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, 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 April 30, 1997
$.025 par value 115,859,969 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 six month periods ended March 31,
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 six months ended
---------------------------- ---------------------------
March 31, March 31, March 31, March 31,
(In thousands except per share amounts) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Product revenues $363,574 $369,281 $706,336 $697,633
Service and other revenues 103,749 100,660 196,719 193,287
- -------------------------------------------------------------------------------------------------------------------------
Total revenues 467,323 469,941 903,055 890,920
- -------------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Cost of product revenues 152,739 163,617 297,970 302,886
Cost of service and other revenues 74,996 72,727 138,648 140,840
Research and development 67,183 68,968 133,365 141,403
Marketing, general, and
administrative 140,258 152,093 287,361 308,586
Restructuring charge -- 52,000 -- 52,000
- -------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 435,176 509,405 857,344 945,715
- -------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 32,147 (39,464) 45,711 (54,795)
Gain on sale of real estate -- -- 5,463 --
Net interest income 1,357 365 2,094 708
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 33,504 (39,099) 53,268 (54,087)
Provision for income taxes 8,500 7,894 16,500 14,838
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 25,004 (46,993) 36,768 (68,925)
Income (loss) from discontinued operations,
net of income taxes -- (2,564) -- 21,334
Gain on disposal of discontinued operations,
net of income taxes 989 -- 989 --
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 25,993 $ (49,557) $ 37,757 $ (47,591)
=========================================================================================================================
Earnings (loss) per share - continuing operations $ .21 $ (.40) $ .30 $ (.59)
Earnings (loss) per share - discontinued operations -- (.02) -- .18
Earnings per share - gain on disposal of
discontinued operations .01 -- .01 --
- -------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share $ .22 $ (.42) $ .31 $ (.41)
=========================================================================================================================
Weighted average shares outstanding 120,249 117,311 120,540 117,152
=========================================================================================================================
See accompanying notes.
</TABLE>
Page 3 of 22
<PAGE>
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
<TABLE>
Consolidated Balance Sheets (Unaudited)
<CAPTION>
- ------------------------------------------------------------------------------------------------------
March 31, September 30,
(In thousands except per share amount) 1997 1996
- ------------------------------------------------------------------------------------------------------
Assets
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets
Cash and equivalents $ 217,299 $ 87,813
Accounts receivable, net 424,140 475,464
Current portion of lease receivables 78,270 74,624
Inventories 99,333 115,320
Prepaid expenses and other 68,852 43,749
Net current assets of discontinued operations -- 62,593
- ------------------------------------------------------------------------------------------------------
Total current assets 887,894 859,563
- ------------------------------------------------------------------------------------------------------
Property, plant, and equipment, at cost 1,249,931 1,246,950
Accumulated depreciation and amortization (732,052) (696,140)
Net property, plant, and equipment of discontinued
operations -- 30,402
- ------------------------------------------------------------------------------------------------------
Net property, plant, and equipment 517,879 581,212
- ------------------------------------------------------------------------------------------------------
Lease receivables 83,024 86,618
- ------------------------------------------------------------------------------------------------------
Other assets 246,052 217,580
- ------------------------------------------------------------------------------------------------------
Total assets $1,734,849 $1,744,973
======================================================================================================
Liabilities and stockholders' investment
- ------------------------------------------------------------------------------------------------------
Current liabilities
Accounts payable $ 149,587 $ 135,821
Accrued liabilities 331,695 353,765
Current maturities of long-term obligations 84,362 93,740
- ------------------------------------------------------------------------------------------------------
Total current liabilities 565,644 583,326
- ------------------------------------------------------------------------------------------------------
Long-term obligations 79,357 75,225
- ------------------------------------------------------------------------------------------------------
Stockholders' investment
Common stock $.025 par value, authorized
400,000 shares, outstanding 122,424 shares at
March 31 and 121,318 shares at September 30 3,060 3,033
Additional paid-in capital 722,862 710,264
Retained earnings 457,362 420,363
Accumulated translation adjustments (5,398) 3,629
Treasury stock, at cost (88,038) (50,867)
- ------------------------------------------------------------------------------------------------------
Total stockholders' investment 1,089,848 1,086,422
- ------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' investment $1,734,849 $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 six months ended
----------------------------------
March 31, March 31,
(In thousands) 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 37,757 $ (47,591)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 93,170 97,443
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 (3,327) 1,689
Changes in:
Accounts receivable 54,440 32,664
Inventories 15,947 (23,089)
Lease receivables (223) 3,930
Non-debt current liabilities and other (64,318) (47,988)
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 126,994 38,430
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities
Investment in property, plant, and equipment (66,530) (89,500)
Proceeds from dispositions of property, plant,
and equipment 19,643 8,147
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 (54,947) (41,360)
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 37,986 (87,911)
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities
Borrowings 49,790 61,626
Repayments (53,066) (43,634)
Repurchase of treasury stock (37,185) --
Issuance of Common Stock under
stock plans, including tax benefits 11,728 6,596
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (28,733) 24,588
- -----------------------------------------------------------------------------------------------
Effect of exchange rate fluctuations on cash
and equivalents (5,880) (1,972)
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 130,367 (26,865)
Cash and equivalents at beginning of period 87,813 121,230
Net change in cash of discontinued operations (881) --
- -----------------------------------------------------------------------------------------------
Cash and equivalents at end of period $217,299 $ 94,365
===============================================================================================
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.
