<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, 1996
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 8, 1996
<S> <C>
$.025 par value 118,201,961 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 1995 Annual Report to Stockholders and Annual Report
on Form 10-K for the year ended September 30, 1995. Such consolidated financial
statements and related notes are filed with the Securities and Exchange
Commission.
The results of operations for the three- and nine-month period ended
June 30, 1996, 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) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Product revenues $ 372,208 $ 399,009 $ 1,069,841 $ 1,103,666
Service and other revenues 93,570 100,142 286,857 270,061
- -------------------------------------------------------------------------------------------------------------------
Total revenues 465,778 499,151 1,356,698 1,373,727
- -------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of product revenues 160,152 163,328 463,038 456,941
Cost of service and other revenues 66,859 74,439 207,699 189,593
Research and development 69,348 71,866 210,751 204,700
Marketing, general, and
administrative 139,184 151,328 447,770 434,040
Restructuring charge -- -- 52,000 --
- -------------------------------------------------------------------------------------------------------------------
Total costs and expenses 435,543 460,961 1,381,258 1,285,274
- -------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 30,235 38,190 (24,560) 88,453
Net interest income 22 1,135 730 4,221
- -------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 30,257 39,325 (23,830) 92,674
Provision for income taxes 6,919 11,324 21,757 19,349
- -------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 23,338 28,001 (45,587) 73,325
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES (15,440) 2,843 5,894 14,430
- -------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 7,898 $ 30,844 $ (39,693) $ 87,755
===================================================================================================================
EARNINGS (LOSS) PER SHARE - CONTINUING OPERATIONS $ .20 $ .24 $ (.39) $ .62
EARNINGS (LOSS) PER SHARE - DISCONTINUED OPERATIONS (.13) .02 .05 .12
- -------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE $ .07 $ .26 $ (.34) $ .74
===================================================================================================================
Weighted average shares
outstanding 118,978 118,055 117,346 118,375
===================================================================================================================
</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) 1996 1995
- ------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 73,950 $ 121,230
Accounts receivable, net 420,076 539,993
Current portion of lease receivables 68,171 73,555
Inventories 148,017 169,948
Prepaid expenses and other 49,162 65,759
Net assets of discontinued operations 95,984 --
- ------------------------------------------------------------------------------------------------
Total current assets 855,360 970,485
- ------------------------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT, at cost 1,227,298 1,297,481
Accumulated depreciation and amortization (668,794) (700,813)
- ------------------------------------------------------------------------------------------------
Net property, plant, and equipment 558,504 596,668
- ------------------------------------------------------------------------------------------------
LEASE RECEIVABLES 85,513 86,173
- ------------------------------------------------------------------------------------------------
OTHER ASSETS 225,343 203,368
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,724,720 $ 1,856,694
================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
- ------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 120,434 $ 195,793
Accrued liabilities 380,203 409,520
Current maturities of long-term obligations 79,199 65,123
- ------------------------------------------------------------------------------------------------
Total current liabilities 579,836 670,436
- ------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS 78,720 75,923
- ------------------------------------------------------------------------------------------------
STOCKHOLDERS' INVESTMENT
Common stock $.025 par value, authorized
400,000 shares, outstanding 120,987 shares at
June 30 and 119,808 shares at September 30 3,024 2,995
Additional paid-in capital 707,242 691,097
Retained earnings 403,271 450,086
Accumulated translation adjustments 3,494 17,064
Treasury stock, at cost (50,867) (50,907)
- ------------------------------------------------------------------------------------------------
Total stockholders' investment 1,066,164 1,110,335
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 1,724,720 $ 1,856,694
================================================================================================
</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) 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (39,693) $ 87,755
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 146,799 125,015
Restructuring charge 52,000 --
Gain on sale of subsidiaries and investments (30,628) (8,677)
Loss on dispositions of property, plant,
and equipment 1,585 1,473
Changes in :
Accounts receivable 50,513 18,215
Inventories (34,068) (22,137)
Lease receivables 5,708 2,026
Non-debt current liabilities and other (87,448) (90,337)
- ------------------------------------------------------------------------------------
Net cash provided by
operating activities 64,768 113,333
- ------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant, and equipment (115,559) (119,030)
Proceeds from dispositions of property, plant,
and equipment 11,373 4,020
Sale of subsidiaries and investments,
net of cash disposed 34,802 11,642
Increase in other assets (67,507) (37,981)
- ------------------------------------------------------------------------------------
Net cash used in investing activities (136,891) (141,349)
- ------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings 88,100 44,957
Repayments (62,842) (53,042)
Issuance of Common Stock under
stock plans, including tax benefits 10,514 40,550
Issuance of warrants 5,700 --
- ------------------------------------------------------------------------------------
Net cash provided by
financing activities 41,472 32,465
- ------------------------------------------------------------------------------------
Effect of exchange rate fluctuations on cash
and equivalents (5,462) 5,922
- ------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (36,113) 10,371
Cash and equivalents at beginning of period 121,230 124,042
Cash of discontinued operations at June 30, 1996 (11,167) --
- ------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 73,950 $ 134,413
====================================================================================
</TABLE>
See accompanying notes.
