<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 June 30, 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.
<TABLE>
<S> <C> <C>
Class: Common Stock, Outstanding at August 11, 1994
$.025 par value 115,220,582 shares
</TABLE>
<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 nine-month periods
ended June 30, 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
----------------------------
June 30, June 30,
(In thousands except per share amounts) 1994 1993
-------- --------
<S> <C> <C>
REVENUES
Product revenues $ 434,176 $ 376,943
Service and other revenues 109,765 98,637
--------- ----------
Total revenues 543,941 475,580
--------- ----------
COSTS AND EXPENSES
Cost of product revenues 170,055 147,604
Cost of service and other revenues 75,214 74,278
Research and development 66,849 82,358
Marketing, general, and administrative 181,141 215,529
Restructuring charges - 451,000
--------- ----------
Total costs and expenses 493,259 970,769
--------- ----------
OPERATING INCOME (LOSS) 50,682 (495,189)
Net interest income 328 659
--------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 51,010 (494,530)
Provision for income taxes 2,500 55,000
--------- ----------
NET INCOME (LOSS) $ 48,510 $ (549,530)
========= ==========
EARNINGS (LOSS) PER SHARE $ .43 $ (4.88)
========= ==========
Weighted average shares outstanding 113,508 112,611
========= ==========
</TABLE>
See accompanying notes.
<PAGE> 4
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended
---------------------------
June 30, June 30,
(In thousands except per share amounts) 1994 1993
-------- --------
<S> <C> <C>
REVENUES
Product revenues $ 1,215,273 $ 1,191,186
Service and other revenues 288,349 285,919
----------- -----------
Total revenues 1,503,622 1,477,105
----------- -----------
COSTS AND EXPENSES
Cost of product revenues 490,475 433,021
Cost of service and other revenues 193,956 196,520
Research and development 196,914 235,233
Marketing, general, and administrative 539,658 632,526
Restructuring charges - 451,000
----------- -----------
Total costs and expenses 1,421,003 1,948,300
----------- ------------
OPERATING INCOME (LOSS) 82,619 (471,195)
Gain on sale of subsidiaries 23,000 -
Net interest income 1,178 2,368
---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME TAXES 106,797 (468,827)
Provision for income taxes 7,600 64,459
---------- ------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 99,197 (533,286)
Cumulative effect as of October 1, 1992
of change in accounting for income taxes - 12,371
----------- ------------
NET INCOME (LOSS) $ 99,197 $ (520,915)
============ ===========
EARNINGS (LOSS) PER SHARE BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE $ .88 $ (4.76)
Per share cumulative effect of
accounting change - .11
---------- ------------
EARNINGS (LOSS) PER SHARE $ .88 $ (4.65)
========== ============
Weighted average shares outstanding 112,942 112,058
========== ============
</TABLE>
See accompanying notes.
<PAGE> 5
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
1994 1993
(In thousands except per share amount) (Unaudited)
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 104,764 $ 106,179
Short-term investments - 18,588
Accounts receivable, net 456,801 458,122
Current portion of lease receivables 58,104 60,376
Inventories 177,733 163,706
Prepaid and deferred income taxes 20,803 9,493
Prepaid expenses and other 52,146 34,966
---------- ----------
Total current assets 870,351 851,430
---------- ----------
PROPERTY, PLANT, AND EQUIPMENT, at cost 1,162,570 1,149,611
Accumulated depreciation and amortization (627,492) (583,043)
---------- ----------
Net property, plant, and equipment 535,078 566,568
---------- ----------
COST IN EXCESS OF NET ASSETS ACQUIRED, NET 7,091 25,168
---------- ----------
LEASE RECEIVABLES 73,676 79,832
---------- ----------
OTHER ASSETS 188,202 162,211
---------- ----------
TOTAL ASSETS $1,674,398 $1,685,209
========== ==========
</TABLE>
LIABILITIES AND STOCKHOLDERS' INVESTMENT
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Short-term borrowings $ - $ 15,080
Accounts payable 130,289 145,378
Accrued liabilities 546,898 648,380
Current maturities of long-term obligations 55,839 53,384
---------- ----------
Total current liabilities 733,026 862,222
---------- ----------
LONG-TERM OBLIGATIONS 83,402 86,162
---------- ----------
STOCKHOLDERS' INVESTMENT
Common stock $.025 par value, authorized
400,000 shares, outstanding 115,548 shares at
June 30 and 113,666 shares at September 30 2,888 2,842
Additional paid-in capital 639,014 620,297
Retained earnings 261,457 162,260
Accumulated translation adjustments 6,583 3,207
Treasury stock, at cost (9,062) (8,871)
Deferred ESOP compensation (42,910) (42,910)
---------- ----------
Total stockholders' investment 857,970 736,825
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $1,674,398 $1,685,209
========== ==========
</TABLE>
See accompanying notes.
