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LOGO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-9134
------------------------
TANDEM COMPUTERS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-2266618
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
19333 VALLCO PARKWAY 95014-2599
CUPERTINO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 285-6000
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
COMMON STOCK, $.025 PAR VALUE AND NEW YORK STOCK EXCHANGE,
RIGHTS TO PURCHASE SERIES A MIDWEST STOCK EXCHANGE,
PARTICIPATING PREFERRED STOCK PACIFIC STOCK EXCHANGE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of December 4, 1995: $1,401,984,963.
The number of shares of Common Stock outstanding as of December 4, 1995:
117,003,559.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the definitive Proxy Statement dated December 15, 1995, for the
1996 Annual Meeting of Stockholders are incorporated by reference in Part
III.
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PART I
ITEM 1. BUSINESS
Tandem Computers Incorporated (Tandem or the Company), a Delaware
corporation founded in 1974, provides its customers with continuously available,
open, parallel processing computer systems and client/server solutions, and
enterprise networks. Tandem designs, develops, manufactures, markets, and
supports a full range of computer systems and services, ranging from the desktop
to the data center, as well as software to deliver complete customer solutions.
The Company's current server offerings include the NonStop Himalaya K2(x) and
K1(x) series of parallel processing servers and the UNIX(R) System V, Release 4
(SVR4)-based Integrity line of servers. Tandem provides networking products
through its Ungermann-Bass Networks, Inc. (UB Networks) subsidiary.
Tandem works to leverage its fundamental strengths in three major
application areas: commercial online transaction processing (OLTP), decision
support, and messaging.
NONSTOP SERVERS
NonStop Himalaya servers, together with the open Tandem NonStop Kernel
operating system, deliver continuous availability, data integrity, linear
scalability, distributed processing, and distributed data capability. The
parallel architecture of NonStop servers means processors work in parallel so
multiple units of work can be processed reliably and simultaneously. All NonStop
servers allow substantial linear expansion of processing power within a single
system through the addition of processors. This enables the user to expand the
system's transaction processing capacity without sacrificing the initial
investment in hardware and software.
Himalaya servers are based on reduced instruction-set computing (RISC)
technology, allowing the Company to introduce new products quickly, based on the
latest high-performance processor chips, for continually improved
price/performance. Accordingly, during 1995, Tandem introduced the Himalaya
K2(x) series of servers, which provide a 50 percent price/performance
improvement over previous Himalaya servers.
For Himalaya servers, Tandem develops highly reliable and scalable software
engines that drive popular open products such as Novell, Inc.'s TUXEDO(R)
monitor and Open Software Foundation's Distributed Computing Environment (DCE).
These products are optimized for Tandem's major markets: interactive customer
service, decision support, and electronic commerce. This software derives the
benefits of the Himalaya servers -- parallelism, nonshared memory, nonshared
disk, and process pairs -- to provide the highest degree of scalability and
reliability possible.
Himalaya servers connect to a wide range of client platforms and operating
systems, including Microsoft Windows, MS-DOS, OS/2, SCO UNIX, SunOS, HP-UX,
Microsoft Windows NT, and Apple System 7 operating systems. NonStop Himalaya
servers also support a wide range of open database gateways and open networking
standards, including TCP/IP, NetBIOS, AppleTalk, SNA, and OSI. In addition,
NonStop Himalaya servers support portability requirements through their Open
System Services.
INTEGRITY SERVERS
The RISC-based Integrity server family is designed to extend Tandem's
strengths, especially reliability, to the market for UNIX systems.
Integrity FT servers can detect, isolate, and recover from component
failures without the operating system or applications being affected. The
architecture is based on three loosely synchronized CPU modules operating as one
triple modular redundant processor, and power and cooling subsystems linked by
redundant data paths to ensure that component failures do not cause the system
to halt.
Additionally, Tandem offers a complete line of highly scalable,
general-purpose servers based on the UNIX operating system: Integrity NR
servers. This product family ranges from low-level products such as the
Indy(TM) and Indigo(R) workstations, to highly scalable symmetric
multiprocessing servers.
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All references to years throughout Parts I, II, and IV represent the
Company's fiscal years ended September 30, unless otherwise indicated.
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Integrity servers conform to the System V Interface Definition (SVID), the
IEEE POSIX standards, the X/Open(R) Portability Guide Base Profile, and the
MIPS(R) ABI standard. This makes thousands of existing applications based on the
UNIX operating system available to users of Integrity servers. Integrity servers
also support application development tools and databases from a variety of
independent software vendors. Tandem markets a wide variety of open middleware
from suppliers such as Oracle Corporation and Novell, Inc.
SERVERNET TECHNOLOGY
Designed to provide reliable, scalable communications between processors
and peripherals, the ServerNet architecture provides a core interconnect
technology that Tandem will build into its future servers. ServerNet technology
uses multiple high-speed, low-cost routers to switch data rapidly and directly
between multiple data sources and destinations, including processors, storage,
and communications devices. By providing the intelligent switching that
previously could be supplied only by a processor, ServerNet architecture
eliminates the need for a processor in every data path. With the ServerNet
router controlling the data path, data can flow directly from processor to
processor, from processor to device, from device to processor, and from device
to device.
At the end of 1995, Tandem shipped its first beta UNIX system-based server
with ServerNet technology: the Integrity S4000 server.
PERIPHERALS
For complete solutions, the Company offers high-quality, industry-standard
desktop products and peripherals -- including high-performance UNIX system-based
workstations and servers, PC-compatible computers, storage devices, and printing
products -- through original equipment manufacturer (OEM) and value-added
reseller (VAR) relationships. The Company adds hardware and software
enhancements to several of these products prior to resale.
NETWORKING, COMMUNICATIONS, AND NETWORK MANAGEMENT
Tandem's networking products enable NonStop and Integrity servers to
participate in complex multiprotocol networks employing a variety of
industry-standard protocols, including SNA, TCP/IP, OSI, AppleTalk, and NetBIOS.
Tandem's communications products allow NonStop servers to connect directly to a
variety of transaction-generating devices such as terminals, workstations,
automated teller machines, cash registers, and bar-code readers.
Tandem offers a variety of network management tools to facilitate the
efficient management of NonStop servers in an open environment. Distributed
Systems Management (DSM) software provides an architecture and set of services
that permit the management of remote systems and business applications. DSM
software can be tailored to support centralized or decentralized management of
operations, and provides the foundation for automated operations at central or
remote sites.
UB Networks
UB Networks is a supplier of networking hardware and software products for
shared and switched environments. The full line of enterprisewide networking
products includes the GeoLAN/500 NonStop Super-Switching Hub, the GeoSwitch/155
ATM Switch, the GeoRim/E Ethernet Switch, and the GeoStax Stackable Workgroup
hubs. UB Networks also provides network management and application products,
including its EMPower distributed management system and Virtual Network
Architecture. Its service division offers innovative support solutions such as
comprehensive integration services and advanced interactive support via the
Internet.
MARKETING, SALES, AND SUPPORT
Tandem markets its products primarily through its own organization, which
includes marketing, sales, training, field support, and professional services
personnel. The Company also markets its products through
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distributors, VARs, and OEMs. The Company intends to continue its expansion of
alternate distribution channels worldwide.
Applications are typically developed and provided by application software
providers and resellers or by the customer's own programmers. To facilitate the
development and availability of applications on Tandem systems, the Company
established the Tandem Alliance program for selected VARs, software houses,
systems integrators, and other related businesses. The Company offers Alliance
members a variety of licensing, marketing, technical, and sales support
programs. More than 350 Alliance members work with Tandem to develop solutions
for customers in a wide range of industries.
To enhance its international marketing, sales, and support efforts, Tandem
has established joint ventures in Chile, Japan, Mexico, Singapore, China, and a
number of European countries. The Company's joint ventures in Chile and Mexico
distribute and support Tandem products. Other joint ventures provide project
management and contract consulting services to Tandem customers, and develop and
support customized application software to meet the needs of the local
marketplace. They may also assist Tandem Alliance members with the distribution
and support of their software products.
To increase its marketing efforts, the Company has established OEM and
reseller relationships with multiple vendors, including AT&T; Cabledata;
Motorola, Inc.; Sprint International; Nippon Telephone and Telegraph (NTT); and
Nippon Electric Company (NEC). Tandem has also established marketing
relationships with leading systems integrators such as Andersen Consulting,
Logica plc, Electronic Data Systems Incorporated (EDS), and Unisys.
During 1995, over 75 percent of the Company's hardware sales were to end
users. The remaining sales were to distributors and to resellers that add their
hardware and software products for specific applications. No customer accounted
for 10 percent or more of the Company's total 1995 revenues.
The Company strives to minimize the time between receipt of orders and
shipment of systems. Typically, Tandem ships within 90 days of receiving the
order. For this reason, and because customers may change delivery schedules or
cancel orders, the order backlog at any particular date may not be
representative of the Company's actual sales for any succeeding fiscal period.
Tandem offers professional services and education, including design
consulting, systems integration, operations management guidance, and system
requirements planning. Tandem's support centers can perform system diagnostics
remotely on both hardware and software. The Company also offers on-site service.
PRODUCT DEVELOPMENT
Tandem continues to develop new products and enhance existing products to
give its customers improved price/performance; to broaden Tandem's customer base
by providing industry-specific platforms and solutions; and to make Tandem
systems and their benefits more accessible in a client/server environment.
Tandem is committed to providing open systems that deliver connectivity,
interoperability, and portability. The Company expects to introduce additional
products in the future based on the NonStop Kernel, Microsoft Windows NT, and
UNIX operating systems, incorporating the Company's new ServerNet technology.
The computer industry is characterized by rapid technological advances. To
remain competitive, computer companies must pursue technical development.
Accordingly, the Company continues to incur substantial engineering and software
development expenses. During 1995, 1994, and 1993, the Company's research and
development expenses were $323.2 million, $269.3 million, and $313.3 million,
respectively. Reference is made to the information found under the caption
"Software development costs" in the Notes to Consolidated Financial Statements
on pages 22 and 23.
INDUSTRY SOLUTIONS
Tandem and its Alliance members provide solutions designed to meet the
specific requirements of particular industries and applications. Tandem's
Alliance strategy offers customers the fundamental strengths
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of Tandem products as well as the specific industry knowledge and advantages
that our Alliance members build into their solutions.
Telecommunications
Tandem provides critical services to the world's major telecommunications
companies. The applications cover a wide range of network and operational
aspects of the industry. Particular emphasis is on business systems for operator
services, call centers, call detail analysis, service ordering, and billing;
network operation systems for network management and network control;
value-added service systems for voice messaging, electronic messaging, fax,
e-mail, and multimedia; and enhanced network services for intelligent networking
and automatic wireless roaming devices.
Banking and Securities
Tandem continues to be a major provider of information technology solutions
to the worldwide financial services industry. The Company's strong presence in
banking is demonstrated by its customer base of more than 500 financial
institutions worldwide. In addition, Tandem remains a significant presence in
retail electronic funds transfer, international banking, and interbank payments
by continually improving its solution offerings in these areas.
In the securities industry, Tandem continues to expand its presence in
stock and commodities exchanges globally. The Company now provides solutions to
45 exchanges worldwide.
Electronic Commerce
Tandem continues to broaden and extend its range of solutions and
infrastructure products in the high-growth electronic commerce market that
includes messaging and electronic data interchange (EDI).
Decision Support
Tandem provides end-to-end data warehouse solutions that scale to meet
business needs. From midrange departmental systems to multi-terabyte,
enterprisewide data warehouses, Tandem offers the right mix of scalable
high-performance hardware, industry-standard software, and decision support
tools and applications.
COMPETITION
The market for computer systems is highly competitive. Potential purchasers
consider many factors: price/performance and cost of ownership, openness, system
capability, availability, scalability, compatibility, reliability and
maintainability, and the manufacturer's ability to develop new products and
enhance existing ones. Tandem believes that with the introduction of the
Himalaya server range, it competes favorably with respect to these factors.
Tandem systems compete with those of three classes of competitors.
Competitors for traditional fault-tolerant systems include IBM, Digital
Equipment Corporation (DEC), and Stratus Computer, Inc. (Stratus). The new
pricing and open features of Himalaya servers position them in a broader market
and against a wider range of competitors, including Sequent Computers, Inc.
(Sequent); Sun Microsystems, Inc. (Sun); and Hewlett-Packard Company (HP).
Certain massively parallel configurations of NonStop servers are competitive
with products from other providers of parallel systems. Recent increased
industry focus on commercial parallelism has placed Tandem in competition with
nontraditional competitors. Specifically, in parallel database applications such
as decision support, AT&T Global Information Solutions and the IBM SP/2 product
family are now competitors.
The Integrity server family competes with UNIX system-based offerings from
HP, IBM, Sequent, Stratus, and Sun.
In the highly competitive LAN market, UB Networks faces substantial
competition from several established and emerging computer communications and
LAN companies, including IBM, DEC, Cabletron Systems, Bay Networks, 3Com
Corporation, and Cisco Systems, Inc.
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MANUFACTURING
The Company's manufacturing facilities are located in Fremont, California,
and in Stirling, Scotland. Manufacture of Tandem computer systems requires the
assembly and testing of integrated circuits, circuit boards, peripheral
subsystems, power supplies, and other items, as well as final assembly,
integration, and testing of completed computer systems. All inspection, final
assembly, and system integration tests are performed by Company personnel. In
general, the Company assembles its systems from components and prefabricated
parts manufactured by others. A number of the custom and semicustom integrated
circuits, printed circuit boards, and power supplies are manufactured by others
to the Company's specifications. Tandem purchases terminals, workstations,
printers, disk drive head disk assemblies, tape drives, cable assemblies, power
supplies, and other subassemblies and peripheral equipment.
Most of the components and peripherals used in the Company's systems are
available from a number of different suppliers. The Company believes that
alternative sources could be developed, if required, for present single-sourced
components or peripherals. Although the Company has not experienced any
significant problem in obtaining its required supplies, future shortages of
components or peripherals could result in production delays that could adversely
affect business.
ENVIRONMENTAL REGULATIONS
The Company's objectives include providing products and services that are
environmentally sound, and conducting business operations in an environmentally
responsible manner. Compliance with federal, state, and local provisions related
to the discharge of materials into the environment, or otherwise related to
protection of the environment by the Company has not had, nor is expected to
have, a material effect on the capital expenditures, earnings, or competitive
position of the Company.
PATENTS
Tandem has been awarded patents in the United States and other countries
for various aspects of its computer systems. Additional patent applications are
pending in the United States and other countries. There can be no assurance that
any of these applications will result in the award of a patent or that the
Company would be successful in asserting its patent rights in any subsequent
infringement actions. The patents and patent applications, although of
significant value to the Company, are not considered to be of material
importance to the business as a whole.
Because a large number of patents exist in the computer field and new
patents are issued frequently, it is not economically practical to determine in
advance whether a new product or any of its components infringe any patent. Some
of the Company's products have been alleged to infringe patents, and additional
allegations may be made in the future. In the event of an infringement, the
Company believes that, based on industry practice, any necessary licenses or
rights under such patents may be obtained on terms that would not have a
material adverse financial effect on the Company.
EMPLOYEES
As of September 30, 1995, the Company had 8,380 full-time equivalent
employees.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Reference is made to the information found under the caption "Outlook and
Risks -- Foreign Operations" in Management's Discussion and Analysis of
Financial Condition and Results of Operations on page 16, and to the information
under the caption "Segment Information" in the Notes to Consolidated Financial
Statements on pages 35 and 36.
ITEM 2. PROPERTIES
The Company is headquartered in Cupertino, California, where it owns 18 and
leases two buildings, totaling approximately 1.8 million square feet.
Approximately 60 percent of the space is devoted to product
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development functions, while the remaining 40 percent houses marketing and
administration. In addition, Tandem owns approximately 40 acres of unimproved
property situated near its Cupertino headquarters. This additional unimproved
property will allow for expansion. The Company recently leased approximately
490,000 square feet in Fremont, California, where it has consolidated all U.S.
manufacturing. The Company has entered into an agreement to sell, in 1996, the
Cupertino retail shopping center owned by the Company since 1990.
The Company's UB Networks, Inc., subsidiary leases six buildings in Santa
Clara, California, for its corporate headquarters. Additionally, the Company
leases a 77,000 square foot facility, devoted to development, marketing and
administration in Plano, Texas. In 1993, the Company acquired a 134,500 square
foot manufacturing facility in Stirling, Scotland. In addition, Tandem owns a
product development facility of approximately 190,000 square feet in Austin,
Texas. The Company also leases sales, field service and training offices at more
than 180 locations in North America, Europe, Asia and the Pacific Rim. In 1988,
Tandem entered into a prepaid 999 year lease for property near London that
serves as its United Kingdom headquarters.
For information about Tandem's lease commitments, reference is made to the
information found under the caption "Property, Plant and Equipment" in the Notes
to Consolidated Financial Statements on Page 27.
ITEM 3. LEGAL PROCEEDINGS
Mark Gaffney v. Tandem Computers Inc. The Company and three principal
officers, James G. Treybig, David J. Rynne and Robert C. Marshall, were named as
defendants in a class action complaint for damages filed in the United States
District Court for the Northern District of California on July 19, 1995. The
class action is purported to be on behalf of purchasers of the Company's Common
Stock between March 8 and July 12, 1995. The complaint alleges violations of
Section 10(b) of the Securities Exchange Act and Securities and Exchange
Commission Rule 10b-5 in connection with public statements about the Company's
expected revenues for the second and third quarters of 1995.
Peter Balkheimer and Ernst Balkheimer v. Tandem Computers Inc. This class
action complaint for damages was filed in the United States District Court for
the Northern District of California on November 2, 1995, and names the Company,
two principal officers, James G. Treybig and David J. Rynne, and the Chairman of
the Board, Thomas J. Perkins, as defendants. This class action is purported to
be on behalf of purchasers of the Company's Common Stock between December 16,
1994 and October 26, 1995. The complaint alleges violations of Sections 10(b)
and 20(a) of the Securities Exchange Act and Securities and Exchange Commission
Rule 10b-5 in connection with public statements about the Company's expected
revenues and earnings during 1995.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1995.
