HP INC — Proxy Solicitation & Information Statement 2002

Feb 28, 2002

DFAN14A 1 f77503k2dfan14a.htm DFAN14A Walter B. Hewlett Definitive Additional Materials PAGEBREAK

SCHEDULE 14A (RULE 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

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HEWLETT-PACKARD COMPANY

(Name of Registrant as Specified In Its Charter)

WALTER B. HEWLETT, EDWIN E. VAN BRONKHORST AND THE WILLIAM R. HEWLETT REVOCABLE TRUST

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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Enclosed with this Schedule 14A is a revised Report Relating to Executive Compensation (the “Report”), together with various documents referred to in the Report. The only change to the Report filed by the Filing Persons on February 26, 2002 is the description on page six of the annual base salary and target annual bonus contemplated for Mr. Capellas.

The Filing Persons are filing the additional documents in response to misleading statements made by or on behalf of HP with respect to the Report, including statements made by HP to the effect that Mr. Hewlett is “fabricating information solely in an effort to gain votes” and statements made by HP’s outside legal counsel to the effect that Mr. Capellas and Ms. Fiorina merely “floated some general terms” for future pay packages and that “[t]hose early discussions did not include the specific figures Hewlett cited.“ 1

The additional documents include:

| • | A “side letter agreement” from HP’s outside legal counsel to
Compaq’s outside legal counsel that contains term sheets embodying
the contemplated terms of the employment agreements for Ms. Fiorina
and Mr. Capellas; |
| --- | --- |
| • | Term sheets that contain very detailed information relating
to the contemplated employment agreements for Ms. Fiorina and Mr.
Capellas; |
| • | Term sheets indicating that the “total estimated current
value” of the stock options was $57 million for Ms. Fiorina and $38
million for Mr. Capellas; |
| • | Minutes of the September 3, 2001 meeting of the compensation
committee of HP’s board of directors which reflect the decision made
by the compensation committee in favor of the employment contract
for Mr. Capellas as presented to the compensation committee; and |
| • | Minutes of the September 20, 2001 meeting of the compensation
committee which reflect that the compensation committee approved new
employment terms for Ms. Fiorina. 2 |

1 Associated Press , 2/26/02, Hewlett Claims HP, Compaq Hiding Potential Windfall for CEOs

2 As indicated in the Report: (i) the minutes contain an asterisk next to the approval of the employment terms for Ms. Fiorina, together with a notation to the effect that subsequent to the adjournment of the meeting, the compensation committee determined that it had not reached agreement on the pricing terms of the option component of the package and, accordingly, all components of the package, which are interrelated, would be reconsidered at a future meeting; and (ii) Mr. Hewlett, a member of the compensation committee, did not participate in any “subsequent determination” by the compensation committee and first became aware of the alleged determination after the compensation committee minutes were made available to the members of the compensation committee.

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REPORT RELATING TO EXECUTIVE COMPENSATION

I. INTRODUCTION

Walter B. Hewlett is a member of the compensation committee of the board of directors of Hewlett-Packard Company. He participated in each of the numerous compensation committee meetings and extensive discussions relating to the compensation packages contemplated for Carly Fiorina, HP’s Chairman and CEO, and Michael Capellas, Compaq’s Chairman and CEO, in connection with the proposed HP/Compaq merger.

Mr. Hewlett has repeatedly attempted to persuade HP to disclose the compensation packages contemplated for Ms. Fiorina and Mr. Capellas. Despite these attempts:

•	HP has repeatedly refused to disclose such packages;
•	HP has attempted to create a record to support its refusal to
disclose such packages until after stockholders vote on the proposed
merger; and
•	HP, through its outside legal counsel, has attempted to
pressure Mr. Hewlett into keeping this information secret.

Mr. Hewlett strongly believes that the details of the compensation packages contemplated for Ms. Fiorina and Mr. Capellas are important to an investor’s consideration of the proposed HP/Compaq merger, and that HP’s stockholders deserve to know this information. The need for additional disclosure is particularly compelling in light of the fact that:

| • | Ms. Fiorina and Mr. Capellas are leading a massive
promotional campaign, which includes in-person meetings with
investors, in support of the proposed HP/Compaq merger; |
| --- | --- |
| • | HP has failed to disclose important aspects of the written
record, including an undisclosed “side letter agreement” (entered
into on the date of the merger agreement) between its outside legal
counsel and Compaq’s outside legal counsel; |
| • | HP has repeatedly changed the compensation-related
disclosures contained in its own proxy statement; |
| • | the agreement by Ms. Fiorina and Mr. Capellas to decline
retention bonuses has been widely publicized; and |
| • | under the terms of the compensation packages that were being
contemplated, Ms. Fiorina and Mr. Capellas would have received
compensation packages valued at more than
$115 million. 1 |

1 In evaluating the compensation packages for Ms. Fiorina and other senior executives of HP and Compaq, the compensation committee, including Mr. Hewlett, recognized that if the proposed merger were to occur, it would present enormous integration challenges that would require a significant commitment of time from, and the substantial efforts of, senior management. With the help of expert employee benefits consultants, the compensation committee attempted to develop compensation packages that would likely result in the necessary commitment from senior management.

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II. HP’S ATTEMPT TO “HIDE THE BALL” WITH RESPECT TO COMPENSATION PACKAGES

A. HP Has Failed to Disclose Important Aspects of the Written Record

The disclosure in HP’s proxy statement with respect to executive compensation does not tell the whole story. It fails to describe the written record which reflects detailed terms of compensation packages contemplated for Ms. Fiorina and Mr. Capellas.

