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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2001
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
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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
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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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 January 28, 2002 was $40,766,871,564.
Indicate the number of shares outstanding of the issuer's common stock as of
January 28, 2002: 1,941,391,000 shares.
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Forward-Looking Statements
This Annual Report on Form 10-K, including "Factors That Could Affect Future
Results" set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7, contains forward-looking
statements that involve risks and uncertainties, as well as assumptions that,
if they never materialize or prove incorrect, could cause the results of
Hewlett-Packard Company and its consolidated subsidiaries ("HP" or the
"Company") to differ materially from those expressed or implied by such
forward-looking statements. All statements other than statements of historical
fact are statements that could be deemed forward-looking statements, including
any projections of earnings, revenues or other financial items; any statements
of the plans, strategies and objectives of management for future operations;
any statement concerning proposed new products, services or developments; any
statements regarding future economic conditions or performance; any statements
of belief; and any statements of assumptions underlying any of the foregoing.
The risks, uncertainties and assumptions referred to above include the
challenge of managing asset levels, including inventory; the difficulty of
keeping expense growth at modest levels while increasing revenues; and other
risks that are described from time to time in HP's Securities and Exchange
Commission reports, including but not limited to the items discussed in
"Factors That Could Affect Future Results" set forth in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 in this report. HP assumes no obligation and does not intend to update
these forward-looking statements.
PART I
ITEM 1. Business.
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.
We are a leading global provider of computing, printing and imaging
solutions and services for business and home, and are focused on making
technology and its benefits accessible to all.
As of October 31, 2001, our major business segments included Imaging and
Printing Systems, Computing Systems and Information Technology Services ("IT
Services").
. Imaging and Printing Systems provides printer hardware, supplies, imaging
products and related professional and consulting services. Printer
hardware consists of laser and inkjet printing devices, which include
color and monochrome printers for the business and home, multi-function
laser devices and wide- and large-format inkjet printers. Supplies offer
laser and inkjet printer cartridges and other related printing media.
Imaging products include all-in-one inkjet devices, scanners, digital
photography products, personal color copiers and faxes. Professional and
consulting services are provided to customers on the optimal use of
printing and imaging assets.
. Computing Systems provides commercial personal computers ("PCs"), home
PCs, workstations, UNIX(R)/(1)/ servers, PC servers, storage and software
solutions. Commercial PCs include the Vectra desktop series, as well as
OmniBook and Pavilion notebook PCs. Home PCs include the Pavilion series
of multi-media consumer desktop PCs. Workstations provide UNIX(R), Windows
and Linux-based systems. The UNIX(R) server offering ranges from low-end
servers to high-end scalable systems such as the Superdome line, all of
which run on HP's PA-RISC architecture and HP-UX operating system. PC
servers offer primarily low-end and mid-range products that run on the
Windows and Linux operating systems. Storage provides mid-range and
high-end array offerings, storage area networks and storage area
management and virtualization software, as well as tape and optical
libraries, tape drive mechanisms and tape media. The software category
offers OpenView and other solutions designed to manage large-scale systems
and networks. In addition, software includes telecommunications
infrastructure solutions and middleware.
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/(1)/ UNIX(R) is a registered trademark of The Open Group.
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. IT Services provides customer support, consulting, outsourcing, technology
financing and complementary third-party products delivered with the sales
of HP solutions. Customer support offers a range of high- value solutions
from mission-critical and networking services that span the entire IT
environment to low-cost, high-volume product support. Consulting provides
industry-specific business and IT consulting and system integration
services in areas such as financial services, telecommunications and
manufacturing, as well as cross-industry expertise in Customer
Relationship Management ("CRM"), e-commerce and IT infrastructure.
Outsourcing offers a range of IT management services, both comprehensive
and selective, including transformational infrastructure services, client
computing managed services, managed web services and application services
to medium and large companies. Technology financing capabilities include
leasing, solution financing and computing and printing utility offerings.
A summary of HP's net revenue and earnings from operations as contributed by
our principal business segments is found in Note 18 to the Consolidated
Financial Statements in Item 8, 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," in Item 7, which is
incorporated herein by reference.
Strategy and Segment Overview
We provide a broad mix of products across a variety of product segments and
across customer categories ranging from large multinational enterprises to
individual consumers. We seek to be the category leader with respect to each of
the specific products and categories in which we compete and to expand actively
into new and adjacent markets. Accordingly, in fiscal 2001 we focused on
strengthening and enhancing each of our segments as described further below.
At the same time that we focus on individual offerings, we seek to utilize
the depth and breadth of our products and services, as well as our expertise in
working with complementary technology providers, in order to provide integrated
solutions that address new and emerging market demands and offer new customer
experiences. This solution-driven approach is focused on two converging paths.
The first path is the development of next-generation devices--printers, PCs,
handhelds, notebooks and new devices that will take advantage of the
convergence of technology. In addition to their more traditional functions,
these devices feature embedded technology that allows them to work in
conjunction with other devices (whether wireless or wired) to provide or access
e-services. For example, the use of Personal Digital Assistants ("PDAs") to
access the Internet to complete transactions and print information requires
that separate devices work together. The second path is the development of a
dynamic, flexible, reliable infrastructure that can be accessed and utilized in
more ways by the variety of devices discussed above. We believe that as
infrastructure and access devices evolve and increase in their interdependence,
they will create a more dynamic, flexible and interconnected world.
Following are discussions of our principal business segments and key
activities in these segments during fiscal 2001:
Imaging and Printing Systems
HP's portfolio of printing and imaging offerings ranges from low-end
printers and supplies to commercial printing solutions. These offerings fall
into four product categories: printer hardware, imaging, printing supplies and
commercial printing. Generally, in fiscal 2001 the Imaging and Printing Systems
segment executed against a number of key goals, including increased focus on
gaining market share in low-end products, ensuring a smooth transition to new
products in our LaserJet and Inkjet printer families, and expanding our
commitment to commercial printing.
More detailed descriptions of our various product categories and their
focuses are set forth below:
Printer Hardware. Our printer hardware category consists of laser and
inkjet printing devices, which include color and monochrome printers for the
business and home, multi-function laser devices and wide- and large-format
inkjet printers. In fiscal 2001, we witnessed the successful introduction of a
completely new line of
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Internet-enabled LaserJet printers with improved speed and reduced price,
including the LaserJet 1200, 2200, 3200 and 4100 models. Other key developments
in the printer hardware category during fiscal 2001 included the following:
. the introduction of the LaserJet 1000, our lowest-ever priced monochrome
laser printer;
. the introduction of the color inkjet printer models cp1160 and cp1700,
which bring improved image quality and paper handling options to their
category;
. an agreement with Research in Motion Limited ("RIM") to develop jointly
mobile printing applications for RIM's BlackBerry wireless e-mail solution
and HP printers;
. the introduction of two new print servers, the HP Jetdirect 200m/250m and
the HP Wireless Print Server, which enable our customers to share printers
wirelessly or over a network;
. the introduction of our DeskJet 995c printer, the industry's first
integrated Bluetooth inkjet printer, which allows mobile users to print
without cables from up to 10 meters away from other devices enabled for
Bluetooth printing;
. the introduction of our Business Inkjet Printer 2600, a wide-format color
inkjet printer which, when configured with an HP Jetdirect print server,
becomes a high-performance Internet-enabled appliance that can be shared
in a network environment;
. the introduction of three graphics printers with exceptional color
accuracy and remote proofing capabilities (HP DesignJet 10ps, 20ps and
50ps); and
. the introduction of the DesignJet 1050c and 1055cm large-format color
printers.
Imaging. Imaging includes all-in-one products, scanners, digital cameras,
PhotoSmart printers, personal color copiers, faxes and imaging services. This
category also includes management of our joint venture with Eastman Kodak
Company, called Phogenix Imaging LLC, which develops solutions for retail photo
processing that replace silver halide processing with inkjet-based solutions.
Key developments during fiscal 2001 included the following:
. the introduction of the PSC 950 all-in-one products, which provide
breakthroughs in ease-of-use in photo printing;
. the introduction of the Photo Scanner 1000, which scans photos with
photo-quality results;
. the introduction of four new Scanjet models, the HP Scanjet 4400c, 4470c,
5470c and 5490c;
. introduction of a suite of easy-to-use digital cameras (the HP PhotoSmart
318, 612 and 715 digital cameras); and
. the expansion of our line of photo-quality color inkjet printers,
including an ultra-portable printer (the HP PhotoSmart 100, 115 and 1315
photo printers).
Printing Supplies. Our printing supplies category includes ink cartridges
for our Inkjet line of printers, toner for our LaserJet line of products and
paper, both for general printing purposes and also specifically for photo
processing. In fiscal 2001 we continued our innovation of printing supplies,
including the introduction of new premium photo paper.
Commercial Printing. The use of digital presses in commercial printing is
an application to which we intend to bring both our printing expertise and our
expertise in enterprise computing in order to develop solutions that can store,
manage and deliver rich content. Key developments in this category included our
$100 million investment in Indigo N.V. ("Indigo") made in 2000 as part of a
broader commercial relationship with Indigo to develop jointly and resell
digital presses that utilize Indigo technology for the commercial printing
market. This relationship and our entry into the market were further advanced
by our agreement in September 2001 to acquire the remaining outstanding shares
of Indigo, which will allow HP to build on its initial work with Indigo and
advance further into the digital press market.
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Computing Systems
Computing Systems is at the core of our infrastructure offering and includes
commercial PCs, home PCs, workstations, UNIX(R) servers, PC servers, storage
and software products. Computing Systems' products and services are used in a
variety of applications ranging from personal and small business information
management to large scale IT infrastructure solutions for global service
providers, telecommunications companies, financial institutions, Internet
services vendors, manufacturers, and retail and transportation companies.
Generally, our Computing Systems segment includes both personal systems,
focused on individual users, and enterprise systems, focused on building
corporate infrastructure.
Key developments over the past year are described below:
Desktop PCs. As the desktop market has matured, many of our efforts have
focused on improving the distribution balance between direct and retail sales
and also in improving the cost structure of our business in order to remain
competitive in this challenging market. At the same time, we have focused on
configuring desktops and pre-loading software to address a variety of customer
uses (such as downloading and playing music and burning CDs) and to take
advantage of the roll-out of Microsoft Corporation's new operating system,
Windows XP. Key products within this area include HP Pavilion multi-media
consumer PCs and the HP Vectra series of desktop PCs for use in enterprise and
small businesses.
Notebook PCs. We continued to focus on providing notebook PCs that maximize
the balance between size, weight and performance. Key products in this area
include HP OmniBook mobile PCs for use in business and Pavilion laptops for
consumers. This past year we successfully introduced a new business notebook
PC, the Omnibook 500, which is an extremely lightweight notebook that offers
great flexibility in use.
Servers and Workstations. Our server line includes products ranging from
high-volume industry standard servers to high-end systems like our Superdome
line. HP servers span operating systems from our UNIX(R) platform, HP-UX, to
Microsoft Windows and Linux. Our core computing technologies include our
Precision Architecture Reduced Instruction Set Computer ("PA-RISC")
architecture for UNIX(R) servers and workstations and our Explicitly Parallel
Instruction Computing ("EPIC") technology, which provides the foundation for
Intel's next-generation Itanium Processor Family ("IPF") architecture. Over the
past year, we introduced the rp8400, an extension of an existing mid-range
server which leverages the high-end Superdome architecture. We also introduced
two new mid-range servers, the rx4610 and rx9610, which use the new Itanium
processor. In addition, we upgraded our low-end rp5400 server, our mid-range
rp7400 server and our high-end Superdome server to the PA-8700 processor, which
improved performance across these products. Workstations include UNIX(R),
Windows and Linux-based systems. As in our server category, we have also begun
our shift toward including the new Itanium processor in our workstation
products.
Storage. Our storage strategy has been focused on enhancing a wide range of
storage solutions from mid-range and high-end array offerings to storage area
networks and storage area management and virtualization software, as well as
establishing stronger positions in tape automation and tape drive markets. Over
the past year, we have taken several actions to increase our offerings in this
area. We acquired StorageApps Inc., a provider of virtualization software that
allows enterprises to support multi-vendor networks. The acquisition allows us
to focus increasingly on storage virtualization as a key technology,
recognizing that customers do not want to be locked into a proprietary storage
system. In addition, we solidified our product offerings by adding the VA7100
and VA7400 mid-range disc arrays to our product line. We also renewed our
partnership with Hitachi Data Systems for an additional three years, allowing
us to continue offering our leading high-end storage products. We also extended
our product offering of the Ultrium family of tape drives, marketed as
stand-alone tape drives and integrated into our tape automation libraries.
These drives are based on the Ultrium format of linear tape-open technology.
Software. Our enterprise software portfolio spans a wide set of software
categories, from server operating systems, to middleware, to network and
systems management software. We have focused on deploying these technologies to
create integrated software suites and solutions. Key products include HP-UX,
HP-Linux, HP Netaction and OpenView.
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In operating systems, we continue to enhance our UNIX(R) operating system,
HP-UX; to develop leading Linux offerings; and to offer systems running
Microsoft products for both servers and PCs. By offering multiple platforms, we
allow customers to choose among a number of selections that will best integrate
with their current environment.
In middleware, we introduced HP Netaction, a product suite that provides a
comprehensive software foundation for the development, integration and
deployment of new revenue-generating voice and data services.
In the area of network and system management software, OpenView continues to
be a market leading product and we continue to enhance both its performance and
breadth by continually developing capabilities for addressing the emerging
requirements of managing dynamic services-based computing. We are expanding the
scope of enterprise management through our Integrated Services Management
Program, which seeks to manage the enterprise IT infrastructure from end to end.
IT Services
Our IT Services strategy reflects the inextricable link between business
transformation and IT implementation. To allow customers to take advantage of
emerging technologies and business models, we offer a complete lifecycle of
services--planning, implementation, support and ongoing operations. IT Services
offers a wide variety of services aimed at providing customers with a highly
reliable IT infrastructure, including consulting and implementation services
for traditional and Internet-based IT infrastructures, storage and storage-area
networks, and IT management; next-generation networks and mobile
communications; proactive, mission-critical support services;
business-continuity and recovery services; and infrastructure outsourcing and
Web-hosting services. Services aimed at helping customers rapidly implement key
business solutions are also provided, including supply-chain management,
e-procurement, business intelligence, CRM, enterprise application integration,
e-commerce, e-banking, trading communities, portals and virtual business
networks.
Our IT Services segment is organized around a number of different service
areas, as described below:
Customer Support. Our customer support category offers a range of
high-value solutions from mission-critical and networking services that span
the entire IT environment to low-cost, high-volume product support. Our support
services provide customers a variety of delivery methods, including web-based
self-service, telephone assistance, express replacement, on-site repair,
software support and updates, always available mission-critical support,
network support and business recovery services. Our key assets in this business
include our support delivery technology, which consists of remote and on-site
diagnostic tools and technologies, self-support portals and a world-class
delivery organization with over 600 support offices in 120 countries. In
addition, our range of services is a key asset.
Consulting. Consulting provides industry-specific business and IT
consulting and system integration services in areas such as financial services,
telecommunications and manufacturing, as well as cross-industry expertise in
CRM, e-commerce and IT infrastructure. Our key assets in this area include our
expertise in the IT infrastructure space and our expertise in certain
industry-specific markets and solution areas. In fiscal 2001, HP Consulting
formed an alliance with PricewaterhouseCoopers LLP to provide technology
consulting services to airlines.
Outsourcing. Outsourcing offers a range of IT management services, both
comprehensive and selective, including transformational infrastructure
services, client computing managed services, managed web services and
application services to medium and large companies. Many customers see
outsourcing as a way to reduce their IT costs and allow them to focus their
resources on their core business instead of investing in IT personnel and
equipment. Competitive advantages in the outsourcing business include our
ability to utilize our experience in IT infrastructure and mission-critical
data centers to provide, manage, operate and evolve our customers' IT
infrastructure. HP Outsourcing offers flexible choices to customers and uses a
combination of nine dedicated worldwide service centers and Internet data
centers in addition to enhanced integration through partnering. In fiscal 2001,
we entered into an agreement with Accenture LLP, whereby we will provide
outsourcing services for its clients.
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Other. We also offer financing services for technology, complementary
third-party products delivered with sales of HP solutions and
e-education/training. Technology financing capabilities, which allow customers
to plan and manage the cost of solutions, include leasing, solution financing
and computing and printing utility offerings.
Other
Our other primary businesses currently include our embedded and personal
systems category, built around our Jornada handheld product line, CD writers
and DVD+RW drives.
Sales and Marketing
We continue to manage our business and report our financial results based on
our three principal business segments described above. The marketing and
selling of our products and services, however, are organized separately into
three main customer-facing organizations: a Consumer Business Organization
("CBO"); a Business Customer Organization ("BCO"); and an HP Services
Organization ("HPS"). HPS was created in fiscal 2001 in order to improve our
marketing and selling efforts for services.
CBO contains all of our consumer-related marketing and selling activities
consolidated into a single functional unit, and BCO represents the
consolidation of all of HP's business and enterprise-related marketing and
selling activities into a single functional unit. By consolidating around
customer groups, we have improved our customer relationships by providing a
single main point of contact to the customer, eliminating redundant sales
efforts, better leveraging cross-selling opportunities with customers and
better coordinating feedback and knowledge-capture of customer requirements and
trends for our development of cross-product solutions. This feedback and
knowledge is continuously incorporated into planning decisions supported by our
product-generation organizations, such as Imaging and Printing Systems and
Computing Systems. This new marketing structure enables us to leverage our core
assets better to deliver world-class technology, services and solutions, and a
world-class customer experience.
Because of the distinct nature of selling services, HPS oversees the
marketing and selling activities of our IT Services segment. This organization
coordinates with BCO due to the existence of enterprise customers in the two
groups, providing us with both the flexibility of distinct sales and marketing
organizations to act independently and the benefits of coordination.
Consumer Business Organization. CBO is responsible for marketing and
supplying our consumer products around the world. CBO is organized by product
offerings, including home PCs (Pavilion desktop PC products), printer hardware
and supplies (DeskJet and All-in-One inkjet printers, ink cartridges and
media), imaging (ScanJet scanners, digital cameras), personal appliances
(Jornada PDAs, CD writers, DVD+RW drives). By integrating the marketing for all
consumer products into a single organization, we have reduced redundancies and
better leveraged opportunities for cross-category consumer product marketing.
We have adopted a blended channel strategy for consumer product distribution
in the United States that includes sales through approximately 20,000
third-party retail locations and direct sales through hpshopping.com, a
wholly-owned subsidiary that supports online sales.
Key product development initiatives in fiscal 2001 included an increased
focus on consumer-oriented industrial design, providing new and additional
consumer e-services--either independently or in conjunction with third-party
partners--and a strong cross-product category marketing focus on imaging.
Sales through CBO are derived through reseller channels, including
retailers, dealers and original equipment manufacturers, as well as through
direct sales and distribution to customers over the Internet.
Business Customer Organization. BCO is responsible for marketing and
delivering products and solutions to all of our business and enterprise
customers. BCO's customers include small and medium businesses as well as
global enterprises, including telecommunications service providers, Internet
service providers and academic,
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scientific and government institutions. BCO is charged with developing a
comprehensive understanding of HP's business customers' needs and translating
this understanding into delivering world-class products, solutions and customer
experience throughout the customer lifecycle. Accordingly, BCO markets
products, services and solutions that constitute either individual products and
services or unique combinations of offerings from Imaging and Printing Systems
(LaserJet printer hardware and supplies), Computing Systems (commercial desktop
PCs, notebook PCs, workstations, servers, storage, software) and IT Services
(financing).
Sales through BCO result from the efforts of our business customer sales
force, which includes direct field sales representatives, indirect sales (i.e.,
commercial channels), HP consultants, pre-sales technical personnel and
administrative support staff. BCO's direct sales force is divided into
specialty product and service representatives (such as for servers, storage,
software and services), and teams assigned to corporate accounts representing
all of our product and service categories.
HP Services Organization. HPS is responsible for marketing and delivering
information technology services to all of our business and enterprise
customers. HPS is charged with developing a comprehensive understanding of the
customer needs for our support, consulting and outsourcing services and
translating this understanding into delivering world-class services. HPS also
is charged with understanding the customer-loyalty and cross-selling
opportunities so that we can better sell services to our BCO customers, as well
as better sell our BCO products and solutions to services customers, including
customers of our multi-vendor support services.
Over the past year, CBO, BCO and HPS shared in several key developments in
our sales and marketing efforts. Besides creating HPS, in fiscal 2001 we
completed the simplification of our product line structure, which reduced our
number of product categories from 83 to 17. This simplification is designed to
eliminate customer confusion and increase our focus on key product lines. We
also implemented a new channel engagement program in fiscal 2001 that we have
called Hard Deck. This program is designed to clarify the roles and
responsibilities for us and our channel partners in order to improve our
channel relationships and make our selling model more efficient.
International
We maintain operations in more than 120 countries worldwide and sell into
additional geographies through various representatives and distributors. We
believe this geographic diversity allows us to draw on business and technical
expertise from a worldwide workforce, provides stability to our operations and
revenue streams to offset geographic economic trends and offers us an
opportunity to exploit new markets for maturing products. In addition, we
believe that in the future technology companies will have to develop products
and sales models that are able to target developing countries. Moreover, we
believe that our broad geographic presence and our e-Inclusion program, which
is focused on developing products and business models that will bring
technology to developing countries, will give us a solid base to build upon for
future growth.
A summary of our net revenue, and net property, plant and equipment by
geographic area is set forth in Note 18 to the Consolidated Financial
Statements in Item 8, which is incorporated herein by reference. More than half
of our overall net revenue comes from outside of the United States. In the last
three fiscal years, more than three-fourths of this international revenue was
derived from Europe and the Asia Pacific region. A majority of our net revenue
originating outside the United States was from customers other than foreign
governments.
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--Due to the international
nature of our business, political or economic changes could harm our future
revenues, costs and expenses and financial condition" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Adoption of the Euro" in Item 7, "Quantitative and Qualitative
Disclosure about Market Risk" in Item 7A and Note 8 to the Consolidated
Financial Statements in Item 8, which are incorporated herein by reference.
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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, our products and services are likely to become technologically
obsolete over time, in which case revenue 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, we must
quickly manufacture and deliver such products and services in sufficient
volumes at acceptable costs to meet demand.
Hewlett-Packard Laboratories, also known as HP Labs, together with the
various research and development groups within the three principal business
segments, are responsible for our total research and development efforts.
Expenditures for research and development in fiscal 2001, including HP Labs
and the three principal business segments, were $2.7 billion. These
expenditures were $2.6 billion in fiscal 2000 and $2.4 billion in fiscal 1999.
In fiscal 2001, total research and development expenditures were 5.9% of net
revenue, compared to 5.4% in fiscal 2000 and 5.8% in fiscal 1999.
We anticipate that we will continue to have significant research and
development expenditures in the future to provide a continuing flow of
innovative, high-quality products and services to maintain and enhance our
competitive position.
Patents
Our 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 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
We believe 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. We compete
primarily on the basis of technology, performance, price, quality, reliability,
brand, distribution and customer service and support. Our reputation, the ease
of use of our products, the ready availability of multiple software
applications, our Internet infrastructure offering, and our customer training,
services and support are also important competitive factors.
The markets for each of our three principal business segments are
characterized by vigorous competition among major corporations with
long-established positions and 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 addition,
we compete with many of our current and potential partners. The successful
management of these competitive partner relationships will be critical to our
future success. Moreover, 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.
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On an overall basis we are among the largest U.S.-based companies offering
our range of general-purpose computers and personal-information, imaging and
printing products for industrial, scientific and business applications, and
information technology services. We are the leader or among the leaders in each
of our principal business segments.
The competitive environments in which each segment operates are described
below:
Imaging and Printing Systems. The markets for printer hardware and
associated supplies are highly competitive, especially with respect to pricing
and the introduction of new products and features. Our key competitors in this
segment include Xerox Corporation, Lexmark International Group Inc., Seiko
Epson Corporation, Sony Corporation of America ("Sony") and Canon USA, Inc. We
are the leading imaging and printing systems provider in the world for printer
hardware, printing supplies and scanning devices. We believe that our brand
recognition, quality reputation, breadth of product offering and large customer
base are important competitive advantages. We and our competitors continue to
develop and market new and innovative products at competitive prices and, at
any given time, may set new market standards for quality, speed and function.
In recent years, we and our principal competitors have regularly lowered prices
on printer hardware to reach new customers and add customer value. If these
pressures are not mitigated by cost and expense reductions, our ability to
maintain or build market share profitably could be adversely affected. In
addition, refill and remanufactured alternatives for our supplies are available
from independent suppliers and, although generally offering lower print
quality, may be offered at lower prices and put pressure on our supplies
business. Two important areas for our growth include new business opportunities
in digital cameras and photo printers within our imaging business and digital
presses in our digital publishing business. While we encounter competitors
whose current market share is greater than ours, such as Sony in cameras and
Heidelberger Druckmaschinen Aktiengesellschaft ("Heidelberg") in publishing, we
believe we will provide important new contributions in both the home and
publishing environments by providing comprehensive solutions that include data
management, storage, integrated system capabilities, security, authentication
and ease-of-use.
Computing Systems. The areas in which the Computing Systems segment
operates are intensely competitive, characterized by rapid and ongoing
technological innovation and price reductions. Our competitors are some of the
largest, most successful companies in the world. They range from broad
solutions providers such as International Business Machines Corporation to more
focused competitors such as EMC Corporation in storage, Dell Computer
Corporation in personal computers and servers, and Sun Microsystems, Inc. in
servers. Compaq Computer Corporation is also a competitor on both focused and
broad-based levels. Broad-based solutions providers benefit from their existing
customer base and the breadth of their product offerings, while more focused
competitors are able to concentrate their efforts on providing the most
competitive product and also may contribute to pricing pressures within a
product category, such as PCs. We believe that our important competitive
advantages in this segment include our broad range of server, storage and
software products and our significant intellectual property portfolio and
research and development capabilities, which will contribute to further
enhancements of our product offerings.
IT Services. The principal areas in which IT Services competes are customer
support, consulting, outsourcing and financing. The support and consulting
markets have been under significant pressure as customers scrutinize their IT
spending in response to the global economic downturn. However, the downturn
also has contributed to increased use of outsourcing services as customers
attempt to reduce their IT costs and focus their resources on their core
businesses. Our key competitors in this segment include the service
organizations of certain companies such as IBM Global Services and Compaq
Global Services and independent service firms such as EDS Corporation and
Computer Sciences Corporation. We also compete with consulting firms such as
Accenture LLP, CapGemini/Ernst & Young and PricewaterhouseCoopers LLP. Many of
these competitors are able to offer a wide range of services through a global
network of service providers, which may be larger than our own, and some of our
competitors enjoy significant brand recognition. We believe that our
competitive advantages in this segment include our world-class delivery
organization with over 600 offices in 120 countries for support and nine
dedicated worldwide service and Internet data centers for outsourcing. An
additional advantage in our support business is our delivery technology, which
consists of remote and on-site diagnostic
10
tools and technologies, as well as self-support portals. Our competitive
advantage in consulting centers around our expertise in IT infrastructure and
in certain industry-specific markets and solution areas. The industry areas of
expertise are mainly financial services, telecommunications and manufacturing,
while the solution areas of expertise include CRM and e-commerce. In our
financing business, our competitors are captive financing companies, mainly IBM
Global Financing, banks and financial institutions. We believe our competitive
advantage in this business is our ability to finance products, services or
total solutions.
Materials
Our manufacturing operations employ a wide variety of semiconductors,
electromechanical components and assemblies, and raw materials such as plastic
resins and sheet metal. Although we believe that the materials and supplies
necessary for our manufacturing operations are presently available in the
quantities required, we sometimes experience a short supply of certain
component parts as a result of strong demand in the industry for those parts.
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. However, we do rely on sole
sources for laser printer engines and parts for products with short life cycles
(although some of these sources have operations in multiple locations). We also
have a dependency upon Intel Corporation as a supplier of processors and static
RAM and Microsoft Corporation for various software products; however, we
believe that disruptions with these suppliers would result in industry-wide
dislocations and therefore would not disproportionately disadvantage HP
relative to competitors. In addition, we have engaged manufacturers in Taiwan
for the production of notebook computers. While these relationships and
dependencies have not resulted in material disruptions in the past, natural
disasters in Taiwan have caused temporary disruptions in communications and
supplies, which did not have a material impact on our results of operations.
Environment
Certain of our 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 United States, 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 86,200 employees worldwide as of October 31, 2001.
Information regarding our executive officers is set forth in Part III.
ITEM 2. Properties.
The principal executive offices of HP are located at 3000 Hanover Street,
Palo Alto, California 94304, USA. As of October 31, 2001, we owned or leased a
total of approximately 43.9 million square feet of space worldwide, including
0.4 million square feet currently occupied by Agilent Technologies, Inc. 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 2001, 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 $1.5 billion in
fiscal 2001, $1.7 billion in fiscal 2000 and $1.1 billion in fiscal 1999.
11
As of October 31, 2001, our sales and support operations occupied
approximately 15.9 million square feet, of which approximately 5.8 million
square feet were located within the United States. We own 34% of the space used
for sales and support activities and lease the remaining 66%.
Our manufacturing plants, research and development facilities and warehouse
and administrative facilities occupied approximately 28.0 million square feet,
of which approximately 19.8 million square feet were located within the United
States. We own 67% of our manufacturing, research and development, warehouse
and administrative space and lease the remaining 33%. None of the property we
own is held subject to any major encumbrances.
As indicated above, we have 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 as follows:
Headquarters of Geographic Operations
Europe, Africa, Middle
Latin America East Asia Pacific
Miami, Florida Geneva, Switzerland Hong Kong
The locations of HP's major product development and manufacturing facilities
and Hewlett-Packard Laboratories are as follows:
Product Development and Manufacturing
Hewlett-Packard
Americas Europe Laboratories
Cupertino, Costa Mesa, Grenoble and Isle Palo Alto, California
Mountain View, Palo D'Abeau, France
Alto, Roseville, Grenoble, France
San Diego, Santa Clara, Boeblingen, Germany
Santa Monica, Sunnyvale Bangalore, India
and Woodland, California Dublin, Ireland
Haifa, Israel
Fort Collins and Greeley, Amsterdam and Amersfoort,
Colorado The Netherlands Tokyo, Japan
Boise, Idaho Barcelona, Spain Bristol, United Kingdom
Mt. Laurel, New Jersey Bristol, United Kingdom
Corvallis, Oregon Asia Pacific
Memphis and Nashville, Melbourne, Australia
Tennessee
Shanghai, China
Austin, Texas
Bangalore, India
Chester, Richmond and
Sandston, Virginia Komiya, Japan
Vancouver, Washington Singapore
Aguadilla, Puerto Rico Taiwan
Sao Paulo, Brazil
Guadalajara, Mexico
12
ITEM 3. Legal Proceedings.
Litigation Settlement
On June 4, 2001, HP and Pitney Bowes Inc. ("Pitney Bowes") announced that
they had entered into agreements which resolved all pending patent litigation
between the parties without admission of infringement and in connection
therewith HP paid Pitney Bowes $400 million in cash on June 7, 2001. In
addition, the companies entered into a technology licensing agreement and
expect to pursue business and commercial relationships. Pitney Bowes filed its
patent infringement case against HP on August 23, 1995 in the U.S. District
Court for the District of Connecticut, alleging that HP's LaserJet printers
infringed Pitney Bowes' character edge smoothing patent, and HP filed one case
against Pitney Bowes on August 23, 1995 in the U.S. District Court for the
District of Idaho to invalidate the Pitney Bowes patent and four cases on March
21, 2001 in the U.S. District Court for the Northern District of California
(San Francisco Division), on March 28, 2001 in the U.S. District Court for the
District of Idaho, on April 4, 2001 in the U.S. District Court for the Western
District of Texas and on May 11, 2001 in the U.S. District Court for the
Northern District of California (San Jose Division), alleging that Pitney
Bowes' copiers, fax machines, document management software and a postal
metering machine infringed HP's patents. On May 29, 1996, HP answered the
complaint filed by Pitney Bowes and counterclaimed for a declaratory judgment
that the Pitney Bowes patent was invalid, unenforceable, and not infringed.
During the following 15 months, the parties engaged in extensive discovery. On
August 11, 1997, HP moved for summary judgment of non-infringement. On February
9, 1998, the Connecticut District Court denied HP's motion. On November 7,
1997, HP moved for summary judgment of invalidity of the Pitney Bowes patent,
and for summary judgment of noninfringement. On March 23, 1998, the Connecticut
District Court denied the motion for summary judgment of invalidity, but
granted the motion for summary judgment of noninfringement, and entered
judgment in favor of HP. Pitney Bowes appealed that judgment, and on June 23,
1999 the Court of Appeals for the Federal Circuit reversed the judgment in
favor of HP and remanded the case to the trial court. On July 7, 1999, HP
petitioned the Patent and Trademark Office ("PTO") to reexamine the validity of
the Pitney Bowes patent. That petition was granted on August 27, 1999, and the
litigation in the Connecticut District Court was thereafter stayed pending
reexamination of the patent. On June 14, 2000, the PTO issued an Office Action
initially rejecting the claims of the Pitney Bowes patent asserted against HP
as invalid. On September 9, 2000, the PTO issued a Statement of Reasons for
Patentability affirming the claims of the Pitney Bowes patent. The stay on the
litigation was thereafter lifted, and on November 13, 2000, the Connecticut
District Court set a June 4, 2001 trial date for the case Pitney Bowes filed. A
"Markman" hearing was held on April 24, 2001 to determine the scope of the
Pitney Bowes patent claims which would affect the outcome of the litigation on
the issues of patent infringement as well as patent validity. The suits by HP
were pending. HP and Pitney Bowes had settlement discussions as the trial date
approached, resulting in the settlement agreement described above.
Pending or Threatened Litigation
On or about March 23, 1998, an individual filed a lawsuit against HP in
federal court in California claiming HP's LaserJet printers infringe his U.S.
patent 5,424,780, which he asserts covers portions of the resolution
enhancement technology employed in these printers. HP believes, based on an
opinion from outside counsel, that it does not infringe the patent. HP has held
discussions with the plaintiff but has not resolved the matter. HP filed a
lawsuit to obtain a ruling that it does not infringe. Thereafter, the U.S.
Patent Office agreed to reexamine the patent based on prior art identified by
HP. The litigation is stayed pending the outcome of the Patent Office
reexamination.
On or about July 31, 2000, HP was sued in an unfair business practices
consumer class action filed by three residents of San Bernardino, California in
federal court in California. The three claim to have purchased different models
of HP inkjet printers over the past three years. This action alleges that HP
printers were sold with half-full or "economy" ink cartridges instead of full
cartridges and that HP's advertising, packaging and marketing representations
for the printers led the plaintiffs to believe they would receive full
cartridges. It is the basic contention of this action that HP's advertising and
failure to advise specifically that "economy" cartridges were included
constitute false and misleading conduct in violation of both the California
Consumer Legal Remedies
13
Act and Section 17200 of the California Business and Professions Code. This
action seeks injunctive relief, disgorgement of profits, compensatory damages,
punitive damages and attorney fees. When HP failed to enter into an early
settlement of this action, consumer class actions were filed, in coordination
with the original plaintiffs, in over 30 states.
On or about April 10, 2001, a nationwide defective product consumer class
action was filed against HP in a Texas state district court by a resident of
eastern Texas. This action is one of five similar suits filed against several
computer manufacturers on the same day. The basic allegation in the action
against HP is that it knowingly sold computers containing floppy disk
controller chips that fail to detect both overruns and underruns if either
occurs on the last byte of a read/write operation. That failure is alleged to
result in data loss, data corruption or system failure. This suit seeks
injunctive relief, declaratory relief, rescission and attorney fees. After
filing this action the plaintiff's counsel initiated a related action with the
State of Illinois, the State of California and the United States of America.
On or about November 26, 2001, a securities class action was filed in
federal court in New York against various officers and directors of Agilent
Technologies, Inc. ("Agilent Technologies") and certain investment bank
underwriters concerning Agilent Technologies' initial public offering ("IPO")
in late 1999. The complaint alleges undisclosed and improper practices by the
underwriters concerning the allocation of Agilent Technologies IPO shares, in
violation of the federal securities laws, and seeks unspecified damages on
behalf of persons who purchased Agilent Technologies stock during the period
from November 17, 1999 through December 6, 2000. Other actions have been filed
making similar allegations regarding the IPOs of more than 300 other companies.
HP believes that Agilent Technologies has meritorious defenses to the claim and
will defend itself vigorously. While HP is not named as a defendant in this
action, HP has agreed to indemnify Agilent Technologies for a substantial
portion of IPO-related liabilities.
A putative class action lawsuit was filed in the Superior Court of the State
of California, County of Santa Clara on or about December 11, 2001, against
various officers and directors of HP alleging that the defendants breached
their fiduciary duties to HP shareowners by, among other things, failing to
conduct reasonable due diligence into the propriety of the merger transaction
involving HP and Compaq Computer Corporation and by filing with the Securities
and Exchange Commission a false and misleading Registration Statement on Form
S-4 and preliminary joint proxy statement/prospectus in connection with the
merger transaction. The case seeks declaratory, injunctive and other relief
permitted by law and equity. Defendants removed the case to the U.S. District
Court for the Northern District of California on or about December 19, 2001. HP
believes that the lawsuit is without merit and intends to defend the case
vigorously.