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Tandem, Himalaya, Integrity, NonStop, ServerNet, and the Tandem logo are
trademarks of Tandem Computers Incorporated. UB Networks, GeoLAN, GeoRim/E and
GeoSwitch are trademarks of Ungermann-Bass Networks, Inc. Indigo is a registered
trademark and Indy is a trademark of Silicon Graphics, Inc. MIPS is a registered
trademark of MIPS Technologies, Inc., a wholly owned subsidiary of Silicon
Graphics, Inc. UNIX is a registered trademark in the United States and other
countries, licensed exclusively through X/Open Company Ltd. X/Open is a
registered trademark of X/Open Company Ltd. TUXEDO is a registered trademark of
Novell, Inc. All other brand and product names are trademarks or registered
trademarks of their respective companies.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Reference is made to the information regarding the principal United States
markets for the Company's Common Stock, market stock price range, dividends, and
holders of record of the Common Stock of the Company found under the caption
"Quarterly Financial Data" in the Notes to Consolidated Financial Statements on
pages 36 and 37.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
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TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
For the years ended September 30
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(In thousands except per share amounts) 1995 1994 1993 1992 1991
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<S> <C> <C> <C> <C> <C>
REVENUES $2,284,962 $2,108,035 $2,030,960 $2,036,917 $1,922,179
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Cost of revenues 1,140,689 955,268 886,054 829,738 757,907
Research and development 323,197 269,267 313,298 285,117 266,627
Marketing, general, and administrative 695,772 726,906 847,047 851,477 838,504
Restructuring charges -- -- 451,000 106,000 --
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OPERATING INCOME (LOSS) 125,304 156,594 (466,439) (35,415) 59,141
Gain on sale of subsidiaries and
investments 9,297 23,000 -- -- --
Net interest income (expense) 5,098 1,606 3,300 3,813 (1,952)
Provision for income taxes (32,153) (11,000) (66,959) (9,582) (22,018)
Cumulative effect of change in accounting
for income taxes -- -- 12,371 -- --
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NET INCOME (LOSS) $ 107,546 $ 170,200 $ (517,727) $ (41,184) $ 35,171
===========================================================================================================
EARNINGS (LOSS) PER SHARE $ .91 $ 1.50 $ (4.61) $ (.38) $ .33
===========================================================================================================
Total assets $1,856,694 $1,761,885 $1,685,209 $2,045,424 $1,931,918
Long-term obligations $ 75,923 $ 86,481 $ 86,162 $ 93,626 $ 93,134
Stockholders' investment $1,110,335 $ 938,841 $ 736,825 $1,236,895 $1,247,945
===========================================================================================================
</TABLE>
Effective October 1, 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." Effective October 1, 1992, the Company adopted SFAS No. 109,
"Accounting for Income Taxes." See the Notes to Consolidated Financial
Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED OPERATING STATISTICS
The table below summarizes the changes in selected operating statistics.
The percentages in the left three columns show the relationship of revenue and
expense items to total revenues, except cost of product and services, which are
shown in relation to product revenues and service revenues, respectively. The
percentages in the right columns measure the year-to-year changes.
Operating results of business units sold 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.
Fluctuations in income statement line items between 1995 and 1994 were not
significantly affected by these business units sold, with less than a 2 percent
impact in most cases. Where significant, discussions are provided on a basis
that excludes the financial information of the above-mentioned businesses for
the period prior to disposition. This basis is described in the text, for
example, as "excluding the effects of business units sold" and reflects the
fluctuations of the ongoing operations of the Company.
The Company's fiscal year ends on September 30. References to 1995, 1994,
and 1993 in this section represent the Company's fiscal years.
<TABLE>
<CAPTION>
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Percent of Total Revenues
(Except cost of product Percent Increase
and service) (Decrease)
- -----------------------------------------------------------------------------------------------------
1995 1994 1993 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
<C> <C>p
80.8 81.5 81.3 Product revenues 7 4
19.2 18.5 18.7 Service and other revenues 13 3
100.0 100.0 100.0 Total revenues 8 4
44.5 40.7 37.7 Cost of product revenues 17 12
72.7 65.6 69.4 Cost of service and other revenues 25 (3)
49.9 45.3 43.7 Total cost of revenues 19 8
14.1 12.8 15.4 Research and development 20 (14)
30.5 34.5 41.7 Marketing, general, and administrative (4) (14)
N/A N/A 22.2 Restructuring charges N/A N/M
5.5 7.4 (23.0) Operating income (loss) (20) N/M
4.7 8.1 (25.5) Net income (loss) (37) N/M
=====================================================================================================
</TABLE>
N/M = not meaningful
N/A = not applicable
OPERATING RESULTS
REVENUES
Total revenues in 1995 of $2.3 billion increased 8 percent over 1994.
Product revenues for 1995 increased 7 percent over 1994, while service and other
revenues increased 13 percent. Increases in product revenues were attributable
primarily to an increased volume of unit shipments of the Company's computer
systems, particularly high-end and midrange Himalaya servers, and to increased
software license and support revenues,
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offset by reduced networking revenues. The benefits of the increased unit
shipments were partially offset by a shift from system add-on business to
aggressively discounted trade-in activity on the NonStop product family, largely
resulting from rapid Himalaya server product introductions. Increases in service
and other revenues were the result of increased consulting revenues.
Total revenues in 1994 increased 4 percent over 1993, but increased 8
percent excluding the effects of business units sold. The increase in product
revenues resulted primarily from a large increase in unit shipments of the
Company's Himalaya server products and increased revenues from networking
products. The increase of unit shipments of the Himalaya servers exceeded the
effect of lower unit pricing, a trend that increased throughout the year. The
increase in service and other revenues was attributable primarily to a large
consulting project that occurred in the third quarter of 1994.
Product lines
The table below summarizes total revenues by product line (which includes
both product revenues and service and other revenues) and the percentage of
total revenues each product line contributed for the indicated periods.
<TABLE>
<CAPTION>
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(Dollars in millions) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
$ % $ % $ %
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computer systems 1,911.1 84 1,730.7 82 1,676.3 83
Networking 373.9 16 377.3 18 354.7 17
- ----------------------------------------------------------------------------------------------------
Total revenues 2,285.0 100 2,108.0 100 2,031.0 100
====================================================================================================
</TABLE>
Computer systems revenues increased 10 percent in 1995 compared to 1994.
The increase was the result of increased unit shipments of high-end and midrange
Himalaya servers, increased recurring software license and support revenues, and
increased consulting revenues. The benefits of the strong growth in unit volumes
were partially offset by the shift from system add-on business to aggressively
discounted trade-in activity on the NonStop product family.
Overall, unit shipments of computer system product lines increased 23
percent in 1995, compared to 1994 (based on the number of processors shipped
excluding workstations and personal computers). High-end NonStop computer unit
shipments increased 40 percent to 2,600 units during the year and midrange
NonStop computer unit shipments increased 61 percent to more than 4,300 units.
Compared to the prior year, units from the UNIX system family were relatively
flat.
Recurring software license and support revenues increased 16 percent for
the year, compared to 1994, primarily from the effect of increased volumes
discussed above. This increase contributed 24 percent to the net increase in the
computer systems business.
Consulting revenues attributable to the computer systems business increased
33 percent during 1995, compared to 1994. The growth in consulting revenues was
attributable to changes made in the first quarter of 1995, whereby the Company
organized to price, market, and sell certain consulting services more
aggressively. The increase in consulting revenues accounted for 19 percent of
the net increase in the computer systems business.
Networking revenues decreased $3 million, or 1 percent, during 1995, in
comparison to 1994. Excluding NetWorth, Inc., which was a consolidated
subsidiary prior to April 1, 1994, networking revenues increased $9 million, or
2 percent. Networking product revenues decreased $7 million, offset by increased
consulting and service revenues of $16 million. As noted above, service revenues
increased as the Company began a formal program to market and sell certain
consulting services.
10
<PAGE> 11
Geographic
The table below summarizes revenues derived from Tandem's domestic and
international operations and the percentage of revenues contributed by
geographic location for the indicated periods.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
(Dollars in millions) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
$ % $ % $ %
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States 1,149.6 50 1,127.5 54 1,087.7 54
Europe
United Kingdom 179.8 8 161.9 8 139.9 7
Germany 97.5 4 92.3 4 100.2 5
Other Europe 300.6 13 258.0 12 298.0 14
- ----------------------------------------------------------------------------------------------------
Total Europe 577.9 25 512.2 24 538.1 26
Japan 338.6 15 265.3 13 233.1 12
Asia-Pacific 123.5 6 116.3 5 86.4 4
Americas Division (excluding the U.S.) 95.4 4 86.7 4 85.7 4
- ----------------------------------------------------------------------------------------------------
Total revenues 2,285.0 100 2,108.0 100 2,031.0 100
====================================================================================================
</TABLE>
Revenues in the United States in 1995 increased 2 percent compared to 1994,
characterized by increased unit shipments of high-end and midrange servers and
increased consulting revenues, offset by the shift to aggressively discounted
trade-in activity on the NonStop product, as previously discussed.
Revenues in Europe increased 13 percent during 1995, compared to 1994, as a
result of the positive effects of foreign exchange fluctuations, estimated to be
10 percent year over year; increased consulting revenues; and increased unit
shipments of high-end and midrange servers. The positive effects of foreign
exchange fluctuations were somewhat offset by local product pricing reductions.
In Japan, revenues increased 28 percent during 1995, compared to 1994.
These increases were attributable to the positive effects of foreign exchange
rate changes (favorable impact of approximately 14 percent), increased product
shipments of high-end servers, and increased consulting revenues, offset by
reduced revenues in the UNIX system family.
Asia-Pacific revenues in 1995 increased by 6 percent as a result of foreign
exchange rate changes since the prior year and increased revenues in the UNIX
system family.
COST OF REVENUES
During 1995, product margins declined 4 percent to 55 percent. Computer
system margins declined 5 percent to 58 percent in 1995, while networking
margins declined 2 percent to 41 percent. The decline in computer system margin
percentages was the result of several factors. With the availability of the new
Himalaya K2(x) line of servers, there was an increase in the volume of
aggressively priced trade-in activity and a decrease in add-on sales. In line
with the Company's strategy to price products more competitively, the Company
reduced prices on disk storage products early in the year, and sales volume of
disk storage products increased for the year. Further, the shift in product mix
to the Himalaya servers from the older NonStop products continued to impact the
period over period comparison of product margins. The unfavorable impact on
product margins from these factors was offset slightly by the strength of
foreign currencies during the year. Networking margins were negatively affected
by higher material and overhead costs, a shift to more indirect sales channels,
and discounting of certain older product lines. Management expects product
margins to continue to decline in 1996, although at a lower rate than in 1995.
However, product margin predictions are difficult to make, as they are affected
by foreign currency fluctuations, geographic revenue mix, product mix, and
future competitive pricing actions.
Margins on service and other revenues decreased 7 percent to 27 percent in
1995, as a result of a higher contribution to revenues from consulting
activities, which generated lower margins than other service
11
<PAGE> 12
activities. Margin dollars on the hardware servicing business, which is the
majority of the service and other revenue business, were relatively flat in
comparison to the prior year. Margin dollars on the professional services and
systems integration businesses experienced more fluctuation, as these activities
are significantly influenced by the nature of the projects conducted in any
given year. Further, the Company implemented an organizational change in the
first quarter of 1995 to price, market, and sell consulting services formally,
resulting in a change of classification of certain costs associated with
consulting services, which were previously reported as marketing expenses. This
organizational change reflects the Company's continued transition to open
systems' business practices. Management expects hardware servicing margins to
decline slightly in 1996. Margins on the consulting business are expected to
improve, but are dependent upon the mix of project revenue.
Excluding the effects of business units sold, product margins in 1994
declined 4 percent, compared to 1993, as a result of the introduction of
Himalaya server products at the beginning of the year and a shift in product mix
to include the expanding UNIX system line. Both of these product families have
lower, more aggressive prices than previous generations of Tandem systems.
Networking margins declined primarily as a result of shifts in product mix.
Margins on service and other revenues increased primarily because of lower
service costs and overhead associated with cumulative restructuring actions.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development spending in 1995 increased $54 million, or 20
percent. The increase was attributable to the Company's new product development
efforts, including additional costs for outside contractors, increased salaries
and benefits, and purchases of development material. Research and development
expenses were approximately 14 percent and 13 percent of total revenues during
1995 and 1994, respectively.
Research and development spending in 1994 decreased $44 million, or 14
percent, over 1993 because of reduced headcount -- approximately 50 percent of
the spending reduction -- and higher levels of software capitalization as
certain projects reached technological feasibility -- approximately 27 percent
of the reduction. Approximately 23 percent of the decrease was the result of
business units sold.
Management anticipates that research and development spending will increase
in dollars in 1996, but not as a percentage of revenues, as the Company prepares
to introduce the next generation of products based on the Tandem NonStop Kernel,
Microsoft Windows NT, and UNIX operating systems, incorporating the Company's
new ServerNet technology.
MARKETING, GENERAL, AND ADMINISTRATIVE EXPENSES
In 1995, marketing, general, and administrative (MG&A) expenses declined
$31 million, or 4 percent, compared to 1994. The impact of business units sold
contributed 47 percent of the decline for the year. The remaining decrease
reflects the Company's ongoing efforts to manage general and administrative
expenses relative to gross margin levels. Specific to marketing expenses, the
Company realized increased commissions generated by growing shipment volumes,
and experienced increased salaries and benefits. These increased marketing
expenses were fully offset by the impact of the change in reporting of certain
consulting services costs as discussed previously. MG&A expenses in 1995 and
1994 included realized gains from the sale of strategic investments of $10.6
million and $6.3 million, respectively.
In 1994, marketing, general, and administrative expenses declined $120
million, or 14 percent, compared to 1993, largely as the result of restructuring
actions initiated in the third quarter of 1993.
Management expects MG&A expenses to increase in dollars in 1996, but not as
a percentage of revenue.
RESTRUCTURING CHARGES
In 1993 and 1992, the Company recorded restructuring charges of $451
million and $106 million, respectively, to reengineer the business, largely
necessitated by the migration toward open systems and servers based on RISC
technology, which resulted in lower-priced, yet more powerful parallel servers.
The
12
<PAGE> 13
restructuring provisions, supported by appropriate levels of specificity for
planned actions, were established and approved by the Company's executive
management and its Board of Directors. The restructuring charges covered
reduction of work force, 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 September 30, 1995, $61 million remained in
accrued liabilities and $10 million remained as a reduction of net property,
plant, and equipment. At September 30, 1994, $144 million remained in accrued
liabilities and $29 million remained as a reduction of net property, plant, and
equipment.
Included in the 1993 restructuring charge was a $151 million write-off of
goodwill associated with the 1988 acquisition of UB Networks, Inc. (formerly
Ungermann-Bass, Inc.). As of June 30, 1993, the Company's UB Networks, Inc.
subsidiary reported its second consecutive quarter of substantial and increased
losses from operations. The results reflected an accelerating two-year decline
in its 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 attract public or private investment
partners, management initiated a plan to restructure the operations, which
included reducing headcount, consolidating facilities, and redirecting certain
development programs. Additionally, based upon the then current undiscounted
cash flow projections, it was concluded that 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.
Information relating to restructuring activity, other than the goodwill
write-off discussed above, is presented below. Minor adjustments were made
during 1995, as certain actions were completed and other estimates were revised.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Reduction of Internal Discontinued
(In thousands) Work Force Facilities Systems Activities Other Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision:
1992 $ 44,000 $ 38,000 -- $18,000 $ 6,000 $106,000
1993 103,000 79,000 $34,000 24,000 60,000 300,000
- ------------------------------------------------------------------------------------------------------
Total 147,000 117,000 34,000 42,000 66,000 406,000
- ------------------------------------------------------------------------------------------------------
Utilized:
1992 32,088 16,838 -- 6,649 2,865 58,440
1993 28,278 10,860 -- 20,026 5,825 64,989
1994 34,568 34,560 10,178 4,614 25,473 109,393
1995 36,000 26,036 19,482 933 20,122 102,573
- ------------------------------------------------------------------------------------------------------
Total 130,934 88,294 29,660 32,222 54,285 335,395
- ------------------------------------------------------------------------------------------------------
Adjustments -- 1995 1,611 (45) 3,074 42 (4,682) 0
- ------------------------------------------------------------------------------------------------------
Balances, September 30, 1995 $ 17,677 $ 28,661 $7,414 $ 9,820 $ 7,033 $ 70,605
======================================================================================================
Cash used:
1992 $ 32,088 $ 6,296 -- $ 4,356 $ 2,865 $ 45,605
1993 28,278 9,142 -- 4,999 5,825 48,244
1994 34,568 25,075 $10,178 (5,037) 23,680 88,464
1995 36,000 20,674 19,482 57 19,093 95,306
Expected future 17,677 21,692 7,414 2,718 6,424 55,925
- ------------------------------------------------------------------------------------------------------
Total $148,611 $ 82,879 $37,074 $ 7,093 $57,887 $333,544
======================================================================================================
</TABLE>
13
<PAGE> 14
IMPACT OF CURRENCY AND INFLATION
The Company's international operations generally consist of sales and
support organizations that generate revenues and incur service costs and
marketing, general, and administrative expenses in local currencies. Product
costs, research and development, and corporate marketing and administrative
expenses are mostly incurred in U.S. dollars. Thus, a strengthening of local
currencies against the U.S. dollar has a positive influence on international
revenues translated into dollars and a negative effect on translated local costs
and expenses. A weakening of local currencies has a negative effect on
translated international revenues and a positive effect on translated local
costs and expenses. Tandem's hedging program moderates the impact of exchange
rate changes on profitability and cash flows.
During 1995, the currencies in most foreign countries where Tandem has
significant operations strengthened against the U.S. dollar, positively
affecting consolidated revenues and operating results of the Company, as stated
in U.S. dollars. However, this impact is somewhat mitigated as the Company
responds to such movements in currency exchange rates with pricing and other
management actions in the local markets. The impact is further mitigated by the
Company's hedging program, the objective of which is to neutralize the impact of
foreign currency exchange rate movements on the Company's operating results.
Understanding that the net impact of currency is difficult to quantify,
particularly when measuring the effects of local currency pricing actions,
management estimates that, compared to 1994, foreign exchange rate movements had
a positive impact on the change in operating income of approximately $15 million
to $20 million.
During 1994, currencies in Europe and Latin America generally weakened
against the U.S. dollar compared to the prior year periods, negatively affecting
revenues and operating results. The negative impact on operating results from
these countries, however, was more than offset by the favorable impact resulting
from the U.S. dollar weakening against the Japanese yen and other Asia-Pacific
currencies. The resulting overall effect of currency movements in 1994, though
positive, had no material impact on the operating results for the year.
The effect of inflation on the Company's financial position has not been
significant.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
Net income for 1995 was $108 million, or $0.91 per share, compared with
$170 million, or $1.50 per share for 1994. Net income for 1995 included a $9
million pretax nonoperating gain from the sale of an equity investment,
Lightstream Corporation. Net income for 1994 included a $23 million pretax
nonoperating gain from the sales of ACI and ACI, Ltd. The 1993 net loss of $518
million included a $12 million positive adjustment representing the cumulative
effect as of October 1, 1992, of adopting Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes," and a $451
million restructuring charge.