<PAGE> 6
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended
---------------------------------
June 30, June 30,
(In thousands) 1994 1993
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 99,197 $(520,915)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 123,514 134,971
Gain on sale of subsidiaries (23,000) -
Cumulative effect of accounting change - (12,371)
Restructuring charges - 451,000
Deferred income taxes (10,768) 36,415
ESOP compensation - 4,268
Gain on dispositions of property, plant, and
equipment (804) (144)
Changes in :
Accounts receivable (16,858) 62,460
Inventories (21,677) (30,232)
Lease receivables 9,933 11,722
Non-debt current liabilities and other (117,978) (7,525)
-------- --------
Net cash provided by
operating activities 41,559 129,649
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant, and equipment (90,894) (117,836)
Proceeds from dispositions of property, plant,
and equipment 23,509 10,242
Sale of subsidiaries, net of cash disposed 70,519 -
Increase in other assets (51,155) (36,627)
------- ---------
Net cash used in
investing activities (48,021) (144,221)
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings 51,698 42,479
Repayments (67,956) (68,978)
Acquisitions of treasury stock - (11,488)
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 18,763 24,984
-------- --------
Net cash provided by
financing activities 2,505 687
-------- --------
Effect of exchange rate fluctuations on cash
and equivalents 2,542 (4,248)
-------- -------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (1,415) (18,133)
Cash and equivalents at beginning of period 106,179 148,984
-------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $104,764 $ 130,851
======== ==========
</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>
June 30, September 30,
(In thousands) 1994 1993
---------- -------------
<S> <C> <C>
Purchased parts and subassemblies $ 73,752 $ 60,302
Work in process 29,039 27,076
Finished goods 74,942 76,328
--------- ---------
Total $ 177,733 $ 163,706
========= =========
</TABLE>
2. EARNINGS (LOSS) PER SHARE
Earnings per share is 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. Loss per share is calculated using the
weighted average number of common shares outstanding during the period.
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's treasury, have been excluded from the 1994
weighted average common 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. FISCAL 1993 RESTRUCTURING
During the third quarter of 1993, the Company initiated a restructuring
program designed to streamline operations and lower its worldwide cost
structure in anticipation of shipping the new Himalaya product line. These
restructuring actions resulted in a charge of $451 million that included a
reduction of headcount, consolidation of facilities, disposal of assets no
longer required, and the write-off of cost in excess of net assets acquired
(goodwill) as discussed below.
As of June 30, 1993, the Company's UB Networks subsidiary (formerly
Ungermann-Bass) had significantly missed its beginning of the quarter revenue
and operating plan, and reported its second consecutive quarter of substantial
and increased losses from operations. The results reflected a continuing and
accelerating two-year decline in financial performance. Due to the
disappointing financial results, the lack of certain products in high-growth
sectors of the market, and unsuccessful efforts by the subsidiary's management
to to attract public or private investment partners, management alternatively
initiated a plan to restructure the operations which included reducing
headcount, consolidating facilities, and redirecting certain development
programs. Additionally, based upon the then current financial projections,
which were significantly lower than at acquisition, it was concluded the
acquisition goodwill could no longer be assured of recovery and the balance of
$151 million was written off and included in the 1993 restructuring charges.
The goodwill write-off was calculated by comparing the balance with
future cash flow projections at the subsidiary. The cash flow projections
anticipated the cost and probable future savings from restructuring actions as
well as the benefits from products and technologies that were in the latter
stages of development. The projections indicated that cash flows from
operations were expected to be negative for the next several years and
cumulatively negative for the remaing life of the goodwill.
<PAGE> 9
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. BUSINESS COMBINATIONS
The consolidated results of operations for the first nine 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 nine months ended June 30, 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 is 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 and no gain or loss
was realized for financial reporting purposes.
<PAGE> 10
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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.
7. 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.
In the third quarter of 1993, an additional valuation allowance of
$55.0 million was provided against deferred tax assets established in prior
periods which the Company determined no longer met the realizability criteria
under SFAS No. 109. The provision for income taxes for the nine month period
ended June 30, 1993 also includes $9.5 million for currently payable foreign
income taxes which were established in the first two quarters. The 1993 tax
provisions do not include tax benefits related to the restructuring charges and
a significant portion of the operating losses recorded in the third quarter of
1993.