On or about December 27, 2001, Cornell University and the Cornell Research
Foundation, Inc. filed an action against HP in federal court in New York
alleging that HP's PA-RISC 8000 family of microprocessors infringes a Cornell
patent that describes a way of executing microprocessor instructions. This
action seeks declaratory, injunctive and other relief. After reviewing the
pertinent materials, HP believes that it does not infringe the patent.
Furthermore, HP believes Cornell's patent is invalid.
HP is involved in lawsuits, claims, investigations and proceedings,
including those identified above, consisting of patent, commercial and
environmental matters, which arise in the ordinary course of business. Any
possible adverse outcome arising from these matters is not expected to have a
material adverse impact on the results of operations or financial position of
HP, either individually or in the aggregate. However, HP's evaluation of the
likely impact of these pending disputes could change in the future.
Environmental
HP is 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. HP is also conducting environmental investigations or
remediations at several of our 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.
14
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 (the "Agency") under which HP 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. As required by the terms
of the settlement agreement, the final report of the audit was submitted to the
Agency in April 2001. In May 2001, HP and Agilent Technologies, HP's former
subsidiary, paid stipulated penalties in the aggregate amount of $600,000 to
the Agency in full satisfaction of any claims under the agreement against
either company.
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 and the cover
page of this Form 10-K, which are incorporated herein by reference,
respectively. We have paid cash dividends each year since 1965. The current
rate is $0.08 per share per quarter. As of December 31, 2001, there were
approximately 121,000 shareowners 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 and
"Consolidated Statement of Cash Flows," "Consolidated Statement of
Stockholders' Equity" and "Quarterly Summary" in Item 8.
15
ITEM 6. Selected Financial Data.
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Selected Financial Data/(1)(2)/
For the years ended October 31
In millions, except per share amounts 2001 2000 1999 1998 1997
- ------------------------------------- ------- ------- ------- ------- -------
Net revenue...................................... $45,226 $48,870 $42,371 $39,330 $35,358
Earnings from operations/(3)/.................... 1,439 4,025 3,818 3,456 3,476
Net earnings from continuing operations before
extraordinary item and cumulative effect of
change in accounting principle/(4)(5)/......... 624 3,561 3,104 2,678 2,515
Net earnings per share from continuing operations
before extraordinary item and cumulative effect
of change in accounting principle:/(4)(5)(6)/
Basic......................................... $ 0.32 $ 1.80 $ 1.54 $ 1.29 $ 1.23
Diluted....................................... 0.32 1.73 1.49 1.26 1.19
Cash dividends declared per share/(6)/........... 0.32 0.32 0.32 0.30 0.26
At year-end:
Total assets/(1)/............................. $32,584 $34,009 $35,297 $31,708 $29,852
Long-term debt................................ 3,729 3,402 1,764 2,063 3,158
- ---------------------
(1) HP's consolidated financial statements and notes for all periods present
the businesses of Agilent Technologies, Inc. as a discontinued operation
through the spin-off date of June 2, 2000. Accordingly, total assets
includes net assets of discontinued operations of $3,533 million at October
31, 1999, $3,084 million at October 31, 1998 and $3,171 million at October
31, 1997. See further discussion in Notes to the Consolidated Financial
Statements in Item 8.
(2) Certain reclassifications have been made to prior year balances in order to
conform to the current year presentation.
(3) Earnings from operations includes restructuring charges of $384 million in
fiscal 2001, $102 million in fiscal 2000 and $122 million in fiscal 1998.
(4) Net earnings and net earnings per share from continuing operations before
extraordinary item and cumulative effect of change in accounting principle
include the following items before related tax effects: $384 million of
restructuring charges, $471 million of impairment losses on investments, a
$400 million charge for litigation settlement and a $131 million loss on
divestiture in fiscal 2001; $102 million of restructuring charges and $203
million of gains from divestitures in fiscal 2000; and $122 million of
restructuring charges in fiscal 1998.
(5) HP adopted Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition
in Financial Statements" in the fourth quarter of fiscal year 2001,
retroactive to November 1, 2000. See further discussion in Notes to the
Consolidated Financial Statements in Item 8.
(6) All per-share amounts reflect the retroactive effects of the two-for-one
stock split in the form of a stock dividend effective October 27, 2000.
16
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
The following discussion should be read in conjunction with the consolidated
financial statements and the related notes that appear elsewhere in this
document.
Our consolidated financial statements for all periods present the businesses
of Agilent Technologies as a discontinued operation through the spin-off date
of June 2, 2000. Unless otherwise indicated, the following discussion relates
to HP's continuing operations.
RESULTS OF OPERATIONS
Overview
The following is a summary of operating results at the HP consolidated
level. This discussion is followed by a more detailed discussion of operating
results by segment. Product category fluctuations highlighted at the
consolidated level are more fully explained in the segment discussion.
Net Revenue
Net revenue declined 7% in fiscal 2001 to $45.2 billion, following growth of
15% in fiscal 2000. U.S. revenue in 2001 declined 13% to $18.8 billion, while
international revenue in 2001 decreased 3% overall to $26.4 billion. The global
economic downturn contributed significantly to the decline in both U.S. and
international revenue in 2001. In fiscal 2000, U.S. revenue increased 14% and
international revenue increased 16%, due largely to economic improvement in
Asia. On a foreign currency-adjusted basis, net revenue declined 3% year over
year for HP as a whole in fiscal 2001, while net revenue increased 17% on a
foreign currency-adjusted basis in fiscal 2000. The majority of the foreign
currency effect in both years was due to the weakening of the euro, partially
offset by the strengthening of the Japanese yen in 2000.
In fiscal 2001, net revenue for the Computing Systems business segment
decreased 14% and declined 5% for the Imaging and Printing Systems segment. Net
revenue for IT Services grew 6% in 2001. Of the overall 7% net revenue decline
for fiscal 2001, on a weighted basis printer hardware represented 4 percentage
points of the decline, while commercial PCs (desktop PCs and notebook PCs) and
home PCs each accounted for approximately 1.5 percentage points of the decline.
A decrease in UNIX(R) and PC servers revenue also contributed slightly to the
year-over-year revenue decline. However, the decrease in server revenue was
offset, for the most part, by revenue growth in printer supplies. The declines
in the printer hardware and PC businesses were due primarily to decreases in
volume as a result of the economic slowdown in fiscal 2001. A shift in sales
mix into the sub-$150 printer market also contributed to the decrease in
printer hardware revenue. In addition, ongoing competitive pricing pressures
affected revenue performance in many of our product categories, particularly
for commercial and home PCs and printer hardware.
On a segment basis, net revenue for Computing Systems increased 19% in
fiscal 2000, while revenue for IT Services grew 13% and Imaging and Printing
Systems grew 10%. On a weighted basis, home PCs and printer supplies each
accounted for 4 percentage points of the overall 15% increase, while commercial
PCs represented 2 percentage points of growth. The remainder of the increase in
fiscal 2000 revenue consisted of growth across many product categories
including imaging, UNIX(R) and PC servers, customer support services,
outsourcing and our technology financing business. Growth in the PC business
was almost entirely attributable to strong unit sales, particularly in home and
notebook PCs, but this growth was moderated by a competitive pricing
environment. The unit growth in home and notebook PCs was driven by favorable
acceptance of new products, including our newly introduced retail notebook
line. Increased volume in our printer supplies business was fueled by continued
expansion of the printer hardware installed base.
17
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Gross margin, operating expenses and earnings as a percentage of net revenue
were as follows for the years ended October 31:
2001 2000 1999
----- ----- -----
Gross margin......................................................... 26.0% 28.3% 29.5%
Research and development............................................. 5.9% 5.4% 5.8%
Selling, general and administrative.................................. 16.1% 14.5% 14.7%
Restructuring charges................................................ 0.8% 0.2% --
Earnings from operations............................................. 3.2% 8.2% 9.0%
Earnings from continuing operations before extraordinary item,
cumulative effect of change in accounting principle and taxes...... 1.6% 9.5% 9.9%
Gross Margin
Gross margin as a percentage of net revenue was 26.0% in fiscal 2001,
compared to 28.3% in fiscal 2000 and 29.5% in fiscal 1999. The 2.3 percentage
point decrease in the gross margin ratio in fiscal 2001 resulted from declines
across all of HP's business segments, while the 1.2 percentage point decline in
fiscal 2000 was mainly attributable to a decrease in the Computing Systems
segment. Overall, in fiscal 2001, gross margins were negatively impacted by a
significant decline in sales volumes across many product categories resulting
from the global economic downturn and increased inventory-related charges in
response to this downturn. The higher inventory-related charges, which
represented 0.4 percentage points of the gross margin decline, mainly impacted
our Inkjet, imaging and personal appliances businesses.
We perform a detailed assessment of inventory at each balance sheet date,
which includes a review of, among other factors, demand requirements, product
lifecycle and product development plans, and quality issues. Based on this
analysis, we record adjustments, when appropriate, to reflect inventory at net
realizable value.
Of the 2.3 percentage point decline in gross margin for fiscal 2001, on a
weighted basis printer hardware and imaging each accounted for one percentage
point of the decline. In addition, gross margins for UNIX(R) and PC servers and
technology financing decreased slightly in fiscal 2001. These declines were
partially offset by an increase of one percentage point for printer supplies on
a weighted basis. Printer hardware and imaging were unfavorably impacted by a
continuing shift to lower-priced products in response to customer demand, in
addition to the inventory writedowns discussed above. Of the 1.2 percentage
point decline in gross margin for fiscal 2000, home PCs and commercial PCs were
the main drivers, although supplies experienced a gross margin improvement.
Gross margins in our PC business were unfavorably impacted by higher memory
costs, as well as a mix shift to lower-margin products and ongoing competitive
pricing pressures.
Operating Expenses
Research and Development
Research and development expense as a percentage of net revenue was 5.9% in
fiscal 2001, compared to 5.4% in fiscal 2000 and 5.8% in fiscal 1999. Research
and development expense in dollars grew 1% in fiscal 2001 and 8% in fiscal
2000. After adjusting for $35 million of in-process research and development
write-offs related to acquisitions recorded in fiscal 2001, research and
development expense for 2001 was flat compared to fiscal 2000. Research and
development expense grew 10% in the Computing Systems segment reflecting
investments related to server, software and storage products. However, declines
in research and development spending of 8% in IT Services and 3% in Imaging and
Printing Systems fully offset this growth during the year as a result of
focused spending in key areas and expense reductions in less strategic
programs. In addition, company-wide actions taken by management throughout the
year to control expenses, including the restructuring
18
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
actions discussed below, moderated research and development expense growth in
fiscal 2001. In fiscal 2000, the growth in research and development expense was
due primarily to an increase in spending on the design and development of new
technologies in both the Computing Systems and Imaging and Printing Systems
segments.
Selling, General and Administrative
Selling, general and administrative expense as a percentage of net revenue
was 16.1% in fiscal 2001, compared to 14.5% in fiscal 2000 and 14.7% in fiscal
1999. Selling, general and administrative expense in dollars increased 3% in
fiscal 2001 and 13% in fiscal 2000. The increase in selling, general and
administrative expense for fiscal 2001 resulted substantially from a $172
million increase in bad debt reserves and write-offs in our financing portfolio
due to weakened economic conditions.
We evaluate the collectibility of our trade and financing receivables based
on a combination of factors. When we become aware of a specific customer's
inability to meet its financial obligations to us, such as in the case of
bankruptcy filings or deterioration in the customer's operating results or
financial position, we record a specific reserve for bad debt to reduce the
related receivable to the amount we reasonably believe is collectible. We also
record reserves for bad debt for all other customers based on a variety of
factors including the length of time the receivables are past due and
historical experience. If circumstances related to specific customers change,
our estimates of the recoverability of receivables could be further reduced.
Overall, company-wide actions taken by management throughout the year to
control expenses, including the restructuring actions discussed below,
moderated selling, general and administrative expense growth in fiscal 2001.
The growth in selling, general and administrative expense in fiscal 2000 was
attributable to increased selling costs to support planned business expansion
and increased marketing expenses from the introduction of new products and to
support our e-services strategy and corporate branding initiative.
Restructuring Charges
In fiscal 2001, management approved restructuring actions to respond to the
global economic downturn and to improve our cost structure by streamlining
operations and prioritizing resources in strategic areas of our business. We
recorded a restructuring charge of $384 million to reflect these actions. This
charge consisted of severance and other employee benefits related to the
planned termination of approximately 7,500 employees worldwide, across many
regions, business functions, and job classes, as well as costs related to the
consolidation of excess facilities. Included as an offset to this charge was
$38 million of related net pension and post-retirement settlement and
curtailment gains. As of October 31, 2001, 5,700 employees were terminated and
we had paid out $238 million of the accrued costs. We also made additional
payments of $26 million in fiscal 2001 related to restructuring charges accrued
in fiscal 2000. We expect to pay out the remainder of the accrual in fiscal
2002. These workforce reduction programs are expected to result in an
annualized cost savings of approximately $500 million.
In fiscal 2000, management approved an enhanced early retirement ("EER")
program designed to balance the workforce based on our long-term business
strategy. We offered approximately 2,500 U.S. employees the opportunity to
retire early and receive an enhanced payout, and approximately 1,300 employees
accepted the offer. Accordingly, we recorded a restructuring charge of $71
million, consisting of $100 million of severance and other employee benefits
offset by $29 million of related pension and post-retirement settlement and
curtailment gains. In addition to the EER program, we incurred $31 million of
other restructuring charges during fiscal 2000 related to various site
shutdowns resulting from strategic management decisions. In fiscal 2000, we
made payments of $98 million related to the restructuring charges accrued
during the year, of which $95 million was paid through HP's pension plan based
on an amendment to the plan.
19
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Interest and Other, Net
Interest and other, net, decreased $185 million in fiscal 2001 and increased
$11 million in fiscal 2000. The decline in interest and other, net, for fiscal
2001 was primarily attributable to a decrease in interest income due to lower
interest rates on cash and investments and lower average cash and investment
balances in fiscal 2001 compared to fiscal 2000. Most of the remainder of the
decline was due to an increase in interest expense as a result of higher
average debt balances, partially offset by lower interest rates. The increase
in fiscal 2000 was due mainly to an increase in interest income due to higher
average cash and investment balances during fiscal 2000 compared to fiscal 1999.
Net Investment (Losses) Gains
HP reported net investment losses of $455 million in fiscal 2001 compared to
net investment gains of $41 million in fiscal 2000 and net investment gains of
$31 million in fiscal 1999.
Our investment portfolio includes equity and debt investments in public and
privately-held emerging technology companies. Many of these emerging technology
companies are still in the start-up or development stage. Our investments in
these companies are inherently risky because the markets for the technologies
or products they have under development are typically in the early stages and
may never develop. We monitor our investment portfolio for impairment on a
periodic basis. In the event that the carrying value of an investment exceeds
its fair value and the decline in value is determined to be
other-than-temporary, an impairment charge is recorded and a new cost basis for
the investment is established. Fair values for investments in public companies
are determined using quoted market prices. Fair values for investments in
privately-held companies are estimated based upon one or more of the following:
pricing models using historical and forecasted financial information and
current market rates, liquidation values, the values of recent rounds of
financing, or quoted market prices of comparable public companies. In order to
determine whether a decline in value is other-than-temporary, HP evaluates,
among other factors: the duration and extent to which the fair value has been
less than carrying value; the financial condition of and business outlook for
the company, including key operational and cash flow metrics, current market
conditions and future trends in the company's industry, and the company's
relative competitive position within the industry; and our intent and ability
to retain the investment for a period of time sufficient to allow for any
anticipated recovery in fair value.
Due to the economic downturn, the decline in value of certain investments in
emerging technology companies was determined to be other-than-temporary.
Accordingly, we recorded impairment losses of $471 million on our investments
in both public and private emerging technology companies in fiscal 2001. This
amount was offset by $16 million of realized gains on the sale of equity
securities. As of October 31, 2001, the carrying value of the portion of our
remaining investment portfolio related to emerging technology companies was
$243 million. Depending on market conditions, we may incur additional charges
on our investment portfolio in the future.
In fiscal 2000, HP recorded $41 million of net gains on investments,
representing gains on sales of equity investments of $104 million, partially
offset by impairment losses of $63 million. The net investment gains of $31
million in fiscal 1999 resulted from realized gains on the sale of equity
securities.
Litigation Settlement
On June 4, 2001, HP and Pitney Bowes, Inc. ("Pitney Bowes") announced that
they had entered into agreements that resolved all pending patent litigation
between the parties without admission of infringement, and in connection
therewith HP paid Pitney Bowes $400 million in cash on June 7, 2001. For
further discussion regarding the litigation, see Note 17 to the Consolidated
Financial Statements in Item 8.
20
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
(Losses) Gains on Divestitures
In fiscal 2001, the net loss from divestitures was $53 million, consisting
of a $131 million loss on the sale of our VeriFone, Inc. subsidiary, offset by
a gain of $78 million on the sale of HP's remaining interest in a joint venture
to the other joint owner. In fiscal 2000, the net gain from divestitures was
$203 million, consisting of the gains on the sale of non-strategic businesses,
as well as the gain from the sale of part of HP's interest in the same joint
venture to the other joint owner.
Earnings from Continuing Operations before Extraordinary Item, Cumulative
Effect of Change in Accounting Principle and Taxes
As reported, earnings from continuing operations before extraordinary item,
cumulative effect of change in accounting principle and taxes decreased 85% to
$702 million in 2001, compared to a 10% increase to $4.6 billion in fiscal
2000. As a percentage of net revenue, earnings from continuing operations
before extraordinary item, cumulative effect of change in accounting principle
and taxes was 1.6% in fiscal 2001, compared to 9.5% in fiscal 2000 and 9.9% in
fiscal 1999. The significant decline in 2001 was driven by the global economic
downturn, as well as $384 million of restructuring charges, $455 million of net
investment losses, a $400 million charge for litigation settlement and $53
million of net losses on divestitures.
Provision for Taxes
HP's effective tax rate from continuing operations was 11% in fiscal 2001,
23% in fiscal 2000 and 26% in fiscal 1999. The year-over-year decreases were
primarily the result of changes in the mix of our pre-tax earnings in various
tax jurisdictions throughout the world. The mix of the pre-tax earnings in
fiscal 2001 was significantly impacted by $384 million of restructuring
charges, $455 million of net investment losses, a $400 million charge for
litigation settlement and $53 million of net losses on divestitures, all on a
pre-tax basis, which were incurred primarily in higher-tax jurisdictions.
Net Earnings from Discontinued Operations
Net earnings from discontinued operations were $136 million for fiscal 2000.
In the second quarter of fiscal 2000, the cumulative net earnings of Agilent
Technologies since the July 31, 1999 measurement date began to exceed the total
estimated net costs to effect the spin-off. Of the $136 million, net earnings
of Agilent Technologies for the period from the July 31, 1999 measurement date
through the June 2, 2000 spin-off date totaled $287 million (net of related tax
expense of $174 million), and the net costs to effect the spin-off were $151
million (net of related tax benefit of $23 million). Net earnings from
discontinued operations of $387 million for fiscal 1999 consisted only of the
net earnings of Agilent Technologies. See Note 5 to the Consolidated Financial
Statements in Item 8 for further discussion.
Extraordinary Item
In December 2000, the Board of Directors authorized a repurchase program for
HP's zero-coupon subordinated convertible notes. Under the repurchase program,
we may repurchase the notes from time to time at varying prices. In fiscal
2001, we repurchased $1.2 billion in face value of the notes with a book value
of $729 million, resulting in an extraordinary gain on the early extinguishment
of debt of $56 million (net of related taxes of $33 million).
Cumulative Effect of Change in Accounting Principle
HP adopted Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements" in
the fourth quarter of fiscal 2001, retroactive to November 1,
21
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
2000. Accordingly, we have restated our consolidated results of operations for
the first three quarters of fiscal 2001, including a cumulative effect of
change in accounting principle of $272 million, which was recorded as a
reduction of net income as of the beginning of the first quarter of fiscal
2001. Had SAB 101 been effective for fiscal 2000 and 1999, the pro forma
results and earnings per share would not have been materially different from
the previously reported results.
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 Note 18 to the Consolidated Financial Statements
in Item 8. The financial data for fiscal years 2000 and 1999 have been restated
to reflect changes in our organizational structure that occurred during fiscal
2001. These changes are more fully described in Note 18 to the Consolidated
Financial Statements in Item 8. The reportable segments disclosed in this
document are based on our management organizational structure as of October 31,
2001. Future changes to this organizational structure may result in changes to
the reportable segments disclosed.
Imaging and Printing Systems
Years Ended October 31,
-----------------------
2001 2000 1999
------- ------- -------
(In millions)
Net revenue...................................... $19,447 $20,468 $18,550
Earnings from operations......................... $ 1,987 $ 2,666 $ 2,364
Earnings from operations as a percentage of net
revenue........................................ 10.2% 13.0% 12.7%
Imaging and Printing Systems' net revenue declined 5% in fiscal 2001,
following growth of 10% in fiscal 2000. On a foreign currency-adjusted basis,
net revenue declined 2% in 2001 and increased 11% in 2000. Of the overall 5%
net revenue decrease for fiscal 2001, on a weighted basis Inkjet and LaserJet
printer hardware revenue represented 9 percentage points of the decline,
partially offset by 3 percentage points of growth in printer supplies and 1
percentage point of growth in imaging devices. Overall, slowing markets across
all product categories and geographic regions due to the economic downturn
negatively impacted revenue in 2001. Of the segment's overall 10% revenue
increase for fiscal 2000, on a weighted basis printer supplies contributed
8 percentage points and imaging devices accounted for 3 percentage points of
growth, partially offset by a decline in printer hardware sales of 2 percentage
points.
Half of the printer hardware net revenue decline in fiscal 2001 was
attributable to a decrease in average selling prices driven by a continuing
demand shift to lower-priced printer products, particularly into the sub-$150
printer hardware market, and a competitive pricing environment. The remainder
of the printer hardware revenue decline reflected a drop in units of
approximately 10% due mainly to softening in both the consumer and business
markets. Partially offsetting this decline in printer hardware revenue was
growth in printer supplies and imaging products. Half of the net revenue growth
for printer supplies reflected a rise in volumes due to continued expansion of
the printer hardware installed base, while the remaining growth resulted
primarily from higher average selling prices. Net revenue growth in imaging was
driven primarily by an increase in unit sales for the product category,
moderated by growing demand for lower-priced products and competitive pricing.
The revenue growth for both supplies and imaging devices in fiscal 2001 was
dampened by the economic downturn.
Net revenue growth for printer supplies in fiscal 2000 was attributable to
increased volumes due mainly to expansion of the printer hardware installed
base. Revenue growth in imaging devices was fueled by excellent unit growth
from newly introduced products within the category, partially offset by planned
pricing declines in all-in-
22
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
one products and a shift in sales mix to lower-priced scanners. Softening
demand in the printer hardware market, as well as shifts to lower-priced
products in this category, moderated the segment's net revenue growth in 2000.
Earnings from operations as a percentage of net revenue was 10.2% in fiscal
2001, compared to 13.0% in fiscal 2000 and 12.7% in fiscal 1999. A decline in
gross margin accounted for 2.5 points of the 2.8 percentage point decrease in
the earnings from operations ratio in 2001, while the remaining decline was due
to a slight increase in operating expenses as a percentage of net revenue.
Within the 2.5 percentage point gross margin decline, gross margins for printer
hardware and imaging products collectively dropped 4.6 percentage points on a
weighted basis. The majority of this gross margin decrease resulted from the
continued shift in sales mix to lower-priced products as noted above. Gross
margins in these categories were further impacted unfavorably by an increase in
inventory-related reserves and charges in our Inkjet and imaging businesses and
charges related to the cancellation of planned production line expansion in our
Inkjet business that occurred in response to weakened economic conditions.
These incremental reserves and charges totaled $214 million for fiscal 2001.
Partially offsetting the 4.6 point gross margin decline in printer hardware and
imaging, on a weighted basis were gross margin improvements of approximately
1.0 percentage point from lower component costs due to a weaker Japanese yen
and approximately 0.8 percentage points due to supplies, which typically have
gross margins that exceed the segment average, becoming a larger portion of the
segment's product mix. Although operating expenses decreased in total,
operating expense as a percentage of net revenue for the segment increased by
0.3 percentage points compared to the prior year as the decrease in revenues
exceeded the rate of decrease in operating expenses.
In fiscal 2000, the increase of 0.3 percentage points in the earnings from
operations ratio consisted of a 1.2 percentage point improvement in operating
expenses as a percentage of net revenue, partially offset by a 0.9 percentage
point decline in the overall segment gross margin. The decline in the operating
expense ratio reflected controlled expense management. The gross margin decline
was attributable to a shift toward lower-priced printers and imaging devices,
as well as higher component costs related to a stronger Japanese yen. These
factors, which unfavorably impacted gross margin by 2.7 percentage points on a
weighted basis, were offset in part by a 2.0 percentage point margin
improvement due to economies of scale from increased production levels of
printer supplies.
Computing Systems
Years Ended October 31,
------------------------
2001 2000 1999
------- ------- -------
(In millions)
Net revenue...................................... $17,771 $20,653 $17,395
Earnings (loss) from operations.................. $ (450) $ 1,007 $ 988
Earnings (loss) from operations as a percentage
of net revenue................................... (2.5)% 4.9% 5.7%
Computing Systems' net revenue declined 14% in fiscal 2001, following a 19%
increase in fiscal 2000. On a foreign currency-adjusted basis, net revenue
declined 10% in 2001 and increased 22% in 2000. Of the overall 14% revenue
decrease for fiscal 2001, on a weighted basis commercial desktop PC and home PC
revenues each represented 4 percentage points of the decline and UNIX(R) and PC
server revenues each accounted for 3 percentage points. In addition, a decline
in revenue from workstations was offset by growth in notebook PCs. Overall
segment net revenue in fiscal 2001 was unfavorably impacted by the economic
downturn resulting in slowing markets across all product categories and
geographic regions. Of the overall 19% net revenue growth for fiscal 2000, on a
weighted basis home PCs contributed 11 percentage points, notebook PCs
accounted for 6 percentage points and UNIX(R) server growth represented 3
percentage points. This growth was moderated slightly by a decrease in both
enterprise storage and commercial desktop PC revenue. In both fiscal 2001 and
23
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
2000, net revenues in the PC business were impacted by declining average
selling prices as a result of decreasing component costs, which are generally
passed on to the customer, and competitive pricing pressures.
The decline in fiscal 2001 net revenue within the PC business resulted from
significant decreases in commercial desktop PCs and home PCs, offset in part by
growth in notebook PCs. The revenue decline in commercial desktop PCs almost
equally reflected a decrease in volumes and an ongoing decrease in average
selling prices. Commercial desktop PC unit sales declined approximately 11% in
2001, while average selling prices declined approximately 10%. A decrease in
volumes of approximately 14% accounted for most of the home PC revenue decline,
while an approximate 4% decline in average selling prices also contributed to
the decrease in this product category. The decline in unit sales in both
commercial desktop PCs and home PCs reflected the effects of the economic
slowdown in fiscal 2001. In addition, a continued shift toward mobile computing
dampened growth in commercial desktop PCs, and home PC revenue was unfavorably
impacted by market saturation that began late in fiscal 2000. Notebook PC
revenue increased mainly as a result of higher unit sales largely as a result
of the previously noted shift toward mobile computing; however, this growth was
moderated by an ongoing decline in average selling prices. More than
three-fourths of the decrease in UNIX(R) server net revenue was due primarily
to weakness in mid-range servers, which were unfavorably impacted by the
enterprise market slowdown and competitive pricing pressures. The UNIX(R)
server revenue decline also resulted from a decrease in high-end server
revenue. Despite increasing sales of our new Superdome server in the last half
of fiscal 2001, high-end server net revenue was down for the fiscal year due to
the slowdown in enterprise capital spending and because Superdome did not begin
shipping in volume until January 2001. The decline in high-end server revenue
in fiscal 2001 was entirely offset by growth in the low-end category. The PC
server net revenue decline was driven by a sales mix shift to low-end products,
ongoing competitive pricing pressures and delayed product launches in 2001.
Revenue from workstations decreased as a result of the decline in IT spending
and overall weakness in the UNIX(R) sector.
In fiscal 2000, home PC net revenue growth reflected very strong unit sales,
moderated by lower average selling prices. Home PC volumes increased
approximately 97%, while average selling prices declined approximately 11% in
2000. Unit growth in home PCs was driven by favorable acceptance of new
products and was aided by the exit of two major competitors from the retail
market. Revenue growth in notebook PCs was due to an increase in volumes,
slightly offset by a decrease in average selling prices. Notebook PC unit sales
increased approximately 199%, while average selling prices decreased
approximately 18%. Notebook PC volumes in 2000 benefited from the introduction
of our retail notebook line as well as continued strong sales of the commercial
portfolio. Growth in low-end and mid-range UNIX(R) servers was driven by
increased unit sales and higher average selling prices that resulted from
enhanced product offerings. High-end UNIX(R) servers, however, exhibited some
weakness in 2000, primarily attributable to customer anticipation of our new
Superdome server introduced in the fourth quarter of 2000. Net revenue growth
for the segment in fiscal 2000 was unfavorably impacted by product transitions
resulting from our switch to a new enterprise storage partner. Revenue
performance in commercial desktop PCs declined due to lower average selling
prices, partially offset by an increase in unit sales.
Earnings (loss) from operations as a percentage of net revenue was (2.5)% in
fiscal 2001 compared to 4.9% in fiscal 2000 and 5.7% in fiscal 1999. An
increase in operating expenses as a percentage of net revenue accounted for 5.3
of the 7.4 percentage point decrease in the earnings from operations ratio in
2001, while the remaining 2.1 percentage points were due to a decline in gross
margin. The increase in operating expenses as a percentage of net revenue was
mainly attributable to lower revenue coupled with a slight increase in
operating expenses. The slight increase in operating expenses reflected
significant hiring in the sales organizations over the past year in
anticipation of growth in key areas, particularly UNIX(R) servers, software and
storage, which did not materialize due to weakened economic conditions. In
addition, the segment invested in research and development
24
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
activities for server, software and storage products. Half of the gross margin
decline was caused by a decline in PC server gross margin, which resulted from
lower average selling prices due to a shift toward lower-margin products and
competitive pricing pressures. The remainder of the gross margin decline for
the segment reflected the effect of the overall market slowdown on commercial
desktop PCs and home PCs.
The decrease in the earnings from operations ratio in fiscal 2000 of 0.8
percentage points was attributable to a 2.6 percentage point decline in gross
margin, partially offset by a 1.8 percentage point improvement in operating
expenses as a percentage of net revenue. The decline in gross margin was driven
by a mix shift within the segment toward home PCs and notebook PCs, which are
lower-margin products. In addition, gross margin was unfavorably impacted by
higher memory costs and declining average selling prices across the PC
business. These margin declines were partially offset by a shift to
higher-margin UNIX(R) server and enterprise storage products. The improvement
in operating expenses as a percentage of net revenue was due to improved
operational efficiencies.
IT Services
Years Ended October 31,
-----------------------
2001 2000 1999
------ ------ ------
(In millions)
Net revenue................................................ $7,599 $7,150 $6,304
Earnings from operations................................... $ 342 $ 474 $ 494
Earnings from operations as a percentage of net revenue.... 4.5% 6.6% 7.8%
IT Services' net revenue increased 6% in fiscal 2001, following a 13%
increase in fiscal 2000. On a foreign currency-adjusted basis, net revenue
increased 11% in 2001 and 17% in 2000. Continued growth in customer support and
consulting drove the increase in revenue in fiscal 2001, with each category
accounting for 3 percentage points of the segment's 6% revenue growth on a
weighted basis. Fiscal 2001 net revenue was also favorably impacted by solid
sales in technology financing and outsourcing which was offset by a revenue
decline in complementary third-party products delivered with the sales of HP
solutions. Overall, customer support, consulting and technology financing net
revenue growth in fiscal 2001 was moderated by the global economic downturn,
while our outsourcing business benefited from the slowdown as companies reduced
costs by outsourcing their IT functions. The segment's overall 13% net revenue
growth for fiscal 2000 was driven by customer support which contributed 4
percentage points on a weighted basis. Consulting and technology financing each
represented approximately 3 percentage points of the total growth, while
strength in our complementary products and outsourcing businesses accounted for
the remainder of the revenue growth for fiscal 2000.
Customer support net revenue grew 6% in fiscal 2001, two-thirds of which was
attributable to sales of mission-critical and networking services, while the
remaining increase was due to strength in various other support services.
Growth in consulting revenue of 21% was fueled by our ability to pursue an
increased number of, as well as larger, engagements as a result of the
investment in headcount in fiscal 2000. Consulting net revenue reflected strong
demand from the financial services and telecommunications industries, each of
which contributed approximately one-fourth to the increase in consulting
revenue in 2001. The remaining growth in consulting was attributable to an
increase in engagements for manufacturing businesses, as well as growth in
other types of consulting services. Revenue from our technology financing
business was favorably impacted in fiscal 2001 by a mix shift in the portfolio
toward operating leases. Net revenue growth in outsourcing was attributable to
larger comprehensive deals and increased business as companies reduced costs by
outsourcing their IT functions. Moderating the segment's overall revenue growth
in fiscal 2001 was a decline in the sale of complementary third-party products
due to a refocusing of this business and softened demand for networking
products during the fiscal year.
25
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
In fiscal 2000, customer support net revenue growth was 8%. Half of this
growth was attributable to mission-critical and networking services, while
another one-third was due to storage services and support. Growth in consulting
resulted from strong demand from the financial services, manufacturing and
telecommunications industries. Net revenue from the financial services industry
contributed one-third of consulting revenue growth in 2000, while sales to
manufacturing businesses and the telecommunications industry each accounted for
one-fifth of the growth. Technology financing revenue benefited in fiscal 2000
from an increase in customer financing arrangements driven by strong
performance in UNIX(R) product sales.
Earnings from operations as a percentage of net revenue was 4.5% in fiscal
2001 compared to 6.6% in fiscal 2000 and 7.8% in fiscal 1999. Growth in
operating expenses as a percentage of net revenue and a decline in gross margin
in fiscal 2001 each represented half of the 2.1 percentage point decrease in
the earnings from operations ratio for the segment. The growth in the operating
expense ratio was due substantially to a $172 million increase in bad debt
reserves and write-offs in our financing portfolio in response to weakened
economic conditions. The one percentage point gross margin decline for IT
Services was driven primarily by a decrease in gross margin related to our
financing and customer support businesses, moderated by a gross margin
improvement in outsourcing and consulting. The gross margin decline in our
financing business was due to the mix shift toward operating leases, which have
lower margins. Customer support gross margin was negatively impacted by
increased costs for support parts due to unfavorable currency effects and a mix
shift toward lower-margin services. The increase in gross margin for
outsourcing reflected increased process standardization and delivery
efficiency, while gross margin improvement in consulting resulted from improved
labor utilization and overall engagement cost management.
The 1.2 percentage point decrease in the earnings from operations ratio in
fiscal 2000 was attributable to a 1.6 percentage point increase in operating
expenses as a percentage of revenue, partially offset by a 0.4 percentage point
improvement in gross margin. The increase in the operating expense ratio was
due primarily to an increase in bad debt write-offs in our financing portfolio
and higher marketing expense to support HP's corporate branding initiative.
Half of the segment's 0.4 percentage point gross margin improvement was driven
by the optimization of existing data centers in outsourcing. In addition,
consulting gross margin was positively impacted in 2000 by improved engagement
cost management. These margin increases were partially offset by lower margins
in our complementary products business and an increase in hiring in our support
business in anticipation of future growth.
LIQUIDITY AND CAPITAL RESOURCES
Our financial position remained strong throughout fiscal 2001 despite the
economic downturn, with cash and cash equivalents and short-term investments of
$4.3 billion at October 31, 2001 compared to $4.0 billion at October 31, 2000.
During fiscal 2001, cash flows from operating activities and short-term and
long-term borrowings were used mainly to fund purchases of property, plant and
equipment, repurchases of our common stock, repurchases of our zero-coupon
subordinated convertible notes and payments of dividends.
Cash flows from operating activities were $2.6 billion during fiscal 2001
compared to $3.7 billion for fiscal 2000 and $3.1 billion for fiscal 1999. The
decrease in cash flows from operating activities in 2001 resulted primarily
from a decline in net earnings and timing of payments on accounts payable,
partially offset by a decline in receivables and a decrease in inventory. The
increase in cash flows from operating activities in 2000 was due mainly to the
timing of payments on taxes and accounts payable, partially offset by increases
in inventory and other assets.
Trade and current financing receivables as a percentage of net revenue were
14.8%, down from 17.5% as of October 31, 2000. The year-over-year improvement
in the ratio is due primarily to a reduction in the number of
26
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
days of sales outstanding in accounts receivable as a result of increased
effectiveness in collection efforts. Inventory as a percentage of net revenue
was 11.5% at October 31, 2001, compared to 11.7% as of October 31, 2000. The
slight decrease in the ratio year over year is mainly attributable to active
inventory management.
Capital expenditures for fiscal 2001 were $1.5 billion, compared to $1.7
billion for fiscal 2000 and $1.1 billion for fiscal 1999. Net property, plant
and equipment as a percentage of net revenue was 9.7% as of October 31, 2001,
compared to 9.2% as of October 31, 2000. The increase in this ratio is due
mainly to a decrease in net revenue.