| • | Merger Agreement. Section 5.12(c) of the Merger
Agreement provides that: “HP will negotiate in good faith with
certain persons who are current senior executives of HP and
Compaq who are expected to become (or continue to be) senior
executives of HP following the Merger for such persons to
accept the positions and the terms of employment previously
discussed between Compaq and HP.” (emphasis added) |
| --- | --- |
| • | “Side Letter.” The “terms of employment
previously discussed” to which the Merger Agreement refers are
contained in term sheets attached to a so-called “side letter” from Mr. Sonsini to outside counsel for Compaq. The “side
letter” provided that “For our mutual reference, I am
attaching hereto term sheets embodying terms of the agreements
previously discussed and to be negotiated in good faith
between HP and the individuals listed on Exhibit A hereto, in
accordance with Section 5.12(c) of the Merger Agreement.” |
| • | Detailed Term Sheets. The attachments to the
“side letter” include a seven-page term sheet dated September
4, 2001 with very detailed information relating to the
proposed employment agreement for Ms. Fiorina, and a nine-page
term sheet with very detailed information relating to the
proposed employment agreement for Mr. Capellas. The term
sheets include information relating to title, duties, term of
employment, base salary, benefits, target bonus, equity
compensation, including number of stock options, death or
disability, change of control vesting and severance. The
structure of the employee stock options, including exercise
price and vesting schedule, were, according to handwritten
notations on the term sheets, “to be determined within the
next seven days.” |
| • | Compensation Committee Approval. On September 3,
2001, the compensation committee of HP’s board of directors
“stated support for Michael Capellas contract as presented to
the meeting.” On September 20, 2001, the compensation
committee of HP’s board of directors discussed and approved new employment agreement terms for Carly Fiorina. |

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• Subsequent Notation on Minutes. Subsequent to the September 20, 2001 compensation committee meeting, the minutes of the meeting were prepared. The minutes contain an asterisk next to the discussion of the employment agreements for the top twelve executive officers, together with the following notation: “Subsequent to the adjournment of the meeting, members of the Committee determined that the Committee had not agreed on the exercise price for the options, specifically whether the performance-based blocks would be priced at FMV or premium prices.” The minutes also state “the Committee approved new employment agreement terms, effective on the merger” for Ms. Fiorina. Following the statement of approval, another asterisk appears, together with the following notation: “[a]s noted previously, it was subsequently determined that the Committee had not reached agreement on the pricing terms of the option component of the package. Accordingly, all components of the package, which are interrelated, will be reconsidered at a future meeting.” Mr. Hewlett did not participate in any “subsequent determination” by the Committee and first became aware of the alleged determination that the previously approved employment arrangements were no longer approved after the compensation committee minutes were made available to the members of the compensation committee .

B. HP Has Repeatedly Changed the Compensation-Related Disclosures Contained in Its Own Proxy Statement

| • | HP’s First Position Relating to Executive
Compensation. On November 15, 2001, HP first filed its proxy
statement with the SEC. This version disclosed that HP “ is
negotiating ” new employment agreements with, among others, Ms.
Fiorina and Mr. Capellas. 2 |
| --- | --- |
| • | HP’s Second Position Relating to Executive
Compensation. On January 11, 2002, HP filed Amendment No. 2
to its proxy statement. In that amendment, HP changed — for
the first time, but not the last — its disclosure regarding
Ms. Fiorina’s post-merger compensation. While the initial
disclosure said HP was in fact negotiating with Ms. Fiorina
and Mr. Capellas, the January 11 proxy statement said: “HP plans to negotiate promptly following the completion of the
merger new employment agreements” with Ms. Fiorina and Mr.
Capellas. 3 |
| • | HP’s January 24, 2002 SEC Filing Relating to
Executive Compensation. On January 24, 2002, HP filed a
letter with the Securities and Exchange Commission in which it
disclosed that HP’s “full compensation committee” had reported
to the HP board that, while preliminary discussions had
occurred regarding the executives’ post-transaction employment
agreements, “no terms have been finalized and substantial work
needs to be done with respect to |

2 Registration Statement on Form S-4, p. 9 (emphasis added).

3 Registration Statement on Form S-4, p. 9 (emphasis added).

3.

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| | performance-based
compensation.” 4 The letter did not reveal
that Mr. Hewlett, a member of the compensation committee, in
fact had voiced his strong belief that the parameters of the
compensation packages that were being contemplated for Ms.
Fiorina and Mr. Capellas were known to the compensation
committee, and should immediately be disclosed to HP’s
stockholders because such information is important information
that stockholders must have before voting on the proposed
merger. |
| --- | --- |
| • | HP’s Third Position Relating to Executive
Compensation. On January 31, 2002, in Amendment No. 3 to its
proxy statement, HP changed the compensation disclosure yet
again . This time, in addition to saying HP would not
negotiate employment agreements with the HP and Compaq
executives until after the closing of the proposed merger, the
proxy statement disclosed that: (i) “following execution of
the merger agreement, HP and Compaq determined that it would
be more appropriate for the compensation committee of the
newly constituted board following completion of the merger to
analyze, review and determine the appropriate structure and
size of compensation packages for executives of the combined
company” and (ii) HP had “determined that the employment terms
previously discussed would not serve as a benchmark for any
future terms.” 5 Significantly, however, the Merger Agreement
still makes the previously discussed terms a benchmark in
future negotiations because Section 5.12(c) of the Merger
Agreement still obligates HP to “negotiate in good faith” for
Ms. Fiorina and the other executives “to accept . . . the
terms of employment previously discussed between Compaq and
HP.” |

C. The Agreement by Ms. Fiorina and Mr. Capellas to Decline Retention Bonuses Has Been Widely Publicized

As demonstrated below, HP has touted, and the press has widely reported, the fact that Ms. Fiorina and Mr. Capellas voluntarily declined millions of dollars in retention bonuses that would be paid if the proposed merger were completed. At the time the press first reported such fact, HP’s proxy statement stated that HP was then negotiating new employment agreements with Ms. Fiorina and Mr. Capellas. To explain the executives’ decision to decline the retention bonuses “[b]oth companies said the CEOs wanted to avoid the appearance of conflicts of interest as they urge on the deal’s completion.” 6 HP, however, has failed to disclose, among other things, that the total value of Ms. Fiorina’s contemplated compensation package was far in excess of the value of the retention bonus that she purportedly declined to accept.

4 Filing pursuant to Rule 425 under the Securities Act of 1933.

5 Registration Statement on Form S-4, p. 84.

6 Associated Press, 1/14/02, see also, Dow Jones International News Service, 11/16/01 (“H-P said Fiorina declined to participate in the retention program to avoid a possible conflict of interest”), Associated Press, 11/16/01 (“[b]oth CEOs wanted to avoid the appearance of potential conflicts of interest, according to company officials”).

4.

