, we have not experienced
any significant Year 2000-related issue that would affect our ability to
manufacture, ship, sell or service our products. While we are encouraged by the
success of our Year 2000 efforts and that of our customers and partners, HP will
continue to offer Year 2000 support to customers and monitor our own operations.
YEAR 2000 READINESS OVERVIEW
The Year 2000 problem arises from the use of a two-digit field to identify
years in computer programs, e.g., 85=1985, and the assumption of a single
century, the 1900s. Any program so created may read, or attempt to read, "00" as
the year 1900. There are two other related issues that could also lead to
incorrect calculations or failure: some systems' programming assigns special
meaning to certain dates, and the year 2000 is a leap year. Accordingly, some
computer hardware and software, including programs embedded within machinery and
parts, need to be modified prior to the year 2000 to remain functional. Our
Year 2000 initiatives are focusing primarily on four areas of potential impact:
internal information technology ("IT") systems; internal non-IT systems and
processes, including services and embedded chips (controllers); our products and
services; and the readiness of significant third parties with whom we have
material business relationships. In 1997, HP established a Year 2000 Program
Office to coordinate these programs for all of its businesses across the
enterprise and to provide a single point of contact for information about Year
2000 programs. The Year 2000 efforts in these areas are led by the Year 2000
general manager who reports directly to HP's senior management.
The costs associated with our IT internal readiness actions are a
combination of incremental external spending and the use of existing internal
resources. We estimate that over the life of our IT internal readiness effort,
we will have spent a total of approximately $160 million over a multi-year
period. Based on current estimates, we do not believe that the costs associated
with these actions will have a material effect on our results of operations,
cash flows or financial condition. However, the costs of these actions may vary
from quarter to quarter, and we cannot assure you that there will not be a delay
in, or increased costs associated with, the implementation of these changes. In
addition, failure to achieve Year 2000 readiness for our internal systems and
processes could delay our ability to manufacture and ship products and deliver
services, disrupt our customer service and technical support facilities and
interrupt customer access to our online products and services. Our inability to
perform these functions could have an adverse effect on our future results of
operations, cash flows or financial condition.
21
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
UNAUDITED
INTERNAL IT SYSTEMS
HP established a dedicated Year 2000 IT Internal Readiness Program
organization to oversee the worldwide Year 2000 internal IT application and
infrastructure readiness activities for all its businesses. The Internal
Readiness IT Program organization has provided monthly progress reports to HP's
senior management. The Internal Readiness IT Program organization was charged
with raising awareness throughout HP, developing tools and methodologies for
addressing the Year 2000 issue, monitoring the development and implementation of
business and infrastructure plans to bring non-compliant applications into
compliance on a timely basis, and identifying and helping resolve high-risk
issues.
We approached our Year 2000 IT internal readiness program in four phases:
(1) assessment, (2) planning, (3) preparation and (4) implementation. The
assessment phase involved taking an inventory of our internal IT applications to
prioritize risk, identifying failure dates, defining a solution strategy,
estimating repair costs and communicating across and within business units
regarding the magnitude of the problem and the need to address Year 2000 issues.
The planning phase consisted of identifying the tasks necessary to ensure
readiness, scheduling remediation plans for applications and infrastructure and
determining resource requirements and allocations. The third phase, preparation,
involved readying the development and testing environments and piloting the
remediation process. Implementation, the last phase, consisted of executing the
plans to fix, test and implement critical applications and associated
infrastructure, and putting into place contingency plans for processes that have
a high impact on our businesses. As of October 31, 1999, the implementation
phase was virtually complete.
INTERNAL NON-IT SYSTEMS AND PROCESSES
Non-IT systems include, but are not limited to, those systems that are not
commonly thought of as IT systems, such as telephone/PBX systems; fax machines;
facilities systems regulating alarms, building access and sprinklers;
manufacturing, assembly and distribution equipment; and other miscellaneous
systems and processes. Year 2000 readiness for these internal non-IT systems is
the responsibility of our worldwide operating units and their respective
functions and operations, e.g., facilities, research and development,
manufacturing, distribution, logistics, sales and customer support.
The Year 2000 Program Office has developed a comprehensive process to ensure
all operations and global business units use a structured and standardized
methodology to organize, plan and implement their Year 2000 readiness.
HP has also established a Year 2000 Council to coordinate its overall
internal readiness and its business continuity planning efforts. The Council is
composed of representatives from the major business units within HP and the
critical corporate and infrastructure functions that support them. The council
is chaired by the Year 2000 general manager and has initiated a comprehensive
program to ensure timely and consistent business continuity planning by all of
HP's business units. As of October 31, 1999, HP had finished virtually all
Year 2000 testing, internal mitigation and remediation activities, and business
contingency plans.
PRODUCT AND CUSTOMER READINESS
Our newly introduced products are Year 2000 compliant. However, some
hardware and software products currently installed at customer sites will
require upgrade or other remediation. Some of these products are used in
critical applications in which the impact of non-performance to these customers
and
22
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
UNAUDITED
other parties could be significant. While we believe our customers are
responsible for the Year 2000 readiness of their IT and business environments,
we are taking significant steps to enable customers to achieve their readiness
goals, thereby preserving our customers' satisfaction and our brand reputation.
In 1997, HP established a dedicated Year 2000 Product Compliance Program Office
to coordinate worldwide Year 2000 product compliance activities for all its
businesses. The Product Compliance Program Office is charged with developing and
overseeing implementation of plans to identify all standard products delivered
since January 1, 1995; to test those products for compliance; to identify an
appropriate path to compliance for non-compliant standard products; and to
communicate the status and necessary customer action for non-compliant standard
products.
HP has an Internet web site dedicated to communicating Year 2000 issues to a
broad customer base. This web site includes a product compliance search page
that allows customers to look up the status of HP products they have installed.
Most of our key business groups have complementary Internet web sites dedicated
to similar communication to their specific customers. We are taking additional
steps to identify affected customers, raise customer awareness related to
non-compliance of some products and help customers to assess their risks.
All of these efforts are coordinated by the HP Year 2000 Products and
Customers Board of Directors, which is composed of representatives from all of
HP's product and service business units. The board works in conjunction with the
Product Compliance Program Office to develop and implement HP's Year 2000
policies for products and services. The Year 2000 general manager chairs the
board.
The costs of the readiness program for products are primarily costs of
existing internal resources largely absorbed within existing engineering
spending levels. These costs were incurred primarily in 1998 and earlier years
and were not broken out from other product engineering costs. Past Year 2000
customer satisfaction costs have not been material. Future product readiness
costs, including those for customer satisfaction, are not anticipated to be
material. We are aware of the potential for legal claims against us and other
companies for damages arising from products that are not Year 2000 compliant. We
believe that we have taken sufficient communication and customer satisfaction
steps so that any claims would not result in material liability for us.
It is unknown how significantly Year 2000 issues may have affected or could
affect customer spending patterns. As customers focused their attention on
preparing their own businesses for the Year 2000, they may have delayed
purchases of new applications, services and systems from HP. As a result, this
may affect our future revenues and revenue patterns. However, there is no
information to date that any such impact would materially affect our revenue
growth.
MATERIAL THIRD-PARTY RELATIONSHIPS
We have developed a Year 2000 process for dealing with our key suppliers,
contract manufacturers, distributors, vendors and partners. The process
generally involves the following steps: (1) initial supplier survey; (2) risk
assessment and contingency planning; (3) follow-up supplier reviews and
escalation, if necessary; and (4) where relevant, testing. We received formal
responses from substantially all of our critical suppliers. Most of them
responded that they expected to address all their significant Year 2000 issues
on a timely basis. We regularly reviewed and monitored the suppliers' Year 2000
readiness plans and performance. Based on our risk assessment, selective on-site
reviews were performed. Risk analysis was completed with our base of suppliers
and contingency plans were developed and tested. All critical surveys
23
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
UNAUDITED
and testing efforts were completed by June 1, 1999. In some cases, to meet
Year 2000 readiness, we have replaced suppliers or eliminated suppliers from
consideration for new business. Where efforts to work with critical suppliers
have not been successful, contingency planning generally emphasizes the
identification of substitute and second-source suppliers, or in certain
situations includes a planned increase in the level of inventory held (e.g., in
the case of sole sources). We also contracted with multiple transportation
companies to provide product delivery alternatives and we conducted Electronic
Data Interchange ("EDI") migration and testing with our supply base.
We identified and analyzed the most reasonably likely worst-case scenarios
for third-party relationships affected by Year 2000. These scenarios included
possible infrastructure collapse, the failure of power and water supplies, major
transportation disruptions, unforeseen product shortages due to hoarding of
products and sub-assemblies, and failures of communications and financial
systems. Any one of these scenarios could have had a major and material effect
on our ability to build our products and deliver services to our customers.
While we have contingency plans in place to address most issues under our
control, an infrastructure problem outside of our control or some combination of
several of these problems could have resulted in a delay in product shipments
depending on the nature and severity of the problems. We expected that most
utilities and service providers would be able to restore service within days,
although more pervasive system problems involving multiple providers could have
lasted two to four weeks or more depending on the complexity of the systems and
the effectiveness of their contingency plans.
Although we have been dedicating substantial resources towards attaining
Year 2000 readiness, we cannot assure you that we can successfully identify and
address all Year 2000 issues. Even though we are confident we have acted in a
timely manner to complete all of our assessments; to identify, develop and
implement remediation plans believed to be adequate; and to develop contingency
plans believed to be adequate; some problems may not be identified or corrected
in time to prevent material adverse consequences to us.
The discussion above regarding estimated completion dates, costs, risks and
other forward-looking statements regarding Year 2000 is based on our best
estimates given information that is currently available and is subject to
change. As we conclude our Year 2000 initiatives during the remainder of the
calendar year 2000, we may discover that actual results will differ materially
from these estimates.
ADOPTION OF THE EURO
HP has 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
will continue through January 1, 2002. On January 1, 1999, we began converting
our product prices from local currencies to Euros as required. At an appropriate
point during the transition period, product prices in participating countries
will be established and stored in Euros, and converted to local denominations.
We implemented system changes to give multi-currency capability to the few
internal applications that did not yet have this capability, and to ensure that
external partners' systems processing Euro conversions are compliant with the
European Council regulations.
We have developed plans to support display and printing of the Euro
character by impacted HP products. Some products are currently able to perform
these functions, while plans are still in process for other products.
