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, 1997
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 July 28, 1997
$.025 par value 118,074,615 shares
<PAGE>
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 1996 Annual Report to Stockholders and Annual Report
on Form 10-K for the year ended September 30, 1996. 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 periods ended June 30,
1997 are not necessarily indicative of results to be expected in the future.
[STATEMENTS ON FOLLOWING PAGES]
Page 2 of 22
<PAGE>
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<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) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Product revenues $ 392,692 $ 372,208 $ 1,099,028 $ 1,069,841
Service and other revenues 109,882 93,570 306,601 286,857
- ----------------------------------------------------------------------------------------------------------------------
Total revenues 502,574 465,778 1,405,629 1,356,698
- ----------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of product revenues 154,375 160,152 452,345 463,038
Cost of service and other revenues 80,979 66,859 219,627 207,699
Research and development 69,433 69,348 202,798 210,751
Marketing, general, and
administrative 147,600 139,184 434,961 447,770
Restructuring charge -- -- -- 52,000
- ----------------------------------------------------------------------------------------------------------------------
Total costs and expenses 452,387 435,543 1,309,731 1,381,258
- ----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 50,187 30,235 95,898 (24,560)
Gain on sale of real estate -- -- 5,463 --
Net interest income 2,049 22 4,143 730
- ----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 52,236 30,257 105,504 (23,830)
Provision for income taxes 9,000 6,919 25,500 21,757
- ----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 43,236 23,338 80,004 (45,587)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES -- (15,440) -- 5,894
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS,
NET OF INCOME TAXES -- -- 989 --
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 43,236 $ 7,898 $ 80,993 $ (39,693)
======================================================================================================================
PRIMARY EARNINGS (LOSS) PER SHARE
CONTINUING OPERATIONS $ .36 $ .20 $ .66 $ (.39)
DISCONTINUED OPERATIONS -- (.13) -- .05
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS -- -- .01 --
- ----------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE $ .36 $ .07 $ .67 $ (.34)
======================================================================================================================
Primary weighted average shares outstanding 119,524 118,978 120,201 117,346
======================================================================================================================
FULLY DILUTED EARNINGS (LOSS) PER SHARE
CONTINUING OPERATIONS $ .35 $ .20 $ .64 $ (.39)
DISCONTINUED OPERATIONS -- (.13) -- .05
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS -- -- .01 --
- ----------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE $ .35 $ .07 $ .65 $ (.34)
======================================================================================================================
Fully diluted weighted average shares outstanding 124,238 119,512 125,497 117,346
======================================================================================================================
See accompanying notes.
</TABLE>
Page 3 of 22
<PAGE>
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
June 30, September 30,
(In thousands, except per share amount) 1997 1996
- --------------------------------------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 227,822 $ 87,813
Accounts receivable, net 430,712 475,464
Current portion of lease receivables 85,702 74,624
Inventories 97,304 115,320
Prepaid expenses and other 76,904 43,749
Net current assets of discontinued operations -- 62,593
- --------------------------------------------------------------------------------------------------------------
Total current assets 918,444 859,563
- --------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT, at cost 1,267,894 1,246,950
Accumulated depreciation and amortization (744,821) (696,140)
Net property, plant, and equipment of discontinued
operations -- 30,402
- --------------------------------------------------------------------------------------------------------------
Net property, plant, and equipment 523,073 581,212
- --------------------------------------------------------------------------------------------------------------
LEASE RECEIVABLES 92,286 86,618
- --------------------------------------------------------------------------------------------------------------
OTHER ASSETS 256,552 217,580
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,790,355 $1,744,973
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
- --------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 140,632 $ 135,821
Accrued liabilities 344,436 353,765
Current maturities of long-term obligations 82,888 93,740
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 567,956 583,326
- --------------------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS 87,078 75,225
- --------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' INVESTMENT
Common stock $.025 par value, authorized
400,000 shares, outstanding 123,531 shares at
June 30 and 121,318 shares at September 30 3,088 3,033
Additional paid-in capital 736,015 710,264
Retained earnings 499,697 420,363
Accumulated translation adjustments (6,816) 3,629
Treasury stock, at cost (96,663) (50,867)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' investment 1,135,321 1,086,422
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $1,790,355 $1,744,973
==============================================================================================================
See accompanying notes.
</TABLE>
Page 4 of 22
<PAGE>
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
For the nine months ended
---------------------------------------
June 30, June 30,
(In thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 80,993 $ (39,693)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 138,277 146,799
Gain on disposal of discontinued operation (989) --
Gain on sale of real estate (5,463) --
Restructuring charge -- 52,000
Gain on sale of investment of discontinued operation -- (30,628)
(Gain) Loss on dispositions of property, plant,
and equipment (2,232) 1,585
Changes in:
Accounts receivable 49,098 50,513
Inventories 19,064 (34,068)
Lease receivables (16,986) 5,708
Non-debt current liabilities and other (71,724) (87,448)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 190,038 64,768
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant, and equipment (104,635) (115,559)
Proceeds from dispositions of property, plant,
and equipment 21,106 11,373
Proceeds from sale of discontinued operation 93,200 --
Proceeds from sale of investment of discontinued
operation 29,764 34,802
Proceeds from sale of real estate 16,856 --
Increase in other assets (79,111) (67,507)
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (22,820) (136,891)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings 84,267 88,100
Repayments (82,138) (62,842)
Repurchase of treasury stock (45,817) --
Issuance of Common Stock under
stock plans, including tax benefits 24,841 10,514
Issuance of warrants -- 5,700
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (18,847) 41,472
- ---------------------------------------------------------------------------------------------------------
Effect of exchange rate fluctuations on cash
and equivalents (7,481) (5,462)
- ---------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 140,890 (36,113)
Cash and equivalents at beginning of period 87,813 121,230
Net change in cash of discontinued operations (881) (11,167)
- ---------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF PERIOD $227,822 $ 73,950
=========================================================================================================
See accompanying notes.
</TABLE>
Page 5 of 22
<PAGE>
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. EARNINGS (LOSS) PER SHARE
- -----------------------------
Earnings per share (EPS) 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 and warrants that have a dilutive
effect when applying the treasury stock method. Loss per share is calculated
using the weighted average number of common shares outstanding during the
period. Fully diluted earnings per share also reflect additional dilution
related to stock options and warrants due to the use of the market price at the
end of the period, when higher than the average price for the period.
In February 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 128 (SFAS No. 128), EARNINGS PER SHARE. The Statement
is effective for periods ending after December 15, 1997, at which time the
Company will be required to change the method currently used to compute EPS.
SFAS No. 128 will require entities to report "basic" and "diluted" earnings per
share. For the Company, the basic earnings per share calculation is equivalent
to its present EPS calculation, excluding the effect of dilutive stock options
and warrants. The diluted earnings per share calculation is equivalent to the
existing primary EPS calculation.
