-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, sRNaPUJytrx+IQDrEsvVUY6X1HLQPvoxSsa5MkKxrSEGEWSv4hlBWB4ihzY8wnk/ gxrUi0UKabolkFXFHIhT2w== 0000891618-94-000168.txt : 19940817 0000891618-94-000168.hdr.sgml : 19940817 ACCESSION NUMBER: 0000891618-94-000168 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TANDEM COMPUTERS INC /DE/ CENTRAL INDEX KEY: 0000315180 STANDARD INDUSTRIAL CLASSIFICATION: 3571 IRS NUMBER: 942266618 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09430 FILM NUMBER: 94544200 BUSINESS ADDRESS: STREET 1: 19333 VALLCO PKWY CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4082854664 MAIL ADDRESS: STREET 1: 10435 N. TANUTA AVE, LOC 200-16 CITY: CUPERTINO STATE: CA ZIP: 95014 FORMER COMPANY: FORMER CONFORMED NAME: TCI DELAWARE INC DATE OF NAME CHANGE: 19600201 10-Q 1 TANDEM COMPUTERS FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1994 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 August 11, 1994 $.025 par value 115,220,582 shares
2 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES - FORM 10-Q PART I -- ITEM 1. FINANCIAL INFORMATION (Unaudited) 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 1993 Annual Report to Stockholders and Annual Report on Form 10-K for the year ended September 30, 1993. Such consolidated financial statements and related notes are filed with the Securities and Exchange Commission. The results of operations for the three-month and nine-month periods ended June 30, 1994, are not necessarily indicative of results to be expected in the future. [STATEMENTS ON FOLLOWING PAGES] 3 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended ---------------------------- June 30, June 30, (In thousands except per share amounts) 1994 1993 -------- -------- REVENUES Product revenues $ 434,176 $ 376,943 Service and other revenues 109,765 98,637 --------- ---------- Total revenues 543,941 475,580 --------- ---------- COSTS AND EXPENSES Cost of product revenues 170,055 147,604 Cost of service and other revenues 75,214 74,278 Research and development 66,849 82,358 Marketing, general, and administrative 181,141 215,529 Restructuring charges - 451,000 --------- ---------- Total costs and expenses 493,259 970,769 --------- ---------- OPERATING INCOME (LOSS) 50,682 (495,189) Net interest income 328 659 --------- ---------- INCOME (LOSS) BEFORE INCOME TAXES 51,010 (494,530) Provision for income taxes 2,500 55,000 --------- ---------- NET INCOME (LOSS) $ 48,510 $ (549,530) ========= ========== EARNINGS (LOSS) PER SHARE $ .43 $ (4.88) ========= ========== Weighted average shares outstanding 113,508 112,611 ========= ==========
See accompanying notes. 4 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the nine months ended --------------------------- June 30, June 30, (In thousands except per share amounts) 1994 1993 -------- -------- REVENUES Product revenues $ 1,215,273 $ 1,191,186 Service and other revenues 288,349 285,919 ----------- ----------- Total revenues 1,503,622 1,477,105 ----------- ----------- COSTS AND EXPENSES Cost of product revenues 490,475 433,021 Cost of service and other revenues 193,956 196,520 Research and development 196,914 235,233 Marketing, general, and administrative 539,658 632,526 Restructuring charges - 451,000 ----------- ----------- Total costs and expenses 1,421,003 1,948,300 ----------- ------------ OPERATING INCOME (LOSS) 82,619 (471,195) Gain on sale of subsidiaries 23,000 - Net interest income 1,178 2,368 ---------- ----------- INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES 106,797 (468,827) Provision for income taxes 7,600 64,459 ---------- ------------ INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 99,197 (533,286) Cumulative effect as of October 1, 1992 of change in accounting for income taxes - 12,371 ----------- ------------ NET INCOME (LOSS) $ 99,197 $ (520,915) ============ =========== EARNINGS (LOSS) PER SHARE BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ .88 $ (4.76) Per share cumulative effect of accounting change - .11 ---------- ------------ EARNINGS (LOSS) PER SHARE $ .88 $ (4.65) ========== ============ Weighted average shares outstanding 112,942 112,058 ========== ============
See accompanying notes. 5 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, September 30, 1994 1993 (In thousands except per share amount) (Unaudited) ----------- ------------ ASSETS CURRENT ASSETS Cash and equivalents $ 104,764 $ 106,179 Short-term investments - 18,588 Accounts receivable, net 456,801 458,122 Current portion of lease receivables 58,104 60,376 Inventories 177,733 163,706 Prepaid and deferred income taxes 20,803 9,493 Prepaid expenses and other 52,146 34,966 ---------- ---------- Total current assets 870,351 851,430 ---------- ---------- PROPERTY, PLANT, AND EQUIPMENT, at cost 1,162,570 1,149,611 Accumulated depreciation and amortization (627,492) (583,043) ---------- ---------- Net property, plant, and equipment 535,078 566,568 ---------- ---------- COST IN EXCESS OF NET ASSETS ACQUIRED, NET 7,091 25,168 ---------- ---------- LEASE RECEIVABLES 73,676 79,832 ---------- ---------- OTHER ASSETS 188,202 162,211 ---------- ---------- TOTAL ASSETS $1,674,398 $1,685,209 ========== ==========
LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES Short-term borrowings $ - $ 15,080 Accounts payable 130,289 145,378 Accrued liabilities 546,898 648,380 Current maturities of long-term obligations 55,839 53,384 ---------- ---------- Total current liabilities 733,026 862,222 ---------- ---------- LONG-TERM OBLIGATIONS 83,402 86,162 ---------- ---------- STOCKHOLDERS' INVESTMENT Common stock $.025 par value, authorized 400,000 shares, outstanding 115,548 shares at June 30 and 113,666 shares at September 30 2,888 2,842 Additional paid-in capital 639,014 620,297 Retained earnings 261,457 162,260 Accumulated translation adjustments 6,583 3,207 Treasury stock, at cost (9,062) (8,871) Deferred ESOP compensation (42,910) (42,910) ---------- ---------- Total stockholders' investment 857,970 736,825 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $1,674,398 $1,685,209 ========== ==========
See accompanying notes. 6 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended --------------------------------- June 30, June 30, (In thousands) 1994 1993 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 99,197 $(520,915) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 123,514 134,971 Gain on sale of subsidiaries (23,000) - Cumulative effect of accounting change - (12,371) Restructuring charges - 451,000 Deferred income taxes (10,768) 36,415 ESOP compensation - 4,268 Gain on dispositions of property, plant, and equipment (804) (144) Changes in : Accounts receivable (16,858) 62,460 Inventories (21,677) (30,232) Lease receivables 9,933 11,722 Non-debt current liabilities and other (117,978) (7,525) -------- -------- Net cash provided by operating activities 41,559 129,649 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in property, plant, and equipment (90,894) (117,836) Proceeds from dispositions of property, plant, and equipment 23,509 10,242 Sale of subsidiaries, net of cash disposed 70,519 - Increase in other assets (51,155) (36,627) ------- --------- Net cash used in investing activities (48,021) (144,221) ------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings 51,698 42,479 Repayments (67,956) (68,978) Acquisitions of treasury stock - (11,488) Proceeds from sale of stock by a subsidiary, net of Company's participation - 13,690 Issuance of Common Stock to ESOP and under other stock plans, including tax benefits 18,763 24,984 -------- -------- Net cash provided by financing activities 2,505 687 -------- -------- Effect of exchange rate fluctuations on cash and equivalents 2,542 (4,248) -------- ------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (1,415) (18,133) Cash and equivalents at beginning of period 106,179 148,984 -------- ---------- CASH AND EQUIVALENTS AT END OF PERIOD $104,764 $ 130,851 ======== ==========
See accompanying notes. 7 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventories were as follows:
June 30, September 30, (In thousands) 1994 1993 ---------- ------------- Purchased parts and subassemblies $ 73,752 $ 60,302 Work in process 29,039 27,076 Finished goods 74,942 76,328 --------- --------- Total $ 177,733 $ 163,706 ========= =========
2. EARNINGS (LOSS) PER SHARE Earnings per share is based on the weighted average number of common and common equivalent shares outstanding. Common equivalent shares result from the assumed exercise of outstanding stock options which have a dilutive effect when applying the treasury stock method. Loss per share is calculated using the weighted average number of common shares outstanding during the period. As a result of terminating the Employee Stock Ownership Plan (ESOP), the approximately 2.4 million unallocated common shares held by the ESOP trust, which will be returned to Tandem's treasury, have been excluded from the 1994 weighted average common shares outstanding calculations. 3. CASH DIVIDENDS The Company has not declared or paid any cash dividends and has no plans to do so in the foreseeable future. 8 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. FISCAL 1993 RESTRUCTURING During the third quarter of 1993, the Company initiated a restructuring program designed to streamline operations and lower its worldwide cost structure in anticipation of shipping the new Himalaya product line. These restructuring actions resulted in a charge of $451 million that included a reduction of headcount, consolidation of facilities, disposal of assets no longer required, and the write-off of cost in excess of net assets acquired (goodwill) as discussed below. As of June 30, 1993, the Company's UB Networks subsidiary (formerly Ungermann-Bass) had significantly missed its beginning of the quarter revenue and operating plan, and reported its second consecutive quarter of substantial and increased losses from operations. The results reflected a continuing and accelerating two-year decline in financial performance. Due to the disappointing financial results, the lack of certain products in high-growth sectors of the market, and unsuccessful efforts by the subsidiary's management to to attract public or private investment