24
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
UNAUDITED
The conversion to the Euro has not had a material effect on our foreign
exchange and hedging activities or our use of derivative instruments, and we do
not presently expect that it will. It has not materially increased our costs and
we do not expect that it will. All costs associated with the conversion to the
Euro are expensed to operations as incurred. While we will continue to evaluate
the impact of the Euro conversion over time, based on currently available
information, we do not believe that the conversion to the Euro currency will
have a material adverse impact on our consolidated financial condition, cash
flows or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement, as amended, is
effective for fiscal years beginning after June 15, 2000. HP will adopt the
standard no later than the first quarter of fiscal year 2001 and is in the
process of determining the impact that adoption will have on its consolidated
financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." The
staff accounting bulletin is effective no later than the first quarter of HP's
fiscal year 2001. HP is in the process of determining the impact that adoption
will have on its consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For quantitative and qualitative disclosures about market risk affecting HP,
see "Management's Discussion and Analysis of Financial Conditions and Results of
Operations" in Item 7 above, which is incorporated herein by reference.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
TABLE OF CONTENTS
Report of Independent Accountants........................... 27
Consolidated Statement of Earnings.......................... 28
Consolidated Balance Sheet.................................. 29
Consolidated Statement of Cash Flows........................ 30
Consolidated Statement of Stockholders' Equity.............. 31
Notes to Consolidated Financial Statements.................. 32
Quarterly Summary........................................... 54
26
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
HEWLETT-PACKARD COMPANY
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Hewlett-Packard Company and its subsidiaries at October 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended October 31, 1999, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
November 23, 1999
27
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEARS ENDED OCTOBER 31
IN MILLIONS EXCEPT PER SHARE AMOUNTS 1999 1998 1997
- ------------------------------------ -------- -------- --------
Net revenue:
Products.................................................. $36,178 $33,836 $30,400
Services.................................................. 6,192 5,583 5,065
------- ------- -------
Total net revenue....................................... 42,370 39,419 35,465
------- ------- -------
Costs and expenses:
Cost of products sold..................................... 25,498 24,295 21,326
Cost of services.......................................... 4,222 3,495 3,198
Research and development.................................. 2,440 2,380 2,191
Selling, general and administrative....................... 6,522 5,850 5,345
------- ------- -------
Total costs and expenses................................ 38,682 36,020 32,060
------- ------- -------
Earnings from operations.................................... 3,688 3,399 3,405
Interest income and other, net.............................. 708 530 378
Interest expense............................................ 202 235 215
------- ------- -------
Earnings from continuing operations before taxes............ 4,194 3,694 3,568
Provision for taxes......................................... 1,090 1,016 1,053
------- ------- -------
Net earnings from continuing operations..................... 3,104 2,678 2,515
Net earnings from discontinued operations................... 387 267 604
------- ------- -------
Net earnings................................................ $ 3,491 $ 2,945 $ 3,119
======= ======= =======
Basic net earnings per share:
Continuing operations..................................... $ 3.08 $ 2.59 $ 2.45
Discontinued operations................................... .38 .26 .59
------- ------- -------
$ 3.46 $ 2.85 $ 3.04
======= ======= =======
Average number of shares.................................. 1,009 1,034 1,026
======= ======= =======
Diluted net earnings per share:
Continuing operations..................................... $ 2.97 $ 2.52 $ 2.38
Discontinued operations................................... .37 .25 .57
------- ------- -------
$ 3.34 $ 2.77 $ 2.95
======= ======= =======
Average number of shares and equivalents.................. 1,052 1,072 1,057
======= ======= =======
The accompanying notes are an integral part of these financial statements.
28
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
OCTOBER 31
IN MILLIONS EXCEPT PAR VALUE AND NUMBER OF SHARES 1999 1998
- ------------------------------------------------- -------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,411 $ 4,046
Short-term investments.................................... 179 21
Accounts receivable....................................... 5,958 5,104
Financing receivables..................................... 1,889 1,494
Inventory................................................. 4,863 4,699
Other current assets...................................... 3,342 3,143
------- -------
Total current assets.................................... 21,642 18,507
------- -------
Property, plant and equipment, net.......................... 4,333 4,877
Long-term investments and other assets...................... 5,789 5,240
Net assets of discontinued operations....................... 3,533 3,084
------- -------
Total assets................................................ $35,297 $31,708
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and short-term borrowings................... $ 3,105 $ 1,245
Accounts payable.......................................... 3,517 2,768
Employee compensation and benefits........................ 1,287 1,195
Taxes on earnings......................................... 2,152 2,796
Deferred revenues......................................... 1,437 1,248
Other accrued liabilities................................. 2,823 2,622
------- -------
Total current liabilities............................... 14,321 11,874
------- -------
Long-term debt.............................................. 1,764 2,063
Other liabilities........................................... 917 852
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value (authorized: 300,000,000
shares; issued: none)................................... -- --
Common stock, $0.01 par value (authorized: 4,800,000,000
shares; issued and outstanding: 1,004,569,000 in 1999
and 1,015,403,000 in 1998).............................. 10 10
Additional paid-in capital................................ -- --
Retained earnings......................................... 18,285 16,909
------- -------
Total stockholders' equity.............................. 18,295 16,919
------- -------
Total liabilities and stockholders' equity.................. $35,297 $31,708
======= =======
The accompanying notes are an integral part of these financial statements.
29
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31
IN MILLIONS 1999 1998 1997
- ------------------------------ -------- -------- --------
Cash flows from operating activities:
Net earnings from continuing operations................... $3,104 $2,678 $2,515
Adjustments to reconcile net earnings from continuing
operations to net cash provided by operating activities:
Depreciation and amortization......................... 1,316 1,377 1,144
Deferred taxes on earnings............................ (171) (1,101) (216)
Changes in assets and liabilities:
Accounts and financing receivables.................. (1,637) (1,100) (972)
Inventory........................................... (171) 630 (222)
Accounts payable.................................... 751 61 702
Taxes on earnings................................... (639) 1,200 3
Other current assets and liabilities................ 330 731 147
Other, net.......................................... 213 284 285
------ ------ ------
Net cash provided by operating activities........... 3,096 4,760 3,386
------ ------ ------
Cash flows from investing activities:
Investment in property, plant and equipment............... (1,134) (1,584) (1,757)
Disposition of property, plant and equipment.............. 542 260 243
Purchases of short-term investments....................... (1,007) (3,307) (5,213)
Maturities of short-term investments...................... 1,048 4,773 4,158
Purchases of long-term investments........................ (8) (752) --
Other, net................................................ (69) 2 (3)
------ ------ ------
Net cash used in investing activities............... (628) (608) (2,572)
------ ------ ------
Cash flows from financing activities:
Change in notes payable and short-term borrowings......... 2,399 (734) (1,194)
Issuance of long-term debt................................ 240 223 1,182
Payment of long-term debt................................. (1,047) (573) (273)
Issuance of common stock under employee stock plans....... 660 467 419
Repurchase of common stock................................ (2,643) (2,424) (724)
Dividends................................................. (650) (625) (532)
------ ------ ------
Net cash used in financing activities............... (1,041) (3,666) (1,122)
------ ------ ------
Net cash (used) provided by discontinued operations......... (62) 488 495
------ ------ ------
Increase in cash and cash equivalents....................... 1,365 974 187
Cash and cash equivalents at beginning of year.............. 4,046 3,072 2,885
------ ------ ------
Cash and cash equivalents at end of year.................... $5,411 $4,046 $3,072
====== ====== ======
The accompanying notes are an integral part of these financial statements.
30
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK
--------------------- ADDITIONAL
IN MILLIONS EXCEPT NUMBER OF NUMBER OF PAID-IN RETAINED
SHARES IN THOUSANDS SHARES PAR VALUE CAPITAL EARNINGS TOTAL
- ------------------- --------- --------- ---------- -------- --------
Balance October 31, 1996..................... 1,014,123 $1,014 $ -- $12,424 $13,438
Acquisition via immaterial pooling......... 23,590 24 19 118 161
Shares issued.............................. 16,536 16 677 -- 693
Shares repurchased......................... (13,207) (13) (550) (161) (724)
Dividends.................................. -- -- -- (532) (532)
Net earnings............................... -- -- -- 3,119 3,119
--------- ------ ------ ------- -------
Balance October 31, 1997..................... 1,041,042 1,041 146 14,968 16,155
Reincorporation............................ -- (1,032) 1,032 -- --
Shares issued.............................. 17,384 13 855 -- 868
Shares repurchased......................... (43,023) (12) (2,033) (379) (2,424)
Dividends.................................. -- -- -- (625) (625)
Net earnings............................... -- -- -- 2,945 2,945
--------- ------ ------ ------- -------
Balance October 31, 1998..................... 1,015,403 10 -- 16,909 16,919
Shares issued.............................. 20,208 -- 1,178 -- 1,178
Shares repurchased......................... (31,042) -- (1,178) (1,465) (2,643)
Dividends.................................. -- -- -- (650) (650)
Net earnings............................... -- -- -- 3,491 3,491
--------- ------ ------ ------- -------
Balance October 31, 1999..................... 1,004,569 $ 10 $ -- $18,285 $18,295
========= ====== ====== ======= =======
The accompanying notes are an integral part of these financial statements.
31
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of HP and its
wholly-owned and controlled majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Certain
reclassifications were made to prior year amounts to conform to the 1999
presentation.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in HP's financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from product sales is generally recognized at the time the product
is shipped, with provisions established for price protection programs and for
estimated product returns. Upon shipment, HP also provides for the estimated
cost that may be incurred for product warranties and post-sales support. Service
revenue is recognized over the contractual period or as services are rendered
and accepted by the customer.
ADVERTISING
Advertising costs are expensed as incurred and amounted to $1,182 million in
1999, $1,121 million in 1998 and $1,033 million in 1997.
TAXES ON EARNINGS
Income tax expense is based on pretax financial accounting income. Deferred
tax assets and liabilities are recognized principally for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts.
NET EARNINGS PER SHARE
HP's basic earnings per share ("EPS") is calculated based on net earnings
available to common stockholders and the weighted-average number of shares
outstanding during the reported period. Diluted
32
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EPS includes additional dilution from potential common stock, such as stock
issuable upon exercise of stock options or the conversion of debt.
FOR THE YEARS ENDED OCTOBER 31,
IN MILLIONS EXCEPT PER SHARE DATA 1999 1998 1997
- --------------------------------- -------- -------- --------
Numerator:
Net earnings from continuing operations available
to common stockholders.......................... $3,104 $2,678 $2,515
Adjustments for interest, net of income tax
effect.......................................... 22 26 --
------ ------ ------
Net earnings from continuing operations,
adjusted........................................ 3,126 2,704 2,515
Net earnings from discontinued operations......... 387 267 604
------ ------ ------
Net earnings, adjusted............................ $3,513 $2,971 $3,119
====== ====== ======
Denominator:
Weighted-average shares outstanding............... 1,009 1,034 1,026
Effect of dilutive securities:
Dilutive options................................ 32 28 31
Zero-coupon subordinated convertible notes due
2017.......................................... 11 10 --
------ ------ ------
Dilutive potential common shares.................. 43 38 31
------ ------ ------
Weighted-average shares and dilutive potential
common shares................................... 1,052 1,072 1,057
====== ====== ======
Basic net earnings per share:
Continuing operations............................. $ 3.08 $ 2.59 $ 2.45
Discontinued operations........................... .38 .26 .59
------ ------ ------
$ 3.46 $ 2.85 $ 3.04
====== ====== ======
Diluted net earnings per share:
Continuing operations............................. $ 2.97 $ 2.52 $ 2.38
Discontinued operations........................... .37 .25 .57
------ ------ ------
$ 3.34 $ 2.77 $ 2.95
====== ====== ======
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
HP classifies investments as cash equivalents if the maturity of an
investment is three months or less from the purchase date. Short-term
investments principally consist of time deposits and temporary money-market
instruments. Cash equivalents and short-term investments are stated at cost,
which approximates market value.