<TABLE>
The Company has determined that, on a pro forma basis, basic earnings per share
and diluted earnings per share would have been as follows:
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
For the three months ended For the nine months ended
------------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pro forma basic earnings (loss) per share
Continuing operations $ .37 $ .20 $ .68 $ (.39)
Discontinued operations -- (.13) -- .05
Gain on disposal of discontinued
operations -- -- .01 --
- ---------------------------------------------------------------------------------------------------------------------------
Pro forma basic earnings (loss) per share $ .37 $ .07 $ .69 $ (.34)
===========================================================================================================================
Pro forma diluted earnings (loss) per share
Continuing operations $ .36 $ .20 $ .66 $ (.39)
Discontinued operations -- (.13) -- .05
Gain on disposal of discontinued
operations -- -- .01 --
- ---------------------------------------------------------------------------------------------------------------------------
Pro forma diluted earnings (loss) per share $ .36 $ .07 $ .67 $ (.34)
===========================================================================================================================
</TABLE>
2. INVENTORIES
- -----------------
<TABLE>
Inventories are stated at the lower of cost (first-in, first-out) or market. The
components of inventories were as follows:
<CAPTION>
- --------------------------------------------------------------------------------
June 30, September 30,
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Purchased parts and subassemblies $45,508 $ 62,511
Work in process 20,277 19,986
Finished goods 31,519 32,823
- --------------------------------------------------------------------------------
Total $97,304 $115,320
================================================================================
</TABLE>
Page 6 of 22
<PAGE>
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS
- ---------------
Realized gains on available-for-sale securities during the three and nine month
periods ended June 30, 1997 and 1996 were not significant. The net adjustment to
unrealized holding gains (losses) on available-for-sale securities for these
periods was not significant.
4. ACCOUNTS RECEIVABLE
- -----------------------
The Company has a receivables purchase agreement with a group of financial
institutions whereby the Company can sell a percentage ownership in an eligible
pool of accounts receivable. Under the terms of the agreement, the Company
retains collection and servicing responsibilities for the receivables and
retains substantially the same risk of credit loss as if the interest in
receivables had not been sold. The agreement allows for maximum borrowings of up
to $100 million and expires in October 1997.
At June 30, 1997, $73 million of financing was available to the Company under
its accounts receivable purchase agreement. The maximum amount outstanding under
this agreement during the first nine months 1997 was $25 million. There were no
amounts outstanding during the quarter ended June 30, 1997 or as of September
30, 1996.
5. DISCONTINUED OPERATIONS
- ---------------------------
During June 1996, the Company adopted a plan to sell its networking business, UB
Networks, Inc. (UB Networks), and on January 17, 1997, sold all of the
outstanding capital stock of UB Networks to Newbridge Networks Inc., a
wholly-owned subsidiary of Newbridge Networks Corporation, effective December
31, 1996. The Company received initial gross proceeds (the "Base Purchase
Price") of $118.0 million ($106.2 million in cash and $11.8 million deposited to
a one-year escrow account) of which $13.0 million is attributable to estimated
cash disbursements by the Company to or on behalf of UB Networks during the
period January 1, 1997, through January 17, 1997. The Base Purchase Price is
subject to certain adjustments that the Company estimates will be immaterial in
the aggregate and is to be increased by amounts, if any, received by the Company
in the future pursuant to an earn-out provision, the details of which have not
yet been finalized. Based upon the Base Purchase Price, the carrying value of UB
Networks, and estimated costs and expenses incurred and expected to be incurred
in connection with the transaction, the Company recorded a gain of $1.0 million
from this transaction in its second quarter ending March 31, 1997.
The results of operations for UB Networks for the three months ended December
31, 1996, which were deferred by the Company as part of net assets of
discontinued operations, included revenues of $67.5 million, an operating loss
of $23.3 million, and a non-operating gain from the sale of an investment of
$29.6 million.
The results of operations for UB Networks for the three months ended June 30,
1996, included revenues of $82.1 million, an operating loss of $15.4 million,
and a loss from discontinued operations of $15.4 million, or $0.13 per share.
The results of operations for UB Networks for the nine months ended June 30,
1996, included revenues of $279.9 million, an operating loss of $24.5 million, a
non-operating gain from the sale of an investment of $30.6 million, and income
from discontinued operations of $5.9 million, or $0.05 per share.
Page 7 of 22
<PAGE>
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RESTRUCTURING
- -----------------
<TABLE>
Information relating to restructuring activity for the nine months ended June
30, 1997 is presented below.
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Reduction of Discontinued
(In thousands) Work Force Facilities Activities Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, September 30, 1996 $17,939 $24,794 $13,488 $56,221
Utilized, nine months ended
June 30, 1997 (17,535) (5,821) (1,130) (24,486)
Applicable to discontinued
operation -- (3,854) -- (3,854)
- ---------------------------------------------------------------------------------------------------
Balances, June 30, 1997 $ 404 $15,119 $12,358 $27,881
===================================================================================================
Cash used, nine months
ended June 30, 1997 $17,535 $ 5,382 $ 848 $23,765
===================================================================================================
</TABLE>
Of the total restructuring reserves remaining as of June 30, 1997, approximately
$12 million is included in accrued liabilities and approximately $16 million is
classified as a reduction of property, plant and equipment.
7. INCOME TAXES
- -----------------
The provision for income taxes for the three months and nine months ended June
30, 1997, and 1996, arose principally from taxes currently payable in foreign
jurisdictions.
8. CASH DIVIDENDS
- -------------------
The Company has not declared or paid any cash dividends and has no plans to do
so in the foreseeable future.
9. 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 was purported
to be on behalf of purchasers of the Company's Common Stock between March 8,
1995, and July 12, 1995. The complaint alleged violations of Section 10(b) of
the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5.
On June 30, 1997, the court entered judgment in favor of the Company on all
claims. The plaintiffs have waived their right of appeal and the judgment is,
therefore, final.
Page 8 of 22
<PAGE>
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. PROPOSED MERGER WITH COMPAQ COMPUTER CORPORATION
- --------------------------------------------------------
On June 23, 1997, the Company and Compaq Computer Corporation (Compaq) announced
the execution of a merger agreement (Merger Agreement) in a stock-for-stock
transaction. Under the terms of the Merger Agreement, shares of and options to
purchase the Company's common stock were to be exchanged for shares of and
options to purchase Compaq common stock at an exchange ratio of 1 share of the
Company's common stock for 0.21 shares of Compaq common stock. The exchange
ratio has been adjusted to 1 share of the Company's common stock to 0.525 shares
of Compaq common stock to reflect Compaq's five-for-two stock split announced on
July 1, 1997. The transaction is intended to qualify as a pooling of interests
for accounting and financial reporting purposes, and is structured to qualify as
a tax-free reorganization.
