<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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.
Class: Common Stock, Outstanding at May 8, 1995
$.025 par value 116,285,345 shares
<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 and six-month periods ended
March 31, 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 six months ended
-------------------------- -----------------------------
March 31, March 31, March 31, March 31,
(In thousands except per share amounts) 1995 1994 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Product revenues $ 409,814 $ 394,901 $ 846,801 $ 781,097
Service and other revenues 106,128 89,227 203,741 178,584
- --------------------------------------------------------------------------------------------------
Total revenues 515,942 484,128 1,050,542 959,681
- --------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of product revenues 183,667 163,853 370,196 320,420
Cost of service and other revenues 74,610 54,418 140,021 118,742
Research and development 78,500 64,363 153,486 130,065
Marketing, general, and
administrative 164,345 173,628 332,839 358,517
- --------------------------------------------------------------------------------------------------
Total costs and expenses 501,122 456,262 996,542 927,744
- --------------------------------------------------------------------------------------------------
OPERATING INCOME 14,820 27,866 54,000 31,937
Gain on sale of subsidiaries
and investments 8,677 -- 8,677 23,000
Net interest income 1,700 417 2,745 850
- --------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 25,197 28,283 65,422 55,787
Provision for income taxes 3,511 2,500 8,511 5,100
- --------------------------------------------------------------------------------------------------
NET INCOME $ 21,686 $ 25,783 $ 56,911 $ 50,687
==================================================================================================
EARNINGS PER SHARE $ .18 $ .23 $ .48 $ .45
==================================================================================================
Weighted average shares
outstanding 119,084 113,519 118,535 112,659
==================================================================================================
</TABLE>
See accompanying notes.
<PAGE> 4
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
March 31, September 30,
(In thousands except per share amount) 1995 1994
- ----------------------------------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 192,582 $ 124,042
Accounts receivable, net 474,335 512,334
Current portion of lease receivables 60,429 61,516
Inventories 168,039 159,609
Prepaid expenses and other 63,817 70,529
- ----------------------------------------------------------------------------------------------------------------
Total current assets 959,202 928,030
- ----------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT, at cost 1,251,454 1,178,888
Accumulated depreciation and amortization (679,231) (630,652)
- ----------------------------------------------------------------------------------------------------------------
Net property, plant, and equipment 572,223 548,236
- ----------------------------------------------------------------------------------------------------------------
COST IN EXCESS OF NET ASSETS ACQUIRED, NET 5,647 6,560
- ----------------------------------------------------------------------------------------------------------------
LEASE RECEIVABLES 74,744 76,765
- ----------------------------------------------------------------------------------------------------------------
OTHER ASSETS 219,888 202,294
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,831,704 $ 1,761,885
================================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
- ----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 157,167 $ 150,933
Accrued liabilities 479,151 527,510
Current maturities of long-term obligations 62,351 58,120
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 698,669 736,563
- ----------------------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS 78,545 86,481
- ----------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' INVESTMENT
Common stock $.025 par value, authorized
400,000 shares, outstanding 119,155 shares at
March 31 and 116,237 shares at September 30 2,979 2,905
Additional paid-in capital 682,653 646,256
Retained earnings 393,128 332,460
Accumulated translation adjustments 26,644 9,192
Treasury stock, at cost (50,914) (9,062)
Deferred ESOP compensation -- (42,910)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' investment 1,054,490 938,841
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 1,831,704 $ 1,761,885
================================================================================================================
</TABLE>
See accompanying notes.