<PAGE> 6
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. EARNINGS(LOSS) 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. Loss per share is calculated using the
weighted average number of common shares outstanding during the period.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market. The
components of inventories were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
June 30, September 30,
(In thousands) 1996 1995
===============================================================================
<S> <C> <C>
Purchased parts and subassemblies $ 85,345 $ 71,455
Work in process 13,593 29,097
Finished goods 49,079 69,396
- -------------------------------------------------------------------------------
Total $148,017 $169,948
===============================================================================
</TABLE>
3. INVESTMENTS
During the quarter ended June 30, 1995, the Company realized $2.5 million in
gains on available-for-sale securities. Realized gains on available-for-sale
securities during the nine months ended June 30, 1996 and 1995 were $0.4 million
and $4.5 million, respectively. Net adjustments to unrealized holding gains
(losses) on available-for-sale securities for these periods were not
significant.
4. ACCOUNTS RECEIVABLE
At June 30, 1996, $91 million of financing was available to the Company under
its accounts receivable purchase agreement, including the balance outstanding at
the end of the quarter of $14 million. The maximum amount outstanding under this
agreement during the third quarter and first nine months of 1996 was $37 million
and $65 million, respectively. There were no amounts outstanding as of September
30, 1995.
In March 1996 the Company renegotiated its accounts receivable purchase
agreement, adjusting the maximum size of the eligible pool of accounts
receivable to $100 million. The current agreement expires during the first
quarter of 1997.
<PAGE> 7
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. DISCONTINUED OPERATIONS
During June 1996, the Company adopted a plan to sell the Company's networking
business. UB Networks, Inc. (UB Networks), a wholly-owned subsidiary of the
Company, is a supplier of networking hardware and software products for shared
and switched environments. The Company has engaged Lehman Brothers to assist in
executing the sale. The Company does not anticipate a loss on the disposal of
this business. The results for UB Networks for the three and nine month periods
ended June 30, 1996 and 1995 have been segregated in the Consolidated Statements
of Operations, and accounted for as a discontinued operation.
Revenues, results of operations and income taxes associated with the
discontinued operation were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
For the three months ended For the nine months ended
-------------------------- -------------------------
June 30, June 30, June 30, June 30,
(In thousands) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 82,132 $ 95,263 $ 279,852 $ 271,229
Operating income (loss) $ (15,430) $ 2,948 $ (24,518) $ 6,685
Income (loss) before income taxes $ (15,359) $ 2,965 $ 6,137 $ 15,038
Income taxes $ 81 $ 122 $ 243 $ 608
Income (loss) from discontinued operations $ (15,440) $ 2,843 $ 5,894 $ 14,430
- ---------------------------------------------------------------------------------------------------
</TABLE>
During the first quarter of 1996, Compaq Computer Corporation acquired, for
cash, all of the outstanding shares of NetWorth Inc., an investment of UB
Networks. UB Networks realized a non-operating gain of $30.6 million. During the
second quarter of 1995, UB Networks realized a non-operating gain of $8.7
million from the sale of assets by one of its equity investments.
The components of net assets of discontinued operations included in the
Consolidated Balance Sheet as of June 30, 1996 were as follows:
<TABLE>
<S> <C>
Cash and equivalents $ 11,167
Accounts receivable, net 59,736
Inventories 54,335
Prepaid expenses and other 12,871
Property, plant and equipment, at cost 92,402
Accumulated depreciation and amortization (63,008)
Other assets 2,622
Accounts payable (39,380)
Accrued liabilities (34,416)
Long-term obligations (345)
- --------------------------------------------------------------------------
Net assets of discontinued operations $ 95,984
==========================================================================
</TABLE>
<PAGE> 8
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RESTRUCTURING
During the second quarter of 1996, the Company initiated a restructuring program
as a result of decisions by its new Chief Executive Officer and management team
to transform the Company's organizational structure in order to align resources
with a new strategic business model and to lower the Company's cost structure.
The restructuring actions resulted in a second quarter charge of $52 million and
include reducing headcount, vacating leased facilities, and disposing of assets
related to discontinuing certain product programs and other activities.
Approximately $39 million of the charge is estimated to require cash
expenditures.