The Company has filed required documents with various regulatory agencies
regarding the proposed merger. The applicable waiting periods for certain
filings have expired. The transaction is conditioned upon satisfactory
completion of all regulatory requirements, obtaining approval of the Company's
stockholders, and other customary closing conditions.
The Company estimates that it will incur merger-related fees and expenses of
approximately $16.8 million, consisting primarily of transaction costs for fees
and expenses of investment bankers, attorneys and accountants. In addition, if
the merger is consummated, the Company will become obligated to pay special
bonuses totaling approximately $4.6 million. If the merger is terminated prior
to consummation, Tandem may be required, among other things, to incur a
termination fee of $55 million.
11. SUBSEQUENT EVENT
- ---------------------
Effective July 1, 1997, the Company acquired an additional 50 percent ownership
interest in Tandem Computers de Mexico de C.V. (Tandem de Mexico) for a total
acquisition cost of approximately $14.5 million. As a result, the Company has a
95 percent ownership interest in Tandem de Mexico. Tandem de Mexico is primarily
engaged in selling and servicing products manufactured by the Company. The
Company will account for this additional investment using the purchase method of
accounting and will begin to report Tandem de Mexico as a consolidated
subsidiary as of July 1, 1997.
Page 9 of 22
<PAGE>
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 its networking business, UB
Networks, Inc. (UB Networks), and on January 17, 1997, sold all of the
outstanding capital stock of UB Networks to Newbridge Networks, Inc., a
wholly-owned subsidiary of Newbridge Networks Corporation, effective December
31, 1996. The Company's consolidated financial statements have been presented
for all periods 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 first nine months of fiscal 1997 and 1996. The first table shows the
relationship of revenue and expense items to total revenues, except costs of
product and services, which are shown in relation to product revenues and
service revenues, respectively. The second table shows the percentage change in
1997 and 1996 from the comparable prior year periods.
The Company's fiscal year ends on September 30. References to 1997 and 1996
in this section represent the Company's fiscal years.
<TABLE>
PERCENT OF TOTAL REVENUES
(Except cost of product and service)
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
- ----------------------------------------------------------------------------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Product revenues 78% 80% 78% 79%
Service and other revenues 22 20 22 21
- ----------------------------------------------------------------------------------------------
TOTAL REVENUES 100 100 100 100
- ----------------------------------------------------------------------------------------------
Cost of product revenues 39 43 41 43
Cost of service and other revenues 74 71 72 72
- ----------------------------------------------------------------------------------------------
Total cost of revenues 47 49 48 49
Research and development 14 15 14 16
Marketing, general, and
administrative 29 30 31 33
Restructuring charge -- -- -- 4
- ----------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 10 6 7 (2)
Gain on sale of real estate -- -- 1 --
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 10 6 8 (2)
Provision for income taxes 1 1 2 1
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 9 5 6 (3)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES -- (3) -- --
- ----------------------------------------------------------------------------------------------
NET INCOME (LOSS) 9% 2% 6% (3)%
==============================================================================================
</TABLE>
Page 10 of 22
<PAGE>
<TABLE>
PERCENT INCREASE (DECREASE)
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
- --------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Product revenues 6% (7)% 3% (3)%
Service and other revenues 17 (7) 7 6
- --------------------------------------------------------------------------------------------------
TOTAL REVENUES 8 (7) 4 (1)
- --------------------------------------------------------------------------------------------------
Cost of product revenues (4) (2) (2) 1
Cost of service and other revenues 21 (10) 6 10
- --------------------------------------------------------------------------------------------------
Total cost of revenues 4 (5) -- 4
Research and development -- (4) (4) 3
Marketing, general, and
administrative 6 (8) (3) 3
Restructuring charge N/A N/A N/M N/M
- --------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 66 (21) N/M N/M
Net interest income 9,214 (98) 468 (83)
- --------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 73 (23) N/M N/M
Provision for income taxes 30 (39) 17 12
- --------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 85 (17) N/M N/M
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES N/M N/M N/M (59)
- --------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 447% (74)% N/M N/M
==================================================================================================
PRIMARY EARNINGS (LOSS) PER SHARE 414% (73)% N/M N/M
FULLY DILUTED EARNINGS (LOSS) PER SHARE 400% (73)% N/M N/M
==================================================================================================
N/A - Not applicable N/M - Not meaningful
</TABLE>
OPERATING RESULTS
REVENUES
Total revenues of $502.6 million during the third quarter of 1997
increased $36.8 million, or 8 percent, compared to the third quarter of 1996.
Product revenues of $392.7 million for the third quarter of 1997 increased $20.5
million, or 6 percent, from the same quarter of 1996. This increase is primarily
attributable to increased revenues from the mid-range Himalaya products and
associated software and increased revenues from NT servers. This increase is
partially offset by the negative impact of the stronger U.S. dollar versus
certain European currencies and the Japanese Yen from a year ago.
Service and other revenues of $109.9 million for the third quarter of 1997
increased $16.3 million, or 17 percent, compared to the third quarter of 1996.
This increase is primarily due to increased consulting revenues, partially
offset by the negative impact of certain currency exchange rate movements
between the periods.
Total revenues of $1.4 billion for the first nine months of 1997 increased $48.9
million, or 4 percent, compared to the first nine months of 1996. Product
revenues of $1.1 billion increased $29.2 million, or 3 percent, from the same
period of 1996. The increase in product revenues is primarily attributable to
increased revenues from
Page 11 of 22
<PAGE>
the high-end and mid-range Himalaya products and initial revenues from NT
servers in 1997. This increase is partially offset by the negative impact of
certain currency exchange rate movements from the previous year. Service and
other revenues of $306.6 million increased $19.7 million, or 7 percent, from the
comparable 1996 period. The increase in service and other revenues is primarily
due to increases in both consulting and hardware maintenance revenues, partially
offset by the negative impact of certain currency exchange rate movements
between the periods.
