<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, 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.
Class: Common Stock, Outstanding at May 10, 1996
$.025 par value 117,593,478 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 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 six month period ended
March 31, 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 six months ended
-------------------------- ------------------------
March 31, March 31, March 31, March 31,
(In thousands except per share amounts) 1996 1995 1996 1995
============================================== =========== =========== =========== ===========
<S> <C> <C> <C> <C>
REVENUES
Product revenues $ 456,073 $ 409,814 $ 856,843 $ 846,801
Service and other revenues 120,125 106,128 231,797 203,741
- - ---------------------------------------------- ----------- ----------- ----------- -----------
Total revenues 576,198 515,942 1,088,640 1,050,542
- - ---------------------------------------------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of product revenues 219,625 183,667 402,759 370,196
Cost of service and other revenues 88,963 74,610 171,992 140,021
Research and development 78,572 78,500 161,148 153,486
Marketing, general, and
administrative 178,831 164,345 364,624 332,839
Restructuring charge 52,000 - 52,000 -
- - ---------------------------------------------- ----------- ----------- ----------- -----------
Total costs and expenses 617,991 501,122 1,152,523 996,542
- - ---------------------------------------------- ----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (41,793) 14,820 (63,883) 54,000
Gain on sale of subsidiaries
and investments - 8,677 30,628 8,677
Net interest income 236 1,700 664 2,745
- - ---------------------------------------------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (41,557) 25,197 (32,591) 65,422
Provision for income taxes 8,000 3,511 15,000 8,511
- - ---------------------------------------------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (49,557) $ 21,686 $ (47,591) $ 56,911
============================================== =========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE $ (.42) $ .18 $ (.41) $ .48
============================================== =========== =========== =========== ===========
Weighted average shares
outstanding 117,311 119,084 117,152 118,535
============================================== =========== =========== =========== ===========
</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) 1996 1995
- - ---------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
ASSETS
- - ---------------------------------------------------------------------------- ----------- -----------
CURRENT ASSETS
Cash and equivalents $ 94,365 $ 121,230
Accounts receivable, net 499,587 539,993
Current portion of lease receivables 67,048 73,555
Inventories 191,814 169,948
Prepaid expenses and other 58,908 65,759
- - ---------------------------------------------------------------------------- ----------- -----------
Total current assets 911,722 970,485
- - ---------------------------------------------------------------------------- ----------- -----------
PROPERTY, PLANT, AND EQUIPMENT, at cost 1,312,337 1,297,481
Accumulated depreciation and amortization (712,198) (700,813)
- - ---------------------------------------------------------------------------- ----------- -----------
Net property, plant, and equipment 600,139 596,668
- - ---------------------------------------------------------------------------- ----------- -----------
LEASE RECEIVABLES 88,402 86,173
- - ---------------------------------------------------------------------------- ----------- -----------
OTHER ASSETS 217,403 203,368
- - ---------------------------------------------------------------------------- ----------- -----------
TOTAL ASSETS $ 1,817,666 $ 1,856,694
============================================================================ =========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
- - ---------------------------------------------------------------------------- ----------- -----------
CURRENT LIABILITIES
Accounts payable $ 176,220 $ 195,793
Accrued liabilities 436,628 409,520
Current maturities of long-term obligations 62,517 65,123
- - ---------------------------------------------------------------------------- ----------- -----------
Total current liabilities 675,365 670,436
- - ---------------------------------------------------------------------------- ----------- -----------
LONG-TERM OBLIGATIONS 90,092 75,923
- - ---------------------------------------------------------------------------- ----------- -----------
STOCKHOLDERS' INVESTMENT
Common stock $.025 par value, authorized
400,000 shares, outstanding 120,543 shares at
March 31 and 119,808 shares at September 30 3,013 2,995
Additional paid-in capital 697,640 691,097
Retained earnings 395,319 450,086
Accumulated translation adjustments 7,109 17,064
Treasury stock, at cost (50,872) (50,907)
- - ---------------------------------------------------------------------------- ----------- -----------
Total stockholders' investment 1,052,209 1,110,335
- - ---------------------------------------------------------------------------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 1,817,666 $ 1,856,694
============================================================================ =========== ===========
</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) 1996 1995
========================================================== ========= =========
