<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No. 0-9134
TANDEM COMPUTERS INCORPORATED
Delaware 94-2266618
(State of incorporation) (IRS Employer Id. No.)
19333 Vallco Parkway, Cupertino, California
95014-2599
(408)285-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class: Common Stock, Outstanding at August 7, 1995
------------- -----------------------------
<S> <C>
$.025 par value 116,700,555 shares
</TABLE>
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following consolidated financial statements have been prepared by
the Company without audit by independent public accountants, but in accordance
with the rules and regulations of the Securities and Exchange Commission.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Securities and Exchange
Commission rules and regulations, the Company believes the financial disclosures
made are sufficient to make the information presented not misleading. In
addition, the consolidated financial statements reflect, in the opinion of
management, all adjustments (limited to normal, recurring adjustments) necessary
to present fairly the consolidated financial position, results of operations,
and cash flows for the periods indicated.
It is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and related notes
included in the Company's 1994 Annual Report to Stockholders and Annual Report
on Form 10-K for the year ended September 30, 1994. Such consolidated financial
statements and related notes are filed with the Securities and Exchange
Commission.
The results of operations for the three-month period ended June 30,
1995, are not necessarily indicative of results to be expected in the future.
[STATEMENTS ON FOLLOWING PAGES]
<PAGE> 3
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
For the three months ended For the nine months ended
--------------------------------- ---------------------------------
June 30, June 30, June 30, June 30,
(In thousands except per share amounts) 1995 1994 1995 1994
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Product revenues $475,592 $434,176 $1,322,393 $1,215,273
Service and other revenues 118,822 109,765 322,563 288,349
--------------------------------------------------------------------------------------------------------------------------------
Total revenues 594,414 543,941 1,644,956 1,503,622
--------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of product revenues 206,250 170,055 576,446 490,475
Cost of service and other revenues 88,294 75,214 228,315 193,956
Research and development 81,800 66,849 235,286 196,914
Marketing, general, and administrative 176,932 181,141 509,771 539,658
--------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 553,276 493,259 1,549,818 1,421,003
--------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 41,138 50,682 95,138 82,619
Gain on sale of subsidiaries and investments -- -- 8,677 23,000
Net interest income 1,152 328 3,897 1,178
--------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 42,290 51,010 107,712 106,797
Provision for income taxes 11,446 2,500 19,957 7,600
--------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 30,844 $ 48,510 $ 87,755 $ 99,197
================================================================================================================================
EARNINGS PER SHARE $ .26 $ .43 $ .74 $ .88
================================================================================================================================
Weighted average shares outstanding 118,055 113,508 118,375 112,942
================================================================================================================================
</TABLE>
See accompanying notes.
<PAGE> 4
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
June 30, September 30,
(In thousands except per share amount) 1995 1994
------------------------------------------------------------------------------------------------------------
ASSETS
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 134,413 $ 124,042
Accounts receivable, net 515,624 512,334
Current portion of lease receivables 61,068 61,516
Inventories 184,964 159,609
Prepaid expenses and other 77,480 70,529
------------------------------------------------------------------------------------------------------------
Total current assets 973,549 928,030
------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT, at cost 1,278,848 1,178,888
Accumulated depreciation and amortization (699,926) (630,652)
------------------------------------------------------------------------------------------------------------
Net property, plant, and equipment 578,922 548,236
------------------------------------------------------------------------------------------------------------
COST IN EXCESS OF NET ASSETS ACQUIRED, NET 5,192 6,560
------------------------------------------------------------------------------------------------------------
LEASE RECEIVABLES 73,605 76,765
------------------------------------------------------------------------------------------------------------
OTHER ASSETS 212,561 202,294
------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,843,829 $1,761,885
============================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Short-term borrowings $ 694 $ --
Accounts payable 176,911 150,933
Accrued liabilities 438,856 527,510
Current maturities of long-term obligations 62,088 58,120
------------------------------------------------------------------------------------------------------------
Total current liabilities 678,549 736,563
------------------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS 76,735 86,481
------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' INVESTMENT
Common stock $.025 par value, authorized
400,000 shares, outstanding 119,515 shares at
June 30 and 116,237 shares at September 30 2,988 2,905
Additional paid-in capital 687,279 646,256
Retained earnings 421,998 332,460
Accumulated translation adjustments 27,194 9,192
Treasury stock, at cost (50,914) (9,062)
Deferred ESOP compensation - (42,910)
------------------------------------------------------------------------------------------------------------
Total stockholders' investment 1,088,545 938,841
------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $1,843,829 $1,761,885
============================================================================================================
</TABLE>
See accompanying notes.
<PAGE> 5
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
For the nine months ended
--------------------------------------
June 30, June 30,
(In thousands) 1995 1994
------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 87,755 $ 99,197
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 125,015 123,514
Gain on sale of subsidiaries (8,677) (23,000)
Loss (gain) on dispositions of property, plant,
and equipment 1,473 (804)
Changes in:
Accounts receivable 18,215 (16,858)
Inventories (22,137) (21,677)
Lease receivables 2,026 9,933
Non-debt current liabilities and other (90,337) (128,746)
------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 113,333 41,559
------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant, and equipment (119,030) (90,894)
Proceeds from dispositions of property, plant,
and equipment 4,020 23,509
Sale of subsidiaries and investments, net of cash disposed 11,642 70,519
Increase in other assets (37,981) (51,155)
------------------------------------------------------------------------------------------------------
Net cash used in
investing activities (141,349) (48,021)
------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings 44,957 51,698
Repayments (53,042) (67,956)
Issuance of Common Stock under stock plans, including tax benefits 40,550 18,763
------------------------------------------------------------------------------------------------------
Net cash provided by
financing activities 32,465 2,505
------------------------------------------------------------------------------------------------------
Effect of exchange rate fluctuations on cash
and equivalents 5,922 2,542
------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 10,371 (1,415)
Cash and equivalents at beginning of period 124,042 106,179
------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 134,413 $ 104,764
======================================================================================================
</TABLE>
See accompanying notes.
<PAGE> 6
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common and common
equivalent shares outstanding. Common equivalent shares result from the assumed
exercise of outstanding stock options, which have a dilutive effect when
applying the treasury stock method. As a result of terminating the Employee
Stock Ownership Plan (ESOP), the approximately 2.4 million unallocated common
shares held by the ESOP trust were returned to Tandem's treasury in January 1995
and are excluded from the weighted average shares outstanding calculations for
all periods presented.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market. The
components of inventories are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
June 30, September 30,
(In thousands) 1995 1994
--------------------------------------------------------------------------------------------
<S> <C> <C>
Purchased parts and subassemblies $ 66,498 $ 52,370
Work in process 36,815 29,234
Finished goods 81,651 78,005
--------------------------------------------------------------------------------------------
Total $184,964 $159,609
============================================================================================
</TABLE>
3. INVESTMENTS
During January 1995, one of the Company's equity investees entered into an
agreement to sell its assets for $120 million. The Company has or will receive
approximately $13.6 million in proceeds from the transaction, for an estimated
gain on the transaction of $10.6 million, $1.9 million of which is subject to
certain contingencies. Accordingly, the Company recorded $8.7 million of the
gain in the second quarter of 1995. The remaining gain will not be recognized
until the related contingencies are satisfied.
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 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.
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
gains on securities classified as available-for-sale.