The effective tax rates for 1995 and 1994 were 23 percent and 6 percent,
respectively, arising principally from taxes currently payable in foreign
jurisdictions. Similarly, although the Company incurred a loss in 1993, there
was a provision for income taxes consisting of taxes currently payable in
foreign jurisdictions and the reduction of deferred tax assets. Tandem expects
to continue to report income in certain foreign jurisdictions, which will result
in tax provisions despite loss carryforwards that are available primarily to
offset U.S. and certain foreign income. At September 30, 1995, net deferred tax
assets of $11 million represent the tax effects of temporary differences
existing in certain foreign jurisdictions that the Company believes are more
likely than not to be realized, based upon the strong earnings history in these
jurisdictions.
Weighted average shares outstanding increased from 1994 because of dilutive
stock options and sales of stock to employees under stock plans.
FINANCIAL CONDITION
During the year, cash and cash equivalents decreased by $3 million, from
$124 million to $121 million. The Company generated $161 million positive cash
flow from operations during 1995 compared with $116 million in 1994. Net cash
used in investing activities was $208 million during 1995, compared with
14
<PAGE> 15
$116 million in 1994. Investing activities in 1995 consisted mainly of
investment in property, equipment, and software development. Financing
activities, consisting of sales of stock and net borrowings, provided $42
million compared with $15 million in 1994.
Accounts receivable days remained unchanged at 77 days for 1995. Inventory
days decreased to 46 days at 1995 year end versus 54 days at the end of 1994.
At September 30, 1995, total debt and short-term borrowings were $142
million compared with $145 million at September 30, 1994, of which $120 million
and $122 million, respectively, represented limited recourse borrowings against
lease receivables. Repayments on the lease borrowings are sourced from the
underlying lease receivables that are collected directly by the lending
institution and are scheduled as follows (in millions): $56 (1996), $39 (1997),
$20 (1998), and $5 (1999). Repayments on the remaining debt will be funded
through operations and are as follows (in millions): $10 (1996), $7 (1997), $2
(1998), $1 (1999), and $2 (thereafter). Total debt as a percentage of total
capital decreased to 11 percent at September 30, 1995, from 13 percent at
September 30, 1994.
Cash used for restructuring actions aggregated $95 million, $88 million,
and $48 million for 1995, 1994, and 1993, respectively. Cash requirements for
restructure actions for 1996 are expected to be approximately $40 million and
will be funded by cash generated from operations.
In December 1993, Tandem secured a three-year financing facility (Financing
Facility), whereby the Company can sell a percentage ownership interest in an
eligible pool of accounts receivable, up to $150 million, on a limited recourse
basis. One component of the Financing Facility, which allows for sales of an
interest in accounts receivable up to $75 million, expires in 1996, but is
renewable annually with the consent of both parties. A second component of the
Financing Facility, which allows for sales of an interest in accounts receivable
up to $75 million, expires in 1997. At September 30, 1995, $114 million of
financing was available to the Company under the agreement. The maximum amount
outstanding at any point during 1995 was $50 million, and there were no amounts
outstanding at year end.
In addition to the Financing Facility, other possible sources of working
capital include cash generated from operations and other financing arrangements.
Management believes that the financing sources available at September 30, 1995,
are adequate to meet Tandem's financing needs, both for the short and long term.
Effective October 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments
in Debt and Equity Securities." Previously, the Company's equity securities were
recorded at the lower of cost or market. Under SFAS No. 115, the Company's
equity securities are classified as available-for-sale. In accordance with SFAS
No. 115, prior period financial statements have not been restated to reflect the
change in accounting principle. The cumulative effect of adopting SFAS No. 115,
as of October 1, 1994, increased the beginning balance of stockholders'
investment by $4.1 million to reflect the net unrealized holding gain on
available-for-sale securities.
OUTLOOK AND RISKS
OVERVIEW
The Company's future operating results are dependent upon a number of
factors, including the Company's ability to increase market share, to expand
successfully into new markets, to improve upon cost control efforts, and to
continue the Company's migration to open platforms.
A key challenge to the Company's continued growth is continuing to sell
increased unit volumes of computer systems and networking products at
competitive prices, while concurrently controlling the cost structure of the
Company. Increased volume shipments is dependent upon continued demand for the
Himalaya K2(x) series of servers, acceptance of new product introductions by the
Company's existing customer base -- including the new UNIX system server
incorporating the ServerNet technology -- as well as successful expansion into
new markets, such as decision support, data warehousing, and commercial uses of
the Internet. As additional products become available based on the ServerNet
technology, the Company must
15
<PAGE> 16
successfully implement its strategy to sell computer components into the open
systems market. With continued pressures on product margins, cost control
remains a key management focus.
Early in 1996, the Company announced that it would undergo significant
management changes. The timing and impact of these management changes on the
operations of the Company cannot be predicted.
CORE COMPUTER OPERATIONS
During the year, Tandem continued to position itself to compete in an open
systems environment based on client/server computing. This trend will continue
in the future with the introduction of new hardware and related software that is
based on Tandem's new ServerNet technology. The ServerNet architecture is
currently planned to be the basis of Tandem's future product lines, including
servers that support NonStop Kernel, UNIX, and Windows NT operating
environments. The success of these product introductions is dependent on a
number of factors, including timeliness to market, market acceptance, the
Company's ability to manage the risks associated with product transitions, and
the effective management of inventory levels. Accordingly, the Company cannot
determine the ultimate effect that the ServerNet technology or the new products
will have on revenues and operating results.
Tandem also plans to sell ServerNet products and manufacturing rights to
other companies on an original equipment manufacturer (OEM) basis, a new type of
business for Tandem. Accordingly, future operating results may be affected by
the Company's ability to implement this strategy and to manage the underlying
alliance agreements and associated competitive risks.
Historically, Tandem recognizes a large percentage of its revenues in the
latter part of each quarter. This trend makes it difficult to forecast revenues
and could subject the Company to fluctuations in revenues and earnings.
UB NETWORKS, INC.
At the end of 1995, UB Networks introduced and began shipping three new
products -- GeoLAN 500, GeoSwitch, and GeoRim. Accordingly, UB Networks' 1996
operating results are dependent upon market acceptance of these new products by
UB Networks' existing customer base, as well as successful expansion into new
accounts.
UB Networks' operating results have been, and in the future may be,
affected by competitive pricing pressures, changes in mix of products sold,
delays in shipping new products, and inventory management. Accordingly, UB
Networks' future success is dependent on its ability to enhance existing
products; to develop and introduce, on a timely and cost-effective basis, new
products that keep pace with technological developments and emerging industry
standards; to address increasingly sophisticated customer requirements; and to
manage the product transition process.
FOREIGN OPERATIONS
Although the Company's operating and pricing strategies and currency
hedging practices take into account changes in foreign currency exchange rates
over time, the Company's operating results can be affected by fluctuations in
foreign currency exchange rates.
16
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
For the years ended September 30
- ----------------------------------------------------------------------------------------------------------------
(In thousands except per share amounts) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Product revenues $1,846,075 $1,719,026 $1,651,597
Service and other revenues 438,887 389,009 379,363
- ----------------------------------------------------------------------------------------------------------------
Total revenues 2,284,962 2,108,035 2,030,960
- ----------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of product revenues 821,780 699,976 622,640
Cost of service and other revenues 318,909 255,292 263,414
Research and development 323,197 269,267 313,298
Marketing, general, and administrative 695,772 726,906 847,047
Restructuring charge -- -- 451,000
- ----------------------------------------------------------------------------------------------------------------
Total costs and expenses 2,159,658 1,951,441 2,497,399
- ----------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 125,304 156,594 (466,439)
Gain on sale of subsidiaries and investments 9,297 23,000 --
Interest income 18,200 14,579 18,985
Interest expense (13,102) (12,973) (15,685)
- ----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING FOR INCOME TAXES 139,699 181,200 (463,139)
Provision for income taxes 32,153 11,000 66,959
- ----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 107,546 170,200 (530,098)
Cumulative effect as of October 1, 1992, of change in
accounting for income taxes -- -- 12,371
- ----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 107,546 $ 170,200 $ (517,727)
================================================================================================================
EARNINGS (LOSS) PER SHARE BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $ .91 $ 1.50 $ (4.72)
Per share cumulative effect of accounting change -- -- .11
- ----------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE $ .91 $ 1.50 $ (4.61)
================================================================================================================
Weighted average shares outstanding 118,217 113,449 112,292
================================================================================================================
</TABLE>
See accompanying notes.
17
<PAGE> 18
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
At September 30
- -------------------------------------------------------------------------------------------------
(In thousands except per share amount) 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- -------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and equivalents $ 121,230 $ 124,042
Accounts receivable, net of allowances of $17,721 in 1995 and
$17,931 in 1994 539,993 512,334
Current portion of lease receivables 73,555 61,516
Inventories 169,948 159,609
Prepaid expenses and other 65,759 70,529
- -------------------------------------------------------------------------------------------------
Total current assets 970,485 928,030
- -------------------------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT, at cost 1,297,481 1,178,888
Accumulated depreciation and amortization (700,813) (630,652)
- -------------------------------------------------------------------------------------------------
Net property, plant, and equipment 596,668 548,236
- -------------------------------------------------------------------------------------------------
LEASE RECEIVABLES 86,173 76,765
- -------------------------------------------------------------------------------------------------
OTHER ASSETS 203,368 208,854
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,856,694 $1,761,885
=================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
- -------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 195,793 $ 150,933
Accrued liabilities 409,520 527,510
Current maturities of long-term obligations 65,123 58,120
- -------------------------------------------------------------------------------------------------
Total current liabilities 670,436 736,563
- -------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS 75,923 86,481
- -------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES -- --
- -------------------------------------------------------------------------------------------------
STOCKHOLDERS' INVESTMENT
Common stock $.025 par value, authorized 400,000 shares, outstanding
119,808 shares in 1995 and 116,237 shares in 1994 2,995 2,905
Additional paid-in capital 691,097 646,256
Retained earnings 450,086 332,460
Accumulated translation adjustments 17,064 9,192
Treasury stock, at cost (50,907) (9,062)
Deferred ESOP compensation -- (42,910)
- -------------------------------------------------------------------------------------------------
Total stockholders' investment 1,110,335 938,841
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $1,856,694 $1,761,885
=================================================================================================
</TABLE>
See accompanying notes.
18
<PAGE> 19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
For the years ended September 30
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Accumulated Deferred Total
---------------- Paid-In Retained Translation Treasury ESOP Stockholders'
(In thousands) Shares Amount Capital Earnings Adjustments Stock Compensation Investment
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, SEPTEMBER 30, 1992 110,651 $2,766 $593,578 $ 679,987 $ 7,008 $ (3,086) $(43,358) $ 1,236,895
Sale of Common Stock under
stock plans 3,015 76 27,149 -- -- -- -- 27,225
Reissuance of treasury stock
under stock plans -- -- (430) -- -- 5,702 -- 5,272
Acquisition of treasury stock -- -- -- -- -- (11,487) -- (11,487)
ESOP compensation -- -- -- -- -- -- 448 448
Translation adjustments -- -- -- -- (3,801) -- -- (3,801)
Net loss -- -- -- (517,727) -- -- -- (517,727)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1993 113,666 2,842 620,297 162,260 3,207 (8,871) (42,910) 736,825
Sale of Common Stock under
stock plans 2,571 63 25,935 -- -- -- -- 25,998
Reissuance of treasury stock
under stock plans -- -- 24 -- -- 426 -- 450
Acquisition of treasury stock -- -- -- -- -- (617) -- (617)
Translation adjustments -- -- -- -- 5,985 -- -- 5,985
Net income -- -- -- 170,200 -- -- -- 170,200
- --------------------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1994 116,237 2,905 646,256 332,460 9,192 (9,062) (42,910) 938,841
Effect of adoption of SFAS No.
115 -- -- -- 4,117 -- -- -- 4,117
- --------------------------------------------------------------------------------------------------------------------------------
BALANCES, OCTOBER 1, 1994 116,237 2,905 646,256 336,577 9,192 (9,062) (42,910) 942,958
Sale of Common Stock under
stock plans 3,571 90 44,277 -- -- -- -- 44,367
Reissuance of treasury stock
under stock plans -- -- (4) -- -- 19 -- 15
Termination of ESOP -- -- (1,046) -- -- (41,864) 42,910 --
Gain from change of interest
in
NetWorth, Inc. -- -- 1,614 -- -- -- -- 1,614
Translation adjustments -- -- -- -- 7,872 -- -- 7,872
Net unrealized gains on
available-for-sale
securities -- -- -- 5,963 -- -- -- 5,963
Net income -- -- -- 107,546 -- -- -- 107,546
- --------------------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1995 119,808 $2,995 $691,097 $ 450,086 $17,064 $(50,907) $ -- $ 1,110,335
================================================================================================================================
</TABLE>
See accompanying notes.
19
<PAGE> 20
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
For the years ended September 30
- -----------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 107,546 $ 170,200 $(517,727)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 170,834 163,277 170,340
Gain on sale of subsidiaries and investments (9,297) (23,000) --
Cumulative effect of accounting change -- -- (12,371)
Restructuring charge -- -- 451,000
Loss on dispositions of property, plant, and
equipment 5,885 3,530 195
Changes in (net of dispositions):
Accounts receivable (20,125) (68,398) (1,044)
Inventories (8,501) (2,399) (24,022)
Lease receivables (23,046) 4,017 2,998
Non-debt current liabilities and other (62,477) (131,397) 65,240
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 160,819 115,830 134,609
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant, and equipment (188,030) (152,807) (146,437)
Proceeds from dispositions of property, plant, and
equipment 14,495 41,036 22,082
Purchase of short-term investments -- -- (18,588)
Sale of businesses, net of cash disposed 12,262 70,519 --
Increase in other assets (47,086) (74,373) (49,843)
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities (208,359) (115,625) (192,786)
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings 65,772 73,480 73,348
Repayments (68,208) (84,864) (83,788)
Acquisitions of treasury stock -- -- (11,487)
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 44,382 25,998 27,225
- -----------------------------------------------------------------------------------------------
Net cash provided by financing activities 41,946 14,614 18,988
- -----------------------------------------------------------------------------------------------
Effect of exchange rate fluctuations on cash and
equivalents 2,782 3,044 (3,616)
- -----------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (2,812) 17,863 (42,805)
Cash and equivalents at beginning of year 124,042 106,179 148,984
- -----------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $ 121,230 $ 124,042 $ 106,179
===============================================================================================
Supplementary cash flow information --
cash paid during the year for:
Income taxes $ 12,099 $ 20,214 $ 30,301
Interest $ 13,074 $ 13,069 $ 15,551
===============================================================================================
</TABLE>
See accompanying notes.
20
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Tandem
Computers Incorporated and its majority-owned subsidiaries (the Company) after
the elimination of intercompany accounts and transactions.
REVENUE RECOGNITION
The Company generally recognizes revenue from hardware and software product
sales at the time of shipment. When significant obligations remain after
products are delivered, revenue is recognized only after such obligations are
fulfilled. Product support and other revenues are recognized ratably over the
contractual period or as the services are provided.
TRANSLATION OF NON-U.S. CURRENCY AMOUNTS
The Company's non-U.S. subsidiaries use as their functional currency the
local currencies of the countries in which they operate. Their assets and
liabilities are translated into U.S. dollars at the exchange rates in effect at
the balance sheet date. Revenues and expenses are translated at average rates of
exchange prevailing during the period. In addition, all ongoing adjustments
resulting from the process of translating each subsidiary's financial statements
into U.S. dollars have been accumulated and recorded within a separate component
of stockholders' investment. Foreign currency transaction gains and losses are
not material and are included in the determination of net earnings.
INCOME TAXES
Effective October 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes."
Under SFAS No. 109, deferred tax assets and liabilities are recognized for the
expected tax consequences attributable to temporary differences between the
carrying amounts of assets and liabilities and their tax bases.
The Company accounts for research and development tax credits as a
reduction of the provision for income taxes in the year in which the credits are
realizable. In general, the Company's practice is to provide U.S. federal taxes
on undistributed foreign earnings.
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. Fully
diluted earnings per share are substantially the same as reported earnings per
share. As a result of terminating the Employee Stock Ownership Plan (ESOP)
during 1993, the approximately 2.4 million unallocated common shares previously
held by the ESOP trust were returned to Tandem's treasury in 1995 and are
excluded from the 1995 and 1994 weighted average common shares and shares
outstanding calculations. Common and common equivalent shares were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Outstanding Common
(In thousands) Shares Equivalents Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995 weighted average 115,746 2,471 118,217
At September 30, 1995 116,721 1,054 117,775
=================================================================================================
</TABLE>
21
<PAGE> 22
CASH AND EQUIVALENTS
Cash equivalents are valued at cost, which approximates market value; have
original maturity dates not exceeding 90 days; and generally consist of
certificates of deposit, time deposits, treasury notes, money market deposits
and preferred stocks, municipal notes, and commercial paper.
INVESTMENTS
Effective October 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments
in Debt and Equity Securities." Previously, the Company's equity securities were
recorded at lower of cost or market. Under SFAS No. 115, the Company's equity
securities are classified as available-for-sale. Available-for-sale securities
are included in prepaid expenses and other and are stated at fair value, with
the unrealized gains and losses, net of taxes, reported in stockholders'
investment. Realized gains and losses, and declines in value judged to be other
than temporary on available-for-sale securities are included in results of
operations. The cost of securities sold is based on the average cost method. In
accordance with SFAS No. 115, prior period financial statements have not been
restated to reflect the change in accounting principle.
When a subsidiary or investee sells additional shares of its common stock
to third parties, thus reducing the Company's percentage ownership interest in
the investee, the Company records any increase in its share value of the
investee directly to paid-in capital.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventories at September 30 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(In thousands) 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Purchased parts and subassemblies $ 71,455 $ 52,370
Work in process 29,097 29,234
Finished goods 69,396 78,005
- -------------------------------------------------------------------------------
Total $169,948 $159,609
===============================================================================
</TABLE>
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over estimated useful
lives.
COST IN EXCESS OF NET ASSETS ACQUIRED
The excess acquisition cost over the fair value of net assets of businesses
acquired is being amortized using the straight-line method over estimated lives
ranging from 3 to 10 years. The amount of unamortized cost in excess of net
assets acquired, included in other assets at September 30, 1995 and 1994, was
$5.8 million and $6.6 million, respectively. Amortization expense for 1995,
1994, and 1993 was $1.9 million, $3.9 million, and $14.9 million, respectively.