We invest excess cash in short- and long-term investments, depending on our
projected cash needs for operations, capital expenditures and other business
purposes. We also supplement our internally generated cash flow with a
combination of short- and long-term borrowings. Short- and long-term net
borrowings in fiscal 2001 generated cash of $277 million, as short-term and
long-term debt issuances, including the issuance of $636 million (based on the
foreign exchange rate at the date of issuance) of Euro Medium-Term Notes in
July 2001, were partially offset by repurchases of our zero-coupon subordinated
convertible notes and payments on other long-term debt. Long-term debt totaling
$290 million matured as scheduled in fiscal 2001. In fiscal 2000, short- and
long-term net borrowings generated cash of $165 million due to the issuance of
$1.5 billion of Global Notes in June 2000, substantially offset by payments on
our short- and long-term debt. Long-term debt totaling $474 million matured as
scheduled in fiscal 2000. At October 31, 2001, we had an unused committed
borrowing facility in place totaling $1.0 billion.
In December 2000, the Board of Directors authorized a repurchase program for
HP's zero-coupon subordinated convertible notes. Under the repurchase program,
we may repurchase the notes from time to time at varying prices. In fiscal
2001, we repurchased notes with a book value of $729 million for an aggregate
price of $640 million, resulting in an extraordinary gain on the early
extinguishment of debt of $56 million (net of related taxes of $33 million).
Between November 1, 2001 and January 15, 2002, we repurchased additional
zero-coupon subordinated convertible notes with a book value of $42 million for
an aggregate price of $33 million, resulting in an extraordinary gain on the
early extinguishment of debt of $6 million (net of related taxes of $3 million).
In February 2000, we filed a shelf registration statement with the SEC to
register $3.0 billion of debt securities, common stock, preferred stock,
depositary shares and warrants. The registration statement was declared
effective in March 2000. In June 2000, HP offered under this shelf registration
statement $1.5 billion of unsecured 7.15% Global Notes, which mature on June
15, 2005 unless previously redeemed. In May 2001, we filed a prospectus
supplement to the registration statement, which allowed us to offer from time
to time up to $1.5 billion of Medium-Term Notes, Series A, due nine months or
more from the date of issue, in addition to the other types of securities
described above. During fiscal 2001, we issued an aggregate of $210 million of
Medium-Term Notes with a weighted average interest rate of 3.67% maturing in
2003 and 2004 under the registration statement. As of October 31, 2001, we had
remaining capacity to issue approximately $1.3 billion of securities under the
shelf registration statement.
In December 2001, we offered under the March 2000 shelf registration
statement $1.0 billion of unsecured 5.75% Global Notes, which mature on
December 15, 2006 unless previously redeemed. The net proceeds from the sale of
the notes were or will be used for general corporate purposes, which included
repayment of existing indebtedness, capital expenditures and working capital
needs. As of January 15, 2002, we had remaining capacity to issue $290 million
of securities under the shelf registration statement.
HP and Hewlett-Packard Finance Company, a wholly-owned subsidiary of HP
("HPFC"), have the ability to offer from time to time up to $3.0 billion of
Medium-Term Notes under a Euro Medium-Term Note Programme filed with the
Luxembourg Stock Exchange. These notes can be denominated in any currency
including the euro.
27
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
However, these notes have not been and will not be registered in the United
States. In July 2001, 750 million euro (or 636 million U.S. dollars, based on
the exchange rate on the date of issuance) of 5.25% Medium-Term Notes maturing
on July 5, 2006 were issued under this program. As of October 31, 2001, HP and
HPFC had remaining capacity to issue approximately $2.3 billion of Medium-Term
Notes under the program.
We repurchase shares of our common stock under a systematic program to
manage the dilution created by shares issued under employee stock plans and a
separate incremental plan. These plans authorize purchases in the open market
or in private transactions. In fiscal 2001, 45,036,000 shares were repurchased
for an aggregate price of $1.2 billion. As of October 31, 2001, we had
authorization for remaining future repurchases under the two programs of $1.6
billion. In fiscal 2000, 96,978,000 shares were repurchased for $5.6 billion
and 62,084,000 shares were repurchased for $2.6 billion in fiscal 1999.
On June 4, 2001, HP and Pitney Bowes announced that they had entered into
agreements that resolved all pending patent litigation between the parties
without admission of infringement and in connection therewith HP paid Pitney
Bowes $400 million in cash on June 7, 2001. This payment did not have a
material impact on HP's liquidity. For further discussion regarding the
litigation see Note 17 to the Consolidated Financial Statements in Item 8.
Completed Acquisitions and Divestitures
In fiscal 2001, we acquired Bluestone Software, Inc. for consideration of
$531 million and StorageApps Inc. for consideration of $319 million. In each
case the consideration consisted of HP common stock issued and options assumed,
as well as direct transaction costs. Each of these transactions was accounted
for under the purchase method, and accordingly the results of operations of the
acquired companies are included in our consolidated results of operations from
the date of acquisition. See Note 6 to the Consolidated Financial Statements in
Item 8 for additional information about these acquisitions.
In fiscal 2001, the net proceeds from divestitures was $117 million
resulting from the sale of our VeriFone, Inc. subsidiary and the sale of HP's
remaining interest in a joint venture to the other joint owner. In fiscal 2000,
the net proceeds from divestitures was $448 million resulting from the sale of
non-strategic businesses, as well as the sale of part of HP's interest in the
same joint venture to the other joint owner.
Pending Acquisitions
In September 2001, we signed a definitive agreement with Compaq Computer
Corporation ("Compaq") to acquire all of the outstanding stock of Compaq in
exchange for 0.6325 shares of HP common stock for each outstanding share of
Compaq stock and the assumption of options based on the same exchange ratio.
The estimated purchase price is $24 billion, which includes the estimated fair
value of HP common stock issued and options assumed, as well as estimated
direct transaction costs. This estimate was derived using an average market
price per share of HP common stock of $20.92, which was based on an average of
the closing prices for a range of trading days (August 30, August 31, September
4 and September 5, 2001) around the announcement date (September 3, 2001) of
the proposed merger. The final purchase price will be determined based upon the
number of Compaq shares and options outstanding at the closing date. Compaq is
a leading global provider of enterprise technology and solutions. Completion of
the Compaq merger is subject to customary closing conditions that include,
among others, receipt of required approvals from our shareowners and from
Compaq shareowners, and receipt of required regulatory approvals. The
transaction, while expected to close in the first half of calendar year 2002,
may not be completed if any of the conditions is not satisfied. Under certain
terms specified in the merger agreement, HP or Compaq may terminate the
agreement, and as a result, either HP or Compaq may be required to pay a $675
million termination fee to the other party in certain circumstances. Unless
otherwise indicated, the
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
discussions in this document relate to HP as a stand-alone entity and do not
reflect the impact of the pending business combination transaction with Compaq.
In September 2001, we signed a definitive agreement with Indigo N.V.
("Indigo") to commence an exchange offer to acquire all of the outstanding
shares of Indigo not already owned by HP (the "Shares") in exchange for a
combination of shares of HP's common stock and non-transferable contingent
value rights ("CVR") entitling the holder to a one-time contingent cash payment
of up to $4.50 per CVR, based on the achievement by the Indigo business of a
cumulative revenue milestone over a three-year post-closing period. Based on
the terms of the agreement, current assumptions on the quantity of each
consideration alternative, and HP's average closing share price for the 20-day
period ended December 31, 2001, the estimated consideration to acquire the
Shares is approximately $720 million plus approximately 56 million CVRs. The
$720 million consideration amount includes the estimated fair value of HP
common stock issued and options and warrants assumed, as well as estimated
direct transaction costs. The future cash pay-out, if any, of the CVRs will be
determined and payable after a three-year period commencing shortly after the
closing of the exchange offer. Indigo is a leading provider of high performance
digital color printing. The completion of this transaction is subject to the
tender for exchange of that number of Indigo shares which, when added to Indigo
shares currently owned by HP, will constitute at least 95% of Indigo's
outstanding shares, the receipt of required regulatory approvals and customary
closing conditions. The transaction, while expected to close in the first half
of calendar year 2002, may not be completed if any of the conditions is not
satisfied.
FACTORS THAT COULD AFFECT FUTURE RESULTS
The competitive pressures we face could harm our revenues, gross margins and
prospects.
We encounter aggressive competition from numerous and varied competitors in
all areas of our business, and compete primarily on the basis of technology,
performance, price, quality, reliability, brand, distribution, customer service
and support. If we fail to develop new products, services and support,
periodically enhance our existing products, services and support, or otherwise
compete successfully, it could harm our operations and prospects. Further, we
may have to continue to lower the prices of many of our products, services and
support to stay competitive, while at the same time trying to maintain or
improve gross margins. If we cannot proportionately decrease our cost structure
in response to competitive price pressures, our gross margins and therefore our
profitability could be adversely affected.
If we cannot continue to develop, manufacture and market innovative products
and services rapidly that meet customer requirements for performance and
reliability, we may lose market share and our revenues may suffer.
The process of developing new high technology products and services is
complex and uncertain, and failure to anticipate customers' changing needs and
emerging technological trends accurately and to develop or obtain appropriate
intellectual property could significantly harm our results of operations. We
must make long-term investments and commit significant resources before knowing
whether our predictions will eventually result in products that the market will
accept. After a product is developed, we must be able to manufacture sufficient
volumes quickly and at low costs. To accomplish this, we must accurately
forecast volumes, mix of products and configurations that meet customer
requirements, and we may not succeed.
If we do not effectively manage the transition from existing products to new
products, our revenues may suffer.
If we do not make an effective transition from existing products to new
products, our revenues may be seriously harmed. Among the factors that make a
smooth transition from current products to new products difficult are delays in
product development or manufacturing, variations in product costs, delays in
customer
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
purchases of existing products in anticipation of new product introductions and
customer demand for the new product. Our revenues and gross margins also may
suffer due to the timing of product or service introductions by our suppliers
and competitors. This is especially challenging when a product has a short life
cycle or a competitor introduces a new product just before our own product
introduction. Furthermore, sales of our new products may replace sales of some
of our current products, offsetting the benefit of even a successful product
introduction. There may also be overlaps in the current products of HP and
product portfolios acquired through mergers and acquisitions that must be
managed. Given the competitive nature of our industry, if we incur delays in
new product introductions or do not accurately estimate the market effects of
new product introductions, future demand for our products and our revenues may
be seriously harmed.
Our revenues and selling, general and administrative expenses will suffer if we
cannot continue to license or enforce the intellectual property rights on which
our business depends or if third parties assert that we violate their
intellectual property rights.
We generally rely upon patent, copyright, trademark and trade secret laws in
the United States and similar laws in other countries, and agreements with our
employees, customers, partners and other parties, to establish and maintain our
intellectual property rights in technology and products used in our operations.
However, any of our intellectual property rights could be challenged,
invalidated or circumvented, or our intellectual property rights may not
provide competitive advantages, which could significantly harm our business.
Also, because of the rapid pace of technological change in the information
technology industry, much of our business and many of our products rely on key
technologies developed by third parties, and we may not be able to obtain or to
continue to obtain licenses and technologies from these third parties at all or
on reasonable terms. Third parties also may claim that we are infringing upon
their intellectual property rights. Even if we do not believe that our products
or business are infringing upon third parties' intellectual property rights,
the claims can be time-consuming and costly to defend and divert management's
attention and resources away from our business. Claims of intellectual property
infringement also might require us to enter into costly settlement or license
agreements. If we cannot or do not license the infringed technology at all or
on reasonable terms or substitute similar technology from another source, our
operations could suffer. In addition, it is possible that as a consequence of
mergers and acquisitions some of our intellectual property rights may be
licensed to a third party that had not been licensed prior to the transaction
or that certain restrictions could be imposed on our business that had not been
imposed prior to the transaction. Consequently, we may lose a competitive
advantage with respect to these intellectual property rights or we may be
required to enter into costly arrangements in order to terminate or limit these
agreements.
If we fail to manage distribution of our products and services properly, or if
our distributors' financial condition or operations weaken, our revenues and
gross margins could be adversely affected.
We use a variety of different distribution methods to sell our products and
services, including third-party resellers and distributors and both retail and
direct sales to both enterprise accounts and consumers. Since each distribution
method has distinct risks and gross margins, the failure to implement the most
advantageous balance in the delivery model for our products and services could
adversely affect our gross margins and therefore profitability. For example:
. As we continue to increase our commitment to direct sales, we could risk
alienating channel partners and adversely affecting our distribution
model.
Since direct sales may compete with the sales made by third-party
resellers and distributors, these third-party resellers and distributors
may elect to use other suppliers that do not directly sell their own
products.
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Because not all of our customers will prefer to or seek to purchase
directly, any increase in our commitment to direct sales in order to
increase our gross margins could alienate some of our channel partners. As
a result, we may lose some of our customers who purchase from third-party
resellers or distributors.
. Some of our wholesale and retail distributors may be unable to withstand
changes in business conditions.
Some of our wholesale and retail distributors may have insufficient
financial resources and may not be able to withstand changes in business
conditions, including the recent economic downturn. Revenues from indirect
sales could suffer if our distributors' financial condition or operations
weaken.
. Our inventory management will be complex as we will continue to sell a
significant mix of products through distributors.
We must manage inventory effectively, particularly with respect to sales
to distributors. Distributors may increase orders during periods of
product shortages, cancel orders if their inventory is too high, or delay
orders in anticipation of new products. Distributors also may adjust their
orders in response to the supply of our products and the products of our
competitors that are available to the distributor and seasonal
fluctuations in end-user demand. If we have excess inventory, we may have
to reduce our prices and write down inventory, which in turn could result
in lower gross margins.
We depend on third party suppliers and our revenues and gross margins could be
adversely affected if we fail to receive timely delivery of quality components
or if we fail to manage inventory levels properly.
Our manufacturing operations depend on our ability to anticipate our needs
for components and products and our suppliers' ability to deliver quality
components and products in time to meet critical manufacturing and distribution
schedules. Given the wide variety of systems, products and services that we
offer and the large number of our suppliers and contract manufacturers that are
dispersed across the globe, problems could arise in planning production and
managing inventory levels that could seriously harm us. Among the problems that
could arise are component shortages, excess supply and risks related to
fixed-price contracts that would require us to pay more than the open market
price.
. Supply shortages. We occasionally may experience a short supply of
certain component parts as a result of strong demand in the industry for
those parts or problems experienced by suppliers. If shortages or delays
persist, the price of these components may increase, or the components may
not be available at all. We may not be able to secure enough components at
reasonable prices or of acceptable quality to build new products in a
timely manner in the quantities or configurations needed. Accordingly, our
revenues and gross margins could suffer until other sources can be
developed.
. Oversupply. In order to secure components for the production of new
products, at times we may make advance payments to suppliers, or we may
enter into non-cancelable purchase commitments with vendors. If we fail to
anticipate customer demand properly, a temporary oversupply of parts could
result in excess or obsolete components which could adversely affect our
gross margins.
. Long-term pricing commitments. As a result of binding price or purchase
commitments with vendors, we may be obligated to purchase components at
prices that are higher than those available in the current market. In the
event that we become committed to purchase components for prices in excess
of the current market price, we may be at a disadvantage to competitors
who have access to components at lower prices, and our gross margins could
suffer.
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
In order to be successful, we must retain and motivate key employees, and
failure to do so could seriously harm us.
In order to be successful, we must retain and motivate executives and other
key employees, including those in managerial, technical, marketing and
information technology support positions. In particular, our product generation
efforts depend on hiring and retaining qualified engineers. Attracting and
retaining skilled solutions providers in the IT support business and qualified
sales representatives is also critical to our future. Experienced management
and technical, marketing and support personnel in the information technology
industry are in high demand and competition for their talents is intense. This
is particularly the case in Silicon Valley, where HP's headquarters and certain
key research and development facilities are located. The loss of key employees
could have a significant impact on our operations. We also must continue to
motivate employees and keep them focused on HP's strategies and goals, which
may be particularly difficult due to morale challenges posed by workforce
reductions and general uncertainty.
The economic downturn could adversely affect our revenues, gross margins and
expenses.
Our revenues and gross margins depend significantly on the overall demand
for computing and imaging products and services, particularly in the product
and service segments in which we compete. Softening demand for our products and
services caused by the ongoing economic downturn may result in decreased
revenues, earnings levels or growth rates and problems with the saleability of
inventory and realizability of customer receivables. The global economy has
weakened and market conditions continue to be challenging. As a result,
individuals and companies are delaying or reducing expenditures, including
those for information technology. We have observed effects of the global
economic downturn in many areas of our business. The downturn has contributed
to reported net revenue declines during fiscal 2001. We have also experienced
gross margin declines, reflecting the effect of competitive pressures as well
as inventory writedowns and charges associated with the cancellation of planned
production line expansion. Our selling, general and administrative expense also
was impacted due in part to an increase in bad debt write-offs and additions to
reserves in our receivables portfolio. The economic downturn also has led to
restructuring actions and contributed to writedowns to reflect the impairment
of certain investments in our investment portfolio. Further delays or
reductions in information technology spending could have a material adverse
effect on demand for our products and services, and consequently, our results
of operations, prospects and stock price.
Due to the international nature of our business, political or economic changes
could harm our future revenues, costs and expenses and financial condition.
Sales outside the United States make up more than half of our revenues. Our
future revenues, costs and expenses and financial condition could be adversely
affected by a variety of international factors, including:
. changes in a country's or region's political or economical conditions;
. longer accounts receivable cycles;
. trade protection measures;
. import or export licensing requirements;
. overlap or different corporate structures;
. unexpected changes in regulatory requirements;
. differing technology standards and/or customer requirements;
. import or export licensing requirements, which could affect our ability to
obtain favorable terms for components or lead to penalties or restrictions;
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
. problems caused by the conversion of various European currencies to the
euro and macroeconomic dislocations that may result; and
. natural disasters.
A portion of our product and component manufacturing, along with key
suppliers, also is located outside of the United States, and also could be
disrupted by some of the international factors described above. In particular,
along with most other PC vendors, we have engaged manufacturers in Taiwan for
the production of notebook computers. In 1999, Taiwan suffered a major
earthquake, and in 2000 it suffered a typhoon, both of which resulted in
temporary communications and supply disruptions. In addition, we procure
components from Japan, which also suffers from earthquakes periodically.
Moreover, we are in the process of acquiring Indigo, N.V., which has research
and development and manufacturing operations located in Israel, which may be
more subject to disruptions in light of recent world events.
Impairment of investment and financing portfolios could harm our net earnings.
We have an investment portfolio that includes minority equity and debt
investments and financing for the purchase of our products and services. In
most cases, we do not attempt to reduce or eliminate our market exposure on
these investments and may incur losses related to the impairment of these
investments and therefore charges to net earnings. Some of our investments are
in public and privately held companies that are still in the start-up or
development stage, which have inherent risks because the markets for the
technologies or products they have under development are typically in the early
stages and may never develop. Furthermore, the values of our investments in
publicly-traded companies are subject to significant market price volatility.
Our investments in technology companies often are coupled with a strategic
commercial relationship. Our commercial agreements with these companies may not
be sufficient to allow us to obtain and integrate such products our technology
into our technology or product lines or otherwise benefit from the
relationship, and these companies may be subsequently acquired by third
parties, including competitors. Moreover, due to the economic downturn and
difficulties that may be faced by some of the companies to which we have
supplied financing, our investment portfolio could be further impaired.
In order to manage our portfolio of products and technology and further our
competitive objectives, we must successfully complete acquisitions and
alliances that enhance our strategic businesses and product lines and divest
non-strategic businesses and product lines.
As part of our business strategy, we frequently engage in discussions with
third parties regarding, and enter into agreements relating to, possible
acquisitions, strategic alliances, joint ventures and divestitures in order to
manage our product and technology portfolios and further strategic objectives.
In order to pursue this strategy successfully, we must identify suitable
acquisition, alliance or divestiture candidates, complete these transactions,
some of which may be large and complex, and integrate acquired companies.
Integration and other risks of acquisitions and strategic alliances can be more
pronounced for larger and more complicated transactions, or if multiple
acquisitions are pursued simultaneously. However, if we fail to identify and
complete these transactions, we may be required to expend resources to
internally develop products and technology, may be at a competitive
disadvantage or may be adversely affected by negative market perceptions, which
may have a material effect on our revenues and selling, general and
administrative expenses.
Integration issues are complex, time-consuming and expensive and, without
proper planning and implementation, could significantly disrupt our business.
The challenges involved in integration include:
. demonstrating to customers that the transaction will not result in adverse
changes in client service standards or business focus and helping
customers conduct business easily;
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
. consolidating and rationalizing corporate IT and administrative
infrastructures;
. consolidating manufacturing operations;
. combining product offerings;
. coordinating sales and marketing efforts to communicate our capabilities
effectively;
. coordinating and rationalizing research and development activities to
enhance introduction of new products and technologies with reduced cost;
. preserving distribution, marketing or other important relationships and
resolving potential conflicts that may arise;
. minimizing the diversion of management attention from ongoing business
concerns;
. persuading employees that business cultures are compatible, maintaining
employee morale and retaining key employees;
. coordinating and combining overseas operations, relationships and
facilities, which may be subject to additional constraints imposed by
local laws and regulations; and
. managing integration issues shortly after or pending the completion of
other independent reorganizations.
We may not successfully address these integration challenges in a timely
manner, or at all, and we may not realize the anticipated benefits or synergies
of the transaction to the extent, or in the timeframe, anticipated. Currently,
we have several acquisitions that are pending completion, including the
proposed merger with Compaq, or that recently have been completed and are still
being integrated. In addition to the pending Compaq transaction, we have
pending a proposed acquisition of Indigo N.V., a leading commercial and
industrial printing systems company. In 2001, we completed acquisitions of
StorageApps, Inc., a provider of storage virtualization solutions, and
Bluestone Software, Inc., which became part of our middleware division. The
number of pending transactions and the size and scope of the proposed merger
with Compaq increase both the scope and consequences of ongoing integration
risks.
Even if an acquisition or alliance is successfully integrated, we may not
receive the expected benefits of the transaction. Managing acquisitions,
alliances, joint ventures and divestitures requires varying levels of
management resources, which may divert our attention from other business
operations. These transactions also may result in significant costs and
expenses and charges to earnings. As a result, any completed, pending or future
transactions may contribute to financial results of the combined company that
differ from the investment community's expectations in a given quarter.
Terrorist acts and acts of war may seriously harm our business and revenues,
costs and expenses and financial condition.
Terrorist acts or acts of war (wherever located around the world) may cause
damage or disruption to HP, our employees, facilities, partners, suppliers,
distributors, resellers, or customers, which could significantly impact our
revenues, costs and expenses and financial condition. The terrorist attacks
that took place in the United States on September 11, 2001 were unprecedented
events that have created many economic and political uncertainties, some of
which may materially harm our business and results of operations. The long-term
effects on our business of the September 11, 2001 attacks are unknown. The
potential for future terrorist attacks, the national and international
responses to terrorist attacks, and other acts of war or hostility have created
many economic and political uncertainties, which could adversely affect our
business and results of operations in ways that cannot
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
presently be predicted. In addition, as a major multi-national company with
headquarters and significant operations located in the United States, we may be
impacted by actions against the United States. We are predominantly uninsured
for losses and interruptions caused by terrorist acts and acts of war.
Business disruptions could seriously harm our future revenues and financial
condition and increase our costs and expenses.
Our worldwide operations could be subject to natural disasters and other
business disruptions, which could seriously harm our revenues and financial
condition and increase our costs and expenses. Our corporate headquarters, a
portion of our research and development activities, other critical business
operations and some of our suppliers are located in California, near major
earthquake faults. The ultimate impact on us, our significant suppliers and our
general infrastructure of being located near major earthquake faults is
unknown, but our revenues and financial condition and our costs and expenses
could be significantly impacted in the event of a major earthquake. In
addition, some areas, including California, have experienced, and may continue
to experience, ongoing power shortages, which have resulted in "rolling
blackouts." These blackouts could cause disruptions to our operations or the
operations of our suppliers, distributors and resellers, or customers. We are
predominantly uninsured for losses and interruptions caused by earthquakes,
power outages and other natural disasters.
The revenues and profitability of our operations have historically varied.
Our revenues and profit margins vary among our products, customer groups and
geographic markets. Our revenue mix in future periods will be different than
our current revenue mix. Overall profitability in any given period is dependent
partially on the product, customer and geographic mix reflected in that
period's net revenue, and therefore revenue and gross margin trends cannot be
reliably predicted. Actual trends may cause us to adjust our operations, which
could cause period-to-period fluctuations in our results of operations.
Failure to execute planned cost reductions successfully could result in total
costs and expenses that are greater than expected.
Historically, we have undertaken restructuring plans to bring operational
expenses to appropriate levels for each of our businesses, while simultaneously
implementing extensive new company-wide expense-control programs. In addition
to previously announced workforce reductions, we may have additional workforce
reductions in the future. The proposed merger with Compaq contemplates
workforce reductions that are expected to involve approximately 15,000
employees of the combined company worldwide, and workforce reductions would
also be expected if the proposed merger is not completed. Significant risks
associated with these actions that may impair our ability to achieve
anticipated cost reductions or that may otherwise harm our business include
delays in implementation of anticipated reductions in force in highly regulated
locations outside of the United States, particularly in Europe and Asia,
redundancies among restructuring programs, and the failure to meet operational
targets due to the loss of employees or decreases in employee morale.
HP's stock price has historically fluctuated and may continue to fluctuate.
HP's stock price, like that of other technology companies, can be volatile.
Some of the factors that can affect our stock price are:
. the announcement of new products, services or technological innovations by
HP or our competitors;
. quarterly increases or decreases in HP's revenue or earnings;
35
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
. changes in quarterly revenue or earnings estimates by the investment
community; and
. speculation in the press or investment community about HP's strategic
position, financial condition, results of operations, business or
significant transactions.
General market conditions or domestic or international macroeconomic and
geopolitical factors unrelated to HP's performance also may affect HP's stock
price. For these reasons, investors should not rely on recent trends to predict
future stock prices or financial results. In addition, following periods of
volatility in a company's securities, securities class action litigation
against a company is sometimes instituted. This type of litigation could result
in substantial costs and the diversion of management time and resources.
Unforeseen environmental costs could impact our future net earnings.
Some of our operations use substances regulated under various federal, state
and international laws governing the environment. We could be subject to
liability for remediation if we do not handle these substances in compliance
with applicable laws. It is our policy to apply strict standards for
environmental protection to sites inside and outside the United States, even
when not subject to local government regulations. We record a liability for
environmental remediation and related costs when we consider the costs to be
probable and the amount of the costs can be reasonably estimated. We have not
incurred environmental costs that are presently material, and we are not
presently subject to known environmental liabilities that we expect to be
material.
Some anti-takeover provisions contained in HP's certificate of incorporation,
bylaws and shareowner rights plan, as well as provisions of Delaware law, could
impair a takeover attempt.
HP has provisions in its certificate of incorporation and bylaws, each of
which could have the effect of rendering more difficult or discouraging an
acquisition deemed undesirable by the HP Board of Directors. These include
provisions:
. authorizing blank check preferred stock, which could be issued with
voting, liquidation, dividend and other rights superior to its common
stock;
. limiting the liability of, and providing indemnification to, directors and
officers;
. limiting the ability of HP shareowners to call special meetings;
. requiring advance notice of shareowner proposals for business to be
conducted at meetings of HP shareowners and for nominations of candidates
for election to the HP Board of Directors;
. controlling the procedures for conduct of Board and shareowner meetings
and election and removal of directors; and
. specifying that shareholders may take action only at a duly called annual
or special meeting of shareowners.
These provisions, alone or together, could deter or delay hostile takeovers,
proxy contests and changes in control or management of HP.
In addition, HP has adopted a shareowner rights plan. The rights are not
intended to prevent a takeover of HP. However, the rights may have the effect
of rendering more difficult or discouraging an acquisition of HP deemed
undesirable by the HP Board of Directors. The rights will cause substantial
dilution to a person or group that attempts to acquire HP on terms or in a
manner not approved by the HP Board of Directors, except pursuant to an offer
conditioned upon redemption of the rights.
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
As a Delaware corporation, HP also is subject to provisions of Delaware law,
including Section 203 of the Delaware General Corporation law, which prevents
some shareowner from engaging in certain business combinations without approval
of the holders of substantially all of HP's outstanding common stock.
Any provision of HP's certificate of incorporation or bylaws, HP's
shareowner rights plan or Delaware law that has the effect of delaying or
deterring a change in control could limit the opportunity for HP shareowner to
receive a premium for their shares of HP common stock, and could also affect
the price that some investors are willing to pay for HP common stock.
HP faces numerous additional risks in connection with the proposed transaction
with Compaq, which may adversely affect our results of operations whether or
not the merger is completed, and the merger may not be completed on a timely
basis or at all.
In response to the pending merger transaction involving Compaq, customers
and distributors of HP may defer purchasing decisions or elect to switch to
other suppliers due to uncertainty about the direction of our product offerings
following the merger and our willingness to support and service existing
products. In order to address customer uncertainty, we may incur additional
obligations. Uncertainty surrounding the proposed transaction also may have an
adverse effect on employee morale and retention, and result in the diversion of
management attention and resources. In addition, the market values of HP common
stock and Compaq common stock will continue to vary prior to completion of the
merger transaction due to changes in the business, operations or prospects of
HP or Compaq, market assessments of the merger, regulatory considerations,
market and economic considerations, or other factors. However, there will be no
adjustment to the exchange ratio between HP and Compaq shares in connection
with the merger, and the parties do not have a right to terminate the merger
agreement based upon changes in the market price of either HP common stock or
Compaq common stock.
Completion of the merger also is subject to numerous risks and
uncertainties. HP and Compaq may be unable to obtain regulatory or shareowner
approvals required to complete the merger in a timely manner or at all. In
order to obtain regulatory approval, we may be required to comply with material
restrictions or conditions, which could include a complete or partial license,
divestiture, spin-off or the holding separate of assets or businesses. HP and
Compaq also are required to obtain separate shareowner approvals in connection
with the merger. Walter B. Hewlett, Eleanor Hewlett Limon, Mary Hewlett Gaffe
and The William R. Hewlett Revocable Trust have announced that they intend to
vote against the proposal to approve the issuance of HP common stock in
connection with the Compaq merger. In addition, each of the William and Flora
Hewlett Foundation and the David and Lucite Packard Foundation has announced
its intention to vote against the proposal to approve the issuance of HP common
stock in connection with the Compaq merger. Mr. Hewlett (co-trustee of the
William R. Hewlett Revocable Trust and Chairman of the Hewlett Foundation),
Edwin van Pronghorns (co-trustee of the William R. Hewlett Revocable Trust and
trustee of certain Hewlett family trusts) and The William R. Hewlett Revocable
Trust have filed a preliminary proxy statement with the Securities and Exchange
Commission stating that they intend to solicit proxies from HP shareowner
against the proposal to approve the issuance of shares of HP common stock in
connection with the Compaq merger and have disseminated to HP shareowner
soliciting materials encouraging HP shareowner to vote against the Compaq
merger. If the merger is not completed, the price of HP common stock may
decline to the extent that the current market price of HP common stock reflects
a market assumption that the merger will be completed. Moreover, HP would not
derive the strategic benefits expected to result from the merger, such as
creating a more complete and balanced product and services portfolio and
providing economies of scale in businesses such as PCs. In addition, our
business may be harmed to the extent that customers, suppliers or others
believe that we cannot effectively compete in the marketplace without the
merger or there is customer and employee uncertainty surrounding the future
direction of the product and service offerings and strategy of HP on a
standalone basis. We also will be required to pay significant costs incurred
37
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
in connection with the merger, including legal, accounting and a portion of the
financial advisory fees, whether or not the merger is completed. Moreover,
under specified circumstances, HP may be required to pay Compaq a termination
fee of $675 million in connection with the termination of the merger agreement.
If the merger is completed, we will continue to face risks associated with
integration of the businesses and operations of HP and Compaq, and we may not
realize the anticipated benefits or synergies of the merger (primarily
associated with anticipated restructurings and other operational efficiencies)
to the extent, or in the timeframe, anticipated. In addition to the integration
risks previously discussed, our ability to realize these benefits and synergies
could be impacted adversely by practical or legal constraints on combining
operations or implementing workforce reductions. In addition to the costs and
expenses previously discussed, we will be required to make payments to
executive officers and key employees under a retention plan adopted in
connection with the merger. Also, any downgrade in our credit ratings
associated with the merger could adversely affect our ability to borrow and
result in more restrictive borrowing terms, including increased borrowing
costs, more restrictive covenants and the extension of less open credit. This
in turn could affect our internal cost of capital estimates and therefore
operational decisions. In addition, the effective tax rate of HP following the
merger is uncertain and could exceed HP's currently reported tax rate and the
weighted average of the pre-merger tax rates of HP and Compaq. Moreover,
charges to earnings resulting from the application of the purchase method of
accounting may affect the market value of HP's common stock adversely following
the merger, as HP will incur additional depreciation and amortization expense
over the useful lives of certain of the net tangible and intangible assets
acquired in connection with the merger, and, to the extent the value of
goodwill or intangible assets with indefinite lives acquired in connection with
the merger becomes impaired, HP may be required to incur material charges
relating to the impairment of those assets. The foregoing risks are described
in more detail in HP's Current Report on Form 8-K dated November 15, 2001 and
incorporated by reference herein.
ADOPTION OF THE EURO
In 1997, we established a dedicated task force to address the issues raised
by the introduction of a European single currency, the euro. The euro's initial
implementation was effective as of January 1, 1999, and the transition period
continued through January 1, 2002 when the euro was adopted as the physical
currency and legal tender in twelve European countries, the final step of the
transition. On January 1, 1999, we began converting our product prices from
local currencies to the euro as required. We implemented system changes to give
multi-currency capability to internal applications and to ensure that external
partners' systems processing euro conversions were compliant with the European
Council regulations. In addition, we implemented design changes to support
display and printing of the euro character by impacted HP products. In 2000,
our task force implemented a comprehensive euro program to manage the
changeover of all operational aspects of our business in preparation for the
final transition in January 2002. We experienced no significant operational
issues upon the final implementation date.
The introduction and use of the euro has not had a material effect on our
foreign exchange and hedging activities, use of derivative instruments or
overall foreign currency risk, and we do not presently expect that it will. We
do not expect a material impact on product pricing, but we will continue to
monitor this aspect of the change going forward. All costs associated with the
conversion to the euro are expensed to operations as incurred. While we will
continue to evaluate the impact of the euro over time, based on currently
available information, we do not believe that the use of the euro currency will
have a material adverse impact on our consolidated financial condition, cash
flows or results of operations.
38
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
141 requires that all business combinations be accounted for by the purchase
method of accounting and changes the criteria for recognition of intangible
assets acquired in a business combination. The provisions of SFAS 141 apply to
all business combinations initiated after June 30, 2001. We do not expect that
the adoption of SFAS 141 will have a material effect on our consolidated
financial position or results of operations. SFAS 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized;
however, these assets must be reviewed at least annually for impairment.
Intangible assets with finite useful lives will continue to be amortized over
their respective useful lives. The standard also establishes specific guidance
for testing for impairment of goodwill and intangible assets with indefinite
useful lives. The provisions of SFAS 142 will be effective for our fiscal year
2003, with early adoption permitted at the beginning of our fiscal year 2002.
However, goodwill and intangible assets acquired after June 30, 2001 are
subject immediately to the non-amortization provisions of SFAS 142. We are
currently in the process of evaluating the potential impact that the adoption
of SFAS 142 will have on our consolidated financial position and results of
operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 amends existing
accounting guidance on asset impairment and provides a single accounting model
for long-lived assets to be disposed of. Among other provisions, the new rules
change the criteria for classifying an asset as held-for-sale. The standard
also broadens the scope of businesses to be disposed of that qualify for
reporting as discontinued operations, and changes the timing of recognizing
losses on such operations. The provisions of SFAS 144 will be effective for our
fiscal year 2003 and will be applied prospectively. We are currently in the
process of evaluating the potential impact that the adoption of SFAS 144 will
have on our consolidated financial position and results of operations.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, we are exposed to foreign currency
exchange rate, interest rate and equity market price risks that could impact
our results of operations. Our risk management strategy includes the use of
derivative financial instruments, including forwards, swaps and purchased
options, to hedge certain of these exposures. Our objective is to offset gains
and losses resulting from these exposures with gains and losses on the
derivative contracts used to hedge them, thereby reducing volatility of
earnings or protecting fair values of assets and liabilities. We do not enter
into any trading or speculative positions with regard to derivative instruments.
Foreign currency exchange rate risk
We are exposed to foreign currency exchange rate risk inherent in our sales
commitments, anticipated sales, anticipated purchases and assets and
liabilities denominated in currencies other than the U.S. dollar. We transact
business in approximately 30 currencies worldwide, of which the most
significant to our operations are the euro, the Japanese yen and the British
pound. For most currencies we are a net receiver of foreign currencies and,
therefore, benefit from a weaker U.S. dollar and are adversely affected by a
stronger U.S. dollar relative to those foreign currencies in which we transact
significant amounts of business. For the Japanese yen, however, we are a net
payer and therefore tend to benefit from a stronger U.S. dollar against the
yen. We have performed a sensitivity analysis as of October 31, 2001 and 2000,
using a modeling technique that measures the change in the fair values arising
from a hypothetical 10% adverse movement in the levels of foreign currency
exchange rates relative to the U.S. dollar with all other variables held
constant. The analysis covers all of our foreign exchange forward contracts
offset by the underlying exposures. Options are excluded from the analysis. The
foreign
39
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
currency exchange rates used were based on the spot rates in effect at October
31, 2001 and 2000. The sensitivity analysis indicated that a hypothetical 10%
adverse movement in foreign currency exchange rates would result in a loss in
the fair values of our foreign exchange derivative financial instruments, net
of exposures, of $52 million at October 31, 2001 and $45 million at October 31,
2000.