INVENTORY
Inventory is valued at standard cost that approximates actual cost computed
on a first-in, first-out basis, not in excess of market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Additions, improvements and
major renewals are capitalized. Maintenance, repairs and minor renewals are
expensed as incurred. Depreciation is provided
33
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
using accelerated methods, principally over 15 to 40 years for buildings and
improvements and 3 to 10 years for machinery and equipment. Depreciation of
leasehold improvements is provided using the straight-line method over the life
of the lease or the asset, whichever is shorter.
LONG-TERM INVESTMENTS
HP's long-term investments primarily consist of debt securities which are
held-to-maturity.
FOREIGN CURRENCY TRANSLATION
HP uses the U.S. dollar as its functional currency. Foreign currency assets
and liabilities are remeasured into U.S. dollars at end-of-period exchange
rates, except for inventory, property, plant and equipment, other assets and
deferred revenues, which are remeasured at historical exchange rates. Revenue
and expenses are remeasured at average exchange rates in effect during each
period, except for those expenses related to balance sheet amounts that are
remeasured at historical exchange rates. Gains or losses from foreign currency
remeasurement are included in net earnings. The effect of foreign currency
exchange rate fluctuations on cash and cash equivalents denominated in foreign
currencies was not material.
COMPREHENSIVE INCOME
HP has no material components of other comprehensive income, and,
accordingly, net income approximates comprehensive income for all periods
presented.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement, as amended, is
effective for fiscal years beginning after June 15, 2000. HP will adopt the
standard no later than the first quarter of fiscal year 2001, and is in the
process of determining the impact that adoption will have on its consolidated
financial statements.
DISCONTINUED OPERATIONS
On March 2, 1999, HP announced its intention to launch a new company,
subsequently named Agilent Technologies, Inc. ("Agilent Technologies"), through
a distribution of Agilent Technologies' common stock to HP's stockholders in the
form of a tax-free spin-off. Agilent Technologies is composed of HP's
Measurement Organization, which includes its test and measurement, semiconductor
products, chemical analysis and healthcare solutions businesses.
Effective July 31, 1999, HP's management and Board of Directors completed
the plan of disposition for Agilent Technologies. HP's consolidated financial
statements for all periods present Agilent Technologies as a discontinued
business segment in accordance with Accounting Principles Board Opinion No. 30.
Net revenue and net earnings from Agilent Technologies' operations, through the
July 31, 1999 measurement date for discontinued operations accounting, are
summarized below. For the period from August 1, 1999 through the spin-off, net
earnings from Agilent Technologies are expected to exceed the
34
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estimated costs to effect the spin-off. The excess net earnings over these costs
will be recognized once the net earnings realized exceed the total estimated
costs of the spin-off.
YEARS ENDED
OCTOBER 31,
NINE MONTHS ENDED -------------------
JULY 31, 1999 1998 1997
----------------- -------- --------
(IN MILLIONS)
Net revenue, including revenue from HP...... $5,883 $7,952 $7,785
====== ====== ======
Earnings from discontinued operations
before taxes.............................. $ 553 $ 397 $ 887
Provision for taxes......................... 166 130 283
------ ------ ------
Earnings from discontinued operations,
net of taxes.............................. $ 387 $ 267 $ 604
====== ====== ======
Net assets of discontinued operations are as follows at October 31:
1999 1998
-------- --------
(IN MILLIONS)
Current assets............................................ $ 3,538 $ 3,075
Property, plant and equipment, net........................ 1,387 1,481
Other assets.............................................. 619 493
Current liabilities....................................... (1,681) (1,599)
Other liabilities......................................... (330) (366)
------- -------
Net assets of discontinued operations..................... $ 3,533 $ 3,084
======= =======
On November 1, 1999, HP provided initial funding of approximately
$1.1 billion to Agilent Technologies. On November 23, 1999, Agilent Technologies
closed an initial public offering of approximately 16% of its common stock and
distributed the net proceeds of $2.1 billion to HP. The pro forma effects of
these transactions were increases to cash of approximately $1.0 billion, net
assets of discontinued operations of approximately $0.5 billion and additional
paid-in capital of approximately $1.5 billion. HP plans to distribute its
remaining 84% interest in Agilent Technologies to HP's stockholders by July 31,
2000 (the distribution date).
FINANCIAL INSTRUMENTS
OFF-BALANCE-SHEET FOREIGN EXCHANGE RISK
HP enters into foreign exchange contracts, primarily forwards and purchased
options, to hedge against exposure to changes in foreign currency exchange
rates. Such contracts are designated at inception to the related foreign
currency exposures being hedged, which include committed and anticipated sales
by subsidiaries, and assets and liabilities that are denominated in currencies
other than the U.S. dollar. To achieve hedge accounting, contracts must reduce
the foreign currency exchange rate risk otherwise inherent in the amount and
duration of the hedged exposures and comply with established company risk
management policies. Hedging contracts generally mature within six months.
When hedging sales-related exposure, foreign exchange contract expirations
are set so as to occur in the same month the hedged shipments occur, allowing
realized gains and losses on the contracts to be recognized in net revenue in
the same periods in which the related revenues are recognized. When hedging
35
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
balance sheet exposure, realized gains and losses on foreign exchange contracts
are recognized in other income and expense in the same period as the realized
gains and losses on remeasurement of the foreign currency denominated assets and
liabilities occur. All gains and losses related to foreign exchange contracts
are included in cash flows from operating activities in the consolidated
statement of cash flows.
The notional amount of foreign exchange contracts outstanding was
$13.7 billion at October 31, 1999 and $12.1 billion at October 31, 1998. The
contracts related to exposures in approximately 33 foreign currencies. The
notional amount represents the future cash flows under contracts to both
purchase and sell foreign currencies. Unrealized gains on hedging contracts
deferred under HP's hedge accounting policies amounted to $113 million at
October 31, 1999, and unrealized losses totaled $113 million. At October 31,
1998, unrealized gains were $63 million and unrealized losses were
$292 million. Unamortized premiums and realized gains deferred under currency
options were not material.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject HP to significant
concentrations of credit risk consist principally of cash, investments, accounts
receivable, financing receivables and certain other financial instruments.
HP maintains cash and cash equivalents, short- and long-term investments and
certain other financial instruments with various financial institutions. These
financial institutions are located in many different geographical regions, and
company policy is designed to limit exposure with any one institution. As part
of its cash and risk management processes, HP performs periodic evaluations of
the relative credit standing of the financial institutions. HP has not sustained
material credit losses from these instruments.
HP sells a significant portion of its products through third-party resellers
and, as a result, maintains individually significant receivable balances with
major distributors. If the financial condition or operations of these
distributors deteriorate substantially, HP's operating results could be
adversely affected. The ten largest distributor receivable balances collectively
represented 27 percent of total accounts receivable at October 31, 1999 and
29 percent at October 31, 1998. Credit risk with respect to other accounts
receivable and financing receivables is generally diversified due to the large
number of entities comprising HP's customer base and their dispersion across
many different industries and geographical regions. HP performs ongoing credit
evaluations of its third-party resellers' and other customers' financial
condition and requires collateral, such as letters of credit and bank
guarantees, in certain circumstances.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of HP's financial instruments, including cash and cash
equivalents, short-term investments, accounts receivable, financing receivables,
notes payable and short-term borrowings, accounts payable and other accrued
liabilities, the carrying amounts approximate fair value due to their short
maturities. Long-term floating rate notes, long-term equity investments and time
deposits are also carried at amounts that approximate fair value. The estimated
fair value of fixed rate long-term debt is primarily based on quoted market
prices, as well as borrowing rates currently available to HP for bank loans with
similar terms and maturities. This fair value, when adjusted for unrealized
gains and losses on related interest rate swap agreements, approximates the
carrying amount of long-term debt.
The estimated fair value of foreign exchange contracts is based primarily on
quoted market prices for the same or similar instruments, adjusted where
necessary for maturity differences. The estimated fair value of foreign exchange
contracts amounted to less than $1 million at October 31, 1999 and
$(229) million at October 31, 1998.
36
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values may not be representative of actual values of the
financial instruments that could have been realized as of year end or that will
be realized in the future.
FINANCING RECEIVABLES AND INVESTMENT IN OPERATING LEASES
Financing receivables represent sales-type and direct-financing leases and
installment sales resulting from the marketing of HP's, and complementary
third-party, products. These receivables typically have terms from two to five
years and are usually collateralized by a security interest in the underlying
assets. The components of net financing receivables, which are included in
financing receivables and long-term investments and other assets, are as follows
at October 31:
1999 1998
-------- --------
(IN MILLIONS)
Gross financing receivables............................... $ 4,336 $ 3,396
Unearned income........................................... (489) (340)
------- -------
Financing receivables, net................................ 3,847 3,056
Less current portion...................................... (1,889) (1,494)
------- -------
Amounts due after one year, net........................... $ 1,958 $ 1,562
======= =======
Contractual maturities of HP's gross financing receivables at October 31,
1999 were $2,135 million in 2000, $1,182 million in 2001, $700 million in 2002,
$139 million in 2003, $126 million in 2004 and $54 million thereafter. Actual
cash collections may differ primarily due to customer early buy-outs and
refinancings.
HP also leases its products to customers under operating leases. Equipment
on operating leases was $1,282 million at October 31, 1999 and $1,184 million at
October 31, 1998 and is included in machinery and equipment. Accumulated
depreciation on equipment on operating leases was $607 million at October 31,
1999 and $538 million at October 31, 1998. Minimum future rentals on
noncancelable operating leases with original terms of one year or longer are
$489 million in 2000, $244 million in 2001, $85 million in 2002, $28 million in
2003, $10 million in 2004 and $4 million thereafter.