<PAGE> 5
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
For the six months ended
------------------------------
March 31, March 31,
(In thousands) 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 56,911 $ 50,687
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 80,818 83,267
Gain on sale of subsidiaries (8,677) (23,000)
Loss (gain) on dispositions of property, plant,
and equipment 1,014 (310)
Changes in :
Accounts receivable 57,606 3,024
Inventories (5,144) (18,932)
Lease receivables 1,818 14,605
Non-debt current liabilities and other (55,104) (79,650)
- ------------------------------------------------------------------------------------
Net cash provided by
operating activities 129,242 29,691
- ------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant, and equipment (79,430) (55,889)
Proceeds from dispositions of property, plant,
and equipment 2,898 22,760
Sale of subsidiaries and investments,
net of cash disposed 11,642 70,519
Increase in other assets (30,749) (56,250)
- ------------------------------------------------------------------------------------
Net cash used in
investing activities (95,639) (18,860)
- ------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings 29,709 33,204
Repayments (36,361) (51,194)
Issuance of Common Stock under
stock plans, including tax benefits 35,915 14,172
- ------------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities 29,263 (3,818)
- ------------------------------------------------------------------------------------
Effect of exchange rate fluctuations on cash
and equivalents 5,674 479
- ------------------------------------------------------------------------------------
NET INCREASE IN CASH AND EQUIVALENTS 68,540 7,492
Cash and equivalents at beginning of period 124,042 106,179
- ------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 192,582 $ 113,671
====================================================================================
</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>
- ----------------------------------------------------------------------------------------------
March 31, September 30,
(In thousands) 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Purchased parts and subassemblies $ 66,977 $ 52,370
Work in process 29,431 29,234
Finished goods 71,631 78,005
- ----------------------------------------------------------------------------------------------
Total $ 168,039 $ 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 March
31, 1995 totaled $1.9 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 six months ended March 31,
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, six months ended
March 31, 1995 26,513 15,755 9,355 886 9,123 61,632
- -------------------------------------------------------------------------------------------------------------
Balances, March 31, 1995 $ 25,553 $ 38,987 $ 14,467 $ 9,825 $ 22,714 $111,546
=============================================================================================================
Cash used, six months ended
March 31, 1995 $ 26,513 $ 12,967 $ 9,355 $ 67 $ 8,923 $ 57,825
=============================================================================================================
</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, an equity investee of the Company.
The transaction has not yet become effective, and accordingly, no amounts have
been recorded related to the transaction. The Company does not anticipate the
transaction to have a material impact 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 six-month periods ended March
31, 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.
<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 second
quarter and the first six 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 the
effect 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 Item 2 represent the Company's fiscal years.
PERCENT OF TOTAL REVENUES
(Except cost of product and service)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
---------------------- -----------------------
1995 1994 1995 1994
---------------------- -----------------------
<S> <C> <C> <C> <C>
Product revenues 79 82 81 81
Service and other revenues 21 18 19 19
- -------------------------------------------------------------------------------------------------------
TOTAL REVENUES 100 100 100 100
- -------------------------------------------------------------------------------------------------------
Cost of product revenues 45 41 44 41
Cost of service and other revenues 70 61 69 66
- -------------------------------------------------------------------------------------------------------
Total cost of revenues 50 45 48 46
Research and development 15 13 15 14
Marketing, general, and
administrative 32 36 32 37
- -------------------------------------------------------------------------------------------------------
OPERATING INCOME 3 6 5 3
- -------------------------------------------------------------------------------------------------------
Gain on sale of subsidiaries
and investments 2 N/A 1 3
- -------------------------------------------------------------------------------------------------------
Net interest income - - - -
- -------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 5 6 6 6
Provision for income taxes 1 1 1 1
- -------------------------------------------------------------------------------------------------------
NET INCOME 4 5 5 5
=======================================================================================================
</TABLE>
N/A - Not applicable
<PAGE> 10
PERCENT INCREASE (DECREASE)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
------------------ -------------------
1995 1994 1995 1994
------------------ -------------------
<S> <C> <C> <C> <C>
Product revenues 4 (7) 8 (4)
Service and other revenues 19 (4) 14 (5)
- ----------------------------------------------------------------------------
TOTAL REVENUES 7 (6) 9 (4)
- ----------------------------------------------------------------------------
Cost of product revenues 12 7 16 12
Cost of service and other revenues 37 (13) 18 (3)
- ----------------------------------------------------------------------------
Total cost of revenues 18 1 16 8
Research and development 22 (19) 18 (15)
Marketing, general, and
administrative (5) (15) (7) (14)
- ----------------------------------------------------------------------------
OPERATING INCOME (47) 68 69 33
- ----------------------------------------------------------------------------
Gain on sale of subsidiaries
and investments N/M N/A (62) N/M
- ----------------------------------------------------------------------------
Net interest income 308 (59) 223 (50)
- ----------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES (11) 61 17 117
Provision for income taxes 40 (61) 67 (46)
- ----------------------------------------------------------------------------
NET INCOME (16) 132 12 77
============================================================================
EARNINGS PER SHARE (22) 130 7 73
============================================================================
</TABLE>
N/A - Not applicable N/M - Not meaningful
OPERATING RESULTS
OVERVIEW
Product revenue growth for the second quarter of 1995 (4 percent over
the second quarter of 1994) was lower than the product revenue growth achieved
in the first quarter of 1995 (13 percent over the first quarter of 1994). This
reduction in product revenue growth is attributable primarily to the following
key events occurring during the second quarter of 1995.