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 EPS calculation. The Company has determined that, on a pro forma basis
with respect to each income statement line for which it presently reports an EPS
amount, "basic" earnings per share, "diluted" earnings per share, and EPS, as
presently calculated, would have been the same amount in each income statement
line and each period presented, except for the six months ended March 31, 1997.
In that period, "basic" earnings per share - continuing operations and "basic"
earnings per share would have been $0.31 and $0.32, respectively, on a pro forma
basis.
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>
- -----------------------------------------------------------------------
March 31, September 30,
(In thousands) 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Purchased parts and subassemblies $53,443 $ 62,511
Work in process 14,800 19,986
Finished goods 31,090 32,823
- -----------------------------------------------------------------------
Total $99,333 $115,320
=======================================================================
</TABLE>
3. Investments
- ---------------
There were no realized gains or losses on available-for-sale securities during
the three or six month periods ended March 31, 1997. Realized gains on
available-for-sale securities during the three and six month periods ended March
31, 1996 were $0.4 million. 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 March 31, 1997, $72 million of financing was available to the Company under
its accounts receivable purchase agreement. The maximum amount outstanding under
this agreement during the first six months 1997 was $25 million. There were no
amounts outstanding during the quarter ended March 31, 1997 or as of September
30, 1996.
Page 6 of 22
<PAGE>
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 March 31,
1996 included revenues of $106.3 million, an operating loss of $2.3 million, and
a loss from discontinued operations of $2.6 million, or $0.02 per share. The
results of operations for UB Networks for the six months ended March 31, 1996
included revenues of $197.7 million, an operating loss of $9.1 million, a
non-operating gain from the sale of an investment of $30.6 million, and income
from discontinued operations of $21.3 million, or $0.18 per share.
6. Restructuring
- -----------------
<TABLE>
Information relating to restructuring activity for the six months ended
March 31, 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, six months ended
March 31, 1997 (15,562) (4,395) (261) (20,218)
Applicable to discontinued
operation -- (3,854) -- (3,854)
- -----------------------------------------------------------------------------------------------------------
Balances, March 31, 1997 $ 2,377 $16,545 $13,227 $32,149
===========================================================================================================
Cash used, six months
ended March 31, 1997 $15,562 $ 4,010 $ 245 $19,817
===========================================================================================================
</TABLE>
Of the total restructuring reserves remaining as of March 31, 1997,
approximately $16 million is included in accrued liabilities and approximately
$16 million is classified as a reduction of property, plant and equipment.
Page 7 of 22
<PAGE>
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
7. Income Taxes
- -----------------
The provision for income taxes for the three months and six months ended March
31, 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 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.