Realized gains on available-for-sale securities during the quarter ended June
30, 1995 totaled $2.5 million. The net adjustment to unrealized holding gains
(losses) on available-for-sale securities for the quarter was not material.
<PAGE> 7
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING
Information related to restructuring activity for the nine months ended June 30,
1995 is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Reduction of Internal Discontinued
(In thousands) Work Force Facilities Systems Activities Other Total
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1994 $52,066 $54,742 $23,822 $10,711 $31,837 $173,178
Utilized, nine months ended June 30, 1995 30,418 22,291 14,051 870 12,405 80,035
--------------------------------------------------------------------------------------------------------------------------
Balances, June 30, 1995 $21,648 $32,451 $ 9,771 $ 9,841 $19,432 $ 93,143
==========================================================================================================================
Cash used, nine months ended June 30, 1995 $30,418 $17,405 $14,051 $ 51 $12,205 $ 74,130
==========================================================================================================================
</TABLE>
5. BUSINESS COMBINATIONS
The consolidated results of operations for the quarter ended December 31, 1993
include the operating results of two wholly owned subsidiaries, Applied
Communications, Inc. (ACI), and Applied Communications, Inc. Limited (ACI Ltd.),
both of which were sold effective December 31, 1993, for approximately $53.6
million net cash. The sales of these subsidiaries resulted in a gain for
financial accounting purposes of $23 million.
On March 15, 1994, the Company sold its interest in the storage subsystems
business of Array Technology Corporation (acquired in 1990), together with
certain assets, to EMC Corporation for approximately $10 million cash. As a part
of its 1993 restructuring plan and related provision, the Company concluded to
sell or otherwise dispose of this business unit. Accordingly, the transaction
was recorded as part of restructuring activity in the quarter ended March 31,
1994, and no gain or loss was realized for financial reporting purposes.
In October 1994, NetWorth, Inc. (NetWorth) completed a second public offering of
its common stock in which it received net proceeds of $20.7 million. In
conjunction with NetWorth's second offering, 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 from 32 percent to 15 percent. 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.
On March 10, 1995, NetWorth entered into a merger agreement providing for a
merger with Network Resources Corporation (NRC), an equity investee of the
Company. The transaction became effective during the quarter ended June 30,
1995. 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.
<PAGE> 8
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES
The provision for income taxes for the three- and nine-month periods ended June
30, 1995 and 1994 arose principally from taxes currently payable in foreign
jurisdictions.
7. CASH DIVIDENDS
The Company has not declared or paid any cash dividends and has no plans to do
so in the foreseeable future.
8. SUBSEQUENT EVENT
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 has just begun the investigation of
this matter. Accordingly, the Company is not yet able to predict the probable
outcome of the case or to estimate the potential financial impact, if any.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED OPERATING STATISTICS
The following tables summarize operating statistics for the third
quarter and the first nine months of fiscal 1995 and 1994. The first table shows
the percentage 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 second table shows the
percentage change in 1995 and 1994 from the comparable prior year periods.
Operating results of business units sold are included in revenues, costs, and
expenses through their respective disposition dates as follows: 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. Throughout Management's Discussion and Analysis
of Financial Condition and Results of Operations, certain fluctuations in
financial statement line items are provided on a basis which 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
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 Item 2 represent the Company's fiscal years.
PERCENT OF TOTAL REVENUES
(Except cost of product and service)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ -------------------
1995 1994 1995 1994
------------------ -------------------
<S> <C> <C> <C> <C>
Product revenues 80 80 80 81
Service and other revenues 20 20 20 19
-------------------------------------------------------------------------------------------------------
TOTAL REVENUES 100 100 100 100
-------------------------------------------------------------------------------------------------------
Cost of product revenues 43 39 44 40
Cost of service and other revenues 74 69 71 67
-------------------------------------------------------------------------------------------------------
Total cost of revenues 49 45 49 46
Research and development 14 12 14 13
Marketing, general, and
administrative 30 34 31 36
-------------------------------------------------------------------------------------------------------
OPERATING INCOME 7 9 6 5
Gain on sale of subsidiaries
and investments N/A N/A 1 2
-------------------------------------------------------------------------------------------------------
Net interest income -- -- -- --
-------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 7 9 7 7
Provision for income taxes 2 -- 2 --
-------------------------------------------------------------------------------------------------------
NET INCOME 5 9 5 7
=======================================================================================================
</TABLE>
N/A - Not applicable
<PAGE> 10
PERCENT INCREASE (DECREASE)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ---------------------
1995 1994 1995 1994
-------------------- ---------------------
<S> <C> <C> <C> <C>
Product revenues 10 15 9 2
Service and other revenues 8 11 12 1
-------------------------------------------------------------------------------------------------------
TOTAL REVENUES 9 14 9 2
-------------------------------------------------------------------------------------------------------
Cost of product revenues 21 15 18 13
Cost of service and other revenues 17 1 18 (1)
-------------------------------------------------------------------------------------------------------
Total cost of revenues 20 11 18 9
Research and development 22 (19) 19 (16)
Marketing, general, and
administrative (2) (16) (6) (15)
-------------------------------------------------------------------------------------------------------
OPERATING INCOME (19) N/M 15 N/M
-------------------------------------------------------------------------------------------------------
Gain on sale of subsidiaries
and investments N/A N/A (62) N/M
-------------------------------------------------------------------------------------------------------
Net interest income 251 (50) 231 (50)
-------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES (17) N/M 1 N/M
Provision for income taxes 358 N/M 163 N/M
-------------------------------------------------------------------------------------------------------
NET INCOME (36) N/M (12) N/M
=======================================================================================================
EARNINGS PER SHARE (40) N/M (16) N/M
=======================================================================================================
</TABLE>
N/A - Not applicable N/M - Not meaningful
OPERATING RESULTS
REVENUES
Total revenues of $594.4 million during the third quarter of 1995
increased $50 million, or 9 percent, compared to the third quarter of 1994.
Product revenues of $475.6 million for the third quarter of 1995 increased $41
million, or 10 percent, over the same quarter of 1994. Service and other
revenues for the third quarter of 1995 of $118.8 million increased 8 percent
over the third quarter of 1994. Total revenues for the first nine months of 1995
of $1.6 billion increased $141 million, or 9 percent, compared to the first nine
months of 1994. Excluding business units sold, total revenues for the nine-month
period increased approximately 11 percent. Product revenues of $1.3 billion
increased $107 million, or 9 percent, over the same period of 1994; excluding
business units sold, product revenues increased 11 percent for the same period
comparison. Service and other revenues of $322.6 million, with and without
business units sold, increased 12 percent and 13 percent, respectively, over the
same nine-month period of 1994.
Increases in product revenues are attributable primarily to increased volume of
unit shipments of the Company's computer systems, particularly high-end and
mid-range NonStop servers. Increases in service and other revenues are the
result of increased consulting revenues.