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ (47,591) $ 56,911
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 97,443 80,818
Restructuring charge 52,000 -
Gain on sale of subsidiaries and investments (30,628) (8,677)
Loss on dispositions of property, plant,
and equipment 1,689 1,014
Changes in :
Accounts receivable 32,664 57,606
Inventories (23,089) (5,144)
Lease receivables 3,930 1,818
Non-debt current liabilities and other (47,988) (55,104)
- - ---------------------------------------------------------- --------- ---------
Net cash provided by
operating activities 38,430 129,242
- - ---------------------------------------------------------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant, and equipment (89,500) (79,430)
Proceeds from dispositions of property, plant,
and equipment 8,147 2,898
Sale of subsidiaries and investments,
net of cash disposed 34,802 11,642
Increase in other assets (41,360) (30,749)
- - ---------------------------------------------------------- --------- ---------
Net cash used in investing activities (87,911) (95,639)
- - ---------------------------------------------------------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings 61,626 29,709
Repayments (43,634) (36,361)
Issuance of Common Stock under
stock plans, including tax benefits 6,596 35,915
- - ---------------------------------------------------------- --------- ---------
Net cash provided by
financing activities 24,588 29,263
- - ---------------------------------------------------------- --------- ---------
Effect of exchange rate fluctuations on cash
and equivalents (1,972) 5,674
- - ---------------------------------------------------------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (26,865) 68,540
Cash and equivalents at beginning of period 121,230 124,042
--------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD $ 94,365 $ 192,582
========================================================== ========= =========
</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. 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>
- - ----------------------------------------------------- --------------------- ---------------------
March 31, September 30,
(In thousands) 1996 1995
===================================================== ===================== =====================
<S> <C> <C>
Purchased parts and subassemblies $ 90,765 $ 71,455
Work in process 18,282 29,097
Finished goods 82,767 69,396
- - ----------------------------------------------------- --------------------- ---------------------
Total $191,814 $169,948
===================================================== ===================== =====================
</TABLE>
3. INVESTMENTS
During the first quarter of 1996, Compaq Computer Corporation acquired, for
cash, all of the outstanding shares of NetWorth Inc., an investment of the
Company. The Company received $34.8 million in proceeds from the transaction for
a realized gain of $30.6 million.
During the quarters ended March 31, 1996 and 1995, the Company realized $0.4
million and $1.9 million, respectively, in gains on available-for-sale
securities. Except for the transactions described above, there were no other
realized gains or losses on available-for-sale securities during the six months
ended March 31, 1996 and 1995. The net adjustment to unrealized holding gains
(losses) on available-for-sale securities for these periods was not significant.
4. ACCOUNTS RECEIVABLE
At March 31, 1996, $82 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 $10 million. The maximum amount outstanding under this
agreement during the second quarter and first six months of 1996 was $53 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. RESTRUCTURING
During the second quarter of 1996, the Company initiated a new 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 result in a 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 will require cash expenditures.
Information relating to restructuring activity for the six months ended March
31, 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, three months ended
March 31, 1996 34,100 8,600 -- 9,300 -- 52,000
Utilized, six months ended
March 31, 1996 16,696 7,309 4,243 658 3,381 32,287
- - ----------------------------- ------- ------- ------- ------- ------- -------
Balances, March 31, 1996 $35,081 $29,952 $ 3,171 $18,462 $ 3,652 $90,318
============================= ======= ======= ======= ======= ======= =======
Cash used, six months ended
March 31, 1996 $16,696 $ 4,761 $ 4,243 $ 106 $ 3,024 $28,830
============================= ======= ======= ======= ======= ======= =======
</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 terminations to
be substantially completed during 1996.
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 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 $32 million restructuring reserves utilized in 1996,
approximately $6 million pertains to the 1996 second quarter provision. Of the
total restructuring reserves remaining as of March 31, 1996, approximately $71
million is included in accrued liabilities, approximately $16 million is
classified as a reduction of property, plant and equipment, and approximately $3
million is classified as a reduction of other assets.
<PAGE> 8
6. INCOME TAXES
The provision for income taxes for the three months and six months ended March
31, 1996 and 1995 arose principally from taxes currently payable in foreign
jurisdictions.
7. CASH DIVIDENDS
The Company has not declared or paid any cash dividends and has no plans to do
so in the foreseeable future.