During 1993, $151 million of unamortized cost in excess of net assets acquired
was written off. See the Restructuring note to the Consolidated Financial
Statements.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs when the resulting
products become "technologically feasible" and amortizes those costs when, and
as, the products are shipped. The annual amortization of the capitalized amounts
is the greater of the amount computed based on the estimated revenue
distribution over the products' remaining life or a straight-line method,
generally three years, from the date of product release. The amounts of
unamortized software development costs included in other assets at September 30,
22
<PAGE> 23
1995 and 1994, were $128.9 million and $117.7 million, respectively. The
amortization expense for 1995, 1994, and 1993 was $44.4 million, $36.0 million,
and $33.1 million, respectively.
ADVERTISING EXPENSES
The Company accounts for advertising costs as expense in the period in
which they are incurred. Advertising expense for 1995, 1994, and 1993 was $24.0
million, $28.5 million, and $32.3 million, respectively.
FINANCIAL INSTRUMENTS
OFF BALANCE SHEET RISK
The Company enters into foreign currency forward exchange and option
contracts to reduce the impact of currency fluctuations on intercompany and
other foreign currency denominated balance sheet positions, and on certain
anticipated revenue transactions related to sales by its foreign subsidiaries
that are expected to occur within 12 months. The objective of these contracts is
to neutralize the impact of foreign currency exchange rate movements on the
Company's operating results. The gains and losses on forward exchange contracts
and option contracts are included in earnings when the underlying foreign
currency denominated transaction is recognized. Costs associated with entering
forward and option contracts are amortized over the life of the instruments. The
cash flows related to gains and losses on these contracts are classified as
operating activities in the Consolidated Statements of Cash Flows.
The foreign currency forward exchange contracts described above generally
require the Company to sell foreign currencies for U.S. dollars at rates agreed
to at the inception of the contracts. Foreign currency option contracts
generally provide the Company with the right, but not the obligation, to sell a
specified amount of foreign currency at a fixed price on a specified future
date. The forward contracts generally have maturities that do not exceed 3
months. The option contracts generally have maturities that range from 6 to 12
months. These contracts do not subject the Company to significant market risk
from exchange rate movements because the contracts offset gains and losses on
the balances and transactions being hedged. At September 30, 1995, the Company
had $158 million of foreign exchange forward contracts outstanding and $70
million of option contracts outstanding in 15 different currencies. At September
30, 1994, the Company had $142 million of foreign exchange forward contracts
outstanding and $65 million of option contracts outstanding in 16 different
currencies. Contracts to exchange European currencies and the Japanese yen
represent approximately 88 percent of the total in 1995 and 94 percent of the
total in 1994. Unrealized gains and losses related to these instruments at
September 30, 1995 and 1994, are not material. The Company does not anticipate
any material adverse effect on its financial position resulting from the use of
these instruments.
FAIR VALUES OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash and
equivalents, accounts receivable and payable, notes payable, and accrued
liabilities, the carrying amounts approximate fair value due to their short
maturities. The following tables provide information regarding the estimated
fair values of other financial instruments at September 30:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1995 1994
-------------------------------- --------------------------------
(Asset)/Liability (Asset)/Liability
--------------------- ---------------------
Contract Carrying Estimated Contract Carrying Estimated
(In thousands) Amount Amount Fair Value Amount Amount Fair Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Long-term obligations:
Japanese yen notes payable -- $12,838 $13,185 -- $12,923 $13,153
Mortgages -- $ 7,626 $ 8,239 -- $ 9,613 $ 9,907
Foreign exchange:
Forward contracts, accrued
(gains)/losses $158,000 $ (917 ) $(1,365) $142,000 $ 306 $ 363
Option contracts, unamortized
premium $ 70,000 $(1,019 ) $(1,178) $ 65,000 $(1,013 ) $ 1,293
===================================================================================================
</TABLE>
23
<PAGE> 24
The fair values for long-term obligations have been estimated using a
discounted cash flow analysis based upon interest rates that approximate current
interest rates for similar borrowings. The fair value of the foreign exchange
forward contracts is based upon quoted market prices for the same or similar
instruments. The fair value of option contracts is estimated using option
pricing models. These values represent general approximations of potential value
and are not necessarily the values that will be ultimately realized.
INVESTMENTS
During 1995, one of the Company's equity investees, Lightstream
Corporation, entered into an agreement to sell its assets. Accordingly, the
Company received $12.3 million in proceeds from the transaction, for a gain of
$9.3 million. Additional proceeds of $1.2 million may be received in the future,
subject to certain contingencies, and will not be recognized until received.
The cumulative effect of adopting SFAS No. 115, as of October 1, 1994,
increased the beginning balance of stockholders' investment by $4.1 million to
reflect the net unrealized holding gains on securities classified as
available-for-sale. During 1995, the Company received $14.0 million in proceeds,
and realized gains of $7.6 million from sales of available-for-sale securities.
These realized gains were reported in marketing, general, and administrative
expenses in the Consolidated Statement of Operations.
At September 30, 1995, the Company held available-for-sale securities with
estimated fair values of $16 million, consisting of gross unrealized gains of
$10 million and cost basis of $6 million. Available-for-sale securities are
reported in prepaid expenses and other.
CONCENTRATIONS OF CREDIT RISK
Credit risk with respect to trade receivables is generally diversified due
to the number of entities that make up the Company's customer base and their
dispersion across many different industries and geographies. Credit risk is also
limited by the Company's credit evaluation process and reasonably short
collection terms. Bad debt expenses have been insignificant, and generally, the
Company does not require collateral or other security to support accounts
receivable. The Company also has short-term cash and foreign exposure management
policies that limit the amount of credit exposure to any one financial
institution and restrict placement of the investments and contracts to financial
institutions evaluated as highly creditworthy.
RESTRUCTURING
During 1992, the Company developed a restructuring program aimed
principally at reducing its cost structure and improving employee productivity
on a worldwide basis. The restructuring actions resulted in a $106 million
charge during 1992.
During 1993, the Company initiated a separate restructuring program
designed to streamline operations and lower its worldwide cost structure in
anticipation of shipping the Himalaya product line. These restructuring actions
resulted in a charge of $451 million and 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 September 30, 1995, $61 million remained in accrued liabilities and
$10 million remained as a reduction of net property, plant, and equipment. At
September 30, 1994, $144 million remained in accrued liabilities and $29 million
remained as a reduction of net property, plant, and equipment.
As of June 30, 1993, the Company's UB Networks, Inc. subsidiary (formerly
Ungermann-Bass, Inc.) reported its second consecutive quarter of substantial and
increased losses from operations. The results reflected a continuing and
accelerating two-year decline in its 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 attract public or private investment partners, management 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 signifi-
24
<PAGE> 25
cantly 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
undiscounted cash flow projections at the subsidiary. The cash flow projections
anticipated the cost and probable future savings from the restructuring actions
as well as the benefits from products and technologies that were in the latter
stages of development. The projections indicated that undiscounted cash flows
from operations were expected to be negative for the next several years and
cumulatively negative for the remaining life of the goodwill.
The restructuring provisions, supported by appropriate levels of
specificity for planned actions, were established and approved by the Company's
executive management and its Board of Directors. Actual restructuring costs are
recognized as reductions in related restructuring reserves in the period
incurred. Information relating to restructuring activity, other than the
goodwill write-off discussed above, is presented below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Reduction of Internal Discontinued
(In thousands) Work Force Facilities Systems Activities Other Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision:
1992 $ 44,000 $ 38,000 -- $18,000 $ 6,000 $106,000
1993 103,000 79,000 $34,000 24,000 60,000 300,000
- ------------------------------------------------------------------------------------------------------
Total 147,000 117,000 34,000 42,000 66,000 406,000
- ------------------------------------------------------------------------------------------------------
Utilized:
1992 32,088 16,838 -- 6,649 2,865 58,440
1993 28,278 10,860 -- 20,026 5,825 64,989
1994 34,568 34,560 10,178 4,614 25,473 109,393
1995 36,000 26,036 19,482 933 20,122 102,573
- ------------------------------------------------------------------------------------------------------
Total 130,934 88,294 29,660 32,222 54,285 335,395
- ------------------------------------------------------------------------------------------------------
Adjustments -- 1995 1,611 (45) 3,074 42 (4,682) 0
- ------------------------------------------------------------------------------------------------------
Balances, September 30, 1995 $ 17,677 $ 28,661 $ 7,414 $ 9,820 $ 7,033 $ 70,605
======================================================================================================
Cash used:
1992 $ 32,088 $ 6,296 -- $ 4,356 $ 2,865 $ 45,605
1993 28,278 9,142 -- 4,999 5,825 48,244
1994 34,568 25,075 $10,178 (5,037) 23,680 88,464
1995 36,000 20,674 19,482 57 19,093 95,306
Expected future 17,677 21,692 7,414 2,718 6,424 55,925
- ------------------------------------------------------------------------------------------------------
Total $148,611 $ 82,879 $37,074 $ 7,093 $57,887 $333,544
======================================================================================================
</TABLE>
The provisions for reduction of work force included severance, related
medical and other benefits, and in the 1993 provision, retention incentives paid
in 1995 to a limited number of employees critical to the Company's ongoing
operations. The provisions included termination benefits for approximately 2,500
employees, of which approximately two-thirds were based in the United States.
Approximately one-half of the planned terminations were in sales, marketing, and
administrative functions, and the balance was evenly distributed among
manufacturing, service and support, development, and UB Networks. Approximately
650 employees were terminated during each of the 1992, 1993, and 1994 fiscal
years, and approximately 325 were terminated during fiscal 1995. A significant
and unanticipated level of voluntary employee terminations since 1993 has
complicated work force restructuring actions. Due to geographic and compensation
mixes, in 1995 the Company increased its estimate for severance costs, and
average employee termination payments in 1996 are expected to exceed those for
employees terminated from 1992 through 1995.
25
<PAGE> 26
The provisions for facilities included lease payments and fixed costs on
idle facilities, write-offs of related facility improvements, moving and other
expenses associated with the closure of approximately 2 million square feet of
office and manufacturing space throughout all principal geographic areas, and
the write-down of properties no longer to be developed. As of September 30,
1995, facilities restructure reserves included approximately $22 million
representing lease payments and expenses for idle facilities, approximately $4
million representing related improvements, and approximately $3 million of
estimated future losses on properties not to be developed. The above leases have
remaining terms generally not exceeding five years.
The provision for internal systems included estimated costs to reengineer
and accelerate the implementation of new systems and processes required to
support significant consolidation, centralization, and reorganization in nearly
every business function and to facilitate the significant work force reductions
referred to above. The 1995 actual costs incurred slightly exceeded original
estimates. Remaining estimated costs to complete these efforts are expected to
be completed during 1996.
The provision for discontinued activities in 1992 included, principally,
lease and other costs and losses associated with closing a manufacturing
operation in Germany during 1992 and the sale of the Company's Watsonville,
California printed circuit board manufacturing operation in early 1993. The 1993
provision included, principally, costs and losses associated with discontinuing
two product initiatives at the Company's telecommunications division and with
exiting and eventually selling certain assets and the disk drive business of the
Company's Array Technology subsidiary in 1994. The above provisions were net of
approximately $6 million and $10 million cash proceeds received in 1993 and
1994, respectively. As of September 30, 1995, estimated losses on assets not yet
disposed aggregated approximately $7 million. Future cash utilization represents
primarily the present value of a long-term land lease in Germany.
The provisions for other costs consisted principally of moving, travel,
temporary living, and other expenses in connection with reorganizing and
centralizing general and administrative functions of the Europe division and
with reorganizing and relocating headquarters' operations in Asia/Pacific and
Latin America; costs associated with the relaunch of a new corporate image at
the UB Networks subsidiary and asset write-offs as a result of redirecting
product strategies; temporary living, travel, and duplicate development
laboratory costs associated with an offshore software development organization
for certain development and support activities; relocation expenses and
equipment write-offs in connection with consolidating and moving manufacturing
activities to a new facility in Fremont, California in 1995; and duplicate costs
and expenses associated with opening a new manufacturing facility in Scotland
during 1994. During 1995, the Company incurred lower than anticipated levels of
asset write-offs associated with the duplicate development laboratory,
consolidating manufacturing and reorganizing the Europe division. Related
restructure reserves were adjusted accordingly. Remaining actions are expected
to be completed during 1996.
ACCOUNTS RECEIVABLE
In December 1993, the Company entered into a three-year receivables
purchase agreement with a group of financial institutions whereby the Company
can sell a percentage ownership interest in an eligible pool of accounts
receivable, up to $150 million, on a limited recourse basis. Under the terms of
the agreement, the Company retains collection and servicing responsibilities for
the receivables and retains substantially the same risk of credit loss as if the
interest in receivables had not been sold. One component of the agreement for up
to $75 million will expire in 1997, and the other component for up to $75
million will expire in 1996 but is renewable annually with the consent of both
parties.
The maximum amount outstanding at any point during the years ended
September 30, 1995 and 1994 was $50 million and $25 million, respectively. At
September 30, 1995, $114 million of financing was available to the Company under
the agreement. There were no amounts outstanding at the end of either year.
26
<PAGE> 27
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment balances at September 30 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(In thousands) 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Land and buildings $ 399,294 $ 380,760
Machinery and equipment 197,235 180,500
Computer equipment 534,748 480,811
System spares 94,348 95,743
Leasehold improvements 64,802 54,157
Construction in progress 16,645 15,766
Restructuring reserves (9,591) (28,849)
- ------------------------------------------------------------------------------
Total $1,297,481 $1,178,888
==============================================================================
</TABLE>
Included in land and buildings at September 30, 1995 and 1994 was
approximately $55.9 million of costs relating to land and land improvements on
undeveloped parcels located near the Company's Cupertino, California,
headquarters.
Depreciation expense was $123.5 million, $122.6 million, and $122.3 million
in 1995, 1994, and 1993, respectively.
The Company leases certain equipment, automobiles, and some of its
operating facilities and offices under operating lease agreements. Future
minimum lease payments as of September 30, 1995, net of amounts included in
restructuring, are as follows (in millions): $50.6 (1996), $37.6 (1997), $28.5
(1998), $20.1 (1999), $14.6 (2000), and $82.2 (2001 and thereafter). Rent
expense was $59.1 million, $62.7 million, and $79.8 million in 1995, 1994, and
1993, respectively.
BUSINESS COMBINATIONS
On March 31, 1994, NetWorth, Inc. (NetWorth) acquired a portion of the
Company's investment in NetWorth for a cash purchase price of $20 million,
thereby reducing the Company's ownership in NetWorth to approximately 32
percent. The Company realized no gain or loss on the transaction for financial
accounting purposes. From March 31, 1994, the investment in NetWorth was
accounted for under the equity method of accounting. In October 1994, in
conjunction with a secondary offering by NetWorth, the Company sold 315,000
shares of its NetWorth stock for cash of $3.4 million, realizing a $1.8 million
gain for financial accounting purposes and reducing the Company's ownership
interest in NetWorth to below 20 percent. This realized gain was reported in
marketing, general, and administrative expenses. Further, as the net offering
price was in excess of the Company's average per share carrying value of the
investment, the Company also recorded a $1.6 million increase in the investment
value. This change of interest gain was recorded directly to additional paid-in
capital. From October 1994, the investment in NetWorth is accounted for as
available-for-sale in accordance with SFAS No. 115.
On March 10, 1995, NetWorth entered into a merger agreement providing for a
merger with Network Resources Corporation (NRC), an equity investment of the
Company. As a result, the Company's shares of NRC were exchanged for shares of
NetWorth. The Company recorded a gain on the transaction of $1.2 million for
financial reporting purposes, which was reported in marketing, general, and
administrative expenses.
In 1994 the Company sold 100 percent of its interest in Applied
Communications, Inc. (ACI), and Applied Communications, Inc. Limited (ACI Ltd.),
for approximately $53.6 million net cash. The sales of these subsidiaries
resulted in a gain for financial accounting purposes of $23 million. The
consolidated results of operations include the results of ACI and ACI Ltd., from
their respective acquisition dates through December 31, 1993, their disposition
date.
On March 15, 1994, the Company sold its interest in Array Technology
Corporation, together with certain assets, for approximately $10 million cash.
As part of its 1993 restructuring plan and related provision,
27
<PAGE> 28
the Company had decided 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 accounting purposes.
LEASING PROGRAM
The Company offers lease financing of selected products to its customers.
Sales-type leases are originated by the Company and either sold on a nonrecourse
basis or used as collateral for borrowings from certain third-party financial
institutions. Under lease borrowings, the Company receives all proceeds at the
inception of the lease in the form of a limited recourse borrowing. The
third-party financial institution assumes the administrative responsibility for
collection of the lease receivables and the credit risk, subject to the limited
recourse provisions. In the event of a default by a lessee, recourse by the
financial institutions is limited to the collateralized computer equipment and a
recourse amount, if any, from a limited recourse pool established as a
percentage of each associated group of financed lease transactions. The Company
may also be required to participate in remarketing the computer equipment on a
"best efforts" basis on behalf of the financial institutions.
The following table relates the borrowing and repayment activity in the
lease-related installment notes to the investment in sales leases:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Total borrowings, beginning balance $121,674 $114,274 $129,860
Current year borrowings 64,447 72,878 50,195
Current year repayments (65,883) (65,478) (65,781)
- ---------------------------------------------------------------------------
Total borrowings, ending balance 120,238 121,674 114,274
Leases not funded at year-end 39,490 16,558 25,864
Insured residual values -- 49 70
- ---------------------------------------------------------------------------
Investment in sales leases 159,728 138,281 140,208
Less current lease receivables (73,555) (61,516) (60,376)
- ---------------------------------------------------------------------------
Lease receivables $ 86,173 $ 76,765 $ 79,832
===========================================================================
</TABLE>
The borrowings and repayments shown above are included in the Company's
total borrowings and repayments as shown in the Consolidated Statements of Cash
Flows.
Sales of lease receivables in 1995, 1994, and 1993 were $11.3 million, $9.0
million, and $28.6 million, respectively.
At September 30, 1995 and 1994, reserves for recourse liabilities on lease
receivables were approximately $3.4 million and $5.5 million, respectively.
28
<PAGE> 29
LONG-TERM OBLIGATIONS
Long-term obligations at September 30 consisted of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Installment notes due through 2000, collateralized by lease receivables(1) $120,238 $121,674
Japanese yen notes payable, due 1996 to 1997(2) 12,838 12,923
Mortgages (9.3% - 14.5%)(3) 7,626 9,613
Other 344 391
- -----------------------------------------------------------------------------------------------------------
Total obligations 141,046 144,601
Less current portion (65,123) (58,120)
- -----------------------------------------------------------------------------------------------------------
Long-term obligations $ 75,923 $ 86,481
===========================================================================================================
</TABLE>
- ---------------
(1) Weighted average interest rates were 8.7% and 8.5% at September 30, 1995 and
1994, respectively.
(2) Weighted average interest rates were 4.6% and 4.4% at September 30, 1995 and
1994, respectively.