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| • | In all versions of the proxy statement HP has
filed with the Securities and Exchange Commission, HP has
stressed that Ms. Fiorina “declined to accept the right to
participate in [the retention bonus] program” under which she
“would have been entitled to receive . . . a total of $8.0
million” and that Mr. Capellas similarly declined to accept
more than $14 million in retention bonuses; 7 |
| --- | --- |
| • | The Associated Press reported that “the
disclosure of [Fiorina’s and Capellas’s] decision comes at a
time when both companies are fighting to hold together the
$23.7 billion deal amid opposition . . .” 8 ; |
| • | USA Today noted: “Fiorina and Compaq CEO Michael
Capellas turned down $8 million and $14.4 million in bonuses,
respectively, to avoid conflict” 9 ; |
| • | Dow Jones ran the headline: “H-P, Compaq CEO’s To
Forgo Retention Bonus If Deal Is Done” 10 ; |
| • | The San Jose Mercury News reported: “Fiorina was
offered $8 million but declined . . . Compaq . . . offered
Michael Capellas $14.4 million but he also declined. The
companies didn’t disclose when or why the CEOs declined the
payments” 11 ; |
| • | The New York Times reported: “in an apparent
gesture of faith in the merger, Carleton S. Fiorina, the chief
executive of Hewlett-Packard, and Michael D. Capellas, the
chief executive of Compaq, chose not to participate in the
executive retention program” 12 ; |
| • | In January 2002, HP filed an updated proxy
statement which reiterated the CEOs’ decision to forgo the
retention bonuses; predictably, reports of the forgone bonuses
proliferated yet again 13 ; and |

7 See, e.g., Registration Statement on Form S-4, filed 11/15/01, pp. 64, 66, Registration Statement on Form S-4, filed 2/5/02, pp. 83, 86.

8 Associated Press, 11/16/01 .

9 USA Today, 12/4/01.

10 11/16/01.

11 11/16/01.

12 11/16/01.

13 For example, the press reported: “H-P Chief Executive Officer Carly Fiorina and Compaq Chief Executive Michael Capellas have declined the retention bonuses, according to the [January] filing” (Dow Jones International News Service , 1/15/02); “HP Chief Executive Carly Fiorina [has] turned down a merger-related bonus package that would have been worth $8 million, and . . . Compaq CEO Michael Capellas forfeited a $14.4 million plan. Both companies said that the CEO’s wanted to avoid the appearance of conflicts of interest as they urge on the deal’s completion” ( Houston Chronicle , 1/14/02); “HP President and Chief Executive Carly Fiorina, who has come under fire for championing the merger, and Compaq CEO Michael Capellas, will not take part in the retention plan” (Reuters , 1/15/02); “Hewlett-Packard Co. Chief Executive Carly Fiorina hoped to appear above the fray when she turned down an $8 million retention bonus linked to the company’s planned merger with Compaq Computer Corp.” (Dow Jones News Service, 1/18/02).

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• On January 29, 2002, HP again referred to Ms. Fiorina’s decision in its Form 10-K filed with the SEC 14 ; additional reports in the press soon followed, including this observation from Bloomberg: “Fiorina and Capellas have, graciously it seems, exempted themselves from the goodies.” 15

III. CARLY FIORINA AND MICHAEL CAPELLAS MAY RECEIVE COMPENSATION PACKAGES VALUED AT MORE THAN $115 MILLION

The compensation packages that were being contemplated for Carly Fiorina and Michael Capellas include:

• Carly Fiorina — two-year employment contract

•	Annual base salary of $1.6 million
•	Target annual bonus of
$4.8 million 16
•	6,000,000 stock options with a
“total estimated current value” of
$57 million 17

• Michael Capellas — two-year employment contract

•	Annual base salary of $1.6 million
•	Target annual bonus of
$3.2 million 18
•	4,000,000 stock options with a
“total estimated current value” of
$38 million 19

14 Report on Form 10-K, p. 98.

15 2/5/02.

16 Actual bonuses may be substantially higher than target bonuses.

17 As estimated in materials provided by HP to its compensation committee.

18 Actual bonuses may be substantially higher than target bonuses.

19 As estimated in materials provided by HP to its compensation committee.

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IV. CONCLUSION

Mr. Hewlett believes that stockholders clearly deserve to know that the people who are actively promoting and recommending the proposed merger have interests in the merger that differ from interests of stockholders generally. He also believes that stockholders deserve to know the extent of those differences .

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ADDITIONAL IMPORTANT INFORMATION

On February 5, 2002, Walter B. Hewlett, Edwin E. van Bronkhorst and the William R. Hewlett Revocable Trust (collectively, the “Filing Persons”) filed a definitive proxy statement with the Securities and Exchange Commission relating to the proposed merger involving Hewlett-Packard Company and Compaq Computer Corporation. The Filing Persons urge stockholders to read their definitive proxy statement because it contains important information. You may obtain a free copy of the Filing persons’ definitive proxy statement and any other documents relating to the Filing Persons’ solicitation on the Securities and Exchange Commission’s website at www.sec.gov, on the Filing Persons’ website at www.votenohpcompaq.com, or by contacting MacKenzie Partners at 1-800-322-2885 or 1-212-929-5500, or by sending an email to proxy@mackenziepartners.com.

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Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, California 94304-1050

September 4, 2001

VIA HAND DELIVERY

Roger S. Aaron Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036

Dear Roger:

Reference is made to Section 5.12(c) the Agreement and Plan of Reorganization, to be dated as of September 4, 2001 (the “Merger Agreement”), by and among Hewlett-Packard Company (“HP”), Heloise Merger Corporation and Compaq Computer Corporation. For our mutual reference, I am attaching hereto term sheets embodying terms of the agreements previously discussed and to be negotiated in good faith between HP and the individuals listed on Exhibit A hereto, in accordance with Section 5.12(c) of the Merger Agreement.