<PAGE> 11
Product Lines--The table below summarizes total revenue by product lines (which
includes both product revenues and service and other revenues) and the
percentage of total revenues each product line contributed for the indicated
periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
(Dollars in millions) 1995 1994 1995 1994
--------------- -------------- --------------- ---------------
$ % $ % $ % $ %
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computer systems 496.3 83 451.7 83 1,367.7 83 1,222.3 81
Networking 98.1 17 92.2 17 277.3 17 281.3 19
--------------- -------------- --------------- ---------------
Total revenues 594.4 100 543.9 100 1,645.0 100 1,503.6 100
=============== ============== =============== ===============
</TABLE>
Computer systems revenues increased $45 million, or 10 percent, in the
third quarter of 1995 and increased $161 million, or 13 percent, for the
nine-month period ended June 30, 1995, compared to the same 1994 periods,
excluding the effects of business units sold. The increase is a result of
increased unit shipments of high-end and mid-range Himalaya servers, recurring
software license and support revenues, and increased consulting revenues.
Unit shipments of all computer system product lines increased 26 percent and 28
percent, respectively, in the third quarter and first nine months of 1995,
compared to the same 1994 periods (based on the number of processors shipped
excluding workstations and personal computers). For the quarter and nine-month
periods respectively, high-end NonStop computer unit shipments increased 8
percent and 30 percent. Mid-range NonStop computer unit shipments increased 63
percent and 54 percent. These increases were partially offset in the nine-month
period by reductions in the low-end NonStop units of 11 percent. Compared to the
third quarter and first nine months of 1994, revenues from the Integrity product
family increased by 28 percent and 24 percent, respectively.
Recurring software license and support revenues increased 12 percent and 15
percent, respectively, for the third quarter and first nine months of 1995,
compared to the same 1994 periods. These increases contributed 19 percent and 20
percent, respectively, to the net increases in computer systems business,
excluding the effects of business units sold.
Consulting revenues attributable to the computer systems business increased 18
percent and 29 percent, respectively, for the third quarter and first nine
months of 1995 compared to the same 1994 periods. These increases comprised 15
percent of the net increases in the computer systems business for both periods,
excluding business units sold.
Networking revenues increased $6 million, or 6 percent, in the third quarter of
1995 in comparison to the third quarter of 1994. Networking product revenues and
service revenues each increased $3 million, or 3 percent and 20 percent,
respectively, in this quarterly comparison. Networking revenues increased 3
percent during the first nine months of the year in comparison to the first nine
months of 1994, excluding business units sold.
<PAGE> 12
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>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
(Dollars in millions) 1995 1994 1995 1994
------------- ------------- --------------- ---------------
$ % $ % $ % $ %
------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States 292.7 49 259.0 48 816.7 50 774.2 52
Europe
United Kingdom 45.4 8 66.7 12 133.1 8 130.7 9
Germany 30.0 5 22.8 4 72.0 4 64.6 4
Other Europe 76.2 13 72.8 14 219.4 14 196.5 13
------------- ------------- --------------- ---------------
Total Europe 151.6 26 162.3 30 424.5 26 391.8 26
Japan 96.2 16 68.8 13 245.1 15 194.9 13
Asia/Pacific 29.8 5 29.9 5 91.1 5 78.1 5
Americas Division
(excluding the U.S.) 24.1 4 23.9 4 67.6 4 64.6 4
------------- ------------- --------------- ---------------
Total revenues 594.4 100 543.9 100 1,645.0 100 1,503.6 100
============= ============= =============== ===============
</TABLE>
Revenues in the United States increased 13 percent during the third
quarter of 1995 compared to the same 1994 period. The increase in U.S. revenues
is attributable primarily to increased computer product revenues -- increased
volume of unit shipments of the Company's high-end and mid-range NonStop
servers. Excluding business units sold, U.S. revenues increased 8 percent during
the first nine months of 1995, compared to the prior year. Domestic results for
this nine-month period are attributable to sales growth into the communications
industry, offset somewhat by reduced computer product revenues across most other
industries.
Revenues in Europe decreased 7 percent during the third quarter of 1995 compared
to the same 1994 period. Computer systems revenues in the United Kingdom were
impacted, quarter over year ago quarter, due to the completion of the first
phase of a large contract in the third quarter of 1994. In the quarter over
quarter comparison, the reduced U.K. computer systems revenues were offset
somewhat by increased revenues in Germany and other parts of Europe. Excluding
the effects of business units sold, European revenues increased 9 percent during
the first nine months of 1995, compared to the prior year. The revenue increase
is attributable to increased unit shipments of over 25 percent, mainly in
mid-range systems, and to foreign currency fluctuations between the periods,
estimated to be 11 percent between the two nine-month periods.
<PAGE> 13
In Japan, revenues increased 40 percent and 26 percent in the third quarter and
first nine months of 1995, respectively, compared to the same 1994 periods. The
increase is primarily due to increased unit shipments of high-end computer
systems, increased consulting revenues, and the impact on revenues of foreign
currency fluctuations, estimated to be 24 percent for the quarter over the
year-ago quarter and 16 percent between the two nine-month periods.
Asia/Pacific revenues decreased 1 percent during the third quarter of 1995
compared to the same 1994 period, primarily as a result of reduced Networking
revenue. Excluding business units sold, Asia/Pacific revenues increased 19
percent during the first nine months of 1995, compared to the prior year. The
increase is primarily a result of increased unit shipments of high-end Himalaya
servers, increased consulting revenues, and the impact on revenues of foreign
currency fluctuations, estimated to be 7 percent between the two nine-month
periods.
COST OF REVENUES
During the third quarter and first nine months of 1995, product margin
percentages declined 4 points to 57 percent and 56 percent, respectively, in
comparison to the same 1994 periods. The decline in product margin percentages
is the result of mix shifts from the direct sales channel to expanding business
through distributor and reseller channels and to an increased contribution to
total revenue from third-party products. Further, shipments of the new Himalaya
K2(x) servers generated higher trade-ins of older NonStop systems. The
unfavorable impact on product margins from these factors was offset slightly by
the strength of foreign markets, where the Company achieves higher unit prices
measured in U.S. dollars. Management expects product margins to decline in the
fourth quarter, compared to the third quarter.
Margins on service and other revenues decreased to 26 percent in the third
quarter of 1995 from 31 percent in the 1994 third quarter. This margin decline
is attributable primarily to a higher contribution to revenues from consulting
and other service activities that generate lower margins. For the first nine
months of 1995, service margins were 29 percent, compared to 33 percent in the
same 1994 period.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the third quarter and first nine
months of 1995 increased $15 million or 22 percent, and $38 million or 19
percent, respectively, compared to 1994 spending. Excluding the effects of
business units sold, research and development expenses increased 22 percent for
the nine-month period ended June 30, 1995. The increase is 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 12 percent of total revenues during the third quarters of 1995 and
1994, respectively. Research and development spending is expected to increase in
the fourth quarter, but not as a percentage of revenues.
<PAGE> 14
MARKETING, GENERAL, AND ADMINISTRATIVE EXPENSES
Marketing, general, and administrative expenses in the third quarter
and for the first nine months of 1995 declined $4 million or 2 percent, and $30
million or 6 percent, respectively, compared to the same 1994 periods. The
impact of business units sold contributed to 49 percent of the decline for the
nine-month period. The remaining decline in the quarter and the nine-month
period is due primarily to reductions in headcount occurring since the third
quarter of 1994. Marketing, general, and administrative expenses are expected to
increase in the fourth quarter, but not as a percentage of revenues.
Aggressive cost containment and restructuring actions have progressively reduced
the ongoing level of fixed expenses. However, certain expenses such as
commissions and incentive compensation for sales and marketing staff will vary
as revenues fluctuate.