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. Current quarter and year-to-date
growth rates in the various geographic regions are not necessarily
representative of future results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
(Dollars in millions) 1997 1996 1997 1996
--------------------- --------------------- ----------------------- -----------------------
$ % $ % $ % $ %
--------------------- --------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States 245.3 49 219.7 47 671.6 48 630.3 46
Europe
United Kingdom 42.4 8 35.5 8 117.7 8 105.2 8
Germany 25.9 5 27.0 6 83.2 6 76.3 6
Other Europe 63.1 13 66.7 14 179.6 13 191.8 14
--------------------- --------------------- ----------------------- -----------------------
Total Europe 131.4 26 129.2 28 380.5 27 373.3 28
Japan 70.9 14 66.8 14 199.9 14 196.5 14
Asia/Pacific 30.4 6 28.8 6 96.2 7 91.9 7
Americas Division
(excluding the
U.S.) 24.6 5 21.3 5 57.4 4 64.7 5
--------------------- --------------------- ----------------------- -----------------------
Total revenues 502.6 100 465.8 100 1,405.6 100 1,356.7 100
===================== ===================== ======================= =======================
</TABLE>
Revenues in the United States increased 12 percent in the third quarter
of 1997 compared to the third quarter of 1996. This increase is primarily
attributable to increased revenues from the mid-range Himalaya products and NT
servers. Revenues in the United States increased 7 percent in the nine month
period ended June 30, 1997, in comparison to the same 1996 period. This increase
is primarily attributable to increased revenues from high-end Himalaya servers,
increased revenues from the mid-range Himalaya products and NT servers, and an
increase in hardware maintenance revenues, partially offset by reduced revenues
from the UNIX system-based products.
Revenues in Europe increased 2 percent during the third quarter of 1997,
compared to the third quarter of 1996. In the quarterly comparison, increased
consulting revenues and increased revenues from mid-range Himalaya products were
partially offset by decreased revenues from high-end Himalaya products and by
the negative impact of certain currency exchange rate movements between the
periods. European revenues increased 2 percent in the first nine months of 1997,
compared to the same 1996 period. For the nine month comparison, increased
revenues from the mid-range Himalaya products, increased revenues from the UNIX
system-based products and increased consulting revenues were partially offset by
decreased revenues from high-end Himalaya products and by the negative impact of
certain currency exchange rate movements between the periods.
Page 12 of 22
<PAGE>
In Japan, revenues increased 6 percent in the third quarter of 1997, compared to
the same 1996 period. In the quarterly comparison, increased revenues from
high-end Himalaya products were partially offset by the negative impact of
currency exchange rate movements between the periods, and by decreased revenues
from mid-range Himalaya products. Revenues in Japan increased 2 percent in the
first nine months of 1997, compared to the same 1996 period. For the nine month
comparison, increased revenues from high-end Himalaya products were generally
offset by the negative impact of currency exchange rate movements between the
periods, by decreased revenues from mid-range Himalaya products, and by reduced
consulting revenues.
Asia/Pacific revenues increased 6 percent during the third quarter of 1997,
compared to the third quarter of 1996, primarily due to increased consulting
revenues. Asia/Pacific revenues increased 5 percent during the first nine months
of 1997, compared to the first nine months of 1996. This increase is primarily
due to increased consulting and hardware maintenance revenues.
COST OF REVENUES
During the third quarter of 1997, product margin percentages increased
to 61 percent as compared to 57 percent in the same 1996 period. During the
first nine months of 1997, product margin percentages increased to 59 percent in
comparison to 57 percent in the same 1996 period. Computer system margins were
positively impacted by improvements in cost of purchased parts, a shift in
product mix to higher margin software products and improved management of
discounting and other pricing management programs. These improvements were
partially offset by the negative impact on revenues of certain currency exchange
rate movements and, in the third quarter, by increased provisions for obsolete
inventory.
Management expects product margins to decline modestly in the fourth quarter of
1997 from the third quarter level. However, product margins are difficult to
predict, as they are affected by future competitive pricing actions, geographic
revenue mix, product mix, cost of purchased parts, 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 26 percent in the third quarter of
1997 compared to 29 percent in the third quarter of 1996. The decline in margins
was primarily attributable to a shift in the mix of revenues, which resulted in
a higher proportion of lower margin consulting revenues. Margins on service and
other revenues were 28 percent in the first nine months of both 1997 and 1996.
Page 13 of 22
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
Research and development (R&D) expenses of $69.4 million for the third
quarter of 1997 were essentially flat compared to the same 1996 quarter. R&D
expenses of $202.8 million for the first nine months of 1997 decreased $8.0
million, or 4 percent, compared to the same 1996 period. In both the quarterly
and nine month comparisons, higher levels of external funding received for joint
development projects, higher levels of software capitalization, and decreases in
both development material and tooling costs were partially offset by increases
in salaries and benefits. Management expects R&D spending to decline slightly in
the fourth quarter of 1997 from the third quarter level. However, the expected
R&D spending pattern could be affected by factors such as changes in product
development schedules and changes in external funding levels. 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 of $147.6
million in the third quarter of 1997 increased $8.4 million, or 6 percent, in
comparison to the third quarter of 1996. The increase in MG&A expenses is
primarily attributable to increased advertising and product promotional
spending, amounts accrued for nonrecurring payments under certain employment
agreements, and net increases in certain other expense items that are not fixed
in nature. This increase was partially offset by lower sales and marketing
personnel-related and occupancy-related expenses. MG&A expenses for the first
nine months of 1997 decreased $12.8 million, or 3 percent, to $435.0 million,
compared to the same period in 1996. This decrease is primarily attributable to
reduced sales and marketing personnel-related and occupancy-related expenses,
partially offset by increased spending for new product introductions, and
advertising and promotional costs. In the fourth quarter of 1997, management
expects MG&A expenses, excluding commissions, to increase slightly from the 1997
third quarter level, but to decline 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.
RESTRUCTURING ACTIVITY
During the second quarter of 1996, the Company initiated a
restructuring program 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 charge of
$52.0 million and included reducing headcount, vacating leased facilities, and
disposing of assets to discontinue certain product programs and other
activities.
Page 14 of 22
<PAGE>
<TABLE>
Information relating to restructuring activity for the nine months ended June
30, 1997, is presented below.
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Reduction of Discontinued
(In thousands) Work Force Facilities Activities Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, September 30, 1996 $ 17,939 $ 24,794 $ 13,488 $ 56,221
Utilized, nine months ended
June 30, 1997 (17,535) (5,821) (1,130) (24,486)
Applicable to discontinued
operation -- (3,854) -- (3,854)
- ---------------------------------------------------------------------------------------------------
Balances, June 30, 1997 $ 404 $ 15,119 $ 12,358 $ 27,881
===================================================================================================
Cash used, nine months ended
June 30, 1997 $ 17,535 $ 5,382 $ 848 $ 23,765
===================================================================================================
</TABLE>
IMPACT OF CURRENCY EXCHANGE RATES
During the third quarter and first nine months of 1997, certain
European currencies and the Japanese yen were weaker against the U.S. dollar
than in the corresponding 1996 periods. If currency exchange rates had not
changed since the respective periods in 1996, operating income for the third
quarter of 1997 and the first nine months of 1997 would have been greater by
approximately $8 million and $22 million, respectively, compared to the
corresponding periods in 1996. During these same 1997 periods, the Company's
hedging program generated income of approximately $2 million and $12 million in
each respective period, which partially mitigated the above.