Very truly yours,

Attachment

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Exhibit A

Carleton S. Fiorina Michael D. Capellas Robert P. Wayman Ann M. Livermore Duane E. Zitzner Vyomesh (VJ) Joshi Peter Blackmore Jeff Clarke Shane V. Robison Michael Winkler Mary T. McDowell Thomas C. Siekman Yvonne R. Jackson

[Certain information has been omitted because it does not relate to the employment agreements contemplated for Carleton Fiorina and Michael Capellas]

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CSF EMPLOYMENT AGREEMENT

Summary of Key Terms

Dated: September 4, 2001

Term	Existing Agreement	Proposed Agreement
Title:	Chairman, President and Chief Executive Officer	Chairman and
Chief Executive Officer
Board of Directors:	Member of the Board of Directors of the
Company during the term of employment.	Continue to serve as Chairman of
the Board
Duties:	All the duties and responsibilities
commensurate with Executive’s role and with
chief executive officers of similarly-situated
companies. Serve as chief external
representative of the Company. Board shall
consider Executive’s recommendations with any nominations to the Board.	Same as existing, and specifically
include: Lead corporation Decide new top level structure Establish integration charters Oversee integration effort Lead BU performance management Manage board constituents External spokesperson on direction
Term of Employment:	At will; employment may be terminated by
Executive or the Company, at any time, with
notice.	24 month term — at will thereafter Agreement continues in effect
throughout employment with the
Company
Base Salary:	$1,000,000 per year	$1,600,000 per year
Benefits:	All Company standard benefits for executive
officers, reimbursement of business expenses,	Same (including,
among other things, personal security, use of Company plane,

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Term	Existing Agreement	Proposed Agreement
	immediate participation in savings and stock purchase plans, retirement plans, etc. No less than 25 days of paid time off per year. Perquisites including relocation expenses, financial counseling ($30k), Company car and driver, Company- provided personal security, and customary use of Company plane.	car and financial
planning as currently provided to
MDC)
Joining Bonus:	$3,000,000.	N/A
Annual Bonus:	Current target no less than $3,000,000, with
an opportunity to earn up to a maximum bonus
opportunity of $9,000,000.	Target annual incentive of
$4,800,000 (3 x base salary)
Equity Compensation:	Current holdings include 3.8 million option shares and 1.4 million shares of restricted stock Eligible for ongoing awards at levels commensurate with position Current equity holdings currently valued at $23.3 million	6 million share option grant 1 Eligible for ongoing awards at levels commensurate with position.
Death or Disability:	“Disability” — Executive is unable to perform her material duties hereunder for six consecutive months because of physical or mental incapacity Executive gets (i) 100% vesting in all stock options, Restricted Stock and Restricted Units, (ii)	Executive gets
(i) 100% vesting in all equity compensation awards, (ii) payment of all accrued salary, bonuses, expenses, etc., (iii) pro-rata bonus under Company’s variable pay plan and (iv) lump sum equal to 1.5 x base salary and target bonus.

1 The structure of the options, including pricing, vesting and other terms, will be determined by the HP Compensation Committee and the Compaq Human Resources Committee within the next seven days.

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Term	Existing Agreement	Proposed Agreement
	payment of all accrued salary, bonuses,
expenses, etc. and (iii) pro-rata bonus under
Company’s variable pay plan.
Change of Control Vesting
Acceleration	On the date of a change of control (a) 100% vesting of any Restricted Stock (defined term)
or
Restricted Stock Unit (defined term), and
(b) 50% vesting
of each tranche of any other
equity award, including any options.	On the date of a change of control
(a) 100% vesting of any restricted
stock or restricted stock unit, and
(b) 50% vesting of each tranche of
each option and of each tranche or
each other equity award.
Involuntary Termination
without Cause or Voluntary
Termination for Good Reason:	Executive can terminate for “Good Reason” within 180 days of Good Reason event.	Same
Payments and Benefits upon
Involuntary Termination
without Cause or Voluntary
Termination for Good Reason:	If Executive signs and does not revoke
release, Executive gets: • Accrued salary, bonuses, expenses, etc. • Pro-rata bonus under Company’s variable pay
plan • 2 x base salary and target bonus (paid out
over 24 months) subject to non-compete
clawback. Severance paid out in lump-sum if
change of control after termination. If
termination occurs in contemplation of, or
within 2 years after a change of control,
Executive gets 3 x base salary and highest
bonus earned with respect to 2 fiscal years
prior to termination, whether or not paid • 2 years of continued participation in Company’s welfare plans (3 years if termination occurs within 2 years after a change of control) • 3 years of service and compensation credit	Same, plus 3 years post-termination
to exercise all options

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Term	Existing Agreement	Proposed Agreement
	under Company’s defined benefit type retirement plans if termination occurs within
2 years after a change of control • 100% vesting in Restricted Stock and Restricted Units • 50% vesting of each tranche of each stock option and of each tranche of each other equity award (100% vesting if termination occurs within 2 years after a change of
control) • 1 year of customary outplacement services No mitigation or offset with these benefits.
Involuntary Termination for Cause or Voluntary
Termination not for Good
Reason:	Payment of all accrued and earned salary,
bonuses, expenses, etc.	Same
Definitions:	“Cause” means (i) the willful failure by
Executive to attempt to substantially perform
her duties with the Company (other than any
such failure resulting from her incapacity due
to physical or mental impairment), unless any
such failure is corrected within thirty (30)
days following written notice by the Board
that specifically identifies the manner in
which the Board believes Executive has
substantially not attempted to materially
perform her duties or (ii) the willful gross
misconduct by Executive with regard to the
Company that is materially injurious to the
Company. No act, or failure to act, by
Executive shall be “willful” unless committed
without good faith and without a reasonable belief that the act or omission was in the best interest of the Company. No event shall be deemed the basis for Cause unless Executive is	Same. CSF to waive clause (i) of
Good Reason definition in
connection with the consummation of
Project Abelard.