In January 1995, the Company introduced its newest generation of the NonStop
Himalaya range of servers, the K2(x) series. The K20000 and K2000 servers in the
K2(x) series began shipping to customers during the second half of March 1995.
The Company experienced certain transitional problems with the new product
introductions, including such problems as part supply shortages. Accordingly,
not all of the orders placed during the second quarter were shipped by the end
of the quarter.
Also during the second quarter the Company consolidated its three Northern
California manufacturing facilities into a single facility in Fremont,
California. As a result, certain management information systems and shipping and
other processes required adaptation. These process changes were not fully
completed by the end of the period and had a negative impact on the results of
the quarter.
<PAGE> 11
REVENUES
Total revenues of $515.9 million during the second quarter of 1995
increased $32 million, or 7 percent, compared to the second quarter of 1994.
Excluding business units sold, total revenues increased approximately 8 percent.
Product revenues of $409.8 million for the second quarter of 1995 increased $15
million, or 4 percent, over the same quarter of 1994; excluding business units
sold, product revenues increased 5 percent for the same quarter comparison.
Service and other revenues for the second quarter of 1995 of $106.1 million,
with and without business units sold, increased 19 percent over the second
quarter of 1994. The second quarter's revenue results were characterized by
strong international growth in the computer systems business -- particularly in
the communications and finance industries -- and increasing consulting revenues,
offset somewhat by declines in domestic computer systems revenues and networking
revenues.
Total revenues for the first six months of 1995 of $1.05 billion increased $91
million, or 9 percent, compared to the first six months of 1994. Excluding
business units sold, total revenues for the six-month period increased
approximately 12 percent. Product revenues of $846.8 million increased $66
million, or 8 percent, over the same period of 1994; excluding business units
sold, product revenues increased 12 percent for the same period comparison.
Service and other revenues of $203.7 million, with and without business units
sold, increased 14 percent and 15 percent, respectively, over the same six-month
period of 1994.
Total revenues decreased 6 percent and 4 percent, respectively, during the
second quarter and first six months of 1994 compared to the 1993 periods.
Excluding the effect of business units sold, product revenues declined 2 percent
and 1 percent, and service and other revenues declined 2 percent and 4 percent
during the 1994 periods. The declines in product revenues resulted primarily
from transitioning to the Company's lower-priced Himalaya server products,
largely offset by additional unit shipments and by increased revenues from its
Integrity family of UNIX(R) server products and UB Networks' products. The
decreases in service and other revenues compared to the 1993 periods resulted
primarily from reductions in hardware service revenues; the continuing
improvement in hardware reliability reduced the pricing for such services.
Historically, the second half of the Company's fiscal year is stronger than the
first. Management believes that this pattern will continue in fiscal 1995.
<PAGE> 12
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 MARCH 31, SIX MONTHS ENDED MARCH 31,
(Dollars in millions) 1995 1994 1995 1994
--------------- ------------------ ------------------- -----------------
$ % $ % $ % $ %
--------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computer systems 426.7 83 387.3 80 871.3 83 770.5 80
Networking 89.2 17 96.8 20 179.2 17 189.2 20
--------------- ------------------ ------------------- -----------------
Total revenues 515.9 100 484.1 100 1,050.5 100 959.7 100
=============== ================== =================== =================
</TABLE>
Computer systems revenues increased $39 million, or 10 percent, in the
second quarter of 1995 and increased $116 million, or 15 percent, for the first
half of 1995, compared to the same 1994 periods, excluding the effects of
business units sold. The increase is a result of recurring software license and
support revenues, increased unit shipments of high-end and mid-range Himalaya
servers, and increased service and other revenues. The increase is offset
somewhat by volume reductions in the Himalaya low-end servers and the Integrity
product family.