INVENTORY
OCTOBER 31,
-------------------
1999 1998
-------- --------
(IN MILLIONS)
Finished goods.............................................. $3,581 $3,553
Purchased parts and fabricated assemblies................... 1,282 1,146
------ ------
$4,863 $4,699
====== ======
37
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
OCTOBER 31,
-------------------
1999 1998
-------- --------
(IN MILLIONS)
Land...................................................... $ 351 $ 357
Buildings and leasehold improvements...................... 3,605 3,555
Machinery and equipment................................... 4,964 5,126
------- -------
8,920 9,038
Accumulated depreciation.................................. (4,587) (4,161)
------- -------
$ 4,333 $ 4,877
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
YEARS ENDED OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
Cash paid for income taxes, net..................... $1,866 $1,039 $1,488
Cash paid for interest.............................. 224 205 325
Non-cash transactions--issuance of common stock for:
Employee benefit plans:
Restricted stock................................ 164 31 38
Employer matching contributions for TAXCAP and
employee stock benefit plans.................. 65 79 67
Business acquisitions............................. -- 134 19
ACQUISITIONS
HP acquired several companies during the last three years that were not
significant to its financial position or results of operations. During 1997, one
acquisition was accounted for using the pooling-of-interests method; however,
prior period consolidated financial statements were not restated because the
retroactive effect was not material. All other acquisitions were accounted for
using the purchase method. Under the purchase method, the results of operations
of acquired companies are included prospectively from the date of acquisition,
and the acquisition cost is allocated to the acquirees' tangible and
identifiable intangible assets and liabilities based upon their fair market
values at the date of the acquisition, with any residual being goodwill. In
process research and development write-offs have not been significant. HP
amortizes goodwill on a straight-line basis over its estimated economic life,
generally two to five years. The net book value of goodwill associated with
acquisitions was $189 million at October 31, 1999 and $76 million at
October 31, 1998.
38
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TAXES ON EARNINGS
The provision for income taxes on earnings from continuing operations is
composed of the following for the years ended October 31:
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
U.S. federal taxes:
Current........................................... $ 91 $ 934 $ 437
Deferred.......................................... (62) (974) (222)
Non-U.S. taxes:
Current........................................... 1,126 1,024 775
Deferred.......................................... (103) (38) 35
State taxes......................................... 38 70 28
------ ------ ------
$1,090 $1,016 $1,053
====== ====== ======
The significant components of deferred tax assets, which required no
valuation allowance, and deferred tax liabilities included on the balance sheet
are as follows at October 31:
1999 1998
---------------------- ----------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
(IN MILLIONS)
Inventory............................... $ 540 $ 3 $ 543 $ 21
Fixed assets............................ 148 -- 125 --
Warranty................................ 384 6 338 --
Employee and retiree benefits........... 458 62 322 31
Intracompany sales...................... 620 -- 740 --
Unremitted earnings of foreign
subsidiaries.......................... -- 171 -- 126
Other................................... 451 129 272 104
------ ---- ------ ----
$2,601 $371 $2,340 $282
====== ==== ====== ====
The current portion of the deferred tax asset is $1,906 million at
October 31, 1999 and $1,831 at October 31, 1998. These amounts are included in
other current assets.
Tax benefits of $289 million in 1999, $157 million in 1998 and $150 million
in 1997, associated with the exercise of employee stock options, were allocated
to stockholders' equity.
The differences between the U.S. federal statutory income tax rate and HP's
effective tax rate are as follows for the years ended October 31:
1999 1998 1997
-------- -------- --------
U.S. federal statutory income tax rate............ 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit.... 0.7 1.2 0.5
Lower rates in other jurisdictions, net........... (10.3) (9.4) (7.4)
Other, net........................................ 0.6 0.7 1.4
----- ----- -----
26.0% 27.5% 29.5%
===== ===== =====
39
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The domestic and foreign components of earnings from continuing operations
before taxes are as follows for the years ended October 31:
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
U.S................................................. $1,370 $ 689 $ 860
Non-U.S............................................. 2,824 3,005 2,708
------ ------ ------
$4,194 $3,694 $3,568
====== ====== ======
HP has not provided for U.S. federal income and foreign withholding taxes on
$9 billion of non-U.S. subsidiaries' undistributed earnings as of October 31,
1999, because such earnings are intended to be reinvested indefinitely. If these
earnings were distributed, foreign tax credits may become available under
current law to reduce or eliminate the resulting U.S. income tax liability.
Where excess cash has accumulated in HP's non-U.S. subsidiaries and it is
advantageous for tax or foreign exchange reasons, subsidiary earnings are
remitted.
As a result of certain employment actions and capital investments undertaken
by HP, income from manufacturing activities in certain countries is subject to
reduced tax rates, and in some cases is wholly exempt from taxes, for years
through 2013. The income tax benefits attributable to the tax status of these
subsidiaries are estimated to be $690 million in 1999, $435 million in 1998 and
$226 million in 1997.
The Internal Revenue Service ("IRS") has examined HP's income tax returns
for years 1993 through 1995, and completed its examination of all years through
1992. The IRS has commenced its examination of returns for years 1996 to 1998.
HP believes that adequate accruals have been provided for all years.
BORROWINGS
Notes payable and short-term borrowings and the related average interest
rates are as follows as of and for the years ended October 31:
1999 1998
------------------- -------------------
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
Current portion of long-term debt........... $ 468 5.8% $1,007 5.7%
Notes payable to banks...................... 1,368 5.9% 72 8.5%
Commercial paper............................ 1,241 5.2% 17 5.3%
Other short-term borrowings................. 28 5.1% 149 4.8%
------ ------
$3,105 $1,245
====== ======
At October 31, 1999, HP had a committed borrowing facility in place with
unused borrowing capacity totaling $1.0 billion.
40
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-term debt and related maturities and interest rates are as follows at
October 31:
1999 1998
-------- --------
(IN MILLIONS)
U.S. dollar zero-coupon subordinated convertible notes, due
2017 at 3.13%............................................ $1,146 $ 1,111
U.S. dollar notes, due 1999-2017 at 5.25%-7.90%............ 494 1,104
Deutschemark notes, due 2000-2002 at 4.75%-5.63%........... 335 372
Yen notes, due 1999-2002 at 1.8%-5.3%...................... 28 265
British pound note, due 1999 at 7.13%...................... -- 170
Malaysian rupia note, due 2004 at 7.9%..................... 42 --
Other...................................................... 187 48
Less current portion....................................... (468) (1,007)
------ -------
$1,764 $ 2,063
====== =======
HP issues long-term debt in either U.S. dollars or foreign currencies based
on market conditions at the time of financing. Interest rate and foreign
currency swaps are then used to modify the market risk exposures in connection
with the debt to achieve primarily U.S. dollar LIBOR-based floating interest
expense and to neutralize exposure to changes in foreign currency exchange
rates. The swap transactions generally involve the exchange of fixed for
floating interest payment obligations and, when the underlying debt is
denominated in a foreign currency, exchange of the foreign currency principal
and interest obligations for U.S. dollar-denominated amounts. Notional amounts
and maturities under the swaps generally match those of the underlying debt.
Unrealized gains and losses on currency swaps hedging foreign currency debt are
recognized as other assets and other liabilities and are not material.
In October 1997, HP issued $1.8 billion face value of zero-coupon
subordinated convertible notes for proceeds of $968 million, and in
November 1997 issued an additional $200 million face value of the notes for
proceeds of $108 million. The notes are due in 2017. They are convertible by the
holders at the rate of 5.43 shares of HP's common stock for each $1,000 face
value of the notes, payable in either cash or common stock at HP's option. The
notes may be redeemed by HP on or after October 14, 2000 at book value, payable
in either cash or common stock at HP's option. In addition, the notes are
redeemable at the holders' option on October 14, 2000, in which case HP intends
to redeem them for common stock. The notes are subordinated to all other
existing and future senior indebtedness of HP.
Aggregate future maturities of the face value of the long-term debt
outstanding at October 31, 1999 are $468 million in 2000, $197 million in 2001,
$92 million in 2002, $7 million in 2003, $193 million in 2004 and
$2,000 million thereafter. HP occasionally repurchases its debt prior to
maturity based on its assessment of current market conditions and financing
alternatives.
STOCKHOLDERS' EQUITY
REINCORPORATION
Effective May 20, 1998, HP changed its state of incorporation from
California to Delaware. In connection with the change, the par value of HP's
stock decreased from $1.00 to $0.01 per share, resulting in a transfer of
$1,032 million from common stock to additional paid-in capital. There was no
impact to HP's financial condition or results of operations as a result of the
reincorporation.
41
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
Eligible company employees may generally contribute up to 10 percent of
their base compensation to the quarterly purchase of shares of HP's common stock
under the Employee Stock Purchase Plan. Under this plan, employee contributions
to purchase shares are partially matched with shares contributed by HP, which
generally vest over two years. At October 31, 1999, approximately 112,000
employees, including persons who became employees of Agilent Technologies, were
eligible to participate and approximately 69,000 employees were participants in
the plan. HP contributed to employees of both companies 1,811,000 matching
shares at a weighted-average price of $78 in 1999, 2,173,000 shares at a
weighted-average price of $63 in 1998, and 2,327,000 shares at a
weighted-average price of $54 in 1997. On the distribution date, all unvested
shares of HP stock held by Agilent Technologies' employees will be forfeited.
Agilent Technologies intends to replace the forfeited HP shares with shares of
Agilent Technologies' stock of equivalent value. Compensation expense recognized
under the plan, including expense relating to persons who became Agilent
Technologies' employees, was $143 million in 1999, $100 million in 1998 and
$96 million in 1997. The portion of these expenses related to continuing
operations was $99 million in 1999, $67 million in 1998 and $64 million in 1997.
INCENTIVE COMPENSATION PLANS
HP has four principal stock option plans, adopted in 1979, 1985, 1990 and
1995. All plans permit options granted to qualify as "Incentive Stock Options"
under the Internal Revenue Code. The exercise price of a stock option is
generally equal to the fair market value of HP's common stock on the date the
option is granted and its term is generally ten years. Under the 1990 and 1995
Incentive Stock Plans, the Compensation Committee may choose, in certain cases,
to establish a discounted exercise price at no less than 75 percent of fair
market value on the grant date. HP granted 1,377,000 shares of discounted
options in 1999, 1,050,000 shares in 1998 and 780,000 shares in 1997. Stock
compensation expense related to the discounted options was not material in each
of these years. Options generally vest at a rate of 25 percent per year over a
period of four years from the date of grant, except for discounted options,
which generally may not be exercised until the third or fifth anniversary of the
option grant date, at which time such options become 100 percent vested.