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Term

terminated therefor within sixty (60) days after such event is known to the Chairman of the Company, or, if Executive is Chairman, known to the Chairman of any committee of the Board. Executive shall not be deemed to have been terminated for Cause without (i) advance written notice provided to Executive not less than fourteen (14) days prior to the date of termination setting forth the Company’s intention to consider terminating Executive and including a statement of the proposed date of termination and the specific detailed basis for such consideration of termination for Cause, (ii) an opportunity of Executive, together with her counsel, to be heard before the Board at least ten (10) days after the giving of such notice and prior to the proposed date of termination, (iii) a duly adopted resolution of the Board stating that in accordance with the provisions of the next to the last sentence of this paragraph, the actions of Executive constituted Cause and the basis thereof, and (iv) a written determination provided by the Board setting forth the acts and omissions that form the basis of such termination of employment. Any determination by the Board hereunder shall be made by the affirmative vote of at least a two-thirds (2/3) majority of all of the members of the Board (other than Executive). Any purported termination of employment of Executive by the Company which does not meet each and every substantive and procedural requirement of this paragraph shall be treated for all purposes under this Agreement as a

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| Term |
| --- |
| termination of employment without Cause. “Good Reason” means, without the express written consent of Executive, the occurrence of any of the following events: (i) any reduction or diminution (except temporarily during any period of disability) in Executive’s titles or positions, any material diminution in Executive’s authority, duties or responsibilities with the Company (it being acknowledged that, in the event any entity becomes the owner (directly or indirectly) of more than 35% of the Common Stock, it shall be Good Reason if Executive is not the Chief Executive Officer of such entity); (ii) a breach by the Company of any material provision of the Agreement, including, but not limited to, a breach of the Company’s obligation with respect to Executive’s position and duties (as set forth in Section 1(a) of the Agreement), any reduction (other than a reduction (not to exceed ten percent (10%)) that applies, in equal percentages, to all U.S. officers (within the meaning of Section 16 of the Securities and Exchange Act of 1934, as amended) of the Company) in Executive’s Base Salary or any material failure to timely pay any part of Executive’s compensation (including, without limitation, Base Salary, annualized
Target Pay and bonus) or to materially provide in
the aggregate the level of benefits contemplated herein; (iii) the failure of the Company to obtain and deliver to Executive a satisfactory written agreement from any successor to the Company to assume and agree to perform the Agreement; or |

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Term	Existing Agreement	Proposed Agreement
	(iv) the failure to appoint or elect Executive to the Board within thirty (30) days of the Employment Commencement Date or at any time thereafter or the removal of Executive therefrom.
Golden Parachute Issues:	Full gross-up for excise tax	Same
Non-Compete; Non-Solicit:	24 months post-termination Executive cannot provide services for ***
organizations designated by the Board ***	24 months post-termination, which
as to non-compete means that
Executive cannot provide services
for 3 organizations to be named by
the Board No non-compete following an
Involuntary Termination without
Cause or Voluntary Termination for
Good Reason which occurs after a
change of control
Attorney and Consultant Fees:	Company responsible for reasonable legal fees associated with agreement	Same

*** Confidential information omitted.

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MDC EMPLOYMENT AGREEMENT

Summary of Key Terms

Term	Existing Agreement	Proposed Agreement
Title:	Chairman of the Board and Chief Executive
Officer	President
Board of Directors:	Serves as Chairman of the Board.	To be elected to the Board of Directors
Duties:	All the duties and responsibilities
commensurate with Executive’s role. All other
employees of the Company report to the
Executive or his designee.	Manage individual BUs Ensure execution of stated strategies Ensure cross-BU sharing • IP • Sales force • Other resources
Term of Employment:	3 year term (October 1, 2000 to September 30,
2003); automatic 1 year-renewal.	24 month term — at will thereafter Agreement continues in effect
throughout employment with the Company
Base Salary:	Not less than $1,600,000 base salary per year.
If Board increases salary during term, may not
be reduced.	$1,600,000 per year
Benefits:	Eligible for same benefits and perquisites as
other Company executives.	Same as CSF
(including, among other things, personal security, use of
Company plane, car and financial
planning as currently provided to MDC) and relocation benefits (including mortgage assistance,

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Term	Existing Agreement	Proposed Agreement
		relocation tax
reimbursement, and other relocation
costs comparable to those provided to CSF)
Bonus:	• Current target annual bonus is 2 x base salary • $850,000 special bonus upon execution of the Agreement	Target annual incentive of $3,200,000
(2 x base salary)
Equity Compensation:	• Special 1999 Stock Option Grant for 1 million shares • 1999 Restricted Stock Grant for 200,000 shares • 2000 Restricted Stock Grant for 970,000 shares • Note: Agreement provides for target long- term incentives of 7-10x base salary	4 million share option grant 2 Eligible for ongoing awards at levels
commensurate with position

2 The structure of the options, including pricing, vesting and other terms, will be determined by the HP Compensation Committee and the Compaq Human Resources Committee within the next seven days.

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Term	Existing Agreement	Proposed Agreement
Loans:	• $5 million loan to purchase shares under
prior employment agreement to be forgiven over 3 years, commencing November 1, 2001 • $2.5 million full recourse loan to assist
with taxes associated under the Agreement due
in 2005 (or within 120 days after
non-Qualifying Termination of employment, if
earlier)	None
Death or Disability:	“Disability” — Executive is inability to
perform the essential functions of Executive’s
position as CEO or to perform as Chairman of
the Board, as a result of illness or injury
for six consecutive months. Executive gets (i) lump sum equal to 1.5 x
base salary and target bonus, (ii) prorated
annual incentive, (iii) forgiveness of $5
million loan and (iv) no acceleration of $2.5
million tax assistance loan.	“Disability” — Executive is unable to perform his material duties hereunder
for six consecutive months because of
physical or mental incapacity Executive gets (i) 100% vesting in all equity compensation awards, (ii)
payment of all accrued salary,
bonuses, expenses, etc., (iii)
pro-rata bonus under Company’s variable pay plan and (iv) lump sum
equal to 1.5 x base salary and target
bonus.
Change of Control Vesting
Acceleration	100% vesting of restricted stock on change of
control per 1989 Equity Incentive Plan and
100% vesting of options on change of control
per 1998 Stock Option Plan.	On the date of a change of control (a) 100% vesting of any restricted stock
or restricted stock unit, and (b) 50%
vesting of each tranche of each option
and of each tranche of each other
equity award.
Qualifying Termination:	Qualifying Termination means any of the
following: (1) Involuntary termination without Cause (2) Resignation within 90 day of a “Good Reason” (3) Involuntary termination within 180 days of a	Qualifying Termination means
involuntary termination by the Company
without Cause or resignation by
Executive for “Good Reason” within 180
days of Good Reason event.