Interest rate risk
We are also exposed to interest rate risk related to our fixed rate debt and
investment portfolios and financing receivables. We have performed a
sensitivity analysis as of October 31, 2001 and 2000, using a modeling
technique that measures the change in the fair values arising from a
hypothetical 10% adverse movement in the levels of interest rates with all
other variables held constant. The analysis covers our fixed rate unhedged
debt, unhedged investment instruments and financing receivables and is based on
our assumed overall maturities of three months for short-term debt and
investments, three years for long-term debt and investments and the actual
maturities for financing receivables. The discount rates used were based on the
market interest rates in effect at October 31, 2001 and 2000. The sensitivity
analysis indicated that a hypothetical 10% adverse movement in interest rates
would result in a loss in the fair values of our debt and investment
instruments and financing receivables of $14 million at October 31, 2001 and
$36 million at October 31, 2000.
Equity price risk
We are also exposed to equity price risk inherent in our portfolio of
publicly-traded equity securities, which had an estimated fair value of $148
million at October 31, 2001 and $328 million at October 31, 2000. We monitor
our equity investments on a periodic basis. In the event that the carrying
value of the equity investment exceeds its fair value, and the decline in value
is determined to be other-than temporary, the carrying value is reduced to its
current fair value. Generally, we do not attempt to reduce or eliminate our
market exposure on these equity securities. We do not hold our equity
securities for trading or speculative purposes. A hypothetical 30% adverse
change in the stock prices of our publicly-traded equity securities would
result in a loss in the fair values of our marketable equity securities of $44
million at October 31, 2001 and $98 million at October 31, 2000.
Actual gains and losses in the future may differ materially from the
sensitivity analyses based on changes in the timing and amount of interest
rate, foreign currency exchange rate and equity price movements and our actual
exposures and hedges.
40
ITEM 8. Financial Statements and Supplementary Data.
TABLE OF CONTENTS
Report of Independent Auditors............................................ 42
Report of Independent Accountants......................................... 43
Statement of Management Responsibility.................................... 44
Consolidated Statement of Earnings........................................ 45
Consolidated Balance Sheet................................................ 46
Consolidated Statement of Cash Flows...................................... 47
Consolidated Statement of Stockholders' Equity............................ 48
Notes to Consolidated Financial Statements................................ 49
Quarterly Summary......................................................... 84
41
Report of Independent Auditors
To the Board of Directors and Stockholders of
Hewlett-Packard Company
We have audited the accompanying consolidated balance sheets of
Hewlett-Packard Company and subsidiaries as of October 31, 2001 and 2000, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the two years in the period ended October 31, 2001. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a)(2) for the years ended October 31, 2001 and 2000. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Hewlett-Packard Company and subsidiaries at October 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended October 31, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 2001 the
Company changed its method of accounting for revenue recognition.
/s/ Ernst & Young LLP
San Jose, California
November 13, 2001,
except for Note 19, as to which the date is
December 6, 2001
42
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 index
appearing under Item 14(a)(1) present fairly, in all material respects, the
results of operations and cash flows of Hewlett-Packard Company and its
subsidiaries for the year ended October 31, 1999, in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 14(a)(2) presents fairly, in all material respects, the information
set forth therein for the year ended October 31, 1999, when read in conjunction
with the related consolidated financial statements. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management; our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. We have not audited the consolidated financial statements and
financial statement schedules of Hewlett-Packard Company for any period
subsequent to October 31, 1999.
/s/ PricewaterhouseCoopers LLP
San Jose, California
November 23, 1999, except for the stock split disclosed
in Note 12 to the consolidated financial statements, as
to which the date is October 27, 2000.
43
Statement of Management Responsibility
HP's management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and other financial
information included in HP's 2001 Annual Report on Form 10-K. The consolidated
financial statements have been prepared in conformity with accounting
principles generally accepted in the United States, and reflect the effects of
certain estimates and judgments made by management.
HP's management maintains an effective system of internal control that is
designed to provide reasonable assurance that assets are safeguarded and
transactions are properly recorded and executed in accordance with management's
authorization. The system is regularly monitored by direct management review
and by internal auditors who conduct an extensive program of audits throughout
HP. HP selects and trains qualified people who are provided with and expected
to adhere to HP's Standards of Business Conduct. These standards, which set
forth the highest principles of business ethics and conduct, are a key element
of HP's control system.
HP's consolidated financial statements as of and for each of the two years
in the period ended October 31, 2001 have been audited by Ernst & Young LLP,
independent auditors. HP's consolidated financial statements as of and for the
year ended October 31, 1999 have been audited by PricewaterhouseCoopers LLP,
independent accountants. Their respective audits were conducted in accordance
with auditing standards generally accepted in the United States, and included a
review of financial controls and tests of accounting records and procedures as
they respectively considered necessary in the circumstances.
The Audit Committee of the Board of Directors, which consists of outside
directors, meets regularly with management, the internal auditors and the
independent auditors to review accounting, reporting, auditing and internal
control matters. The Audit Committee has direct and private access to both
internal and external auditors.
/s/ CARLETON S. FIORINA /s/ ROBERT P. WAYMAN
Carleton S. Fiorina Robert P. Wayman
President and Chief Executive Officer Executive Vice President, Finance and
Administration and Chief Financial
Officer
44
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statement of Earnings
For the years ended October 31
In millions, except per share amounts 2001 2000 1999
- ------------------------------------- ------- ------- -------
Net revenue:
Products..................................................................... $37,498 $41,653 $36,113
Services..................................................................... 7,325 6,848 5,960
Financing income............................................................. 403 369 298
------- ------- -------
Total net revenue........................................................ 45,226 48,870 42,371
------- ------- -------
Cost of sales:
Products..................................................................... 28,370 30,343 25,436
Services..................................................................... 4,870 4,470 4,284
Financing interest........................................................... 234 233 168
------- ------- -------
Total cost of sales...................................................... 33,474 35,046 29,888
------- ------- -------
Gross margin.................................................................... 11,752 13,824 12,483
Operating expenses:
Research and development..................................................... 2,670 2,634 2,440
Selling, general and administrative.......................................... 7,259 7,063 6,225
Restructuring charges........................................................ 384 102 --
------- ------- -------
Total operating expenses................................................. 10,313 9,799 8,665
------- ------- -------
Earnings from operations........................................................ 1,439 4,025 3,818
Interest and other, net......................................................... 171 356 345
Net investment (losses) gains................................................... (455) 41 31
Litigation settlement........................................................... (400) -- --
(Losses) gains on divestitures.................................................. (53) 203 --
------- ------- -------
Earnings from continuing operations before extraordinary item, cumulative effect
of change in accounting principle and taxes................................... 702 4,625 4,194
Provision for taxes............................................................. 78 1,064 1,090
------- ------- -------
Net earnings from continuing operations before extraordinary item and
cumulative effect of change in accounting principle........................... 624 3,561 3,104
Net earnings from discontinued operations....................................... -- 136 387
Extraordinary item--gain on early extinguishment of debt, net of taxes.......... 56 -- --
Cumulative effect of change in accounting principle, net of taxes............... (272) -- --
------- ------- -------
Net earnings.................................................................... $ 408 $ 3,697 $ 3,491
======= ======= =======
Basic net earnings per share:
Net earnings from continuing operations before extraordinary item and
cumulative effect of change in accounting principle........................ $ 0.32 $ 1.80 $ 1.54
Net earnings from discontinued operations.................................... -- 0.07 0.19
Extraordinary item--gain on early extinguishment of debt, net of taxes....... 0.03 -- --
Cumulative effect of change in accounting principle, net of taxes............ (0.14) -- --
------- ------- -------
Net earnings................................................................. $ 0.21 $ 1.87 $ 1.73
======= ======= =======
Diluted net earnings per share:
Net earnings from continuing operations before extraordinary item and
cumulative effect of change in accounting principle........................ $ 0.32 $ 1.73 $ 1.49
Net earnings from discontinued operations.................................... -- 0.07 0.18
Extraordinary item--gain on early extinguishment of debt, net of taxes....... 0.03 -- --
Cumulative effect of change in accounting principle, net of taxes............ (0.14) -- --
------- ------- -------
Net earnings................................................................. $ 0.21 $ 1.80 $ 1.67
======= ======= =======
Weighted average shares used to compute net earnings per share:
Basic........................................................................ 1,936 1,979 2,018
======= ======= =======
Diluted...................................................................... 1,974 2,077 2,105
======= ======= =======
The accompanying notes are an integral part of these financial statements.
45
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet
October 31
In millions, except par value 2001 2000
- ----------------------------- ------- -------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 4,197 $ 3,415
Short-term investments................................... 139 592
Accounts receivable, net................................. 4,488 6,394
Financing receivables, net............................... 2,183 2,174
Inventory................................................ 5,204 5,699
Other current assets..................................... 5,094 4,970
------- -------
Total current assets................................. 21,305 23,244
Property, plant and equipment, net.......................... 4,397 4,500
Long-term investments and other assets...................... 6,882 6,265
------- -------
Total assets................................................ $32,584 $34,009
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and short-term borrowings.................. $ 1,722 $ 1,555
Accounts payable......................................... 3,791 5,049
Employee compensation and benefits....................... 1,477 1,584
Taxes on earnings........................................ 1,818 2,046
Deferred revenue......................................... 1,867 1,759
Other accrued liabilities................................ 3,289 3,204
------- -------
Total current liabilities............................ 13,964 15,197
Long-term debt.............................................. 3,729 3,402
Other liabilities........................................... 938 1,201
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value (300 shares authorized;
none issued)........................................... -- --
Common stock, $0.01 par value (9,600 and 4,800 shares
authorized at October 31, 2001 and 2000, respectively;
1,939 and 1,947 shares issued and outstanding at
October 31, 2001 and 2000, respectively)............... 19 19
Additional paid-in capital............................... 200 --
Retained earnings........................................ 13,693 14,097
Accumulated other comprehensive income................... 41 93
------- -------
Total stockholders' equity........................... 13,953 14,209
------- -------
Total liabilities and stockholders' equity.................. $32,584 $34,009
======= =======
The accompanying notes are an integral part of these financial statements.
46
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the years ended October 31
In millions 2001 2000 1999
- ------------------------------ ------- ------- -------
Cash flows from operating activities:
Net earnings, excluding net earnings from discontinued
operations...................................................... $ 408 $ 3,561 $ 3,104
Adjustments to reconcile net earnings from continuing
operations to net cash provided by operating activities:
Net investment losses (gains)................................. 455 (41) (31)
Losses (gains) from divestitures.............................. 53 (203) --
Gain on early extinguishment of debt, net of taxes............ (56) -- --
Cumulative effect of change in accounting principle, net
of taxes.................................................... 272 -- --
Depreciation and amortization................................. 1,369 1,241 1,146
Provision for doubtful accounts--accounts receivable.......... 206 122 102
Provision for doubtful accounts--financing receivables........ 232 60 38
Tax benefit from employee stock plans......................... 16 495 289
Deferred taxes on earnings.................................... (970) (689) (171)
Changes in assets and liabilities:
Accounts and financing receivables......................... 566 (1,384) (1,715)
Inventory.................................................. 1,096 (845) (171)
Accounts payable........................................... (1,249) 1,544 751
Taxes on earnings.......................................... (195) 175 (639)
Other current assets and liabilities....................... 362 (282) 330
Other, net................................................. (4) (49) 63
------- ------- -------
Net cash provided by operating activities.............. 2,561 3,705 3,096
------- ------- -------
Cash flows from investing activities:
Investment in property, plant and equipment....................... (1,527) (1,737) (1,134)
Proceeds from sale of property, plant and equipment............... 447 420 542
Purchases of investments.......................................... (434) (1,376) (1,015)
Maturities and sales of investments............................... 742 1,004 1,063
Cash acquired through (paid for) business acquisitions, net....... 106 -- (166)
Net proceeds from divestitures.................................... 117 448 35
Other, net........................................................ -- (130) 47
------- ------- -------
Net cash used in investing activities.................. (549) (1,371) (628)
------- ------- -------
Cash flows from financing activities:
Increase (decrease) in notes payable and short-term borrowings.... 303 (1,297) 2,399
Issuance of long-term debt........................................ 904 1,936 240
Payment of long-term debt......................................... (290) (474) (1,047)
Repurchase of zero-coupon subordinated convertible notes.......... (640) -- --
Issuance of common stock under employee stock plans............... 354 748 660
Repurchase of common stock........................................ (1,240) (5,570) (2,643)
Dividends......................................................... (621) (638) (650)
------- ------- -------
Net cash used in financing activities.................. (1,230) (5,295) (1,041)
------- ------- -------
Net cash provided by (used in) discontinued operations............... -- 965 (62)
------- ------- -------
Increase (decrease) in cash and cash equivalents..................... 782 (1,996) 1,365
Cash and cash equivalents at beginning of period..................... 3,415 5,411 4,046
------- ------- -------
Cash and cash equivalents at end of period........................... $ 4,197 $ 3,415 $ 5,411
======= ======= =======
The accompanying notes are an integral part of these financial statements.
47
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Common Stock Accumulated
--------------- Additional Other
In millions, except number of Number of Par Paid-in Retained Comprehensive
shares in thousands Shares Value Capital Earnings Income Total
- ----------------------------- --------- ----- ---------- -------- ------------- -------
Balance October 31, 1998.......................... 2,030,806 $20 $ 506 $16,393 $ -- $16,919
Net earnings................................... -- -- -- 3,491 -- 3,491
Issuance of common stock....................... 40,416 -- 889 -- -- 889
Repurchase of common stock..................... (62,084) -- (1,684) (959) -- (2,643)
Tax benefit from employee stock plans.......... -- -- 289 -- -- 289
Dividends...................................... -- -- -- (650) -- (650)
--------- --- ------- ------- ---- -------
Balance October 31, 1999.......................... 2,009,138 20 -- 18,275 -- 18,295
Net earnings................................... -- -- -- 3,697 -- 3,697
Net unrealized gain on available-for-
sale securities.............................. -- -- -- -- 93 93
-------
Comprehensive income........................... 3,790
-------
Issuance of common stock....................... 35,152 -- 741 -- -- 741
Repurchase of common stock..................... (96,978) (1) (2,571) (2,998) -- (5,570)
Tax benefit from employee stock plans.......... -- -- 495 -- -- 495
Initial public offering and spin-off of
Agilent Technologies......................... -- -- 1,335 (4,239) -- (2,904)
Dividends...................................... -- -- -- (638) -- (638)
--------- --- ------- ------- ---- -------
Balance October 31, 2000.......................... 1,947,312 19 -- 14,097 93 14,209
Net earnings................................... -- -- -- 408 -- 408
Net unrealized loss on available-for-
sale securities.............................. -- -- -- -- (74) (74)
Net unrealized gain on derivative instruments.. -- -- -- -- 22 22
-------
Comprehensive income........................... 356
-------
Issuance of common stock....................... 36,552 -- 1,233 -- -- 1,233
Repurchase of common stock..................... (45,036) -- (1,049) (191) -- (1,240)
Tax benefit from employee stock plans.......... -- -- 16 -- -- 16
Dividends...................................... -- -- -- (621) -- (621)
--------- --- ------- ------- ---- -------
Balance October 31, 2001.......................... 1,938,828 $19 $ 200 $13,693 $ 41 $13,953
========= === ======= ======= ==== =======
The accompanying notes are an integral part of these financial statements.
48
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of
Hewlett-Packard Company ("HP") and its wholly-owned and controlled
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States 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
Accounting Changes
HP adopted Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements" in
the fourth quarter of fiscal 2001, retroactive to November 1, 2000. SAB 101
summarizes certain of the SEC's views in applying accounting principles
generally accepted in the United States to revenue recognition in financial
statements. The primary impact of HP's adoption of SAB 101 was to delay the
recognition of product revenue from the date of shipment until the date of
delivery, when title and risk of loss transfer to the customer, provided that
no significant obligations exist upon delivery. HP has restated its
consolidated results of operations for the first three quarters of fiscal 2001,
including a cumulative effect of a change in accounting principle of $272
million, net of income taxes of $108 million, which was recorded as a reduction
of net income as of the beginning of the first quarter of fiscal 2001. In
conjunction with the cumulative effect adjustment, an increase to deferred
revenue of $1.0 billion and an increase in inventory of $631 million was
recorded on November 1, 2000. This amount consisted of equipment that had been
shipped prior to October 31, 2000, but had not yet been received by the
customer at that date. The $1.0 billion was recognized as revenue in 2001,
along with the associated $631 million of cost of sales, both of which were
included in the cumulative effect adjustment and resulted in after-tax earnings
of $272 million. Had SAB 101 been effective for all prior fiscal years
presented, the pro forma results and earnings per share would not have been
materially different from the previously reported results.
HP early adopted Emerging Issues Task Force ("EITF") Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller
of the Vendor's Products" in the fourth quarter of fiscal 2001. In April 2001,
the EITF reached a consensus on Issue No. 00-25, concluding that consideration
from a vendor to a reseller of the vendor's products is generally presumed to
be an adjustment to the selling prices of the vendor's products and, therefore,
should be classified as a reduction of revenue. HP had previously classified
consideration paid to distributors and resellers of its products as selling,
general and administrative expense. HP has reclassified $281 million in 2000
and $297 million in 1999 from selling, general and administrative expense to a
reduction of revenue to conform to the current year presentation.
General
Revenue is recognized when persuasive evidence of an arrangement exists,
products are delivered or services rendered, the sales price is fixed or
determinable, and collectibility is reasonably assured. The following are the
policies applicable to HP's major categories of revenue transactions:
Products
Revenue from product sales, including sales to distributors and resellers,
is recognized when title and risk of loss transfer to the customer, generally
at the time the product is delivered to the customer. Revenue is deferred
49
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
when customer acceptance is uncertain, when significant obligations remain, or
when undelivered products or services are essential to the functionality of
delivered products. Revenue is reduced for estimated customer returns, price
protection, rebates, and other offerings that occur under sales programs
established with HP's distributors and resellers. The estimated cost of
post-sale obligations, including basic product warranties, is accrued based on
historical experience at the time revenue is recognized.
Services
Revenue from support or maintenance contracts, including extended warranty
programs, is recognized ratably over the contractual period. Amounts invoiced
to customers in excess of revenue recognized on support or maintenance
contracts are recorded as deferred revenue until the revenue recognition
criteria are met. Revenue for time and material contracts is recognized as
services are rendered. Revenue from long-term, fixed-price service contracts,
such as certain outsourcing or consulting arrangements, is recognized over the
contractual period on a percentage-of-completion basis. Revenue in excess of
amounts invoiced on long-term, fixed-price contracts are recorded as unbilled
receivables and are included in trade accounts receivable. Losses on
fixed-price contracts are recognized in the period that the loss becomes
evident.
Software
Revenue from software is comprised of software licensing and post-contract
customer support. Software revenue is allocated to the license and support
elements using vendor specific objective evidence of fair value ("VSOE") or, in
the absence of VSOE, the residual method. Revenue allocated to software
licenses is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the price is fixed or determinable and collectibility is
probable ("the four basic criteria"). Revenue allocated to post-contract
support is recognized ratably over the term of the support contract, assuming
the four basic criteria are met.
Financing
Revenue from the sale of equipment under sales-type leases and
direct-financing leases is recognized as product revenue at the inception of
the lease. Associated financing income is earned on an accrual basis under an
effective annual yield method. Prior to 2001, HP recorded financing income as a
component of interest and other, net, along with the interest cost associated
with monies borrowed to fund this financing activity. HP has reclassified
financing income to revenue and financing interest expense to the related cost
of sales to conform to the current year presentation.
Revenue from rentals and operating leases is recognized as the fees accrue.
Revenue Arrangements that Include Multiple Elements
Revenue for transactions that include multiple elements such as hardware,
software, consulting, training, and support agreements is allocated to each
element based on its relative fair value (or in the absence of fair value, the
residual method) and recognized when the revenue recognition criteria have been
met for each element. HP recognizes revenue for delivered elements only when
the following criteria are satisfied: (1) undelivered elements are not
essential to the functionality of delivered elements, (2) uncertainties
regarding customer acceptance are resolved, and (3) the fair value for all
undelivered elements is known.
Shipping and Handling
Costs related to shipping and handling are included in cost of sales for all
periods presented.
50
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
Advertising
Advertising costs are expensed as incurred and amounted to $1.0 billion in
2001, $1.1 billion in 2000 and $1.3 billion in 1999.
Taxes on Earnings
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts using enacted tax rates in effect for
the year the differences are expected to reverse. HP records a valuation
allowance to reduce the deferred tax assets to the amount that is more likely
than not to be recognized.
Cash and Cash Equivalents
HP classifies investments as cash equivalents if the original maturity of an
investment is three months or less from the purchase date.
Inventory
Inventory is valued at the lower of cost or market with cost computed on a
first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Additions, improvements and major renewals are capitalized.
Maintenance, repairs and minor renewals are expensed as incurred. Depreciation
is provided using accelerated methods over the estimated useful lives of the
assets. Estimated useful lives are 15 to 40 years for buildings and
improvements and 3 to 10 years for machinery and equipment. Leasehold
improvements are depreciated using the straight-line method over the life of
the lease or the asset, whichever is shorter. Leased equipment is depreciated
using the straight-line method over the initial term of the operating lease to
its estimated residual value.
Goodwill and Purchased Intangible Assets
Goodwill related to acquisitions prior to July 1, 2001 and purchased
intangible assets are amortized using the straight-line method over the
estimated economic lives of the assets, ranging from two to ten years. Goodwill
related to acquisitions after June 30, 2001 is not amortized.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant and equipment, goodwill and
purchased intangibles, are evaluated for impairment whenever events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable. An impairment loss is recognized when estimated undiscounted
future cash flows expected to result from the use of the asset plus net
proceeds expected from disposition of the asset (if any) are less than the
carrying value of the asset. When an impairment is identified, the carrying
amount of the asset is reduced to its fair value.
Capitalized Software
HP capitalizes certain internal and external costs incurred to acquire or
create internal use software, principally related to software coding, designing
system interfaces, and installation and testing of the software. Capitalized
costs are amortized over three years.
51
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
Derivative Financial Instruments
HP enters into derivative financial instrument contracts to hedge certain
foreign exchange and interest rate exposures. On November 1, 2000, HP adopted
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The cumulative effect of
adopting SFAS 133 was not material to HP's consolidated financial statements.
See Note 8 to the Consolidated Financial Statements for a full description of
HP's hedging activities and related accounting policies.
Investments
HP's investments principally consist of time deposits, municipal securities,
repurchase agreements and other debt securities, as well as equity securities
of public and privately-held companies. Investments with maturities of less
than one year are classified as short-term investments.
Debt securities that HP has the ability and intent to hold until maturity
are accounted for as held-to-maturity securities and are carried at amortized
cost. The remainder of HP's debt securities and its equity investments in
public companies are classified as available-for-sale securities and carried at
fair value. For the majority of available-for-sale securities, unrealized gains
and losses, net of taxes, are recorded in accumulated other comprehensive
income. The remainder of available-for-sale securities are hedged and changes
in fair value of these securities are recognized in earnings and offset by
gains or losses on the related derivative instruments.
Equity investments in privately-held companies are generally carried at
cost. Equity investments in companies over which HP has the ability to exercise
significant influence, but does not hold a controlling interest, are accounted
for under the equity method and HP's proportionate share of income or losses is
recorded in interest and other, net.
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, derivatives and certain other
financial instruments.
HP maintains cash and cash equivalents, short- and long-term investments,
derivatives 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 instruments held
at financial institutions.
HP sells a significant portion of its products through third-party
distributors and resellers and, as a result, maintains individually significant
receivable balances with these parties. If the financial condition or
operations of these distributors and resellers deteriorate substantially, HP's
operating results could be adversely affected. The ten largest distributor and
reseller receivable balances collectively represented 28% of total accounts
receivable at October 31, 2001 and 31% at October 31, 2000. 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 distributors',
resellers' and other customers' financial condition and requires collateral,
such as letters of credit and bank guarantees, in certain circumstances.
52
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
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 revenue, 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 the previously noted balance sheet
amounts, which are remeasured at historical exchange rates. Gains or losses
from foreign currency remeasurement are included in net earnings.
Comprehensive Income
Comprehensive income includes net earnings as well as other comprehensive
income. HP's other comprehensive income consists of unrealized gains and losses
on available-for-sale securities and, effective in fiscal 2001, unrealized
gains and losses on derivative instruments, both recorded net of tax.
Reclassifications
Certain reclassifications have been made to prior year balances in order to
conform to the current year presentation.
Recent Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS 141 requires that all business combinations be
accounted for by the purchase method of accounting and changes the criteria for
recognition of intangible assets acquired in a business combination. The
provisions of SFAS 141 apply to all business combinations initiated after June
30, 2001. HP does not expect that the adoption of SFAS 141 will have a material
effect on its consolidated financial position or results of operations. SFAS
142 requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized; however, these assets must be reviewed at least
annually for impairment. Intangible assets with finite useful lives will
continue to be amortized over their respective useful lives. The standard also
establishes specific guidance for testing for impairment of goodwill and
intangible assets with indefinite useful lives. The provisions of SFAS 142 will
be effective for HP's fiscal year 2003, with early adoption permitted at the
beginning of HP's fiscal year 2002. However, goodwill and intangible assets
acquired after June 30, 2001 are subject immediately to the non-amortization
provisions of SFAS 142. HP is currently in the process of evaluating the
potential impact that the adoption of SFAS 142 will have on its consolidated
financial position and results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 amends existing
accounting guidance on asset impairment and provides a single accounting model
for long-lived assets to be disposed of. Among other provisions, the new rules
change the criteria for classifying an asset as held-for-sale. The standard
also broadens the scope of businesses to be disposed of that qualify for
reporting as discontinued operations, and changes the timing of recognizing
losses on such operations. The provisions of SFAS 144 will be effective for
HP's fiscal year 2003 and will be applied prospectively. HP is currently in the
process of evaluating the potential impact that the adoption of SFAS 144 will
have on its consolidated financial position and results of operations.
53
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Net Earnings Per Share
HP's basic earnings per share ("EPS") is calculated based on net earnings
and the weighted-average number of shares outstanding during the reporting
period. Diluted EPS includes additional dilution from potential issuance of
common stock, such as stock issuable pursuant to the exercise of stock options
outstanding and the conversion of debt. All share and per-share amounts reflect
the retroactive effects of the two-for-one stock split in the form of a stock
dividend effective October 27, 2000.
The following table presents a reconciliation of the numerators and
denominators of the basic and diluted EPS calculations.
For the years ended October 31
In millions, except per share data 2001 2000 1999
- ---------------------------------- ------ ------ ------
Numerator:
Net earnings from continuing operations before
extraordinary item and cumulative effect of change in
accounting principle................................... $ 624 $3,561 $3,104
Adjustment for interest expense on zero-coupon
subordinated convertible notes, net of income tax
effect................................................. 16 31 22
------ ------ ------
Net earnings from continuing operations before
extraordinary item and cumulative effect of change in
accounting principle, adjusted......................... 640 3,592 3,126
Net earnings from discontinued operations................ -- 136 387
Extraordinary item--gain on early extinguishment of
debt, net of taxes..................................... 56 -- --
Cumulative effect of change in accounting principle, net
of taxes............................................... (272) -- --
------ ------ ------
Net earnings, adjusted................................... $ 424 $3,728 $3,513
====== ====== ======
Denominator:
Weighted-average shares used to compute basic EPS........ 1,936 1,979 2,018
Effect of dilutive securities:
Dilutive options and other stock-based awards........ 20 72 65
Zero-coupon subordinated convertible notes........... 18 26 22
------ ------ ------
Dilutive potential common shares......................... 38 98 87
------ ------ ------
Weighted-average shares used to compute diluted EPS...... 1,974 2,077 2,105
====== ====== ======
Basic net earnings per share:
Net earnings from continuing operations before
extraordinary item and cumulative effect of change in
accounting principle................................... $ 0.32 $ 1.80 $ 1.54
Net earnings from discontinued operations................ -- 0.07 0.19
Extraordinary item--gain on early extinguishment of
debt, net of taxes..................................... 0.03 -- --
Cumulative effect of change in accounting principle, net
of taxes............................................... (0.14) -- --
------ ------ ------
Net earnings............................................. $ 0.21 $ 1.87 $ 1.73
====== ====== ======
Diluted net earnings per share:
Net earnings from continuing operations before
extraordinary item and cumulative effect of change in
accounting principle................................... $ 0.32 $ 1.73 $ 1.49
Net earnings from discontinued operations................ -- 0.07 0.18
Extraordinary item--gain on early extinguishment of
debt, net of taxes..................................... 0.03 -- --
Cumulative effect of change in accounting principle, net
of taxes............................................... (0.14) -- --
------ ------ ------
Net earnings............................................. $ 0.21 $ 1.80 $ 1.67
====== ====== ======
54
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Net Earnings Per Share (Continued)
The shares issuable upon exercise of certain of HP's stock options were
excluded from the calculation of diluted net earnings per share because the
exercise price of these options was greater than the average market price of
the common shares for the respective fiscal years, and therefore the effect
would have been antidilutive. The shares issuable upon exercise of such options
that were excluded were 147,583,000 in 2001, 37,666,000 in 2000 and 1,817,000
in 1999.
Note 3: Restructuring Charges
In fiscal 2001, HP's management approved restructuring actions to respond to
the global economic downturn and to improve HP's cost structure by streamlining
operations and prioritizing resources in strategic areas of HP's business. The
company recorded a restructuring charge of $384 million to reflect these
actions. This charge consisted of severance and other employee benefits related
to the planned termination of approximately 7,500 employees worldwide, across
many regions, business functions, and job classes, as well as costs related to
the consolidation of excess facilities. Included as an offset to this charge
was $38 million of related net pension and post-retirement settlement and
curtailment gains. As of October 31, 2001, 5,700 employees were terminated and
HP had paid out $238 million of the accrued costs. HP also made additional
payments of $26 million in fiscal 2001 related to restructuring charges accrued
in fiscal 2000. HP expects to pay out the remainder of the accrual in fiscal
2002.
In fiscal 2000, HP's management approved an enhanced early retirement
("EER") program designed to balance the workforce based on HP's long-term
business strategy. HP offered approximately 2,500 U.S. employees the
opportunity to retire early and receive an enhanced payout, and approximately
1,300 employees accepted the offer. Accordingly, HP recorded a restructuring
charge of $71 million, consisting of $100 million of severance and other
employee benefits offset by $29 million of related pension and post-retirement
settlement and curtailment gains. In addition to the EER program, HP incurred
$31 million of other restructuring charges during fiscal 2000 related to
various site shutdowns resulting from strategic management decisions. In fiscal
2000, HP made payments of $98 million related to the restructuring charges
accrued during the year, of which $95 million was paid through HP's pension
plan based on an amendment to the plan.
As of October 31, 2001, the balance of the accrued restructuring charges
recorded in fiscal 2001 and fiscal 2000 consisted of the following:
Employee Severance Facility
and Other Consolidations
Related Benefits and Other Total
------------------ -------------- -----
(In millions)
Balance at November 1, 1999........... $ -- $ -- $ --
Restructuring charges, net......... 97 5 102
Funded through pension plan........ (95) -- (95)
Cash payments...................... (3) -- (3)
Non-cash gains, net................ 27 (5) 22
----- ---- -----
Balance at October 31, 2000........... 26 -- 26
Restructuring charges, net......... 372 12 384
Cash payments...................... (264) -- (264)
Non-cash gains, net................ 12 -- 12
----- ---- -----
Balance at October 31, 2001........... $ 146 $ 12 $ 158
===== ==== =====
55
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 3: Restructuring Charges (Continued)
Non-cash gains, net, related to employee severance and other related
benefits include net pension and post-retirement settlement and curtailment
gains offset by charges related to stock-based compensation.
Note 4: Net Investment (Losses) Gains
HP's investment portfolio includes equity and debt investments in public and
privately-held emerging technology companies. Many of these emerging technology
companies are still in the start-up or development stage. HP's investments in
these companies are inherently risky because the markets for the technologies
or products they have under development are typically in the early stages and
may never develop.
HP monitors its investment portfolio for impairment on a periodic basis. In
the event that the carrying value of an investment exceeds its fair value and
the decline in value is determined to be other-than-temporary, an impairment
charge is recorded and a new cost basis for the investment is established. Fair
values for investments in public companies are determined using quoted market
prices. Fair values for investments in privately-held companies are estimated
based upon one or more of the following: pricing models using historical and
forecasted financial information and current market rates, liquidation values,
the values of recent rounds of financing, or quoted market prices of comparable
public companies. In order to determine whether a decline in value is
other-than-temporary, HP evaluates, among other factors: the duration and
extent to which the fair value has been less than carrying value; the financial
condition of and business outlook for the company, including key operational
and cash flow metrics, current market conditions and future trends in the
company's industry, and the company's relative competitive position within the
industry; and HP's intent and ability to retain the investment for a period of
time sufficient to allow for any anticipated recovery in fair value.
Due to the economic downturn, the decline in value of certain investments in
emerging technology companies was determined to be other-than-temporary.
Accordingly, HP recorded impairment losses of $471 million on its investments
in both public and private emerging technology companies in fiscal 2001. This
amount was offset by $16 million of realized gains on the sale of equity
securities, resulting in net investment losses of $455 in fiscal 2001. As of
October 31, 2001, the carrying value of the portion of HP's remaining
investment portfolio related to emerging technology companies was $243 million.
Depending on market conditions, HP may incur additional charges on this
investment portfolio in the future.
In fiscal 2000, HP recorded $41 million of net gains on investments,
representing gains on sales of equity investments of $104 million, net of
impairment losses of $63 million. In fiscal 1999, HP recorded $31 million of
realized gains on sales of equity investments.
Note 5: Discontinued Operations
On March 2, 1999, HP announced its intention to launch a new company,
subsequently named 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 was composed of HP's former Measurement
Organization, which included the 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 through the
spin-off date of June 2, 2000.
In November 1999, Agilent Technologies completed an initial public offering
of approximately 16% of its common stock and distributed the net proceeds of
approximately $2.1 billion to HP. HP distributed substantially all of its
remaining interest in Agilent Technologies through a stock dividend to HP
stockholders on June 2, 2000, resulting in a $4.2 billion reduction of retained
earnings.
56
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 5: Discontinued Operations (Continued)
Net earnings from discontinued operations for fiscal 2000 were $136 million.
In the second quarter of fiscal 2000, the cumulative net earnings of Agilent
Technologies since the July 31, 1999 measurement date began to exceed the total
estimated net costs to effect the spin-off. Of the $136 million, net earnings
of Agilent Technologies for the period from the July 31, 1999 measurement date
through the June 2, 2000 spin-off date totaled $287 million (net of related tax
expense of $174 million), and the net costs to effect the spin-off were $151
million (net of related tax benefit of $23 million). Net earnings from
discontinued operations for fiscal year 1999 consisted only of the net earnings
of Agilent Technologies.
Note 6: Acquisitions and Divestitures
Completed Acquisitions
In January 2001, HP acquired all of the outstanding stock of Bluestone
Software, Inc. ("Bluestone") in exchange for HP common stock and options. The
total consideration was $531 million, which included the fair value of HP
common stock issued and options assumed, as well as direct transaction costs.
With this acquisition, HP expanded its Internet software offering by adding
Bluestone's XML-based web application server and tools to its portfolio,
forming the core of HP's middleware offering. The acquisition was recorded
under the purchase method of accounting, and accordingly the purchase price was
allocated to the tangible assets and liabilities and intangible assets
acquired, including in-process research and development, based on their
estimated fair values. The excess purchase price over those fair values was
recorded as goodwill. The fair value assigned to intangible assets acquired was
based on a valuation prepared by an independent third party appraisal firm. HP
recorded approximately $338 million of goodwill and identified intangibles in
conjunction with the transaction. Amortization of the goodwill, which
represents a majority of these intangible assets, will cease upon HP's adoption
of SFAS 142. In addition, HP recorded a pre-tax charge of approximately $19
million for in-process research and development at the time of acquisition in
the first quarter of fiscal 2001 because technological feasibility had not been
established and no future alternative uses existed.
In September 2001, HP acquired all of the outstanding stock of StorageApps
Inc. in exchange for HP common stock and options. The total consideration was
$319 million, which included the fair value of HP common stock issued and
options assumed, as well as direct transaction costs. This acquisition
strengthens HP's storage offering by adding virtualization technology, which is
a key component of HP's Federated Storage Area Management ("FSAM") strategy.
FSAM is designed to give customers the ability to expand storage capacity
without increasing the number of employees, and storage virtualization
technology is designed to allow customers to easily mix and match their storage
needs from different vendors. The acquisition was recorded under the purchase
method of accounting, and accordingly the purchase price was allocated to the
tangible assets and liabilities and intangible assets acquired, including
in-process research and development, based on their estimated fair values. The
excess purchase price over those fair values was recorded as goodwill. The fair
value assigned to intangible assets acquired was based on a valuation prepared
by an independent third party appraisal firm. HP recorded approximately
$296 million of goodwill and identified intangibles in conjunction with the
transaction. The goodwill recorded as a result of this transaction is not
expected to be deductible for tax purposes. In accordance with SFAS 142,
goodwill, which represents the majority of these intangible assets, will not be
amortized but will be reviewed periodically for impairment. In addition, HP
recorded a pre-tax charge of approximately $15 million for in-process research
and development at the time of acquisition in the fourth quarter of fiscal 2001
because technological feasibility had not been established and no future
alternative uses existed.