Information relating to restructuring activity for the nine months ended June
30, 1996 is presented below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Reduction of Internal Discontinued
(In thousands) Work Force Facilities Systems Activities Other Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1995 $ 17,677 $ 28,661 $ 7,414 $ 9,820 $ 7,033 $ 70,605
Provision, nine months ended
June 30, 1996 34,100 8,600 -- 9,300 -- 52,000
Utilized, nine months ended
June 30, 1996 (29,260) (11,277) (5,755) (2,982) (5,946) (55,220)
- ---------------------------------------------------------------------------------------------------------------
Balances, June 30, 1996 $ 22,517 $ 25,984 $ 1,659 $ 16,138 $ 1,087 $ 67,385
===============================================================================================================
Cash used, nine months ended
June 30, 1996 $ 29,260 $ 8,391 $ 5,755 $ 167 $ 5,374 $ 48,947
===============================================================================================================
</TABLE>
The provision for reduction of work force includes severance, related medical
and other benefits, and obligations relating to an employment agreement with the
former Chief Executive Officer. The provision includes termination benefits for
approximately 500 employees, of which approximately three-fourths are based in
the United States. Approximately two-thirds of the planned terminations are in
sales, marketing and administrative functions, approximately 20 percent in
engineering and development functions, and the balance is in manufacturing,
service and support functions. The Company's plan anticipates these terminations
to be substantially completed during 1996 and in early 1997.
The provision for facilities includes primarily lease payments, fixed costs and
write-offs of related property, plant and equipment associated with plans to
permanently exit sales, support and administrative operations in approximately
fifteen leased facilities throughout the United States, Europe and Asia-Pacific
geographic areas. The Company plans to vacate substantially all of these
facilities during 1996 and the first quarter of 1997. Restructuring costs are
expected to be incurred through 1999 as leases are either terminated early or
expire.
The provision for discontinued activities includes costs related to exiting the
maintenance and support obligations of a third party product, asset write-offs
associated with discontinuing imaging solutions products, and asset write-offs
and other costs associated with discontinuing product initiatives and programs.
The Company intends to begin outsourcing the above maintenance and support
obligations and to complete the other actions during 1996.
Of the approximately $55 million restructuring reserves utilized in 1996,
approximately $20 million pertains to the second quarter 1996 provision. Of the
total restructuring reserves remaining as of June 30, 1996, approximately $50
million is included in accrued liabilities, approximately $16 million is
classified as a reduction of property, plant and equipment, and approximately $1
million is classified as a reduction of other assets.
<PAGE> 9
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM OBLIGATIONS
During the quarter ended June 30, 1996, the Company borrowed $8.4 million, at an
interest rate of 6.8 percent. The loan matures in March 1997, but is renewable
annually at the consent of both parties. This loan is secured by an underlying
note receivable of the Company. The note receivable of $8.4 million, with an
interest rate of 7.5 percent, is due in November 1998. The note receivable is
included in other assets and the loan is included in current maturities of
long-term obligations in the Consolidated Balance Sheet. The loan is included in
the Company's total borrowings as shown in the Consolidated Statement of Cash
Flows.
8. INCOME TAXES
The provision for income taxes for the three months and nine months ended June
30, 1996 and 1995 arose principally from taxes currently payable in foreign
jurisdictions.
9. CASH DIVIDENDS
The Company has not declared or paid any cash dividends and has no plans to do
so in the foreseeable future.
10. COMMITMENTS AND CONTINGENCIES
The Company and three principal officers were named as defendants in a class
action complaint for damages filed in the United States District Court for the
Northern District of California on July 19, 1995. The class action is purported
to be on behalf of purchasers of the Company's Common Stock between March 8,
1995 and July 12, 1995. The complaint alleges violations of Section 10(b) of the
Securities Exchange Act and Securities and Exchange Commission Rule 10b-5.
Management believes that this complaint is without merit and that the outcome of
the complaint will not have a material adverse effect on the financial position
or overall trends in the results of operations of the Company.
Two similar class action complaints were filed on November 2, 1995 and December
19, 1995, respectively. The plaintiffs in both of these cases voluntarily
dismissed their complaints in January 1996.
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
During June 1996, the Company adopted a plan to sell the Company's
networking business, UB Networks, Inc. (UB Networks). UB Networks, a
wholly-owned subsidiary of the Company, is a supplier of networking hardware and
software products for shared and switched environments. The Company has engaged
Lehman Brothers to assist in executing the sale. The Company's Consolidated
Statements of Operations have been restated, for all periods presented, to
reflect UB Networks as a discontinued operation.
The discussion of operating results and financial tables that follow pertain to
the Company's continuing operations, the computer systems business. Discontinued
operations are discussed separately.
