<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
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 No. 0-9134
TANDEM COMPUTERS INCORPORATED
<TABLE>
<S> <C>
Delaware 94-2266618
---------------- -----------------
(State of incorporation) (IRS Employer Id. No.)
</TABLE>
19333 Vallco Parkway, Cupertino, California
95014-2599
(408)285-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __x__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Common Stock, Outstanding at May 12, 1994
$.025 par value 114,854,548 shares
<PAGE> 2
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES - FORM 10-Q
PART I -- ITEM 1. FINANCIAL INFORMATION
(Unaudited)
The following consolidated financial statements have been prepared by the
Company without audit by independent public accountants, but in accordance
with the rules and regulations of the Securities and Exchange Commission.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Securities and Exchange
Commission rules and regulations, the Company believes the financial
disclosures made are sufficient to make the information presented not
misleading. In addition, the consolidated financial statements reflect, in the
opinion of management, all adjustments (limited to normal, recurring
adjustments) necessary to present fairly the consolidated financial position,
results of operations, and cash flows for the periods indicated.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and related notes
included in the Company's 1993 Annual Report to Stockholders and Annual Report
on Form 10-K for the year ended September 30, 1993. Such consolidated
financial statements and related notes are filed with the Securities and
Exchange Commission.
The results of operations for the three-month and six-month periods ended
March 31, 1994, are not necessarily indicative of results to be expected in the
future.
[STATEMENTS ON FOLLOWING PAGES]
<PAGE> 3
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
----------------------------
March 31, March 31,
(In thousands except per share amounts) 1994 1993
-------- --------
<S> <C> <C>
REVENUES
Product revenues $ 394,901 $ 425,136
Service and other revenues 89,227 92,511
-------- ---------
Total revenues 484,128 517,647
-------- ---------
COSTS AND EXPENSES
Cost of product revenues 163,853 153,298
Cost of service and other revenues 54,418 62,587
Research and development 64,363 79,837
Marketing, general, and administrative 173,628 205,369
-------- ---------
Total costs and expenses 456,262 501,091
-------- ---------
OPERATING INCOME 27,866 16,556
Net interest income 417 1,013
--------- ---------
INCOME BEFORE INCOME TAXES 28,283 17,569
Provision for income taxes 2,500 6,466
--------- ---------
NET INCOME $ 25,783 $ 11,103
========= =========
EARNINGS PER SHARE $ .23 $ .10
========= =========
Weighted average shares outstanding 113,519 113,509
========= =========
</TABLE>
See accompanying notes.
<PAGE> 4
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended
---------------------------
March 31, March 31,
(In thousands except per share amounts) 1994 1993
-------- --------
<S> <C> <C>
REVENUES
Product revenues $ 781,097 $ 814,243
Service and other revenues 178,584 187,282
-------- ----------
Total revenues 959,681 1,001,525
-------- ----------
COSTS AND EXPENSES
Cost of product revenues 320,420 285,417
Cost of service and other revenues 118,742 122,242
Research and development 130,065 152,875
Marketing, general, and administrative 358,517 416,997
-------- ----------
Total costs and expenses 927,744 977,531
-------- ----------
OPERATING INCOME 31,937 23,994
Gain on sale of subsidiaries 23,000 -
Net interest income 850 1,709
-------- ----------
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME TAXES 55,787 25,703
Provision for income taxes 5,100 9,459
-------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 50,687 16,244
Cumulative effect as of October 1, 1992
of change in accounting for income taxes - 12,371
-------- ----------
NET INCOME $ 50,687 $ 28,615
======== ==========
EARNINGS PER SHARE BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE $ .45 $ .14
Per share cumulative effect of
accounting change - .11
-------- ---------
EARNINGS PER SHARE $ .45 $ .25
======== =========
Weighted average shares outstanding 112,659 113,112
======== =========
</TABLE>
See accompanying notes.