IMPACT OF CURRENCY
During the third quarter and first nine months of 1995, in comparison
to the third quarter and first nine months of 1994, the currencies in most
foreign countries where Tandem has significant operations strengthened against
the U.S. dollar. Consequently, the translation of foreign revenues and operating
results had a positive impact on the consolidated 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 the third quarter of 1994, foreign
exchange rate movements had a positive impact on the change in operating income
of approximately $9 million to $11 million.
NET INCOME AND EARNINGS PER SHARE
Net income for the third quarter of 1995 was $30.8 million, or $0.26
per share, compared to $48.5 million, or $0.43 per share, for the third quarter
of 1994. Net income for the first nine months of 1995 was $87.8 million, or
$0.74 per share, compared to $99.2 million, or $0.88 per share, for the first
nine months of 1994. Net income for the nine months ended June 30, 1995 included
an $8.7 million, or $0.07 per share, non-operating gain from the sale of an
equity investment, Lightstream Corporation. The nine-month net income in 1994
included a $23.0 million, or approximately $0.20 per share, non-operating gain
from the sales of ACI and ACI Ltd.
The effective tax rates for the nine month periods ended June 30, 1995 and 1994
were 19 percent and 7 percent, respectively. Excluding the 1995 gain on sale of
subsidiaries and investments which will be offset fully by available net
operating loss carryforwards in the U.S., the effective tax rate for the nine
month period ended June 30, 1995 is 20 percent. The tax provision arises
principally from taxes payable in foreign jurisdictions. The effective tax rate
for the third quarter of 1995 includes an adjustment relating to an
<PAGE> 15
increase in the annual effective tax rate due to changes in both the overall
level and geographic distribution of earnings. Tandem is generating income in
specific foreign jurisdictions, which will result in tax provisions despite loss
carryforwards which are available primarily to offset U.S. and certain other
foreign income.
Weighted average shares outstanding increased from 1994 due to sales of stock to
employees under stock plans and to increased dilutive stock options.
FINANCIAL CONDITION
During the first nine months of 1995, cash and cash equivalents
increased by $10 million, to $134 million. The Company generated $113 million
positive cash flow from operations during the first nine months of the year.
Investing activities in the first nine months of the year consumed approximately
$141 million, principally through the investment in capital equipment and
software. Financing activities provided approximately $32 million, primarily
from the sales of common stock under employee stock plans.
Accounts receivable days increased to 79 days at June 30, 1995, compared to 77
days at September 30, 1994. Inventory days increased to 57 days at June 30,
1995, compared to 54 days at September 30, 1994.
At June 30, 1995, total debt of $140 million, including $115 million of
nonrecourse borrowings against lease receivables, decreased $5 million from
September 30, 1994. Total debt as a percentage of total capital is approximately
11 percent at June 30, 1995, as compared to 13 percent at September 30, 1994.
Cash used for restructuring actions during the first nine months of 1995
aggregated approximately $74 million and was funded by cash generated from
operations.
The Company's sources of working capital include cash generated from operations,
a $150 million financing facility, and other financing arrangements. Management
believes that the financing sources available at June 30, 1995 can adequately
meet Tandem's financing needs, both in the short and the long term.
As of June 30, 1995, the Company had approximately 8,300 full-time equivalent
employees. Headcount is expected to increase slightly during the remainder of
the year.
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.
<PAGE> 16
OUTLOOK AND RISKS
The Company's future operating results may be affected by 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 selling sufficiently
increased unit volumes of computer systems and networking products to achieve
increased revenues, while concurrently controlling the cost structure of the
Company. Increased volume shipments of the Himalaya product family is dependent
upon product acceptance of the K2(x) series of servers by the Company's existing
customer base, as well as successful expansion into new markets, such as
decision support and commercial uses of the Internet. With continued pressures
on product margins, cost control remains a key management focus.
UB Networks' contribution to the Company's operating results is dependent upon
its ability to enhance its existing products and to develop and introduce, on a
timely and cost-effective basis, new products that keep pace with the increasing
technological requirements of the marketplace.
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 in the short term by
significant fluctuations in foreign currency exchange rates.
Tandem, Himalaya, Integrity, and NonStop are trademarks of the Tandem Computers
Incorporated. UB Networks is a trademark of Ungermann-Bass Networks, Inc. UNIX
is a registered trademark in the United States and other countries, licensed
exclusively through X/Open Company Limited. All other brand names and product
names are trademarks or registered trademarks of their respective companies.
<PAGE> 17
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit
Number Exhibit
------- -------
10.1 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 Friedrich, Gerald L. Peterson
and Roel Pieper.
27 Financial Data Schedule
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the third
fiscal quarter.
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Cupertino, State of
California.
TANDEM COMPUTERS INCORPORATED
(Registrant)
Date: August 11, 1995 By: DAVID J. RYNNE
------------------------------
David J. Rynne
Senior Vice President and
Chief Financial Officer
Date: August 11, 1995 By: ANTHONY H. LEWIS, JR.
------------------------------
Anthony H. Lewis, Jr.
Vice President and
Corporate Controller
<PAGE> 1
Exhibit 10.1
FORM OF EMPLOYMENT AGREEMENT
During the quarter ended June 30, 1995, the Company entered into employment
agreements with the following executive officers: James G. Treybig, Robert C.
Marshall, David J. Rynne, Donald E. Fowler, Kurt Friedrich, Gerald L. Peterson,
and Roel Pieper. Such employment agreements provide generally for an initial
term of eighteen months and contain certain severance payments and other
benefits in the event that the executive is terminated during the period of
employment without cause as defined in the employment agreements or in the
event that the executive terminates employment during the period of employment
for good reason as defined in the employment agreement. The employment
agreements also provide for certain additional severance payments and other
benefits in connection with a change of control of the Company.
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of_______________, 1995, is entered
into by and between Tandem Computers Incorporated ("Employer") and
______________________ ("Executive"), and supersedes and replaces any prior
employment agreement previously entered into between Employer or any subsidiary
thereof and Executive.
In consideration of the respective undertakings of Employer
and Executive set forth below, Employer and Executive agree as follows:
1. Employment. Employer hereby employs Executive, and
Executive accepts such employment and agrees to perform services for Employer,
for the period and upon the other terms and conditions set forth in this
Agreement.
2. Term of Employment.
2.01 Period of Employment. The initial term of
Executive's employment pursuant to this Agreement will commence on
________________, 1995 (the "Commencement Date") and, unless terminated at an
earlier date in accordance with Section 5.01 of this Agreement, shall continue
in effect until the date eighteen months after the Commencement Date or as
extended to a later date under Section 5.03(a) or 5.03(e) of this Agreement.
The term of Executive's employment under the terms of this Agreement commencing
on the Commencement Date and ending pursuant to the terms hereof is hereinafter
referred to as the "Period of Employment." The initial eighteen month Period
of Employment under this Agreement shall be subject to possible extension in
twelve month increments in the sole discretion of Employer as follows. Within
one month prior to each anniversary of the Commencement Date during the
Executive's Period of Employment, Employer may elect (which election shall be
made in writing), in its sole discretion, to extend the term of Executive's
employment pursuant to the terms of this Agreement for an additional twelve
month period, under the terms and conditions in effect at the time of such
election, or with such modifications as Employer and Executive may then agree.
Failure of Employer to make any such election shall mean that there is no
extension of the Period of Employment hereunder.