Page 8 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 second
quarter and first six 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 Ended Six Months Ended
March 31, March 31,
- -----------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Product revenues 78 79 78 78
Service and other revenues 22 21 22 22
- -----------------------------------------------------------------------------------------------------
Total Revenues 100 100 100 100
- -----------------------------------------------------------------------------------------------------
Cost of product revenues 42 44 42 43
Cost of service and other revenues 72 72 70 73
- -----------------------------------------------------------------------------------------------------
Total cost of revenues 49 50 48 50
Research and development 14 15 15 16
Marketing, general, and
administrative 30 32 32 34
Restructuring charge -- 11 -- 6
- -----------------------------------------------------------------------------------------------------
Operating income (loss) 7 (8) 5 (6)
Net interest income -- -- 1 --
- -----------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 7 (8) 6 (6)
Provision for income taxes 2 2 2 1
- -----------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 5 (10) 4 (7)
Income (loss) from discontinued operations,
net of income taxes -- (1) -- 2
Gain on disposal of discontinued operations,
net of income taxes 1 -- -- --
- -----------------------------------------------------------------------------------------------------
Net income (loss) 6 (11) 4 (5)
=====================================================================================================
</TABLE>
Page 9 of 22
<PAGE>
<TABLE>
Percent Increase (Decrease)
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
- -----------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Product revenues (2) 9 1 (1)
Service and other revenues 3 13 2 14
- -----------------------------------------------------------------------------------------------------
Total revenues (1) 10 1 2
- -----------------------------------------------------------------------------------------------------
Cost of product revenues (7) 14 (2) 3
Cost of service and other revenues 3 17 (2) 22
- -----------------------------------------------------------------------------------------------------
Total cost of revenues (4) 15 (2) 9
Research and development (3) 1 (6) 6
Marketing, general, and
administrative (8) 10 (7) 9
Restructuring charge N/M N/M N/M N/M
- -----------------------------------------------------------------------------------------------------
Operating income (loss) N/M N/M N/M N/M
Net interest income 272 (77) 196 (77)
- -----------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes N/M N/M N/M N/M
Provision for income taxes 8 130 11 85
- -----------------------------------------------------------------------------------------------------
Income (loss) from continuing operations N/M N/M N/M N/M
Income (loss) from discontinued operations,
net of income taxes N/M N/M N/M N/M
Gain on disposal of discontinued operations,
net of income taxes N/M N/A N/M N/A
- -----------------------------------------------------------------------------------------------------
Net income (loss) N/M N/M N/M N/M
=====================================================================================================
Earnings (loss) per share N/M N/M N/M N/M
=====================================================================================================
N/A - Not applicable N/M - Not meaningful
</TABLE>
Operating Results
Revenues
Total revenues of $467.3 million during the second quarter of 1997
decreased $2.6 million, or 1 percent, compared to the second quarter of 1996.
Product revenues of $363.6 million for the second quarter of 1997 decreased $5.7
million, or 2 percent, from the same quarter of 1996. The decrease in product
revenues is primarily attributable to the negative impact of the stronger U.S.
dollar versus certain European and Japanese currencies from a year ago. This
decrease is partially offset by increased unit shipments of the mid-range
Himalaya products.
Service and other revenues of $103.7 million for the second quarter of 1997
increased $3.1 million, or 3 percent compared to the second quarter of 1996. The
increase in service and other revenues is primarily due to increased hardware
service revenues, partially offset by the negative impact of certain currency
exchange rate movements between the periods.
Total revenues of $903.1 million for the first six months of 1997 increased
$12.1 million, or 1 percent compared to the first six months of 1996. Product
revenues of $706.3 million increased $8.7 million, or 1 percent, from the same
period of 1996. The increase in product revenues is
Page 10 of 22
<PAGE>
primarily attributable to increased unit shipments of the high-end Himalaya
products. This increase is partially offset by the negative impact of certain
currency exchange rate movements from the previous year. Service and other
revenues of $196.7 million increased $3.4 million, or 2 percent, from the
comparable 1996 period. The increase in service and other revenues is primarily
due to increased hardware service 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 March 31, Six Months Ended March 31,
(Dollars in millions) 1997 1996 1997 1996
------------------ --------------------- ------------------- -----------------
$ % $ % $ % $ %
------------------ --------------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States 216.5 46 230.4 49 426.3 47 410.6 46
Europe
United Kingdom 42.1 9 32.5 7 75.4 8 69.7 8
Germany 25.3 5 25.5 5 57.3 6 49.3 6
Other Europe 58.0 13 68.0 15 116.4 14 125.1 13
------------------ --------------------- ------------------- -----------------
Total Europe 125.4 27 126.0 27 249.1 28 244.1 27
Japan 70.9 15 66.9 14 129.0 14 129.7 15
Asia/Pacific 33.9 7 24.7 5 65.8 7 63.0 7
Americas Division
(excluding the U.S.) 20.6 5 22.0 5 32.9 4 43.5 5
------------------ --------------------- ------------------- -----------------
Total revenues 467.3 100 470.0 100 903.1 100 890.9 100
================== ===================== =================== =================
</TABLE>
Revenues in the United States decreased 6 percent in the second quarter
of 1997 compared to the second quarter of 1996. In the quarterly comparison,
decreased unit shipments of high-end Himalaya servers were modestly offset by
increased revenues from the mid-range Himalaya products. Revenues in the United
States increased 4 percent in the six month period ended March 31, 1997, in
comparison to the same 1996 period. This increase is attributable primarily to
increased unit shipments of high-end Himalaya servers and increased revenues
from the mid-range Himalaya products, partially offset by reduced revenues from
the UNIX system-based products.
Revenues in Europe were essentially flat during the second quarter of 1997
compared to the second quarter of 1996. In the quarterly comparison, increased
unit shipments of mid-range Himalaya products were offset by the negative impact
of certain currency exchange rate movements between the periods. European
revenues increased 2 percent in the first six months of 1997, compared to the
same 1996 period. For the six month comparison, increased unit shipments of the
high-end Himalaya products and increased revenues from the UNIX system-based
products were partially offset by the negative impact of certain currency
exchange rate movements between the periods.