SELECTED OPERATING STATISTICS
The following tables summarize operating statistics for the third
quarter and the first nine months of fiscal 1996 and 1995. 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 1996 and 1995 from the comparable prior year periods.
The Company's fiscal year ends on September 30. References to 1996 and 1995 in
this section 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,
-------------------- --------------------
1996 1995 1996 1995
-------------------- --------------------
<S> <C> <C> <C> <C>
Product revenues 80 80 79 80
Service and other revenues 20 20 21 20
- ----------------------------------------------------------------------------------------------------
TOTAL REVENUES 100 100 100 100
- ----------------------------------------------------------------------------------------------------
Cost of product revenues 43 41 43 41
Cost of service and other revenues 71 74 72 70
- ----------------------------------------------------------------------------------------------------
Total cost of revenues 49 48 49 47
Research and development 15 14 16 15
Marketing, general, and
administrative 30 30 33 32
Restructuring charge N/A N/A 4 N/A
- ----------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 6 8 (2) 6
Net interest income -- -- -- 1
- ----------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 6 8 (2) 7
Provision for income taxes 1 2 1 2
- ----------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 5 6 (3) 5
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES (3) -- -- 1
- ----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 2 6 (3) 6
====================================================================================================
</TABLE>
N/A - Not applicable
<PAGE> 11
PERCENT INCREASE (DECREASE)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Product revenues (7) 10 (3) 12
Service and other revenues (7) 8 6 10
- -------------------------------------------------------------------------------------------------------------
TOTAL REVENUES (7) 10 (1) 12
- -------------------------------------------------------------------------------------------------------------
Cost of product revenues (2) 26 1 26
Cost of service and other revenues (10) 17 10 15
- -------------------------------------------------------------------------------------------------------------
Total cost of revenues (5) 23 4 23
Research and development (4) 24 3 21
Marketing, general, and
administrative (8) (5) 3 (6)
Restructuring charge N/A N/A N/M N/A
- -------------------------------------------------------------------------------------------------------------
OPERATING INCOME (21) (13) N/M 26
- -------------------------------------------------------------------------------------------------------------
Net interest income (98) 28 (83) 59
- -------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (23) (12) N/M (3)
Provision for income taxes (39) 338 12 156
- -------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (17) (34) N/M (17)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES N/M (55) (59) 30
- -------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (74) (36) N/M (12)
=============================================================================================================
EARNINGS (LOSS) PER SHARE (73) (40) N/M (16)
=============================================================================================================
</TABLE>
N/A - Not applicable N/M - Not meaningful
OPERATING RESULTS
REVENUES
Total revenues of $465.8 million during the third quarter of 1996
decreased $33.4 million, or 7 percent, compared to the third quarter of 1995.
Product revenues of $372.2 million for the third quarter of 1996 decreased $26.8
million, or 7 percent, from the same quarter of 1995. The decline in product
revenues is attributable to reduced unit shipments of Himalaya products
(approximately 28 percent from the 1995 third quarter, based on the number of
processors shipped excluding workstations and personal computers) and the
negative impact of changes in European and Japanese currencies from a year ago.
This decline is partially offset by higher revenue per processor shipped in the
third quarter of 1996, than in the third quarter of 1995. The later half of 1995
was characterized by a high volume of processor only trade-in activity.
Service and other revenues for the third quarter of 1996 of $93.6 million
decreased $6.6 million, also 7 percent, from the third quarter of 1995. The
decrease in service and other revenues is primarily the result of reduced
consulting revenues; however, hardware service revenues were also down slightly.
<PAGE> 12
Total revenues of $1.4 billion for the first nine months of 1996 decreased $17.0
million, or 1 percent, compared to the first nine months of 1995. Product
revenues of $1.1 billion decreased $33.8 million, or 3 percent, from the same
period of 1995. The decline in product revenues is attributable to reduced unit
shipments of Himalaya products (approximately 15 percent in the nine month
comparison) and the negative impact of changes in the Japanese currency from a
year ago, offset somewhat by increases in software related revenues and improved
revenue per processor shipped. Service and other revenues of $286.9 million
increased $16.8 million, or 6 percent, over the same nine-month period of 1995.
Growth in service and other revenues were primarily attributable to increased
consulting revenues. Hardware service revenues were relatively flat in the nine
month comparison.