Recurring software license and support revenues increased 16 percent and 17
percent, respectively, for the second quarter and first six months of 1995,
compared to the same 1994 periods. These increases contributed 29 percent and 19
percent, respectively, to the net increases in computer systems business.
Unit shipments of all computer system product lines increased 7 percent and 29
percent, respectively, in the second quarter and first six 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 six-month
periods respectively, high-end NonStop computer unit shipments increased 43
percent and 51 percent. Mid-range NonStop computer unit shipments increased 63
percent and 48 percent. These increases were partially offset by reductions in
the low-end NonStop units of 48 percent and 16 percent, respectively, for the
quarter and six-month periods. Compared to the second quarter of 1994, revenues
from the Integrity product family decreased by 26 percent, yet increased in the
six-month comparison by 22 percent.
Service and other revenues attributable to the computer systems business
increased 17 percent and 14 percent, respectively, for the second quarter and
first six months of 1995 compared to the same 1994 periods. These increases
comprised 32 percent and 18 percent, respectively, of the net increases in the
computer systems business.
Networking revenues decreased $2.0 million, or 2 percent, in the second quarter
of 1995 in comparison to the second quarter of 1994, excluding the effects of
business units sold. The decrease is primarily the result of a continuing shift
in product mix, with more revenues generated from lower-priced third party
products and through lower-priced OEM channels. The impact of product mix was
partially offset by increased service revenues. Networking revenues increased 1
percent during the first half of the year in comparison to the first half of
1994, excluding business units sold, as increased service revenues more
than offset reduced product revenues.
<PAGE> 13
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 MARCH 31, SIX MONTHS ENDED MARCH 31,
(Dollars in millions) 1995 1994 1995 1994
--------------- ------------------ ------------------- -----------------
$ % $ % $ % $ %
--------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States 243.6 47 264.2 55 523.9 50 515.3 54
Europe
United Kingdom 46.1 9 29.6 6 87.7 8 64.0 7
Germany 18.8 4 19.4 4 42.0 4 41.8 4
Other Europe 71.3 13 58.8 12 143.2 14 123.6 13
--------------- ------------------ ------------------- -----------------
Total Europe 136.2 26 107.8 22 272.9 26 229.4 24
Japan 80.0 16 68.2 14 148.9 14 126.1 13
Asia/Pacific 33.8 7 21.5 4 61.3 6 48.1 5
Americas Division
(excluding the U.S.) 22.3 4 22.4 5 43.5 4 40.8 4
--------------- ------------------ ------------------- -----------------
Total revenues 515.9 100 484.1 100 1,050.5 100 959.7 100
=============== ================== =================== =================
</TABLE>
Revenues in the United States decreased 6 percent during the second
quarter of 1995 compared to the same 1994 period, excluding the effect of
business units sold. On the same basis, U.S. revenues increased 5 percent during
the first six months of 1995, compared to the prior year. Domestic second
quarter results are attributable primarily to reduced computer product revenues
and reduced networking revenues, partially offset by increased service and other
revenues. Reduced computer product revenues occurred across most industries,
with the exception of the communications industry. The Company believes this
performance is attributable to slowed momentum in commercial markets as the
Company's customers and direct sales force adjust to a reorganization, which
shifted the focus of the sales force from geography to industry.
Excluding the effect of business units sold, revenues in Europe increased 26
percent and 21 percent in the second quarter and first six months of 1995,
respectively, compared to the second quarter and first six months of 1994. The
revenue increase is attributable to increased unit shipments of over 20 percent,
mainly in mid-range systems, and to foreign currency fluctuations between the
periods, estimated to be 12 percent for the quarter over the year-ago quarter.
In Japan, revenues increased 17 percent and 18 percent in the second quarter and
first six 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 10 percent for the quarter over the
year-ago quarter.
<PAGE> 14
Excluding business units sold, Asia/Pacific revenues increased 57 percent and 30
percent in the second quarter and first half of 1995, respectively, compared to
the 1994 periods. 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 11 percent for the
quarter over the year-ago quarter.