2.02 Expiration of Employment. Executive may
continue employment with Employer after the expiration of the Period of
Employment in which case Executive's employment relationship with Employer will
be governed by such other terms as Executive and Employer may agree or as may
apply under applicable law, and Executive's only rights continuing under this
Agreement shall be those rights that have vested during the Period of
Employment or otherwise continue after the Period of Employment under Section
5.03 or other express terms of this Agreement.
<PAGE> 3
3. Position and Duties.
(a) During the Period of Employment, Executive
agrees to perform such duties and executive
functions as Employer shall assign to him
from time to time and shall have the title of
_______________________________. Executive
shall devote his best efforts and (except as
provided in Section 5.03(e) hereof) full-time
attention to the performance of his duties.
(b) Except upon the prior written consent of
Employer, Executive, during the Period of
Employment, shall not (i) accept any other
employment; or (ii) engage, directly or
indirectly, in any other business, commercial
or professional activity (whether or not
pursued for pecuniary advantage) that is or
may be competitive with Employer, that might
create a conflict of interest with Employer,
or that otherwise might interfere with the
business of Employer, or any affiliate of
Employer.
4. Compensation.
4.01 Base Salary. Employer will pay to Executive
during the Period of Employment an annual base salary to be paid in
substantially equal installments in accordance with Employer's standard payroll
procedures and policies. The initial annual base salary will be at the rate
currently being paid to Executive, and the annual base salary may be increased
from time to time in the sole discretion of Employer (and may not be decreased
except pursuant to a reduction comparable to reductions generally applicable to
similarly situated employees of Employer imposed as part of a company wide
cost-savings initiative).
4.02 Annual Bonus. During the Period of
Employment, Executive will be entitled to participate in Employer's Targeted
Income Plan, or any other bonus plan or program made generally available to
Employer's senior executives (the "Plan"). The award of an annual bonus shall
be subject to the terms and provisions of the Plan, which may be modified from
time to time, and the Executive's annual incentive target bonus may be
increased in the sole discretion of Employer (and may not be decreased except
pursuant to a reduction comparable to reductions generally applicable to
similarly situated employees of Employer imposed as part of a company wide
cost-savings initiative).
4.03 Stock Options. During the Period of
Employment, Executive will be eligible to receive grants of Employer's stock
options or other stock incentive awards under programs which are made generally
available to Employer's senior executives from time to time. Such grants are
highly discretionary and will be subject to the terms of the applicable plans
and agreements adopted by Employer from time to time.
2
<PAGE> 4
4.04 Participation in Other Benefit Plans. During
the Period of Employment, Executive will be entitled to participate in
Employer's retirement plans, medical and dental plans, disability plans, life
insurance plans, and other Employer benefits not described elsewhere in this
Section 4 which are made generally available to Employer's senior executives
from time to time to the extent that Executive's age, position and other
factors qualify him for such benefits.
4.05 Fringe Benefits and Perquisites: Vacation and
Sick Leave. During the Period of Employment, Employer will provide Executive
with such fringe benefits, perquisites, vacation and sick leave as Employer
from time to time makes generally available to its senior executives.
5. Termination and Change in Control.
5.01 Grounds for Termination. The Period of
Employment will terminate prior to the expiration of the term set forth in
Section 2 of this Agreement in the event that:
(a) Executive dies.
(b) Executive becomes permanently disabled and
qualifies for payments under Employer's
disability plans for a period covering 90
consecutive days.
(c) Employer terminates the Period of Employment
for Cause. "Cause" means termination upon
(i) willful and substantial failure by
Executive to perform his duties with Employer
(other than due to disability); (ii) willful
engaging by Executive in conduct which is
demonstrably and materially injurious to
Employer or that demonstrates gross unfitness
for service; (iii) Executive's conviction of
a felony which impairs his ability
substantially to perform his duties with
Employer or other felony involving dishonesty
or breach of trust; or (iv) any material
breach by Executive of the terms of this
Agreement. Executive will not be subject to
termination for "Cause" without (A)
reasonable written notice to Executive
setting forth the reasons for Employer's
intention to terminate Executive and (B) an
opportunity for Executive to cure any of the
actions or omissions forming the basis for
such intended termination, if possible,
within 15 days after receipt of such written
notice.
(d) Executive terminates the Period of Employment
for Good Reason. "Good Reason" means
termination by Executive due to (i) a
material reduction in Executive's position
(status, offices, titles, or reporting
requirements) , authorities, duties or
responsibilities; (ii) a reduction in
Executive's annual base salary or target
annual bonus, other than a reduction
comparable to
3
<PAGE> 5
reductions generally applicable to similarly
situated employees of Employer imposed as
part of a company wide cost-savings
initiative; (iii) a requirement for
Executive to move his principal office in
excess of 30 miles from the present location
of Executive's principal office; or (iv) any
material breach by Employer of the terms of
this Agreement. Executive may not terminate
his employment for "Good Reason" without
(A) reasonable written notice to Employer
setting forth the reasons for Executive's
intention to terminate employment and (B) an
opportunity for Employer to cure any of the
actions or omissions forming the basis for
such intended termination, if possible,
within 15 days after receipt of such written
notice.
(e) Employer terminates the Period of Employment
without Cause, other than pursuant to Section
5.01(a) or (b) above.
(f) Executive voluntarily terminates the Period
of Employment without Good Reason, other than
pursuant to Section 5.01(a) or (b) above.
5.02 Effect of Termination.
(a) In the event of termination of the Period of
Employment pursuant to the provisions of
Section 5.01(a) above, Executive's estate
will be entitled to be paid the annual base
salary otherwise payable to Executive
pursuant to Section 4.01 of this Agreement
only through the date of termination, and
Employer will continue to provide Executive
with the benefits described in Sections 4.04
and 4.05 above through the date of
termination. In addition, Executive's
beneficiaries will be entitled to any
benefits provided under Employer's life
insurance plans.
(b) In the event of termination of the Period of
Employment pursuant to the provisions of
Section 5.01(b) above, Executive will be
entitled to be paid the annual base salary
otherwise payable to Executive pursuant to
Section 4.01 of this Agreement only through
the date of termination, and Employer will
continue to provide Executive with the
benefits described in Sections 4.04 and 4.05
above through the date of termination.
Executive will also be entitled to benefits
in accordance with the terms and conditions
of Employer's disability plans.
(c) In the event of termination of the Period of
Employment pursuant to the provisions of
Section 5.01(c) or (f) above, Employer will
have no further obligations
4
<PAGE> 6
hereunder, except that (i) Employer will pay
Executive his annual base salary and continue
to provide Executive with the benefits
described in Sections 4.04 and 4.05 above
through the date of termination and shall
remain obligated under Sections 5.03(h) and
the first and third sentences of Section 7.06
(a), and (ii) in the event of a termination
pursuant to Section 5.01(f) because Executive
does not accept Employer's offer under clause
(A) of Section 5.03(e)(ii), Employer shall
remain obligated under Section 5.03(c)(v) and
(viii). Executive will not be paid any
annual bonus pursuant to Section 4.02 of this
Agreement for the fiscal year in which
the termination occurs or any subsequent
fiscal year, unless otherwise provided in
section 5.03(e).