The provision for income taxes for the three and nine month periods
ended June 30, 1994 arose principally from taxes currently payable in foreign
jurisdictions.
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SELECTED OPERATING STATISTICS
The following tables summarize operating statistics for the third
quarter and first nine 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 June 1993 are included
in revenues, costs and expenses 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;
Array Technology Corporation--March 15, 1994; and NetWorth, Inc.--March 31,
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 NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ----------------------
1994 1993 1994 1993
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Product revenues 79.8 79.3 80.8 80.6
Service and other revenues 20.2 20.7 19.2 19.4
------ ------ ------ ------
TOTAL REVENUES 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of product revenues 31.3 31.1 32.6 29.3
Cost of service and other revenues 13.8 15.6 12.9 13.3
------ ------ ------ ------
Total cost of revenues 45.1 46.7 45.5 42.6
Research and development 12.3 17.3 13.1 15.9
Marketing, general and
administrative 33.3 45.3 35.9 42.9
Restructuring charges N/A 94.8 N/A 30.5
------ ------ ------ ------
OPERATING INCOME (LOSS) 9.3 (104.1) 5.5 (31.9)
------ ------ ------ ------
Gain on sale of subsidiaries N/A N/A 1.5 N/A
Net interest income .1 .1 .1 .2
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME TAXES 9.4 (104.0) 7.1 (31.7)
Provision for income taxes .5 11.6 .5 4.4
------ ------ ------ ------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 8.9 (115.6) 6.6 (36.1)
Cumulative effect as of
October 1, 1992 of change in
accounting for income taxes N/A N/A N/A .8
------ ------ ------ ------
NET INCOME (LOSS) 8.9 (115.6) 6.6 (35.3)
====== ====== ====== ======
</TABLE>
N/A - Not applicable
<PAGE> 12
PERCENT INCREASE (DECREASE)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
1994 1993 1994 1993
------ ------- ------ ------
<S> <C> <C> <C> <C>
Product revenues 15 (8) 2 0
Service and other revenues 11 4 1 5
---- ---- ---- ----
TOTAL REVENUES 14 (6) 2 1
---- ---- ---- ----
Cost of product revenues 15 5 13 6
Cost of service and other revenues 1 18 (1) 7
---- ---- ---- ----
Total cost of revenues 11 9 9 6
Research and development (19) 17 (16) 8
Marketing, general and
administrative (16) 4 (15) 0
Restructuring charges N/A N/M N/M 360
---- ---- ---- ----
OPERATING INCOME (LOSS) N/M N/M N/M 489
---- ---- ---- ----
Gain on sale of subsidiaries N/A N/A N/M N/A
Net interest income (50) (21) (50) (22)
---- ---- ---- ----
INCOME (LOSS) BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME TAXES N/M N/M N/M 509
Provision for income taxes N/M N/M N/M N/M
---- ---- ---- ----
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE N/M N/M N/M 679
Cumulative effect as of
October 1, 1992 of change in
accounting for income taxes N/A N/A N/M N/M
---- ---- ---- ----
NET INCOME (LOSS) N/M N/M N/M 661
==== ==== ==== ====
EARNINGS (LOSS) PER SHARE N/M N/M N/M 638
==== ==== ==== ====
</TABLE>
N/A - Not applicable N/M - Not meaningful
OPERATING RESULTS
REVENUES
Total revenues increased 14 percent and 2 percent, respectively, during
the third quarter and first nine months of 1994 compared to the 1993 periods,
despite the effect of business units sold contributing approximately 7 percent
and 4 percent decreases. Excluding the effect of business units sold, product
revenues increased 23 percent and 6 percent and service and other revenues
increased 13 percent and 2 percent during the 1994 periods. The increases in
product revenues resulted primarily from the effect of a
<PAGE> 13
comparatively large volume of unit shipments of the Company's
lower-priced Himalaya server products exceeding the effect of lower unit
pricing, particularly in the 1994 third quarter, and by increased revenues from
networking products. The increases in service and other revenues compared to
the 1993 periods resulted primarily from a comparatively large consulting
project in the third quarter, partially offset by lower hardware service
revenues during 1994 due to continuing improvement in hardware reliability
which reduces the pricing for such services.
In 1993, total revenues decreased 6 percent and increased 1 percent,
respectively, during the third quarter and first nine months compared to the
1992 periods, which the Company believes is primarily attributable to customer
hesitation to purchase products in the third quarter of 1993 while awaiting
announcement of the Company's significantly lower-priced new Himalaya server
products.