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) 1996 1995 1996 1995
------------------- ------------------- ------------------- --------------------
$ % $ % $ % $ %
---------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States 219.7 47 235.5 47 630.3 46 651.3 47
Europe
United Kingdom 35.5 8 40.7 8 105.2 8 118.9 9
Germany 27.0 6 30.0 6 76.3 6 72.1 5
Other Europe 66.7 14 67.1 14 191.8 14 189.8 14
---------- ------- ---------- ------- ---------- ------- ---------- -------
Total Europe 129.2 28 137.8 28 373.3 28 380.8 28
Japan 66.8 14 77.4 16 196.5 14 199.9 15
Asia/Pacific 28.8 6 26.3 5 91.9 7 80.9 6
Americas Division
(excluding the U.S.) 21.3 5 22.2 4 64.7 5 60.8 4
---------- ------- ---------- ------- ---------- ------- ---------- -------
Total revenues 465.8 100 499.2 100 1,356.7 100 1,373.7 100
========== ======= ========== ======= ========== ======= ========== =======
</TABLE>
Revenues in the United States decreased 7 percent and 3 percent,
respectively, in the three and nine month periods ended June 30, 1996, in
comparison to the same 1995 periods. Reduced unit shipments of Himalaya servers
and reduced revenues from the UNIX system-based products were modestly offset by
increased software related revenues.
Revenues in Europe decreased 6 percent and 2 percent, respectively, during the
third quarter and first nine months of 1996, compared to the same 1995 periods.
This decrease resulted primarily from decreased unit shipments of most product
families and the negative impact of changes in currency between the periods.
In Japan, revenues decreased 14 percent and 2 percent, respectively, in the
three and nine month periods ended June 30, 1996, in comparison to the same 1995
periods. The decrease is due to the impact of currency movements between the two
periods, offset partially by increased sales of the mid-range line of Himalaya
servers and the UNIX system-based products.
<PAGE> 13
Asia/Pacific revenues increased 10 percent during the third quarter of 1996
compared to the same 1995 period, primarily resulting from increased consulting
revenues and the favorable impact of changes in currency, offset by reduced unit
shipments of computer systems. Asia/Pacific revenues increased 14 percent during
the first nine months of 1996, compared to the prior year. The increase is
primarily the result of a high volume of high-end Himalaya product shipments in
the first quarter of 1996.
Current quarter and year-to-date growth rates in the various geographic regions
are not necessarily representative of future trends.
COST OF REVENUES
During the third quarter and first nine months of 1996, product margin
percentages declined 2 percent to 57 percent, in comparison to the same 1995
periods. Computer system margins were impacted by increases in third party
royalty payments, increases in amortization of capitalized software, and changes
in product mix.
Management expects product margins to decline further during the fourth quarter
of 1996. However, product margins are difficult to predict, as they are affected
by future competitive pricing actions, geographic revenue mix, product mix, and
changes in foreign currency. For additional discussion on the risks associated
with these statements and other forward looking statements, refer to the Outlook
and Risks section below.
Margins on service and other revenues were 29 percent in the 1996 third quarter
and 28 percent in the first nine months of 1996, compared to 26 percent in the
1995 third quarter and 30 percent in the first nine months of 1995. The improved
margins over the 1995 third quarter are mainly attributable to improved
profitability in the Company's consulting activities, offset somewhat by
increased costs in the hardware servicing business. The decline in the nine
month comparison is reflective of the increase in salaries and benefits and the
increase in the proportion of consulting revenue to total service and other
revenues that has occurred over the past year.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses of $69.3 million for the third
quarter of 1996 decreased $2.5 million, or 4 percent, compared to the same 1995
quarter. Research and development (R&D) expenses of $210.8 million for the first
nine months of 1996 increased $6.1 million, or 3 percent, compared to 1995
spending. In the quarterly comparison, increases in salaries and benefits and
equipment depreciation were more than offset by higher levels of software
capitalization and external funding received for joint development projects. The
increase in the nine month comparison is attributable primarily to increased
salaries and benefits and equipment depreciation. Management expects R&D
spending to decline slightly in the fourth quarter. However, the expected R&D
spending pattern could be affected by delays or changes in product development
schedules and by changes in external funding. For additional discussion on the
risks associated with these statements and other forward looking statements,
refer to the Outlook and Risks section below.
<PAGE> 14
MARKETING, GENERAL, AND ADMINISTRATIVE EXPENSES
Marketing, general, and administrative (MG&A) expenses of $139.2
million in the third quarter of 1996 decreased $12.1 million, or 8 percent, in
comparison to the third quarter of 1995. The decline in MG&A expenses is
attributable mainly to restructuring actions initiated in the prior quarter
which reduced sales and marketing headcount and to strict management of certain
variable costs, such as travel and entertainment expenses and promotional
events. MG&A expenses for the first nine months of 1996 increased $13.7 million,
or 3 percent, to $447.8 million. The increase in MG&A expenses in the 1996 nine
month period is attributable to increased commissions, software house fees, and
salaries and benefits. Management expects MG&A expenses to increase in the
fourth quarter, but not as a percentage of revenues. For additional discussion
on the risks associated with these statements and other forward looking
statements, refer to the Outlook and Risks section below.