8. 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> 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 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 SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------- ---------------
1996 1995 1996 1995
--------------- ---------------
<S> <C> <C> <C> <C>
Product revenues 79 79 79 81
Service and other revenues 21 21 21 19
- - --------------------------------- --- --- --- ---
TOTAL REVENUES 100 100 100 100
- - --------------------------------- --- --- --- ---
Cost of product revenues 48 45 47 44
Cost of service and other revenues 74 70 74 69
- - --------------------------------- --- --- --- ---
Total cost of revenues 54 50 53 48
Research and development 14 15 15 15
Marketing, general, and
administrative 31 32 33 32
Restructuring charge 9 N/A 5 N/A
- - --------------------------------- --- --- --- ---
OPERATING INCOME (LOSS) (8) 3 (6) 5
- - --------------------------------- --- --- --- ---
Gain on sale of subsidiaries
and investments N/A 2 3 1
- - --------------------------------- --- --- --- ---
INCOME (LOSS) BEFORE INCOME TAXES (8) 5 (3) 6
Provision for income taxes 1 1 1 1
- - --------------------------------- --- --- --- ---
NET INCOME (LOSS) (9) 4 (4) 5
================================= === === === ===
</TABLE>
N/A - Not applicable
<PAGE> 10
PERCENT INCREASE (DECREASE)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------- ---------------
1996 1995 1996 1995
--------------- ---------------
<S> <C> <C> <C> <C>
Product revenues 11 4 1 8
Service and other revenues 13 19 14 14
- - --------------------------------- --- --- --- ----
TOTAL REVENUES 12 7 4 9
- - --------------------------------- --- --- --- ----
Cost of product revenues 20 12 9 16
Cost of service and other revenues 19 37 23 18
- - --------------------------------- --- --- --- ----
Total cost of revenues 19 18 13 16
Research and development - 22 5 18
Marketing, general, and
administrative 9 (5) 10 (7)
Restructuring charge N/M N/A N/M N/A
- - --------------------------------- --- --- --- ----
OPERATING INCOME N/M (47) N/M 69
- - --------------------------------- --- --- --- ----
Gain on sale of subsidiaries
and investments N/M N/M N/M (62)
- - --------------------------------- --- --- --- ----
Net interest income (86) 308 (76) 223
- - --------------------------------- --- --- --- ----
INCOME BEFORE INCOME TAXES N/M (11) N/M 17
Provision for income taxes 128 40 76 67
- - --------------------------------- --- --- --- ----
NET INCOME N/M (16) N/M 12
================================= === === === ====
EARNINGS PER SHARE N/M (22) N/M 7
================================= === === === ====
</TABLE>
N/A - Not applicable N/M - Not meaningful
OPERATING RESULTS
REVENUES
Total revenues of $576.2 million during the second quarter of 1996
increased $60 million, or 12 percent, compared to the second quarter of 1995.
Product revenues of $456.1 million for the second quarter of 1996 increased $46
million, or 11 percent, over the same quarter of 1995. Service and other
revenues for the second quarter of 1996 of $120.1 million increased $14 million
or 13 percent over the second quarter of 1995. This revenue growth in the second
quarter occurred principally in the United States. The growth was fueled by
sales of high-end Himalaya servers, with successes in the decision support and
finance marketplaces, as well as sales of networking products and UNIX(R)
system-based servers. The increase in service and other revenues is primarily
the result of increased consulting revenues. Hardware service revenues remained
relatively flat.
Total revenues of $1.1 billion for the first six months of 1996 increased $38
million, or 4 percent, compared to the first six months of 1995. Product
revenues of $856.8 million increased $10 million, or 1 percent, over the same
period of 1995. Service and other revenues of $231.8 million increased $28
million or 14 percent over the same six-month period of 1995. The six month
product revenue comparison was negatively affected by the relatively weak
revenue performance in the first quarter of 1996. The first half of 1996 was
characterized by increased networking sales, somewhat offset by reduced computer
system sales across most product families, particularly in the United States.