RESULTS FROM CONTINUING OPERATIONS
For the three month period ended June 30, 1997, the Company reported
income from continuing operations of $43.2 million, or $0.35 per share on a
fully diluted basis. For the nine month period ended June 30, 1997, the Company
reported income from continuing operations of $80.0 million, or $0.64 per share
on a fully diluted basis. For the three month period ended June 30, 1996, the
Company reported income from continuing operations of $23.3 million, of $0.20
per share on a fully diluted basis. 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, including the $52.0 million restructuring charge.
The income tax provisions for the third quarters of 1997 and 1996 were $9.0
million and $6.9 million, respectively, arising principally from taxes currently
payable in foreign jurisdictions. The income tax provisions for the first nine
months of 1997 and 1996 were $25.5 million and $21.8 million, respectively,
arising principally from taxes currently payable in foreign jurisdictions. The
Company expects to continue to report income for the remainder of 1997 in
certain foreign jurisdictions, which will result in tax provisions despite loss
carryforwards which are available primarily to offset U.S. and certain foreign
income.
Page 15 of 22
<PAGE>
RESULTS FROM DISCONTINUED OPERATIONS
During June 1996, the Company adopted a plan to sell its networking
business, UB Networks, Inc. (UB Networks), and on January 17, 1997, sold all of
the outstanding capital stock of UB Networks to Newbridge Networks, Inc., a
wholly-owned subsidiary of Newbridge Networks Corporation, effective December
31, 1996. The Company received initial gross proceeds (the "Base Purchase
Price") in the amount of $118.0 million ($106.2 million in cash and $11.8
million deposited to a one-year escrow account) of which $13.0 million is
attributable to estimated cash disbursements by the Company to or on behalf of
UB Networks during the period January 1, 1997, through January 17, 1997. The
Base Purchase Price is subject to certain adjustments that the Company estimates
will be immaterial in the aggregate and is to be increased by amounts, if any,
received by the Company in the future pursuant to an earn-out provision the
details of which have not yet been finalized. Based upon the Base Purchase
Price, the carrying value of UB Networks and estimated costs and expenses
incurred and expected to be incurred in connection with this transaction, the
Company recorded a gain of $1.0 million from this transaction in its second
quarter ending March 31, 1997.
The results of operations for UB Networks for the three months ended December
31, 1996, which were deferred by the Company as part of net assets of
discontinued operations, included revenues of $67.5 million, an operating loss
of $23.3 million, and a non-operating gain from the sale of an investment of
$29.6 million.
The results of operations for UB Networks for the three months ended June 30,
1996, included revenues of $82.1 million, an operating loss of $15.4 million,
and a loss from discontinued operations of $15.4 million, or $0.13 per share.
The results of operations for UB Networks for the nine months ended June 30,
1996, included revenues of $279.9 million, an operating loss of $24.5
million, a non-operating gain from the sale of an investment of $30.6 million,
and income from discontinued operations of $5.9 million, or $0.05 per share.
FINANCIAL CONDITION
During the first nine months of 1997, cash and cash equivalents
increased by $140 million to $228 million. The Company generated $190 million
positive cash flow from operations during the first nine months of the year.
Investing activities for the period used approximately $23 million, principally
through investment in capital equipment and software, partially offset by
proceeds from the sale of discontinued operations of approximately $93 million
and proceeds from the sale of real estate. Financing activities consumed
approximately $19 million, primarily from the purchase of treasury stock,
partially offset by issuances of common stock under the Company's stock plans.
The Company has a receivables purchase agreement with a group of financial
institutions whereby the Company can sell a percentage ownership interest in an
eligible pool of accounts receivable. Under the terms of the agreement, the
Company retains collection and servicing responsibilities for the receivables
and retains substantially the same risk
Page 16 of 22
<PAGE>
of credit loss as if the interest in receivables had not been sold. The
agreement allows for maximum borrowings of up to $100 million and expires in
October 1997. At June 30, 1997, $73 million of financing was available to the
Company under its accounts receivable purchase agreement. The maximum amount
outstanding at any point during the first nine months of 1997 was $25 million.
There were no amounts outstanding during the quarter ended June 30, 1997 or as
of September 30, 1996.
Accounts receivable days were 78 at June 30, 1997 compared to 80 days at
September 30, 1996. Inventory days were 38 at June 30, 1997 compared to 39 days
at September 30, 1996.
Total debt and short-term borrowings of $176 million at June 30, 1997, including
$139 million of limited recourse borrowings against lease receivables, increased
$1 million from September 30, 1996. Total debt as a percentage of total capital
was approximately 13 percent as of June 30, 1997 compared to 14 percent as of
September 30, 1996.
Cash used for restructuring actions during the first nine months of 1997
aggregated approximately $24 million and was funded by cash from operations.
Cash requirements for restructuring actions for the remainder of 1997 are
expected to be approximately $3 million and will be funded by cash generated
from operations.
The Company's sources of working capital include cash generated from operations,
amounts available under the accounts receivable purchase agreement, certain
committed and uncommitted unsecured credit lines, and other financing
arrangements available to the Company. Management believes that the financing
sources available at June 30, 1997 can adequately meet Tandem's financing needs,
both in the short and the long term.
As of June 30, 1997, the Company had approximately 7,000 full-time equivalent
employees.
PROPOSED MERGER WITH COMPAQ COMPUTER CORPORATION
On June 23, 1997, the Company and Compaq Computer Corporation (Compaq)
announced the execution of a merger agreement (Merger Agreement) in a
stock-for-stock transaction. Under the terms of the Merger Agreement, shares of
and options to purchase the Company's common stock were to be exchanged for
shares of and options to purchase Compaq common stock at an exchange ratio of 1
share of the Company's common stock for 0.21 shares of Compaq common stock. The
exchange ratio has been adjusted to 1 share of the Company's common stock for
0.525 shares of Compaq common stock to reflect Compaq's five-for-two stock split
announced on July 1, 1997. The transaction is intended to qualify as a pooling
of interests for accounting and financial reporting purposes, and is structured
to qualify as a tax-free reorganization.
The Company has filed required documents with various regulatory agencies
regarding the proposed merger. The applicable waiting periods for certain
filings have expired. The transaction is conditioned upon satisfactory
completion of all regulatory requirements,
Page 17 of 22
<PAGE>
obtaining approval of the Company's stockholders, and other customary closing
conditions.
The Company estimates that it will incur merger-related fees and expenses of
approximately $16.8 million, consisting primarily of transaction costs for fees
and expenses of investment bankers, attorneys and accountants. In addition, if
the merger is consummated, the Company will become obligated to pay special
bonuses totaling approximately $4.6 million. If the merger is terminated prior
to consummation, Tandem may be required, among other things, to incur a
termination fee of $55 million.