<PAGE> 5
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, September 30,
1994 1993
--------- -------------
(In thousands except per share amount) (Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 113,671 $ 106,179
Short-term investments - 18,588
Accounts receivable, net 427,824 458,122
Current portion of lease receivables 56,488 60,376
Inventories 172,525 163,706
Prepaid and deferred income taxes 13,655 9,493
Prepaid expenses and other 61,062 34,966
---------- ----------
Total current assets 845,225 851,430
---------- ----------
PROPERTY, PLANT, AND EQUIPMENT, at cost 1,129,647 1,149,611
Accumulated depreciation and amortization (604,105) (583,043)
---------- ----------
Net property, plant, and equipment 525,542 566,568
---------- ----------
COST IN EXCESS OF NET ASSETS ACQUIRED, NET 7,625 25,168
---------- ----------
LEASE RECEIVABLES 69,296 79,832
---------- ----------
OTHER ASSETS 201,243 162,211
---------- ----------
TOTAL ASSETS $1,648,931 $1,685,209
========== ==========
</TABLE>
LIABILITIES AND STOCKHOLDERS' INVESTMENT
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Short-term borrowings $ 1,951 $ 15,080
Accounts payable 138,375 145,378
Accrued liabilities 573,648 648,380
Current maturities of long-term obligations 53,445 53,384
---------- ----------
Total current liabilities 767,419 862,222
---------- ----------
LONG-TERM OBLIGATIONS 80,477 86,162
---------- ----------
STOCKHOLDERS' INVESTMENT
Common stock $.025 par value, authorized
400,000 shares, outstanding 115,088 shares at
March 31 and 113,666 shares at September 30 2,877 2,842
Additional paid-in capital 634,434 620,297
Retained earnings 212,947 162,260
Accumulated translation adjustments 3,175 3,207
Treasury stock, at cost (9,488) (8,871)
Deferred ESOP compensation (42,910) (42,910)
---------- ----------
Total stockholders' investment 801,035 736,825
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $1,648,931 $1,685,209
========== ==========
</TABLE>
See accompanying notes.
<PAGE> 6
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended
------------------------------
March 31, March 31,
(In thousands) 1994 1993
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 50,687 $ 28,615
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 83,267 88,508
Gain on sale of subsidiaries (23,000) -
Cumulative effect of accounting change - (12,371)
Deferred income taxes (4,486) (17,937)
ESOP compensation - 2,895
Gain on dispositions of property, plant, and
equipment (310) (214)
Changes in :
Accounts receivable 3,024 6,118
Inventories (18,932) (6,173)
Lease receivables 14,605 5,109
Non-debt current liabilities and other (75,164) 132
-------- ---------
Net cash provided by
operating activities 29,691 94,682
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant, and equipment (55,889) (83,147)
Proceeds from dispositions of property, plant,
and equipment 22,760 8,985
Sale of subsidiaries, net of cash disposed 70,519 -
Increase in other assets (56,250) (25,978)
-------- ---------
Net cash used in
investing activities (18,860) (100,140)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings 33,204 29,663
Repayments (51,194) (46,049)
Acquisitions of treasury stock - (10,667)
Proceeds from sale of stock by a subsidiary, net
of Company's participation - 13,690
Issuance of Common Stock to ESOP and under
other stock plans, including tax benefits 14,172 21,945
-------- ---------
Net cash (used in) provided by
financing activities (3,818) 8,582
-------- ---------
Effect of exchange rate fluctuations on cash
and equivalents 479 (2,492)
-------- ---------
NET INCREASE IN CASH AND EQUIVALENTS 7,492 632
Cash and equivalents at beginning of period 106,179 148,984
-------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD $113,671 $ 149,616
======== =========
</TABLE>
See accompanying notes.
<PAGE> 7
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
The components of inventories were as follows:
<TABLE>
<CAPTION>
March 31, September 30,
(In thousands) 1994 1993
--------- -------------
<S> <C> <C>
Purchased parts and subassemblies $ 71,436 $ 60,302
Work in process 23,625 27,076
Finished goods 77,464 76,328
-------- --------
Total $172,525 $163,706
======== ========
</TABLE>
2. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common and
common equivalent shares outstanding. Common equivalent shares result from the
assumed exercise of outstanding stock options, which have a dilutive effect
when applying the treasury stock method.