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 JUNE 30, NINE MONTHS ENDED JUNE 30,
(Dollars in millions) 1994 1993 1994 1993
$ % $ % $ % $ %
--------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States 259.0 48 241.5 51 774.2 52 764.9 52
Europe
United Kingdom 66.7 12 32.0 7 130.7 9 103.8 7
Germany 22.8 4 31.0 6 64.6 4 80.2 5
Other Europe 72.8 14 66.8 14 196.5 13 229.7 16
----- --- ----- --- ------ --- ------ ---
Total Europe 162.3 30 129.8 27 391.8 26 413.7 28
Japan 68.8 13 59.5 13 194.9 13 171.1 12
Asia/Pacific 29.9 5 21.6 4 78.1 5 62.9 4
Americas Division
(excluding the U.S.) 23.9 4 23.2 5 64.6 4 64.5 4
----- --- ----- --- ------- --- ------- ---
Total revenues 543.9 100 475.6 100 1,503.6 100 1,477.1 100
===== === ===== === ======= === ======= ===
</TABLE>
Revenues in the United States increased 7 percent and 1 percent,
respectively, during the third quarter and first nine months of 1994 compared
to the 1993 periods, but increased 18 percent and 6 percent excluding the
effect of business units sold. These increases reflect a particularly strong
1994 third quarter and a comparatively weak 1993 third quarter as discussed
above. Excluding the effect of business units sold in the United Kingdom,
revenues in Europe increased 29 percent and declined 2 percent in these
periods. The increase in 1994 third quarter resulted from product revenues in
the United Kingdom more than doubling compared with the 1993 quarter, due in
large part to completing the first phase of a contract with a new customer, and
to general weakness in most European economies in the 1993 period. These
increases were partially offset, however, by continued sluggish sales
performance in Germany and by a generally stronger
<PAGE> 14
U.S. dollar against most European currencies. The 1994 nine-month
decline resulted from what management believes to be an overall weak economic
environment in Europe, which the Company believes has hindered customers'
investments in capital equipment, particularly during the first six months of
1994, and to a generally stronger U.S. dollar. In Japan, revenues increased 16
percent in the third quarter and 14 percent in the first nine months of 1994
compared to the 1993 periods due in large part to exchange rate changes and to
increased product shipments in the 1994 periods. Asia/Pacific revenues
increased in the third quarter and first nine months of 1994 by 39 percent and
24 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 JUNE 30, NINE MONTHS ENDED JUNE 30,
(Dollars in millions) 1994 1993 1994 1993
$ % $ % $ % $ %
--------------- ---------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computer systems 451.7 83 390.6 82 1,222.3 81 1,208.7 82
Networking 92.2 17 85.0 18 281.3 19 268.4 18
----- --- ----- --- ------- --- ------- ---
Total revenues 543.9 100 475.6 100 1,503.6 100 1,477.1 100
===== === ===== === ======= === ======= ===
</TABLE>
Computer systems revenues increased 22 percent and 5 percent (excluding
the effect of business units sold) in the third quarter and first nine months of
1994, respectively, compared to the 1993 periods primarily resulting from
steadily increasing unit shipment volumes of the new lower-priced Himalaya
server products, notwithstanding corresponding declines in per unit revenues.
Networking products revenues increased in both the third quarter and
first nine months of 1994 compared to the year earlier periods primarily 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 is now accounted for under the
equity method of accounting and not as a consolidated subsidiary. Accordingly,
NetWorth's revenues to customers not affiliated with the Company were not
included in consolidation for the third quarter of 1994. Revenues prior to the
1994 third quarter represented approximately 4 percent of the above networking
revenues for first nine months of 1994 and approximately 8 percent and 6 percent
for the 1993 three-month and nine-month periods.
COST OF REVENUES
During the third quarter of 1994, product margins were essentially flat
with the prior year quarter at 61 percent and for the first nine months of 1994
decreased to 60 percent from 64 percent in the 1993 period. The decline in
product margin percentage for
<PAGE> 15
the 1994 nine months compared to 1993 is 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. Third quarter
1994 product margins were slightly higher than in earlier 1994 periods due to
geographical mix and to networking and the Company's family of UNIX server
products comprising a lower percentage of total product revenues. Margins on
service and other revenues increased to 31 percent in the third quarter of 1994
from 25 percent in the 1993 quarter and increased to 33 percent from 31 percent
for the nine month periods. The third quarter margin improvement is due
primarily to lower service costs and overhead associated with cumulative
restructuring actions. Higher than anticipated costs on certain systems
integration projects earlier in 1994 partially offset lower service costs and
overhead in the 1994 nine month period compared to 1993.