Results of operations for each of the acquired companies are included
prospectively from the date of acquisition. Pro forma results of operations
reflecting these acquisitions have not been presented because the
57
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6: Acquisitions and Divestitures (Continued)
results of operations of the acquired companies, either individually or
collectively, are not material to HP's results of operations.
HP also acquired other companies during fiscal 2001, 2000 and 1999 that were
not significant to its financial position or results of operations. Each of
these acquisitions was recorded under the purchase method of accounting.
The net book value of goodwill and purchased intangible assets was $756
million at October 31, 2001, of which $297 million is not subject to
amortization in accordance with SFAS 142. The net book value of goodwill and
purchased intangible assets was $224 million at October 31, 2000, and $189
million at October 31, 1999, all of which is subject to amortization until
adoption of SFAS 142. Accumulated amortization related to these assets was
$1,171 million at October 31, 2001, $997 million at October 31, 2000 and $911
million at October 31, 1999. Amortization expense for goodwill and purchased
intangible assets was $174 million in 2001, $86 million in 2000 and $59 million
in 1999.
Pending Acquisitions
In September 2001, HP signed a definitive agreement with Compaq Computer
Corporation ("Compaq") to acquire all of the outstanding stock of Compaq in
exchange for 0.6325 shares of HP common stock for each outstanding share of
Compaq stock and the assumption of options based on the same exchange ratio.
The estimated purchase price is $24 billion, which includes the estimated fair
value of HP common stock issued and options assumed, as well as estimated
direct transaction costs. This estimate was derived using an average market
price per share of HP common stock of $20.92, which was based on an average of
the closing prices for a range of trading days (August 30, August 31, September
4, and September 5, 2001) around the announcement date (September 3, 2001) of
the proposed merger. The final purchase price will be determined based upon the
number of Compaq shares and options outstanding at the closing date. Compaq is
a leading global provider of enterprise technology and solutions. Completion of
the Compaq merger is subject to customary closing conditions that include,
among others, receipt of required approvals from HP's shareowners and from
Compaq shareowners, and receipt of required regulatory approvals. The
transaction, while expected to close in the first half of calendar year 2002,
may not be completed if any of the conditions is not satisfied. Under certain
terms specified in the merger agreement, HP or Compaq may terminate the
agreement, and as a result either HP or Compaq may be required to pay a $675
million termination fee to the other party in certain circumstances. Unless
otherwise indicated, the discussions in this document relate to HP as a
stand-alone entity and do not reflect the impact of the pending business
combination transaction with Compaq.
In September 2001, HP signed a definitive agreement with Indigo N.V.
("Indigo") to commence an exchange offer to acquire all of the outstanding
shares of Indigo not already owned by HP (the "Shares") in exchange for a
combination of shares of HP's common stock and non-transferable contingent
value rights ("CVR") entitling the holder to a one-time contingent cash payment
of up to $4.50 per CVR, based on the achievement by the Indigo business of a
cumulative revenue milestone over a three-year post-closing period. Based on
the terms of the agreement, current assumptions on the quantity of each
consideration alternative, and HP's average closing share price for the 20-day
period ended December 31, 2001, the estimated consideration to acquire the
Shares is approximately $720 million plus approximately 56 million CVRs. The
$720 million consideration amount includes the estimated fair value of HP
common stock issued and options and warrants assumed, as well as estimated
direct transaction costs. The future cash pay-out, if any, of the CVRs will be
determined and payable after a three-year period commencing shortly after the
closing of the exchange offer. Indigo is a leading provider of high performance
digital color printing. The completion of this transaction is subject to the
tender for exchange of that number of Indigo shares which, when added to Indigo
shares currently
58
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6: Acquisitions and Divestitures (Continued)
owned by HP, will constitute at least 95% of Indigo's outstanding shares, the
receipt of required regulatory approvals and customary closing conditions. The
transaction, while expected to close in the first half of calendar year 2002,
may not be completed if any of the conditions is not satisfied.
Completed Divestitures
In fiscal 2001, the net loss from divestitures was $53 million, consisting
of a $131 million loss on the sale of the VeriFone, Inc. subsidiary, primarily
offset by a gain of $78 million on the sale of HP's remaining interest in a
joint venture to the other joint owner.
In fiscal 2000, the net gain from divestitures was $203 million, consisting
of the gains on the sale of non-strategic businesses, as well as the gain from
the sale of part of HP's interest in the same joint venture to the other joint
owner.
Note 7: Balance Sheet Details
Accounts Receivable
October 31,
--------------
2001 2000
------ ------
(In millions)
Accounts receivable........................................ $4,763 $6,565
Allowance for doubtful accounts............................ (275) (171)
------ ------
$4,488 $6,394
====== ======
Inventory
October 31,
-------------
2001 2000
------ ------
(In millions)
Finished goods............................................. $3,705 $4,251
Purchased parts and fabricated assemblies.................. 1,499 1,448
------ ------
$5,204 $5,699
====== ======
Property, Plant and Equipment
October 31,
----------------
2001 2000
------- -------
(In millions)
Land....................................................... $ 323 $ 346
Buildings and leasehold improvements....................... 3,732 3,644
Machinery and equipment.................................... 5,753 5,515
------- -------
9,808 9,505
Accumulated depreciation................................... (5,411) (5,005)
------- -------
$ 4,397 $ 4,500
======= =======
Depreciation expense was $1,195 million in 2001, $1,155 million in 2000 and
$1,087 million in 1999.
59
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 7: Balance Sheet Details (Continued)
Long-Term Investments and Other Assets
October 31,
-------------
2001 2000
------ ------
(In millions)
Financing receivables...................................... $2,169 $2,415
Investments................................................ 2,144 2,622
Goodwill and purchased intangibles......................... 756 224
Deferred tax assets........................................ 880 501
Other...................................................... 933 503
------ ------
$6,882 $6,265
====== ======
Note 8: Financial Instruments
Investments in Debt and Equity Securities
Investments in held-to-maturity and available-for-sale debt and equity
securities were as follows at October 31:
2001 2000
------------------------------------ --------------------------------------
Gross Gross Estimated Gross Gross Estimated
Unrealized Unrealized Fair Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ---------- ---------- --------- ------ ---------- ---------- ---------
(In millions)
Held-to-Maturity Securities (carried at
amortized cost):
Municipal securities..................... $ -- $-- $ -- $ -- $ 167 $ -- $ (6) $ 161
U.S. government and agency securities.... -- -- -- -- 12 -- -- 12
Repurchase agreements.................... -- -- -- -- 260 -- (2) 258
Time deposits............................ 94 -- -- 94 352 -- -- 352
Other debt securities.................... 72 -- -- 72 315 1 (2) 314
---- --- ---- ---- ------ ---- ---- ------
166 -- -- 166 1,106 1 (10) 1,097
---- --- ---- ---- ------ ---- ---- ------
Available-for-Sale Securities (carried at
fair value):
Debt securities:
Municipal securities................... 168 2 (1) 169 -- -- -- --
U.S. government and agency securities.. 12 -- -- 12 -- -- -- --
Repurchase agreements.................. 120 9 -- 129 -- -- -- --
Other debt securities.................. 201 11 -- 212 -- -- -- --
---- --- ---- ---- ------ ---- ---- ------
Total debt securities.................... 501 22 (1) 522 -- -- -- --
Equity securities in public companies.... 129 29 (10) 148 176 216 (64) 328
---- --- ---- ---- ------ ---- ---- ------
630 51 (11) 670 176 216 (64) 328
---- --- ---- ---- ------ ---- ---- ------
$796 $51 $(11) $836 $1,282 $217 $(74) $1,425
==== === ==== ==== ====== ==== ==== ======
The fair values were estimated based on quoted market prices or pricing
models using current market rates. These 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.
Other debt securities consist primarily of collateralized notes with banks
and corporate debt securities.
In connection with the adoption of SFAS 133 on November 1, 2000, HP elected
to reclassify investments in debt securities with a net book value of $967
million from held-to-maturity to available-for-sale. The unrealized
60
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 8: Financial Instruments (Continued)
loss on these securities, net of taxes, was $5 million at the time of the
reclassification and was recorded in accumulated other comprehensive income as
part of the cumulative effect of adopting SFAS 133.
Contractual maturities of held-to-maturity and available-for-sale debt
securities at October 31, 2001 were as follows:
Held-to-Maturity Available-for-Sale
Securities Securities
---------------- ------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
(In millions)
Due in less than one year.............. $103 $103 $ 35 $ 36
Due in 1-5 years....................... 63 63 445 465
Due in 5-10 years...................... -- -- 12 12
Due after 10 years..................... -- -- 9 9
---- ---- ---- ----
$166 $166 $501 $522
==== ==== ==== ====
Proceeds from sales of available-for-sale securities were $17 million in
2001, $100 million in 2000 and $31 million in 1999. The gross realized gains
totaled $16 million in 2001, $94 million in 2000 and $31 million in 1999. The
specific identification method is used to account for gains and losses on
available-for-sale securities.
A summary of the carrying values and balance sheet classification of all
investments in debt and equity securities including held-to-maturity and
available-for-sale securities disclosed above was as follows at October 31:
2001 2000
- - ------ ------
(In millions)
Held-to-maturity debt securities...................... $ 103 $ 592
Available-for-sale debt securities.................... 36 --
------ ------
Short-term investments............................. 139 592
------ ------
Held-to-maturity debt securities...................... 63 514
Available-for-sale debt securities.................... 486 --
Available-for-sale equity securities.................. 148 328
Equity securities in privately-held companies......... 1,447 1,780
------ ------
Included in long-term investments and other assets. 2,144 2,622
------ ------
Total investments..................................... $2,283 $3,214
====== ======
Derivative Financial Instruments
On November 1, 2000, HP adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." SFAS 133, as
amended, requires that all derivative instruments be recognized on the balance
sheet at fair value. In addition, the standard specifies criteria for
designation and effectiveness of hedging relationships and establishes
accounting rules for reporting changes in the fair value of a derivative
depending on the designated type of hedge. The cumulative effect of the
adoption of SFAS 133 as of November 1, 2000 was not material to HP's
consolidated financial statements.
HP is exposed to foreign currency exchange rate fluctuations and interest
rate changes in the normal course of its business. As part of HP's risk
management strategy, the company uses derivative instruments, including
forwards, swaps and purchased options, to hedge certain foreign currency and
interest rate exposures. HP's
61
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 8: Financial Instruments (Continued)
objective is to offset gains and losses resulting from these exposures with
gains and losses on the derivative contracts used to hedge them, thereby
reducing volatility of earnings or protecting fair values of assets and
liabilities. HP does not enter into any trading or speculative positions with
regard to derivative instruments. Based upon the criteria established by SFAS
133, HP designates most of its derivatives as either fair value hedges or cash
flow hedges.
HP enters into fair value hedges to reduce the exposure of its debt and
investment portfolios to both interest rate risk and foreign currency exchange
rate risk. The company 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. In order to hedge
the fair value of certain fixed-rate investments, HP periodically enters into
interest rate swaps that convert fixed interest returns into variable interest
returns.
HP uses a combination of forwards and purchased options designated as cash
flow hedges to protect against the foreign currency exchange rate risks
inherent in its forecasted revenues and cost of sales denominated in currencies
other than the U.S. dollar. HP's cash flow hedges generally mature within six
months.
Derivatives not designated as hedging instruments under SFAS 133 consist
primarily of forwards used to hedge foreign currency balance sheet exposures
and warrants in companies acquired as part of strategic relationships. The
foreign currency forward contracts are not designated as hedges under SFAS 133,
but represent natural hedging instruments as their related gains and losses
naturally offset foreign currency changes in the fair values of the underlying
assets and liabilities.
For derivative instruments that are designated and qualify as fair value
hedges, the gain or loss on the derivative instrument, as well as the
offsetting gain or loss on the hedged item, is recognized in earnings in the
current period. Any ineffective portion of the hedge is reflected in interest
income or expense for hedges of interest rate risk and in other income or
expense for hedges of foreign currency risk. For derivative instruments that
are designated and qualify as cash flow hedges, the effective portion of the
gain or loss on the derivative instrument is initially recorded in accumulated
other comprehensive income as a separate component of stockholders' equity and
subsequently reclassified into earnings in the period during which the hedged
transaction is recognized in earnings. The ineffective portion of the gain or
loss is reported in other income or expense immediately. The effective portion
of all derivatives designated as hedges is reported in the same financial
statement line item as the changes in fair value of the hedged item. For
derivative instruments not designated as hedging instruments under SFAS 133,
changes in the fair values are recognized in earnings in the period of change.
The gains and losses on foreign currency forward contracts used to hedge
balance sheet exposures are recognized in other income and expense in the same
period as the remeasurement gain and loss of the related foreign currency
denominated assets and liabilities and thus naturally offset these gains and
losses. Warrants that contain net settlement provisions or are readily
convertible to cash are recorded at fair value with changes in fair value
recognized in other income and expense in the period of change.
For foreign currency option and forward contracts, designated as cash flow
or fair value hedges, hedge effectiveness is measured by comparing the
cumulative change in the fair value of the hedge contract with the cumulative
change in the fair value of the hedged item, both of which are based on forward
rates. For interest rate swaps designated as fair value hedges, the critical
terms of the interest rate swap and hedged item are designed to match up when
possible, enabling the short-cut method of accounting as defined by SFAS 133.
As of October 31,
62
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 8: Financial Instruments (Continued)
2001, no amounts were excluded from the assessment of hedge effectiveness.
Hedge ineffectiveness was not material in the year ended October 31, 2001. In
addition, during fiscal 2001, HP did not discontinue any cash flow hedges for
which it was probable that a forecasted transaction would not occur.
HP estimates the fair values of derivatives based on quoted market prices or
pricing models using current market rates, and records all derivatives on the
balance sheet at fair value. At October 31, 2001, the net fair value of
interest-rate-related derivatives designated as fair value hedges of debt and
investment instruments was $250 million, of which $255 million was recorded in
long-term investments and other assets and $5 million in other accrued
liabilities. The net fair value of foreign currency-related derivatives
designated as cash flow hedges or fair value hedges was $174 million. Of this
amount, $99 million was recorded in other current assets, $142 million in
long-term investments and other assets, $64 million in other accrued
liabilities and $3 million in other liabilities. At October 31, 2001 HP also
had $(31) million in net fair value of derivatives that were not designated as
hedges, of which $44 million was recorded in other current assets, $69 million
in other accrued liabilities and $6 million in other liabilities.
At October 31, 2000, the estimated net fair value of all interest-rate and
foreign currency-related derivatives amounted to $337 million. Prior to the
adoption of SFAS 133 on November 1, 2000, a significant portion of these
derivative financial instruments were not recorded on the balance sheet.
As of October 31, 2001, HP had approximately $22 million of net unrealized
gains on derivative instruments, after taxes, classified in accumulated other
comprehensive income. HP estimates that $17 million of net unrealized gains
after taxes will be reclassified into earnings within one year.
Fair Value of Other Financial Instruments
For certain of HP's financial instruments, including cash and cash
equivalents, short-term investments, accounts receivable, notes payable and
short-term borrowings, accounts payable and other accrued liabilities, the
carrying amounts approximate fair value due to their short maturities. The
estimated fair value of HP's long-term debt was $3.5 billion at October 31,
2001, compared to a carrying value of $3.7 billion. The estimated fair value of
the debt is based primarily on quoted market prices, as well as borrowing rates
currently available to HP for bank loans with similar terms and maturities.
Note 9: Financing Receivables and Operating Leases
Financing receivables represent sales-type and direct-financing leases
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, were as follows at October 31:
2001 2000
------- -------
(In millions)
Minimum lease payments receivables......................... $ 4,574 $ 4,805
Allowance for doubtful accounts............................ (147) (69)
Unguaranteed residual value................................ 418 426
Unearned income............................................ (493) (573)
------- -------
Financing receivables, net................................. 4,352 4,589
Less current portion....................................... (2,183) (2,174)
------- -------
Amounts due after one year, net............................ $ 2,169 $ 2,415
======= =======
63
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: Financing Receivables and Operating Leases (Continued)
Scheduled maturities of HP's minimum lease payments receivable at October
31, 2001 were $2,427 million in 2002, $1,396 million in 2003, $531 million in
2004, $121 million in 2005, $47 million in 2006 and $52 million thereafter.
Actual cash collections may differ due primarily to customer early buy-outs and
refinancings.
HP also leases its products to customers under operating leases. Equipment
under lease was $1,410 million at October 31, 2001 and $1,477 million at
October 31, 2000 and is included in machinery and equipment. Accumulated
depreciation on equipment under lease was $752 million at October 31, 2001 and
$687 million at October 31, 2000. Minimum future rentals on non-cancelable
operating leases are $667 million in 2002, $205 million in 2003, $66 million in
2004, $13 million in 2005, $3 million in 2006 and $6 million thereafter.
Note 10: Borrowings
Notes payable and short-term borrowings and the related average interest
rates were as follows as of and for the years ended October 31:
2001 2000
-------------- --------------
Average Average
Interest Interest
Amount Rate Amount Rate
------ -------- ------ --------
(Dollars in millions)
Current portion of long-term debt................ $ 104 6.6% $ 202 5.5%
Notes payable to banks........................... 666 3.5% 1,353 6.8%
Commercial paper................................. 952 2.4% -- --
------ ------
$1,722 $1,555
====== ======
HP has a committed borrowing facility in place with a borrowing capacity
totaling $1.0 billion. This facility expires in April 2002 and bears interest
at LIBOR plus 0.15%. There were no borrowings outstanding under this facility
as of October 31, 2001 or October 31, 2000.
Long-term debt and related maturities and interest rates were as follows at
October 31:
2001 2000
------ ------
(In millions)
U.S. dollar Global Notes, due 2005 at 7.15%................ $1,496 $1,495
Euro Medium-Term Notes, due 2006 at 5.25%.................. 673 --
U.S. dollar zero-coupon subordinated convertible notes, due
2017 imputed at 3.13%.................................... 465 1,176
Notes payable, multiple currencies, due 2001-2005 at
3.51%-7.90%.............................................. 528 526
Other...................................................... 416 407
Fair value adjustment related to SFAS 133.................. 255 --
Less current portion....................................... (104) (202)
------ ------
$3,729 $3,402
====== ======
In February 2000, HP filed a shelf registration statement with the SEC to
register $3.0 billion of debt securities, common stock, preferred stock,
depositary shares and warrants. The registration statement was declared
effective in March 2000. In June 2000, HP offered under this shelf registration
statement $1.5 billion of unsecured 7.15% Global Notes, which mature on June
15, 2005 unless previously redeemed. In May 2001, HP filed a prospectus
supplement to the registration statement, which allowed HP to offer from time
to time up to $1.5 billion of Medium-Term Notes, Series A, due nine months or
more from the date of issue, in addition to the other types of securities
described above. During fiscal 2001, HP issued an aggregate of $210 million of
64
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10: Borrowings (Continued)
Medium-Term Notes with a weighted average interest rate of 3.67% maturing in
2003 and 2004 under the registration statement. As of October 31, 2001, HP had
the remaining capacity to issue approximately $1.3 billion of securities under
the shelf registration statement. See Note 19 to the Consolidated Financial
Statements for a discussion of a debt issuance under this registration
statement subsequent to October 31, 2001.
HP and Hewlett-Packard Finance Company, a wholly-owned subsidiary of HP
("HPFC"), have the ability to offer from time to time up to $3.0 billion of
Medium-Term Notes under a Euro Medium-Term Note Programme filed with the
Luxembourg Stock Exchange. These notes can be denominated in any currency
including the euro. However, these notes have not been and will not be
registered in the United States. In July 2001, 750 million euro (or 636 million
U.S. dollars based on the exchange rate on the date of issuance) of 5.25%
Medium-Term Notes maturing on July 5, 2006 were issued under this program. As
of October 31, 2001, HP and HPFC had the remaining capacity to issue
approximately $2.3 billion of Medium-Term Notes under the program.
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. The notes are convertible by the
holders at the rate of 15.09 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 election. At
any time, HP may redeem the notes at book value, payable in cash only. The
notes are subordinated to all other existing and future senior indebtedness of
HP. In December 2000, the Board of Directors authorized a repurchase program
for the notes. Under the repurchase program, HP may repurchase the notes from
time to time at varying prices. In fiscal 2001, HP repurchased $1.2 billion in
face value of the notes with a book value of $729 million, resulting in an
extraordinary gain on the early extinguishment of debt of $56 million (net of
related taxes of $33 million). As of October 31, 2001, the notes had a
remaining book value of $465 million.
Aggregate future maturities of the face value of the long-term debt
outstanding at October 31, 2001 (excluding the fair value adjustment related to
SFAS 133 of $255 million and discounts on debt issuances totaling $300 million)
are $104 million in 2002, $261 million in 2003, $264 million in 2004, $1,750
million in 2005, $737 million in 2006 and $762 million thereafter. HP
occasionally repurchases its debt prior to maturity based on its assessment of
current market conditions and financing alternatives.
Note 11: Taxes on Earnings
The provision for income taxes on earnings from continuing operations before
extraordinary item, cumulative effect of change in accounting principle and
taxes was composed of the following for the years ended October 31:
2001 2000 1999
------- ------ ------
(In millions)
U.S. federal taxes:
Current............................................ $ (178) $ 740 $ 91
Deferred........................................... (1,038) (634) (62)
Non-U.S. taxes:
Current............................................ 1,239 928 1,126
Deferred........................................... 41 (19) (103)
State taxes........................................... 14 49 38
------- ------ ------
$ 78 $1,064 $1,090
======= ====== ======
65
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 11: Taxes on Earnings (Continued)
The significant components of deferred tax assets and deferred tax
liabilities were as follows at October 31:
2001 2000
-------------------- --------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
(In millions)
Inventory........................................ $ 281 $ -- $ 632 $ 2
Fixed assets..................................... 138 7 101 2
Warranty......................................... 291 -- 382 --
Employee and retiree benefits.................... 474 160 490 84
Intracompany sales............................... 2,248 -- 1,433 --
Unremitted earnings of foreign subsidiaries...... -- 874 -- 347
Credits and net operating loss carryforwards..... 1,160 -- -- --
Other............................................ 490 90 258 99
------ ------ ------ ----
Gross deferred tax assets and liabilities........ 5,082 1,131 3,296 534
Valuation allowance.............................. (74) -- -- --
------ ------ ------ ----
Total deferred tax assets and liabilities........ $5,008 $1,131 $3,296 $534
====== ====== ====== ====
The current portion of the deferred tax asset, which is included in other
current assets, was $3,073 million at October 31, 2001 and $2,607 million at
October 31, 2000.
Approximately $25 million of the valuation allowance for deferred tax assets
as of October 31, 2001 was attributable to pre-acquisition tax attributes of
acquired companies. If HP determines that it will realize these tax attributes
in the future, the related reduction in the valuation allowance will reduce
goodwill instead of the provision for taxes.
At October 31, 2001, HP had federal net operating tax loss carryforwards of
approximately $1.5 billion, and federal tax credit carryforwards of
approximately $636 million. The net operating loss and approximately
$406 million of the credit carryforwards will expire beginning in 2007 through
2022 if not utilized. Alternative minimum tax credit carryforwards of
approximately $230 million have an unlimited carryforward period.
Tax benefits of $16 million in 2001, $495 million in 2000 and $289 million
in 1999 associated with the exercise of employee stock options and other
employee stock programs were allocated to stockholders' equity.
The differences between the U.S. federal statutory income tax rate and HP's
effective tax rate were as follows for the years ended October 31:
2001 2000 1999
----- ----- -----
U.S. federal statutory income tax rate................ 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit........ 1.4 0.7 0.7
Lower rates in other jurisdictions, net............... (43.0) (13.4) (10.3)
Goodwill.............................................. 7.5 0.5 0.4
Acquired in-process research and development.......... 1.8 -- --
Valuation allowance................................... 7.0 -- --
Other, net............................................ 1.4 0.2 0.2
----- ----- -----
11.1% 23.0% 26.0%
===== ===== =====
66
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 11: Taxes on Earnings (Continued)
The domestic and foreign components of earnings (losses) from continuing
operations before extraordinary item, cumulative effect of change in accounting
principle and taxes were as follows for the years ended October 31:
2001 2000 1999
------- ------ ------
(In millions)
U.S........................................................ $(2,570) $1,547 $1,370
Non-U.S.................................................... 3,272 3,078 2,824
------- ------ ------
$ 702 $4,625 $4,194
======= ====== ======
HP has not provided for U.S. federal income and foreign withholding taxes on
$13.2 billion of undistributed earnings from non-U.S. and Puerto Rican
operations as of October 31, 2001 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 $457 million ($0.24 per share) in 2001, $969
million ($0.49 per share) in 2000 and $690 million ($0.34 per share) in 1999.
The Internal Revenue Service ("IRS") has completed its examination of HP's
income tax returns for all years through 1995. As of October 31, 2001, the IRS
was in the process of examining HP's income tax returns for years 1996 through
1998. In November 2001, the IRS commenced its examination of returns for years
1999 and 2000. HP believes that adequate accruals have been provided for all
years.
Note 12: Stockholders' Equity
Stock Split
On August 16, 2000, HP's Board of Directors approved a two-for-one stock
split in the form of a stock dividend. On October 27, 2000, HP distributed one
additional share of HP common stock for every share of common stock outstanding
to stockholders of record as of the close of business on September 27, 2000.
The par value of HP's common stock after the split remained at $0.01 per share,
and additional paid-in capital was reduced by the par value of the additional
common shares issued. The rights of the holders of these securities were not
otherwise modified. All shares, per-share and market price data related to HP's
common shares outstanding and under employee stock plans reflect the
retroactive effects of this stock split.
Authorized Common Stock
At the Annual Meeting of Shareowners held on February 27, 2001, HP
stockholders approved an amendment of HP's Certificate of Incorporation to
increase the number of authorized shares of common stock to 9.6 billion shares.
As of October 31, 2000, HP had 4.8 billion shares of authorized common stock.
Authorized Preferred Stock and Preferred Share Purchase Rights Plan
HP has 300,000,000 authorized shares of preferred stock. On August 31, 2001,
HP classified 4,500,000 of these shares as Series A Participating Preferred
Stock in conjunction with HP's adoption of a stockholder rights
67
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 12: Stockholders' Equity (Continued)
plan as of that date. The stockholder rights plan provides for the issuance of
one preferred share purchase right for each share of HP common stock held of
record as of the close of business on September 17, 2001. Each preferred share
purchase right confers the right to purchase one one-thousandth of a share of
HP's Series A Participating Preferred Stock at a purchase price of $180.00,
subject to adjustment, under certain circumstances. The rights are not
currently exercisable. Under certain conditions involving an acquisition or
proposed acquisition by any person or group of 15% or more of HP's common
stock, the purchase rights will become exercisable. Upon exercise, the holder
of the purchase right will also have the right to receive HP common stock
having a value equal to two times the purchase price. At any time after a
person or group has acquired 15% or more of HP's common stock, but less than
50% of the common stock, HP's Board of Directors may exchange the purchase
rights, in whole or in part, at an exchange ratio of one common share per
purchase right, as adjusted to reflect any stock split, stock dividend or
similar transaction. The Board of Directors, under certain conditions, also may
redeem the purchase rights in whole, but not in part, at a price of $0.001 per
purchase right. The purchase rights have no voting privileges and are attached
to and automatically trade with HP common stock until the occurrence of
specified triggering events. The rights will expire on the earlier of September
17, 2011 or the date of their redemption or exchange.
Dividends
The stockholders of HP common stock are entitled to receive dividends when
and as declared by HP's Board of Directors. Dividends are paid quarterly.
Dividends were $0.32 per share in each of fiscal 2001, 2000 and 1999.
Agilent Technologies Spin-Off
On June 2, 2000 ("the distribution date"), HP distributed substantially all
of its remaining interest in Agilent Technologies through a stock dividend to
HP stockholders of record as of the close of business on May 2, 2000. This
distribution was made in the amount of 0.3814 share of Agilent Technologies
common stock for each outstanding share of HP common stock. The decrease in the
intrinsic value of HP's employee stock plans attributable to the distribution
of Agilent Technologies was restored in accordance with the methodology set
forth in the FASB EITF Issue No. 90-9, "Changes to Fixed Employee Stock Option
Plans as a Result of Equity Restructuring." Accordingly, the number of HP
employee options and shares of restricted stock not yet released (including
unvested matching shares under the Employee Stock Purchase Plan ("ESPP"))
outstanding on May 2, 2000 were increased and, in the case of options, the
exercise prices were correspondingly decreased to reflect the decline in
intrinsic value on the distribution date. Holders of options that were
exercised and shares of restricted stock which were released prior to May 2,
2000 received shares of Agilent Technologies in connection with the spin-off.
Employee Stock Purchase Plan
Effective November 1, 2000, HP adopted a new employee stock purchase plan
(referred to as the Share Ownership Plan) approved by HP's Board of Directors
and stockholders. This is a noncompensatory plan that qualifies under Section
423 of the Internal Revenue Code of 1986, as amended. Under the plan, any
regular full-time or part-time employee may contribute up to 10% of base
compensation (subject to certain income limits) to the semi-annual purchase of
shares of HP's common stock. The purchase price is 85% of the fair market value
at certain plan-defined dates. At October 31, 2001, approximately 87,000
employees were eligible to participate and approximately 54,000 employees were
participants in the plan. In fiscal 2001, employee participants purchased
5,868,000 shares of HP common stock under the plan at a weighted-average price
of $24 per share.
68
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 12: Stockholders' Equity (Continued)
As of October 31, 2000 employees no longer may make contributions to HP's
prior ESPP. Under the prior ESPP, eligible company employees could generally
contribute up to 10% of their base compensation to the quarterly purchase of
shares of HP's common stock. Employee contributions to purchase shares were
partially matched with shares contributed by HP, which generally vested over
two years. The unvested matching shares for stock purchased up to and including
October 31, 2000 will continue to vest over the two-year vesting period as is
consistent with the terms of the plan. HP contributed to employees 615,000
matching shares at a weighted-average price of $47 in 2001 related to shares
purchased by employees for the last quarterly purchase period in fiscal 2000.
HP contributed to employees, including persons who became employees of Agilent
Technologies, 2,534,000 matching shares at a weighted-average price of $50 in
2000 and 3,622,000 matching shares at a weighted-average price of $39 in 1999.
On the distribution date, 569,000 shares of HP stock held by Agilent
Technologies employees were forfeited. Agilent Technologies replaced the
forfeited HP shares with shares of Agilent Technologies stock of equivalent
value. Compensation expense recognized under the plan related to continuing
operations was $74 million in 2001, $89 million in 2000 and $99 million in 1999.
Incentive Compensation Plans
HP has four principal stock option plans, adopted in 1985, 1990, 1995 and
2000, under which stock options are outstanding. 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 and
the 2000 Stock Plan, the Compensation Committee of the Board of Directors, in
certain cases, may choose to establish a discounted exercise price at no less
than 75% of fair market value on the grant date. HP granted 4,177,000 shares of
discounted options in 2001, 5,151,000 shares in 2000 and 2,754,000 shares in
1999. Options generally vest at a rate of 25% per year over a period of four
years from the date of grant, with the exception of discounted options.
Discounted options generally may not be exercised until the third or fifth
anniversary of the option grant date, at which time such options become fully
vested. The cost of the discounted options, determined to be the difference
between the exercise price of the option and the fair market value of HP's
common stock on the date of the option grant, is expensed ratably over the
option vesting period.
The following table summarizes option activity for the years ended October
31:
2001 2000 1999
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(In thousands) Price (In thousands) Price (In thousands) Price
-------------- --------- -------------- --------- -------------- ---------
Outstanding at beginning of year... 163,125 $36 115,582 $24 104,146 $17
Granted............................ 65,628 29 85,412 51 37,673 38
Additional options granted to
compensate for loss in intrinsic
value due to Agilent Technologies
spin-off......................... -- -- 28,767 19 -- --
Assumed through acquisitions....... 5,415 26
Exercised.......................... (7,610) 11 (34,496) 13 (23,521) 11
Forfeited/Cancelled................ (9,117) 41 (32,140) 24 (2,716) 28
------- ------- -------
Outstanding at end of year......... 217,441 35 163,125 36 115,582 24
======= ======= =======
Exercisable at year-end............ 84,281 $28 51,404 $18 52,196 $15
======= ======= =======
69
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 12: Stockholders' Equity (Continued)
The following table summarizes information about options outstanding at
October 31, 2001:
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Weighted- Weighted-
Number Weighted-Average Average Number Average
Outstanding Remaining Exercise Exercisable Exercise
Range Of Exercise Prices (In thousands) Contractual Life Price (In thousands) Price
- ------------------------ -------------- ---------------- --------- -------------- ---------
$0-15............. 20,802 2.9 years $ 9 19,148 $ 9
$16-30............ 102,052 7.4 26 38,161 24
$31-45............ 23,903 7.8 37 7,808 38
$46-60............ 64,393 8.0 53 17,458 52
$61 and over...... 6,291 8.3 65 1,706 70
------- ------
217,441 7.2 35 84,281 28
======= ======
Under the 1985 Incentive Compensation Plan, the 1990 and 1995 Incentive
Stock Plans and the 2000 Stock Plan, certain employees were granted cash or
restricted stock awards. Cash and restricted stock awards are independent of
option grants and are subject to restrictions considered appropriate by the
Compensation Committee. The majority of the shares of restricted stock
outstanding at October 31, 2001 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. HP had 2,501,000 shares of restricted stock
outstanding at October 31, 2001, 6,079,000 shares outstanding at October 31,
2000 and 10,054,000 shares outstanding at October 31, 1999.
Shares available for option and restricted stock grants were 169,906,000 at
October 31, 2001, 234,071,000 at October 31, 2000 and 54,035,000 at October 31,
1999. All regular employees were considered eligible to receive stock options
in fiscal 2001. There were approximately 84,000 employees holding options under
one or more of the option plans as of October 31, 2001.
Compensation expense recognized under incentive compensation plans related
to continuing operations was $90 million in 2001, $149 million in 2000 and $77
million in 1999.
Information presented above regarding the incentive compensation plans
includes activity related to Agilent Technologies employees through the
distribution date, except as noted. Under the existing terms of the stock
option plans, substantially all stock options held by Agilent Technologies
employees were cancelled and replaced with Agilent Technologies stock options,
or became fully vested on the distribution date. The fully vested options, if
not exercised, expired within three months from the distribution date. A total
of 25,543,000 options held by Agilent Technologies employees were cancelled and
replaced with Agilent Technologies stock options. On the distribution date,
812,000 options became fully vested and of this amount, 91,000 options expired
three months from that date. A total of 1,177,000 shares of HP restricted stock
held by Agilent Technologies employees were forfeited and cancelled on or
before the distribution date and were replaced with shares of Agilent
Technologies stock of equivalent value.
Pro Forma Information
HP applies the intrinsic-value-based method prescribed by APB 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.
70
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 12: Stockholders' Equity (Continued)
HP has determined pro forma net earnings and earnings per share information,
as required by SFAS 123, "Accounting for Stock-Based Compensation," as if HP
had accounted for employee stock options 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:
2001 2000 1999
------- ------- -------
Risk-free interest rate.................................... 5.10% 6.88% 5.53%
Dividend yield............................................. 1.4% 0.7% 1.0%
Volatility................................................. 39% 34% 30%
Expected option life....................................... 7 years 7 years 7 years
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the four-year average vesting period of
the options. The weighted-average fair value of options granted during the year
was $12.30 in 2001, $24.40 in 2000 and $15.46 in 1999. HP's pro forma net
earnings (loss) from continuing operations before extraordinary item and
cumulative effect of change in accounting principle was $(65) million in 2001,
$3.2 billion in 2000 and $3.0 billion in 1999. Pro forma diluted net earnings
(loss) per share from continuing operations before extraordinary item and
cumulative effect of change in accounting principle was $(0.03) in 2001, $1.54
in 2000 and $1.43 in 1999.
Shares Reserved
HP had 500,036,000 shares of common stock reserved at October 31, 2001 and
511,845,000 shares reserved at October 31, 2000 for future issuance under
employee benefit plans and employee stock plans. Additionally, HP had
21,495,000 shares reserved at October 31, 2001 and 21,503,000 shares reserved
at October 31, 2000 for future issuances related to conversions of zero-coupon
subordinated notes.
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 a
separate incremental plan. These plans authorize purchases in the open market
or in private transactions. At October 31, 2000, HP had authorization for
future repurchases of $868 million of common stock under the two programs. In
November 2000, the Board of Directors authorized an additional $2.0 billion of
future repurchases under these two programs in the aggregate. In fiscal 2001,
45,036,000 shares were repurchased for an aggregate price of $1.2 billion. As
of October 31, 2001, HP had authorization for remaining future repurchases
under the two programs of approximately $1.6 billion. In fiscal 2000,
96,978,000 shares were repurchased for $5.6 billion and 62,084,000 shares were
repurchased for $2.6 billion in fiscal 1999.