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Term	Existing Agreement	Proposed Agreement
	Change of Control
Payments and Benefits upon a
Qualifying Termination:	• Separation payment equal to 3 x base salary and target bonus • Pro-rated annual incentive • Continued vesting in any unvested stock options for 2 years • 3 years (or expiration of option, if
earlier) to exercise any options that are or
become vested • Vest in a pro-rated portion of 200,000 shares under 1999 Restricted Stock Grant • Vest in 470,000 shares of 2000 Restricted Stock Grant • Forgiveness of outstanding balance of $5 million loan to purchase shares • No acceleration of $2.5 million tax assistance loan • Lump sum payment of $100,000 • 6 months paid COBRA coverage	Upon termination by Executive for Good Reason (within 180 days of Good Reason event) or by the Company without
Cause, Executive gets: • Accrued salary, bonuses, expenses,
etc. • Pro-rata bonus under Company’s variable pay plan • 2 x base salary and target bonus (paid out over 24 months) subject to non- compete clawback. Severance paid out in lump sum if change of control after termination. If termination occurs in contemplation of, or within 2 years after change of control, Executive gets 3 x base salary and highest bonus earned with respect to 2 fiscal years prior to termination, whether or not previously paid • 2 years of continued participation in Company’s welfare plans (3 years if termination occurs within 2 years after change of control) • 3 years of service and compensation credit under Company’s defined benefit type retirement plans if termination occurs within 2 years after change of control • 100% vesting in restricted stock and restricted units to be granted • 50% vesting of each tranche of each

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Term	Existing Agreement	Proposed Agreement
		stock option and of each tranche of each other equity award (100% vesting if termination occurs within 2 years after change of control) • 3 years post-termination to exercise all options • 1 year of customary outplacement services • No acceleration of $2.5 million tax assistance loan No mitigation or offset with these
benefits.
Severance Offset:		Through one year after close,
severance payable under this Agreement
offset by severance under Church
employment agreement. No offset under
this Agreement for retention payments.
Involuntary Termination for Cause or Resignation without Good Reason:	No severance is payable.	Payment of all accrued and earned
salary, bonuses, expenses, etc.
Definitions:	“Cause” means a good faith determination by the
Board of Directors, after consultation with outside legal counsel, that you have committed
an act or omission that is materially contrary
to the best interests of Church or that
Executive has materially breached any of the
terms and conditions of the Agreement. Executive
will not be deemed to have been involuntarily
terminated for Cause unless he is presented with
a resolution of the Board of Directors, approved
by at least 3/4 of the entire membership of the
Board after	“Cause” means (i) the willful failure by
Executive to attempt to substantially perform his duties with the Company (other than any such failure resulting
from his incapacity due to physical or
mental impairment), unless any such
failure is corrected within thirty (30)
days following written notice by the
Board that specifically identifies the
manner in which the Board believes
Executive has substantially not attempted
to materially

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Term	Proposed Agreement
providing him with reasonable notice
and opportunity to be heard, with counsel,
before the Board, finding that he has engaged in
conduct which would constitute Cause under the
Agreement. “Good Reason” shall mean (a) involuntary removal
from the position of Chief Executive Officer,
(b) involuntary removal from, or failure to be
elected, Chairman of the Board, (c) assignment,
by the Board, of duties inconsistent with the
position of Chief Executive Officer, (d) receipt
of a notice of non-renewal of the Agreement, or
(e) approval by the Board of a material
reduction in target compensation (unless
applicable to other executives).	perform his duties or (ii)
the willful gross misconduct by Executive
with regard to the Company that is
materially injurious to the Company. No
act, or failure to act, by Executive shall be “willful” unless committed without good faith and without a reasonable belief that the act or omission was in the best interest of the Company. No event shall be deemed the basis for Cause unless Executive is terminated therefor within sixty (60) days after such event is known to the Chairman of the Company, or, Executive is Chairman, known to the Chairman of any committee of the Board. Executive shall not be deemed to have been terminated for Cause without (i) advance written notice provided to Executive not less than fourteen (14) days prior to the date of termination setting forth the Company’s intention to consider terminating Executive and including a statement of the proposed date of termination and the specific detailed basis for such consideration of termination for Cause, (ii) an opportunity of Executive, together with his counsel, to be heard before the Board at least ten (10) days after the giving of such notice and prior to the proposed date of termination, (iii) a duly adopted resolution of the Board stating that in accordance with the provisions of the

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Term
next to the last
sentence of this paragraph, the actions of Executive constituted Cause and the basis thereof, and (iv) a written determination provided by the Board setting forth the acts and omissions that form the basis of such termination of employment. Any determination by the Board hereunder shall be made by the affirmative vote of a least a two-thirds (2/3) majority of all of the members of the Board (other than Executive). Any purported termination of employment of Executive by the Company which does not meet each and every substantive and procedural requirement of this paragraph shall be treated for all purposes under this Agreement as a termination of employment without Cause. “Good Reason” means, without the express written consent of Executive, the occurrence of any of the following events: (i) any reduction or diminution (except temporarily during any period of disability) in Executive’s titles or positions, or any material diminution in Executive’s authority, duties or responsibilities with the Company (it being acknowledged that, in the event any entity becomes the owner (directly or indirectly) of more than 35% of the Common Stock, it shall be Good Reason if Executive is not the President of such entity); (ii) a breach by the Company

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Term	Existing Agreement	Proposed Agreement
		of any material provision of the Agreement, including, but not limited to, a breach of the Company’s obligation under position/duties
section of the Agreement, any reduction (other than a reduction
(not to exceed ten percent (10%)) that
applies, in equal percentages, to all
U.S. officers (within the meaning of
Section 16 of the Securities and Exchange
Act of 1934, as amended) of the Company)
in Executive’s Base Salary or any
material failure to timely pay any part
of Executive’s compensation (including,
without limitation, Base Salary,
annualized Target Pay and bonus) or to
materially provide in the aggregate the level of
benefits contemplated in the Agreement;
(iii) the failure of the Company to
obtain and deliver to Executive a
satisfactory written agreement from any
successor to the Company to assume and
agree to perform the Agreement; or (iv)
the failure to appoint or elect Executive
to the Board within thirty (30) days of
the Employment Commencement Date or at
any time thereafter or the removal of
Executive therefrom.
Golden Parachute Issues:	Full gross-up for excise tax	Full gross-up for excise tax
Non-Compete; Non-Solicit:	24 month post-termination non-compete,
non-solicit, non-disparagement	24 months post-termination, which as
to non-compete means that Executive
cannot provide services for 3
organizations to be