As a result of terminating the Employee Stock Ownership Plan (ESOP), the
approximately 2.4 million unallocated common shares held by the ESOP trust,
which will be returned to Tandem in fiscal 1994, have been excluded from the
1994 weighted average shares outstanding calculations.
3. CASH DIVIDENDS
The Company has not declared or paid any cash dividends and has no plans to do
so in the foreseeable future.
<PAGE> 8
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. BUSINESS COMBINATIONS
The consolidated results of operations for the first six months of 1993 include
the accounts of MPACT EDI Systems, Inc., a wholly- owned subsidiary of Tandem,
which was sold to Immedia Infomatic Corporation on June 30, 1993.
The consolidated results of operations for the quarter ended December 31, 1993
and the six months ended March 31, 1993 include the operating results of two
wholly-owned subsidiaries, Applied Communications Inc. (ACI), and Applied
Communications, Inc., Limited (ACI. Ltd.), both of which were sold effective
December 31, 1993 for approximately $53.6 million net cash. The sales of these
subsidiaries resulted in a gain for financial accounting purposes of $23
million.
In December 1992, NetWorth Inc. (NetWorth), an approximately 51 percent owned
subsidiary at the time, completed an initial public offering of its common
stock in which NetWorth received net proceeds of $26.9 million. The Company
concurrently purchased shares in the offering in approximate proportion to its
then ownership. On March 31, 1994, NetWorth acquired approximately 30 percent
of the shares then held by the Company for a cash purchase price of $20
million, financed by debt, thereby reducing the Company's ownership to
approximately 31.5 percent. After expenses of the transaction and adjusting
its investment to reflect its approximate $5.6 million equity in NetWorth's
remaining net assets, the Company realized no gain or loss for financial
reporting purposes. As of March 31, 1994, the investment in NetWorth will be
accounted for under the equity method of accounting and the investment is
included in other assets.
On March 15, 1994, the Company sold its interest in the storage subsystems
business of Array Technology Corporation (acquired in 1990), together with
certain assets, to EMC Corporation for approximately $10 million cash. As a
part of its 1993 restructuring plan and related provision, the Company
concluded to sell or otherwise dispose of this business unit. Accordingly, the
transaction was recorded as part of restructuring activity in the quarter ended
March 31, 1994 and no gain or loss was realized for financial reporting
purposes.
<PAGE> 9
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FINANCING ARRANGEMENTS
In December 1993, Tandem secured a three-year Financing Facility (the Financing
Facility) to replace the multiple option financing facility (MOFF) which was
canceled in the fourth quarter of fiscal 1993. A ninety-day bridge facility
supported the Company during the period between cancellation of the MOFF and
completion of the Financing Facility.
Under the Financing Facility, the Company can sell up to $150 million of
qualified domestic receivables on a limited recourse basis. One component of
the Financing Facility, which allows for sales of accounts receivable up to $75
million, will expire in fiscal 1997. A second component of the Financing
Facility, which also allows for sales of accounts receivable up to $75 million,
will expire in fiscal 1995, but will be renewable annually with the consent of
both parties.
6. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS No. 109) effective October 1, 1992. As a
result of adopting SFAS No. 109, the net income for the three months ended
December 31, 1992 was increased by the cumulative effect of the change, or
$12.4 million ($.11 per share), and a valuation allowance of approximately $53
million was established for certain deferred tax assets related to foreign
losses and stock option deductions. The effective tax rate for the three and
six month periods ended March 31, 1993 was 36.8 percent.
The provision for income taxes for the three and six month periods ended March
31, 1994 arose principally from taxes currently payable in foreign
jurisdictions.
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SELECTED OPERATING STATISTICS
The following tables summarize operating statistics for the second
quarter and first six months of 1994 and 1993. The first table shows the
percentage relationship of revenue and expense items to total revenues. The
second table shows the percentage change in 1994 and 1993 from the comparable
prior year periods.