RESTRUCTURE CHARGE
During the second quarter of 1996, the Company initiated a
restructuring program as a result of decisions by its new Chief Executive
Officer (CEO) and management team to transform the Company's organizational
structure in order to align resources with a new strategic business model and to
lower the Company's cost structure. The restructuring actions resulted in a
second quarter charge of $52 million and included reducing headcount, vacating
leased facilities, and disposing of assets related to discontinuing certain
product programs and other activities. Approximately $39 million of the charge
is estimated to require cash expenditures.
Information relating to restructuring activity for the nine months ended June
30, 1996 is presented below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Reduction of Internal Discontinued
(In thousands) Work Force Facilities Systems Activities Other Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1995 $17,677 $28,661 $7,414 $ 9,820 $7,033 $70,605
Provision, three months ended
March 31, 1996 34,100 8,600 -- 9,300 -- 52,000
Utilized, nine months ended
June 30, 1996 (29,260) (11,277) (5,755) (2,982) (5,946) (55,220)
- ---------------------------------------------------------------------------------------------------------------------
Balances, June 30, 1996 $22,517 $25,984 $1,659 $16,138 $1,087 $67,385
=====================================================================================================================
Cash used, nine months ended
June 30, 1996 $29,260 $8,391 $5,755 $167 $5,374 $48,947
=====================================================================================================================
</TABLE>
The provision for reduction of work force includes severance, related
medical and other benefits, and obligations relating to an employment agreement
with the former CEO. The provision includes termination benefits for
approximately 500 employees, of which approximately three-fourths are based in
the United States. Approximately two-thirds of the planned terminations are in
sales, marketing and administrative functions, approximately 20 percent are in
engineering and development functions, and the balance
<PAGE> 15
is in manufacturing, service and support functions. The Company's plan
anticipates these terminations to be substantially completed during 1996 and
early 1997.
The provision for facilities includes primarily lease payments, fixed costs and
write-offs of related property, plant and equipment associated with plans to
permanently exit sales, support and administrative operations in approximately
fifteen leased facilities throughout the United States, Europe and Asia-Pacific
geographic areas. The Company plans to vacate substantially all of these
facilities during 1996 and the first quarter of 1997. Restructuring costs are
expected to be incurred through 1999 as leases are either terminated early or
expire.
The provision for discontinued activities includes costs related to exiting the
maintenance and support obligations of a third party product, asset write-offs
associated with discontinuing imaging solutions products, and asset write-offs
and other costs associated with discontinuing product initiatives and programs.
The Company intends to begin outsourcing the above maintenance and support
obligations and to complete the other actions during 1996.
Of the approximately $55 million restructuring reserves utilized in 1996,
approximately $20 million pertains to the 1996 second quarter provision. Of the
total restructuring reserves remaining as of June 30, 1996, approximately $50
million is included in accrued liabilities, approximately $16 million is
classified as a reduction of property, plant and equipment, and approximately $1
million is classified as a reduction of other assets.
IMPACT OF CURRENCY
During the third quarter of 1996, in comparison to the third quarter of
1995, most currencies in Europe and Japan weakened against the U.S. dollar.
Consequently, the translation of revenues and operating results had a negative
impact on the consolidated results of the Company. Giving effect for the results
of the Company's hedging program, management estimates that foreign exchange
rate movements contributed to approximately 75% of the reduction in operating
income between the two quarterly periods. In comparing the nine month periods
ended June 30, 1996 and 1995, the effect of foreign exchange rate movements on
changes in operating income was insignificant.
EARNINGS FROM CONTINUING OPERATIONS
For the three month period ended June 30, 1996, the Company reported
income from continuing operations of $23.3 million, or $0.20 per share. For the
nine month period ended June 30, 1996, the Company reported a loss from
continuing operations of $45.6 million, or $0.39 per share. The results for the
nine month period included the $52 million restructuring charge discussed above.
For the same periods ended June 30, 1995, the Company reported income from
continuing operations of $28.0 million, or $0.24 per share, and $73.3 million,
or $0.62 per share, respectively.
The income tax provisions for the third quarters of 1996 and 1995 were $6.9
million and $11.3 million, respectively, arising principally from taxes
currently payable in foreign jurisdictions. The Company expects to continue to
report income for the remainder of
<PAGE> 16
1996 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.
EARNINGS FROM DISCONTINUED OPERATIONS
During June 1996, the Company adopted a plan to sell the Company's
networking business, UB Networks, Inc. (UB Networks). UB Networks, a
wholly-owned subsidiary of the Company, is a supplier of networking hardware and
software products for shared and switched environments. The Company has engaged
Lehman Brothers to assist in executing the sale. The Company does not anticipate
a loss on the disposal of this business.