COST OF REVENUES
During the second quarter and first six months of 1995, product margin
percentages declined to 55 percent and 56 percent, respectively, from 59 percent
in the comparable 1994 periods. The decline in product margin percentages is the
result of the following factors. Business through distributor and reseller
channels, which commands lower prices, continues to expand. Shipping of the new
Himalaya K2(x) servers generated higher discounting of the Himalaya K1(x)
series. Following certain new software releases, capitalized software
amortization has increased. System sales for use with decision support
applications are expanding significantly, thus increasing the sales volume of
disk storage products. Disk storage products, which had a price reduction during
the quarter, achieve lower margins than other computer system products. 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.
Margins on service and other revenues decreased to 30 percent in the second
quarter of 1995 from 39 percent in the 1994 quarter. This margin decline is
attributable primarily to higher contribution to revenues from consulting
services, increased training costs, and certain costs associated with consulting
services which were previously reported as general and administrative expenses.
The Company implemented an organizational change in the first quarter of 1995,
reflecting the continued transition to open systems business practices -- to
formally price, market, and sell consulting services -- resulting in the change
of the classification of these costs. For the first half of 1995, service
margins were 31 percent, compared to 34 percent in the same 1994 period.
During both the second quarter and first six months of 1994, product margins
decreased to 59 percent from 64 percent and 65 percent for the respective 1993
periods. The decrease is due principally to the introduction of Himalaya server
products (which have lower prices and margins than previous generations of
Tandem systems) during the first quarter of 1994 and to increased networking
revenues at lower margins. Margins on service and other revenues increased to 39
percent in the second quarter of 1994 from 32 percent in the 1993 quarter and
decreased to 34 percent from 35 percent for the six-month periods. The second
quarter margin improvement was due primarily to lower service costs and overhead
associated with cumulative restructuring actions and to reduced costs incurred
on systems integration projects. Higher costs on certain systems integration
projects in the first quarter of 1994 were the major factor causing margin
deterioration in the first six months of 1994.
<PAGE> 15
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the second quarter and first half
of 1995 increased $14 million or 22 percent, and $23 million or 18 percent,
respectively, compared to 1994 spending. Excluding the effect of business units
sold, research and development expenses increased 25 percent and 21 percent,
respectively, for the quarter and six-month period ended March 31, 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. Some of these related products
began shipping late in the second quarter, and others will ship later in the
calendar year. Research and development expenses were approximately 15 percent
and 13 percent of total revenues during the second quarters of 1995 and 1994,
respectively. Third quarter spending is expected to be comparable to the second
quarter, but lower as a percentage of revenues.
Compared to the 1993 second quarter and first six-month periods, 1994 research
and development expenses for the same periods decreased $15 million and $23
million, respectively, in part due to the effect of business units sold but
primarily as the result of restructuring actions taken since 1993 and higher
levels of software capitalization. Additionally, second quarter 1993 research
and development expenses included development material and tooling expenses
associated with products that have since been introduced.
MARKETING, GENERAL, AND ADMINISTRATIVE EXPENSES
Marketing, general, and administrative expenses in the second quarter
and for the first six months of 1995 declined $9 million or 5 percent, and $26
million or 7 percent, respectively, compared to the same 1994 periods. The
impact of business units sold contributed to 42 percent and 57 percent,
respectively, of the decline for the quarterly and six-month periods. The
remaining decline is due to reductions in headcount occurring since the second
quarter of 1994 and to the change in reporting of certain consulting services
costs as discussed previously. Marketing, general, and administrative expenses
are expected to increase in the following quarters, but decrease as a percentage
of revenues.
Marketing, general, and administrative expenses were also down sharply in the
second quarter and first six months of 1994 from the 1993 periods, $32 million
and $58 million, respectively, primarily as the result of restructuring actions
initiated in the third quarter of 1993. Of these decreases, approximately
one-third of the second quarter and approximately one-quarter of the first six
months of 1994 pertain to business units sold.
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.
<PAGE> 16
IMPACT OF CURRENCY
During the second quarter and first half of 1995, in comparison to the
second quarter and first half 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 second quarter of 1994, foreign
exchange rate movements had a positive impact on the change in operating income
of approximately $3 million to $4 million.
During the first six months of 1994, especially in the first quarter, the
currencies in most foreign countries where Tandem has significant operations
weakened against the U.S. dollar compared to the prior year periods,
particularly in Europe. The negative impact from translating revenues and
operating results for these countries was modestly offset by the favorable
impact resulting from the U.S. dollar weakening against the Japanese yen.