OUTLOOK AND RISKS
TANDEM'S CORE COMPETENCIES HAVE HISTORICALLY CENTERED AROUND PROVIDING
RELIABLE, SCALEABLE HARDWARE AND SOFTWARE SOLUTIONS FOR BUSINESS-CRITICAL
APPLICATIONS, SUCH AS ONLINE TRANSACTION PROCESSING (OLTP), DECISION SUPPORT,
AND MESSAGING. WITH THE ADVENT OF THE INTERNET AND GROWING CORPORATE INTRANETS,
THE COMPANY BELIEVES THAT COMPUTER APPLICATIONS WILL EMERGE THAT WILL RESULT IN
MEDIA-RICH, HIGH-VOLUME TRANSACTIONS, CAUSING OLTP TO BE EXPANDED TO INCLUDE
INTERNET TRANSACTION PROCESSING (ITP), INCREASING THE DEMAND FOR RELIABILITY AND
SCALABILITY IN COMPUTING INFRASTRUCTURES. THE COMPANY BELIEVES THAT IT IS WELL
POSITIONED TO PROVIDE THE COMPUTING SOLUTIONS TO MEET THIS DEMAND.
IN RESPONSE TO THIS OPPORTUNITY, TANDEM PLANS TO EXTEND ITS FUNDAMENTALS,
INTEGRAL TO THE HIGH-END HIMALAYA PLATFORM, TO THE WINDOWS NT SERVER MARKET.
TANDEM'S SERVERNET CLUSTERING TECHNOLOGY IS INCLUDED IN THE S-SERIES SERVERS NOW
SHIPPING ACROSS ALL THREE PRODUCT FAMILIES AND THE CS150 CLUSTERED SERVER
PRODUCT. FIRST CUSTOMER SHIPMENT DATES FOR THE S-SERIES PRODUCTS WERE: UNIX,
FEBRUARY 1996; WINDOWS NT, NOVEMBER 1996; AND, HIMALAYA, JUNE 1997. THE FIRST
CUSTOMER SHIPMENT DATE FOR THE CS150 PRODUCT WAS ALSO JUNE 1997. S-SERIES AND
CS150 PRODUCT REVENUES ACCOUNTED FOR APPROXIMATELY 8 PERCENT OR $42 MILLION OF
TOTAL REVENUES IN THE THIRD QUARTER OF FISCAL 1997, OF WHICH APPROXIMATELY $22
MILLION RELATED TO THE HIMALAYA S-SERIES SERVERS. THERE CAN BE NO ASSURANCE THAT
REVENUES OF THESE PRODUCTS WILL CONTINUE AT THE SAME LEVEL.
THE COMPANY EXPECTS NO SIGNIFICANT IMPACT ON THE OVERALL REVENUE ATTRIBUTABLE TO
HIMALAYA SERVERS (K-SERIES AND S-SERIES) AS A RESULT OF THE INTRODUCTION OF THE
S-SERIES SERVERS. S-SERIES HIMALAYA SERVERS INTEROPERATE WITH K-SERIES HIMALAYA
SERVERS. SALES OF S-SERIES HIMALAYA SERVERS ARE EXPECTED TO REPLACE SALES OF
K-SERIES SERVERS FOR NEW APPLICATIONS. THE COMPANY EXPECTS THAT SALES OF
HIMALAYA SERVERS FOR ADDITIONAL CUSTOMER CAPACITY WILL BE SPLIT BETWEEN K-SERIES
AND S-SERIES SERVERS FOR THE NEXT TWO TO THREE YEARS. THE S-SERIES HIMALAYA AND
S-SERIES NT SERVERS HAVE NO IMPACT ON THE MARKET SUCCESS OF THE S-SERIES UNIX
SERVERS, BECAUSE THE COMPANY'S UNIX PRODUCTS ARE FOCUSED ON SPECIFIC APPLICATION
AREAS IN THE TELECOMMUNICATIONS INDUSTRY.
IN THE CONTEXT OF THE COMPANY'S NEW PRODUCT STRATEGY, THE COMPANY'S FUTURE
OPERATING RESULTS ARE DEPENDENT UPON THE COMPANY'S ABILITY TO EXECUTE ITS NEW
STRATEGY, TO INTRODUCE NEW PRODUCTS ON A TIMELY BASIS, AND TO MANAGE PRODUCT
TRANSITIONS EFFECTIVELY. FUTURE
Page 18 of 22
<PAGE>
OPERATING RESULTS ARE ALSO DEPENDENT UPON CONTINUED DEMAND FOR HIMALAYA AND
INTEGRITY SERVERS AND THE MARKET'S ACCEPTANCE OF THE COMPANY'S NEW PRODUCT
OFFERINGS.
ANOTHER ASPECT OF THE COMPANY'S VISION ADDRESSES STRATEGIC PARTNERSHIPS. THE
COMPANY HAS ENTERED INTO STRATEGIC PARTNERSHIPS WITH OTHER TECHNOLOGY COMPANIES
FOR JOINT DEVELOPMENT, OEM DISTRIBUTION, AND PRODUCT LICENSING ASSOCIATED WITH
THE COMPANY'S SERVERNET CLUSTERING TECHNOLOGY AND NONSTOP SOFTWARE. FUTURE
OPERATING RESULTS ARE DEPENDENT UPON THE COMPANY'S ABILITY TO MANAGE THESE NEW
PARTNERSHIP RELATIONSHIPS, AND ASSOCIATED COMPETITIVE RISKS, EFFECTIVELY.
TO PREPARE FOR THE CHANGES IN BUSINESS STRATEGY BRIEFLY OUTLINED ABOVE, THE
COMPANY CHANGED ITS ORGANIZATIONAL STRUCTURE DURING 1996 INTO PRODUCT LINE
BUSINESS UNITS AND REFOCUSED ITS NORTH AMERICAN SALES ORGANIZATION FIRST BY
GEOGRAPHY AND THEN BY LINE OF BUSINESS. THESE ORGANIZATIONAL CHANGES, TOGETHER
WITH THE 1996 RESTRUCTURING ACTIONS, HAVE RESULTED IN SUBSTANTIAL CHANGES IN THE
COMPANY'S MANAGEMENT TEAM. GOING FORWARD, CHANGES OF MANAGEMENT AND
ORGANIZATIONAL STRUCTURE MAY CONTINUE TO OCCUR. THE IMPACT OF SUCH CHANGES ON
THE COMPANY'S FUTURE OPERATING RESULTS CANNOT BE PREDICTED.
HISTORICALLY, TANDEM RECOGNIZES A LARGE PERCENTAGE OF ITS REVENUES IN THE LATTER
PART OF EACH QUARTER. FURTHER, THE COMPANY'S PERFORMANCE IN THE LATTER HALF OF A
FISCAL YEAR IS TYPICALLY STRONGER THAN IN THE BEGINNING OF A FISCAL YEAR. THESE
TRENDS MAKE IT DIFFICULT TO FORECAST REVENUES AND COULD SUBJECT THE COMPANY TO
FLUCTUATIONS IN REVENUES AND EARNINGS.