Page 11 of 22
<PAGE>
In Japan, revenues increased 6 percent in the second quarter of 1997, compared
to the same 1996 period. In the quarterly comparison, increased unit shipments
of high-end Himalaya products were partially offset by the negative impact of
certain currency exchange rate movements between the periods. Revenues in Japan
were essentially flat in the first six months of 1997, compared to the same 1996
period. For the six month comparison, increased unit shipments of high-end
Himalaya products were generally offset by the negative impact of certain
currency exchange rate movements between the periods, decreased unit shipments
of mid-range Himalaya products, and reduced consulting revenues.
Asia/Pacific revenues increased 38 percent during the second quarter of 1997,
compared to the second quarter of 1996, which was a particularly weak period for
unit shipments of highend Himalaya products . Asia/Pacific revenues increased 4
percent during the first six months of 1997 compared to the first six months of
1996.
Cost of revenues
During the second quarter of 1997, product margin percentages increased
to 58 percent as compared to 56 percent in the same 1996 period. During the
first six months of 1997, product margin percentages increased to 58 percent in
comparison to 57 percent in the same 1996 period. Computer system margins were
positively impacted by improved management of discounting and other pricing
management programs. This improvement was partially offset by the negative
impact on revenues of certain currency exchange rate movements.
Management expects product margins to decline slightly during the remainder of
1997. However, product margins are difficult to predict, as they are affected by
future competitive pricing actions, geographic revenue mix, product mix, and
changes in foreign currency. For additional discussion on the risks associated
with these statements and other forward looking statements, refer to the Outlook
and Risks section below.
Margins on service and other revenues were 28 percent in the second quarter of
both 1997 and 1996. Margins on service and other revenues increased to 30
percent in the first six months of 1997 as compared to 27 percent in the same
1996 period. These improved margins were primarily attributable to increased
profitability of the Company's consulting activities, and reduced costs in the
hardware servicing business.
Research and development expenses
Research and development (R&D) expenses of $67.2 million for the second
quarter of 1997 decreased $1.8 million, or 3 percent, compared to the same 1996
quarter. R&D expenses of $133.4 million for the first six months of 1997
decreased $8.0 million, or 6 percent, compared to the same 1996 period. In both
the quarterly and six month comparison, higher levels of external funding
received for joint development projects 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 from the 1997
second quarter level in the remainder of the year. 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
Page 12 of 22
<PAGE>
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 $140.3 million
in the second quarter of 1997 decreased $11.8 million, or 8 percent, in
comparison to the second quarter of 1996. The decline in MG&A expenses is
attributable mainly to restructuring actions initiated in the prior year, which
reduced sales and marketing headcount, as well as reduced travel, depreciation
and occupancy expenses. MG&A expenses for the first six months of 1997 decreased
$21.2 million, or 7 percent, to $287.4 million. The decrease in MG&A expenses in
the 1997 six month period is primarily attributable to the restructuring actions
described above, partially offset by increased spending for new product
introductions and promotional costs in the first quarter of 1997. In the second
half of 1997, management expects MG&A expenses, excluding commissions, to
decline slightly from the 1997 second quarter level, and in total 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.
<TABLE>
Information relating to restructuring activity for the six months ended
March 31, 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, six months ended
March 31, 1997 (15,562) (4,395) (261) (20,218)
Applicable to discontinued
operation -- (3,854) -- (3,854)
- ---------------------------------------------------------------------------------------------------------
Balances, March 31, 1997 $ 2,377 $ 16,545 $ 13,227 $ 32,149
=========================================================================================================
Cash used, six months ended
March 31, 1997 $ 15,562 $ 4,010 $ 245 $ 19,817
=========================================================================================================
</TABLE>
Page 13 of 22
<PAGE>
Impact of currency exchange rates
During the second quarter and first six months of 1997, in comparison to
the same 1996 periods, many currencies in Europe and the Japanese Yen weakened
against the U.S. dollar. The translation of revenues and operating results had a
negative impact on the consolidated results of the Company. However, such impact
was significantly mitigated by the Company's hedging program.
Results from continuing operations
For the three month period ended March 31, 1997, the Company reported
income from continuing operations of $25.0 million, or $0.21 per share. For the
six month period ended March 31, 1997, the Company reported income from
continuing operations of $36.8 million, or $0.30 per share. For the three and
six month periods ended March 31, 1996, the Company reported a loss from
continuing operations of $47.0 million, or $0.40 per share, and $68.9 million,
or $0.59 per share, respectively. The results for the 1996 periods included the
$52.0 million restructuring charge.