71
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13: Comprehensive Income
The changes in the components of other comprehensive income, net of taxes,
were as follows for the years ended October 31:
2001 2000 1999
---- ------ ------
(In millions)
Net earnings................................................ $408 $3,697 $3,491
Net unrealized gains (losses) on available-for-sale
securities:
Change in net unrealized gains (losses) on
available-for-sale securities, net of tax benefit of
$34 in 2001 and taxes of $119 in 2000.................. (58) 187 --
Net unrealized gains reclassified into earnings, net of
tax benefit of $9 in 2001 and $60 in 2000.............. (16) (94) --
---- ------ ------
(74) 93 --
---- ------ ------
Net unrealized gains on derivative instruments:
Change in net unrealized gains on derivative
instruments, net of taxes of $31 in 2001............... 64 -- --
Net unrealized gains reclassified into earnings, net of
tax benefit of $18 in 2001............................. (42) -- --
---- ------ ------
22 -- --
---- ------ ------
Comprehensive income........................................ $356 $3,790 $3,491
==== ====== ======
The components of accumulated other comprehensive income, net of taxes, were
as follows at October 31:
2001 2000
---- ----
(In millions)
Net unrealized gains on available-for-sale securities........... $19 $93
Net unrealized gains on derivative instruments.................. 22 --
--- ---
Accumulated other comprehensive income.......................... $41 $93
=== ===
Note 14: Supplemental Cash Flow Information
Years ended October 31,
-----------------------
2001 2000 1999
------ ------ ------
(In millions)
Cash paid for income taxes, net............................ $1,159 $1,063 $1,770
Cash paid for interest..................................... 266 198 224
Non-cash transactions:.....................................
Net issuances (forfeitures) of common stock for
employee benefit plans:
Restricted stock and other.......................... (8) (96) 164
Employer matching contributions for 401(k) and
employee stock purchase plans..................... 47 89 65
Issuance of common stock and options assumed
related to business acquisitions...................... 840 -- --
Note 15: Retirement and Post-Retirement Benefit Plans
General
Substantially all of HP's employees are covered under various pension and
deferred profit-sharing retirement plans. In addition, HP sponsors health care
and life insurance plans that provide benefits to retired U.S. employees.
72
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Retirement and Post-Retirement Benefit Plans (Continued)
Agilent Technologies Spin-off
On the June 2, 2000 spin-off date of Agilent Technologies, Agilent
Technologies assumed responsibility for pension, deferred profit-sharing and
other post-retirement benefits for current and former employees whose last work
assignment prior to the distribution date was with businesses spun-off to
Agilent Technologies. In the United States, the Hewlett-Packard Company
Retirement Plan and Deferred Profit-Sharing Plan Master Trust was converted to
the Group Trust for the Hewlett-Packard Company Deferred Profit-Sharing Plan
and Retirement Plan and the Agilent Technologies, Inc. Deferred Profit-Sharing
Plan and Retirement Plan ("the Group Trust"). Both the HP and Agilent
Technologies Retirement Plans include post-retirement medical accounts. A
pro-rata share of the assets of the Group Trust was assigned to the HP
Retirement Plan and Deferred Profit-Sharing Trusts and the respective Agilent
Technologies' Trusts. Outside the United States, generally, a pro-rata share of
the HP pension assets, if any, was transferred or otherwise assigned to the
Agilent Technologies entity in accordance with local law or practice. The
pro-rata shares were in the same proportion as the projected benefit
obligations for HP employees to the total projected benefit obligations of HP
and Agilent Technologies as of April 30, 2000. For all periods presented, the
assets and liabilities related to the retirement and post-retirement benefit
plans of Agilent Technologies are included in net assets of discontinued
operations in HP's accompanying Consolidated Balance Sheet through the spin-off
date of June 2, 2000 and the related costs are included in net earnings of
discontinued operations in HP's accompanying Consolidated Statement of Earnings
through June 2, 2000. The information in this note for all periods relates to
the HP Plans and excludes Agilent Technologies.
Restructuring Actions
In 2001, HP realized net pension settlement and curtailment gains related to
fiscal 2001 restructuring actions (see Note 3 to the Consolidated Financial
Statements) of approximately $7 million as the pension obligations to affected
employees were settled. HP also realized an additional curtailment gain of
approximately $31 million related to other post-employment retirement benefits.
In 2000, in connection with its enhanced early retirement program (see Note
3 to the Consolidated Financial Statements), HP recognized special termination
charges of $95 million and realized related net pension settlement and
curtailment gains of approximately $28 million as the pension obligations to
employees who accepted the offer were settled and realized an additional $1
million curtailment gain related to other post-employment retirement benefits.
Retirement Plans
Worldwide pension and deferred profit-sharing costs were $318 million in
2001, $343 million in 2000 and $301 million in 1999. U.S. employees who meet
certain minimum eligibility criteria are provided pension benefits under the
Hewlett-Packard Company pension plans. 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 ("DPSP"), which has since been closed
to new participants.
The combined status of the U.S. pension plans and DPSP was as follows at
October 31:
2001 2000
------ ------
(In millions)
Fair value of plan assets.................................. $2,416 $3,154
Retirement benefit obligation.............................. $3,185 $3,268
73
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Retirement and Post-Retirement Benefit Plans (Continued)
Employees outside the United States 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.
Post-Retirement Benefit Plans
In addition to providing pension benefits, HP sponsors post-retirement
benefit plans providing medical and life insurance 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 medical plan, retirees
may choose from managed-care and indemnity options, with their contributions
dependent on options chosen and length of service.
Components of Net Pension and Post-Retirement Benefit Costs
HP's net pension and post-retirement benefit costs were composed of the
following:
U.S. Defined Non-U.S. Defined U.S. Post-Retirement
Benefit Plans Benefit Plans Benefit Plans
------------------ ------------------ -------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
----- ----- ---- ----- ----- ---- ---- ---- ----
(In millions)
Service cost........................... $ 198 $ 161 $151 $ 93 $ 77 $ 90 $ 18 $ 18 $ 21
Interest cost.......................... 96 74 52 91 74 62 27 24 23
Expected return on plan assets......... (105) (100) (52) (136) (107) (94) (47) (41) (28)
Amortization and deferrals:
Actuarial (gain) loss............... (14) (21) 7 5 8 (13) (22) (20) (10)
Transition (asset) obligation....... -- (5) (5) -- -- -- -- -- --
Prior service cost (benefit)........ 3 3 2 2 2 2 (4) (5) (6)
----- ----- ---- ----- ----- ---- ---- ---- ----
Net periodic benefit cost.............. 178 112 155 55 54 47 (28) (24) --
Net restructuring (gains) charges...... (23) 67 -- 16 -- -- (31) (1) --
----- ----- ---- ----- ----- ---- ---- ---- ----
Net pension benefit cost............... $ 155 $ 179 $155 $ 71 $ 54 $ 47 $(59) $(25) $ --
===== ===== ==== ===== ===== ==== ==== ==== ====
74
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Retirement and Post-Retirement Benefit Plans (Continued)
The funded status of the defined benefit and post-retirement benefit plans
was as follows:
U.S. Post-
U.S. Defined Non-U.S. Defined Retirement
Benefit Plans Benefit Plans Benefit Plans
-------------- --------------- ------------
2001 2000 2001 2000 2001 2000
------ ------ ------ ------ ----- -----
(In millions)
Change in fair value of plan assets:
Fair value--Beginning of year......................... $1,200 $ 998 $1,562 $1,448 $ 522 $ 400
Addition of plan...................................... -- -- -- -- -- --
Divestitures.......................................... -- -- -- (37) -- --
Actual return on plan assets.......................... (307) 354 (115) 214 (131) 142
Employer contributions................................ 38 18 102 142 -- --
Participants' contributions........................... -- -- 23 22 5 5
Agilent spin-off...................................... -- (16) -- (8) -- (15)
Benefits paid......................................... (50) (154) (44) (30) (15) (10)
Restructuring impact.................................. -- -- (5) -- -- --
Currency impact....................................... -- -- 5 (189) -- --
------ ------ ------ ------ ----- -----
Fair value--End of year............................... 881 1,200 1,528 1,562 381 522
------ ------ ------ ------ ----- -----
Change in benefit obligation:
Benefit obligation--Beginning of year................. 1,314 943 1,508 1,538 350 311
Addition of plan...................................... -- -- -- -- 11 13
Divestitures.......................................... -- -- -- (35) -- --
Service cost.......................................... 198 161 93 77 18 18
Interest cost......................................... 96 74 91 74 27 24
Participants' contributions........................... -- -- 23 22 5 5
Agilent spin-off...................................... -- (12) -- (7) -- (4)
Actuarial (gain) loss................................. 125 211 (22) 54 123 (31)
Benefits paid......................................... (50) (154) (44) (30) (15) (10)
Plan amendments....................................... -- -- (24) -- -- --
Restructuring impact.................................. (33) 91 (20) -- (30) 24
Currency impact....................................... -- -- -- (185) -- --
------ ------ ------ ------ ----- -----
Benefit obligation--End of year.......................... 1,650 1,314 1,605 1,508 489 350
------ ------ ------ ------ ----- -----
Plan assets (less than) in excess of benefit obligation.. (769) (114) (77) 54 (108) 172
Unrecognized net experience loss (gain).................. 365 (177) 267 84 (26) (349)
Unrecognized prior service cost (benefit) related to plan
changes................................................ 16 20 (8) 17 (34) (40)
Unrecognized net transition asset........................ -- -- (1) (1) -- --
------ ------ ------ ------ ----- -----
Net (accrued) prepaid costs.............................. $ (388) $ (271) $ 181 $ 154 $(168) $(217)
====== ====== ====== ====== ===== =====
75
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Retirement and Post-Retirement Benefit Plans (Continued)
Defined benefit plans with benefit obligations exceeding the fair value of
plan assets were as follows:
Non-U.S.
U.S. Defined Defined
Benefit Plans Benefit Plans
------------- -------------
2001 2000 2001 2000
------ ---- ---- ----
(In millions)
Aggregate fair value of plan assets.............. $ 881 $ -- $779 $757
Aggregate benefit obligation..................... $1,650 $221 $903 $819
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
post-retirement benefit plans were as follows for the years ended October 31:
2001 2000 1999
----------- ----------- -----------
U.S. defined benefit plans:
Discount rate............................ 7.0% 7.5% 7.3%
Average increase in compensation levels.. 5.8% 6.5% 5.0%
Expected long-term return on assets...... 9.0% 9.0% 9.0%
Non-U.S. defined benefit plans:
Discount rate............................ 2.5 to 6.5% 3.0 to 6.5% 3.3 to 6.0%
Average increase in compensation levels.. 3.5 to 5.5% 3.5 to 5.5% 3.5 to 5.3%
Expected long-term return on assets...... 6.5 to 8.5% 6.1 to 8.5% 6.1 to 8.5%
U.S. post-retirement benefit plans:
Discount rate............................ 7.0% 7.5% 7.3%
Expected long-term return on assets...... 9.0% 9.0% 9.0%
Current medical cost trend rate.......... 7.8% 7.8% 8.2%
Ultimate medical cost trend rate......... 5.5% 5.5% 5.5%
The rate of increase in medical costs was assumed to decrease gradually
through 2007, and remain at that level thereafter. Assumed health care cost
trend rates could have a significant effect on the amounts reported for health
care plans. A 1.0 percentage point increase in the assumed health care cost
trend rates would have increased the total service and interest cost components
reported in 2001 by $12 million, and would have increased the post-retirement
benefit obligation reported in 2001 by $83 million. A 1.0 percentage point
decrease in the assumed health care cost trend rates would have decreased the
total service and interest cost components reported in 2001 by $9 million, and
would have decreased the post-retirement obligation reported in 2001 by
$65 million.
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. Beginning on November 1, 2000, the
76
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Retirement and Post-Retirement Benefit Plans (Continued)
maximum contribution under the TAXCAP is 20% of an employee's annual eligible
compensation subject to certain IRS limitations. HP's expense related to TAXCAP
was $119 million in 2001, $110 million in 2000 and $98 million in 1999. Through
October 31, 2000, the maximum combined contribution to the ESPP and TAXCAP was
25% of an employee's annual eligible compensation subject to certain regulatory
and plan limitations.
Note 16: Commitments
HP leases certain real and personal property under non-cancelable operating
leases. Future annual minimum lease payments at October 31, 2001 were $204
million for 2002, $172 million for 2003, $137 million for 2004, $112 million
for 2005, $87 million for 2006 and $217 million thereafter. These payments will
be partially offset by sublease rental income commitments. Future minimum
sublease rental income commitments at October 31, 2001 were $6 million for
2002, $5 million for 2003, and $2 million per year in each of years 2004
through 2006. Certain leases require HP to pay property taxes, insurance and
routine maintenance, and include escalation clauses. Rent expense was $374
million in 2001, $344 million in 2000 and $352 million in 1999. Sublease rental
income was $20 million in 2001, $19 million in 2000 and $12 million in 1999.
Note 17: Litigation and Contingencies
Litigation Settlement
On June 4, 2001, HP and Pitney Bowes Inc. ("Pitney Bowes") announced that
they had entered into agreements which resolved all pending patent litigation
between the parties without admission of infringement and in connection
therewith HP paid Pitney Bowes $400 million in cash on June 7, 2001. In
addition, the companies entered into a technology licensing agreement and
expect to pursue business and commercial relationships. Pitney Bowes filed its
patent infringement case against HP on August 23, 1995 in the U.S. District
Court for the District of Connecticut, alleging that HP's LaserJet printers
infringed Pitney Bowes' character edge smoothing patent, and HP filed one case
against Pitney Bowes on August 23, 1995 in the U.S. District Court for the
District of Idaho to invalidate the Pitney Bowes patent and four cases on March
21, 2001 in the U.S. District Court for the Northern District of California
(San Francisco Division), on March 28, 2001 in the U.S. District Court for the
District of Idaho, on April 4, 2001 in the U.S. District Court for the Western
District of Texas and on May 11, 2001 in the U.S. District Court for the
Northern District of California (San Jose Division), alleging that Pitney
Bowes' copiers, fax machines, document management software and a postal
metering machine infringed HP's patents. On May 29, 1996, HP answered the
complaint filed by Pitney Bowes and counterclaimed for a declaratory judgment
that the Pitney Bowes patent was invalid, unenforceable, and not infringed.
During the following 15 months, the parties engaged in extensive discovery. On
August 11, 1997, HP moved for summary judgment of non-infringement. On February
9, 1998, the Connecticut District Court denied HP's motion. On November 7,
1997, HP moved for summary judgment of invalidity of the Pitney Bowes patent,
and for summary judgment of noninfringement. On March 23, 1998, the Connecticut
District Court denied the motion for summary judgment of invalidity, but
granted the motion for summary judgment of noninfringement, and entered
judgment in favor of HP. Pitney Bowes appealed that judgment, and on June 23,
1999 the Court of Appeals for the Federal Circuit reversed the judgment in
favor of HP and remanded the case to the trial court. On July 7, 1999, HP
petitioned the Patent and Trademark Office ("PTO") to reexamine the validity of
the Pitney Bowes patent. That petition was granted on August 27, 1999, and the
litigation in the Connecticut District Court was thereafter stayed pending
reexamination of the patent. On June 14, 2000, the PTO issued an Office Action
initially rejecting the claims of the Pitney Bowes patent asserted against HP
as invalid. On September 9, 2000, the PTO issued a Statement of Reasons for
Patentability affirming the claims of the Pitney Bowes patent. The stay on the
litigation was thereafter lifted, and on November 13, 2000, the Connecticut
District Court set a
77
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 17: Litigation and Contingencies (Continued)
June 4, 2001 trial date for the case Pitney Bowes filed. A "Markman" hearing
was held on April 24, 2001 to determine the scope of the Pitney Bowes patent
claims which would affect the outcome of the litigation on the issues of patent
infringement as well as patent validity. The suits by HP were pending. HP and
Pitney Bowes had settlement discussions as the trial date approached, resulting
in the settlement agreement described above.
Pending Litigation
An individual filed a lawsuit against HP in federal court in California
claiming HP's LaserJet printers infringe his U.S. patent 5,424,780, which he
asserts covers portions of the resolution enhancement technology employed in
these printers. HP believes, based on an opinion from outside counsel, that it
does not infringe the patent. HP has held discussions with the plaintiff but
has not resolved the matter. HP filed a lawsuit to obtain a ruling that it does
not infringe. Thereafter, the U.S. Patent Office agreed to reexamine the patent
based on prior art identified by HP. The litigation is stayed pending the
outcome of the Patent Office reexamination.
HP was sued in an unfair business practices consumer class action filed by
three residents of San Bernardino, California in federal court in California.
The three claim to have purchased different models of HP inkjet printers over
the past three years. This action alleges that HP printers were sold with
half-full or "economy" ink cartridges instead of full cartridges and that HP's
advertising, packaging and marketing representations for the printers led the
plaintiffs to believe they would receive full cartridges. It is the basic
contention of this action that HP's advertising and failure to advise
specifically that "economy" cartridges were included constitute false and
misleading conduct in violation of both the California Consumer Legal Remedies
Act and Section 17200 of the California Business and Professions Code. This
action seeks injunctive relief, disgorgement of profits, compensatory damages,
punitive damages and attorney fees. When HP failed to enter into an early
settlement of this action, consumer class actions were filed, in coordination
with the original plaintiffs, in over 30 states.
A nationwide defective product consumer class action was filed against HP in
a Texas state district court by a resident of eastern Texas. This action is one
of five similar suits filed against several computer manufacturers on the same
day. The basic allegation in the action against HP is that it knowingly sold
computers containing floppy disk controller chips that fail to detect both
overruns and underruns if either occurs on the last byte of a read/write
operation. That failure is alleged to result in data loss, data corruption or
system failure. This suit seeks injunctive relief, declaratory relief,
rescission and attorney fees. After filing this action the plaintiff's counsel
initiated a related action with the State of Illinois, the State of California
and the United States of America.
Cornell University and the Cornell Research Foundation, Inc. filed an action
against HP in federal court in New York alleging that HP's PA-RISC 8000 family
of microprocessors infringes a Cornell patent that describes a way of executing
microprocessor instructions. This action seeks declaratory, injunctive and
other relief. After reviewing the pertinent materials, HP believes that it does
not infringe the patent. Furthermore, HP believes Cornell's patent is invalid.
HP is involved in lawsuits, claims, investigations and proceedings,
including those identified above, consisting of patent, commercial and
environmental matters, which arise in the ordinary course of business. Any
possible adverse outcome arising from these matters is not expected to have a
material adverse impact on the results of operations or financial position of
HP, either individually or in the aggregate. However, HP's evaluation of the
likely impact of these pending disputes could change in the future.
78
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 18: Segment Information
Description of Segments
HP is a leading global provider of computing, printing and imaging solutions
and services for business and home, and is focused on making technology and its
benefits accessible to all.
As of October 31, 2001, HP organized its operations into three major
businesses: Imaging and Printing Systems, Computing Systems and IT Services.
The segments were determined in accordance with how management views and
evaluates HP's businesses. The factors that management uses to identify HP's
separate businesses include customer base, homogeneity of products, technology
and delivery channels. A description of the types of products and services
provided by each reportable segment is as follows:
. Imaging and Printing Systems provides printer hardware, supplies, imaging
products and related professional and consulting services. Printer
hardware consists of laser and inkjet printing devices, which include
color and monochrome printers for the business and home, multi-function
laser devices and wide- and large-format inkjet printers. Supplies offer
laser and inkjet printer cartridges and other related printing media.
Imaging products include all-in-one inkjet devices, scanners, digital
photography products, personal color copiers and faxes. Professional and
consulting services are provided to customers on the optimal use of
printing and imaging assets.
. Computing Systems provides commercial personal computers ("PCs"), home
PCs, workstations, UNIX(R) servers, PC servers, storage and software
solutions. Commercial PCs include the Vectra desktop series, as well as
OmniBook and Pavilion notebook PCs. Home PCs include the Pavilion series
of multi-media consumer desktop PCs. Workstations provide UNIX(R), Windows
and Linux-based systems. The UNIX(R) server offering ranges from low-end
servers to high-end scalable systems such as the Superdome line, all of
which run on HP's PA-RISC architecture and HP-UX operating system. PC
servers offer primarily low-end and mid-range products that run on the
Windows and Linux operating systems. Storage provides mid-range and
high-end array offerings, storage area networks and storage area
management and virtualization software, as well as tape and optical
libraries, tape drive mechanisms and tape media. The software category
offers OpenView and other solutions designed to manage large-scale systems
and networks. In addition, software includes telecommunications
infrastructure solutions and middleware.
. IT Services provides customer support, consulting, outsourcing, technology
financing and complementary third-party products delivered with the sales
of HP solutions. Customer support offers a range of high-value solutions
from mission-critical and networking services that span the entire IT
environment to low-cost, high volume product support. Consulting provides
industry-specific business and IT consulting and system integration
services in areas such as financial services, telecommunications and
manufacturing, as well as cross-industry solution expertise in Customer
Relationship Management ("CRM"), e-commerce and IT infrastructure.
Outsourcing offers a range of IT management services, both comprehensive
and selective, including transformational infrastructure services, client
computing managed services, managed web services and application services
to medium and large companies. Technology financing capabilities include
leasing, solution financing and computing and printing utility offerings.
HP's immaterial operating segments were aggregated to form an "All Other"
category. This category primarily includes its Embedded and Personal Systems
and, prior to its divestiture, included its VeriFone business. Embedded and
Personal Systems provides a range of handheld computing devices, CD writers,
DVD+RW drives, calculators and other related accessories and services for
commercial and consumer markets.
In the first quarter of 2001, HP made certain strategic changes to its
organizational structure. These changes included the movement of the VeriFone
business from the Computing Systems segment to a separate operating
79
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 18: Segment Information (Continued)
segment. The VeriFone operating segment, which was divested in the third
quarter of 2001, was included in "All Other" as it did not meet the materiality
threshold for a reportable segment. Segment financial data for the fiscal years
ended October 31, 2000 and 1999 have been restated to reflect these
organizational changes.
Segment Revenue and Profit
The accounting policies used to derive reportable segment results are
generally the same as those described in Note 1 to the 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 from comparable external customers.
A significant portion of each segment's expenses arises from shared services
and infrastructure that HP has historically provided to the segments in order
to realize economies of scale and to use resources efficiently. These expenses
include costs of centralized research and development, legal, accounting,
employee benefits, real estate, insurance services, information technology
services, treasury and other corporate and infrastructure costs. In the first
quarter of fiscal 2001, HP implemented a new management reporting system. This
change in the reporting system included a revised allocation methodology for
shared services and infrastructure. HP believes these allocation changes
resulted in a better reflection of the utilization of services provided to or
benefits received by the segments. Segment financial data for the fiscal years
ended October 31, 2000 and 1999 have been restated to reflect these changes.
Segment Data
The results of the reportable segments are derived directly from HP's
management reporting system. The results are based on HP's method of internal
reporting and are not necessarily in conformity with accounting principles
generally accepted in the United States. Management measures the performance of
each segment based on several metrics, including earnings from operations.
These results are used, in part, to evaluate the performance of, and allocate
resources to, each of the segments. Certain operating expenses which are
separately managed at the corporate level are not allocated to segments. These
unallocated costs include corporate infrastructure costs, restructuring
charges, amortization of goodwill and purchased intangibles, charges for
purchased in-process research and development, and the amount by which
profit-dependent bonus expenses and certain employee-related benefit program
costs differ from a targeted level recorded by the segments.
Asset data is not reviewed by management at the segment level, with the
exception of inventory which is allocated to and directly managed by each
segment.
80
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 18: Segment Information (Continued)
The following table presents financial information for each reportable
segment as of and for the years ended October 31:
Imaging
and
Printing Computing IT All Total
Systems Systems Services Other Segments
-------- --------- -------- ------ --------
(In millions)
2001:
Net revenue from external customers.... $19,447 $17,482 $7,599 $1,010 $45,538
Intersegment net revenue............... -- 289 -- -- 289
------- ------- ------ ------ -------
Total net revenue................... $19,447 $17,771 $7,599 $1,010 $45,827
======= ======= ====== ====== =======
Earnings (loss) from operations........ $ 1,987 $ (450) $ 342 $ (321) $ 1,558
======= ======= ====== ====== =======
Depreciation expense................... $ 227 $ 82 $ 508 $ 14 $ 831
======= ======= ====== ====== =======
Inventory.............................. $ 3,495 $ 1,337 $ 337 $ 35 $ 5,204
======= ======= ====== ====== =======
2000:
Net revenue from external customers.... $20,462 $20,329 $7,139 $1,511 $49,441
Intersegment net revenue............... 6 324 11 45 386
------- ------- ------ ------ -------
Total net revenue................... $20,468 $20,653 $7,150 $1,556 $49,827
======= ======= ====== ====== =======
Earnings (loss) from operations........ $ 2,666 $ 1,007 $ 474 $ (92) $ 4,055
======= ======= ====== ====== =======
Depreciation expense................... $ 298 $ 76 $ 445 $ 7 $ 826
======= ======= ====== ====== =======
Inventory.............................. $ 3,475 $ 1,665 $ 377 $ 182 $ 5,699
======= ======= ====== ====== =======
1999:
Net revenue from external customers.... $18,512 $16,837 $6,240 $1,250 $42,839
Intersegment net revenue............... 38 558 64 6 666
------- ------- ------ ------ -------
Total net revenue................... $18,550 $17,395 $6,304 $1,256 $43,505
======= ======= ====== ====== =======
Earnings (loss) from operations........ $ 2,364 $ 988 $ 494 $ (112) $ 3,734
======= ======= ====== ====== =======
Depreciation expense................... $ 479 $ 73 $ 408 $ 4 $ 964
======= ======= ====== ====== =======
Inventory.............................. $ 2,810 $ 1,539 $ 336 $ 178 $ 4,863
======= ======= ====== ====== =======
81
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 18: Segment Information (Continued)
The following is a reconciliation of segment information to HP consolidated
totals for the years ended October 31:
2001 2000 1999
------- ------- -------
(In millions)
Net revenue:
Total segments........................................................... $45,827 $49,827 $43,505
Elimination of intersegment net revenue and other........................ (601) (957) (1,134)
------- ------- -------
Total HP consolidated.................................................... $45,226 $48,870 $42,371
======= ======= =======
Earnings from continuing operations before extraordinary item, cumulative
effect of change in accounting principle and taxes:
Total segment earnings from operations................................... $ 1,558 $ 4,055 $ 3,734
Interest and other, net.................................................. 171 356 345
Net investment (losses) gains............................................ (455) 41 31
Litigation settlement.................................................... (400) -- --
(Losses) gains on divestitures........................................... (53) 203 --
Corporate and unallocated costs, and eliminations........................ (119) (30) 84
------- ------- -------
Total HP consolidated.................................................... $ 702 $ 4,625 $ 4,194
======= ======= =======
Depreciation expense:
Total segments........................................................... $ 831 $ 826 $ 964
Depreciation expense on corporate-held assets............................ 364 329 123
------- ------- -------
Total HP consolidated.................................................... $ 1,195 $ 1,155 $ 1,087
======= ======= =======
Major Customers
No single customer represented 10% or more of HP's total net revenue in any
period presented.
82
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 18: Segment Information (Continued)
Geographic Information
Net revenue and net property, plant and equipment, classified by major
geographic areas in which HP operates, were as follows:
Years ended October 31,
-----------------------
2001 2000 1999
------- ------- -------
(In millions)
Net revenue:
U.S.................................... $18,833 $21,528 $18,883
Non-U.S................................ 26,393 27,342 23,488
------- ------- -------
Total.................................. $45,226 $48,870 $42,371
======= ======= =======
October 31,
--------------------
2001 2000 1999
------ ------ ------
(In millions)
Net property, plant and equipment:
U.S.................................... $2,102 $2,256 $2,102
Non-U.S................................ 2,295 2,244 2,231
------ ------ ------
Total.................................. $4,397 $4,500 $4,333
====== ====== ======
Net revenue by geographic area is based upon the customer's location.
No single country outside of the United States represented more than 10% of
HP's total net revenue in any period presented. No single country outside of
the United States represented more than 10% of HP's total net property, plant
and equipment in any period presented with the exception of Ireland, which held
11% of these assets at October 31, 2001, and Singapore, which held 10%. HP's
long-lived assets are composed principally of net property, plant and equipment.
Note 19: Subsequent Event
On December 6, 2001, HP offered under an existing shelf registration
statement $1.0 billion of unsecured 5.75% Global Notes, which mature on
December 15, 2006 unless previously redeemed. After this issuance, HP has the
remaining capacity to issue $290 million of securities under this shelf
registration statement.
83
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Quarterly Summary/(1)/
(Unaudited)
For the three months ended
In millions, except per share amounts January 31 April 30 July 31 October 31
- ------------------------------------- ---------- ---------- ---------- ----------
(Restated) (Restated) (Restated)
2001
Net revenue..................................................... $12,398 $11,668 $10,284 $10,876
Cost of sales................................................... 9,060 8,724 7,609 8,081
Earnings from operations........................................ 770 343 204 122
Net earnings before extraordinary item and cumulative effect of
change in accounting principle................................ 390 35 115 84
Extraordinary item--gain on early extinguishment of debt, net of
taxes......................................................... 23 12 8 13
Cumulative effect of change in accounting principle, net of
taxes/(2)/.................................................... (272) -- -- --
Net earnings.................................................... 141 47 123 97
Basic net earnings per share:/(3)/
Net earnings before extraordinary item and cumulative effect
of change in accounting principle.......................... $ 0.20 $ 0.02 $ 0.06 $ 0.04
Extraordinary item--gain on early extinguishment of debt,
net of taxes............................................... 0.01 -- -- 0.01
Cumulative effect of change in accounting principle, net of
taxes/(2)/................................................. (0.14) -- -- --
------- ------- ------- -------
Net earnings................................................. $ 0.07 $ 0.02 $ 0.06 $ 0.05
======= ======= ======= =======
Diluted net earnings per share:/(3)/
Net earnings before extraordinary item and cumulative effect
of change in accounting principle.......................... $ 0.20 $ 0.02 $ 0.06 $ 0.04
Extraordinary item--gain on early extinguishment of debt,
net of taxes............................................... 0.01 -- -- 0.01
Cumulative effect of change in accounting principle, net of
taxes/(2)/................................................. (0.14) -- -- --
------- ------- ------- -------
Net earnings................................................. $ 0.07 $ 0.02 $ 0.06 $ 0.05
======= ======= ======= =======
Cash dividends paid............................................. $ 0.08 $ 0.08 $ 0.08 $ 0.08
Range of closing stock prices on NYSE:
Low.......................................................... $ 29.38 $ 27.41 $ 24.00 $ 14.50
High......................................................... $ 47.44 $ 36.86 $ 30.90 $ 25.91
84
The amounts previously reported in HP's Quarterly Reports on Form 10-Q for
fiscal 2001 have been adjusted for the following items, which are discussed
more fully in the Notes to the Consolidated Financial Statements:
January 31 April 30 July 31
---------- -------- -------
Net revenue:
SAB 101/(2)/.................................. $ 387 $(23) $ 48
EITF 00-25/(4)/............................... (40) (15) (11)
Financing income/(5)/......................... 103 99 100
----- ---- -----
450 61 137
Cost of sales:
SAB 101/(2)/.................................. 280 2 33
Financing interest/(5)/....................... 77 55 56
----- ---- -----
357 57 89
Selling, general and administrative expense:
EITF 00-25/(4)/............................... (40) (15) (11)
Interest and other, net:
Financing income/(5)/......................... (103) (99) (100)
Financing interest expense/(5)/............... 77 55 56
----- ---- -----
(26) (44) (44)
----- ---- -----
Subtotal before tax effect....................... 107 (25) 15
Income tax effect................................ 22 (5) 3
----- ---- -----
Total restatement adjustments before cumulative
effect of change in accounting principle....... 85 (20) 12
Cumulative effect of change in accounting
principle, net of taxes/(2)/................... (272) -- --
----- ---- -----
Total restatement adjustments.................... $(187) $(20) $ 12
===== ==== =====
January 31 April 30 July 31 October 31
---------- -------- ------- ----------
2000/(4)(5)/
Net revenue...................................... $11,681 $12,045 $11,849 $13,295
Cost of sales.................................... 8,406 8,598 8,365 9,677
Earnings from operations......................... 978 940 1,139 968
Net earnings from continuing operations.......... 794 816 1,029 922
Net earnings from discontinued operations........ -- 119 17 --
Net earnings..................................... 794 935 1,046 922
Basic net earnings per share:/(3)/
Net earnings from continuing operations....... $ 0.40 $ 0.41 $ 0.52 $ 0.47
Net earnings from discontinued operations..... -- 0.06 0.01 --
------- ------- ------- -------
Net earnings.................................. $ 0.40 $ 0.47 $ 0.53 $ 0.47
======= ======= ======= =======
Diluted net earnings per share:/(3)/
Net earnings from continuing operations....... $ 0.38 $ 0.39 $ 0.50 $ 0.45
Net earnings from discontinued operations..... -- 0.06 0.01 --
------- ------- ------- -------
Net earnings.................................. $ 0.38 $ 0.45 $ 0.51 $ 0.45
======= ======= ======= =======
Cash dividends paid.............................. $ 0.08 $ 0.08 $ 0.08 $ 0.08
Range of closing stock prices on NYSE:
Low........................................... $ 36.13 $ 52.91 $ 52.94 $ 41.84
High.......................................... $ 58.72 $ 77.00 $ 71.06 $ 63.00
85
- ---------------------
Notes:
(1) HP's consolidated financial statements and notes for all periods present
the businesses of Agilent Technologies as a discontinued operation through
the spin-off date of June 2, 2000. All per-share amounts reflect the
retroactive effects of the two-for-one stock split in the form of a stock
dividend effective October 27, 2000.
(2) HP adopted SAB No. 101, "Revenue Recognition in Financial Statements" in
the fourth quarter of fiscal 2001, retroactive to November 1, 2000.
Accordingly, HP has restated its consolidated results of operations for the
first three quarters of fiscal 2001, including a cumulative effect of
change in accounting principle, which was recorded as a reduction of net
income as of the beginning of the first quarter of fiscal 2001.
(3) EPS for each quarter is computed using the weighted-average number of
shares outstanding during that quarter, while EPS for the fiscal year is
computed using the weighted-average number of shares outstanding during the
year. Thus, the sum of the EPS for each of the four quarters may not equal
the EPS for the fiscal year.
(4) HP early adopted EITF Issue No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's
Products" in the fourth quarter of fiscal 2001. Reclassifications have been
made to prior periods in order to conform to the current year presentation.
(5) In the fourth quarter of fiscal 2001, HP changed the classification of
financing interest income and expense. Previously, HP recorded financing
interest income and expense as a component of interest and other, net.
Financing interest income is now classified as revenue and financing
interest expense is now classified as cost of sales. Reclassifications have
been made to prior periods in order to conform to the current year
presentation.
86
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On September 21, 2000, the Audit Committee of HP's Board of Directors
terminated PricewaterhouseCoopers LLP ("PwC") as HP's independent public
accountants with respect to the audit of HP's consolidated financial statements
for the fiscal year ended October 31, 2000 (the "2000 Audit"). The decision was
made because of concerns by both HP and PwC regarding the timing of the
completion of the 2000 Audit in light of the potential loss of PwC's
independence since HP was in discussion with PwC over a possible acquisition of
its global management and information consulting practice (the "Potential
Acquisition"). PwC had already ceased all audit work for HP on September 12,
2000. HP subsequently terminated discussions with PwC with respect to the
Potential Acquisition because HP and PwC could not reach a mutually acceptable
agreement.
On September 21, 2000, the Audit Committee also selected and appointed Ernst
& Young LLP ("E&Y") to serve as HP's independent auditor with respect to the
2000 Audit. At that time, HP committed to undertake a more formal evaluation
process in selecting independent public auditors with respect to the audit of
HP's consolidated financial statements for the fiscal year ending October 31,
2001 (the "2001 Audit"). On February 5, 2001, the Audit Committee unanimously
approved the appointment of E&Y as the company's independent auditors to
complete the 2001 Audit. On November 16, 2001, the Audit Committee unanimously
approved the appointment of E&Y as the company's independent auditors to
complete the audit of HP's consolidated financial statements for the fiscal
year ending October 31, 2002.
Neither the reports of E&Y with respect to the 2001 Audit or 2000 Audit nor
the report of PwC with respect to the audits of HP's consolidated financial
statements for the fiscal years ended October 31, 1999 or October 31, 1998
contained an adverse opinion or a disclaimer of opinion, or were qualified or
modified as to uncertainty, audit scope, or accounting principles. In addition,
during HP's fiscal years ended October 31, 1999 and October 31, 1998 and
through September 21, 2000 there were no disagreements with PwC on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure with respect to HP's consolidated financial
statements, which disagreements, if not resolved to the satisfaction of PwC,
would have caused it to make reference to the subject matter of the
disagreements in connection with its reports.
Prior to retaining E&Y with respect to the 2000 Audit, HP consulted with E&Y
on various aspects of the Potential Acquisition, including tax and accounting
matters related to a variety of preliminary structures for the Potential
Acquisition. HP did not consult with PwC on such issues.
87
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The names of the directors and executive officers of HP, and their ages,
titles and biographies as of the date hereof are set forth below. All directors
are elected for one-year terms and officers are elected to serve at the
pleasure of the Board.
Directors:
Philip M. Condit; age 60; Director since 1998.
Mr. Condit has been Chairman of The Boeing Company since February 1997, its
Chief Executive Officer since April 1996 and a member of its board since 1992.