(d) In the event of termination of the Period of
Employment pursuant to the provisions of
Section 5.01(d) or (a) above, Employer will
(i) pay Executive his annual base salary
through the date of termination at the rate
in effect at the time notice of termination
is given; (ii) pay Executive a pro-rated
annual bonus for the fiscal year in which
termination occurs for the portion of the
fiscal year prior to the date of termination,
based on Employer's performance through the
end of the fiscal quarter in which the
termination occurs; (iii) (except as provided
in section 5.03(f)) pay to Executive, not
later than 30 days following the date of
termination, a lump sum payment equal to
three times the sum of (A) Executive's annual
base salary at the rate in effect at the time
notice of termination is given plus (B)
Executive's annual incentive target bonus
under the Plan at the time notice of
termination is given as if such bonus in paid
at 100% of the potential payout under such
Plan; (iv) continue to provide for a period
of three years from the date of termination
the benefits described in Section 4.04 (with
disability benefits to be calculated as of
the date of termination) to which Executive
was entitled on the date of termination; (v)
continue to provide for a period of three
years from the date of termination the fringe
benefits and perquisites described in Section
4.05 to which Executive was entitled on the
date of termination; (vi) (except as provided
in section 5.03(e)) make a lump sum payment
to Executive in the amount of _____________;
(vii) pay for individual outplacement
counseling services to Executive up to a
maximum of $50,000; and (viii) extend any
Employer loan guarantees and renew any
Employer loans to Executive for a period of
three years from the date of termination.
5
<PAGE> 7
(e) Notwithstanding any other provision of this
Agreement, Employer shall have the right in
its sole discretion at any time, upon notice
to Executive, to terminate Executive's
employment without Cause as provided in
Section 5.01(e). In the event of any such
termination, Employer may condition making
payment of the amounts contemplated to be
paid under this Agreement upon Executive's
execution and delivery of a release and
settlement agreement in favor of Employer of
all claims by Executive for payments under
this Agreement or otherwise arising out of
Executive's employment with Employer, except
for any claims which Executive may have based
on race, sex or age discrimination. Any
decision of Employer to terminate Executive's
employment without Cause shall not be subject
to arbitration under this Agreement, nor may
a termination without Cause be challenged for
any reason in any court of law or before any
federal or state administrative agency or in
any other legal proceeding; provided that
nothing in this paragraph (e) shall preclude
arbitration of any claim for failure to pay
amounts owed to Executive as expressly
provided herein.
5.03 Provisions For Change In Control. The following
special provisions will apply in connection with a Change in Control which is
publicly announced during the Period of Employment. As used in this Agreement,
"Change in Control" shall have the meaning given to it in Section 7.12. Unless
otherwise expressly provided, the benefits under this Section 5.03 will be in
addition to all other benefits to which Executive may be entitled under other
provisions of this Agreement.
(a) When Employer publicly announces during the
Period of Employment execution by Employer of
a letter of intent or definitive agreement to
consummate a transaction that would
constitute a Change in control, Employer will
pay to Executive a special incentive bonus in
the amount of $______________. The period
following such announcement until the Change
in Control occurs or the transaction is
abandoned shall be included within the period
of Employment for all purposes of this
Agreement, and the Period of Employment shall
thereby be extended to the expiration of such
period.
(b) Upon the change in Control contemplated by
the announcement described in Section
5.03(a), if Executive has remained in
Employer's employment through the Change in
Control or Executive's employment is
terminated after the announcement described
in Section 5.03(a) either by Employer without
Cause or by Executive for Good Reason,
Employer will pay to Executive a special
extraordinary efforts bonus for
6
<PAGE> 8
special efforts to accomplish the successful
consummation of the Change in Control
transaction.
(c) Upon the Change in Control aforementioned in
Section 5.03(b), if Executive has remained in
Employer's employment through the Change in
Control or Executive's employment is
terminated after the announcement described
in Section 503(a) either by Employer without
Cause or by Executive for Good Reason,
Employer shall use its best efforts to cause
all stock options then held by Executive
which have not yet vested to be assumed by
the acquiring company, or to cause stock
options with similar terms and conditions in
the acquiring company to be substituted
therefor, and, in either case, Executive
shall continue to vest in such stock options
in the acquiring company in accordance with
their terms during additional employment and
consulting periods described in paragraph (e)
below and during such other periods as may
apply pursuant to the terms of such stock
options. The time to exercise any stock
options in the acquiring company shall not
terminate before 90 days following the end of
the additional employment and consulting
periods described in paragraph (e) below.
(d) Upon the Change in Control aforementioned in
Section 5.03(b), if Executive has remained in
Employer's employment through the Change in
Control or Executive's employment is
terminated after the announcement described
in Section 5.03(a) either by Employer without
Cause or by Executive for Good Reason,
Employer will pay to Executive the full
(instead of pro-rated) annual bonus which
would be payable to Executive for the entire
fiscal year in which the Change in Control
occurs, based on the assumption that Employer
would have continued to perform for the full
fiscal year at the same level of performance
which it had achieved through the date of the
Change in Control. All special payments
which are made and expenses which are
incurred on account of the Change in Control
will be disregarded in measuring Employer's
performance. Upon receipt of such payment,
Executive shall not thereafter be entitled to
receive any payment pursuant to Section 5.02
(d)(ii).
(e) (i) Employer agrees to employ Executive,
and Employee hereby accepts
employment, as a full-time employee
for the first six months following
the Change in Control aforementioned
in Section 3.03(b) and to pay
Executive (I) a monthly base salary
at twice the monthly rate of base
salary in effect immediately prior
to the change in Control and
7
<PAGE> 9
(II) a bonus equal to Executive's
annual incentive target bonus under
the Plan at the time of the Change
in Control (for the entire fiscal
year in which the change in control
occurs) as if such bonus is paid
at 100% of the potential payout
under such Plan.
(ii) Employer further agrees to offer to
retain Executive during the second
six months following the Change in
Control either:
(A) as a full-time employee, in
which event Employer will pay
Executive seventy-five
percent (75%) of the monthly
base salary and bonus which
is payable to Executive under
the preceding sentence during
the first six months
following the Change in
Control, or
(B) as a part-time consultant or
employee, in which event
Employer will pay Executive
fifty percent (50%) of the
monthly base salary and bonus
which is payable to Executive
under the preceding sentence
during the first six months
following the Change in
Control.
(iii) If Employer does not offer to retain
Executive as a full-time employee
pursuant to subparagraph (ii)(A)
above, such action by Employer shall
be deemed to be a termination of
Executive's employment by Employer
without Cause for purposes of this
Agreement, including Section 5.03(f)
below; provided, however, that
nothing in this Section 5.03(e)
shall affect or interfere with
Employer's right to terminate
Executive for Cause during
Executive's full-time employment in
accordance with the provisions of
Section 5.01(c).
(iv) If Employer does offer to retain
Executive as a full-time employee
pursuant to subparagraph (ii)(A)
above, and Executive accepts such
offer and is employed as a full-time
employee for such second six-month
period, the Period of Employment
will expire on the first anniversary
of the Change in Control.
Executive's employment with Employer
shall continue thereafter at the
level of monthly base salary and
bonus which were in effect
immediately prior to the Change in
Control, or upon such other terms as
Employer and Executive may agree,
until terminated for any reason.