The income tax provisions for the second quarters of 1997 and 1996 were $8.5
million and $7.9 million, respectively, arising principally from taxes currently
payable in foreign jurisdictions. The income tax provisions for the first six
months of 1997 and 1996 were $16.5 million and $14.8 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.
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
Page 14 of 22
<PAGE>
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 March 31,
1996 included revenues of $106.3 million, an operating loss of $2.3 million, and
a loss from discontinued operations of $2.6 million, or $0.02 per share. The
results of operations for UB Networks for the six months ended March 31, 1996
included of revenues of $197.7 million, an operating loss of $9.1 million, a
non-operating gain from the sale of an investment of $30.6 million, and income
from discontinued operations of $21.3 million, or $0.18 per share.
Financial condition
During the first six months of 1997, cash and cash equivalents increased
by $130 million to $217 million. The Company generated $127 million positive
cash flow from operations during the first six months of the year. Investing
activities for the period provided approximately $38 million, principally
through proceeds from the sale of discontinued operations (approximately $93
million) and proceeds from the sale of real estate, partially offset by
investment in capital equipment and software. Financing activities consumed
approximately $29 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 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 March 31, 1997, $72 million of
financing was available to the Company under its accounts receivable purchase
agreement. The maximum amount outstanding at any point during the first six
months of 1997 was $25 million. There were no amounts outstanding during the
quarter ended March 31, 1997 or as of September 30, 1996.
Accounts receivable days were 83 at March 31, 1997 compared to 80 days at
September 30, 1996. Inventory days were 40 at March 31, 1997 compared to 39 days
at September 30, 1996.
Total debt and short-term borrowings of $169 million at March 31, 1997,
including $135 million of limited recourse borrowings against lease receivables,
decreased $6.5 million from September 30, 1996. Total debt as a percentage of
total capital was approximately 13 percent as of March 31, 1997 compared to 14
percent as of September 30, 1996.
Cash used for restructuring actions during the first six months of 1997
aggregated approximately $20 million and was funded by cash from operations.
Cash requirements for restructuring action for the remainder of 1997 are
expected to be approximately $7 million and will be funded by cash generated
from operations.
Page 15 of 22
<PAGE>
The Company's sources of working capital include cash generated from operations,
amounts available under the accounts receivable purchase agreement, certain
uncommitted, unsecured credit lines and other financing arrangements available
to the Company. Management believes that the financing sources available at
March 31, 1997 can adequately meet Tandem's financing needs, both in the short
and the long term.
As of March 31, 1997, the Company had approximately 6,900 full-time equivalent
employees.
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. In
October 1996 the Company introduced its S-series servers, ServerNet interconnect
technology-enabled NonStop Himalaya servers, and introductory Windows NT
Server-based systems, joining the UNIX system-based Integrity servers which were
introduced in fiscal 1996. Tandem plans to continue to invest in Himalaya and
Integrity servers and to leverage that investment into the Windows NT Server
market. The Company is also working to extend its business-critical software
applications to the Windows NT Server market.
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 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, including, but not limited to, a new President and
Chief Operating Officer (COO). Going forward, changes of management and
organizational
Page 16 of 22
<PAGE>
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 17 of 22
<PAGE>
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 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of the Company was held on January 28,
1997, in Cupertino, California. Three matters were voted upon:
(a) Proposal 1. To elect two Class II Directors to hold office until
2000.
(b) Proposal 2. To consider and vote upon a proposal to adopt the Tandem
Computers Incorporated 1997 Stock Plan.
(c) Proposal 3. To ratify the appointment of Ernst & Young as the
Company's independent auditors.
All matters were voted on, as follows:
Proposal 1 - Election of Class II Director - Franklin P. Johnson, Jr.
For Authority Withheld
--- ------------------
93,375,929 12,912,953
Election of Class II Director - Thomas J. Perkins
For Authority Withheld
--- ------------------
104,729,080 1,559,802
Page 18 of 22
<PAGE>
Proposal 2 - Adoption of Tandem Computers Incorporated 1997 Stock Plan
For Against Abstain
--- ------- -------
59,418,082 45,593,678 1,227,122
Proposal 3 - Appointment of Ernst & Young as Independent Auditors
For Against Abstain
--- ------- -------
105,828,627 265,051 195,204
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit
Number Exhibit
------- -------
3.1* Restated Certificate of Incorporation of the Company,
filed as Exhibit 3.1 to the Company's Report on Form 10-K
for the fiscal year ended September 30, 1994, is hereby
incorporated by reference.
3.2* Bylaws of the Company, as amended, filed as Exhibit 3.2 to
the Company's Report on Form 10-K for the fiscal year
ended September 30, 1996, is hereby incorporated by
reference.