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Term	Existing Agreement	Proposed Agreement
		named by the
Board No non-compete following an Involuntary Termination
without Cause or Voluntary Termination for Good Reason which occurs after a change of control
Attorney and Consultant Fees:	Lump sum payment of $100,000 upon a Qualifying
Termination intended to cover, among other
things, accounting or legal fees necessitated by Executive’s termination of employment.	Company
responsible for reasonable legal fees associated with agreement

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COMPENSATION COMMITTEE AGENDA September 3, 2001 7:00 am Conference Call

1.	Review Employment Contracts for Carly & Michael
2.	Formula for Performance-Based Options
3.	Adoption of 2001 Executive Transition Program
4.	Retention Packages for Selected Tier I Employees
5.	Employment Contracts for Ten Key Leaders

[Information relating to items 2-5 above has been intentionally omitted because it does not relate to the employment agreements contemplated for Carleton Fiorina and Michael Capellas.]

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Proposed Employment Agreements

Term	CSF	MDC
Title	Chairman and CEO	President
Duties	Lead corporation Decide new top level structure Establish integration effort Oversee integration effort Lead BU performance management Manage board constituents External spokesperson on direction	Manage individual BUs Ensure execution of stated strategies Ensure cross-BU sharing - IP; Sales force; Other resources
Base Salary	$1,600,000	$1,600,000
Term of Agreement	2 years, at-will thereafter	2 years, at-will thereafter
Target Annual Incentive	$4,800,000 (3 x base salary)	$3,200,000 (2 x base salary)
Equity Compensation	6 million option shares: • 35% time-based vesting over 3 years • 65% performance based with price targets for 1/3 rd of shares subject to option equal to 120%, 125% and 140% of FMV respectively and vesting based on achievement of such price targets Total estimated current value - [$57 million]	4 million
option shares: • 35% time-based
vesting over 3 years • 65% performance based with price targets for 1/3 rd of shares subject to option equal to 120%, 125% and 140% of FMV respectively and vesting based on achievement of such price targets Total estimated current value — [$38 million]
Severance	2 x base salary and target bonus
(3 x base salary and high bonus
if within 2 years after a change
of control) 2 years continued participation
in welfare plans (3 years if
related to change of control) and
3 years of service and
compensation credit under retirement plans if related to
change of control 100% acceleration of restricted
stock grant and restricted stock
award 50% acceleration of unvested shares subject to any options (100% if related to change of control)	2 x base salary and target bonus (3
x base salary and high bonus if
within 2 years after a change of
control) 2 years continued participation in welfare plans (3 years if related to change of control) and 3 years of service and compensation credit under retirement plans if related to change of control 100% acceleration of any restricted stock grant and restricted stock
award 50% acceleration of unvested shares subject to any options (100% if related to change of control)

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Severance/Retention Offset		Through one year after close, severance payable under this Agreement offset by severance/retention under Church agreement. Through the second year after close, severance payable under this Agreement offset by retention provided under Church agreement.
Golden Parachute Provision	Full excise tax gross-up	Full excise tax gross-up
Non-Compete	2 year post termination — limited
to 3 organizations to be named by
the Board	2 year post termination — limited to
3 organizations to be named by the Board

PAGEBREAK

Existing Employment Agreements

Term	CSF	MDC
Title	Chairman, President and CEO	Chairman and CEO
Base Salary	$1 million	Not less than $1.6 million
Target Bonus	$3 million signing bonus $3 to $9 million annual bonus	$850,000 signing
bonus 2 x base salary
Equity Compensation	3.8 million option shares 1.4 million restricted stock shares Eligibility for ongoing awards Total current value — $23 million	1 million option shares 200,000 restricted stock grant (1999) 970,000 restricted stock grant (2000) Total current value — Agreement provides for long-term incentive of
7- 10x base
Loans	N/A	$5 million
loan to purchase shares $2.5 million tax assistance loan
Constructive Termination Severance	2 x base salary and target bonus
(3 x base salary and high bonus if
within 2 years after a change of
control) 2 years continued participation in welfare plans (3 years if related
to change of control) and 3 years
of service and compensation credit
under retirement plans if related
to change of control 100% acceleration of restricted
stock grant and restricted stock
award 50% acceleration of unvested
shares subject to any options
(100% if related to change of
control)	3 x base salary and target bonus Pro-rata annual incentive Continued option vesting for 2 years 3 year post-termination period to exercise options Vest in pro-rata portion of 200,000 restricted stock grant Vest in 470,000 shares of 970,000 restricted stock grant Forgiveness of $5 million loan; no acceleration of $2.5 million loan $100,000 lump sum payment 6 months paid COBRA
Change in Control
Benefits (single trigger)	100% acceleration of restricted
stock grant and restricted stock
award and 50% acceleration of
unvested options	N/A
Golden Parachute Provision	Full excise tax gross-up	Full excise tax gross-up
Non-Compete/Non-Solicitation	2 year post-termination ***	2 year post-termination

*** Confidential information omitted.

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MINUTES OF A SPECIAL MEETING OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF HEWLETT-PACKARD COMPANY

September 3, 2001

Pursuant to notice, a special telephonic meeting of the Compensation Committee of the Board of Directors of Hewlett-Packard Company was convened at 7:00 a.m. PDT on September 3, 2001. Present and able to hear one another were Committee Chairman Phil Condit and Committee members Sam Ginn and Walter Hewlett. Also present were Carly Fiorina, Susan Bowick, Ann Baskins, James Otieno, Jackie Kane and Larry Sonsini.

It was announced that the purpose of the meeting was to consider retention agreements and employment contracts proposed in connection with the Compaq transaction. Carly Fiorina indicated that in particular the Committee was being asked to consider employment contract terms for Michael Capellas and retention packages and employment contract terms for other key individuals.