He served as President of The Boeing Company from August 1992 until becoming
Chairman.
Patricia C. Dunn; age 48; Director since 1998.
Ms. Dunn has been Global Chief Executive of Barclays Global Investors (BGI)
since 1998 and its Co-Chairman from October 1995 through June 1999. Ms. Dunn
oversees the activities and strategy of BGI, the world's largest institutional
investment manager, having joined the firm's predecessor organization, Wells
Fargo Investment Advisors, in 1978.
Carleton S. Fiorina; age 47; Director since 1999.
Ms. Fiorina became Chairman of the Board in September 2000 and was named
President, Chief Executive Officer and director of HP in July 1999. Prior to
joining HP, she served as Executive Vice President, Computer Operations for
Lucent Technologies, Inc. and oversaw the formation and spin-off of Lucent from
AT&T. She also served as Lucent's President, Global Service Provider Business
and President, Consumer Products. Ms. Fiorina is a member of the Board of
Directors of Cisco Systems, Inc.
Sam Ginn; age 64; Director since 1996.
Mr. Ginn served as Chairman of Vodafone AirTouch Plc from 1999, following
the merger of Vodafone and AirTouch, until his retirement in May 2000. He was
Chairman of the Board and Chief Executive Officer of AirTouch from December
1993 to June 1999. Mr. Ginn is also a director of ChevronTexaco Corporation and
the Fremont Group.
Richard A. Hackborn; age 64; Director since 1992.
Mr. Hackborn served as Chairman of the Board from January 2000 to September
2000. He was HP's Executive Vice President, Computer Products Organization from
1990 until his retirement in 1993 after a 33-year career with our company. He
is a director of the Boise Art Museum.
Walter B. Hewlett; age 57; Director since 1987.
Mr. Hewlett has been an independent software developer involved with
computer applications in the humanities for more than five years. In 1997, Mr.
Hewlett was elected to the Board of Overseers of Harvard University. In 1994,
Mr. Hewlett participated in the formation of Vermont Telephone Company of
Springfield, Vermont and currently serves as its Chairman. Mr. Hewlett founded
the Center for Computer Assisted Research in the Humanities in 1984, for which
he serves as a director. Mr. Hewlett has been a trustee of The William and
Flora Hewlett Foundation since its founding in 1966 and currently serves as its
Chairman. Mr. Hewlett also serves as a director of the Packard Humanities
Institute and the Public Policy Institute of California. Mr. Hewlett has served
as a director of Agilent Technologies since 1999. He is the son of the late HP
co-founder William R. Hewlett.
88
George A. Keyworth II; age 62; Director since 1986.
Dr. Keyworth has been Chairman and Senior Fellow with The Progress & Freedom
Foundation, a public policy research institute, since 1995. He is a director of
General Atomics and Curl, Inc. Dr. Keyworth holds various honorary degrees and
is an honorary professor at Fudan University in Shanghai, People's Republic of
China.
Robert E. Knowling, Jr.; age 46; Director since 2000.
Mr. Knowling has been Chairman and Chief Executive Officer of Internet
Access Technologies, Inc., a software development company specializing in
ASP-based productivity suites provided through the Internet, since February
2001. From July 1998 through October 2000, he was President and Chief Executive
Officer of Covad Communications Company, a national broadband service provider
of high speed Internet and network access using DSL technology. He also served
as Chairman of Covad from September 1999 to October 2000. From 1997 though July
1998, Mr. Knowling served as the Executive Vice President of Operations and
Technologies at US WEST Communications, Inc. Mr. Knowling is a director of
Ariba, Inc., Broadmedia Inc., Heidrick & Struggles International, Inc. and the
Juvenile Diabetes Foundation International. He also serves as a member of the
advisory board for both Northwestern University's Kellogg Graduate School of
Management and the University of Michigan Graduate School of Business.
Robert P. Wayman; age 56; Director since 1993.
Mr. Wayman has served as Executive Vice President, Finance and
Administration since December 1992 and Chief Financial Officer of HP since
1984. Mr. Wayman is a director of CNF Transportation, Inc., Sybase Inc., and
Portal Software, Inc. He also serves as a member of the Kellogg Advisory Board
to Northwestern University School of Business and is a director of the Private
Sector Council and Cultural Initiatives Silicon Valley.
Executive Officers:
Susan D. Bowick; age 53; Vice President and Director, Corporate Human Resources.
Ms. Bowick was elected a Vice President in November 1999. Between 1995 and
1997, she served as Business Personnel Manager for the Computer Organization.
She was first appointed a Vice President in 1997.
Richard A. DeMillo; age 55; Vice President and Chief Technology Officer.
Dr. DeMillo was appointed Chief Technology Officer in October 2000 and was
elected a Vice President in November 2000. From 1995 to 2000, he was Vice
President and General Manager at Telcordia Technologies, Inc., a provider of
operations support systems, network software and consulting and engineering
services to the telecommunications industry. At Telcordia, Dr. DeMillo was
responsible for computer science research, internet systems and software
strategy.
Debra L. Dunn; age 45; Vice President, Strategy and Corporate Operations.
Ms. Dunn was elected a Vice President in November 1999. She previously held
the position of General Manager of the Executive Staff from 1998 to 1999. From
1996 to 1998 she was General Manager of the Video Communications Division.
Carleton S. Fiorina; age 47; Chairman, President and Chief Executive Officer.
See biography above.
Jon E. Flaxman; age 44; Vice President and Controller.
Mr. Flaxman was elected a Vice President and Controller in July 2001. He was
General Manager of Computer Logistics and Distribution from 1997 to 1998. From
1998 to December 2000, he was Vice President
89
and Chief Financial Officer of the Enterprise Computing Business/Business
Customer Organization, and from December 2000 to June 2001 he was Vice
President of Infrastructure Reinvention. He was first appointed a Vice
President in 1998.
Vyomesh Joshi; age 47; President, Imaging and Printing Systems.
Mr. Joshi was elected a Vice President in January 2001. He became President
of Imaging and Printing Systems in February 2001. Mr. Joshi also is Chairman of
Phogenix Imaging LLC, a joint venture between HP and Kodak. From 1995 to 2000,
he held various management positions in Imaging and Printing Systems. Mr. Joshi
was first appointed a Vice President in 1999.
Pradeep Jotwani; age 47; President, Consumer Business Organization.
Mr. Jotwani was elected a Vice President in September 2000 and became
President of the Consumer Business Organization in June 2000. From 1999 to June
2000, he served as Vice President and General Manager of the Consumer Business
Organization. From 1997 to 1999, he served as Vice President of worldwide
consumer sales and marketing for the Inkjet Products Group.
Ann M. Livermore; age 43; President, HP Services.
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 Business Customer Organization. In April 2001, she
became President of HP Services. Ms. Livermore is a member of the Board of
Directors of United Parcel Service, Inc. She is also on the board of visitors
of the Kenan-Flagler Business School at the University of North Carolina at
Chapel Hill.
Harry W. (Webb) McKinney; age 56; President, Business Customer Organization.
Mr. McKinney was elected a Vice President in April 2001. He is President of
the Business Customer Organization. He is also currently serving as HP's lead
for the Integration Office established in connection with the business
combination transaction with Compaq Computer Corporation. Mr. McKinney was
General Manager of the Home Products Division from 1994 to 1998, leading HP's
initial entry into the consumer market for home computing products. In 1999, he
was appointed a Vice President and became the Vice President and General
Manager of the PC business within the Computing Systems Organization. From 1996
to 2001, he held various management positions in the Computing Systems
Organization.
Iain Morris; age 45; President, Embedded and Personal Systems Organization.
Mr. Morris was elected a Vice President in March 2001. He is President of
Embedded and Personal Systems. Mr. Morris joined HP after 23 years at Motorola,
Inc., where he had served as Senior Vice President and General Manager.
Robert P. Wayman; age 56; Executive Vice President, Finance and Administration
and Chief Financial Officer.
See biography above.
Duane E. Zitzner; age 54; 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 the Personal Information Products Group/Personal Systems Group became a
group within the Computer Products Organization in 1997 and was named President
of the Computer Products Organization in April 1999. Computer Products was
renamed Computing Systems in November 1999.
90
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors, executive officers and holders of more than 10% of our common
stock to file with the Securities and Exchange Commission reports regarding
their ownership and changes in ownership of our securities. HP believes that,
during fiscal 2001, its directors, executive officers and 10% shareowners
complied with all Section 16(a) filing requirements with the following
exceptions: two late reports filed by Susan D. Bowick regarding a sale of
shares through her broker and a sale of shares from her account in the Tax
Saving Capital Accumulation Plan, a 401(k) plan. In making this statement, HP
has relied upon examination of the copies of Forms 3, 4 and 5, and amendments
thereto, provided to the Company and the written representations of its
directors, executive officers and 10% shareowners.
ITEM 11. Director and Executive Compensation
DIRECTOR COMPENSATION AND STOCK OWNERSHIP GUIDELINES
The following table provides information on HP's compensation and
reimbursement practices during fiscal year 2001 for non-employee directors, as
well as the range of compensation paid to non-employee directors who served the
entire 2001 fiscal year. Directors who are employed by HP, Ms. Fiorina and Mr.
Wayman, do not receive any compensation for their Board activities.
NON-EMPLOYEE DIRECTOR COMPENSATION TABLE
FOR FISCAL 2001
Annual director retainer...................................... $100,000
Minimum percentage of annual retainer to be paid in HP
stock/(1)/.................................................. 75%
Additional retainer for Committee chair....................... $5,000
Reimbursement for expenses attendant to Board membership...... Yes
Range of total compensation paid to directors (for the year).. $100,000-$105,000
- ---------------------
(1) Each director may elect to receive the annual director retainer in a grant
of stock or stock options. Under special circumstances, less than 75% may
be paid in stock.
Under the Company's stock ownership guidelines for directors, all directors
are required to accumulate over time shares of HP stock equal in value to at
least twice the value of the annual director retainer.
91
EXECUTIVE COMPENSATION
The following table discloses compensation received by HP's Chief Executive
Officer during fiscal 2001 and HP's four other most highly paid executive
officers ("named executive officers") during fiscal 2001 as well as their
compensation for each of the fiscal years ending October 31, 2000 and October
31, 1999.
Unless otherwise indicated, option, restricted stock and restricted stock
unit amounts outstanding on May 2, 2000 (the record date with respect to the
distribution of Agilent shares) have been adjusted in order to restore their
intrinsic value for the impact of HP's common stock market value from the
Agilent Technologies spin-off. Holders of options that were exercised and
shares of restricted stock that were released prior to May 2, 2000 received
shares of Agilent Technologies in connection with the spin-off. Although
adjustments were made to the number of shares of restricted stock and
restricted stock units as described above, the dollar values of restricted
stock and restricted stock unit awards represent the dollar value on the date
originally granted in order to reflect the intrinsic value of the compensation
received at the time of grant. All option, restricted stock and restricted
stock unit amounts have also been adjusted to reflect the two-for-one stock
split in the form of a stock dividend effective October 27, 2000.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
--------------------------------
Annual Compensation Awards Payouts
---------------------------------- ---------------------- ---------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Bonus Compensation Award(s) Options/ Payouts Compensation
Principal Position Year Salary ($) ($)/(1)/ ($)/(2)/ ($)/(3)/ SARs (#) ($)/(4)/ ($)/(5)(6)/
- ------------------ ---- ---------- ---------- ------------ ----------- ---------- --------- ------------
Carleton S. Fiorina........ 2001 $1,000,000 0 $ 74,811 0 1,000,000 N/A $ 173,262
Chairman and Chief 2000 1,000,000 $1,766,250 205,113 0 1,280,042 N/A 755,266
Executive Officer 1999 287,933 366,438 * $65,557,400 1,535,810 N/A 3,551,678
Robert P. Wayman........... 2001 925,000 0 * 0 350,000 $(682,520) 6,885
Executive Vice President, 2000 845,250 402,633 * 41,048 358,576 450,057 6,885
Chief Financial Officer 1999 930,000 471,590 * 4,208,840 294,362 0 264,384
and Director
Duane E. Zitzner........... 2001 725,000 0 * 0 350,000 (303,349) 6,085
President--Computing 2000 575,000 273,900 * 26,522 1,015,902 N/A 6,885
Systems 1999 449,500 364,991 * 1,428,002 255,968 N/A 6,485
Ann M. Livermore........... 2001 700,000 0 * 0 350,000 (530,875) 6,085
President--HP Services 2000 527,084 273,900 * 24,540 785,532 N/A 6,085
1999 499,313 187,721 * 4,713,851 255,968 N/A 5,799
Pradeep Jotwani............ 2001 625,000 0 * 0 300,000 N/A 6,885
President--Consumer 2000 353,036 122,424 * 16,347 251,092 N/A 6,885
Business Organization 1999 337,848 147,502 * 443,219 47,354 N/A 6,485
- ---------------------
* Does not exceed reporting thresholds for perquisites and other personal
benefits.
(1) The amounts shown in this column reflect payments under HP's Executive
Pay-for-Results Plan, as amended and restated as of November 1, 2000 (the
"Executive Pay-for-Results Plan," which term includes its predecessors, as
applicable) and HP's prior cash profit-sharing plan. All HP officers
subject to Section 162(m) of the Internal Revenue Code of 1986, as amended,
and selected other employees were eligible to participate in the Executive
Pay-for-Results Plan. During the fiscal years shown, all of the named
executive officers participated in the Executive Pay-for-Results Plan.
The Executive Pay-for-Results Plan permits the Compensation Committee to
designate a portion of the annual cash compensation planned for certain
executive officers as variable pay. Under the Executive Pay-for-Results
Plan, the percentage of the targeted variable amount to be paid is
dependent upon the degree to which performance metrics defined on a
semi-annual basis were met. In November 2000 and May 2001, the
92
Compensation Committee established the performance metrics for the first and
second halves of fiscal 2001, respectively. These metrics varied for each
participant, but at least a portion of each person's pay was dependent on
Company-wide revenue and net profit metrics. For fiscal 2001, the
Compensation Committee determined that the variable compensation for the
named executive officers would be zero for both periods.
For fiscal 2000, pursuant to the terms of her employment contract, Ms.
Fiorina was entitled to receive a minimum guaranteed bonus of $1,250,000.
During the second half of fiscal 2000, Ms. Fiorina received a prorated
portion of the minimum annual guaranteed bonus, or $625,000, in accordance
with normal payroll practices. In light of the Company falling short of
meeting its net profit objectives for the second half of fiscal 2000,
resulting in no payout to the other named executive officers and Executive
Council members, Ms. Fiorina initiated a dialogue with the Compensation
Committee and recommended that her guaranteed bonus for the second half of
fiscal 2000 be zero. The Compensation Committee agreed with Ms. Fiorina's
recommendation and modified Ms. Fiorina's fiscal 2001 bonus opportunity by
reducing it by $625,000. After it was determined there would be no bonus
payout to Ms. Fiorina for fiscal 2001, Ms. Fiorina paid the Company an
amount equal to the after-tax amount of her second half fiscal 2000
guaranteed bonus of $625,000. In the first half of fiscal 2000, Ms. Fiorina
received a short-term bonus of $1,141,250, as determined by the
Compensation Committee.
During fiscal 2000 and 1999, the cash profit-sharing plan was available to
all employees of HP. Under the cash profit-sharing plan, a portion of HP's
earnings for each half of its fiscal year was paid to all employees. The
amount paid was based upon HP's performance as measured by return on assets
and revenue growth. The amounts shown in this column that are not
associated with bonuses payable under the Executive Pay-for-Results Plan
are payments pursuant to HP's prior cash profit-sharing plan.
(2) For Ms. Fiorina, in fiscal 2001 this column includes $40,739 for
incremental cost of company-required personal use of corporate aircraft,
$19,122 in tax reimbursements and certain other perquisites, and in fiscal
2000 this column includes $105,657 for incremental cost of company-required
personal use of corporate aircraft, $83,290 in tax reimbursements and
certain other perquisites. The other named executive officers did not have
perquisites and personal benefits in excess of reporting thresholds but did
receive tax reimbursements in the following amounts during fiscal 2001: Mr.
Wayman, $1,635, Mr. Zitzner, $1,635, Ms. Livermore, $1,635 and Mr. Jotwani,
$1,635.
(3) The amounts disclosed in this column reflect for fiscal 2001, 2000, and
1999 the dollar values of (a) performance-based restricted stock granted to
the named executive officers other than Ms. Fiorina and Mr. Jotwani, (b)
time-based restricted stock granted to Ms. Livermore, (c)
employment/transition agreement awards granted to the named executive
officers in 1999, and (d) HP common stock that HP contributed under its
previous Employee Stock Purchase Plan (the "ESPP") as a match for every two
shares purchased by the named executive officers during the applicable
fiscal years, as follows:
Performance-based Time-based Employment/Transition Employee Stock
Restricted Stock Restricted Stock Agreement Awards Purchase Plan
----------------- ----------------- --------------------- -----------------
Name # Shares $ Amount # Shares $ Amount # Shares $ Amount # Shares $ Amount
- ---- -------- -------- -------- -------- --------- ----------- -------- --------
Carleton S. Fiorina
2001............... 0 $ 0 0 $0 0 $ 0 N/A N/A
2000............... 0 0 0 0 0 0 0 $ 0
1999............... 0 0 0 0 1,486,336 65,557,400 0 0
Robert P. Wayman
2001............... 0 0 0 0 0 0 N/A N/A
2000............... 0 0 0 0 0 0 842 41,048
1999............... 23,062 532,710 0 0 98,148 3,614,754 1,896 61,376
Duane E. Zitzner
2001............... 0 0 0 0 0 0 N/A N/A
2000............... 0 0 0 0 0 0 544 26,522
1999............... 10,250 236,760 0 0 31,622 1,164,649 818 26,593
93
Performance-based Time-based Employment/Transition Employee Stock
Restricted Stock Restricted Stock Agreement Awards Purchase Plan
----------------- ------------------- --------------------- -----------------
Name # Shares $ Amount # Shares $ Amount # Shares $ Amount # Shares $ Amount
- ---- -------- -------- -------- ---------- -------- ---------- -------- --------
Ann M. Livermore
2001............ 0 $ 0 0 $ 0 0 $ 0 N/A N/A
2000............ 0 0 0 0 0 0 504 $24,540
1999............ 17,938 414,330 64,066 2,699,250 42,590 1,568,596 980 31,675
Pradeep Jotwani
2001............ 0 0 0 0 0 0 N/A N/A
2000............ 0 0 0 0 0 0 309 16,347
1999............ 0 0 0 0 0 425,654 426 17,565
As shown above, in connection with her employment as President and Chief
Executive Officer, during fiscal 1999 Ms. Fiorina received 743,168 shares
of restricted stock and 743,168 shares of restricted stock units that vest
annually over a three-year period with an aggregate value of $65,557,400 at
the time of grant. These shares were provided in order to compensate her
partially for stock and options that she forfeited upon the termination of
her employment with Lucent Technologies, Inc. and are reflected in this
column. Ms. Fiorina's employment arrangements are described more fully
under "Employment Contracts, Termination of Employment and
Change-in-Control Arrangements" below.
The performance-based restricted stock shown above vests only to the extent
that HP achieves stated performance goals with respect to earnings per
share and return on assets over a three-year period ending October 31, 2001
for the performance-based restricted stock granted in fiscal 1999, and
vests at the end of the three-year period. Because the stated performance
goals for the three-year period ended October 31, 2001 were not met, 100%
of the performance based restricted stock granted in fiscal 1999 to each of
Mr. Wayman, Mr. Zitzner and Ms. Livermore was forfeited in fiscal 2001, as
further described in footnote 4 below. The time-based restricted stock
granted to Ms. Livermore are not subject to performance-based goals and
vest at the end of a three-year period. The employment/transition agreement
awards granted to Mr. Wayman, Mr. Zitzner, Ms. Livermore and Mr. Jotwani in
1999 were based on a Transition Agreement with each named executive
officer, as described more fully in "Employment Contracts, Termination of
Employment and Change-in-Control Arrangements." The amounts set forth above
for restricted stock awards (other than for the ESPP) are based on the
average stock price for HP common stock on the date of grant.
The ESPP is a broad-based plan that was available to all HP employees until
its replacement in November 2000. Under the terms of the ESPP in effect
during the fiscal years shown, matching shares were provided that vest two
years after HP's contributions, which occur on a rolling fiscal quarter
basis, and are subject to forfeiture during the two-year period in the
event of termination. The matching shares are reported for the year they
were allocated rather than in the year they vested. The ESPP was replaced
with a new employee stock purchase plan, known as the Share Ownership Plan,
effective November 1, 2000 that does not provide matching shares.
At the end of fiscal 2001, the aggregate share amount and dollar value of
the restricted stock (and, in the case of Ms. Fiorina, restricted stock
units) held by the named executive officers was as follows:
Number of
Shares Value
--------- -----------
Carleton S. Fiorina.............................. 1,006,375 $16,937,291
Robert P. Wayman................................. 23,062 388,133
Duane E. Zitzner................................. 35,876 603,794
Ann M. Livermore................................. 120,442 2,027,039
Pradeep Jotwani.................................. 0 0
The named executive officers receive non-preferential dividends on
restricted stock held by them.
(4) In November 2001, the Compensation Committee reviewed the results for the
three-year performance period ended October 31, 2001 and determined that
the performance objectives associated with
94
performance-based restricted stock granted in fiscal 1999 had not been met.
Therefore, Mr. Wayman, Mr. Zitzner and Ms. Livermore forfeited 100% of the
performance-based restricted stock granted to them in fiscal 1999. The value
of the forfeiture is reflected in the Summary Compensation table as a
negative LTIP payout in fiscal year 2001 based upon the value of HP stock as
of the date of the grant in fiscal 1999 adjusted for the Agilent
Technologies spin-off.
In November 2000, the Compensation Committee reviewed the results for the
three-year performance period ended October 31, 2000 and determined that
the performance objectives associated with performance-based restricted
stock granted in fiscal 1998 had been exceeded. Therefore, a 25% bonus to
the restricted stock granted to Mr. Wayman in 1998 was made and the value
of this bonus is reflected in the LTIP Payouts column in fiscal 2000 based
upon the value of HP stock as of the date of the grant in fiscal year 1998.
In November 1999, the Compensation Committee reviewed the results for the
three-year performance period ended October 31, 1999 and determined that
the performance objectives associated with performance-based restricted
stock granted in fiscal 1997 had been met at target. Therefore, no
adjustments to the stock grants were made and the amount in the LTIP
Payouts column is correspondingly $0.
(5) For the named executive officers, this column includes the following
payments by HP:
Term-Life Accrued Sick
401(k) Insurance Leave Payment for
Name (TAXCAP) Payment Discontinued Plan
---- -------- --------- -----------------
Carleton S. Fiorina
2001................................... $6,000 $85
2000................................... 6,000 85
1999................................... 0 24 N/A
Robert P. Wayman
2001................................... 6,800 85
2000................................... 6,800 85
1999................................... 6,400 85 $257,899
Duane E. Zitzner
2001................................... 6,000 85
2000................................... 6,800 85
1999................................... 6,400 85 N/A
Ann M. Livermore
2001................................... 6,000 85
2000................................... 6,000 85
1999................................... 5,714 85 0
Pradeep Jotwani
2001................................... 6,800 85
2000................................... 6,800 85
1999................................... 6,400 85 N/A
For Ms. Fiorina, this column also includes a sign-on bonus of $3,000,000
paid in fiscal year 1999 and the following Company-sponsored relocation
expenses: $167,177 fiscal 2001 mortgage assistance, $218,104 fiscal 2000
relocation tax reimbursement, $203,520 fiscal 2000 mortgage assistance,
$327,557 other fiscal 2000 relocation expenses, $187,500 fiscal 1999
relocation allowance, $156,257 fiscal 1999 relocation tax reimbursement,
$36,343 fiscal 1999 mortgage assistance and $171,554 other fiscal 1999
relocation expenses.
(6) The amounts described in this column do not include payment by HP on
November 1, 1999 of a lump-sum settlement amount for benefits accrued under
the Officers Early Retirement Plan (terminated effective November 1, 1999)
in the amount of $1,641,169 for Mr. Wayman, $389,518 for Mr. Zitzner and
$280,333 for Ms. Livermore.
95
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on option grants in fiscal 2001 to
each of the named executive officers. HP did not grant any stock appreciation
rights to the named executive officers during fiscal 2001.
Number of % of Total
Securities Options
Underlying Granted to Exercise Grant Date
Options Employees in Price Expiration Present Value
Name Granted/(1)(2)/ Fiscal Year/(3)/ ($/Share)/(4)/ Date ($)/(5)/
- ---- -------------- --------------- ------------- ---------- -------------
Carleton S. Fiorina... 1,000,000 1.5% $35.13 Nov. 2010 $13,519,781
Robert P. Wayman...... 350,000 0.5% $35.13 Nov. 2010 4,731,923
Duane E. Zitzner...... 350,000 0.5% $35.13 Nov. 2010 4,731,923
Ann M. Livermore...... 350,000 0.5% $35.13 Nov. 2010 4,731,923
Pradeep Jotwani....... 300,000 0.5% $35.13 Nov. 2010 4,055,934
- ---------------------
(1) All options granted in fiscal 2001 are exercisable 25% after the first
year, 50% after the second year, 75% after the third year, and 100% after
the fourth year.
(2) All or a portion of the unvested portion of these options vests in
connection with certain terminations of employment. In addition, 50% of Ms.
Fiorina's then unvested options vest upon a change of control of HP (see
"Employment Contracts, Termination of Employment and Change-in-Control
Arrangements" below).
(3) HP granted options to purchase approximately 65,628,000 shares to employees
in fiscal 2001.
(4) The exercise price may be paid by delivery of already-owned shares and tax
withholding obligations related to exercise may be paid by offset of the
underlying shares, subject to certain conditions. Unless otherwise
indicated, the exercise price is the fair market value on the date of grant.
(5) HP used a modified Black-Scholes model of option valuation to determine
grant date present value. HP does not advocate or necessarily agree that
the Black-Scholes model can properly determine the value of an option.
Calculations for the named executive officers are based on a seven-year
option term, which reflects HP's experience that its options, on average,
are exercised within seven years of grant. Other assumptions used for the
valuations are: risk free rate of return of 5.1%; annual dividend yield of
1.4%; and volatility of 39%. The resulting values are reduced by 10.5% to
reflect the Company's experience with forfeitures.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table provides information on option exercises in fiscal 2001
by each of the named executive officers and the values of each of such
officer's unexercised options at October 31, 2001. There were no stock
appreciation rights exercised or outstanding.
Number of Securities Value of Unexercised
Number Underlying Unexercised Options In-the-Money Options
of Shares at Fiscal Year-End/(1)/ at Fiscal Year-End/(2)/
Acquired Value ------------------------------ -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
Carleton S. Fiorina... 0 $0 1,087,865 2,727,987 $ 0 $0
Robert P. Wayman...... 0 0 835,078 817,362 1,958,328 0
Duane E. Zitzner...... 0 0 487,295 1,252,317 469,742 0
Ann M. Livermore...... 0 0 416,329 1,081,139 78,552 0
Pradeep Jotwani....... 0 0 76,510 516,494 0 0
- ---------------------
(1) All or a portion of the unvested portion of these options vests in
connection with certain terminations of employment. In addition, 50% of Ms.
Fiorina's then unvested options vest upon a change of control of HP (see
"Employment Contracts, Termination of Employment and Change-in-Control
Arrangements").
(2) The value of unexercised options is based upon the difference between the
exercise price and the closing market price on October 31, 2001, which was
$16.83.
96
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT
AND CHANGE-IN-CONTROL ARRANGEMENTS
HP entered into an employment agreement with Ms. Fiorina, Chairman,
President and Chief Executive Officer of HP, as of July 17, 1999. The agreement
provides for an initial base salary of $1,000,000 per year. It also provides
for a targeted annual incentive award of $1,250,000 per year, with an
opportunity to earn up to an additional $2,500,000 per year in annual variable
compensation. This variable pay is guaranteed at target for the 2000 fiscal
year and was prorated at the target level for the portion of the 1999 fiscal
year during which Ms. Fiorina was employed. Ms. Fiorina is entitled to
participate at a level commensurate with her position in all HP employee
benefit programs and equity plans and is also entitled to all perquisites that
other senior executives are entitled to receive and as are otherwise suitable
to her position.
In accordance with her employment agreement, Ms. Fiorina was also granted HP
restricted stock, HP restricted stock units and HP non-qualified stock options
in order to compensate her for stock and options that she forfeited upon the
termination of her employment with Lucent Technologies, Inc. and that were
scheduled to vest in the short-term. Details of these grants follow:
1. Ms. Fiorina was granted 743,168 shares (as adjusted to reflect the
distribution of shares of Agilent Technologies and the two-for-one stock
split) of HP restricted stock. Subject to earlier vesting, as described
below, and continued employment, the restricted stock vests one-third
per year on each anniversary date of employment.
2. Ms. Fiorina was also granted 743,168 shares (on an adjusted basis) of HP
restricted stock units. Subject to earlier vesting, as described below,
and continued employment, the restricted stock units vest one-third per
year on each anniversary date of employment. Payment of the restricted
stock units will occur on the first to occur of the fifth anniversary of
employment, the date of any termination of employment or a change of
control of HP, whether by merger or asset sale or acquisition of 35% or
more of HP's voting securities.
3. Ms. Fiorina was granted an option to purchase, within 10 years,
1,535,810 shares (on an adjusted basis) of HP common stock at a purchase
price of $44.16 per share (on an adjusted basis). Subject to earlier
vesting, as described below, and continued employment, such options will
vest as to 25% of the shares on each anniversary of employment.
As part of her employment agreement, HP also agreed to pay Ms. Fiorina a
lump-sum hiring bonus of $3,000,000, reduced by any annual cash bonus she
received from Lucent Technologies, Inc. for its fiscal year ending September
30, 1999. Ms. Fiorina's employment agreement also provided for specified
relocation benefits and paid time off.
In the event that Ms. Fiorina's employment is terminated involuntarily other
than for cause, death or disability, or if Ms. Fiorina terminates her
employment for good reason (generally a reduction in Ms. Fiorina's
responsibilities or compensation, breach by HP of its obligations under the
employment agreement, or failure to appoint Ms. Fiorina to the Board), then Ms.
Fiorina will receive her accrued benefits, prorated bonus, her guaranteed bonus
for fiscal 1999 and 2000 to the extent not previously paid, a severance amount
of two times her base salary and target variable pay payable over a 24-month
period, a two-year continuation of all welfare plans, full vesting of
restricted stock and restricted stock units, and 50% vesting of all unvested
stock options. However, if Ms. Fiorina's employment is terminated in
contemplation of, at the time of, or within two years after a change in control
of HP, then she will receive instead a severance amount of three times her base
salary and specified variable pay payable on a lump-sum basis, a three-year
continuation of all welfare plans, and 100% vesting of all unvested stock
options.
In the event of a change of control of HP, all restricted stock and unvested
restricted stock units she holds will fully vest, and 50% of all unvested
options she holds will fully vest. Payments to Ms. Fiorina in connection with a
change in control will be increased to offset the effects of any golden
parachute excise taxes payable with respect to such payments.
97
As a condition to receiving severance and other benefits in connection with
a termination of her employment, Ms. Fiorina agreed to execute a release in
favor of HP and agreed that, during and for 24 months following her employment
with HP, she will not render services to certain companies and will not solicit
employees of HP or violate the confidentiality agreement she entered into with
HP.
In connection with the realignment of HP and the search for a new Chief
Executive Officer, the Board adopted the Hewlett-Packard Company Executive
Transition Program (the "Program") to provide certain key employees of HP
(including Mr. Zitzner, Ms. Livermore and Mr. Jotwani) with financial security
and incentives to remain with HP. The Program specified that, until the second
anniversary date of the effective date of the Program (the "Transition
Period"), HP would provide the Program participants with a base salary and
target pay in accordance with the 1999 Variable Pay Plan and eligibility to
participate in HP's equity programs, benefit programs and executive
compensation programs. In addition, the Program participants would receive
protection of their existing retirement benefits during the Transition Period.
In the event that a Program participant was terminated involuntarily other than
for cause or if the participant terminates his or her employment as a result of
constructive termination (generally a reduction in the participant's
compensation or a material reduction in his or her benefits) or the participant
was terminated due to his or her disability, then the participant would receive
a severance payment equal to the participant's annualized base pay plus target
variable pay multiplied by a severance payment factor specified in the
participant's notice of participation. For the named executive officers covered
by the Program, the severance payment factor was 1.5. Pursuant to the Program,
the following named executive officers received special restricted stock awards
which vested in full in May 2001 in the following amounts (on an adjusted
basis): Mr. Zitzner, 31,622 shares, Ms. Livermore, 42,590 shares and Mr.
Jotwani, 9,020 shares. In the event of a qualifying termination as described
above, participants would have also been entitled to receive full vesting of
any stock options held and of restricted stock not subject to performance
criteria, partial vesting of restricted stock subject to performance criteria,
financial counseling benefits for one year and other benefits specified on the
notice of participation. As a condition to receiving severance and other
benefits in connection with a termination of employment, participants would
have been required to execute a release in favor of HP and refrain from
competing with HP or soliciting its employees.
HP also entered into an employment agreement with Mr. Wayman as of May 20,
1999 for his employment as Executive Vice President, Finance and Administration
and Chief Financial Officer. The agreement provides for an initial base salary
of $930,000 per year and variable compensation of $270,000 per year. Pursuant
to the agreement, Mr. Wayman receives protection of his existing retirement
arrangements and a special restricted stock award of 98,148 shares (on an
adjusted basis), corresponding to three times his targeted cash compensation
divided by the fair market value of HP common stock as of the date of grant.
These shares will vest upon a termination of Mr. Wayman's employment by HP
other than for cause or by Mr. Wayman as a result of constructive termination
(generally a reduction in Mr. Wayman's compensation, a material reduction in
his benefits or HP's failure to retain Mr. Wayman as its Executive Vice
President, Finance and Administration and Chief Financial Officer) or the
distribution of shares in Agilent Technologies to HP shareowners prior to May
20, 2001 (any of the foregoing, a "Vesting Event"). Upon the occurrence of a
Vesting Event, Mr. Wayman will also receive full vesting of any stock options
held, partial vesting of other restricted stock held, financial counseling
benefits for one year and other retiree benefits. Payments by HP to Mr. Wayman
under the agreement or otherwise will be increased to offset the effects of any
golden parachute excise taxes payable with respect to such payments. As a
condition to receiving severance and other benefits under the agreement, Mr.
Wayman agreed to execute a release in favor of HP and agreed that, for 18
months following the termination of his employment with HP, he will not compete
with HP, solicit its employees, or violate his confidentiality obligations to
HP.
HP has adopted a retention program that includes the payment of retention
bonuses to specified employees of HP that are contingent upon the completion of
the business combination transaction with Compaq Computer Corporation. Ms.
Fiorina would have been entitled to receive retention bonuses under this
program totaling two times the sum of her current salary and target annual
bonus (a total of $8.0 million), but she has declined to accept the right to
participate in this program. Mr. Jotwani, Ms. Livermore, Mr. Wayman and Mr.
Zitzner may receive three times current salary plus target bonus under this
program, in each case payable in two equal
98
installments, with the first installment payable on September 4, 2002 and the
second installment payable on September 4, 2003, assuming that they remain
employed through the installment payment dates.
As a part of its retention program, HP also agreed to provide the executive
officers who are receiving retention bonuses as described above certain
payments and benefits in the event of a "qualifying termination" within two
years after the completion date of the merger. A qualifying termination is
defined as any termination by HP other than for cause, resignation of the
executive for good cause (including a reduction in the executive's total salary
plus target bonus, a reduction of the executive's base salary or a material
reduction in the kind or level of the executive's employee benefits) or
termination of the executive for disability. In the event of a qualifying
termination within two years after the completion of the merger, the executive
will become entitled to the following payments and benefits, offset by any
retention payments described above previously paid to the executive:
. a cash payment equal to 1.5 times the executive's then-current base salary
plus target bonus;
. the executive's stock options will become fully exercisable and will
remain exercisable until the earlier of:
- the third anniversary of the executive's termination date; and
- the expiration of the term of the stock option;
. any unvested restricted stock granted to the executive under HP's stock
plans will vest and a portion of other restricted stock held by the
executive will vest; and
. continuation of certain health benefits.
99
PENSION PLAN
The following table shows the estimated annual benefits payable upon
retirement to HP employees in the United States under the Company's Deferred
Profit-Sharing Plan (the "Deferred Plan") and the Company's Retirement Plan
(the "Retirement Plan"), as well as the Company's Excess Benefit Retirement
Plan (the "Excess Benefit Plan").