(3) Payable monthly; maturing 1997 to 2001; weighted average interest rates were
11.1% and 11.4% at September 30, 1995 and 1994, respectively. The mortgages
are secured by certain land and buildings, with a carrying value of
approximately $44 million.
Principal repayments required in the future are as follows (in millions):
$65.1 (1996), $46.1 (1997), $21.5 (1998), $6.4 (1999), $1.2 (2000), and $0.7
(thereafter).
The Company has guaranteed payment of personal bank loans made to officers
and other employees totaling $3.8 million and $4.1 million at September 30, 1995
and 1994, respectively, under a bank credit line of $5.0 million.
ACCRUED LIABILITIES
Accrued liabilities at September 30 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued salaries and related items $ 76,264 $ 74,690
Accrued commissions to third parties 11,281 15,118
Deferred income 171,415 170,957
Restructuring reserves 61,014 144,329
Other 89,546 122,416
- -----------------------------------------------------------------------------------------------------------
Total $409,520 $527,510
===========================================================================================================
</TABLE>
Short-term borrowings, included above in Other, consisted of notes payable
of $1.4 million at September 30, 1995. Notes payable generally consist of notes,
bankers acceptances, and borrowings under uncommitted credit lines at a weighted
average interest rate of 14.0 percent at September 30, 1995. The carrying value
of short-term borrowings approximates fair values due to their short-term
nature.
INCOME TAXES
Income (loss) before income taxes and cumulative effect of accounting
change is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ 10,517 $114,077 $(319,106)
Foreign 129,182 67,123 (144,033)
- -----------------------------------------------------------------------------------------------------------
Total $139,699 $181,200 $(463,139)
===========================================================================================================
</TABLE>
29
<PAGE> 30
The provision for income taxes included the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current -- $ 1,046 --
Deferred -- -- $52,359
- -----------------------------------------------------------------------------------------------
-- 1,046 52,359
- -----------------------------------------------------------------------------------------------
State:
Current $ 781 1,459 --
Deferred -- -- 3,152
- -----------------------------------------------------------------------------------------------
781 1,459 3,152
- -----------------------------------------------------------------------------------------------
Foreign:
Current 42,111 8,495 9,747
Deferred (10,739) -- 1,701
- -----------------------------------------------------------------------------------------------
31,372 8,495 11,448
- -----------------------------------------------------------------------------------------------
Total provision for income taxes $ 32,153 $11,000 $66,959
===============================================================================================
</TABLE>
Although the Company incurred a loss in 1993, there was a provision for
income taxes consisting primarily of taxes currently payable in foreign
jurisdictions and the reduction of deferred tax assets. A significant portion of
the 1993 operating loss provided no current tax benefit.
The provision for income taxes differed from the amount obtained by
applying the federal statutory income tax rate to income (loss) before income
taxes, as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory tax rate 35.0% 35.0% (35.0)%
Losses with no current tax benefit 1.6 2.8 24.1
Foreign earnings at other than U.S. statutory rate 4.6 -- .7
Valuation allowance (utilization)/provision (17.3) (34.1) 11.9
State taxes, net of federal income tax benefit .6 .8 --
Amortization and write-off of cost in excess of net assets acquired -- .3 12.3
Other (1.5) 1.3 .5
- -----------------------------------------------------------------------------------------------
Effective tax rate 23.0% 6.1% 14.5%
===============================================================================================
</TABLE>
30
<PAGE> 31
Significant components of the Company's deferred tax assets (liabilities)
as of September 30 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(In thousands) 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Restructuring accruals $ 32,380 $ 71,567
Inventory reserves 13,937 26,031
Deferred income 17,492 18,894
Intercompany profit eliminations 29,576 33,126
Federal tax credit carryovers (expire beginning 1997) 44,050 29,991
Federal net operating loss carryover (expires in 2010) 53,982 --
Foreign net operating loss carryovers (expire beginning 1997) 20,573 32,268
Foreign taxes on unremitted foreign earnings, net of the related
U.S. tax liability 54,295 40,345
Expenses not currently deductible 28,051 25,220
Other 11,046 15,566
- ----------------------------------------------------------------------------------------------
Total deferred tax assets 305,382 293,008
Valuation allowance for deferred tax assets (198,232) (196,873)
- ----------------------------------------------------------------------------------------------
Net deferred tax assets $ 107,150 $ 96,135
- ----------------------------------------------------------------------------------------------
Deferred tax liabilities:
Capitalized software $ (43,145) $ (41,415)
Operating leases for income tax reporting (41,208) (44,412)
Accelerated depreciation (12,058) (10,308)
- ----------------------------------------------------------------------------------------------
Total deferred tax liabilities $ (96,411) $ (96,135)
- ----------------------------------------------------------------------------------------------
Total net deferred tax assets $ 10,739 $ --
==============================================================================================
</TABLE>
At September 30, 1995, net deferred tax assets of $10.7 million represent
the tax effects of temporary differences existing in certain foreign
jurisdictions that the Company believes are more likely than not to be realized,
based upon the strong earnings history in those jurisdictions. Accordingly, the
valuation allowance at September 30, 1995 and 1994, reduced deferred tax assets
to an amount deemed realizable. The valuation allowance includes $30.0 million
and $24.5 million in 1995 and 1994, respectively, attributable to stock option
deductions, the benefit of which will be credited to paid-in capital when
realized.
CAPITAL STOCK
The Company's authorized capital stock consists of 2.4 million shares of
preferred stock, of which .8 million shares are designated as Series A
Participating Preferred Stock; 4.0 million shares of Junior Common Stock; and
396.0 million shares of Common Stock. No shares of preferred stock or Junior
Common Stock have been issued. At September 30, 1995 and 1994, 26.3 million
shares and 21.1 million shares of Common Stock, respectively, were reserved for
future issuance under stock option plans and the employee stock purchase plan.
TREASURY STOCK
Treasury shares are carried at cost and are being used to satisfy
requirements under employee stock and benefit plans. At September 30, 1995 and
1994, the Company held 3.1 million and .7 million shares, respectively, with an
aggregate cost of $50.9 million and $9.1 million, respectively.
31
<PAGE> 32
STOCK RIGHTS
The Company has a stock rights plan (the Plan), which is intended to
protect stockholders from unfair takeover practices. Under the Plan, each share
of Common Stock carries one right to obtain additional stock or other property
with equivalent value on terms provided in the Plan. The rights will not be
exercisable or transferable apart from the Common Stock until another person or
group of persons (subject to certain exceptions) acquires at least 20 percent of
the Common Stock or commences, or announces its intention to commence, a tender
offer for at least 30 percent of the Common Stock.
The rights are redeemable by the Board of Directors or upon vote of the
stockholders for $.05 per right or property with an equivalent value, and expire
on June 17, 1998.
EMPLOYEE BENEFITS
STOCK OPTION PLANS
The Company has stock option plans under which eligible individuals may be
granted options to purchase shares of Common Stock, generally at fair market
value at the time of the grant. In general, options become exercisable six
months after the effective date, vest over four years, and expire no more than
ten years after the effective date. At the discretion of the Board of Directors,
options granted under the stock option plans may qualify as incentive stock
options under the Internal Revenue Code of 1986.
In 1993, options were granted to acquire 2.6 million shares, which
generally vest upon obtaining certain performance targets. If these targets are
not met, these options will become fully vested after four years. In 1994, 1.1
million of these shares became fully vested.
At September 30, 1995 and 1994, options for 9.5 million shares and 2.3
million shares, respectively, were available for future grant.
EMPLOYEE STOCK PURCHASE PLAN
Under the employee stock purchase plan, the Company may offer shares to
employees in two ways. Under the first method, eligible employees may elect to
purchase shares of Common Stock at the lower of 85 percent of fair market value
as of the first trading day of each quarterly participation period, or as of the
last trading day of each quarterly participation period. Under this method, in
1995, 1994, and 1993, employees purchased 876,000 shares for aggregate proceeds
of $11.0 million; 1,111,000 shares for aggregate proceeds of $10.4 million; and
1,351,000 shares for aggregate proceeds of $13.6 million, respectively. Under
the second method, the Company may grant to all eligible employees an option to
purchase an identical number of shares of Common Stock at not less than 85
percent of fair market value at the grant date. As of September 30, 1995 and
1994, the Company has reserved 1.2 million shares and 2.1 million shares,
respectively, for future issuance under its employee stock purchase plan.
32
<PAGE> 33
STOCK OPTION ACTIVITY
Information concerning the combined option activity during the years ended
September 30, under the stock option plans and the option portion of the
employee stock purchase plan is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(In millions except per share
amounts) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
Aggregate Aggregate Aggregate
Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 16.7 $ 222.0 19.4 $ 254.7 19.2 $ 288.6
Options granted 3.2 47.8 .8 9.8 9.3 108.7
Options exercised ($8.88 to $19.00
per share) (2.7) (33.0) (1.5) (16.9) (1.7) (16.3)
Options canceled (1.6) (21.7) (2.0) (25.6) (7.4) (126.3)
- --------------------------------------------------------------------------------------------------
End of year 15.6 $ 215.1 16.7 $ 222.0 19.4 $ 254.7
==================================================================================================
Options vested at year-end 11.4 12.4 10.9
==================================================================================================
</TABLE>
Included in the 1993 activity are the cancellation of options for 3.7
million shares and regrants of options for 2.9 million shares, at exercise
prices equal to the fair market value on the dates of the regrants. The regrants
did not affect the vested status of the shares.
Although stock options may be exercised before they are fully vested and
the effect of all dilutive stock options is considered in the determination of
earnings per share, the following tables show the maximum number of shares that
would be issued based on the number of options vesting in each future year and
the maximum number of shares expiring in each future year. The option vesting
table does not reflect any anticipated early vesting based upon stock price
performance.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Maximum number of existing options vesting each year
- ----------------------------------------------------------------------------------------------------
1995 and 1999 and Total
Exercise Price Range Prior 1996 1997 1998 Thereafter Shares
- ----------------------------------------------------------------------------------------------------
(In thousands except price range
amounts)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Under $9.00 1 -- -- -- -- 1
$9.00 -- $9.99 1,186 49 770 10 -- 2,015
$10.00 -- $10.99 569 255 156 8 -- 988
$11.00 -- $11.99 483 139 45 20 -- 687
$12.00 -- $12.99 1,392 224 83 46 -- 1,745
$13.00 -- $13.99 2,642 494 458 422 6 4,022
$14.00 -- $14.99 2,334 80 45 26 -- 2,485
$15.00 -- $15.99 156 28 20 12 -- 216
$16.00 -- $16.99 610 39 36 33 4 722
$17.00 -- $17.99 977 201 201 201 36 1,616
$18.00 -- $18.99 203 38 37 37 9 324
$19.00 -- $19.99 561 -- -- -- -- 561
Over $20.00 243 -- -- -- -- 243
- ----------------------------------------------------------------------------------------------------
11,357 1,547 1,851 815 55 15,625
====================================================================================================
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Maximum number of existing options expiring each year
- ----------------------------------------------------------------------------------------------------
2000 and Total
Exercise Price Range 1996 1997 1998 1999 Thereafter Shares
- ----------------------------------------------------------------------------------------------------
(In thousands except price range amounts)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Under $9.00 -- -- -- -- 1 1
$9.00 -- $9.99 -- -- 24 -- 1,991 2,015
$10.00 -- $10.99 1 -- 10 -- 977 988
$11.00 -- $11.99 6 2 5 -- 674 687
$12.00 -- $12.99 4 17 16 1 1,707 1,745
$13.00 -- $13.99 7 3 406 40 3,566 4,022
$14.00 -- $14.99 4 716 632 321 812 2,485
$15.00 -- $15.99 2 4 -- 61 149 216
$16.00 -- $16.99 9 10 52 424 227 722
$17.00 -- $17.99 6 301 281 171 857 1,616
$18.00 -- $18.99 2 -- 134 27 161 324
$19.00 -- $19.99 24 313 56 70 98 561
Over $20.00 2 66 -- 8 167 243
- ----------------------------------------------------------------------------------------------------
67 1,432 1,616 1,123 11,387 15,625
====================================================================================================
</TABLE>
OPTION LOAN PROGRAM
The Company has the Tandem Computers Incorporated Option Loan Program (the
Program) to enable employees to exercise certain outstanding options. Under the
Program, the Company can issue full recourse loans that are secured by a pledge
of the Company's Common Stock. Loan agreements entered into between the Company
and participants provide that in the event of a change in control of the Company
(as defined), principal and interest will be forgiven over a four-year period.
The amounts outstanding at September 30, 1995 and 1994, were insignificant.
401(K) INVESTMENT PLAN
The Company has a 401(k) investment plan (the Investment Plan) covering
substantially all of its U.S. employees. Under the Investment Plan,
participating employees may defer up to 18 percent of their pretax earnings,
subject to the Internal Revenue Service annual contribution limit ($9,240 for
calendar year 1995). The Company matches 63 percent to 100 percent of each
employee's contribution up to a maximum 2.5 percent of the employee's earnings.
The Company's matching contributions to the Investment Plan for 1995, 1994, and
1993 were $8.1 million, $7.9 million, and $7.3 million, respectively.
DEFERRED COMPENSATION PLAN
The Company has the Tandem Computers Incorporated Deferred Compensation
Plan that permits eligible officers and employees to defer a portion of their
compensation. Funds deferred under the plan are held by the Company in an
irrevocable trust established for the benefits of the participants. The deferred
compensation is distributable in cash after retirement or termination of
employment. At September 30, 1995, the liability for deferred compensation
included in other liabilities totaled $1.9 million. The Company can insure the
lives of the participants in the Deferred Compensation Plan to assist in the
funding of the deferred compensation liability. The life insurance policies are
owned by and payable to the trust. At September 30, 1995, the cash surrender
value of these insurance policies included in other assets was $2.6 million.
EMPLOYEE STOCK OWNERSHIP PLAN
In 1989, the Company adopted the Tandem Computers Incorporated Employee
Stock Ownership Plan (ESOP). During 1993, contributions to the ESOP were
suspended and the Company announced its intention to terminate the ESOP and
reacquire all of the unallocated shares from the ESOP trust. Total compensation
34
<PAGE> 35
expense from all contributions to the ESOP was $4.3 million in 1993. Included in
the ESOP compensation expense was the contribution of 279,000 shares of treasury
stock in 1993. All allocated shares in the ESOP were automatically vested to the
participants on September 30, 1993.
As of September 30, 1994, there were approximately 2.4 million unallocated
outstanding shares in the ESOP trust, which were returned to Tandem's treasury
in 1995. For financial accounting purposes, the reacquisition and termination of
the ESOP did not require an outlay of cash, nor did it impact the Company's
results of operations.
COMMITMENTS AND CONTINGENCIES
The Company and three principal officers were named as defendants in a
class action complaint for damages filed in the United States District Court for
the Northern District of California on July 19, 1995. The complaint alleges
violations of Section 10(b) of the Securities Exchange Act and Securities and
Exchange Commission Rule 10b-5. The Company filed a motion for dismissal on
October 13, 1995. Management believes that this complaint is without merit and
that the outcome of the complaint will not have a material adverse effect on the
financial position or overall trends in the results of operations of the
Company.
The Company is subject to other legal proceedings and claims that arise in
the normal course of its business. In the opinion of management, these
proceedings will not have a material adverse effect on the financial position or
overall trends in the results of operations of the Company.
See the Property, Plant, and Equipment note to the Consolidated Financial
Statements for a discussion of the Company's operating lease commitments.
SEGMENT INFORMATION
The Company operates primarily in one industry segment, which includes the
development, manufacturing, marketing, and servicing of computer systems,
servers, networks, and software.
The Company operates in five geographic regions: the United States
(internally, included in the Americas Division), Americas, Europe, Japan, and
Asia-Pacific. Americas includes operations in North and South America outside of
the United States, principally Canada and Latin America.
The following table sets forth information about the Company's operations
in these different geographic regions for the fiscal years ended September 30.
Certain prior year amounts have been reclassified to conform to current year
presentation.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
United States -- customers $1,149,598 $1,127,518 $1,087,665
United States -- intercompany 494,270 512,700 547,298
Americas -- customers 95,352 86,727 85,755
Americas -- intercompany 1,309 811 27,620
Europe -- customers 577,866 512,162 538,068
Europe -- intercompany 22,827 23,186 9,383
Japan -- customers 338,613 265,277 233,078
Japan -- intercompany 2,398 825 6,304
Asia-Pacific -- customers 123,533 116,351 86,394
Asia-Pacific -- intercompany 749 4,734 1,595
- -------------------------------------------------------------------------------------------------
2,806,515 2,650,291 2,623,160
Eliminations (521,553) (542,256) (592,200)
- -------------------------------------------------------------------------------------------------
Total revenues $2,284,962 $2,108,035 $2,030,960
=================================================================================================
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pretax income (loss)
United States $ 15,885 $ 149,971 $ (281,862)
Americas 5,688 (1,947) (16,551)
Europe 66,073 20,723 (140,893)
Japan 45,515 5,168 2,532
Asia-Pacific (9,615) (3,980) (24,067)
- -------------------------------------------------------------------------------------------------
123,546 169,935 (460,841)
Eliminations 16,153 11,265 (2,298)
- -------------------------------------------------------------------------------------------------
Total pretax income (loss) $ 139,699 $ 181,200 $ (463,139)
=================================================================================================
Identifiable assets
United States $1,327,352 $1,277,554 $1,279,318
Americas 44,654 35,880 35,760
Europe 343,774 351,386 316,320
Japan 157,359 134,716 124,123
Asia-Pacific 75,561 71,998 50,409
- -------------------------------------------------------------------------------------------------
1,948,700 1,871,534 1,805,930
Eliminations (92,006) (109,649) (120,721)
- -------------------------------------------------------------------------------------------------
Total identifiable assets $1,856,694 $1,761,885 $1,685,209
=================================================================================================
</TABLE>
Intercompany transfers are made at arm's-length prices. Pretax income
(loss) for 1993 includes restructuring charges for United States, Americas,
Europe, Japan, and Asia-Pacific in the approximate amounts of $358 million, $8
million, $70 million, $8 million, and $7 million, respectively. Identifiable
assets are those assets of the Company that are identified with the operations
of the corresponding geographic area. United States customer revenues include
export sales of $132 million in 1995, $97 million in 1994, and $51 million in
1993.