10.21** Supplement dated December 23, 1996 to Settlement Agreement
and General Release dated January 18, 1996 between the
Company and James G. Treybig which was previously filed
with the Commission on February 14, 1997 in the Company's
Report on Form 10-Q for the quarterly period ended
December 31, 1996.
10.22** Separation Agreement, Release and Consulting Agreement
dated February 21, 1997 between the Company and David J.
Rynne.
27 Financial Data Schedule
- --------------
* Incorporated by reference.
** Director or officer compensatory plan.
Page 19 of 22
<PAGE>
(b) Reports on Form 8-K: A report on Form 8-K, Item 2 was filed by the
Registrant with the Commission on February 3, 1997 to report the sale by the
Company on January 17, 1997 of all of the outstanding stock of Ungermann-Bass
Networks, Inc., a Delaware corporation doing business as UB Networks, Inc. ("UB
Networks"), to Newbridge Networks, Inc., a Delaware corporation and wholly owned
subsidiary of Newbridge Networks Corporation, a corporation organized under the
laws of Canada ("Newbridge"), effective December 31, 1996. The following
financial statements were filed as exhibit 99.1 to the 8-K:
a. Pro Forma Consolidated Balance Sheet at December 31, 1996 (Unaudited)
b. Notes to Pro Forma Consolidated Balance Sheet at December 31, 1996
(Unaudited)
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: May 14, 1997 By: /s/ Enrico L. Pesatori
--------------------------------------
Enrico L. Pesatori
President,
Chief Operating Officer and
Interim Chief Financial Officer
Date: May 14, 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
- ------- ----
3.1 Restated Certificate of Incorporation of the Company, filed *
as Exhibit 3.1 to the Company's Report on Form 10-K for
the fiscal year ended September 30, 1994, is hereby
incorporated by reference.
3.2 Bylaws of the Company, as amended, filed as Exhibit 3.2 *
to the Company's Report on Form 10-K for the fiscal year
ended September 30, 1996, is hereby incorporated by
reference.
10.21** Supplement dated December 23, 1996 to Settlement
Agreement and General Release dated January 18, 1996
between the Company and James G. Treybig which was
previously filed with the Commission on February 14,
1997 in the Company's Report on Form 10-Q for the
quarterly period ended December 31, 1996.
10.22** Separation Agreement, Release and Consulting Agreement
dated February 21, 1997 between the Company and David
J. Rynne.
27 Financial Data Schedule
* Incorporated by reference.
** Director or officer compensatory plan.
Page 22 of 22
EXHIBIT 10.21
SUPPLEMENT TO SETTLEMENT AGREEMENT AND GENERAL RELEASE
------------------------------------------------------
Pursuant to an employment agreement between Tandem Computers
Incorporated ("Tandem") and James G. Treybig ("Treybig") dated as of May 19,
1995 (the "Employment Agreement"), as amended as of January 10, 1996 (the
"Amendment"), Treybig retired from employment with Tandem on January 10, 1996.
As of January 18, 1996 Tandem and Treybig entered into a settlement agreement
and general release to satisfy Treybig's obligations under Section 5 of the
Amendment. Tandem and Treybig desire to enter into an agreement to resolve the
amount payable to Treybig pursuant to clause (ii) of Section 2 of the Amendment.
Accordingly, for and in consideration of the commitments set forth
herein, Treybig and Tandem agree that Tandem shall, within five (5) working days
of the receipt of this Release executed by Treybig, pay to Treybig the sum of
One Hundred Thousand Dollars ($100,000.00), less applicable taxes, and that such
payment shall constitute full and final satisfaction of Tandem's obligation
under clause (ii) of Section 2 of the Amendment.
Dated: December 23, 1996 /s/ JAMES G. TREYBIG
--------------------------------------
James G. Treybig
TANDEM COMPUTERS INCORPORATED
Dated: December 23, 1996 By /s/ THOMAS J. PERKINS
-----------------------------------
Thomas J. Perkins
Chairman of the Board
SEPARATION AGREEMENT, RELEASE
-----------------------------
AND CONSULTING AGREEMENT
------------------------
WHEREAS, David J. Rynne ("Rynne") desires to voluntarily resign from his
employment with Tandem Computers Incorporated ("Tandem"); and
WHEREAS, the parties wish to effectuate an orderly transition for Tandem
and Rynne;
THEREFORE, the parties have agreed upon the following schedule of events,
rights and obligations:
1. Rynne has resigned from his employment with Tandem effective January 31,
1997 (the "Resignation Date").
2. Rynne shall be paid for all accrued and unused vacation as of the
Resignation Date. Rynne shall continue to be covered under Tandem's health
insurance plan through the Resignation Date, and at that time, shall have the
right to continue such coverage, at his own expense, under the Company's health
insurance as provided by the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended ("COBRA"). Except as expressly provided herein, Rynne shall not
be entitled to any compensation, benefit coverage or other perquisites of
employment.