Estimated Annual Retirement Benefits/(1)(2)/
Years of Service
---------------------------------------
Highest Five-Year Average Compensation 15 20 25 30
-------------------------------------- -------- -------- ---------- ----------
$ 400,000.............. $ 86,662 $115,549 $ 144,436 $ 173,323
500,000.............. 109,162 145,549 181,936 218,323
600,000.............. 131,662 175,549 219,436 263,323
700,000.............. 154,162 205,549 256,936 308,323
800,000.............. 176,662 235,549 294,436 353,323
900,000.............. 199,162 265,549 331,936 398,323
1,000,000.............. 221,662 295,549 369,436 443,323
1,100,000.............. 244,162 325,549 406,936 488,323
1,200,000.............. 266,662 355,549 444,436 533,323
1,300,000.............. 289,162 385,549 481,936 578,323
1,400,000.............. 311,662 415,549 519,436 623,323
1,500,000.............. 334,162 445,549 556,936 668,323
1,600,000.............. 356,662 475,549 594,436 713,323
1,700,000.............. 379,162 505,549 631,936 758,323
1,800,000.............. 401,662 535,549 669,436 803,323
1,900,000.............. 424,162 565,549 706,936 848,323
2,000,000.............. 446,662 595,549 744,436 893,323
2,100,000.............. 469,162 625,549 781,936 938,323
2,200,000.............. 491,662 655,549 819,436 983,323
2,300,000.............. 514,162 685,549 856,936 1,028,323
2,400,000.............. 536,662 715,549 894,436 1,073,323
2,500,000.............. 559,162 745,549 931,936 1,118,323
2,600,000.............. 581,662 775,549 969,436 1,163,323
2,700,000.............. 604,162 805,549 1,006,936 1,208,323
2,800,000.............. 626,662 835,549 1,044,436 1,253,323
2,900,000.............. 649,162 865,549 1,081,936 1,298,323
3,000,000.............. 671,662 895,549 1,119,436 1,343,323
- ---------------------
(1) Amounts exceeding $160,000 (as adjusted from time to time by the Internal
Revenue Service) would be paid pursuant to the Excess Benefit Plan.
(2) No more than $200,000 (as adjusted from time to time by the Internal
Revenue Service) of cash compensation may be taken into account in
calculating benefits payable under the Retirement Plan.
The compensation covered by the plans whose benefits are summarized in the
table above equals base pay and bonuses paid pursuant to the Executive
Pay-for-Results Plan. The covered compensation for each of the named executive
officers is the highest five-year average of the amounts shown in the "Salary"
column of the Summary Compensation table and amounts paid pursuant to the
Executive Pay-for-Results Plan as shown in the "Bonus" column of the Summary
Compensation table. Benefits payable upon retirement will be based on the total
of the amounts shown in the "Salary" column of the Summary Compensation table
and amounts paid pursuant to the Executive Pay-for-Results Plan as shown in the
"Bonus" column of the Summary Compensation table.
Officers named in the Summary Compensation table have been credited with the
following years of service: Ms. Fiorina, two years; Mr. Wayman, 32 years; Mr.
Zitzner, 12 years; Ms. Livermore, 19 years; and Mr. Jotwani, 19 years.
Retirement benefits shown are payable at age 65 in the form of (1) a single
life annuity, (2) a joint annuity, or (3) a lump sum to the employee, and
reflect the maximum offset allowance currently in effect under Section 401(l)
of the Internal Revenue Code to compute the offset for such benefits under the
plans. For purposes of calculating the benefit, an employee may not be credited
with more than 30 years of service.
100
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
COMMON STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of January 28, 2002
concerning:
. The David and Lucile Packard Foundation, a beneficial owner of more than
5% of HP's common stock, as well as Mr. Walter B. Hewlett and Mr. Edwin E.
van Bronkhorst;
. beneficial ownership by all other current HP directors and the named
executive officers set forth in the Summary Compensation table on page 92;
and
. beneficial ownership by all current HP directors and HP executive officers
as a group.
The information provided in the table is based on the Company's records,
information filed with the Securities and Exchange Commission and information
provided to the Company, except where otherwise noted.
The table begins with certain ownership information of the families of HP's
founders and their related entities: (1) the foundation of the late Mr. David
Packard and a related charitable institution, and (2) The William R. Hewlett
Revocable Trust, a family foundation and other related persons.
The number of shares beneficially owned by each entity, person, director or
executive officer is determined under rules of the Securities and Exchange
Commission, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership
includes any shares as to which the individual has the sole or shared voting
power or investment power and also any shares that the individual has the right
to acquire as of March 29, 2002 (60 days after January 28, 2002) through the
exercise of any stock option or other right. Unless otherwise indicated, each
person has sole voting and investment power (or shares such powers with his or
her spouse) with respect to the shares set forth in the following table.
BENEFICIAL OWNERSHIP TABLE
Amount and Nature of Percent
Name and Address of Beneficial Owner Beneficial Ownership/(1)(2)/ of Class
- ------------------------------------ --------------------------- --------
The David and Lucile Packard Foundation
(the "Packard Foundation").......................... 201,279,656 10.4%
300 Second Street, Suite 200
Los Altos, CA 94022
The Packard Humanities Institute ("PHI")/(3)/....... 25,760,000 1.3%
300 Second Street, Suite 201
Los Altos, CA 94022
The William R. Hewlett Revocable Trust
dated February 3, 1995 (the "Hewlett Trust")/(4)/... 72,802,148 3.7%
c/o Los Trancos Management, LLC
1501 Page Mill Road MS 3U-10
Palo Alto, CA 94304
The William and Flora Hewlett Foundation
(the "Hewlett Foundation")/(5)/..................... 36,457,840 1.9%
525 Middlefield Road, Suite 200
Menlo Park, CA 94025
101
Amount and Nature of Percent
Name and Address of Beneficial Owner Beneficial Ownership/(1)(2)/ of Class
- ------------------------------------ --------------------------- --------
Walter B. Hewlett/(6)(7)/.............................. 401,896 Direct
c/o Los Trancos Management, LLC 37,905 Vested Options
1501 Page Mill Road MS 3U-10 2,506,645 Indirect/(8)/
---------
Palo Alto, CA 94304 2,946,446 */(1)/
Edwin E. van Bronkhorst/(7)(9)/........................ 176 Direct
c/o Los Trancos Management, LLC 5,887,235 Indirect/(10)/
1501 Page Mill Road MS 3U-10 ---------
5,887,411 */(1)/
Palo Alto, CA 94304
All Other Directors and Named Executive Officers Not Listed Above:
Phillip M. Condit...................................... 10,023 Direct
10,000 Vested Options
-------
20,023 *
Patricia C. Dunn....................................... 32,047 Direct
10,000 Vested options
-------
42,047 *
Carleton S. Fiorina.................................... 407,629 Direct
1,337,865 Vested Options
---------
1,745,494 *
Sam Ginn............................................... 12,167 Direct
21,092 Vested Options
-------
33,259 *
Richard A. Hackborn.................................... 17,126 Direct
10,000 Vested Options
-------
27,126 *
George A. Keyworth II.................................. 8,080 Direct
32,665 Vested Options
-------
40,745 *
Robert E. Knowling, Jr................................. 4,000 Direct
17,707 Vested Options
-------
21,707 *
Robert P. Wayman....................................... 299,794 Direct
1,092,156 Vested Options
120 Indirect/(11)/
---------
1,392,070 *
Pradeep Jotwani........................................ 34,857 Direct
203,024 Vested Options
-------
237,881 *
Ann M. Livermore....................................... 121,683 Direct
641,412 Vested Options
-------
763,095 *
Duane E. Zitzner....................................... 100,266 Direct
736,375 Vested Options
-------
836,641 *
All Current Directors and Executive Officers as a Group
(19 persons)......................................... 94,228,269 /(12)(13)(14)/ 4.9%
102
- ---------------------
* Represents holdings of less than one percent.
(1) None of HP's named executive officers, directors or persons listed in the
table beneficially owns more than 1% of HP's outstanding shares, except
for Mr. Walter B. Hewlett and Mr. Edwin E. van Bronkhorst. Based on the
total of 1,941,391,000 shares outstanding as of January 28, 2002, and the
87,730,887 shares reported for Mr. Hewlett and 90,689,559 shares reported
for Mr. van Bronkhorst in their preliminary proxy statement filed January
14, 2002 with the Securities and Exchange Commission, Mr. Hewlett and Mr.
Van Bronkhorst beneficially own 4.5% and 4.7%, respectively. These
percentages represent, in part, shared voting and investment power and in
some cases may cover the same shares. Accordingly, the ownership
percentages for each of the above individuals should not be combined to
determine the total voting power and investment power of the Hewlett
family. For these named individuals, the number of shares indicated under
the "Amount and Nature of Beneficial Ownership" column in the table
reflects all shares held directly or indirectly by them except for any
beneficial ownership interest, as described elsewhere in the table, that
they may have in PHI, the Hewlett Trust or the Hewlett Foundation.
(2) Pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, as
amended, "Vested Options" are options that may be exercised as of March
29, 2002.
(3) The directors of PHI include Mr. Hewlett (who is also a director of HP)
and Mr. van Bronkhorst. Mr. Hewlett and Mr. van Bronkhorst share (with
other persons) voting and investment power over the PHI shares and
accordingly are considered beneficial owners of these shares; however, Mr.
Hewlett and Mr. van Bronkhorst disclaim any beneficial interest in the PHI
shares because they have no economic interest in any of these shares.
Furthermore, Mr. Hewlett and Mr. van Bronkhorst indicated in their
preliminary proxy statement filed January 14, 2002 with the Securities and
Exchange Commission that they have irrevocably agreed to abstain from
voting as directors of the PHI with respect to the voting or disposition
of such shares until the later of (i) 90 days after November 13, 2001, or
(ii) the date on which the proposed merger with Compaq Computer
Corporation terminates or closes.
(4) As of January 14, 2002, the co-trustees of the Hewlett Trust are Mr.
Hewlett and Mr. van Bronkhorst. As co-trustees of the Hewlett Trust, Mr.
Hewlett and Mr. van Bronkhorst share voting and investment power over the
Hewlett Trust shares. Accordingly, each of them is considered a beneficial
owner of these shares; however, Mr. Hewlett and Mr. van Bronkhorst
disclaim any beneficial interest in the Hewlett Trust shares because they
have no economic interest in any of these shares.
(5) Mr. Hewlett is the chairman of the Hewlett Foundation; however, he
disclaims voting or investment power over the Hewlett Foundation shares as
voting and dispositive power are exercised by an independent stock
committee, and Mr. Hewlett is not a member of the independent stock
committee. Mr. Hewlett disclaims any beneficial interest in the Hewlett
Foundation shares because he has no economic interest in any of these
shares.
(6) Son of the late Mr. William R. Hewlett, director of HP, PHI and the
Hewlett Foundation, co-trustee of the Hewlett Trust and co-executor of the
estate of the late Mr. William R. Hewlett.
(7) In their Schedule 13D filed with the Securities and Exchange Commission on
November 14, 2001, Mr. Hewlett and Mr. Van Bronkhorst, Ms. Eleanor H.
Gimon and Ms. Mary Hewlett Jaffe acknowledged that publicly stating their
opposition to the proposed merger of HP and Compaq Computer Corporation
could be viewed as holding shares of HP stock with the purpose or effect
of changing or influencing control of HP and that issuing a press release
on November 6, 2001 announcing their intent to vote against the proposed
merger could lead to an allegation that a "group" has been formed within
the meaning of Rule 13(d)-5(b)(1) of the Securities Exchange Act of 1934,
as amended. The filing specifically states that the reporting persons do
not concede that such a "group" has been formed.
(8) Indirect holdings include 17,240 shares held by Mr. Hewlett as custodian
for his children. Mr. Hewlett disclaims any beneficial interest in all of
these shares. Indirect holdings also include 768,520 shares held
103
by the Public Policy Institute of California ("PPIC"). Mr. Hewlett also
disclaims beneficial ownership of these shares because, while he shares
voting and dispositive authority with the other directors of the PPIC, he
has no economic interest in such shares. Indirect holdings also include
1,720,885 shares held by the estate of the late Mr. William R. Hewlett.
Mr. Hewlett also disclaims any interest in these shares because, while he
and Mr. van Bronkhorst share voting and investment power over such shares,
they have no economic interest in any of them.
(9) Director of PHI, co-executor of the estate of William R. Hewlett and
trustee of certain Hewlett family trusts.
(10) Indirect holdings include 1,601,950 shares held in a trust for Ms. Mary
Hewlett Jaffe and 398,400 shares are held in a trust for Ms. Eleanor H.
Gimon, of which trusts Mr. van Bronkhorst is a co-trustee.
Mr. van Bronkhorst disclaims any beneficial interest in all of the shares
held by those trusts because he has no economic interest in any of those
shares. Indirect holdings also include 1,720,885 shares held by the estate
of the late Mr. William R. Hewlett; however, Mr. van Bronkhorst disclaims
any beneficial interest in such shares because, while Mr. van Bronkhorst
and Mr. Hewlett share voting and investment power over such shares, they
have no economic interest in any of them. Indirect holdings also include
2,166,000 shares held in The Flora L. Hewlett Trust for the grandchildren
of the late Mr. William R. Hewlett. Mr. van Bronkhorst is a trustee with
shared voting and investment power over such shares; however, Mr. van
Bronkhorst disclaims any beneficial interest in all of these shares
because he has no economic interest in any of these shares.
(11) Includes 120 shares held by Mr. Wayman as custodian for his son.
(12) Includes an aggregate of 5,179,327 shares that the current directors and
executive officers have the right to acquire as of March 29, 2002 through
the exercise of options.
(13) Includes an aggregate of 92,488,240 shares held by current directors and
executive officers in fiduciary or beneficial capacities. The total number
of shares held by Mr. Hewlett in fiduciary or beneficial capacities used
for this calculation is 87,346,698. It has been calculated by taking the
87,730,887 shares reported in Mr. Hewlett's preliminary proxy statement
filed with the Securities and Exchange Commission on January 14, 2002
subtracting the 401,896 shares he owns directly and adding 17,707 shares
that Mr. Hewlett has the right to acquire as of March 29, 2002.
(14) The total number of shares reported for Mr. Hewlett is 87,748,594 based on
the 87,730,887 shares reported in Mr. Hewlett's preliminary proxy
statement filed with the Securities and Exchange Commission on January 14,
2002 and an additional 17,707 shares that Mr. Hewlett has the right to
require as of March 29, 2002.
ITEM 13. Certain Relationships and Related Transactions.
None.
104
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:
The following financial statements are filed as part of this report
under Item 8--"Financial Statements and Supplementary Data."
Report of Independent Auditors............................... 42
Report of Independent Accountants............................ 43
Statement of Management Responsibility....................... 44
Consolidated Statement of Earnings........................... 45
Consolidated Balance Sheet................................... 46
Consolidated Statement of Cash Flows......................... 47
Consolidated Statement of Stockholders' Equity............... 48
Notes to Consolidated Financial Statements................... 49
Quarterly Summary............................................ 84
2. Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts for the three fiscal
years ended October 31, 2001.
All other schedules are omitted as the required information is
inapplicable or the information is presented in the Consolidated
Financial Statements and notes thereto in Item 8 above.
105
Schedule II
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended
October 31,
------------------
2001 2000 1999
----- ----- ----
(In millions)
Allowance for doubtful accounts--accounts receivable:
Balance, beginning of period.......................... $ 171 $ 214 $129
Additions to allowance................................ 206 122 102
Deductions, net of recoveries......................... (102) (165) (17)
----- ----- ----
Balance, end of period................................ $ 275 $ 171 $214
===== ===== ====
Allowance for doubtful accounts--financing receivables:
Balance, beginning of period.......................... $ 69 $ 47 $ 43
Additions to allowance................................ 232 60 38
Deductions, net of recoveries......................... (154) (38) (34)
----- ----- ----
Balance, end of period................................ $ 147 $ 69 $ 47
===== ===== ====
106
3. Exhibits:
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the SEC. HP shall furnish
copies of exhibits for a reasonable fee (covering the expense of
furnishing copies) upon request.
Exhibit
Number Description
- ------ -----------
1 Not applicable.
2(a) Master Separation and Distribution Agreement between Hewlett-Packard Company and Agilent
Technologies, Inc. effective as of August 12, 1999, which appears as Exhibit 2 to Registrant's
Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is
incorporated herein by reference.
2(b) Agreement and Plan of Reorganization by and among Hewlett-Packard Company, Heloise Merger
Corporation and Compaq Computer Corporation dated as of September 4, 2001, which appears as
Exhibit 2.1 to Registrant's Form 8-K dated August 31, 2001, which exhibit is incorporated herein by
reference.
3(a) Registrant's Certificate of Incorporation, which appears as Exhibit 3(a) to Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended April 30, 1998, which exhibit is incorporated
herein by reference.
3(b) Registrant's Amendment to the Certificate of Incorporation, which appears as Exhibit 3(b) to
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2001, which
exhibit is incorporated herein by reference.
3(c) Registrant's Amended and Restated By-Laws, which appears as Exhibit 3.1 to Registrant's Form 8-K
dated November 6, 2001, which exhibit is incorporated herein by reference.
3(d) Registrant's Certificate of Designation of Rights, Preferences and Privileges of Series A Participating
Preferred Stock, which appears as Exhibit 3.4 to Registrant's Form 8-A dated September 4, 2001,
which exhibit is incorporated herein by reference.
4(a) Indenture dated as of October 14, 1997 among Registrant and Chase Trust Company of California
regarding Liquid Yield Option Notes due 2017, which appears as Exhibit 4.2 to Registrant's
Registration Statement on Form S-3 (Registration No. 333-44113), which exhibit is incorporated
herein by reference.
4(b) Supplemental Indenture dated as of March 16, 2000 among Registrant and Chase Trust Company of
California regarding Liquid Yield Option Notes due 2017, which appears as Exhibit 4(b) to
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2000, which exhibit
is incorporated herein by reference.
4(c) Form of Registrant's 7.15% Global notes due June 15, 2005 and related Officers' Certificate, which
appear as Exhibits 4.1 and 4.3 to Registrant's Form 8-K filed on June 15, 2000, which exhibits are
incorporated herein by reference.
4(d) Senior Indenture, which appears as Exhibit 4.1 to Registrant's Registration Statement on Form S-3
dated February 18, 2000, as amended by Amendment No. 1 thereto dated March 17, 2000
(Registration No. 333-30786), which exhibit is incorporated herein by reference.
4(e) Form of Registrant's Fixed Rate Note and Floating Rate Note and related Officers' Certificate, which
appear as Exhibits 4.1, 4.2 and 4.4 to Registrant's Form 8-K filed on May 24, 2001, which exhibits
are incorporated herein by reference.
107
Exhibit
Number Description
- ------ -----------
4(f) Preferred Stock Rights Agreement, dated as of August 31, 2001, between Hewlett-Packard Company
and Computershare Investor Services, LLC., which appears as Exhibit 4.1 to Registrant's Form 8-K
dated August 31, 2001, which exhibit is incorporated herein by reference.
4(g) Underwriting Agreement, dated December 3, 2001, between Hewlett-Packard Company and Credit
Suisse First Boston Corporation and Salomon Smith Barney Inc., as representatives of the several
underwriters named therein, which appears as Exhibit 1.1 to Registrant's Form 8-K dated
December 7, 2001, which exhibit is incorporated herein by reference.
4(h) Form of 5.75% Global Note due December 15, 2006 and related officers' certificate, which appear as
Exhibits 4.1 and 4.2 to Registrant's Form 8-K dated December 7, 2001, which exhibits are
incorporated herein by reference.
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, which appears
as Exhibit 10(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31,
1999, which exhibit is incorporated herein by reference.*
10(c) Registrant's Excess Benefit Retirement Plan, amended and restated as of November 1, 1999, which
appears as Exhibit 10(c) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended
July 31, 2000, which exhibit is incorporated herein by reference.*
10(d) Registrant's 1990 Incentive Stock Plan, as amended, which appears as Exhibit 10(d) to Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2001, which exhibit is
incorporated herein by reference.*
10(e) Registrant's 1990 Incentive Stock Plan, as amended, stock option agreement, which appears as
Exhibit 10(e) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31,
1999, which exhibit is incorporated herein by reference.*
10(f) Registrant's 1995 Incentive Stock Plan, as amended, which appears as Exhibit 10(f) to Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2001, which exhibit is
incorporated herein by reference.*
10(g) Registrant's 1995 Incentive Stock Plan, as amended, stock option and restricted stock agreements,
which appears as Exhibit 10(g) to Registrant's Annual Report on Form 10-K for the fiscal year ended
October 31, 1999, which exhibit is incorporated herein by reference.*
10(h) Registrant's 1997 Director Stock Plan, which appears as Exhibit 99 to Registrant's Form S-8 filed on
March 7, 1997, which exhibit is incorporated herein by reference.*
10(i) Registrant's Executive Deferred Compensation Plan, Amended and Restated effective November 1,
2000, which appears as Exhibit 10(i) to Registrant's Annual Report on Form 10-K for the fiscal year
ended October 31, 2000, which exhibit is incorporated herein by reference.*
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.*
108
Exhibit
Number Description
- ------ -----------
10(l) VeriFone, Inc. Amended and Restated 1987 Supplemental Stock Option Plan and form of agreement,
which appears as Exhibit 99.3 to Registrant's Form S-8 filed on July 1, 1997, which exhibit is
incorporated herein by reference.*
10(m) Enterprise Integration Technologies Corporation 1991 Stock Plan and form of agreement, which
appears as Exhibit 99.4 to Registrant's Form S-8 filed on July 1, 1997, which exhibit is incorporated
herein by reference.*
10(n) VeriFone, Inc. Amended and Restated Employee Stock Purchase Plan, which appears as Exhibit 99.1
to Registrant's Form S-8 filed on July 1, 1997, which exhibit is incorporated herein by reference.*
10(o) Registrant's 1998 Subsidiary Employee Stock Purchase Plan and the Subscription Agreement, which
appear as Appendices E and E-1 to Registrant's Proxy Statement dated January 12, 1998,
respectively, which appendices are incorporated herein by reference.*
10(p) Employment Agreement, dated July 17, 1999, between Registrant and Carleton S. Fiorina, which
appears as Exhibit 10(gg) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended
July 31, 1999, which exhibit is incorporated herein by reference.*
10(q) 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(r) 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(s) 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(t) 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(u) Registrant's 2000 Stock Plan amended as of October 27, 2000.*
10(v) Registrant's 2000 Employee Stock Purchase Plan amended as of March 29, 2001.*
10(w) Registrant's Executive Pay-For-Results Plan (Amended and Restated as of November 1, 2000),
which appears as Exhibit 10(y) to Registrant's Annual Report on Form 10-K for the fiscal year ended
October 31, 2000, which exhibit is incorporated herein by reference.*
10(x) Registrant's Pay-For-Results Short-Term Bonus Plan (Effective November 1, 2000), which appears
as Exhibit 10(z) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31,
2000, which exhibit is incorporated herein by reference.*
10(y) StorageApps Inc. 2000 Stock Incentive Plan, which appears as Exhibit 4.1 to Registrant's Form S-8
filed on September 26, 2001, which exhibit is incorporated herein by reference.*
10(z) Registrant's 2001 Executive Transition Program.*
11 Not applicable.
12 Statement of Computation of Ratio of Earnings to Fixed Charges.
13-15 Not applicable.
109
Exhibit
Number Description
- ------ -----------
16 Letter regarding change in independent accountants.
17 Not applicable.
18 None.
19-20 Not applicable.
21 Subsidiaries of Registrant as of January 17, 2002.
22 None.
23.1 Consent of Independent Auditors.
23.2 Consent of Independent Accountants.
24 Powers of Attorney. Contained in page 113 of this Annual Report on Form 10-K and incorporated
herein by reference.
25-27 Not applicable.
28 None.
99 2001 Employee Stock Purchase Plan Annual Report on Form 11-K.
- ---------------------
* Indicates management contract or compensatory plan, contract or arrangement.
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 August 16, 2001, HP filed a report on Form 8-K, which reported under Item
5, the issuance of a press release containing financial information for the
third quarter and first nine months of fiscal year 2001 and forward-looking
statements relating to the fourth quarter of fiscal year 2001.
On September 4, 2001, HP filed a report on Form 8-K which reported under
Item 5, (1) a declaration by HP's Board of Directors on August 31, 2001 of a
dividend of one Preferred Share Purchase Right on each share of Common Stock of
HP outstanding as of the close of business on September 17, 2001, and (2) the
issuance of a joint press release with Compaq Computer Corporation announcing
the execution of a definitive merger agreement between the two companies.
On September 7, 2001, HP filed a report on Form 8-K, which reported under
Item 5 the issuance of a press release on September 6, 2001 with Indigo N.V.
announcing an Offer Agreement between the two companies. Under the terms of the
Offer Agreement, HP will commence an exchange offer to acquire the outstanding
common shares of Indigo N.V. stock not already owned by HP.
On September 13, 2001, HP filed a report on Form 8-K/A, which amended the
Form 8-K filed on September 4, 2001.
On September 18, 2001, HP filed a report on Form 8-K, which reported under
Item 5 the issuance of a press release on September 17, 2001 announcing that it
has resumed its normal stock repurchase activities, and that it has
authorization of approximately $1.8 billion available for the repurchase of
shares as part of its share repurchase programs.
On September 19, 2001, HP filed a report on Form 8-K/A, which amended the
Form 8-K filed on September 7, 2001.
110
On November 6, 2001, HP filed a report on Form 8-K under Exhibit 3.1 to
correct clerical errors contained in the Amended and Restated Bylaws of the
Company attached as an exhibit to the registration statement on Form 8-A filed
by the Company with the Securities and Exchange Commission on September 4, 2001.
On November 14, 2001, HP filed a report on Form 8-K, which reported under
Item 5 the issuance of a press release announcing HP's fourth quarter results
dated November 14, 2001 relating to its fiscal 2001 fourth quarter and 2002
guidance.
On November 16, 2001, HP filed a report on Form 8-K, which reported under
Item 5 the filing with the Securities and Exchange Commission a Registration
Statement on Form S-4 (the "Registration Statement") in connection with the
proposed business combination of HP and Compaq Computer Corporation, a Delaware
corporation ("Compaq"), by means of a merger of a wholly-owned subsidiary of HP
with and into Compaq (the "Merger"). Risk factors relating to the Merger and
the combined company following the Merger and unaudited pro forma financial
information of HP giving effect to the Merger as a purchase of Compaq by HP
using the purchase method of accounting were included in the Registration
Statement and attached as exhibits and incorporated by reference in the Form
8-K.
On November 30, 2001, HP filed a report on Form 8-K relating to the proposed
merger with Compaq Computer Corporation, which attached as exhibits and
incorporated by reference in the Form 8-K: (i) the historical audited
consolidated financial statements of Compaq including Compaq's consolidated
balance sheet at December 31, 2000 and 1999, and the consolidated statements of
income, cash flows and stockholders' equity for each of the three years in the
period ended December 31, 2000, and (ii) the historical unaudited interim
condensed consolidated financial statements of Compaq including Compaq's
condensed consolidated balance sheet at September 30, 2001, the condensed
consolidated statement of income for the three and nine months ended September
30, 2001 and 2000, and the condensed consolidated statement of cash flows for
the nine months ended September 30, 2001 and 2000.
On December 7, 2001, HP filed a report on Form 8-K, which reported under
Item 5 the issuance of the 5.75% Global Notes due December 15, 2006. The report
also filed the form of the 5.75% Global Note, the Underwriting Agreement and
the Section 301 Officers' Certificate with respect thereto.
111
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 29, 2002
HEWLETT-PACKARD COMPANY
By: /s/ ANN O. BASKINS
________________________________
Ann O. Baskins
Vice President, General Counsel
and Secretary
112
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 Chairman, President and January 29, 2002
____________________________ Chief Executive Officer
Carleton S. Fiorina (Principal Executive Officer)
/s/ ROBERT P. WAYMAN Executive Vice President, Finance January 29, 2002
____________________________ and Administration, Chief Financial
Robert P. Wayman Officer (Principal Financial Officer)
and Director
/s/ JON E. FLAXMAN Vice President and Controller January 29, 2002
____________________________ (Principal Accounting Officer)
Jon E. Flaxman
/s/ PHILIP M. CONDIT Director January 29, 2002
____________________________
Philip M. Condit
/s/ PATRICIA C. DUNN Director January 29, 2002
____________________________
Patricia C. Dunn
/s/ SAM GINN Director January 29, 2002
____________________________
Sam Ginn
/s/ RICHARD A. HACKBORN Director January 29, 2002
____________________________
Richard A. Hackborn
/s/ WALTER B. HEWLETT Director January 29, 2002
____________________________
Walter B. Hewlett
/s/ GEORGE A. KEYWORTH II Director January 29, 2002
____________________________
George A. Keyworth II
/s/ ROBERT E. KNOWLING, JR. Director January 29, 2002
____________________________
Robert E. Knowling, Jr.
113
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
1 Not applicable.
2(a) Master Separation and Distribution Agreement between Hewlett-Packard Company and Agilent
Technologies, Inc. effective as of August 12, 1999, which appears as Exhibit 2 to Registrant's
Annual Report on Form 10-K for the fiscal year ended October 31, 1999, which exhibit is
incorporated herein by reference.
2(b) Agreement and Plan of Reorganization by and among Hewlett-Packard Company, Heloise Merger
Corporation and Compaq Computer Corporation dated as of September 4, 2001, which appears as
Exhibit 2.1 to Registrant's Form 8-K dated August 31, 2001, which exhibit is incorporated herein by
reference.
3(a) Registrant's Certificate of Incorporation, which appears as Exhibit 3(a) to Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended April 30, 1998, which exhibit is incorporated
herein by reference.
3(b) Registrant's Amendment to the Certificate of Incorporation, which appears as Exhibit 3(b) to
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2001, which
exhibit is incorporated herein by reference.
3(c) Registrant's Amended and Restated By-Laws, which appears as Exhibit 3.1 to Registrant's Form 8-K
dated November 6, 2001, which exhibit is incorporated herein by reference.
3(d) Registrant's Certificate of Designation of Rights, Preferences and Privileges of Series A Participating
Preferred Stock, which appears as Exhibit 3.4 to Registrant's Form 8-A dated September 4, 2001,
which exhibit is incorporated herein by reference.
4(a) Indenture dated as of October 14, 1997 among Registrant and Chase Trust Company of California
regarding Liquid Yield Option Notes due 2017, which appears as Exhibit 4.2 to Registrant's
Registration Statement on Form S-3 (Registration No. 333-44113), which exhibit is incorporated
herein by reference.
4(b) Supplemental Indenture dated as of March 16, 2000 among Registrant and Chase Trust Company of
California regarding Liquid Yield Option Notes due 2017, which appears as Exhibit 4(b) to
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2000, which exhibit
is incorporated herein by reference.
4(c) Form of Registrant's 7.15% Global notes due June 15, 2005 and related Officers' Certificate, which
appear as Exhibits 4.1 and 4.3 to Registrant's Form 8-K filed on June 15, 2000, which exhibits are
incorporated herein by reference.
4(d) Senior Indenture, which appears as Exhibit 4.1 to Registrant's Registration Statement on Form S-3
dated February 18, 2000, as amended by Amendment No. 1 thereto dated March 17, 2000
(Registration No. 333-30786), which exhibit is incorporated herein by reference.
4(e) Form of Registrant's Fixed Rate Note and Floating Rate Note and related Officers' Certificate, which
appear as Exhibits 4.1, 4.2 and 4.4 to Registrant's Form 8-K filed on May 24, 2001, which exhibits
are incorporated herein by reference.
4(f) Preferred Stock Rights Agreement, dated as of August 31, 2001, between Hewlett-Packard Company
and Computershare Investor Services, LLC., which appears as Exhibit 4.1 to Registrant's Form 8-K
dated August 31, 2001, which exhibit is incorporated herein by reference.
4(g) Underwriting Agreement, dated December 3, 2001, between Hewlett-Packard Company and Credit
Suisse First Boston Corporation and Salomon Smith Barney Inc., as representatives of the several
underwriters named therein, which appears as Exhibit 1.1 to Registrant's Form 8-K dated
December 7, 2001, which exhibit is incorporated herein by reference.
4(h) Form of 5.75% Global Note due December 15, 2006 and related officers' certificate, which appear as
Exhibits 4.1 and 4.2 to Registrant's Form 8-K dated December 7, 2001, which exhibits are
incorporated herein by reference.
Exhibit
Number Description
- ------ -----------
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, which appears
as Exhibit 10(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31,
1999, which exhibit is incorporated herein by reference.*
10(c) Registrant's Excess Benefit Retirement Plan, amended and restated as of November 1, 1999, which
appears as Exhibit 10(c) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended
July 31, 2000, which exhibit is incorporated herein by reference.*
10(d) Registrant's 1990 Incentive Stock Plan, as amended, which appears as Exhibit 10(d) to Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2001, which exhibit is
incorporated herein by reference.*
10(e) Registrant's 1990 Incentive Stock Plan, as amended, stock option agreement, which appears as
Exhibit 10(e) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31,
1999, which exhibit is incorporated herein by reference.*
10(f) Registrant's 1995 Incentive Stock Plan, as amended, which appears as Exhibit 10(f) to Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2001, which exhibit is
incorporated herein by reference.*
10(g) Registrant's 1995 Incentive Stock Plan, as amended, stock option and restricted stock agreements,
which appears as Exhibit 10(g) to Registrant's Annual Report on Form 10-K for the fiscal year ended
October 31, 1999, which exhibit is incorporated herein by reference.*
10(h) Registrant's 1997 Director Stock Plan, which appears as Exhibit 99 to Registrant's Form S-8 filed on
March 7, 1997, which exhibit is incorporated herein by reference.*
10(i) Registrant's Executive Deferred Compensation Plan, Amended and Restated effective November 1,
2000, which appears as Exhibit 10(i) to Registrant's Annual Report on Form 10-K for the fiscal year
ended October 31, 2000, which exhibit is incorporated herein by reference.*
10(j) VeriFone, Inc. Amended and Restated 1992 Non-Employee Directors' Stock Option Plan, which
appears as Exhibit 99.1 to Registrant's Form S-8 filed on July 1, 1997, which exhibit is incorporated
herein by reference.*
10(k) VeriFone, Inc. Amended and Restated Incentive Stock Option Plan and form of agreement, which
appears as Exhibit 99.2 to Registrant's Form S-8 filed on July 1, 1997, which exhibit is incorporated
herein by reference.*
10(l) VeriFone, Inc. Amended and Restated 1987 Supplemental Stock Option Plan and form of agreement,
which appears as Exhibit 99.3 to Registrant's Form S-8 filed on July 1, 1997, which exhibit is
incorporated herein by reference.*
10(m) Enterprise Integration Technologies Corporation 1991 Stock Plan and form of agreement, which
appears as Exhibit 99.4 to Registrant's Form S-8 filed on July 1, 1997, which exhibit is incorporated
herein by reference.*
10(n) VeriFone, Inc. Amended and Restated Employee Stock Purchase Plan, which appears as Exhibit 99.1
to Registrant's Form S-8 filed on July 1, 1997, which exhibit is incorporated herein by reference.*
10(o) Registrant's 1998 Subsidiary Employee Stock Purchase Plan and the Subscription Agreement, which
appear as Appendices E and E-1 to Registrant's Proxy Statement dated January 12, 1998,
respectively, which appendices are incorporated herein by reference.*
10(p) Employment Agreement, dated July 17, 1999, between Registrant and Carleton S. Fiorina, which
appears as Exhibit 10(gg) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended
July 31, 1999, which exhibit is incorporated herein by reference.*
Exhibit
Number Description
- ------ -----------
10(q) Executive Transition Program, which appears as Exhibit 10(hh) to Registrant's Quarterly Report
onForm 10-Q for the fiscal quarter ended July 31, 1999, which exhibit is incorporated herein
byreference.*
10(r) Incentive Stock Plan Stock Option Agreement (Non-Qualified), dated July 17, 1999, betweenRegistrant
and Carleton S. Fiorina, which appears as Exhibit 10(ii) to Registrant's Quarterly Reporton Form
10-Q for the fiscal quarter ended July 31, 1999, which exhibit is incorporated herein by reference.*
10(s) Restricted Stock Agreement, dated July 17, 1999, between Registrant and Carleton S. Fiorina,
whichappears as Exhibit 10(jj) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
endedJuly 31, 1999, which exhibit is incorporated herein by reference.*
10(t) 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 quarterended July 31, 1999, which exhibit is incorporated herein by reference.*
10(u) Registrant's 2000 Stock Plan amended as of October 27, 2000.*
10(v) Registrant's 2000 Employee Stock Purchase Plan amended as of March 29, 2001.*
10(w) Registrant's Executive Pay-For-Results Plan (Amended and Restated as of November 1, 2000),which
appears as Exhibit 10(y) to Registrant's Annual Report on Form 10-K for the fiscal year
endedOctober 31, 2000, which exhibit is incorporated herein by reference.*
10(x) Registrant's Pay-For-Results Short-Term Bonus Plan (Effective November 1, 2000), which appearsas
Exhibit 10(z) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31,2000,
which exhibit is incorporated herein by reference.*
10(y) StorageApps Inc. 2000 Stock Incentive Plan, which appears as Exhibit 4.1 to Registrant's Form
S-8filed on September 26, 2001, which exhibit is incorporated herein by reference.*
10(z) Registrant's 2001 Executive Transition Program.*
11 Not applicable.
12 Statement of Computation of Ratio of Earnings to Fixed Charges.
13-15 Not applicable.
16 Letter regarding change in independent accountants.
17 Not applicable.
18 None.
19-20 Not applicable.
21 Subsidiaries of Registrant as of January 17, 2002.
22 None.
23.1 Consent of Independent Auditors.
23.2 Consent of Independent Accountants.
24 Powers of Attorney. Contained in page 113 of this Annual Report on Form 10-K and incorporatedherein
by reference.
25-27 Not applicable.
28 None.
99 2001 Employee Stock Purchase Plan Annual Report on Form 11-K.
- ---------------------
* Indicates management contract or compensatory plan, contract or arrangement.
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.