The following table summarizes option activity during the years ended
October 31, 1999, 1998 and 1997:
1999 1998 1997
--------------------------- --------------------------- ---------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
-------- ---------------- -------- ---------------- -------- ----------------
Outstanding at beginning of year........ 52,073 $33 51,250 $26 49,344 $20
Granted................................. 18,836 76 10,648 60 8,000 51
Assumed via acquisitions................ -- -- -- -- 3,179 30
Exercised............................... (11,760) 22 (8,245) 16 (8,689) 14
Cancelled............................... (1,358) 57 (1,580) 44 (584) 33
------- ------ ------
Outstanding at end of year.............. 57,791 49 52,073 33 51,250 26
======= ====== ======
Options exercisable at year-end......... 26,098 30 29,140 21 27,471 17
Weighted-average fair value of options
granted during the year............... $30.91 $21.67 $20.16
=========================== =========================== ===========================
42
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about options outstanding at
October 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES (000) CONTRACTUAL LIFE EXERCISE PRICE (000) EXERCISE PRICE
- --------------------------------- ----------- ---------------- ---------------- ----------- ----------------
$0-25............................ 17,175 3.3 years $ 17 15,992 $ 16
$26-50........................... 8,804 6.2 42 4,694 42
$51-75........................... 17,794 7.9 59 5,273 58
$76-100.......................... 12,202 9.3 76 132 76
$101 and over.................... 1,816 9.8 108 7 106
------ ------
57,791 49 26,098 30
====== ======
Shares available for option and restricted stock grants were 27,018,000 at
October 31, 1999 and 47,070,000 at October 31, 1998. Approximately 66,000
employees were considered eligible to receive stock options in fiscal year 1999.
There were approximately 48,000 employees holding options under one or more of
the option plans as of October 31, 1999.
Under the 1985 Incentive Compensation Plan and the 1990 and 1995 Incentive
Stock Plans, certain key employees may be granted cash or restricted stock
awards. Cash and restricted stock awards are independent of option grants and
are subject to restrictions considered appropriate by HP's Compensation
Committee. The majority of the shares of restricted stock outstanding at
October 31, 1999 are subject to forfeiture if employment terminates prior to
three years from the date of grant. During that period, ownership of the shares
cannot be transferred. Restricted stock has the same cash dividend and voting
rights as other common stock and is considered to be currently issued and
outstanding. The cost of the awards, determined to be the fair market value of
the shares at the date of grant, is expensed ratably over the period the
restrictions lapse. Such expense was not material in 1999, 1998 or 1997. HP had
5,027,000 shares of restricted stock outstanding at October 31, 1999 and
4,380,000 shares outstanding at October 31, 1998.
Information presented above regarding the incentive compensation plans
includes activity related to Agilent Technologies' employees. Under the existing
terms of the stock option plans, substantially all stock options held by Agilent
Technologies' employees will be converted to Agilent Technologies' stock options
or on the distribution date will become fully vested and, if not exercised, will
expire three months from the distribution date. Shares of restricted HP stock
held by Agilent Technologies' employees will be forfeited on or before the
distribution date and will be replaced with shares of Agilent Technologies'
stock of equivalent value. As of October 31, 1999, Agilent Technologies'
employees held approximately 855,000 shares of restricted HP stock and options
to acquire approximately 15,011,000 shares of HP stock.
PRO FORMA INFORMATION
HP applies the intrinsic-value-based method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in
accounting for employee stock options. Accordingly, compensation expense is
recognized only when options are granted with a discounted exercise price. Any
resulting compensation expense is recognized ratably over the associated service
period, which is generally the option vesting term.
HP has determined pro forma net earnings and earnings per share information,
as required by SFAS No. 123, "Accounting for Stock-Based Compensation," as if HP
had accounted for employee stock options
43
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
under SFAS 123's fair value method. The fair value of these options was
estimated using a Black-Scholes option pricing model with the following
weighted-average assumptions:
1999 1998 1997
-------- -------- --------
Risk-free interest rate........................... 5.53% 5.38% 6.21%
Dividend yield.................................... 1.0% 1.0% 1.0%
Volatility........................................ 30% 30% 30%
Expected option life.............................. 7 years 7 years 6 years
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the 4-year average vesting period of the
options. HP's pro forma net earnings from continuing operations is
$2,996 million for 1999, $2,646 million for 1998 and $2,484 million for 1997.
Pro forma diluted net earning per share from continuing operations is $2.85 for
1999, $2.47 for 1998 and $2.35 for 1997. These pro forma amounts include
amortized fair values attributable to options granted after October 31, 1995
only.
SHARES RESERVED
HP had 97,624,000 shares of common stock reserved for future issuance under
the employee stock plans at October 31, 1999 and 116,168,000 shares reserved at
October 31, 1998.
STOCK REPURCHASE PROGRAMS
HP repurchases shares of its common stock under a systematic program to
manage the dilution created by shares issued under employee stock plans, and
under a separate incremental plan authorizing purchases in the open market or in
private transactions. In 1999, 31,042,000 shares were repurchased under these
plans for an aggregate price of $2,643 million; in 1998, 43,023,000 shares were
repurchased for $2,424 million; and in 1997, 13,207,000 shares were purchased
for $724 million. During 1999, HP's Board of Directors authorized an additional
$2.0 billion of future repurchases under these two programs in the aggregate. As
of October 31, 1999, HP had authorization for remaining future repurchases under
the two programs of approximately $1.4 billion. In November 1999, the Board of
Directors authorized an additional $2.0 billion in future repurchases under the
plans resulting in remaining authorized repurchases totaling $3.4 billion.
RETIREMENT PLANS AND RETIREE MEDICAL BENEFITS
GENERAL
On the distribution date, Agilent Technologies will establish separate
defined benefit pension, deferred profit-sharing, retiree medical and 401(k)
plans for its current and former employees. An allocable share of the defined
benefit plan assets will be transferred from the HP pension trust in each
country to a newly established Agilent Technologies pension trust. In addition,
an allocable share of the U.S. retiree medical plan trust will be transferred to
a newly established Agilent Technologies retiree medical plan trust. Subject to
local law, it is anticipated that the share of assets allocated to Agilent
Technologies will be in the same proportion as the projected benefit obligation
of Agilent Technologies' employees to the total projected benefit obligation of
HP. The deferred profit sharing plan assets attributable to Agilent Technologies
will also be transferred to Agilent Technologies. Included in the consolidated
balance sheet are estimates as of October 31, 1999 and 1998 of the assets and
pension obligations to be retained by HP. Actual amounts to be transferred will
be measured at the distribution
44
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
date, using the same methodology, and will likely be different from these
estimates. All amounts presented in this note relate to HP's continuing
operations only.
PENSION AND DEFERRED PROFIT-SHARING PLANS
Substantially all of HP's employees are covered under various pension and
deferred profit-sharing retirement plans. Worldwide pension and deferred
profit-sharing costs were $301 million in 1999, $226 million in 1998 and
$205 million in 1997.
U.S. employees who meet certain minimum eligibility criteria are provided
retirement benefits under the Hewlett-Packard Company Retirement Plan
("Retirement Plan"). Defined benefits are based upon an employee's highest
average pay rate and length of service. For eligible service through
October 31, 1993, the benefit payable under the Retirement Plan is reduced by
any amounts due to the employee under HP's frozen defined contribution Deferred
Profit-Sharing Plan ("DPS"), which has since been closed to new participants.
The combined status of the Retirement Plan and DPS related to continuing
operations is as follows at October 31:
1999 1998
-------- --------
(IN MILLIONS)
Fair value of plan assets................................... $2,842 $2,310
Retirement benefit obligation............................... $2,786 $2,422
Employees outside the U.S. generally receive retirement benefits under
various defined benefit and defined contribution plans based upon factors such
as years of service and employee compensation levels. Eligibility is generally
determined in accordance with local statutory requirements.
RETIREE MEDICAL PLAN
In addition to providing pension benefits, HP sponsors a medical plan that
provides defined benefits to U.S. retired employees. Substantially all of HP's
current U.S. employees could become eligible for these benefits, and the
existing benefit obligation relates primarily to those employees. Once
participating in the plan, retirees may choose from managed-care and indemnity
options, with their contributions dependent on options chosen and length of
service.
401(k) PLAN
U.S. employees may participate in the Tax Saving Capital Accumulation Plan
("TAXCAP"), which was established as a supplemental retirement program.
Beginning February 1, 1998, enrollment in the TAXCAP is automatic for employees
who meet eligibility requirements unless they decline participation. Under the
TAXCAP program, HP matches contributions by employees up to a maximum of 4% of
an employee's annual compensation. A portion of this matching contribution may
be made in the form of HP common stock to the extent an employee elects HP stock
as an investment option under the plan. The maximum combined contribution to the
Employee Stock Purchase Plan and TAXCAP is 25% of an employee's annual base
compensation subject to certain regulatory and plan limitations. HP's expense
related to TAXCAP was $98 million in 1999, $87 million in 1998 and $74 million
in 1997.
45
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NET PERIODIC COST
HP's net pension and retiree medical costs are composed of the following for
the years ended October 31:
PENSION
--------------------------------------------------------------- U.S. RETIREE
U.S. PLANS NON-U.S. PLANS MEDICAL PLAN
------------------------------ ------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
Service cost................... $151 $124 $103 $ 90 $ 74 $ 68 $ 21 $ 18 $ 16
Interest cost.................. 52 37 27 62 55 52 23 22 21
Expected return on plan
assets....................... (52) (39) (27) (94) (75) (62) (28) (26) (21)
Amortization and deferrals:
Actuarial (gains) losses..... 7 -- -- (13) (13) (9) (10) (11) (9)
Transition obligation
(asset).................... (5) (5) (5) -- (1) (1) -- -- --
Prior service cost........... 2 2 2 2 2 3 (6) (6) (6)
---- ---- ---- ---- ---- ---- ---- ---- ----
Net periodic benefit cost...... $155 $119 $100 $ 47 $ 42 $ 51 $ -- $ (3) $ 1
==== ==== ==== ==== ==== ==== ==== ==== ====
46
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FUNDED STATUS
The funded status of the defined benefit and retiree medical plans are as
follows at October 31:
U.S. DEFINED NON-U.S. DEFINED U.S. RETIREE
BENEFIT PLANS BENEFIT PLANS MEDICAL PLAN
------------------- ------------------- ----------------------
1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- --------
(IN MILLIONS)
Change in fair value of plan assets:
Fair value--beginning of year............... $ 593 $ 464 $1,214 $ 952 $ 314 $ 279
Addition of plan............................ -- -- 28 -- -- --
Actual return on plan assets................ 262 54 68 162 130 35
Employer contributions...................... 118 92 91 42 1 4
Participants' contributions................. -- -- 17 14 4 3
Change in population estimate............... 60 -- 100 -- (41) --
Benefits paid............................... (35) (17) (27) (19) (8) (7)
Currency impact............................. -- -- (43) 63 -- --
----- ----- ------ ------ ----- -----
Fair value--end of year..................... 998 593 1,448 1,214 400 314
----- ----- ------ ------ ----- -----
Change in benefit obligation:
Benefit obligation--beginning of year....... 785 526 1,233 898 339 297
Addition of plan............................ -- -- 26 -- -- --
Service cost................................ 151 124 90 74 21 18
Interest cost............................... 52 37 62 55 23 22
Participants' contributions................. -- -- -- -- 4 3
Change in population estimate............... 40 -- 99 -- (32) --
Actuarial (gain) loss....................... (50) 115 73 197 (36) 6
Benefits paid............................... (35) (17) (27) (19) (8) (7)
Currency impact............................. -- -- (18) 28 -- --
----- ----- ------ ------ ----- -----
Benefit obligation- end of year............. 943 785 1,538 1,233 311 339
----- ----- ------ ------ ----- -----
Plan assets in excess of (less than) benefit
obligation.................................. 55 (192) (90) (19) 89 (25)
Unrecognized net experience (gain) loss....... (187) 103 146 22 (259) (159)
Unrecognized prior service cost (benefit)
related to plan changes..................... 24 25 21 21 (76) (90)
Unrecognized net transition asset*............ (5) (11) (1) -- -- --
----- ----- ------ ------ ----- -----
Net (accrued) prepaid costs................... $(113) $ (75) $ 76 $ 24 $(246) $(274)
===== ===== ====== ====== ===== =====
- ------------------------
* Amortized over 15 years for the U.S. plan and over periods ranging from 10
to 22 years for non-U.S. plans.