NET INCOME AND EARNINGS PER SHARE
Net income for the second quarter of 1995 was $21.7 million, or $0.18
per share, compared to $25.8 million, or $0.23 per share, for the second quarter
of 1994. Net income for the second quarter of 1995 includes an $8.7 million, or
$0.07 per share, non-operating gain from the sale of an equity investee,
LightStream Corporation. Net income for the second quarter of 1993 was $11.1
million, or $0.10 per share.
Net income for the first half of 1995 was $56.9 million, or $0.48 per share,
compared to $50.7 million, or $0.45 per share, for the first six months of 1994.
The six-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. Net
income for the first half of 1993 was $28.6 million, or $0.25 per share, which
included a $12.4 million positive adjustment for the cumulative effect of
adopting Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," as of October 1, 1992.
The effective tax rates for the second quarter of 1995 and 1994 were 14 percent
and 9 percent, respectively, arising principally from taxes currently payable in
foreign jurisdictions. The increased effective tax rate for the second quarter
of 1995 is due to the geographic distribution of income. Tandem expects to
continue to report income for the remainder of 1995 in certain foreign
jurisdictions, which will result in tax provisions despite loss carryforwards
which are available primarily to offset U.S. and certain foreign income.
<PAGE> 17
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 six months of 1995, cash and cash equivalents
increased by $69 million, to $192.6 million. The Company generated $129 million
positive cash flow from operations during the first half of the year. Investing
activities in the first six months of the year consumed approximately $96
million, principally through the investment in capital equipment and software.
Financing activities provided approximately $29 million, primarily from the
sales of common stock under employee stock plans.
Accounts receivable days increased to 84 days at March 31, 1995, compared to 77
days at September 30, 1994. Inventory days increased to 59 days at March 31,
1995, compared to 54 days at September 30, 1994.
At March 31, 1995, total debt of $141 million, including $117 million of
nonrecourse borrowings against lease receivables, decreased $4 million from
September 30, 1994. Total debt as a percentage of total capital is approximately
12 percent at March 31, 1995.
Cash used for restructuring actions during the first half of 1995 aggregated
approximately $58 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 March 31, 1995 can adequately
meet Tandem's financing needs, both in the short and the long term.
As of March 31, 1995, the Company had approximately 8,200 full-time equivalent
employees. Headcount decreased approximately 260 during the first half of the
year. 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> 18
OUTLOOK AND RISKS
The key challenge in meeting the Company's 1995 operating plan
continues to be shipping sufficiently increased unit volumes of both the
Himalaya and the Integrity 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 customer acceptance
of the K2(x) series and the manufacturing organization's ability to keep pace
with demand and shipping requirements. While management is encouraged by the
favorable results since the July 1993 restructure, cost control remains a key
management focus in meeting the Company operating goals for the year.
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> 19
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K
Exhibit
Number Exhibit
------- -------
27 Financial Data Schedule
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
second fiscal quarter.
<PAGE> 20
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: May 12, 1995 By: DAVID J. RYNNE
---------------------------------
David J. Rynne
Senior Vice President and
Chief Financial Officer
Date: May 12, 1995 By: ANTHONY H. LEWIS, JR.
---------------------------------
Anthony H. Lewis, Jr.
Vice President and
Corporate Controller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> MAR-31-1995
<CASH> 192,582
<SECURITIES> 0
<RECEIVABLES> 491,148
<ALLOWANCES> 16,813
<INVENTORY> 168,039
<CURRENT-ASSETS> 959,202
<PP&E> 1,251,454
<DEPRECIATION> 679,231
<TOTAL-ASSETS> 1,831,704
<CURRENT-LIABILITIES> 698,669
<BONDS> 78,545
<COMMON> 2,979
0
0
<OTHER-SE> 1,051,511
<TOTAL-LIABILITY-AND-EQUITY> 1,831,704
<SALES> 846,801
<TOTAL-REVENUES> 1,050,542
<CGS> 370,196
<TOTAL-COSTS> 510,217
<OTHER-EXPENSES> 153,486
<LOSS-PROVISION> 995
<INTEREST-EXPENSE> 6,483
<INCOME-PRETAX> 65,422
<INCOME-TAX> 8,511
<INCOME-CONTINUING> 56,911
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,911
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
</TABLE>