Revenues and results of operations associated with the discontinued operation
were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
For the three months ended For the nine months ended
-------------------------------- -----------------------------
June 30, June 30, June 30, June 30,
(In thousands) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 82,132 $95,263 $279,852 $271,229
Operating income (loss) $(15,430) $ 2,948 $(24,518) $ 6,685
Income (loss) from discontinued $(15,440) $ 2,843 $ 5,894 $ 14,430
operations
Earning (loss) per share $ (0.13) $ 0.02 $ 0.05 $ 0.12
- -------------------------------------------------------------------------------------------------------------
</TABLE>
During the first quarter of 1996, Compaq Computer Corporation acquired, for
cash, all of the outstanding shares of NetWorth Inc., an investment of UB
Networks. UB Networks realized a non-operating gain of $30.6 million on the
transaction. During the second quarter of 1995, UB Networks realized a
non-operating gain of $8.7 million from the sale of assets by one of its equity
investments.
Networking revenues decreased $13.1 million, or 14 percent, in the
third quarter of 1996, compared to the third quarter of 1995. Sales of newer
products were not sufficient to offset the decline in sales of the more mature
products. Networking margins declined to 29 percent and 32 percent,
respectively, in the three and nine month periods ended June 30, 1996, compared
to 40 percent and 42 percent in the same 1995 periods. Networking margins were
negatively affected by lower sales of proprietary ethernet switching enclosures
and related peripheral products, and an increased proportion of revenues from
third party product sales and related service fees. Research and development
expenses of $9.6 million and $29.3 million, respectively, in the three and nine
months ended June 30, 1996, decreased 4 percent of the same 1995 periods. MG&A
expenses of $29.4 million and $85.5 million, respectively, in the third quarter
and first nine months of 1996 increased 15 percent and 13 percent, respectively,
over the same 1995 periods. The increase in MG&A expenses is due to
international geographic expansion, an increase in the number of sales
representatives and associated travel costs, and increased marketing and
advertising.
<PAGE> 17
FINANCIAL CONDITION
During the first nine months of 1996, cash and cash equivalents
decreased by $47 million to $74 million. The Company generated $65 million
positive cash flow from operations during the first nine months of the year.
Investing activities for the period consumed approximately $137 million,
principally through the investment in capital equipment and software offset
partially by proceeds from the sale of an investment in NetWorth, Inc. Financing
activities provided approximately $41 million.
At June 30, 1996, $91 million of financing was available to the Company under
its accounts receivable purchase agreement, including the balance outstanding at
the end of the quarter of $14 million. The maximum amount outstanding under this
agreement during the first nine months of 1996 was $65 million. There were no
amounts outstanding as of September 30, 1995. In March 1996 the Company
renegotiated its accounts receivable purchase agreement, adjusting the maximum
size of the eligible pool of accounts receivable to $100 million. The current
agreement expires during the first quarter of 1997. Management is currently
negotiating to replace this agreement with a new credit facility with similar
terms and conditions.
Including the amounts sold under the receivables purchase agreement, accounts
receivable days were 85 days at June 30, 1996, compared to 78 days at September
30, 1995 and 82 days at June 30, 1995. Inventory days were 60 days at June 30,
1996, compared to 42 days at September 30, 1995 and 55 days at June 30, 1995.
Total debt of $165 million at June 30, 1996, including $129 million of
nonrecourse borrowings against lease receivables, increased $23 million from
September 30, 1995. Total debt as a percentage of total capital was
approximately 13 percent as of June 30, 1996, compared to 11 percent as of
September 30, 1995. During the quarter ended June 30, 1996, the Company borrowed
$8.4 million, at an interest rate of 6.8 percent. The loan matures in March
1997, but is renewable annually with the consent of both parties. This loan is
secured by an underlying note receivable of the Company. The note receivable of
$8.4 million, with an interest rate of 7.5 percent, is due in November 1998.
Cash used for restructuring actions during the first nine months of 1996
aggregated approximately $49 million and was funded by cash from operations.
Cash requirements for restructuring action for the remainder of 1996 are
expected to be approximately $20 million.
The Company's sources of working capital include cash generated from operations,
amounts available under the accounts receivable purchase agreement, certain
uncommitted, unsecured credit lines and other financing arrangements available
to the Company. Management believes that the financing sources available at June
30, 1996 can adequately meet Tandem's financing needs, both in the short and the
long term.
As of June 30, 1996, the Company had approximately 8,000 full-time equivalent
employees, including approximately 1,100 full-time equivalent employees employed
by UB Networks.