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(In thousands except per share amounts)
- ------------------------------------------------------------------------------------------------
Fiscal 1995
Quarters Ended Dec. 31 March 31 June 30 Sept. 30
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $534,600 $515,942 $594,414 $640,006
Gross margin $282,660 $257,665 $299,870 $304,078
Income before income taxes $ 40,225 $25,197 $ 42,290 $ 31,987
Net income $ 35,225 $21,686 $ 30,844 $ 19,791
Earnings per share $ .30 $ .18 $ .26 $ .17
Market stock price range
High $ 19.13 $ 19.75 $ 17.25 $ 17.50
Low $ 15.50 $ 15.38 $ 13.38 $ 11.75
================================================================================================
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(In thousands except per share amounts)
- ------------------------------------------------------------------------------------------------
Fiscal 1994
Quarters Ended Dec. 31 March 31 June 30 Sept. 30
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $475,553 $484,128 $543,941 $604,413
Gross margin $254,662 $265,857 $298,672 $333,576
Income before income taxes $ 27,504 $28,283 $ 51,010 $ 74,403
Net income $ 24,904 $25,783 $ 48,510 $ 71,003
Earnings per share $ .22 $ .23 $ .43 $ .62
Market stock price range
High $ 13.63 $ 16.38 $ 15.25 $ 16.75
Low $ 10.00 $ 10.88 $ 10.50 $ 11.25
================================================================================================
</TABLE>
Tandem Computers Incorporated Common Stock is traded on the New York,
Midwest, and Pacific Stock Exchanges under the trading symbol TDM. All
quotations shown represent the high and low sale prices. The Company has not
declared or paid any cash dividends on its Common Stock and has no plans to do
so in the foreseeable future. As of December 4, 1995, there were approximately
8,576 holders of record of the Common Stock of the Company.
SUBSEQUENT EVENTS (UNAUDITED)
The Company, two principal officers, and one additional Board member were
named as defendants in a class action complaint for damages filed in the United
States District Court for the Northern District of California on November 2,
1995. The complaint alleges violations of Sections 10(b) and 20(a) of the
Securities Exchange Act and Securities and Exchange Commission Rule 10b-5.
Management believes that this complaint is without merit and that the outcome of
the complaint will not have a material adverse effect on the financial position
or overall trends in the results of operations of the Company.
On November 6, 1995, Compaq Computer Corporation announced that it had
reached a definitive agreement to acquire, for cash, all of the outstanding
shares of NetWorth for $42.00 per share. As of September 30, 1995 and November
6, 1995, the Company owned 545,095 shares of NetWorth, with a cost basis of $4
million. The Company also holds options and warrants to purchase additional
NetWorth shares. Completion of the transaction is subject to certain conditions,
including shareholder approval and the Hart-Scott-Rodino Antitrust Improvements
Act.
37
<PAGE> 38
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Tandem
Computers Incorporated:
We have audited the accompanying consolidated balance sheets of Tandem
Computers Incorporated and subsidiaries as of September 30, 1995 and 1994, and
the related consolidated statements of operations, stockholders' investment, and
cash flows for each of the three years in the period ended September 30, 1995.
Our audits also include the financial statement schedule listed in the Index at
Item 14(a)2. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tandem
Computers Incorporated and subsidiaries at September 30, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in the Notes to the Consolidated Financial Statements, in 1993
the Company changed its method of accounting for income taxes.
ERNST & YOUNG LLP
San Jose, California
October 24, 1995
38
<PAGE> 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors. Reference is made to the information regarding directors
appearing under the caption "Election of Directors" on pages 2 and 3 of the
Company's definitive Proxy Statement dated December 15, 1995, for its 1996
Annual Meeting of Stockholders (the "Proxy Statement"), which information is
incorporated in this Form 10-K by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION OR OFFICE AND PRINCIPAL OCCUPATION
---- --- -------------------------------------------
<S> <C> <C>
James G. Treybig............ 55 President and Chief Executive Officer since 1974. Mr.
Treybig is the principal founder of the Company and has
been its president since its formation. Mr. Treybig has
been a director of the Company since 1974.
Jack W. Chapman............. 61 Vice President and Chairman, Tandem Europe since October
1990. Vice President, Sales from 1988 to 1990, Vice
President, International Sales Operations from 1986 to
1988, and Vice President and Managing Director, European
Division from 1983 to 1986. Mr. Chapman joined Tandem in
1978 as Managing Director of Tandem Computers Limited in
the United Kingdom. He has also held the positions of
Director of the Northwest Europe Region and General
Manager of Central Europe.
Donald E. Fowler............ 57 Senior Vice President and General Manager, Solutions
Products Group since 1993. Senior Vice President and
General Manager, Tandem Companies Group from 1988 to
1993. Vice President, Strategy and Corporate Development
from 1986 to 1988. Prior to joining Tandem, Mr. Fowler
held various management positions at Bechtel Group,
Inc., from 1976 to 1986, and at IBM from 1965 to 1976.
Mr. Fowler has announced his retirement from the Company
effective December 31, 1995.
Kurt L. Friedrich........... 46 Senior Vice President and General Manager, Systems
Development Group since 1993. Prior to joining Tandem,
Mr. Friedrich was General Manager, Software Development,
at Hewlett Packard Company from 1992 to 1993, and was
Vice President, Software Development, and held other
software and product management positions, at Digital
Equipment Corporation from 1974 to 1992.
Lawrence A. Laurich......... 52 Vice President, Systems Development since 1992, and
General Manager, Austin Unit Operations since 1995. Vice
President, Systems and Manufacturing Development from
1988 to 1992, Vice President, Transaction Systems
Division from 1987 to 1988, Vice President, Engineering
from 1985 to 1987, Vice President, Hardware Development
from 1983 to 1985, and Vice President, Engineering from
1978 to 1983.
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
NAME AGE POSITION OR OFFICE AND PRINCIPAL OCCUPATION
---- --- -------------------------------------------
<S> <C> <C>
Robert C. Marshall.......... 64 Senior Vice President and Chief Operating Officer since
1980. Vice President and Chief Operating Officer from
1979 to 1980. Mr. Marshall joined the Company in 1975 as
Vice President of Manufacturing and has been a director
of the Company since 1980. In October 1995, Mr. Marshall
announced his retirement from the Company and his
resignation from the Board of Directors effective
December 31, 1995.
Josephine T. Parry.......... 47 Vice President, General Counsel and Secretary since
1992. Assistant General Counsel and Director of Law from
1989 to 1992. Ms. Parry joined Tandem in 1987 from Atari
Corporation where she served as Corporate Counsel from
1984 to 1987.
Gerald L. Peterson.......... 50 Senior Vice President and General Manager, Tandem Sales
and Support Group since 1993. Senior Vice President and
General Manager, Tandem Sales and Marketing Group from
1988 to 1993. Vice President, Marketing from 1985 to
1988, Vice President, International Marketing and
Product Management from 1984 to 1985, and Vice
President, International Marketing from 1982 to 1984. He
joined Tandem in 1980 as Director of Marketing.
Roel Pieper................. 39 Senior Vice President and President and Chief Executive
Officer of Ungermann-Bass Networks, Inc., since 1993.
President and Chief Executive Officer from 1991 to 1993
of UNIX Systems Laboratories, Inc. Mr. Pieper was Chief
Technical Officer and Senior Vice President of Software
AG USA from 1981 to 1991.
David J. Rynne.............. 55 Senior Vice President and Chief Financial Officer since
1988. Vice President and Chief Financial Officer from
1983 to 1988. Prior to joining Tandem in 1983, Mr. Rynne
was with the Burroughs Corporation (now Unisys
Corporation) for 18 years, where he held key finance
positions.
Gerd Stoecker............... 52 Vice President and Treasurer since 1988. Treasurer from
1987 to 1988. Prior to joining Tandem in 1984 as
Controller of Marketing, Mr. Stoecker was with Atari,
Inc.
</TABLE>
There are no family relationships among the executive officers.
Reference is made to the information regarding Section 16(a) of the
Securities Exchange Act of 1934 on page 5 of the Proxy Statement, which
information is incorporated in this Form 10-K by reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information appearing under the captions
"Compensation of Executive Officers and Directors" appearing on page 6 and
"Certain Transactions and Employment Agreements" on pages 12 and 13 of the Proxy
Statement, which information is incorporated in this Form 10-K by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information appearing under the caption "Stock
Ownership" on pages 4 and 5 of the Proxy Statement, which information is
incorporated in this Form 10-K by reference.
40
<PAGE> 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information appearing under the caption "Certain
Transactions and Employment Agreements" on pages 12 and 13 of the Proxy
Statement, which information is incorporated in this Form 10-K by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of the report:
1. All financial statements.
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS PAGE
-----
<S> <C>
Consolidated Statements of Operations..................... 17
Consolidated Balance Sheets............................... 18
Consolidated Statements of Stockholders' Investment....... 19
Consolidated Statements of Cash Flows..................... 20
Notes to Consolidated Financial Statements................ 21-37
Report of Ernst & Young LLP, Independent Auditors......... 38
</TABLE>
2. Financial statement schedules.
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENT SCHEDULES
<S> <C>
Financial Statement Schedules
II. Valuation and Qualifying Accounts.................. S-1
</TABLE>
All other schedules have been omitted because the required information is
not present or not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
3. Exhibits required by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
3.1* Restated Certificate of Incorporation of the Company, filed as
Exhibit 3.1 to the Company's Report on Form 10-K for the fiscal year
ended September 30, 1994.
3.2* By-laws of the Company, as amended, filed as Exhibit 4.3 to the
Company's Report onForm 10-Q for the quarter ended June 30, 1990.
4.1* First Amended and Restated Rights Agreement, dated June 17, 1988,
between theCompany and Bank of America, N.T. & S.A., as Rights Agent,
filed as Exhibit 4.1 to the Company's Report on Form 10-K for the
fiscal year ended September 30, 1988.
10.1*+ Form of Non-Qualified Stock Option Plan and Agreement between the
Company and Walter B. Wriston, dated as of October 9, 1991, filed as
Exhibit 10.3 to the Company's Report on Form 10-K for the fiscal year
ended September 30, 1991.
10.2*+ Tandem Computers Incorporated 1979 Stock Option Plan, as amended,
filed as Exhibit 10.6 to the Company's Report on Form 10-K for the
fiscal year ended September 30, 1988.
10.3*+ Tandem Computers Incorporated 1981 Stock Option Plan, as amended,
filed as Exhibit 10.7 to the Company's Report on Form 10-K for the
fiscal year ended September 30, 1988.
10.4*+ Tandem Computers Incorporated 1989 Stock Plan, as amended, filed as
Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter
ended December 31, 1994.
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
10.5*+ Tandem Computers Incorporated Stock Option Plan for Non-Employee Directors, filed as
Exhibit 10.8 to the Company's Report on Form 10-K for the fiscal year ended
September 30, 1987.
10.6*+ Form of Non-Qualified Stock Option Plan and Agreement between the Company and Vera
Stephanie Shirley, dated as of December 8, 1992, filed as Exhibit 10.6 to the
Company's Report on Form 10-K for the fiscal year ended September 30, 1993.
10.7*+ Form of Non-Qualified Stock Option Plan and Agreement between the Company and Sir
Campbell Fraser, dated as of September 28, 1993, filed as Exhibit 10.7 to the
Company's Report on Form 10-K for the fiscal Year ended September 30, 1993.
10.8 + Tandem Computers Incorporated Deferred Compensation Plan, as amended and restated as
of October 1, 1995.
10.9*+ Form of Employment Agreement entered into during the quarter ended June 30, 1995,
between the Company and the following executive officers: James G. Treybig, Robert
C. Marshall, David J. Rynne, Donald E. Fowler, Kurt L. Friedrich, Gerald L. Peterson
and Roel Pieper, filed as Exhibit 10.1 to the Company's Report on Form 10-Q for the
quarter ended June 30, 1995.
10.10+ Amendment to Employment Agreement between the Company and Donald E. Fowler, dated as
of October 20, 1995.
10.11+ Amendment to Employment Agreement between the Company and Robert C. Marshall, dated
as of October 20, 1995.
22.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP (See page 43).
27 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference.
+ Director or officer compensatory plan.
(b) Reports on Form 8-K during the fourth quarter: None.
42
<PAGE> 43
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-2635, 33-12572, 33-15875, 33-29773, 33-55421 and 33-58759) and
in the Registration Statement (Form S-3 No. 33-20902) of Tandem Computers
Incorporated and in the related Prospectuses of our report dated October 24,
1995, with respect to the consolidated financial statements and schedule of
Tandem Computers Incorporated included in this Annual Report (Form 10-K) for the
year ended September 30, 1995.
ERNST & YOUNG LLP
San Jose, California
December 8, 1995
43
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TANDEM COMPUTERS INCORPORATED
December 8, 1995
By DAVID J. RYNNE
------------------------------
David J. Rynne
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
By JAMES G. TREYBIG President, Chief Executive Officer December 8, 1995
- ----------------------------- and Director (Principal
James G. Treybig Executive Officer)
By DAVID J. RYNNE Senior Vice President and Chief December 8, 1995
- ----------------------------- Financial Officer (Principal
David J. Rynne Financial and Principal
Accounting Officer)
By THOMAS J. PERKINS Director December 8, 1995
- -----------------------------
Thomas J. Perkins
By JACK F. BENNETT Director December 8, 1995
- -----------------------------
Jack F. Bennett
By MORTON COLLINS Director December 8, 1995
- -----------------------------
Morton Collins
By SIR CAMPBELL FRASER Director December 8, 1995
- -----------------------------
Sir Campbell Fraser
By FRANKLIN P. JOHNSON, JR. Director December 8, 1995
- -----------------------------
Franklin P. Johnson, Jr.
By ROBERT C. MARSHALL Director December 8, 1995
- -----------------------------
Robert C. Marshall
By VERA STEPHANIE SHIRLEY Director December 8, 1995
- -----------------------------
Vera Stephanie Shirley
By ROBERT G. STONE, JR. Director December 8, 1995
- -----------------------------
Robert G. Stone, Jr.
By WALTER B. WRISTON Director December 8, 1995
- -----------------------------
Walter B. Wriston
</TABLE>
44
<PAGE> 45
SCHEDULE II
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
----------- ---------- ------------------------- ----------- -----------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER AMOUNTS BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS WRITTEN OFF END OF YEAR
----------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Accounts Receivable Allowance
1995............................. $17,931 $2,738 -- $2,948 $17,721
======= ====== == ====== =======
1994............................. $17,745 $2,684 -- $2,498 $17,931
======= ====== == ====== =======
1993............................. $13,982 $7,557 -- $3,794 $17,745
======= ====== == ====== =======
</TABLE>
S-1
<PAGE> 1
EXHIBIT 10.8
TANDEM COMPUTERS INCORPORATED
DEFERRED COMPENSATION PLAN
AMENDED AND RESTATED AS OF OCTOBER 1, 1995
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1 INTRODUCTION............................................ 1
1.1 Establishment of Plan................................... 1
1.2 Purpose of Plan......................................... 1
ARTICLE 2 DEFINITIONS............................................. 1
2.1 Base Salary............................................. 1
2.2 Beneficiary............................................. 1
2.3 Board................................................... 2
2.4 Bonus................................................... 2
2.5 Code.................................................... 2
2.6 Commission.............................................. 2
2.7 Committee............................................... 2
2.8 Company................................................. 2
2.9 Deferral Account........................................ 2
2.10 Deferred Compensation Agreement......................... 2
2.11 Disability.............................................. 2
2.12 Eligible Employee....................................... 2
2.13 Enrollment Period....................................... 3
2.14 ERISA................................................... 3
2.15 Hardship................................................ 3
2.16 Insolvent............................................... 3
2.17 Investment Fund or Funds................................ 3
2.18 Participant............................................. 3
2.19 Plan.................................................... 3
2.20 Plan Year............................................... 3
2.21 Retirement Age.......................................... 3
ARTICLE 3 PARTICIPATION........................................... 3
3.1 Eligibility............................................. 3
3.2 Participation........................................... 3
3.3 Election Procedure...................................... 4
3.4 Deferred Compensation Agreement......................... 4
3.5 Irrevocable Elections................................... 5
3.6 Community and Marital Property.......................... 5
ARTICLE 4 PARTICIPANT ACCOUNT BALANCES............................ 6
4.1 Establishment of Accounts............................... 6
4.2 Bookkeeping............................................. 6
4.3 Crediting Deferred Compensation......................... 6
4.4 Establishment of Investment Funds....................... 6
4.5 Crediting Investment Results............................ 6
4.6 Notification to Participants............................ 7
ARTICLE 5 DISTRIBUTION OF ACCOUNTS................................ 7
5.1 Distribution in the Event of Hardship................... 7
5.2 Distribution Upon Separation From Employment............ 7
5.3 Distribution of Small Accounts.......................... 8
5.4 Distribution Upon Death................................. 8
5.5 Distribution at a Specific Date......................... 9
5.6 Unscheduled Lump Sum Distribution....................... 9
5.7 Modification of Distribution............................ 9
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
5.8 Cash Payments Only...................................... 9
ARTICLE 6 PLAN ADMINISTRATION..................................... 9
6.1 Plan Administrator...................................... 9
6.2 Amendment or Termination................................ 10
6.3 Administration of the Plan.............................. 10
6.4 Indemnification......................................... 10
ARTICLE 7 MISCELLANEOUS........................................... 10
7.1 Trust................................................... 10
7.2 Nonalienation........................................... 11
7.3 Limitation of Rights.................................... 11
7.4 Governing Law........................................... 11
APPENDIX A TRANSFERRED OBLIGATIONS................................. 13
APPENDIX B PARTICIPATION BY BOARD MEMBERS.......................... 14
</TABLE>
-ii-
<PAGE> 4
TANDEM COMPUTERS INCORPORATED
DEFERRED COMPENSATION PLAN
ARTICLE 1
INTRODUCTION
1.1 Establishment of Plan. Tandem Computers Incorporated hereby
establishes the Tandem Computers Incorporated Deferred Compensation Plan
effective as of October 1, 1994.
1.2 Purpose of Plan. Tandem Computers Incorporated has established
this Plan to provide select executives with the opportunity to defer the receipt
of compensation and a vehicle through which to do so. Tandem Computers
Incorporated intends to maintain the Plan primarily for the purpose of providing
deferred compensation for a select group of management or highly compensated
employees, within the meaning of sections 201(2), 301(a)(3) and 401(a)(1) of the
Employee Retirement Income Security Act of 1974, as amended. The Plan will be
interpreted in a manner consistent with these intentions.
ARTICLE 2
DEFINITIONS
Definitions are contained in this article and throughout other sections
of the Plan. The location of a definition is for convenience only and should not
be given any significance. A word or term defined in this article (or in any
other article) will have the same meaning throughout the Plan unless the context
clearly requires a different meaning.
2.1 Base Salary means a participant's base salary for a Plan Year,
and excludes any other form of compensation such as bonuses, commissions, income
from the exercise of stock options or stock appreciation rights, severance
payments, moving expenses, car or other special allowances, or any other amounts
included in an Eligible Employee's taxable income that are not compensation for
services. For purposes of applying base salary reduction elections, a
Participant's Base Salary is determined before taking into account any reduction
in taxable income by salary reduction under Code section 125 or 401(k), or under
this Plan.