47
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Defined benefit plans with benefit obligations exceeding the fair value of
plan assets are as follows at October 31:
U.S. DEFINED NON-U.S. DEFINED
BENEFIT PLANS BENEFIT PLANS
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN MILLIONS)
Aggregate fair value of plan assets.............. $-- $593 $1,017 $422
Aggregate benefit obligation..................... $82 $785 $1,139 $547
Plan assets consist primarily of listed stocks and bonds. It is HP's
practice to fund the plans to the extent that contributions are tax-deductible.
ASSUMPTIONS
The assumptions used to measure the benefit obligations and to compute the
expected long-term return on assets for HP's defined benefit and retiree medical
plans are as follows for the years ended October 31:
1999 1998 1997
---------- ----------- ----------
U.S. defined benefit plans:
Discount rate........................................ 7.25% 6.5% 7.0%
Average increase in compensation levels.............. 5.0% 5.0% 5.5%
Expected long-term return on assets.................. 9.0% 9.0% 9.0%
Non-U.S. defined benefit plans:
Discount rate........................................ 3.3 to 6.0% 3.0 to 6.5% 3.5 to 8.0%
Average increase in compensation levels.............. 3.5 to 5.3% 3.75 to 5.0% 3.5 to 5.5%
Expected long-term return on assets.................. 6.1 to 8.5% 6.5 to 8.5% 6.0 to 9.0%
U.S. retiree medical plan:
Discount rate........................................ 7.25% 6.5% 7.0%
Expected long-term return on assets.................. 9.0% 9.0% 9.0%
Current medical cost trend rate...................... 8.2% 8.65% 9.6%
Ultimate medical cost trend rate..................... 5.5% 5.5% 6.0%
For measurement purposes in 1999, the rate of increase in medical costs was
assumed to decrease gradually through 2007, and remain at that level thereafter.
Assumed health care trend rates could have a significant effect on the amounts
reported for health care plans. A one percentage point increase in the assumed
health care cost trend rates would have increased the total service and interest
cost components reported in 1999 by $11 million, and would have increased the
postretirement benefit obligation reported in 1999 by $73 million. A one
percentage point decrease in the assumed health care cost trend rates would have
decreased the total service and interest cost components reported in 1999 by
$8 million, and would have decreased the postretirement obligation reported in
1999 by $55 million.
COMMITMENTS
HP leases certain real and personal property under noncancelable operating
leases. Future minimum lease payments at October 31, 1999 are $187 million for
2000, $152 million for 2001, $123 million for 2002, $79 million for 2003,
$62 million for 2004 and $236 million thereafter. Certain leases require HP to
pay
48
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
property taxes, insurance and routine maintenance, and include escalation
clauses. Rent expense was $352 million in 1999, $354 million in 1998 and
$296 million in 1997.
CONTINGENCIES AND FACTORS THAT COULD AFFECT FUTURE RESULTS
CONTINGENCIES
HP is involved in lawsuits, claims, investigations and proceedings,
including patent, commercial, and environmental matters, which arise in the
ordinary course of business. There are no such matters pending that HP expects
to be material in relation to its business, financial condition or results of
operations.
FACTORS THAT COULD AFFECT FUTURE RESULTS
A substantial portion of HP's revenues each year is generated from the
development, manufacture and rapid release to market of high technology products
newly introduced during the year. In the extremely competitive industry in which
HP operates, product development, manufacturing and marketing are complex and
uncertain processes requiring HP to accurately predict emerging technological
trends and customers' changing needs. Additionally, HP's production strategy
relies on our suppliers' ability to deliver quality components and products in
time to meet critical manufacturing and distribution schedules, and its sales
strategy relies on the ability of third-party distributors to sell HP products
to accommodate changing consumer preferences. In light of these dependencies,
failure to successfully manage a significant product introduction or the
transition from existing products to new products, failure of suppliers to
deliver as needed, or failure of resellers to remain customers and channel
partners could have a severe near-term impact on HP's revenue growth or results
of operations. HP sells a significant portion of its products through
third-party resellers and, as a result, maintains individually significant
receivable balances with major distributors. If the financial condition or
operations of these distributors deteriorate substantially, HP's operating
results could be adversely affected. Our future results could also be affected
by problems we encounter with respect to our intellectual property;
international sales and operations; the spin-off of Agilent Technologies; and
acquisition, strategic alliance, joint venture and divestiture activities.
SEGMENT INFORMATION
DESCRIPTION OF SEGMENTS
HP is a leading global provider of computing and imaging solutions and
services for business and home. HP is focused on capitalizing on the
opportunities of the Internet and the proliferation of electronic services.
HP organizes its operations into four major businesses: Imaging and Printing
Systems, Computing Systems, IT Services, and Measurement Systems, each of which
comprises a reportable segment. The segments were determined primarily on 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. The Measurement Systems business,
now named Agilent Technologies, is reported as a discontinued operation. For
further discussion, see "Discontinued Operations" note to consolidated financial
statements.
A description of the types of products and services provided by each
continuing reportable segment is as follows:
- IMAGING AND PRINTING SYSTEMS provides laser and inkjet printers (both
monochrome and color), mopiers, scanners, all-in-one devices, personal
color copiers and faxes, digital senders, wide- and
49
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
large-format printers, print servers, network-management software,
networking solutions, digital photography products, imaging and printing
supplies, imaging and software solutions, and related professional and
consulting services.
- COMPUTING SYSTEMS provides a broad range of computing systems for the
enterprise, commercial and consumer markets. The products and solutions
range from mission-critical systems and software to personal computers for
the business and home. Major product lines include
UNIX-Registered Trademark- and PC servers, desktop and mobile personal
computers, workstations, software solutions and storage solutions.
- IT SERVICES provides consulting, education, design and installation
services, ongoing support and maintenance, proactive services like
mission-critical support, outsourcing and utility-computing capabilities.
Financing capabilities include leasing, automatic technology-refreshment
services, solution financing and venture financing.
HP's immaterial operating segments were aggregated to form an "all other"
category.
SEGMENT REVENUE AND PROFIT
The accounting policies used to derive reportable segment results are
generally the same as those described in the "Summary of Significant Accounting
Policies" note to consolidated financial statements. 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 for
comparable external customers.
A significant portion of the segments' 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. These
allocations have been determined on bases that HP considers to be a reasonable
reflection of the utilization of services provided to or benefits received by
the segments. If costs were specifically identified to each segment, amounts
could vary from the allocated cost.
SEGMENT ASSETS AND OTHER ITEMS
The asset totals disclosed for each segment represent assets directly
managed by each segment and an allocation of certain assets held at the
corporate level. Assets directly managed by each segment primarily include
accounts receivable, inventory, property, plant and equipment and certain other
assets. Assets directly managed by the IT Services segment also are composed of
short- and long-term financing receivables. Corporate-held assets allocated to
the segments include inventory, property, plant and equipment and certain other
assets. Corporate-held assets not allocated to the segments include cash and
cash equivalents, short-term investments, long-term investments in debt
securities, deferred tax assets and other current and long-term assets managed
at the corporate level.
Property, plant and equipment included in each segment's total assets
reflects allocations between segments and allocations of corporate-held assets;
however, the depreciation and amortization expense disclosed for each segment
does not reflect similar allocations. In addition, the capital expenditures
disclosed for each segment do not include allocations of corporate level capital
expenditures.
SEGMENT DATA
The results of the reportable segments are derived directly from HP's
management reporting system. As described above, these results are based on HP's
method of internal reporting and are not necessarily in
50
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
conformity with generally accepted accounting principles. 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.