<PAGE> 11
Product Lines--The table below summarizes total revenue by product lines (which
includes both product revenues and service and other revenues) and the
percentage of total revenues each product line contributed for the indicated
periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
(Dollars in millions) 1996 1995 1996 1995
-------------------- ------------------ ------------------ -------------------
$ % $ % $ % $ %
--------- --------- -------- -------- --------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computer systems 467.6 81 426.7 83 886.0 81 871.3 83
Networking 108.6 19 89.2 17 202.6 19 179.2 17
--------- --------- -------- -------- --------- ------- ---------- -------
Total revenues 576.2 100 515.9 100 1,088.6 100 1,050.5 100
========= ========= ======== ======== ========= ======= ========== =======
</TABLE>
Computer systems revenues increased $41 million, or 10 percent, in the
second quarter of 1996 when compared to the second quarter of 1995. This
increase was attributable to increased unit shipments of high-end Himalaya
products (18 percent over the 1995 second quarter), UNIX system-based sales, and
increased consulting revenues, partially offset by reduced revenues from the
mid-range line of Himalaya servers. Computer systems revenues increased $15
million, or 2 percent, for the six-month period ended March 31, 1996, compared
to the same 1995 period. The six month results were characterized by increased
consulting revenues offset by reduced unit shipments of low-end and mid-range
Himalaya servers and UNIX system-based products.
Networking revenues increased $19 million and $23 million, or 22 percent and 13
percent, respectively, in the second quarter and first six months of 1996 in
comparison to the same 1995 periods. The increase in networking revenues is
primarily a result of increased third party product sales and increased service
and consulting revenues.
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) 1996 1995 1996 1995
------------------- ------------------- ------------------- -------------------
$ % $ % $ % $ %
---------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States 295.1 51 243.6 47 533.5 49 523.9 50
Europe
United Kingdom 38.5 7 46.1 9 81.0 7 87.7 8
Germany 25.6 4 18.8 4 49.5 5 42.0 4
Other Europe 75.9 13 71.3 13 140.6 13 143.2 14
---------- ------- ---------- ------- ---------- ------- ---------- -------
Total Europe 140.0 24 136.2 26 271.1 25 272.9 26
Japan 88.6 15 80.0 16 166.9 15 148.9 14
Asia/Pacific 27.2 5 33.8 7 68.0 6 61.3 6
Americas Division
(excluding the U.S.) 25.3 5 22.3 4 49.1 5 43.5 4
---------- ------- ---------- ------- ---------- ------- ---------- -------
Total revenues 576.2 100 515.9 100 1,088.6 100 1,050.5 100
========== ======= ========== ======= ========== ======= ========== =======
</TABLE>
<PAGE> 12
Revenues in the United States increased 21 percent during the second
quarter of 1996 compared to the same 1995 period. The increase in U.S. revenues
is attributable primarily to increased computer product revenues -- increased
volume of unit shipments of the Company's high-end Himalaya products -- as well
as increased networking revenues. U.S. revenues increased 2 percent during the
first six months of 1996, compared to the prior year.
Revenues in Europe increased 3 percent during the second quarter of 1996
compared to the same 1995 period. This increase resulted primarily from
increased shipments of UNIX system-based products and certain Himalaya products,
and increased consulting revenues, partially offset by decreased shipments of
mid-range Himalaya products. European revenues decreased 1 percent during the
first six months of 1996, compared to the prior year.
In Japan, revenues increased 11 percent and 12 percent in the second quarter and
first six months of 1996, respectively, compared to the same 1995 periods. The
increase is primarily due to increased networking revenues, increased consulting
revenues, and increased unit shipments of mid-range computer systems.
Asia/Pacific revenues decreased 20 percent during the second quarter of 1996
compared to the same 1995 period, primarily resulting from decreased unit
shipments of high-end Himalaya products, offset somewhat by increased consulting
revenues. Asia/Pacific revenues increased 11 percent during the first six months
of 1996, compared to the prior year. The increase is primarily a result of a
strong first quarter, with a high volume of high-end Himalaya product shipments.
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 second quarter and first six months of 1996, product margin
percentages declined 3 percent to 52 percent and 53 percent, respectively, in
comparison to the same 1995 periods. Computer system margins declined 2 percent
to 56 percent and 57 percent, respectively, for the same comparative periods.
Computer system margins were impacted by product mix and an increase in
amortization of capitalized software, in comparison to the prior year. During
the same comparative periods, networking margins declined 8 percent to 33
percent and 9 percent to 35 percent, respectively. Networking margins were
negatively affected by an increased contribution to revenues from third party
product sales and related service fees.
Management expects product margins to continue to decline during the remainder
of 1996. However, product margins are difficult to predict, as they are affected
by future competitive pricing actions, geographic revenue mix, product mix, and
foreign currency fluctuations. For additional discussion on the risks associated
with these statements and other forward looking statements, refer to the Outlook
and Risks section below.