In both the third quarter and first nine 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 $16 million and $38 million
from the 1993 third quarter and first nine months periods due primarily to
restructuring actions taken since 1993 and higher levels of software
capitalization. Approximately 20 percent of the decrease for each period is
due to the effect of business units sold. 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 third quarter and first nine months of 1993 due primarily
to hiring development engineers to support the Company's development plans at
the time and, in the third quarter, to receiving a lower level of external
funding for joint development projects than in the prior year period.
MARKETING, GENERAL, AND ADMINISTRATIVE EXPENSES
Marketing, general and administrative expenses were down sharply in the
third quarter ($34 million) and first nine months ($93 million) of 1994 from
the 1993 periods, largely as the result of restructuring actions initiated in
the third quarter of 1993. Of these decreases, approximately 40 percent for
the third quarter and approximately 30 percent for the first nine months of
1994 pertain to business units sold. Marketing, general and administrative
expenses increased in the 1993 third quarter compared with the 1992 quarter due
primarily to higher advertising and certain employee costs, translating
international spending into United States dollars and higher costs associated
with the Company's currency hedging programs. Due to year-over-year decreases
in the first half of 1993 as a result of earlier restructuring and cost
containment actions, marketing, general and administrative expenses
for the first nine months of 1993 were essentially flat with the prior year.
<PAGE> 16
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 has reinstated 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 nine months of 1994, especially earlier in the year,
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 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 (LOSS) AND EARNINGS (LOSS) PER SHARE
In addition to the factors discussed above, net income in the first
nine months of 1994 was impacted by a $23 million first quarter pretax
non-operating gain from the sales of ACI and ACI, Ltd. The net loss for the
first nine 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) and for both the 1993 third quarter and first nine months included
the previously reported $451 million restructuring charges.
The effective tax rate for the three and nine month periods ended June
30, 1994 was 4.9 percent and 7.1 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
tax provision for the third quarter of 1993 was $55 million, representing an
additional allowance against deferred tax assets established in prior periods
which the Company determined no longer met the realizability criteria under
SFAS No. 109. The tax provision for the first nine months of 1993 also
included $9.5 million for currently payable foreign incom e taxes which were
established in the first two quarters. The 1993 tax provisions do not include
tax benefits related to the restructuring charges and a significant portion of
the operating losses recorded in the third quarter of 1993.
Weighted average shares outstanding increased from the 1993 periods due
to sales of stock to employees under stock plans and to dilutive stock options
but these increases were partially offset by a decrease relating to the
termination of Tandem's Employee Stock Ownership Plan (ESOP).
<PAGE> 17
FINANCIAL CONDITION
During the third quarter of 1994, cash and cash equivalents decreased
by $9 million. The Company generated $12 million positive cash flow from
operations during the quarter. Investing activities in the third quarter
included $49 million of investment in capital equipment and software. Cash
used in investing activities was partially offset by $8 million representing
returns of deposits on terminated facility leases. Financing activities,
consisting of sales of stock and net borrowings, provided $6 million.
Accounts receivable days, excluding business units sold, decreased from
80 days at September 30, 1993 to 77 days at June 30, 1994. Inventory days,
excluding these business units, decreased from 70 days at September 30, 1993 to
66 days at June 30, 1994.
At June 30, 1994, total debt was $139 million compared with $155
million at September 30, 1993, of which $116 million and $114 million,
respectively, represent nonrecourse borrowings against lease receivables.
Total debt as a percentage of total capital decreased from 17 percent at
September 30, 1993 to 14 percent at June 30, 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 June 30, 1994 can adequately meet Tandem's financing
needs.
As of June 30, 1994, the Company had approximately 8,600 full-time
equivalent employees. Headcount decreased approximately 200 during the
quarter, due in part to business units sold, and is down approximately 2,100
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 and a product mix shift to lower margin UNIX and networking products
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
<PAGE> 18
the fourth quarter of 1993 through the third quarter of 1994, but key
challanges 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> 19
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> 20
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.
<TABLE>
<S> <C> <C>
TANDEM COMPUTERS INCORPORATED
(Registrant)
/s/ DAVID J. RYNNE
Date: August 15, 1994 By:___________________________________
David J. Rynne
Senior Vice President and
Chief Financial Officer
/s/ ANTHONY H. LEWIS, JR.
Date: August 15, 1994 By:__________________________________
Anthony H. Lewis, Jr.
Vice President and
Corporate Controller
</TABLE>