Operating results of business units sold since March 1993 are included
through their respective disposition dates as follows: MPACT EDI Systems,
Inc.--June 30, 1993; Applied Communications, Inc. (ACI) and Applied
Communications, Inc., Limited (ACI, Ltd.)--December 31, 1993; and Array
Technology Corporation--March 15, 1994.
The Company's fiscal year ends on September 30. References to 1994,
1993, and 1992 in this section represent the Company's fiscal years.
PERCENT OF TOTAL REVENUES
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
------------------- ---------------------
1994 1993 1994 1993
------------------- ---------------------
<S> <C> <C> <C> <C>
Product revenues 81.6 82.1 81.4 81.3
Service and other revenues 18.4 17.9 18.6 18.7
----- ----- ----- -----
TOTAL REVENUES 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of product revenues 33.8 29.6 33.4 28.5
Cost of service and other revenues 11.2 12.1 12.4 12.2
----- ----- ----- -----
Total cost of revenues 45.0 41.7 45.8 40.7
Research and development 13.3 15.4 13.6 15.3
Marketing, general and
administrative 35.9 39.7 37.3 41.6
----- ----- ----- -----
OPERATING INCOME 5.8 3.2 3.3 2.4
----- ----- ----- -----
Gain on sale of subsidiaries N/A N/A 2.4 N/A
Net interest income 0.0 0.2 0.1 0.2
----- ----- ----- -----
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES 5.8 3.4 5.8 2.6
Provision for income taxes 0.5 1.3 0.5 0.9
----- ----- ----- -----
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 5.3 2.1 5.3 1.7
Cumulative effect as of
October 1, 1992 of change in
accounting for income taxes N/A N/A N/A 1.2
----- ----- ----- -----
NET INCOME 5.3 2.1 5.3 2.9
===== ===== ===== =====
</TABLE>
N/A - Not applicable
<PAGE> 11
PERCENT INCREASE (DECREASE)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------------- ---------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product revenues (7) 3 (4) 4
Service and other revenues (4) 1 (5) 6
--- --- --- ---
TOTAL REVENUES (6) 3 (4) 5
--- --- --- ---
Cost of product revenues 7 8 12 7
Cost of service and other revenues (13) 4 (3) 1
--- --- --- ---
Total cost of revenues 1 7 8 5
Research and development (19) 5 (15) 3
Marketing, general and
administrative (15) (3) (14) (2)
--- --- --- ---
OPERATING INCOME 68 39 33 N/M
--- --- --- ---
Gain on sale of subsidiaries N/A N/A N/M N/A
Net interest income (59) 5 (50) (22)
--- --- --- ---
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES 61 36 117 N/M
Provision for income taxes (61) 58 (46) N/M
--- --- --- ---
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 132 26 212 N/M
Cumulative effect as of
October 1, 1992 of change in
accounting for income taxes N/A N/A N/M N/M
--- --- --- ---
NET INCOME 132 26 77 N/M
=== === === ===
EARNINGS PER SHARE 130 25 73 N/M
=== === === ===
</TABLE>
N/A - Not applicable
N/M - Not meaningful
OPERATING RESULTS
REVENUES
Total revenues decreased 6 percent and 4 percent, respectively, during
the second quarter and first six months of 1994 compared to the 1993 periods,
the effect of business units sold contributing more than one-half of these
decreases. Excluding the effect of business units sold, product revenues
declined 2 percent and 1 percent and service and other revenues declined 2
percent and 4 percent during the 1994 periods. The declines in product revenues
resulted primarily from transitioning to the Company's lower-priced Himalaya
server products, largely offset by additional unit shipments and by increased
<PAGE> 12
revenues from its Integrity family of UNIX server products and
Ungermann-Bass networking products. The decreases in service and other
revenues compared to the 1993 periods resulted primarily from reductions in
hardware service revenues due to the continuing improvement in hardware
reliability which reduces the pricing for such services.