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.
FORWARD-LOOKING STATEMENTS IN THIS DOCUMENT ARE BASED ON MANAGEMENT'S CURRENT
EXPECTATIONS AND INVOLVE NUMEROUS RISKS AND UNCERTAINTIES, SOME OF WHICH HAVE
BEEN OUTLINED ABOVE, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY.
Tandem, Himalaya, Integrity, iTP, NonStop, ServerNet, ServerWare, and the Tandem
Logo are trademarks or registered trademarks of Tandem Computers Incorporated in
the United States and/or other countries. Windows NT is either a registered
trademark or a trademark of Microsoft Corporation in the United States and/or
other countries. 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 Ltd. All other brand and product
names are trademarks or registered trademarks of their respective companies.
Page 19 of 22
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit
Number Exhibit
10.23** Settlement Agreement and General Release dated May 27,
1997, as amended, to Employment Agreement dated May 19,
1995 and amended as of January 18, 1996 and May 2, 1996
between the Company and Kurt Friedrich
27 Financial Data Schedule
- --------------
* Incorporated by reference.
** Director or officer compensatory plan.
(b) Reports on Form 8-K: (i) A report on Form 8-K, Item 2 was filed by
the Company with the Commission on June 26, 1997, with respect to Compaq's
proposed merger with Tandem. (ii) A report on Form 8-K, Item 5 was filed by the
Company with the Commission on July 23, 1997, containing the Company's news
release dated July 22, 1997, with respect to its financial results for the
period ended June 30, 1997.
Page 20 of 22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TANDEM COMPUTERS INCORPORATED
(Registrant)
Date: August 12, 1997 By: /s/ Enrico L. Pesatori
----------------------------------
Enrico L. Pesatori
President,
Chief Operating Officer and
Interim Chief Financial Officer
Date: August 12, 1997 By: /s/ Kenneth R. Barber
----------------------------------
Kenneth R. Barber
Senior Vice President and
Corporate Controller
Page 21 of 22
<PAGE>
INDEX TO EXHIBITS
EXHIBIT PAGE
- ------- ----
10.23* Settlement Agreement and General Release dated May 27, *
1997, as amended, to Employment Agreement dated May
19, 1995 and amended as of January 18, 1996 and May 2,
1996 between the Company and Kurt Friedrich.
27 Financial Data Schedule
* Director or officer compensatory plan.
Page 22 of 22
SETTLEMENT AGREEMENT AND GENERAL RELEASE
INSTRUCTIONS TO EMPLOYEE: THIS IS AN IMPORTANT LEGAL
DOCUMENT. FOR THAT REASON, YOU ARE ADVISED THAT:
YOU HAVE THE RIGHT TO CONSULT WITH AN ATTORNEY, AND YOU SHOULD CONSULT
WITH AN ATTORNEY, BEFORE SIGNING.
YOU HAVE UP TO TWENTY-ONE (21) DAYS TO CONSIDER THIS AGREEMENT. AFTER
SIGNING THE AGREEMENT, YOU MAY REVOKE THE AGREEMENT WITHIN SEVEN (7)
DAYS. THE AGREEMENT WILL BECOME EFFECTIVE SEVEN (7) DAYS AFTER YOU SIGN
IT.
Kurt Friedrich ("Friedrich") and Tandem Computers Incorporated
("Tandem") entered into an employment agreement dated as of May 19, 1995 (the
"Agreement"). As of January 1, 1996, Friedrich and Tandem entered into an
amendment to the Agreement (the "First Amendment"). As of May 2, 1996, Friedrich
and Tandem entered into a second amendment to the Agreement (the "Second
Amendment"). The Agreement, as amended, is hereinafter referred to as the
Amended Agreement. This Settlement Agreement and General Release (the "Release")
is being entered into pursuant to the requirements of Section 5 of the Amended
Agreement.
Accordingly, for and in consideration of the commitments set forth
herein and in the Amended Agreement, Friedreich and Tandem agree as follows:
1. Tandem and Friedrich agree (I) that Friedrich's employment with
Tandem will terminate effective as of April 30, 1997 ("Date of Termination"),
(ii) that such date was the last day of Friedrich's Period of Employment with
Tandem for purposes of the Amended Agreement, and (iii) that Friedrich will not
be entitled to any of the benefits of any employee benefit program of Tandem
accruing after said date except as set forth in the Amended Agreement.
2. Pursuant to section 5 of the Amended Agreement, the Parties agree
that for purposes of the Amended Agreement, the termination of Friedrich's
employment shall be treated as if Tandem terminated the Period of Employment
Without Cause (as such terms were used in the Amended Agreement).
3. Within thirty (30) days of the execution and delivery of this
Release, Tandem will take the following actions and shall pay Friedrich the
following amounts in full satisfaction of any and all obligations of Tandem
--------------------
under the Amended Agreement:
(a) Pursuant to, and in full satisfaction of, sections
5.02(d)(i),(iii), and (vi)of the Amended Agreement, Tandem shall pay Friedrich
the sum of one million, nine hundred seventy nine thousand dollars
($1,979,000.00).
(b) Pursuant to, and in full satisfaction of, section
1
<PAGE>
5.02(d)(ii) of the Amended Agreement, Tandem shall pay Friedrich a pro-rated
annual bonus for the fiscal year in which termination occurs, for the portion of
the fiscal year prior to the date of termination, based on Tandem's performance
through the end of the fiscal quarter in which termination occurs (October 1,
1996 through June 30, 1997.)
(c) Pursuant to, and in full satisfaction of, section
5.02(d)(vii) of the Amended Agreement, Tandem shall pay for outplacement
counseling services for Friedrich up to a maximum of thirty five thousand
dollars ($35,000.00).
(d) Pursuant to, and in full satisfaction of, section 2(B) of
the Second Amendment, the Parties agree that Friedrich's rights under his
outstanding stock options will be determined under the terms of the applicable
plans and agreements, except that all of Friedrich's stock options which are
vested at the time of the Termination Date will remain outstanding and may be
exercised at any time on or before (i) the third anniversary of his termination
of employment or (ii) the original expiration date of the applicable stock
option, whichever occurs first.
(e) Pursuant to, and in full satisfaction of, section 5.02(d)
(iv) and (v) of the Amended Agreement, Tandem shall pay Friedrich the sum of
seventy six thousand, six hundred eleven dollars ($76,611.00).