<PAGE> 13
Margins on service and other revenues decreased to 26 percent in the second
quarter and first six months of 1996 from 30 percent in the 1995 second quarter
and 31 percent in the first six months of 1995. Service and other revenues
margins have been declining gradually over the past few quarters due to
increased salaries and benefits, increased consulting costs, and the increased
contribution to services revenue from consulting services.
RESEARCH AND DEVELOPMENT EXPENSES
The level of research and development (R&D) expenses reported for the
second quarter of 1996 was consistent with that reported for the second quarter
of 1995. However, certain elements of R&D expenses increased, such as salaries
and benefits due to increased headcount and salary increases, spending on
tooling and development material, and equipment depreciation. These increasing
costs were offset by increased software capitalization, as many ongoing
development projects reached technical feasibility during the second quarter of
1996. In comparing the first six month periods of 1996 and 1995, R&D costs
increased $8 million or 5 percent. The increase in this six month comparison is
attributable primarily to increased salaries and benefits due to increased
headcount and salary increases and equipment depreciation. Management expects
R&D spending to decline in the second half of the year, primarily due to
restructuring actions initiated during the second quarter. However, the expected
R&D spending pattern could be affected by delays or changes in product
development schedules. For additional discussion on the risks associated with
these statements and other forward looking statements, refer to the Outlook and
Risks section below.
MARKETING, GENERAL, AND ADMINISTRATIVE EXPENSES
Marketing, general, and administrative (MG&A) expenses in the second
quarter and first six months of 1996 increased $14 million or 9 percent, and $32
million or 10 percent, respectively, compared to the same 1995 periods. The
increase in MG&A expenses in 1996 is attributable primarily to increased
commissions, software house fees and other costs that vary with revenues, and
increased salaries and benefits resulting from headcount and salary increases.
As part of the restructure actions discussed below, management has reviewed and
is implementing actions to reduce fixed and discretionary elements of MG&A
spending and expects expenses to decline as actions are taken. However, certain
expenses, such as commissions and incentive compensation for sales and marketing
staff, vary with 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 new 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 result in a 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 will require cash expenditures.
<PAGE> 14
Information relating to restructuring activity for the six months ended March
31, 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, three months ended
March 31, 1996 34,100 8,600 -- 9,300 -- 52,000
Utilized, six months ended
March 31, 1996 16,696 7,309 4,243 658 3,381 32,287
- - ---------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1996 $35,081 $29,952 $3,171 $18,462 $3,652 $90,318
=====================================================================================================================
Cash used, six months ended
March 31, 1996 $16,696 $ 4,761 $4,243 $ 106 $3,024 $28,830
=====================================================================================================================
</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 is in manufacturing, service and support
functions. The Company's plan anticipates these terminations to be substantially
completed during 1996.
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 $32 million restructuring reserves utilized in 1996,
approximately $6 million pertains to the 1996 second quarter provision. Of the
total restructuring reserves remaining as of March 31, 1996, approximately $71
million is included in accrued liabilities, approximately $16 million is
classified as a reduction of property, plant and equipment, and approximately $3
million is classified as a reduction of other assets.
<PAGE> 15
IMPACT OF CURRENCY
During the second quarter and first six months of 1996, in comparison
to the second quarter and first six months of 1995, most currencies in Europe
and Asia-Pacific strengthened against the U.S. The positive impact of
translating revenues and operating results for these countries was somewhat
offset by the unfavorable impact resulting from the U.S. dollar strengthening
against the Japanese yen. In comparing 1996 to 1995 quarterly and six month
operating results, the overall effect of currency movements, together with
results from the Company's hedging program, was modestly positive.
NET INCOME AND EARNINGS PER SHARE
For the periods ended March 31, 1996, the Company reported a net loss
of $49.6 million, or $0.42 per share, for the quarter, and $47.6 million, or
$0.41 per share, for the six-month period. These results included the $52
million restructuring charge discussed above. The six month results also
included a $31 million non-operating gain from the sale of an investment in
NetWorth, Inc. For the same periods ended March 31, 1995, the Company reported
net income of $21.7 million, or $0.18 per share, and $56.9 million, or $0.48 per
share, respectively. Net income for the 1995 periods included a non-operating
gain of $8.7 million from the sale of an equity investee, LightStream
Corporation.