In 1993, total revenues increased 3 percent and 5 percent,
respectively, during the second quarter and first six months compared to the
1992 periods, as a result of increased product sales, increases in the number
of customers contracting for the Company's professional services and increases
in sales of the Company's peripheral products in the second quarter of 1993.
These increases were partly offset by declines in hardware service revenues
primarily reflecting sales of newer, more reliable products which afford
customers less expensive hardware maintenance.
Historically, revenues in the second half of the Company's fiscal year
exceed those in the first half and Management believes that this pattern will
continue in fiscal 1994.
Geographic--The table below summarizes revenues derived from Tandem's
domestic and international operations and the percentage of revenue contributed
by geographic location for the indicated periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
(Dollars in millions) 1994 1993 1994 1993
$ % $ % $ % $ %
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States 264.2 55 277.5 54 515.3 54 523.4 53
Europe
United Kingdom 29.6 6 40.6 8 64.0 7 71.7 7
Germany 19.4 4 23.7 5 41.8 4 49.2 5
Other Europe 58.8 12 75.5 14 123.6 13 163.0 16
---------------------------------- ----------------------------------
Total Europe 107.8 22 139.8 27 229.4 24 283.9 28
Japan 68.2 14 58.7 11 126.1 13 111.6 11
Asia/Pacific 21.5 4 19.3 4 48.1 5 41.3 4
Americas Division
(excluding the U.S.) 22.4 5 22.3 4 40.8 4 41.3 4
---------------------------------- ----------------------------------
Total revenues 484.1 100 517.6 100 959.7 100 1,001.5 100
================================== ==================================
</TABLE>
Revenues in the United States declined 5 percent and 2 percent,
respectively, during the second quarter and first six months of 1994 compared
to the 1993 periods, reflecting primarily the effect of business units sold.
Revenues in Europe declined 23 percent and 19 percent in these periods due in
part to the effect in the United Kingdom of business units sold and to a
generally stronger U.S. dollar particularly during the first quarter of 1994.
In addition, management believes the overall weak economic environment in
Europe has hindered customers' investments in capital equipment. In Japan,
revenues increased 16 percent in the second quarter and 13 percent in the first
<PAGE> 13
six months of 1994 compared to the 1993 periods due in large part to exchange
rate changes and to increased product shipments in the 1994 second quarter.
Excluding the effect of business units sold, Asia/Pacific revenues increased in
the second quarter and first six months of 1994 by 17 percent and 18 percent,
respectively, due primarily to increased product shipments.
Product Lines--The table below summarizes total revenue by product lines
(which includes both product revenues and service and other revenues) and the
percentage of total revenue each product line contributed for the indicated
periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
(Dollars in millions) 1994 1993 1994 1993
$ % $ % $ % $ %
------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computer systems 387.3 80 426.9 82 770.5 80 818.1 82
Networking 96.8 20 90.7 18 189.2 20 183.4 18
------------- -------------- ------------- ---------------
Total revenues 484.1 100 517.6 100 959.7 100 1,001.5 100
============= ============== ============= =================
</TABLE>
Computer systems revenues declined 5 percent and 3 percent (excluding
the effect of business units sold) in the second quarter and first six months of
1994, respectively, compared to the 1993 periods primarily resulting from the
transition to the lower-priced Himalaya server products and a corresponding
decline in per unit revenues, partially offset by increased unit shipments and
increased sales of the Integrity family of UNIX server products.
Networking products achieved record revenues in the second quarter of
1994 as a result of strong demand for the Access/One and departmental
Access/Stax products. On March 31, 1994, NetWorth, Inc. acquired approximately
1.6 million shares of its common stock held by the Company thereby reducing the
Company's ownership from approximately 51 percent to approximately 31.5
percent. As a result, the Company's investment in NetWorth will now be
accounted for under the equity method of accounting and not as a consolidated
subsidiary. NetWorth's revenues to customers not affiliated with the Company
represented approximately 6 percent of networking revenues for both the second
quarter and first six months of 1994 and approximately 5 percent for the
comparable 1993 periods.