2.2 Beneficiary means the individual(s) or entity designated by a
Participant, or under the Plan, to receive any benefit payable upon the death of
a Participant or Beneficiary.
A Beneficiary designation must be completed by the Participant and
delivered to the Committee on such form as specified by the Committee. In the
absence of a valid or
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<PAGE> 5
effective Beneficiary designation, the Beneficiary will be the Participant's
surviving spouse, or if there is no surviving spouse, the Participant's estate.
2.3 Board means the Board of Directors of the Company.
2.4 Bonus means the compensation paid to a Participant in accordance
with the applicable bonus program sponsored by the Company.
2.5 Code means the Internal Revenue Code of 1986, as amended from
time to time.
2.6 Commission means variable compensation related to sales revenue.
2.7 Committee means the Deferred Compensation Plan Committee, the
members of which are to be appointed by the Board.
2.8 Company means Tandem Computers Incorporated, a corporation
organized under the laws of the state of Delaware, and any successor thereto.
2.9 Deferral Account means a bookkeeping account established for and
maintained on behalf of a Participant to which deferred compensation amounts,
and net income (or losses) thereon, are credited.
2.10 Deferred Compensation Agreement means an agreement entered into
by a Participant and the Company to reduce the Participant's Base Salary, Bonus
and/or Commissions for a specified period and contribute such amounts to the
Plan, in accordance with Article III.
2.11 Disability means "disability" (or similar term) as defined in the
Company's long-term disability program and which results in payments to the
Participant under such program.
2.12 Eligible Employee means a common law employee of the Company who
(i) in the twelve (12) month period preceding July 1 had total compensation from
Base Salary, Bonus and Commissions of at least two (2) times the social security
wage base, or (ii) currently has an annual Base Salary rate of $100,000 and Base
Salary plus target Bonus equaling at least two (2) times the social security
wage base; provided that the Committee may amend the Plan's definition of
Eligible Employee from time to time and may exclude any employee to comply with
any applicable laws or any exemption from applicable laws, including ERISA;
provided further, that an employee of the Company shall not become an Eligible
Employee until he or she is designated by the Company as an Eligible Employee.
-2-
<PAGE> 6
2.13 Enrollment Period means the period designated by the Committee
during which the enrollment for the upcoming Plan Year takes place.
2.14 ERISA means the Employee Retirement Income Security Act of 1974,
as amended.
2.15 Hardship means an unforeseeable and unanticipated emergency
which is caused by an event beyond the control of the Participant or
Beneficiary, and which would result in severe financial hardship to the
Participant or Beneficiary if a distribution or revocation of a deferral
election were not permitted. Hardship conditions will be evaluated in accordance
with the terms of Treasury Regulation section 1.457-2(h)(4). The Committee will
have sole discretion to determine whether a Hardship condition exists and the
Committee's determination will be final.
2.16 Insolvent means the Company is: (a) unable to pay its debts as
they become due, or (b) subject to a pending proceeding as a debtor under the
U.S. Bankruptcy Code.
2.17 Investment Fund or Funds mean the investment vehicles designated
by the Committee as the basis for determining the investment return to
Participants' Deferral Accounts.
2.18 Participant means a current or former Eligible Employee who
participates in the Plan in accordance with Article III or a member of the Board
who participates in the Plan in accordance with Appendix B.
2.19 Plan means the Tandem Computers Incorporated Deferred
Compensation Plan, as set forth in this document, as amended from time to time.
2.20 Plan Year means the twelve (12) month period from October 1
through September 30.
2.21 Retirement Age means, while employed by the Company, attaining
age 55 with ten (10) years of service, or attaining age 65.
ARTICLE 3
PARTICIPATION
3.1 Eligibility. An Eligible Employee of the Company shall
participate in the Plan only to the extent and for the period that the Eligible
Employee satisfies the requirements of Section 2.12.
3.2 Participation. An Eligible Employee may elect to defer the
receipt of Base Salary, Bonus and/or Commissions that otherwise would be earned
by the Eligible Employee. The Eligi-
-3-
<PAGE> 7
ble Employee may make such election in accordance with Section 3.3. The Company
shall withhold amounts deferred by the Participant in accordance with this
election. The Participant's deferred amounts shall be credited to the Deferral
Account as provided in Article IV and distributed in accordance with Article V.
An election to defer receipt of compensation shall continue in effect for the
periods described in Section 3.4 below unless the Participant's election is
terminated or modified in accordance with the provisions of Section 3.5. A
Participant who ceases to be an Eligible Employee shall continue to participate
in the Plan with respect to any Deferred Compensation Agreement in effect as of
the Plan Year in which he or she ceases to be an Eligible Employee, but shall
not be permitted to enter into any new Deferred Compensation Agreement with the
Company until the individual again becomes an Eligible Employee.
3.3 Election Procedure. An election to defer Base Salary, Bonus and/
or Commissions is made by executing a Deferred Compensation Agreement on such
form, at such time and in such manner as may be prescribed by the Committee.
Such Deferred Compensation Agreement must be properly completed, signed and
delivered to the Company prior to the first day of the Plan Year for which such
compensation shall be earned; provided, however, that:
(i) an Eligible Employee who became an employee of the Company
for the first time during the Plan Year shall be permitted, within the
thirty (30) day period that begins on the day the Eligible Employee
became an employee of the Company, to make an election to defer Base
Salary, Bonus and/or Commissions that will be earned after his or her
date of hire;
(ii) an employee of the Company who becomes an Eligible Employee
for the first time during the Plan Year shall be permitted, in
accordance with procedures established by the Company from time to time,
but no later than the end of the thirty (30) day period that begins on
the day the employee became an Eligible Employee, to make an election to
defer Base Salary earned during such Plan Year after the effective date
of such election; and
(iii) the individuals who are eligible to participate in the
Plan when the Plan is initially adopted shall be permitted, within the
thirty (30) day period that ends on the date the Plan is effective, to
make an election to defer Base Salary, Bonus and/or Commissions that
will be earned after the effective date of the Plan.
3.4 Deferred Compensation Agreement. A Deferred Compensa- tion
Agreement shall remain in effect and shall be applicable to Base Salary earned
during the Plan Year following the delivery of the Deferred Compensation
Agreement, subject to the excep-
-4-
<PAGE> 8
tions set forth in Section 3.3(i), (ii) and (iii). A Deferred Compensation
Agreement shall remain in effect and shall be applicable to Bonus and/or
Commissions earned during the calendar year commencing in the Plan Year
following the delivery of the Deferred Compensation Agreement. The Agreement
shall set forth the whole percentage of Base Salary, Bonus and Commissions that
shall be deferred for the Plan Year or calendar year, as applicable, subject to
the following:
(a) Base Salary. A Participant shall be per- mitted to defer a
maximum of fifty percent (50%) of Base Salary earned in a Plan Year.
(b) Commission and Bonus. A Participant shall be permitted to
defer a maximum of one hundred percent (100%) of Commissions and/or one
hundred percent (100%) of Bonus with respect to the calendar year
commencing in a Plan Year.
(c) Minimum Deferral. A Participant who elects to defer any
amount must elect to defer a minimum of $3,000 for the Plan Year.
(d) Hardship Distribution Request. All Base Salary, Bonus and
Commissions deferrals with respect to a Plan Year shall cease in the
event the Committee approves a request for Hardship distribution for
that Plan Year or in the event of Disability. No reduction or cessation
of Base Salary, Bonus and/or Commission deferrals shall affect the
limits set forth above, and no part of the Hardship distribution shall
be deferred under this Plan.
3.5 Irrevocable Elections. Except to the extent provided in Sections
3.4, 5.1 and 5.6, a Participant's Deferred Compensation Agreement shall be
irrevocable and cannot be amended by the Participant. A Participant may request
to amend or revoke a Deferred Compensation Agreement in the event of a Hardship.
Such request will be made in writing on such form and in such manner as
prescribed by the Committee. The Committee may grant such request if and to the
extent that it determines that the revocation of the election would serve to
alleviate the Hardship, in a manner consistent with Sections 2.15 and 5.1.
The Company reserves the right to modify any Deferred Compensation
Agreement in any case or class of cases to reflect a change in Plan provisions
or for administrative convenience.
3.6 Community and Marital Property. The spouse of a Participant may
have a community or marital property interest in the Participant's Deferral
Account which the spouse may pass to a third party upon his or her death. If it
is intended that a spouse relinquish his or her community or marital property
interest in the Participant's Deferral Account, the spouse must execute a waiver
in which he or she clearly states an intention
-5-
<PAGE> 9
to relinquish his or her rights under community or marital property law with
respect to the Deferral Account. A spouse's consent to a Participant's
designation of a nonspouse Beneficiary is not sufficient to effect such a
waiver.
ARTICLE 4
PARTICIPANT ACCOUNT BALANCES
4.1 Establishment of Accounts. The Committee will select an
independent recordkeeper who will establish and maintain a Deferral Account on
behalf of each Participant. Contributions and net income (or losses) will be
credited to such accounts in accordance with the provision of this Article.
4.2 Bookkeeping. Deferral Accounts will be maintained for accounting
purposes and will not restrict the operation of the Plan or require separate
earmarked assets to be allocated to any account. The establishment of a Deferral
Account will not give any Participant the right to receive any asset held by the
Company in connection with the Plan or otherwise.
4.3 Crediting Deferred Compensation. The Committee will credit to a
Participant's Deferral Account the amount of any Base Salary, Bonus and/or
Commissions deferred by the Participant as soon as administratively possible
following the month in which such Base Salary, Bonus and/or Commissions would
have been paid absent a Deferred Compensation Agreement.
4.4 Establishment of Investment Funds. The Committee will establish
one or more Investment Funds which will be maintained for the purpose of
determining the investment return to be credited to a Participant's Deferral
Account. The Committee may change the number, identity or composition of the
Investment Funds from time to time.
Each Participant will indicate the Investment Funds based on which
contributions under Sections 4.3 and 4.4 and any existing Deferral Account
balance are to be adjusted for investment performance. Investment fund elections
must be made in whole percentage increments and at such times and in such manner
as the Committee will specify. A Participant may change his or her Investment
Fund election periodically in such manner as the Committee may specify.
4.5 Crediting Investment Results. No less frequently than as of the
last day of each quarter, a Participant's Deferral Account balance will be
increased or decreased to reflect investment results. Deferral Accounts will be
credited with the investment return of the Investment Funds in which the
Participant elected to be deemed to participate. The credited investment return
is intended to reflect the actual performance of the Investment Funds net of any
applicable administrative charges determined by the Company.
-6-
<PAGE> 10
4.6 Notification to Participants. The Committee shall notify each
Participant with respect to the status of such Participant's Deferral Account
as soon as practical after the end of a quarter, but in no event less than once
for each Plan Year. Neither the Company nor the Committee to any extent
warrants, guarantees or represents that the value of any Participant's Deferral
Account at any time will equal or exceed the amount previously allocated or
contributed thereto.
ARTICLE 5
DISTRIBUTION OF ACCOUNTS
5.1 Distribution in the Event of Hardship. Prior to a distribution under
Section 5.2, 5.3, 5.4, 5.5 or 5.6, payment of all or a portion of a
Participant's Deferral Account may be made in the event of Hardship. The
amount of any Hardship distribution will not exceed the amount required to meet
the Hardship, including any taxes or penalties due on the distribution. A
Participant or Beneficiary must submit a written request for a Hardship
distribution to the Committee on such form and in such manner as the Committee
prescribes. The Hardship distribution request must: (i) certify as to the
Hardship condition and the severe financial need; and (ii) state whether the
Participant requests a distribution of all or a portion of his Deferral Account
to meet the severe financial need. The Committee will have sole discretion to
determine whether a Hardship exists and to determine whether to make a Hardship
distribution and the amount of any such Hardship distribution; provided,
however, that the Compensation and Option Committee of the Board shall have the
sole discretion to grant or deny a Hardship distribution to any Participant
subject to the short-swing trading restrictions of Section 16 of the Securities
Exchange Act of 1934. Regardless of whether the Participant desires to reduce
or cease any deferrals of Base Salary, Bonus and/or Commissions after the
Hardship request is made, the Participant will be precluded from deferring
compensation until the Enrollment Period that begins at least one (1) year from
the date of the Hardship approval. A Hardship distribution shall be made in a
single lump sum payment as soon as practicable after the Committee approves the
Hardship distribution request.
5.2 Distribution Upon Separation From Employment. Subject to Section
5.3, a Participant who separates from employment with the Company shall receive
amounts credited to his Deferral Account in the manner selected by the
Participant when the Participant first commenced participation in the Plan or
as modified in accordance with Section 5.7. An election regarding the time and
manner of payment of the Participant's Deferral Account balance must be made
concurrent with the Participant's initial election to defer compensation under
Section 3.3 and can only be modified as expressly provided under this Article
V.
-7-
<PAGE> 11
(a) Time of Payment. Subject to earlier distribution pursuant to
Section 5.5, a Participant's Deferral Account balance shall be paid (or commence
to be paid) within sixty (60) days after the end of the month in which
separation of employment occurs.
(b) Manner of Payment. A Participant's Deferral Account will be paid in
annual installments over a fifteen (15) year period, commencing as of the
January 1 next following the Participant's separation from employment, unless
the Participant has elected to receive payment in: (i) a lump sum cash
payment; or (ii) substantially equal annual installment payments over a period
of five (5) or ten (10) years (as selected by the Participant).
(c) Value of Deferral Account Balance. The value of a Participant's
Deferral Account to be distributed shall be determined as of the last day of
the calendar month preceding the date a payment is to be made. To the extent
payment is to be made in installments, the amount of the installment for a
particular year shall be adjusted to take into account the value of the
Participant's Deferral Account (as adjusted) and the number of remaining years
over which the installment payments are to be made, in a manner determined by
the Plan recordkeeper.
5.3 Distribution of Small Accounts. At the Committee's discretion,
following the date a Participant separates from employment with the Company, if
the amount credited to the participant's Deferral Account is $10,000 or less as
of the last day of a calendar month, such amount shall be distributed to the
Participant in a lump sum payment as soon as practicable after such last day of
the calendar month.
5.4 Distribution Upon Death. The Beneficiary of a Participant who dies
prior to receiving any payments under this Article V (other than Hardship
distributions), shall receive the Participant's Deferral Account: (i) in a
lump sum payment if the amount credited to the Participant's Deferral Account
is $10,000 or less as of the date the Company receives written proof of the
Participant's death, with such amount to be paid as soon as reasonably
practicable after receipt of such written proof, or (ii) in the manner selected
by the Participant when the Participant first commenced participation in the
Plan among the options set forth in Section 5.2 or later modified under Section
5.7, and commencing in accordance with the Participant's distribution option
elections. If payment is to be made in installments, the amount of the
installment for a particular year shall be adjusted to take into account the
value of the Participant's Deferral Account (as adjusted) and the number of
remaining years over which the installment payments are to be made, in a manner
determined by the Plan recordkeeper.
If a Participant dies after installment payments have begun, the
Participant's Beneficiary will continue to receive
-8-
<PAGE> 12
the Participant's unpaid Deferral Account balance in installment payments for
the remaining period of time.
5.5 Distribution at a Specific Date. A Participant can elect to receive
a lump sum distribution of his Deferral Account at any date after the end of the
Plan Year when the Participant first commenced participation in the Plan;
provided that (i) no distributions shall be made under the Plan prior to March
1, 1996, (ii) the election of the specific date for distribution shall be made
within the time period specified within Section 5.2, and (iii) notwithstanding
the election of a specific date for distribution, distribution shall be made no
later than the date specified in Section 5.2(a). If a Participant terminates
employment prior to the elected distribution date, the lump sum distribution of
his Deferral Account will be paid out within sixty (60) days after the month in
which termination occurred.
5.6 Unscheduled Lump Sum Distribution. A Participant may request in
writing a lump sum distribution of a Participant's entire Deferral Account
balance attributable to one or more Plan Years of participation with a ten
percent (10%) penalty forfeited to the Company. The value of a Participant's
Deferral Account less the ten percent (10%) penalty to be distributed shall be
determined as of the last day of the month in which the request is submitted,
and distribution shall be made as soon as practicable thereafter.
The request for an unscheduled distribution must be approved by the
Committee and will be paid out within sixty (60) days after the month in which
the distribution is approved.
The Participant will not be allowed to participate under the Plan until
the Plan Year that commences at least one (1) year from the date of
distribution.
5.7 Modification of Distribution. Subject to Committee approval, a
Participant may request in writing a change regarding the manner (e.g., lump
sum or installment) of payment of the Participant's Deferral Account balance
following attainment of Retirement Age; provided that if the modification is
elected less than twelve (12) months before Retirement Age, such change shall
be permitted only after a ten percent (10%) penalty is forfeited to the
Company.
5.8 Cash Payments Only. All distributions under the Plan will be made in
cash by check.
ARTICLE 6
PLAN ADMINISTRATION
6.1 Plan Administrator. The Company shall be the Plan Administrator, and
shall act through the Committee. The
-9-
<PAGE> 13
Committee members shall be appointed by and serve at the pleasure of the
Company.
6.2 Amendment or Termination. The Board may amend all or any provision
of this Plan, and may terminate the Plan in its entirety, at any time and for
any reason. No amendment or termination of the Plan will reduce any
Participant's Deferral Account balance as of the effective date of such
amendment or termination. Upon termination of the Plan, the Company shall have
the right to immediately distribute the amount credited to Participants'
Deferral Accounts to Participants; provided that no such immediate distribution
shall be permitted if the Plan is terminated following a Change of Control (as
defined in the trust agreement entered into pursuant to this Plan).
6.3 Administration of the Plan. The Committee shall have the sole
authority to control and manage the operation and administration of the Plan and
have all powers, authority and discretion necessary or appropriate to carry out
the Plan provisions, and to interpret and apply the terms of the Plan to
particular cases or circumstances. All decisions, determinations and
interpretations of the Committee will be binding on all interested parties,
subject to the claims and appeal procedure necessary to satisfy the minimum
standard of ERISA section 503, and will be given the maximum deference allowed
by law. The Committee may delegate in writing its responsibilities as it sees
fit.
Committee members who are Participants will abstain from voting on any
Plan matters that relate primarily to themselves or that would cause them to be
in constructive receipt of amounts credited to their respective Deferral
Account. In the event that all Committee members must abstain from voting, the
Board will identify three or more individuals to serve as a temporary
replacement of the Committee members.