The Committee discussed the background for the proposed packages, competitive data relative to certain of the proposals and the appropriate size of retention packages. The Committee also discussed the use of cash versus equity or some combination thereof. It was agreed that the change of control features of Compaq’s existing program necessitated some action. Larry Sonsini explained the proposed packages and agreements in the context of the overall negotiation of the deal and summarized the analysis that had been performed.

The meeting was suspended at 7:30 a.m. PDT so that the Committee members could attend the Board meeting called to consider the Compaq transaction. The Committee then reconvened at 8:30 a.m. Committee members expressed the view that it was appropriate for the Committee to review and act on the Capellas contract as it was closely tied to the overall merger agreement. The Committee’s support for the retention packages was also confirmed. However, the Committee members indicated that they would prefer additional time to consider compensation metrics and other employment agreement terms for the other members of the senior team given the long-term implications of such agreements.

1 PAGEBREAK

Following some additional discussion, the Committee stated its support for the Michael Capellas contract as presented to the meeting and approved cash retention packages for specific HP managers as described in the attachment to these minutes. It was further agreed that employment agreement terms for individuals other than Michael Capellas would be developed and reviewed by the Committee as important next steps.

There being no further business to come before the meeting, it was adjourned at 9:05 a.m.

Date: Ann O. Baskins

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MINUTES OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF HEWLETT-PACKARD COMPANY September 20, 2001

Pursuant to notice, a meeting of the Compensation Committee of the Board of Directors of Hewlett- Packard Company was convened at the Company’s offices at 1501 Page Mill Road, Palo Alto, California at 12:00 p.m. on September 20, 2001. Present were Committee Chair Phil Condit and Committee members Sam Ginn and Walter Hewlett. Also in attendance were Carly Fiorina, Susan Bowick, Ann Baskins and James Otieno, as well as outside counsel Larry Sonsini. Baskins recorded the minutes.

There being a quorum present, the meeting was called to order by Chairman Condit.

| [Certain
information has been omitted because it does not relate to the employment agreements contemplated
for Carleton Fiorina and Michael Capellas.] |
| --- |
| III. |

PAGEBREAK

[Certain information has been omitted because it does not relate to the employment agreements contemplated for Carleton Fiorina and Michael Capellas]

| VI. |
| --- |
| Phil Condit rejoined the meeting. |
| James Otieno reviewed prior Committee decisions and discussions regarding
guiding principles for employment agreements for the top twelve managers
of the new HP. Otieno described design objectives for the agreements,
including being competitive and performance driven and being able to withstand shareholder, employee and investment community scrutiny. Otieno
then reported that he and his counterpart at Compaq had agreed on a
conceptual framework, subject to discussion and approval by the
Committee. |
| Larry Sonsini then described the Company’s commitment, pursuant to a side
letter signed by outside counsel, to negotiate in good faith employment
agreements for certain named individuals. |

2 PAGEBREAK

| Carly Fiorina rejoined the meeting at this time. |
| --- |
| The Committee then discussed design issues associated with the stock
option component of the employment agreements under consideration.
Committee members expressed their continuing preference for linking
option vesting to performance. Phil Condit rejoined the meeting, and
the Committee reviewed possible performance metrics for the stock options.
It was generally agreed that vesting should be tied to stock price growth
in defined time periods and that value drivers associated with the deal
would be an appropriate secondary metric. Discussion ensued
regarding what share price growth should trigger vesting. To provide context for
the discussion, Sam Ginn recapped discussions over the last several weeks
regarding the structure of the options, which are expected to be granted
at the close of the merger. |
| Following extensive discussion, the Committee developed a framework* for
the options, a copy of which is attached to these minutes, which provides
for a.) 25 percent of the option shares to time- vest over three years;
b.) three-25 percent option tranches to vest upon the attainment of
defined stock price targets in specified time frames; c.) with respect to
each of the stock price performance-based blocks, Afail-safe@ vesting of
50 percent of the block if the relevant stock price target is not met but
certain defined value creation metrics are met; and d.) the opportunity
to Arecapture@ vesting for a block if initial stock price targets are
missed but value capture metrics are met and the stock price meets or
exceeds 200 percent of the option exercise price within four years.
Larry Sonsini was instructed to propose the structure to the chairman of
Compaq’s compensation committee and report back on his reaction. |
| Additional features of the proposed compensation packages were discussed,
with attention paid to the constituent components of the package. It was
noted that the agreements, including the cash compensation levels and the
option grants, contemplate a two-year term. The Committee also clarified its intent with respect to how retirement and other termination events
would affect options granted pursuant to the agreements. It was agreed
that options held for at least two years after grant and before
retirement would continue to Aride@, i.e. recipients would be treated as
though they were still employed with respect to vesting and exercisability. However, a recipient who retires less than two years
following grant would be eligible only for partial vesting. |
| Finally, the Committee asked that the staff reopen with Compaq issues
associated with the lack of offset between severance and retention
payments for its employees in the Tier two and below categories. |
| * Subsequent to the adjournment of the meeting, members of the Committee
determined that the Committee had not agreed on the exercise price for
the options, specifically whether the performance-based blocks would be
priced at FMV or premium prices. |

3 PAGEBREAK

	Fiorina then left the meeting.
VII.	Fiorina Employment Contract
	James Otieno outlined the terms of the existing employment agreement with
Carly Fiorina. The agreement was reviewed in the context of the revised
duties contemplated upon the close of the merger and in light of the
Capellas contract. The Committee reviewed and discussed the base
and bonus cash components, the possible bonus amounts at the aspirational
level and the total package value. Following some discussion, the
Committee approved new employment agreement terms, effective on the
merger, including a base salary increase from $1M to $1.6M, an increase
in the annual bonus at target to $4.8M and a new option grant of 6M
shares on the terms reflected in the preceding discussion on options
associated with employment packages*. The Committee also approved an $8M
retention package consistent with the retention terms approved at the
September 3, 2001 meeting of the Committee.

[Certain information has been omitted because it does not relate to the employment agreements contemplated for Carleton Fiorina and Michael Capellas]

4 PAGEBREAK

• As noted previously, it was subsequently determined that the Committee had not reached agreement on the pricing terms of the option component of the package. Accordingly, all components of the package, which are interrelated, will be reconsidered at a future meeting.

5