4. Except as provided in the Amended Agreement and by any
indemnification agreement or by-law applicable to Friedrich in his capacity as
an employee, officer or a director of Tandem or pursuant to California Labor
Code Section 2802 or similar provision of law, Friedrich, his representatives,
heirs, successors and assignees, do hereby completely release and forever
discharge Tandem and its parent, affiliated and subsidiary corporations, and
their shareholders, officers, directors, agents, employees, attorneys,
successors and assigns (referred to hereinafter collectively as "Tandem") from
all claims, rights, demands, actions, obligations, liabilities and causes of
action of any and every kind, nature and character whatsoever, known or unknown,
which Friedrich may now have or has ever had against Tandem including, without
limitation, those arising from or in any way connected with the employment of
Friedrich by Tandem or termination thereof, whether based on tort, contract or
any federal, state or local law, statute or regulation, including but not
limited to any claims Friedrich may have under the federal Age Discrimination in
Employment Act (29 U.S.C. Section 621, et seq.) or the California Fair
Employment and Housing Act. It is understood and agreed that Friedrich's rights
to indemnification under Tandem's by-laws shall be determined under Tandem's
by-laws as in effect on the date hereof, or as such by-laws may be amended from
time to time hereafter to the extent any such amendment provides broader
indemnification rights than were provided before such amendment. It is further
understood that this Agreement and General Release supersedes the Amended
Agreement between Friedrich and Tandem from which Friedrich releases all claims,
rights, demands, actions, obligations, liabilities and causes of action of any
kind.
2
<PAGE>
5. Friedrich further agrees that he will not file, in any court or with
any governmental agency, any action, claims or charge against Tandem arising
from or in any way connected with his employment with Tandem, including, without
limitation, the termination thereof, except to enforce his rights under the
Amended Agreement or under any indemnification agreement or by-law applicable to
Friedrich in his capacity as an employee, officer or director of Tandem or
pursuant to California Labor Code Section 2802 or similar provision of law.
6. It is understood and agreed that this is a full and final release
covering all known, unknown, anticipated, and unanticipated injuries, debts,
claims, or damages to Friedrich which may have arisen or may be connected with
the employment of Friedrich by Tandem or the termination thereof. Friedrich
hereby waives any and all rights or benefits which he may now have, or in the
future may have, under the terms of Section 1542 of the California Civil Code
which provides as follows:
A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the
time of executing the release, which if known by him must have
materially affected his settlement with the debtor.
In that regard, Friedrich hereby acknowledges that he may have
sustained losses which are presently unknown or unsuspected, that such damages
and other losses as were sustained may give rise to additional complaints,
actions, causes of action, claims, demands and debts in the future.
Nevertheless, he acknowledges that this Release has been negotiated and agreed
upon in light of this realization and, being fully aware of this situation, he
does nevertheless intend hereby to release, acquit and forever discharge Tandem
from any and all such unknown claims including damages which are unknown or
unanticipated, except as provided in Paragraphs 3 and 4 above.
7. Friedrich hereby agrees that he accepts the termination of his
employment with Tandem and that he shall not seek reinstatement or reemployment
with Tandem at any time. Friedrich expressly waives any and all rights he may
have to reemployment with Tandem.
8. It is understood and agreed that except to the extent disclosed by
Tandem, the Amended Agreement and this Release, and each and every provision
thereof and hereof, shall be confidential and shall not be disclosed by
Friedrich to any person, firm, organization or entity, of any and every type,
public or private, for any reason without the prior written consent of Tandem,
unless required by law.
9. Friedrich agrees to hold all Proprietary Information in confidence
and not to, directly or indirectly, disclose, use, copy, publish, summarize, or
remove from Tandem any Proprietary Information except as specifically authorized
in writing by Tandem. As used in this paragraph, "Proprietary Information" means
any information in whatever form, tangible or intangible, directly related to
the business of Tandem or any affiliated company of Tandem, unless: (i) the
information is or becomes publicly available through lawful means, (ii) the
information was rightfully in Friedrich's possession, or part of his general
knowledge, prior to his employment by Tandem, or (iii)
3
<PAGE>
the information is disclosed to Friedrich without confidential or proprietary
restriction by a third party who rightfully possesses the information (without
confidential or proprietary restriction) and did not learn of it, directly or
indirectly, from Tandem.
10. It is understood and agreed that this is a compromise settlement of
a disputed claim, or disputed claims, and that the furnishing of the
consideration of this Release shall not be deemed or construed at any time or
for any purpose as an admission of liability by Tandem. The liability for any
and all claims is expressly denied by Tandem.
11. Friedrich and Tandem agree that they have had the opportunity to be
represented in the negotiation of this Release by individuals of their own
choosing, that they have read this Release and fully understand its legal
effect, that this Release contains all of the promises which they have made, and
that they are entering into this Release freely and not on the basis of promises
which are not stated in this Release. Friedrich specifically acknowledges that
he has been advised to consult an attorney regarding the terms of this Release.
Friedrich further acknowledges that he has had at least twenty-one (21) days to
consider and evaluate the terms of this agreement and that he understands that
this Release is revocable for seven (7) days after its execution.
12. Any dispute between Friedrich and Tandem arising from Friedrich's
employment with Tandem, including termination thereof, and any dispute as to the
violation of any provision of this Release shall be resolved by arbitration,
which arbitration shall be conducted in accordance with the provisions of
Section 7.11 of the Amended Agreement.
13. This Release shall not be construed as an admission by Tandem or
Friedrich of any violation of law, or breach of any legal or contractual duties,
or of any other improper conduct by Tandem, Friedrich or anyone else.
14. The terms of this Release shall be governed by the laws of the
State of California. In the event that any term of this Release shall be found
to be null or void, the remaining terms shall continue to have full force and
effect.
Dated: 5/27/97 /s/ Kurt Friedrich
______________________________________
Kurt Friedrich
Dated: 5/27/97 Tandem Computers Incorporated
/s/ Phil Johnson
By:___________________________________
Philip Johnson
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 227,822
<SECURITIES> 0
<RECEIVABLES> 452,819
<ALLOWANCES> 22,107
<INVENTORY> 97,304
<CURRENT-ASSETS> 918,444
<PP&E> 1,267,894
<DEPRECIATION> 744,821
<TOTAL-ASSETS> 1,790,355
<CURRENT-LIABILITIES> 567,956
<BONDS> 87,078
0
0
<COMMON> 3,088
<OTHER-SE> 1,132,233
<TOTAL-LIABILITY-AND-EQUITY> 1,790,355
<SALES> 1,099,028
<TOTAL-REVENUES> 1,405,629
<CGS> 452,345
<TOTAL-COSTS> 671,972
<OTHER-EXPENSES> 202,798
<LOSS-PROVISION> 3,283
<INTEREST-EXPENSE> 9,602
<INCOME-PRETAX> 105,504
<INCOME-TAX> 25,500
<INCOME-CONTINUING> 80,004
<DISCONTINUED> 989
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,993
<EPS-PRIMARY> 0.67
<EPS-DILUTED> 0.65
</TABLE>