3. In connection with the stock option agreements pursuant to which Rynne
was granted a non-qualified option to purchase shares of Tandem Common Stock
under the 1989 Stock Plan of Tandem ("the Plan"), the Compensation/Option
Committee of the Board of Directors of Tandem has interpreted the Plan and
Rynne's stock option agreements to provide that Rynne's performance under the
terms of this Consulting Agreement shall toll or delay the beginning of the
30-day period during which Rynne must exercise the options following termination
of employment or consultancy.
4. In consideration of the undertakings described in this Agreement, which
exceed that to which Rynne is otherwise entitled, Rynne relinquishes all rights
to the options listed in Exhibit "A" attached hereto and incorporated herein to
which Rynne would otherwise have been entitled in exchange for the rights
described in this Agreement. Rynne's other options shall remain outstanding and
will be subject to the terms of this Agreement.
5. In order to resolve any potential claims by Rynne arising from his
employment with Tandem and to effectuate an orderly transition, Tandem wishes to
retain the consulting services of Rynne for a twelve-month period ("Consulting
Period") following the Resignation Date. During the Consulting Period, Rynne
shall be available for consultation to Tandem for up to ten (10) hours per
month, upon reasonable notice, in order to provide assistance with customer
relations, financial issues, special projects, or other work as may be
reasonably assigned. In consideration for the consulting services, and the
general release provided by
-1-
<PAGE>
Rynne, Rynne's stock options shall continue to vest during the Consulting Period
in the same manner as if he were employed by Tandem, and Rynne's performance
under this Consulting Agreement shall toll or delay the beginning of the 30-day
period during which Rynne must exercise the options following the termination of
employment. The Consulting Period may not be terminated prior to January 1,
1998, except by the mutual written consent of both parties hereto. In the event
of Rynne's death during the Consulting Period, Rynne will be treated in the same
manner as if he were a Tandem employee on the date of his death.
6. Rynne represents and warrants that he has obtained his current
employer's approval of this Consulting Agreement, as evidenced by the Consent
attached hereto as Exhibit "B". Rynne agrees that he will obtain the approval of
any new Employer(s) in the event that his employment with his current employer
is terminated.
7. During the Consulting Period, Rynne shall operate at all times as an
independent contractor of Tandem, and is in no way considered an employee of
Tandem. This Agreement does not authorize Rynne to act for Tandem as its agent
or to make commitments on behalf of Tandem. Tandem shall not withhold payroll
taxes, and Rynne shall not be covered by health, life, disability, or worker's
compensation insurance of Tandem.
8. Neither Tandem nor Rynne shall disclose the existence of this
Agreement, or any of its terms, except as necessary to obtain professional
advice regarding the operation of the Agreement and its tax consequences and as
required under this Agreement.
9. In further consideration of the undertakings described in this
Agreement, Rynne, on behalf of himself and his representatives, successors,
heirs and assigns, hereby completely releases and forever discharges Tandem, all
affiliated and subsidiary corporations, and their past and present officers,
representatives, agents, directors, employees, attorneys, predecessors,
successors and assigns, from all claims, rights, demands, obligations and causes
of action of any and every kind nature and character, known or unknown, which
Rynne may now have, or has ever had, including, but not limited to, those claims
arising from or in any way connected with Rynne's employment with Tandem or his
resignation therefrom. This Release expressly extends to: (1) any claim for
wrongful discharge and any other claims relating to any contracts, express or
implied, or any covenant of good faith and fair dealing, express or implied; (2)
any claim for harassment or infliction of emotional distress; (3) any claims for
defamation, misrepresentation, battery or any other tort; (4) any claims under
any federal, state or municipal statute or ordinance; (5) any claims under the
California Fair Employment and Housing Act, Title VII of the Civil Rights Act of
1964, the Age Discrimination in Employment Act of 1967, the Older Workers'
Benefit Protection Act, the California Labor Code, and any other laws and
regulations relating to discrimination; and (6) any and all claims for
attorneys' fees and costs.
10. Rynne has been informed of Section 1542 of the Civil Code of
the State of California, which provides as follows:
-2-
<PAGE>
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.
Rynne understands that Section 1542 gives him the right not to release
existing claims of which he is not now aware, unless he voluntarily chooses to
waive this right. Having been so apprised, he understands that this is a full
and final release of all claims known as well as unknown and unanticipated
claims, and hereby voluntarily elects to, and does, waive the rights described
in Section 1542 and elects to assume all risks for claims that now exist in his
favor, known or unknown, including, but not limited to, those claims relating in
any way to his employment with Tandem or the termination thereof.