The income tax provisions for the second quarters of 1996 and 1995 were $8
million and $4 million, respectively, arising principally from taxes currently
payable in foreign jurisdictions. The Company expects to continue to report
income for the remainder of 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.
FINANCIAL CONDITION
During the first six months of 1996, cash and cash equivalents
decreased by $27 million to $94 million. The Company generated $38 million
positive cash flow from operations during the first six months of the year.
Investing activities for the period consumed approximately $88 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 $25 million.
At March 31, 1996, $82 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 $10 million. The maximum amount outstanding under this
agreement during the first six 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.
<PAGE> 16
Including the amounts sold under the receivables purchase agreement, accounts
receivable days were 81 days at March 31, 1996, compared to 77 days at September
30, 1995 and 84 days at March 31, 1995. Inventory days were 57 days at March 31,
1996, compared to 46 days at September 30, 1995 and 59 days at March 31, 1995.
At March 31, 1996, total debt of $159 million, including $131 million of
nonrecourse borrowings against lease receivables, increased $16 million from
September 30, 1995. Total debt as a percentage of total capital was
approximately 13 percent as of March 31, 1996, compared to 11 percent as of
September 30, 1995.
Cash used for restructuring actions during the first half of 1996 aggregated
approximately $29 million and was funded by cash from operations. Cash
requirements for restructuring action for the remainder of 1996 are expected to
be approximately $45 million.
The Company's sources of working capital include cash generated from operations,
amounts available under the accounts receivable purchase agreement, and other
financing arrangements. Management believes that the financing sources available
at March 31, 1996 can adequately meet Tandem's financing needs, both in the
short and the long term.
As of March 31, 1996, the Company had approximately 8,300 full-time equivalent
employees.
OUTLOOK AND RISKS
OVERVIEW
During the first six months of 1996, the Company 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.
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 and networking products 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
<PAGE> 17
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 recently entered into strategic relationships
with 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
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.
UB NETWORKS, INC.
At the end of 1995, UB Networks introduced and began shipping three new
products -- GeoLAN 500, GeoSwitch, and GeoRim. Accordingly, UB Networks' 1996
operating results are dependent upon market acceptance of these new products by
UB Networks' existing customer base, as well as successful expansion into new
accounts.
UB Networks' operating results have been, and in the future may be, affected by
competitive pricing pressures, changes in mix of products sold, delays in
shipping new products, and inventory management. Accordingly, UB Networks'
future success is dependent on its ability to enhance existing products; to
develop and introduce, on a timely and cost-effective basis, new products that
keep pace with technological developments and emerging industry standards; to
address increasingly sophisticated customer requirements; and to manage the
product transition process.
FOREIGN OPERATIONS
Although the Company's operating and pricing strategies and currency
hedging practices take into account changes in foreign currency exchange rates
over time, the Company's operating results can be affected by foreign currency
exchange rates.
Tandem, Himalaya, Integrity, NonStop, and ServerNet are trademarks of the Tandem
Computers Incorporated. UB Networks, GeoLAN, GeoRim/E, and GeoSwitch are
trademarks 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> 18
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
second fiscal quarter.
<PAGE> 19
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 15, 1996 By: /s/ DAVID J. RYNNE
------------------------------
David J. Rynne
Senior Vice President and
Chief Financial Officer
Date: May 15, 1996 By: /s/ JOHN T. REECE
------------------------------
John T. Reece
Vice President and
Corporate Controller
<PAGE> 20
EXHIBIT INDEX
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 94365
<SECURITIES> 0
<RECEIVABLES> 516576
<ALLOWANCES> 17759
<INVENTORY> 191814
<CURRENT-ASSETS> 911722
<PP&E> 1312337
<DEPRECIATION> 712198
<TOTAL-ASSETS> 1817666
<CURRENT-LIABILITIES> 675365
<BONDS> 90092
0
0
<COMMON> 3013
<OTHER-SE> 1049196
<TOTAL-LIABILITY-AND-EQUITY> 1817666
<SALES> 856843
<TOTAL-REVENUES> 1088640
<CGS> 402759
<TOTAL-COSTS> 574751
<OTHER-EXPENSES> 161148
<LOSS-PROVISION> 2907
<INTEREST-EXPENSE> 7602
<INCOME-PRETAX> (32591)
<INCOME-TAX> 15000
<INCOME-CONTINUING> (47591)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (47591)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