(v) If Employer does offer to retain
Executive as a full-time employee
pursuant to subparagraph
8
<PAGE> 10
(ii)(A) above, and Executive does not accept
such offer, Executive may elect to be a
part-time employee or consultant during the
second six months following the Change in
Control on the terms described in
subparagraph (ii)(B) above. If Executive
elects such position as a part-time employee
or consultant, his employment with Employer
shall terminate upon the expiration of such
second six-month period. Such election by
Executive shall be deemed to be a voluntary
termination of employment by Executive
without good Reason at the end of such second
six month period for purposes of this
Agreement, including section 5.03(f) below;
provided, however, that nothing in this
section 5.03(e) shall affect or interfere
with Executive's right to terminate
employment for Good Reason during Executive's
full-time employment in accordance with the
provisions of Section 5.01(d).
(vi) The Period of Employment shall be extended
to the expiration of both such six month
periods described in subparagraphs (e)(i)
and (ii) above, unless and until Executive
declines Employer's offer of full or
part-time employment or consultancy as
described in subparagraphs (e)(i) and
(ii) above, provided, that the compensation
and bonus payments described in
subparagraphs (e)(i) and (ii) above shall
be in lieu of all amounts otherwise owing
pursuant to Sections 4.01 or 4.02 hereof with
respect to such periods.
(vii) If Executive is employed as a full-time
employee for the first six months and
retained as a full or part-time employee or
consultant for the second six months after
the Change in Control under the terms
described above in this paragraph (e), and
Employer performs its obligations under this
paragraph (e), Executive shall not be
entitled to receive any contribution or
payment pursuant to Section 5.02(d)(vi).
(viii) Upon any breach of Employer's obligations
under this paragraph (e) (which breach
continues following written notice by
Executive and the expiration of a reasonable
opportunity for cure), Executive shall be
entitled to receive the payment or
contribution specified in Section
5.02(d)(vi), in addition to the amounts
provided in section 5.03(f) below to the
extent applicable.
9
<PAGE> 11
(f) In the event of termination of Executive's employment
by Employer without Cause (other than due to
Executive's death or permanent disability) or by
Executive for Good Reason at any time within 36
months after the Change in Control aforementioned in
Section 5.03(b), Employer will pay to Executive, not
later than 30 days following the date of termination,
a lump sum Payment equal to two and one-half times
the sum of (A) Executive's annual base salary at the
rate in effect immediately prior to the Change in
Control plus (B) Executive's annual incentive target
bonus under the Plan at the time of the Change in
Control as if such bonus is paid at 100% of the
potential payout under such Plan. Upon receipt of
such payment, Executive shall not be entitled to
receive any payment pursuant to Section 5.02(d)(iii).
(g) In the event of termination of Executive's employment
by Employer without Cause (other than due to
Executive's death or permanent disability) or by
Executive for Good Reason any time within 36 months
after the Change in Control aforementioned in Section
5.03(b), Employer will continue to provide the
benefits described in Sections 5.02(d)(iv) and (v)
for a period of three years from the date of
termination and will pay for individual outplacement
counseling services described in Section
5.02(d)(vii). If Employer is unable for any reason to
continue Executive's coverage under its medical
benefits plan, Employer shall provide equivalent
benefits coverage through insurance.
(h) In the event a Change in Control occurs and Executive
becomes entitled to payments under this Agreement,
Employer shall cause its independent auditors
promptly to review, at Employer's sole expense, the
applicability to such payments of Section 4999 of the
Internal Revenue Code of 1986, as amended (the
"Code"). If such auditors shall determine that any
payment or distribution of any type by Employer to
Executive or for his benefit, whether paid or payable
or distributed or distributable pursuant to the terms
of this Agreement or otherwise (the "Total
Payments"), would be subject to the excise tax
imposed by Section 4999 of the Code, or any interest
or penalties with respect to such excise tax (such
excise tax, together with any such interest and
penalties are collectively referred to as the "Excise
Tax"), then Executive shall be entitled to receive an
additional cash payment from Employer (a "Gross-Up
Payment") within 30 days of such determination equal
to an amount such that after payment by Executive of
all taxes (including any interest or penalties
imposed with respect to such taxes), including any
Excise Tax and employment taxes imposed upon the
Gross-Up Payment, Executive would retain an amount of
the Gross-Up Payment equal to the Excise Tax imposed
upon the Total Payments; provided, however, that
Executive will
10
<PAGE> 12
be entitled to receive a Gross-Up Payment
only if the amount of the payment defined
in Section 28OG(b)(2) of the Code exceeds
the sum of (A) $100,000 plus (B) 2.99
times the Executive's "base amount" as
defined in Section 28OG(b)(3) of the
Code, and provided further, that if
Executive is not entitled to receive a
Gross-Up payment, Executive will receive
only an amount of Total Payments that
would not include any payment defined in
Section 28OG(b)(1) of the Code. For
purposes of the foregoing determination,
Executive's income tax rate shall be
deemed to be the highest statutory
marginal Federal and California income
tax rates (on a combined basis)
applicable to individuals which are then
in effect. Employer's independent
auditors shall make their determination
based upon a substantial authority
standard under Section 6662 of the Code.
The intent of the parties is that Employer
shall be solely responsible for, and
shall pay, any Excise Tax on the Total
Payments and Gross-up Payment and any
income and employment taxes (including,
without limitation, penalties and
interest) imposed on any Gross-Up
Payment, as well as any loss of tax
deduction caused by the Gross-Up Payment.
An example of the calculation of the
Gross-Up Payment is set forth in
Appendix A. If no determination by
Employer's auditors is made prior to the
time a tax return reflecting any portion
of the Total Payments is required to be
filed by Executive, Executive will be
entitled to receive a Gross-Up Payment
calculated on the basis of the Total
Payments reported by Executive in such
tax return, within 30 days of the filing
of such tax return. In all events, if
any tax authority determines that a
greater Excise Tax should be imposed upon
the Total Payments than is determined by
Employer's independent auditors or
reflected in Executive's tax returns,
Executive shall be entitled to receive
the full Gross-Up Payment calculated on
the basis of the amount of Excise Tax
determined to be payable by such tax
authority from Employer within 30 days of
such determination.
6. Taxes. All payments to be made to Executive under this
Agreement will be net of required withholding of federal, state income and
employment taxes.
7. Miscellaneous.
7.01 Governing Law. This Agreement is made under and
shall be governed by and construed in accordance with the laws of the State of
California.
7.02 Successors. This Agreement shall be binding upon and
inure to the benefit of Executive and Executive's heirs and estate and of
Employer and its successors. Employer will require any successor (whether by
purchase, merger, consolidation, or otherwise) to all or substantially all of
the business and/or assets of Employer to expressly assume this
11
<PAGE> 13
Agreement. Failure of Employer to obtain such assumption of this Agreement
prior to the consummation of any such succession shall be a breach of this
Agreement. In any case where a successor assumes Employer's obligations under
this Agreement by operation of law, the requirements imposed in thus Section
7.02 will be satisfied if the successor acknowledges to Executive in writing
that it shall assume or has assumed Employer's obligations under this Agreement
by operation of law within 30 days of receipt of a written notice from
Executive requesting such acknowledgment.
7.03 Amendments. No amendment or modification of this
Agreement will be deemed effective unless made in writing and signed by each
party hereto.
7.04 No Waiver. No term or condition of this Agreement
will be deemed to have been waived, nor will there by any estoppel to enforce
any provisions of this Agreement, except by a statement in writing signed by
the party against whom enforcement of the waiver or estoppel is sought. Any
written waiver will not be deemed a continuing waiver unless specifically
stated, will operate only as to the specific term or condition waived and will
not constitute a waiver of such term or condition for the future or as to any
act other than that specifically waived.