The table below presents segment information as of and for the years ended
October 31:
IMAGING AND
PRINTING COMPUTING IT ALL TOTAL
SYSTEMS SYSTEMS SERVICES OTHER SEGMENTS
----------- --------- -------- -------- --------
(IN MILLIONS)
1999:
Net revenue from external customers.......... $18,832 $17,877 $ 5,880 $ 79 $42,668
Intersegment net revenue..................... 70 558 36 1 665
------- ------- ------- ---- -------
Total net revenue.......................... $18,902 $18,435 $ 5,916 $ 80 $43,333
======= ======= ======= ==== =======
Earnings (loss) from operations.............. $ 2,305 $ 856 $ 636 $(11) $ 3,786
======= ======= ======= ==== =======
Depreciation and amortization expense........ $ 501 $ 96 $ 412 $ -- $ 1,009
======= ======= ======= ==== =======
Assets....................................... $ 7,304 $ 6,049 $ 6,976 $ 17 $20,346
======= ======= ======= ==== =======
Capital expenditures......................... $ 143 $ 96 $ 542 $ -- $ 781
======= ======= ======= ==== =======
1998:
Net revenue from external customers.......... $17,006 $17,313 $ 5,164 $157 $39,640
Intersegment net revenue..................... 40 462 78 5 585
------- ------- ------- ---- -------
Total net revenue.......................... $17,046 $17,775 $ 5,242 $162 $40,225
======= ======= ======= ==== =======
Earnings (loss) from operations.............. $ 2,050 $ 515 $ 785 $ (1) $ 3,349
======= ======= ======= ==== =======
Depreciation and amortization expense........ $ 432 $ 189 $ 402 $ 7 $ 1,030
======= ======= ======= ==== =======
Assets....................................... $ 6,935 $ 5,559 $ 5,758 $ 60 $18,312
======= ======= ======= ==== =======
Capital expenditures......................... $ 454 $ 89 $ 491 $ 9 $ 1,043
======= ======= ======= ==== =======
1997:
Net revenue from external customers.......... $15,822 $14,958 $ 4,747 $120 $35,647
Intersegment net revenue..................... 164 542 57 (36) 727
------- ------- ------- ---- -------
Total net revenue.......................... $15,986 $15,500 $ 4,804 $ 84 $36,374
======= ======= ======= ==== =======
Earnings (loss) from operations.............. $ 2,037 $ 581 $ 797 $(11) $ 3,404
======= ======= ======= ==== =======
Depreciation and amortization expense........ $ 322 $ 198 $ 315 $ 7 $ 842
======= ======= ======= ==== =======
Assets....................................... $ 6,741 $ 6,361 $ 4,823 $ 71 $17,996
======= ======= ======= ==== =======
Capital expenditures......................... $ 562 $ 104 $ 538 $ 5 $ 1,209
======= ======= ======= ==== =======
51
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of segment information to HP consolidated
totals as of and for the years ended October 31:
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
NET REVENUE:
Total segments.............................................. $43,333 $40,225 $36,374
Financing interest income reclassification.................. (298) (221) (182)
Elimination of intersegment net revenue..................... (665) (585) (727)
------- ------- -------
Total HP consolidated....................................... $42,370 $39,419 $35,465
======= ======= =======
EARNINGS FROM CONTINUING OPERATIONS BEFORE TAXES:
Total segment earnings from operations...................... $ 3,786 $ 3,349 $ 3,404
Net financing interest reclassification..................... (139) (84) (73)
Interest income and other, net.............................. 708 530 378
Interest expense............................................ (202) (235) (215)
Corporate and unallocated costs, and eliminations........... 41 134 74
------- ------- -------
Total HP consolidated....................................... $ 4,194 $ 3,694 $ 3,568
======= ======= =======
ASSETS:
Total segments.............................................. $20,346 $18,312 $17,996
Assets not allocated to segments:
Cash and cash equivalents................................. 5,411 4,046 3,072
Short-term investments and long-term investments in debt
securities.............................................. 1,192 1,241 2,766
Other corporate........................................... 4,815 5,025 2,847
------- ------- -------
Total assets from continuing operations..................... 31,764 28,624 26,681
Net assets of discontinued operations....................... 3,533 3,084 3,171
------- ------- -------
Total HP consolidated....................................... $35,297 $31,708 $29,852
======= ======= =======
Financing interest income from the leasing of HP and complementary
third-party products is included in the IT services segment's net revenue but is
reported in "Interest income and other, net" in HP's consolidated statement of
earnings. In addition, the financing business calculates its share of corporate
level debt and the related interest expense. This imputed interest expense is
included in the IT services segment's cost of sales but is reported in "Interest
expense" in HP's consolidated statement of earnings.
Corporate and unallocated costs relate primarily to corporate infrastructure
and employee related benefit program costs not allocated to the segments. The
benefit program costs are recorded by the segments at a pre-determined rate and
adjusted at the corporate level to reflect the actual costs. The corporate level
adjustment is not allocated to the segments.
Other corporate assets relate primarily to deferred tax assets, equity
investments and certain other current and long-term assets managed at the
corporate level.
MAJOR CUSTOMERS
No single customer represented 10% or more of HP's total net revenue in any
period presented.
52
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GEOGRAPHIC INFORMATION
Net revenue and net property, plant and equipment, classified by major
geographic areas in which HP operates are as follows:
YEARS ENDED OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
NET REVENUE:
U.S......................................................... $18,972 $17,901 $15,826
Non-U.S..................................................... 23,398 21,518 19,639
------- ------- -------
Total....................................................... $42,370 $39,419 $35,465
======= ======= =======
OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
NET PROPERTY, PLANT AND EQUIPMENT:
U.S......................................................... $ 2,102 $ 2,659 $ 2,653
Non-U.S..................................................... 2,231 2,218 2,037
------- ------- -------
Total....................................................... $ 4,333 $ 4,877 $ 4,690
======= ======= =======
No single country outside of the United States represented more than 10% of
HP's total net revenue or net property, plant and equipment in any period
presented. HP's long-lived assets are composed principally of property, plant
and equipment, net.
53
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
QUARTERLY SUMMARY
UNAUDITED
FOR THE THREE MONTHS ENDED
IN MILLIONS EXCEPT PER SHARE AMOUNTS JANUARY 31 APRIL 30 JULY 31
- ------------------------------------ ------------------------ ------------------------ ------------------------
1999
Net revenue............................... $ 10,235 $ 10,455 $ 10,318
Cost of products sold and services........ $ 7,068 $ 7,299 $ 7,251
Earnings from operations.................. $ 1,097 $ 895 $ 787
Net earnings from continuing operations... $ 882 $ 766 $ 696
Net earnings from discontinued
operations.............................. $ 78 $ 152 $ 157
Net earnings.............................. $ 960 $ 918 $ 853
Per share amounts:
Net earnings--Basic:
Continuing operations................. $ .87 $ .76 $ .69
Discontinued operations............... .08 .15 .15
------------------------ ------------------------ ------------------------
$ .95 $ .91 $ .84
======================== ======================== ========================
Net earnings--Diluted:
Continuing operations................. $ .85 $ .73 $ .66
Discontinued operations............... .07 .15 .15
------------------------ ------------------------ ------------------------
$ .92 $ .88 $ .81
======================== ======================== ========================
Cash dividends.......................... $ .16 $ .16 $ .16
Range of closing stock prices on NYSE... $ 57 13/16-78 3/8 $ 65 7/8-81 15/16 $ 77 5/16-116 1/4
======================== ======================== ========================
1998
Net revenue............................... $ 9,888 $ 10,053 $ 9,182
Cost of products sold and services........ $ 6,869 $ 7,130 $ 6,507
Earnings from operations.................. $ 1,040 $ 759 $ 673
Net earnings from continuing operations... $ 762 $ 603 $ 554
Net earnings from discontinued
operations.............................. $ 167 $ 82 $ 67
Net earnings.............................. $ 929 $ 685 $ 621
Per share amounts:
Net earnings--Basic:
Continuing operations................. $ .73 $ .58 $ .53
Discontinued operations............... .16 .08 .07
------------------------ ------------------------ ------------------------
$ .89 $ .66 $ .60
======================== ======================== ========================
Net earnings--Diluted:
Continuing operations................. $ .71 $ .57 $ .52
Discontinued operations............... .15 .08 .06
------------------------ ------------------------ ------------------------
$ .86 $ .65 $ .58
======================== ======================== ========================
Cash dividends.......................... $ .14 $ .14 $ .16
Range of closing stock prices on NYSE... $ 58 3/4-67 3/4 $ 60 1/4-75 3/8 $ 55 3/8-81 5/8
======================== ======================== ========================
FOR THE THREE MONTHS ENDED
IN MILLIONS EXCEPT PER SHARE AMOUNTS OCTOBER 31
- ------------------------------------ -----------------------
1999
Net revenue............................... $ 11,362
Cost of products sold and services........ $ 8,102
Earnings from operations.................. $ 909
Net earnings from continuing operations... $ 760
Net earnings from discontinued
operations.............................. $ --
Net earnings.............................. $ 760
Per share amounts:
Net earnings--Basic:
Continuing operations................. $ .76
Discontinued operations............... --
-----------------------
$ .76
=======================
Net earnings--Diluted:
Continuing operations................. $ .73
Discontinued operations............... --
-----------------------
$ .73
=======================
Cash dividends.......................... $ .16
Range of closing stock prices on NYSE... $ 67-114
=======================
1998
Net revenue............................... $ 10,296
Cost of products sold and services........ $ 7,284
Earnings from operations.................. $ 927
Net earnings from continuing operations... $ 759
Net earnings from discontinued
operations.............................. $ (49)
Net earnings.............................. $ 710
Per share amounts:
Net earnings--Basic:
Continuing operations................. $ .74
Discontinued operations............... (.05)
-----------------------
$ .69
=======================
Net earnings--Diluted:
Continuing operations................. $ .72
Discontinued operations............... (.04)
-----------------------
$ .68
=======================
Cash dividends.......................... $ .16
Range of closing stock prices on NYSE... $ 48 9/16-60 1/4
=======================
- ------------------------
Note: HP's consolidated financial statements and notes for all periods present
Agilent Technologies' businesses as a discontinued operation. See further
discussion in notes to the consolidated financial statements.
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding directors of HP who are standing for reelection is set
forth under "Election of Directors" on pages 9-10 of HP's Notice of Annual
Meeting of Stockholders and Proxy Statement, dated January 18, 2000 (the "Notice
and Proxy Statement"), which pages are incorporated herein by reference.
The names of the executive officers of HP, and their ages, titles and
biographies as of December 31, 1999, are set forth below. All officers are
elected for one-year terms.
EXECUTIVE OFFICERS:
SUSAN D. BOWICK; AGE 51; VICE PRESIDENT, HUMAN RESOURCES.
Ms. Bowick was elected a Vice President in November 1999. She previously
held positions as Business Personnel Manager for the Computer Organization in
1995 and Personnel Manager for the San Diego site in 1993. She was first
appointed a Vice President in 1997.
RAYMOND W. COOKINGHAM; AGE 56; VICE PRESIDENT AND CONTROLLER.
Mr. Cookingham was elected a Vice President in 1993. He has served as
Controller since 1986.
DEBRA L. DUNN: AGE 43; VICE PRESIDENT AND GENERAL MANAGER, STRATEGY AND
CORPORATE OPERATIONS.
Ms. Dunn was elected a Vice President in November 1999. She was General
Manager of HP's Executive Staff from 1998 to 1999. From 1996 to 1998 she was
General Manager of the Video Communications Division and from 1994 to 1996 she
was that division's Marketing Manager.
CARLETON S. FIORINA; AGE 45; PRESIDENT AND CHIEF EXECUTIVE OFFICER.
Ms. Fiorina became President and Chief Executive Officer of HP in July 1999,
succeeding Lewis E. Platt. In July 1999 she also was elected to the HP Board of
Directors. From October 1997 until she joined HP, Ms. Fiorina was Group
President of the Global Service Provider Business of Lucent Technologies, Inc.,
a communications systems and technology company. From October 1996 to October
1997, she was President of Lucent Technologies' Consumer Products Business, and
from January to October 1996 she was Executive Vice President, Corporate
Operations. From January 1995 to January 1996, she was President, North America
and, from July 1994 to January 1995, she was President, Atlantic and Canada
Region in the Network Systems Group of AT&T. Ms. Fiorina is a member of the
Board of Directors of the Kellogg Company and Merck & Co. and also serves on the
U.S. China Board of Trade.
ANN M. LIVERMORE; AGE 41; PRESIDENT, ENTERPRISE AND COMMERCIAL BUSINESS.