6.4 Indemnification. The Company will and hereby does indemnify and hold
harmless any of its employees, officers, directors or members of the Committee
who have fiduciary or administrative responsibilities with respect to the Plan
from and against any and all losses, claims, damages, expenses and liabilities
(including reasonable attorneys' fees and amounts paid, with the approval of
the Board, in settlement of any claim) arising out of or resulting from the
implementation of a duty, act or decision with respect to the Plan, so long as
such duty, act or decision does not involve gross negligence or willful
misconduct on the part of any such individual.
ARTICLE 7
MISCELLANEOUS
7.1 Trust. It is the intention of the Company that the Plan be unfunded
for tax purposes and for purposes of Title I of
-10-
<PAGE> 14
ERISA. However, such amounts as the Committee deems necessary or appropriate
to meet the obligation to pay Deferral Accounts will be held in trust by an
independent third party trustee selected by the Committee of the Board, and as
such are earmarked to pay benefits under the terms of the Plan. The Committee
will direct the Company to make periodic contributions to the trust at such
times and in such amounts as the Committee deems appropriate.
Trust assets cannot be diverted to, or used for, any purpose except
payments to Participants and Beneficiaries under the terms of the Plan or, if
the Company is Insolvent, to pay the Company's creditors; provided, however,
that the trust agreement for the trust established under the Plan may provide
for the withdrawal of any trust assets in excess of the sum of all Deferral
Account balances under the Plan. Participants and Beneficiaries will have no
right against the Company with respect to the payment of any portion of the
Participant's Deferral Account, except as a general unsecured creditor of the
Company.
7.2 Nonalienation. No benefit or interest of any Participant or
Beneficiary under this Plan will be subject to any manner of assignment,
alienation, anticipation, sale transfer, pledge or encumbrance, whether
voluntary or involuntary. Notwithstanding the foregoing, the Committee will
honor a court order regarding the payment of alimony or other support payments,
or the establishment of community property or other marital property rights, to
the extent required by law. Prior to distribution to a Participant or
Beneficiary, no Deferral Account balance will be in any manner subject to the
debts, contracts, liabilities, engagements or torts of the Participant or
Beneficiary. Assets held in trust to fund this Plan may, however, be diverted to
pay the Company's creditors, if the Company is Insolvent.
7.3 Limitation of Rights. Nothing in this Plan will be constructed to
give a Participant the right to continue in the employ of the Company at any
particular position or to interfere with the right of the Company to discharge,
lay off or discipline a Participant at any time and for any reason, or to give
the Company the right to require any Participant to remain in its employ or to
interfere with the Participant's right to terminate his or her employment.
7.4 Governing Law. To the extent that state law applies, the provisions
of this Plan will be construed, enforced and
-11-
<PAGE> 15
administered in accordance with the laws of the state of California, except to
the extent preempted by ERISA.
IN WITNESS WHEREOF, the Company by its duly authorized officer has
executed this Tandem Computers Incorporated Deferred Compensation Plan as of the
effective date set forth above.
TANDEM COMPUTERS INCORPORATED
By
--------------------------------
Its
--------------------------------
-12-
<PAGE> 16
APPENDIX A
TRANSFERRED OBLIGATIONS
As of December 31, 1994, the amounts credited to active employees of the
Company who were participants under the Company's Supplemental Retirement Plan
were transferred to Deferral Accounts under this Plan and all such participants
in the Supplemental Retirement Plan became Participants under this Plan.
Amounts held in such transferred Deferral Accounts shall be distributed at the
time and manner specified under the deferral elections submitted under the
Supplemental Retirement Plan, but shall be credited with investment performance
in accordance with an Investment Fund election completed by the Participant in
a manner consistent with Section 4.4.
-13-
<PAGE> 17
APPENDIX B
PARTICIPATION BY BOARD MEMBERS
This Appendix B shall be effective only if the Board has expressly
determined to implement this Appendix B.
Members of the Board may elect to defer their directors fees by making a
fee deferral election prior to the period for which such fees are earned, in
accordance with procedures established by the Committee. Such deferrals will be
contributed to Deferral Accounts and credited with investment performance in
accordance with Article IV. A Board member's Deferral Account shall be
distributed, in accordance with the fee deferral elections made by the Board
member, (i) upon termination of Board membership or at a specified date and (ii)
in a manner specified in Section 5.2(b). A Board member may request a Hardship
distribution in accordance with Section 5.1, provided that a Board member who is
also a member of the Compensation and Option Committee of the Board shall
abstain from any discussion of such Board member's Hardship distribution
request. A Board member may also request an unscheduled distribution in
accordance with Section 5.6.
-14-
<PAGE> 1
EXHIBIT 10.10
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT, dated as of October 20, 1995,
is entered into by and between Tandem Computers Incorporated ("Employer") and
Donald E. Fowler ("Executive"), to amend the prior employment agreement
previously entered into between Employer and Executive on May 19, 1995 (the
"Employment Agreement").
In consideration of the respective undertakings of Employer and
Executive set forth below, Employer and Executive agree as follows:
1. Executive will retire from employment with Employer on December
31, 1995. However, for all purposes of the Employment Agreement it is agreed
that Executive shall be treated in the same manner as if Employer terminated
the Period Employment of Executive without Cause (as such terms are used in the
Employment Agreement) on December 31, 1995.
2. The following payments and benefits shall be due to Executive
pursuant to Section 5.02(d) of the Employment Agreement:
(i) Pursuant to Section 5.02(d)(i) of the Employment
Agreement, Executive will be paid his annual base salary at the current rate
through December 31, 1995.
(ii) Section 5.02(d)(ii) of the Employment Agreement is
modified as follows. Executive shall receive any annual bonus to which he may
be entitled under the Employer's Targeted Income Plan or other applicable bonus
plan or program for the fiscal year ended September 30, 1995. Executive shall
receive the special bonus described in Section 3 below, in lieu of any other
bonus for the period from October 1 through December 31, 1995.
(iii) In satisfaction of Section 5.02(d)(iii) of the
Employment Agreement, Executive will receive a lump sum payment in the amount
of $1,350,000 on January 5, 1996.
(iv) Pursuant to Section 5.02(d)(iv) of the Employment
Agreement, Executive will continue to receive the benefits described in Section
4.04 of the Employment Agreement for three years beginning on January 1, 1996
and ending on December 31, 1998.
(v) Pursuant to Section 5.02(d)(v) of the Employment
Agreement, Executive will continue to receive the fringe benefits and
perquisites described in Section 4.05 of the Employment Agreement for three
years beginning on January 1, 1996 and ending on December 31, 1998.
<PAGE> 2
(vi) Pursuant to Section 5.02(d)(vi) of the Employment
Agreement, Employer will make a lump sum payment to Executive in the amount of
$500,000 on January 5, 1996.
(vii) In satisfaction of Section 5.02(d)(vii) of the Employment
Agreement, Employer will make a lump sum payment of $50,000 to Executive on
January 5, 1996.
(viii) Section 5.02(d)(viii) of the Employment Agreement is
modified as follows. Employer will extend all Employer loan guarantees and
renew any Employer loans to Executive only for a period of one year through
December 31, 1996.
3. Employer will pay a special lump sum bonus to Executive in the
amount of $300,000 on January 5, 1996. This bonus will be in lieu of any other
bonus for the period from October 1 through December 31, 1995, and may be
utilized by Executive to reduce his outstanding loans which are guaranteed by
Employer.
4. Executive's rights under his outstanding stock options will be
determined under the terms of the applicable plans and agreements based on
termination of Executive's employment on December 31, 1995, except that all of
Executive's stock options which are vested at the time of his termination of
employment will remain outstanding and may be exercised at any time on or
before (i) December 31, 1998, or (ii) the original expiration date of the
applicable stock option, whichever occurs first.
5. Pursuant to Section 5.02(e) of the Employment Agreement, Executive
will execute and deliver a release and settlement agreement in favor of
Employer in a form satisfactory to Employer on or before January 5, 1996.
6. The special provisions contained in Section 5.03 of the Employment
Agreement which apply in connection with a Change in Control will continue to
apply if a Change in Control of Employer is publicly announced on or before
December 31, 1995. However, it is agreed that Section 5.03(h) will apply to
Executive after December 31, 1995, and Executive shall be entitled to receive a
full "Gross-Up Payment" thereunder, in the event that any payments which are
made to Executive by Employer are subject to an Excise Tax (as defined therein).
7. Executive shall be entitled to retain, without charge, the AST
Notebook computer which he currently uses.
8. Executive will resign from the Boards of Directors of subsidiaries
of Employer effective as of December 31, 1995.
9. Employer will pay legal fees charged by Munger, Tolles & Olson in
connection with entering into this Amendment to Employment Agreement. Employer
will make a tax gross up payment
2
<PAGE> 3
to Executive, if necessary, to offset any taxable income which is reportable
for or realized by Executive with respect to these legal fees.
10. Except as otherwise expressly provided in this Amendment to
Employment Agreement, all provisions of the Employment Agreement shall remain
in full force and effect.
IN WITNESS WHEREOF, Employer and Executive have executed this Amendment
to Employment Agreement as of the date set forth in the first paragraph hereof.
EMPLOYER: TANDEM COMPUTERS INCORPORATED
By Thomas J. Perkins
-----------------------
Its Chairman of the Board
-----------------------
EXECUTIVE: Donald E. Fowler
-----------------------
Donald E. Fowler
3
<PAGE> 1
EXHIBIT 10.11
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT, dated as of October 20, 1995,
is entered into by and between Tandem Computers Incorporated ("Employer") and
Robert C. Marshall ("Executive"), to amend the prior employment agreement
previously entered into between Employer and Executive on May 19, 1995 (the
"Employment Agreement").
In consideration of the respective undertakings of Employer and
Executive set forth below, Employer and Executive agree as follows:
1. Executive will retire from employment with Employer on December 31,
1995. However, for all purposes of the Employment Agreement it is agreed that
Executive shall be treated in the same manner as if Employer terminated the
Period Employment of Executive without Cause (as such terms are used in the
Employment Agreement) on December 31, 1995.
2. The following payments and benefits shall be due to Executive
pursuant to Section 5.02(d) of the Employment Agreement:
(i) Pursuant to Section 5.02(d)(i) of the Employment
Agreement, Executive will be paid his annual base salary at the current rate
through December 31, 1995.
(ii) Section 5.02(d)(ii) of the Employment Agreement is
modified as follows. Executive shall receive any annual bonus to which he may
be entitled under the Employer's Targeted Income Plan or other applicable bonus
plan or program for the fiscal year ended September 30, 1995. Executive shall
receive the special bonus described in Section 3 below, in lieu of any other
bonus for the period from October 1 through December 31, 1995.
(iii) In satisfaction of Section 5.02(d)(iii) of the Employment
Agreement, Executive will receive a lump sum payment in the amount of
$1,274,334 on January 5, 1996.
(iv) Pursuant to Section 5.02(d)(iv) of the Employment
Agreement, Executive will continue to receive the benefits described in
Section 4.04 of the Employment Agreement for three years beginning on
January 1, 1996 and ending on December 31, 1998.
(v) Pursuant to Section 5.02(d)(v) of the Employment
Agreement, Executive will continue to receive the fringe benefits and
perquisites described in Section 4.05 of the Employment Agreement for three
years beginning on January 1, 1996 and ending on December 31, 1998.
<PAGE> 2
(vi) Pursuant to Section 5.02(d)(vi) of the Employment
Agreement, Employer will make a 100% vested Employer contribution on behalf of
Executive to Employer's Deferred Compensation Plan in the amount of $500,000 on
December 31, 1995.
(vii) In satisfaction of Section 5.02(d)(vii) of the
Employment Agreement, Employer will make a lump sum payment of $50,000 to
Executive on January 5, 1996.
(viii) Section 5.02(d)(viii) of the Employment Agreement is
modified as follows. Employer will extend all Employer loan guarantees and renew
any Employer loans to Executive only for a period of one year through December
31, 1996.
3. Employer will pay a special lump sum bonus to Executive in the
amount of $375,000 on January 5, 1996. This bonus will be in lieu of any other
bonus for the period from October 1 through December 31, 1995, and may be
utilized by Executive to reduce his outstanding loans which are guaranteed by
Employer.
4. Executive's rights under his outstanding stock options will be
determined under the terms of the applicable plans and agreements based on
termination of Executive's employment on December 31, 1995, except that all of
Executive's stock options which are vested at the time of his termination of
employment will remain outstanding and may be exercised at any time on or
before (i) December 31, 1998, or (ii) the original expiration date of the
applicable stock option, whichever occurs first.
5. Pursuant to Section 5.02(e) of the Employment Agreement, Executive
will execute and deliver a release and settlement agreement in favor of
Employer in a form satisfactory to Employer on or before January 5, 1996.
6. The special provisions contained in Section 5.03 of the Employment
Agreement which apply in connection with a Change in Control will continue to
apply if a Change in Control of Employer is publicly announced on or before
December 31, 1995. However, it is agreed that Section 5.03(h) will apply to
Executive after December 31, 1995, and Executive shall be entitled to receive a
full "Gross-Up Payment" thereunder, in the event that any payments which are
made to Executive by Employer are subject to an Excise Tax (as defined therein).
7. Executive shall be entitled to retain, without charge, the Apple
Power Book Model 540C which he currently uses.
8. Executive will resign from the Boards of Directors of Employer and
its subsidiaries effective as of December 31, 1995.
9. Employer will pay legal fees charged by Munger, Tolles & Olson in
connection with entering into this Amendment to
2
<PAGE> 3
Employment Agreement. Employer will make a tax gross up payment to Executive, if
necessary, to offset any taxable income which is reportable for or realized by
Executive with respect to these legal fees.
10. Except as otherwise expressly provided in this Amendment to
Employment Agreement, all provisions of the Employment Agreement shall remain
in full force and effect.
IN WITNESS WHEREOF, Employer and Executive have executed this
Amendment to Employment Agreement as of the date set forth in the first
paragraph hereof.
EMPLOYER: TANDEM COMPUTERS INCORPORATED
By Thomas J. Perkins
------------------------------------
Its Chairman of the Board
------------------------------------
EXECUTIVE: Robert C. Marshall
------------------------------------
Robert C. Marshall
3
<PAGE> 1
EXHIBIT 22.1
SUBSIDIARIES OF TANDEM COMPUTERS INCORPORATED
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY AND JURISDICTION
NAME UNDER WHICH DOING BUSINESS OF INCORPORATION
- ------------------------------- ----------------
<S> <C>
ACI Canada EFTS, Ltd. Nebraska
Australasian On Line Systems Pty. Ltd. Delaware
Computer Technologies, Ltd. Bermuda
NonStop Manufacturing Pty. Ltd. Delaware
PT Tandem Computers Indonesia Indonesia
Tandem Applied Communications Pty. Ltd. Nebraska
Tandem Computers AB Sweden
Tandem Computers AG Switzerland
Tandem Computers A/O Russia
Tandem Computers A/S Denmark
Tandem Computers Asia Ltd. Delaware
Tandem Computers Asia-Pacific Incorporated Delaware
Tandem Computers B.V. Netherlands
Tandem Computers Canada Limited Canada
Tandem Computers Credit Corporation Delaware
Tandem Computers de Mexico, S.A. de C.V. Mexico
Tandem Computers del Peru S.A. Peru
Tandem Computers do Brasil Inc. Delaware
Tandem Computers do Brasil Inc. & Cia Brazil
Tandem Computers Europe Incorporated Delaware
Tandem Computers Export Corporation California
Tandem Computers FSC, Inc. Barbados
Tandem Computer Ges.m.b.H. Austria
Tandem Computers GmbH Germany
Tandem Computers Holding Incorporated Delaware
Tandem Computers (Hong Kong) Limited Hong Kong
Tandem Computers (Hungary) Incorporated Delaware
Tandem Computers Iberica, S.A. Spain
Tandem Computers India Ltd. Delaware
Tandem Computers International Incorporated Delaware
Tandem Computers Investment Corporation Delaware
Tandem Computers Investments do Brasil Inc. Delaware
Tandem Computers Italia S.p.A. Italy
Tandem Computers Japan, Limited Japan
Tandem Computers KKT Hungary
Tandem Computers Korea, Ltd. Korea
Tandem Computers Limited United Kingdom
Tandem Computers Manufacturing, Inc. California
Tandem Computers Marketing, Inc. Delaware
Tandem Computers (Norway) A/S Norway
Tandem Computers Pty. Ltd. Delaware
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION
NAME UNDER WHICH DOING BUSINESS OF INCORPORATION
- ------------------------------- ----------------
<S> <C>
Tandem Computers S.A. France
Tandem Computers S.A./N.V. Belgium
Tandem Computers South Asia Ltd. Delaware
Tandem Computer Systems Sdn BHD Malaysia
Tandem Employees Emergency Relief Fund, Inc. Delaware
Tandem PRC Incorporated Delaware
Tandem South Africa(Pty) Ltd. South Africa
Tandem Taiwan Incorporated Delaware
Twinco A/S Norway
UB Networks, a division of Ungermann-Bass Australia
Pty. Ltd.
UB Networks Canada Limited Canada
UB Networks Czech Republic, Inc. Delaware
UB Networks do Brasil Limitada Brazil
UB Networks European Corporation Delaware
UB Networks Hong Kong, Inc. Delaware
UB Networks International, Inc. Delaware
UB Networks Korea Limited Korea
UB Networks Limited England
UB Networks Norway, Inc. Delaware
UB Networks Singapore, Inc. Delaware
Ungermann-Bass (Europe), Inc. Delaware
Ungermann-Bass Financial Corporation Delaware
Ungermann-Bass Networks AB Sweden
Ungermann-Bass Networks Benelux S.A.-N.V. Belgium
Ungermann-Bass Networks Espanola Limited Delaware
Ungermann-Bass Networks, Inc. Delaware
Ungermann-Bass Networks Kabushiki Kaisha Japan
Ungermann-Bass Networks SA France
Yura Corp. Colorado
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-K
FOR THE PERIOD ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 121,230
<SECURITIES> 0
<RECEIVABLES> 557,714
<ALLOWANCES> 17,721
<INVENTORY> 169,948
<CURRENT-ASSETS> 970,485
<PP&E> 1,297,481
<DEPRECIATION> 700,813
<TOTAL-ASSETS> 1,856,694
<CURRENT-LIABILITIES> 670,436
<BONDS> 75,923
<COMMON> 2,995
0
0
<OTHER-SE> 1,107,340
<TOTAL-LIABILITY-AND-EQUITY> 1,856,694
<SALES> 1,846,075
<TOTAL-REVENUES> 2,284,962
<CGS> 821,780
<TOTAL-COSTS> 1,140,689
<OTHER-EXPENSES> 323,197
<LOSS-PROVISION> 3,635
<INTEREST-EXPENSE> 13,102
<INCOME-PRETAX> 139,699
<INCOME-TAX> 32,153
<INCOME-CONTINUING> 107,546
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107,546
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.91
</TABLE>