COST OF REVENUES
During both the second quarter and first six months of 1994, product
margins decreased to 59 percent from 64 percent and 65 percent for the
respective 1993 periods due principally to the introduction of Himalaya server
products during the first quarter of 1994 (which have lower prices and margins
than previous generations of Tandem systems) and to increased networking
revenues at lower margins. Margins on service and other revenues increased to
39 percent in the second quarter of 1994 from 32 percent in the 1993 quarter
and decreased to 34 percent from 35 percent for the six month periods.
The second quarter margin im.provement is due primarily to lower service costs
<PAGE> 14
and overhead associated with cumulative restructuring actions and to reduced
costs incurred on systems integration projects. Higher than anticipated costs
on certain systems integration projects in the first quarter of 1994 was the
major factor causing margin deterioration in the first six months of 1994.
In both the second quarter and first six months of 1993 product margin
percentages declined compared with the year earlier periods primarily as a
result of realizing lower prices due to geographic and channel mix, decreased
margins on networking products and increased volumes by some of the Company's
operations which traditionally sell lower margin products.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $15 million and $23 million
from the 1993 second quarter and first six months periods in part due to the
effect of business units sold but primarily as the result of restructuring
actions taken since 1993 and higher levels of software capitalization.
Additionally, second quarter 1993 research and development expenses included
development material and tooling expenses associated with products that have
since been introduced. Tandem believes that the levels of spending will rise
slightly for the remainder of 1994, but not as a percentage of revenues.
Compared with the 1992 periods, research and development expenses
increased in both the second quarter and first six months of 1993 due primarily
to hiring development engineers to support the Company's development plans at
the time and to the new product development materials and tooling expenses
referred to above.
MARKETING, GENERAL, AND ADMINISTRATIVE EXPENSES
Marketing, general and administrative expenses were down sharply in the
second quarter ($32 million) and first six months ($58 million) of 1994 from the
1993 periods, primarily as the result of restructuring actions initiated in the
third quarter of 1993. Of these decreases, approximately one-third for the
second quarter and approximately one-quarter for the first six months of 1994
pertain to business units sold. Marketing, general and administrative expenses
were slightly lower in the 1993 periods than the year earlier periods due to
earlier restructuring and cost containment actions.
Aggressive cost containment and restructuring actions have progressively
reduced the on-going level of fixed expenses. However, certain expenses such as
commissions and incentive compensation for sales and marketing staff will vary
as revenues fluctuate and the Company will reinstate a limited, competitive
salary increase plan for U.S. employees beginning in the fourth quarter. As
part of the Company's cost containment program, salaries for most U.S. employees
were reduced and the salary increase program was suspended effective August
1993.
IMPACT OF CURRENCY AND INFLATION
During the first six months of 1994, especially in the first quarter,
the currencies in most foreign countries where Tandem has significant operations
weakened against the U.S. dollar compared to the prior year periods,
particularly in Europe. The negative
<PAGE> 15
impact from translating revenues and operating results for these
countries was modestly offset by the favorable impact resulting from the U.S.
dollar weakening against the Japanese yen. In the 1993 periods, the strength of
the U.S. dollar against international currencies also had a slightly negative
influence on international revenues and operating results.
NET INCOME AND EARNINGS PER SHARE
In addition to the factors discussed above, net income in the first six
months of 1994 was impacted by a $23 million first quarter pretax non-operating
gain from the sales of ACI and ACI, Ltd. Net income for the first six months
of 1993 included a $12 million positive adjustment representing the cumulative
effect as of October 1, 1992 of adopting Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109).
The effective tax rate for the three and six month periods ended March
31, 1994 was 8.8 percent and 9.1 percent, respectively, arising principally
from taxes currently payable in foreign jurisdictions. Tandem expects to
continue to report income for the remainder of 1994 in certain foreign
jurisdictions, which will result in tax provisions despite loss carryforwards
which are available primarily to offset U.S. and certain foreign income. The
effective tax rate under SFAS No. 109 for both the three and six month periods
ended March 31, 1993 was 36.8 percent.