Ms. Livermore was elected a Vice President in 1995 and became General
Manager of Worldwide Customer Support Operations in 1996. She was named General
Manager of the Enterprise Computing Solutions Organization in 1998 and was
appointed President of Enterprise Computing in April 1999. In October 1999, she
became President of the Enterprise and Commercial Business. Ms. Livermore is a
member of the Board of Directors of United Parcel Service. She is also on the
Board of Visitors of the Kenan-Flagler Business School at the University of
North Carolina at Chapel Hill.
55
ANTONIO M. PEREZ; AGE 54; PRESIDENT, CONSUMER BUSINESS.
Mr. Perez was elected a Vice President and named General Manager of the
InkJet Products Group in 1995. In April 1999, he was appointed President of
Inkjet Imaging Solutions. In November 1999, he was appointed President of
Consumer Business. Mr. Perez serves on the Board of Directors of Stac Software,
Inc.
WILLIAM V. RUSSELL; AGE 47; VICE PRESIDENT, ENTERPRISE SYSTEMS AND SOFTWARE.
Mr. Russell was appointed Vice President of Enterprise Systems and Software
in October 1999. He was General Manager of Europe, Africa and the Middle East
for the Computer Systems Organization from 1994 to 1996, and became General
Manager of the Enterprise Systems Group in 1997. He was first elected a Vice
President in 1998.
CAROLYN M. TICKNOR; AGE 52; PRESIDENT, IMAGING AND PRINTING SYSTEMS.
Ms. Ticknor was named General Manager of the LaserJet Printer Group in 1994.
She was elected a Vice President in 1995 when the group reorganized and was
renamed the LaserJet Solutions Group. In 1999, she was elected President of HP's
Imaging and Printing Systems. Ms. Ticknor is a director of Stamps.com and serves
on the Stanford Graduate School of Business Activities Council.
ROBERT P. WAYMAN; AGE 54; EXECUTIVE VICE PRESIDENT, FINANCE AND ADMINISTRATION
AND CHIEF FINANCIAL OFFICER.
Mr. Wayman has served as an Executive Vice President responsible for finance
and administration since 1992 and Chief Financial Officer since 1984. He is a
director of CNF Transportation, Inc. and Sybase Inc. He also serves as a member
of the Kellogg Advisory Board to Northwestern University School of Business and
is Chairman of the Private Sector Council.
DUANE E. ZITZNER; AGE 52; PRESIDENT, COMPUTING SYSTEMS.
Mr. Zitzner was elected a Vice President and named General Manager of the
Personal Information Products Group in 1996. He continued as General Manager
when Personal Systems Group became a group within the Computer Organization in
1997 and was named President of the Computer Products organization in April
1999. Computer Products was renamed Computing Systems in November 1999.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 is set forth on page 26 of the Notice and Proxy Statement,
which page is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding HP's compensation of its named executive officers is
set forth on pages 27-44 of the Notice and Proxy Statement, which pages are
incorporated herein by reference. Information regarding HP's compensation of its
directors is set forth on page 8 of the Notice and Proxy Statement, which page
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management is set forth on pages 22-26 of the Notice and Proxy Statement, which
pages are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. All Financial Statements:
See the Consolidated Financial Statements and notes thereto in
Item 8 above.
2. Financial Statement Schedules:
None.
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
1 Not applicable.
2 Master Separation and Distribution Agreement between
Hewlett-Packard Company and Agilent Technologies, Inc.
effective as of August 12, 1999.
3(a) Registrant's Amended and Restated 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 Amended By-Laws.
4 None.
5-8 Not applicable.
9 None.
10(a) Registrant's 1985 Incentive Compensation Plan, as amended.*
10(b) Registrant's 1985 Incentive Compensation Plan, as amended,
stock option agreement.*
10(c) Registrant's Excess Benefit Retirement Plan, amended and
restated as of November 1, 1994, which appears as
Exhibit 10(g) to Registrant's Annual Report on Form 10-K for
the fiscal year ended October 31, 1996, which exhibit is
incorporated herein by reference.*
10(d) Registrant's 1990 Incentive Stock Option Plan, as amended.*
10(e) Registrant's 1990 Incentive Stock Option Plan, as amended,
stock option agreement.*
10(f) Registrant's 1995 Incentive Stock Plan, as amended.*
10(g) Registrant's 1995 Incentive Stock Plan, as amended, stock
option and restricted stock agreements.*
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, 1999.*
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.*
57
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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) Transition Agreement, dated May 20, 1999, between Registrant
and Lewis E. Platt which appears as exhibit 10(ee) 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) Employment Agreement, dated May 20, 1999, between Registrant
and Robert P. Wayman which appears as exhibit 10(ff) 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) 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(s) Executive Transition Program which appears as
exhibit 10(hh) 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) 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(u) 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(v) 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(w) Registrant's 2000 Stock Plan which appears as Appendix A to
Registrant's Proxy Statement dated January 18, 2000, which
appendix is incorporated herein by reference.*
10(x) Registrant's 2000 Employee Stock Purchase Plan which appears
as Appendix B to Registrant's Proxy Statement dated
January 18, 2000, which appendix is incorporated herein by
reference.*
10(y) Registrant's Pay-for-Results Plan which appears as
Appendix C to Registrant's Proxy Statement dated
January 18, 2000, which appendix is incorporated herein by
reference.*
11-17 Not applicable.
18 None.
19-20 Not applicable.
21 Subsidiaries of Registrant as of January 18, 2000.
22 None.
23 Consent of Independent Accountants.
24 Powers of Attorney. Contained in page 60 of this Annual
Report on Form 10-K and incorporated herein by reference.
25-26 Not applicable.
27 Financial Data Schedule.
28 None.
99 1999 Employee Stock Purchase Plan Annual Report on Form
11-K.
- ------------------------
* Indicates management contract or compensatory plan, contract or arrangement.
58
Exhibit numbers may not correspond in all cases to those numbers in Item 601
of Regulation S-K because of special requirements applicable to EDGAR filers.
(b) Reports on Form 8-K
On March 2, 1999, HP filed a report on Form 8-K, which reported under Item 5
that our Board of Directors approved plans to pursue a strategic realignment
under which we would separate into two independent companies, Hewlett-Packard
Company and Agilent Technologies, Inc.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: January 27, 2000 HEWLETT-PACKARD COMPANY
By: /s/ ANN O. BASKINS
----------------------------------------
Ann O. Baskins
VICE PRESIDENT, GENERAL COUNSEL AND
SECRETARY
POWER OF ATTORNEY
Know All Persons By These Presents, that each person whose signature appears
below constitutes and appoints Ann O. Baskins and Charles N. Charnas, or either
of them, his or her attorneys-in-fact, for such person in any and all
capacities, to sign any amendments to this report and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
either of said attorneys-in-fact, or substitute or substitutes, may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
--------- -------- ----
/s/ CARLETON S. FIORINA
------------------------------------------- January 27, 2000
Carleton S. Fiorina President and Chief Executive
Officer (Principal
Executive Officer) and
Director
/s/ ROBERT P. WAYMAN
------------------------------------------- January 27, 2000
Robert P. Wayman Executive Vice President
Finance and Administration,
Chief Financial Officer
(Principal Financial
Officer) and Director
/s/ RAYMOND W. COOKINGHAM
------------------------------------------- January 27, 2000
Raymond W. Cookingham Vice President and Controller
(Principal Accounting
Officer)
/s/ PHILIP M. CONDIT
------------------------------------------- January 27, 2000
Philip M. Condit Director
/s/ PATRICIA C. DUNN
------------------------------------------- January 27, 2000
Patricia C. Dunn Director
/s/ JOHN B. FERY
------------------------------------------- January 27, 2000
John B. Fery Director
------------------------------------------- January , 2000
Jean-Paul G. Gimon Director
/s/ SAM GINN
------------------------------------------- January 27, 2000
Sam Ginn Director
/s/ RICHARD A. HACKBORN
------------------------------------------- January 27, 2000
Richard A. Hackborn Chairman of the Board
60
SIGNATURE TITLE(S) DATE
--------- -------- ----
/s/ WALTER B. HEWLETT
------------------------------------------- January 27, 2000
Walter B. Hewlett Director
/s/ GEORGE A. KEYWORTH II
------------------------------------------- January 27, 2000
George A. Keyworth II Director
/s/ SUSAN P. ORR
------------------------------------------- January 27, 2000
Susan P. Orr Director
61
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
1 Not applicable.
2 Master Separation and Distribution Agreement between
Hewlett-Packard Company and Agilent Technologies, Inc.
effective as of August 12, 1999.
3(a) Registrant's Amended and Restated 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 Amended By-Laws.
4 None.
5-8 Not applicable.
9 None.
10(a) Registrant's 1985 Incentive Compensation Plan, as amended.*
10(b) Registrant's 1985 Incentive Compensation Plan, as amended,
stock option agreement.*
10(c) Registrant's Excess Benefit Retirement Plan, amended and
restated as of November 1, 1994, which appears as
Exhibit 10(g) to Registrant's Annual Report on Form 10-K for
the fiscal year ended October 31, 1996, which exhibit is
incorporated herein by reference.*
10(d) Registrant's 1990 Incentive Stock Option Plan, as amended.*
10(e) Registrant's 1990 Incentive Stock Option Plan, as amended,
stock option agreement.*
10(f) Registrant's 1995 Incentive Stock Plan, as amended.*
10(g) Registrant's 1995 Incentive Stock Plan, as amended, stock
option and restricted stock agreements.*
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, 1999.*
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) Transition Agreement, dated May 20, 1999, between Registrant
and Lewis E. Platt which appears as exhibit 10(ee) 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) Employment Agreement, dated May 20, 1999, between Registrant
and Robert P. Wayman which appears as exhibit 10(ff) 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) 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(s) Executive Transition Program which appears as
exhibit 10(hh) to Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended July 31, 1999, which
exhibit is incorporated herein by reference.*
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10(t) 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(u) 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(v) 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(w) Registrant's 2000 Stock Plan which appears as Appendix A to
Registrant's Proxy Statement dated January 18, 2000, which
appendix is incorporated herein by reference.*
10(x) Registrant's 2000 Employee Stock Purchase Plan which appears
as Appendix B to Registrant's Proxy Statement dated
January 18, 2000, which appendix is incorporated herein by
reference.*
10(y) Registrant's Pay-for-Results Plan which appears as
Appendix C to Registrant's Proxy Statement dated
January 18, 2000, which appendix is incorporated herein by
reference.*
11-17 Not applicable.
18 None.
19-20 Not applicable.
21 Subsidiaries of Registrant as of January 18, 2000.
22 None.
23 Consent of Independent Accountants.
24 Powers of Attorney. Contained in page 60 of this Annual
Report on Form 10-K and incorporated herein by reference.
25-26 Not applicable.
27 Financial Data Schedule.
28 None.
99 1999 Employee Stock Purchase Plan Annual Report on Form
11-K.
- ------------------------
* Indicates management contract or compensatory plan, contract or arrangement.