<PAGE> 18
OUTLOOK AND RISKS
OVERVIEW
Since the end of the prior fiscal year, the Company has experienced
significant changes in top management, including the appointment of a new CEO in
early January. The new CEO, together with the management team, has been
reviewing Tandem's business opportunities, strategic direction, and organization
and cost structure. As a result of this review, new product strategies and a new
organizational model have been developed; implementation is in process.
Restructuring actions are also in progress, which are aimed at reducing the cost
structure of the Company. The success of these actions and their impact on the
Company's operations cannot be fully measured at this time.
As previously discussed, the Company has adopted a plan to sell UB Networks.
There can be no assurances that the sale of UB Networks will be completed within
management's plans.
OPERATING RESULTS
The Company's future operating results and many of the forward looking
statements contained in this document are dependent upon a number of factors,
including the Company's ability to grow its traditional businesses, to expand
successfully into new markets, to effectively manage resources, to successfully
implement a new organizational model and to continue the Company's product
migration to open platforms.
A key challenge to the Company's continued growth is selling increased unit
volumes of computer systems at competitive prices, while concurrently
controlling the cost structure of the Company. Increased volume shipments are
dependent upon continued demand for existing products, timeliness to market with
new products, identification of new competitive products, acceptance of new
product introductions by the Company's existing customer base, as well as
successful expansion into new markets, such as decision support, data
warehousing, and electronic commerce.
The Company has embarked on a strategy of entering partnering relationships with
major technology companies and has entered into strategic relationships with
companies such as Compaq Computer Corporation and Microsoft Corporation. Future
operating results may be affected by the Company's ability to implement this
strategy and to manage the underlying alliance agreements and associated
competitive risks. The Compaq agreement calls for joint development relating to
the Company's ServerNet clustering technology and OEM distribution by Compaq of
ServerNet products. The Microsoft relationship covers, among other things,
porting of the Company's "middleware" software to the Windows NT operating
system, the addition of the Company's clustering technology to Microsoft's
clustering initiative and a patent cross license. These relationships represent
a new way of doing business for the Company. The Company does not anticipate any
immediate significant impact on the operating results of the Company from these
<PAGE> 19
relationships. The ultimate success of these projects and their contribution to
the Company's operating results cannot be predicted or fully measured at this
time.
Historically, Tandem recognizes a large percentage of its revenues in the latter
part of each quarter. This trend makes it difficult to forecast revenues and
could subject the Company to fluctuations in revenues and earnings.
FOREIGN OPERATIONS
Although the Company's operating and pricing strategies and currency
hedging practices take into account changes in foreign currency exchange rates
over time, the Company's operating results can be affected by foreign currency
exchange rates.
Tandem, Himalaya, and ServerNet 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 and product names
are trademarks or registered trademarks of their respective companies.
<PAGE> 20
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company and three principal officers, James G. Treybig, David J.
Rynne and Robert C. Marshall, were named as defendants in a class action
complaint for damages filed in the United States District Court for the Northern
District of California on July 19, 1995. The class action is purported to be on
behalf of purchasers of the Company's Common Stock between March 8 and July 12,
1995. The complaint alleges violations of Section 10(b) of the Securities
Exchange Act and Securities and Exchange Commission Rule 10b-5 in connection
with public statements about the Company's expected revenues for the second and
third quarters of 1995.
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
third fiscal quarter.
<PAGE> 21
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 14, 1996 By: DAVID J. RYNNE
---------------------
David J. Rynne
Senior Vice President and
Chief Financial Officer
Date: August 14, 1996 By: JOHN T. REECE
--------------------
John T. Reece
Vice President and
Corporate Controller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR
THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 73,950
<SECURITIES> 0
<RECEIVABLES> 435,029
<ALLOWANCES> 14,953
<INVENTORY> 148,017
<CURRENT-ASSETS> 855,360
<PP&E> 1,227,298
<DEPRECIATION> 668,794
<TOTAL-ASSETS> 1,724,720
<CURRENT-LIABILITIES> 579,836
<BONDS> 0
0
0
<COMMON> 3,024
<OTHER-SE> 1,063,140
<TOTAL-LIABILITY-AND-EQUITY> 1,724,720
<SALES> 1,069,841
<TOTAL-REVENUES> 1,356,698
<CGS> 463,038
<TOTAL-COSTS> 670,699
<OTHER-EXPENSES> 210,751
<LOSS-PROVISION> 2,236
<INTEREST-EXPENSE> 11,190
<INCOME-PRETAX> (23,830)
<INCOME-TAX> 21,757
<INCOME-CONTINUING> (45,587)
<DISCONTINUED> 5,894
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,693)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