Weighted average shares outstanding increased only slightly from the
second quarter of 1993, and decreased from the first six months of 1993,
primarily due to the termination of Tandem's Employee Stock Ownership Plan
(ESOP). For the second quarter, the effect of this decrease was more than
offset, and for the first six months the effect of this decrease was partially
offset, by increases from sales of stock to employees under other stock plans.
FINANCIAL CONDITION
During the second quarter of 1994, cash and cash equivalents decreased
by $9 million. The Company generated $35 million positive cash flow from
operations during the quarter. Investing activities in the second quarter
included $68 million of investment in capital equipment, software and strategic
investments in new technology. Cash used in investing activities was partially
offset by $17 million (net of cash disposed) relating to the Company's March
31, 1994 sale of a portion of its common stock investment in NetWorth reducing
its ownership from 51 percent to 31.5 percent. Financing activities,
consisting of net debt repayments net of stock sales, provided $2 million.
Accounts receivable days, excluding business units sold, increased from
80 days at September 30, 1993 to 81 days at March 31, 1994. Inventory days,
excluding these business units, increased from 70 days at September 30, 1993 to
72 days at March 31, 1994.
At March 31, 1994, total debt was $136 million compared with $155
million at September 30, 1993, of which $111 million and $114 million,
<PAGE> 16
respectively, represent nonrecourse borrowings against lease receivables.
Total debt as a percentage of total capital decreased from 17 percent at
September 30, 1993 to 15 percent at March 31, 1994.
In December 1993, Tandem secured a three-year Financing Facility
(Financing Facility) to replace the multiple option financing facility, which
was canceled in the fourth quarter of 1993. Under the Financing Facility, the
Company can sell up to $150 million of qualified domestic receivables on a
limited recourse basis. One component of the Financing Facility, which allows
for sales of accounts receivable up to $75 million, expires in 1995, but is
renewable annually with the consent of both parties. A second component of the
Financing Facility, which allows for sales of accounts receivable up to $75
million, expires in 1997. The total financing available under the Financing
Facility is limited to a pool of qualified domestic receivables.
In addition to the Financing Facility, other possible sources of working
capital include other financing arrangements and sales of noncritical assets
such as land and buildings. Management believes that the financing sources
available at March 31, 1994 can adequately meet Tandem's financing needs.
As of March 31, 1994, the Company had approximately 8,800 full-time
equivalent employees. Headcount decreased approximately 700 during the quarter,
primarily due to business units sold, and is down approximately 1,900 since the
Company initiated its restructuring actions during the third quarter of 1993.
OUTLOOK AND RISKS
Management expects the shift to lower-priced, lower-margin Himalaya
servers will result in a continuing decline in product margins, although the
decline may slow over the next few quarters. A key challenge in meeting the
Company's 1994 operating plan includes shipping sufficiently increased unit
volumes of new lower-priced products to achieve increased revenues, and
concurrently controlling the cost structure of the Company. Management is
encouraged by the increasingly favorable cost containment results during the
fourth quarter of 1993 through the second quarter of 1994, but key challenges
remain to meet the Company's revenue goals.
Tandem, Himalaya, Integrity, Ungermann-Bass, Access/One and Access/Stax are
trademarks of the Company. UNIX is a trademark of UNIX Systems Laboratories,
Inc.
<PAGE> 17
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES - FORM 10-Q
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required by Item 601 of Regulation S-K: None
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
first fiscal quarter.
<PAGE> 18
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES - FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Cupertino, State of
California.
TANDEM COMPUTERS INCORPORATED
(Registrant)
<TABLE>
<S> <C>
Date: May 16, 1994 By: /s/ DAVID J. RYNNE
David J. Rynne
Senior Vice President and
Chief Financial Officer
Date: May 16, 1994 By: /s/ ANTHONY H. LEWIS, JR.
Anthony H. Lewis, Jr.
Vice President and
Corporate Controller
</TABLE>