7.05 Assignment. This Agreement is not assignable, in
whole or in part, by any party without the written consent of the other party.
7.06 Legal and Accounting Fees.
(a) Employer will pay legal and accounting fees
charged by Munger, Tolles & Olson and Price
Waterhouse in connection with entering into
this Agreement. In addition, upon
Executive's request, Employer will also pay
or reimburse Executive for the cost, not to
exceed $15,000, of professional accounting
and tax services in connection with the
receipt of payments under Section 5.03 of
this Agreement unless the Period of
Employment terminated under Section 5.01(c)
or (f). Employer will make a tax gross-up
payment to Executive, if necessary, to offset
any taxable income which is reported for or
realized by Executive with respect to these
legal and accounting fees.
(b) Each party will bear its own legal and
accounting fees in connection with any claim
or dispute arising out of or relating to this
Agreement.
7.07 Severability. To the extent that any provision of
this Agreement shall be determined to be invalid or unenforceable, the invalid
or unenforceable portion of such provision will be deleted from this Agreement,
and the validity and enforceability of the remainder of such provision and of
this Agreement will not be affected.
12
<PAGE> 14
7.08 Notices. All notices under this Agreement will be in
writing and will be deemed effective when delivered in person (in Employer's
case, to its Secretary) or twenty four (24) hours after deposit thereof in the
U.S. mails, postage prepaid, for delivery as registered or certified mail --
addressed, in the case of Executive, to him at his last residential address
known by Employer and, in the case of Employer, to its corporate headquarters,
attention to its Secretary, or to such other address as Executive or Employer
may designate in writing at any time or from time to time to the other party.
In lieu of notice by deposit in the U.S. mails, a party may give notice by
telegram, telex or telecopy, in which case such notice will be deemed effective
upon receipt.
7.09 Counterparts. This Agreement may be executed by the
parties hereto in counterparts, each of which will be deemed to be an original,
but all such counterparts will together constitute one and the same instrument.
7.10 Headings. The headings of sections herein are
included solely for convenience of reference and shall not control the meaning
or interpretation of any of the provisions of this Agreement.
7.11 Arbitration.
(a) All disputes between Executive (and his
attorneys, successors, and assigns) and
Employer (and its employees, agents,
successors, attorneys and assigns) of any
kind whatsoever, including, without
limitation, all disputes relating in any
manner to the employment or termination of
Executive and all disputes arising under this
Agreement, but excluding any claims by
Executive based on race, sex or age
discrimination ("Arbitrable Claims") shall be
resolved by arbitration. All persons and
entities specified in the preceding sentence
(other than Employer and Executive) shall be
considered third party beneficiaries of the
rights and obligations created by this
Section on Arbitration. Arbitration shall be
final and binding upon the parties and shall
be the exclusive remedy for all Arbitrable
Claims. THE PARTIES HEREBY WAIVE ANY RIGHTS
THEY MAY HAVE TO TRIAL BY JURY IN REGARD TO
ARBITRABLE CLAIMS.
(b) Arbitration of Arbitrable Claims shall be in
accordance with the Employment Dispute
Resolution Rules of the American Arbitration
Association ("AAA Employment Rules"), except
as provided otherwise in this Agreement. The
arbitrator shall be selected from a source
provided by the Judicial Arbitration and
Mediation Service ("J.A.M.S."). In any
arbitration, the burden of proof shall be
allocated as provided by applicable law.
Either party may bring an action in court to
compel arbitration under this Agreement and
to enforce an arbitration award. Otherwise,
neither party shall initiate or prosecute any
lawsuit or
13
<PAGE> 15
administrative action in any way related
to any Arbitrable Claim. All arbitration
hearings under this Agreement shall be
conducted in San Francisco, California. The
Federal Arbitration Act shall govern the
interpretation and enforcement of this
Section 7.11. The fees of the arbitrator
shall be split between both parties equally.
(c) All proceedings and all documents prepared in
connection with any Arbitrable Claim shall be
confidential and, unless otherwise required
by law, the subject matter thereof shall not
be disclosed to any person other than the
parties to the proceedings, their counsel,
witnesses and experts, the arbitrator, and,
if involved, the court and court staff.
(d) The rights and obligations of Executive and
Employer set forth in this Section 7.11 with
respect to arbitration shall survive the
termination of Executive's employment and the
expiration of this Agreement.
7.12 Change in Control. A "Change in Control" shall be deemed to
have occurred upon: (i) the acquisition by any Person, other than Employer or
one or more Persons controlling, controlled by or under common control with
Employer, of beneficial ownership (as determined pursuant to Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) of eighty-five percent (85%)
or more of Employer's outstanding voting securities, or (ii) a change in the
composition of the Board of Directors of Employer (the "Board") over any period
of thirty-six (36) consecutive months or less such that a majority of the Board
members (determined by rounding up to the next whole number) cease to be
comprised of individuals who either (A) were Continuing Directors at the start
of such period or (B) were elected or nominated for election as Board members
during such period by at least a majority of the Continuing Directors in office
at the time such election or nomination was approved by the Board.
The 85% test in subparagraph (i) of the Change in Control
definition shall be measured at the time the transaction resulting in the
Change in Control first commences, and there shall be excluded from such
calculation, to the extent provided pursuant to Section 203 (or any successor
provision) of the Delaware General Corporation Law, shares owned by (i) persons
who are both officers and directors of Employer and (ii) employee stock plans
in which employee participants do not have the right to determine
confidentiality whether shares held subject to the plan are to be tendered in a
tender or exchange offer.
"Continuing Director" shall mean any member of the Board who
has served continually as such Board member from and before the commencement of
the transaction resulting in the Change of Control.
14
<PAGE> 16
"Person" shall mean any individual firm, partnership,
corporation or other entity and shall include any successor of such entity and
all Affiliates, Associates and Subsidiaries (as such terms are defined in Rule
12b-2 of the Securities Exchange Act of 1934, as amended) of such entity.
IN WITNESS WHEREOF, Employer and Executive have executed this
Agreement as of the date set forth in the first paragraph above.
EMPLOYER: TANDEM COMPUTERS INCORPORATED
By____________________________
Its___________________________
EXECUTIVE: ______________________________
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 134,413
<SECURITIES> 0
<RECEIVABLES> 533,669
<ALLOWANCES> 18,045
<INVENTORY> 184,964
<CURRENT-ASSETS> 973,549
<PP&E> 1,278,848
<DEPRECIATION> 699,926
<TOTAL-ASSETS> 1,843,829
<CURRENT-LIABILITIES> 678,549
<BONDS> 76,735
<COMMON> 2,988
0
0
<OTHER-SE> 1,085,557
<TOTAL-LIABILITY-AND-EQUITY> 1,843,829
<SALES> 1,322,393
<TOTAL-REVENUES> 1,644,956
<CGS> 576,466
<TOTAL-COSTS> 804,761
<OTHER-EXPENSES> 235,286
<LOSS-PROVISION> 2,326
<INTEREST-EXPENSE> 9,669
<INCOME-PRETAX> 107,712
<INCOME-TAX> 19,957
<INCOME-CONTINUING> 87,755
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87,755
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.74
</TABLE>