11. Rynne understands and agrees that, by entering into this Agreement,
(i) he is waiving any rights or claims he might have under the Age
Discrimination in Employment Act, as amended by the Older Workers Benefit
Protection Act; (ii) he has received consideration beyond that to which he was
previously entitled; (iii) he has been advised to consult with an attorney
before signing this Agreement; and (iv) he has been offered the opportunity to
evaluate the terms of this Agreement for not less than twenty-one (21) days
prior to his execution of the Agreement. Employee may revoke this Agreement (by
written notice to Employer) for a period of seven (7) days after his execution
of the Agreement, and it shall become enforceable only upon the expiration of
this revocation period without prior revocation by Employee
12. Rynne hereby acknowledges that he has read and understands the
contents and legal effect of this Agreement and that he has affixed his
signature hereto voluntarily and without coercion and that he acknowledges that
the waivers herein are knowing, conscious, not in reliance upon any
representations or promises made by Tandem, other than those contained herein,
and with full appreciation that he is forever foreclosed from pursuing the
rights so waived.
13. Should any part, term or provision of this Agreement be declared or
determined by a court of competent jurisdiction to be illegal or invalid, the
validity of the remaining parts, terms, or provisions shall not be affected
thereby and said illegal or invalid part, term or provision shall be deemed not
to be a part of this Agreement.
14. The language of all parts of this Agreement shall in all cases be
construed as a whole, according to its fair meaning, and not strictly for or
against either of the parties.
15. This Agreement represents and constitutes the entire agreement
between the parties, may only be amended in writing signed by both parties, and
supersedes all prior agreements and understandings with respect to the matters
covered by this Agreement. The parties agree that the terms of this Agreement
represent the final expression of their agreement with respect to Rynne's
separation from employment from Tandem and that this Agreement may not be
contradicted by any prior or contemporaneous writing or agreement.
-3-
<PAGE>
16. This Agreement shall be governed by the laws of the State of
California.
17. This Agreement may be executed in counterparts and by facsimile
signature with the same force and effect as if all original signatures were set
forth in a single document.
Tandem Computers Incorporated
By /s/ Josephine T. Parry /s/ David J. Rynne
-------------------------------- ----------------------------
David J. Rynne
Its General Counsel and Secretary
------------------------------- Date February 20, 1997
------------------------
Date February 21, 1997
------------------------------
-4-
<PAGE>
EXHIBIT A
<TABLE>
VESTING CALCULATION SHEET
Employee: David J. Rynne
Employee #: 5268
<CAPTION>
Number of Vested
Total Options
Option ID Effective Date Option Price Granted Shares as of 1/31/97
- --------- -------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
007 12/09/88 16.750 5,970 5,970
008 12/09/88 16.750 10,000 10,000
019 12/09/88 16.750 9,030 9,030
033 03/08/96 15.000 40,000 9,014
034 03/08/96 18.750 40,000 9,014
035 03/08/96 23.500 40,000 9,014
Totals 145,000 52,042
</TABLE>
A-1
<PAGE>
EXHIBIT B
ACKNOWLEDGMENT
By this signature below, Bay Networks Inc. ("Bay") acknowledges that
David J. Rynne ("Rynne"), a Bay employee, has disclosed his intent to provide
consulting services to Tandem Computers Incorporated ("Tandem") on a limited
basis for a period of twelve (12) months. Under the terms disclosed to Bay, Bay
acknowledges that such consultancy does not present a conflict of interest and
consents to Rynne providing such consultant services to Tandem for the period of
the Consulting Agreement.
Date 1/31/97
-------------- BAY NETWORKS INC.
By /s/ David L. House
----------------------------------
David L. House
Its
----------------------------------
B-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE FORM
10-Q FOR THE PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 217,299
<SECURITIES> 0
<RECEIVABLES> 447,682
<ALLOWANCES> 23,542
<INVENTORY> 99,333
<CURRENT-ASSETS> 887,894
<PP&E> 1,249,931
<DEPRECIATION> 732,052
<TOTAL-ASSETS> 1,734,849
<CURRENT-LIABILITIES> 565,644
<BONDS> 79,357
0
0
<COMMON> 3,060
<OTHER-SE> 1,086,788
<TOTAL-LIABILITY-AND-EQUITY> 1,734,849
<SALES> 706,336
<TOTAL-REVENUES> 903,055
<CGS> 297,970
<TOTAL-COSTS> 436,618
<OTHER-EXPENSES> 133,365
<LOSS-PROVISION> 4,575
<INTEREST-EXPENSE> 6,571
<INCOME-PRETAX> 53,268
<INCOME-TAX> 16,500
<INCOME-CONTINUING> 36,768
<DISCONTINUED> 989
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,757
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
</TABLE>