partners, management alternatively initiated a plan to restructure the operations which included reducing headcount, consolidating facilities, and redirecting certain development programs. Additionally, based upon the then current financial projections, which were significantly lower than at acquisition, it was concluded the acquisition goodwill could no longer be assured of recovery and the balance of $151 million was written off and included in the 1993 restructuring charges. The goodwill write-off was calculated by comparing the balance with future cash flow projections at the subsidiary. The cash flow projections anticipated the cost and probable future savings from restructuring actions as well as the benefits from products and technologies that were in the latter stages of development. The projections indicated that cash flows from operations were expected to be negative for the next several years and cumulatively negative for the remaing life of the goodwill. 9 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. BUSINESS COMBINATIONS The consolidated results of operations for the first nine months of 1993 include the accounts of MPACT EDI Systems, Inc., a wholly- owned subsidiary of Tandem, which was sold to Immedia Infomatic Corporation on June 30, 1993. The consolidated results of operations for the quarter ended December 31, 1993 and the nine months ended June 30, 1993 include the operating results of two wholly-owned subsidiaries, Applied Communications, Inc. (ACI) and Applied Communications, Inc., Limited (ACI. Ltd.), both of which were sold effective December 31, 1993 for approximately $53.6 million net cash. The sales of these subsidiaries resulted in a gain for financial accounting purposes of $23 million. In December 1992, NetWorth, Inc. (NetWorth), an approximately 51 percent owned subsidiary at the time, completed an initial public offering of its common stock in which NetWorth received net proceeds of $26.9 million. The Company concurrently purchased shares in the offering in approximate proportion to its then ownership. On March 31, 1994, NetWorth acquired approximately 30 percent of the shares then held by the Company for a cash purchase price of $20 million, financed by debt, thereby reducing the Company's ownership to approximately 31.5 percent. After expenses of the transaction and adjusting its investment to reflect its approximate $5.6 million equity in NetWorth's remaining net assets, the Company realized no gain or loss for financial reporting purposes. As of March 31, 1994, the investment in NetWorth is accounted for under the equity method of accounting and the investment is included in other assets. On March 15, 1994, the Company sold its interest in the storage subsystems business of Array Technology Corporation (acquired in 1990), together with certain assets, to EMC Corporation for approximately $10 million cash. As a part of its 1993 restructuring plan and related provision, the Company concluded to sell or otherwise dispose of this business unit. Accordingly, the transaction was recorded as part of restructuring activity and no gain or loss was realized for financial reporting purposes. 10 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. FINANCING ARRANGEMENTS In December 1993, Tandem secured a three-year Financing Facility (the Financing Facility) to replace the multiple option financing facility (MOFF) which was canceled in the fourth quarter of fiscal 1993. A ninety-day bridge facility supported the Company during the period between cancellation of the MOFF and completion of the Financing Facility. Under the Financing Facility, the Company can sell up to $150 million of qualified domestic receivables on a limited recourse basis. One component of the Financing Facility, which allows for sales of accounts receivable up to $75 million, will expire in fiscal 1997. A second component of the Financing Facility, which also allows for sales of accounts receivable up to $75 million, will expire in fiscal 1995, but will be renewable annually with the consent of both parties. 7. INCOME TAXES The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109) effective October 1, 1992. As a result of adopting SFAS No. 109, the net income for the three months ended December 31, 1992 was increased by the cumulative effect of the change, or $12.4 million ($.11 per share), and a valuation allowance of approximately $53 million was established for certain deferred tax assets related to foreign losses and stock option deductions. In the third quarter of 1993, an additional valuation allowance of $55.0 million was provided against deferred tax assets established in prior periods which the Company determined no longer met the realizability criteria under SFAS No. 109. The provision for income taxes for the nine month period ended June 30, 1993 also includes $9.5 million for currently payable foreign income taxes which were established in the first two quarters. The 1993 tax provisions do not include tax benefits related to the restructuring charges and a significant portion of the operating losses recorded in the third quarter of 1993. The provision for income taxes for the three and nine month periods ended June 30, 1994 arose principally from taxes currently payable in foreign jurisdictions. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SELECTED OPERATING STATISTICS The following tables summarize operating statistics for the third quarter and first nine months of 1994 and 1993. The first table shows the percentage relationship of revenue and expense items to total revenues. The second table shows the percentage change in 1994 and 1993 from the comparable prior year periods. Operating results of business units sold since June 1993 are included in revenues, costs and expenses through their respective disposition dates as follows: MPACT EDI Systems, Inc.--June 30, 1993; Applied Communications, Inc. (ACI) and Applied Communications, Inc., Limited (ACI, Ltd.)--December 31, 1993; Array Technology Corporation--March 15, 1994; and NetWorth, Inc.--March 31, 1994. The Company's fiscal year ends on September 30. References to 1994, 1993, and 1992 in this section represent the Company's fiscal years. PERCENT OF TOTAL REVENUES
THREE MONTHS NINE MONTHS ENDED JUNE 30, ENDED JUNE 30, --------------------- ---------------------- 1994 1993 1994 1993 -------- -------- --------- -------- Product revenues 79.8 79.3 80.8 80.6 Service and other revenues 20.2 20.7 19.2 19.4 ------ ------ ------ ------ TOTAL REVENUES 100.0 100.0 100.0 100.0 ------ ------ ------ ------ Cost of product revenues 31.3 31.1 32.6 29.3 Cost of service and other revenues 13.8 15.6 12.9 13.3 ------ ------ ------ ------ Total cost of revenues 45.1 46.7 45.5 42.6 Research and development 12.3 17.3 13.1 15.9 Marketing, general and administrative 33.3 45.3 35.9 42.9 Restructuring charges N/A 94.8 N/A 30.5 ------ ------ ------ ------ OPERATING INCOME (LOSS) 9.3 (104.1) 5.5 (31.9) ------ ------ ------ ------ Gain on sale of subsidiaries N/A N/A 1.5 N/A Net interest income .1 .1 .1 .2 ------ ------ ------ ------ INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES 9.4 (104.0) 7.1 (31.7) Provision for income taxes .5 11.6 .5 4.4 ------ ------ ------ ------ INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 8.9 (115.6) 6.6 (36.1) Cumulative effect as of October 1, 1992 of change in accounting for income taxes N/A N/A N/A .8 ------ ------ ------ ------ NET INCOME (LOSS) 8.9 (115.6) 6.6 (35.3) ====== ====== ====== ======
N/A - Not applicable 12 PERCENT INCREASE (DECREASE)
THREE MONTHS NINE MONTHS ENDED JUNE 30, ENDED JUNE 30, ---------------------- ---------------------- 1994 1993 1994 1993 ------ ------- ------ ------ Product revenues 15 (8) 2 0 Service and other revenues 11 4 1 5 ---- ---- ---- ---- TOTAL REVENUES 14 (6) 2 1 ---- ---- ---- ---- Cost of product revenues 15 5 13 6 Cost of service and other revenues 1 18 (1) 7 ---- ---- ---- ---- Total cost of revenues 11 9 9 6 Research and development (19) 17 (16) 8 Marketing, general and administrative (16) 4 (15) 0 Restructuring charges N/A N/M N/M 360 ---- ---- ---- ---- OPERATING INCOME (LOSS) N/M N/M N/M 489 ---- ---- ---- ---- Gain on sale of subsidiaries N/A N/A N/M N/A Net interest income (50) (21) (50) (22) ---- ---- ---- ---- INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES N/M N/M N/M 509 Provision for income taxes N/M N/M N/M N/M ---- ---- ---- ---- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE N/M N/M N/M 679 Cumulative effect as of October 1, 1992 of change in accounting for income taxes N/A N/A N/M N/M ---- ---- ---- ---- NET INCOME (LOSS) N/M N/M N/M 661 ==== ==== ==== ==== EARNINGS (LOSS) PER SHARE N/M N/M N/M 638 ==== ==== ==== ====
N/A - Not applicable N/M - Not meaningful OPERATING RESULTS REVENUES Total revenues increased 14 percent and 2 percent, respectively, during the third quarter and first nine months of 1994 compared to the 1993 periods, despite the effect of business units sold contributing approximately 7 percent and 4 percent decreases. Excluding the effect of business units sold, product revenues increased 23 percent and 6 percent and service and other revenues increased 13 percent and 2 percent during the 1994 periods. The increases in product revenues resulted primarily from the effect of a 13 comparatively large volume of unit shipments of the Company's lower-priced Himalaya server products exceeding the effect of lower unit pricing, particularly in the 1994 third quarter, and by increased revenues from networking products. The increases in service and other revenues compared to the 1993 periods resulted primarily from a comparatively large consulting project in the third quarter, partially offset by lower hardware service revenues during 1994 due to continuing improvement in hardware reliability which reduces the pricing for such services. In 1993, total revenues decreased 6 percent and increased 1 percent, respectively, during the third quarter and first nine months compared to the 1992 periods, which the Company believes is primarily attributable to customer hesitation to purchase products in the third quarter of 1993 while awaiting announcement of the Company's significantly lower-priced new Himalaya server products. Geographic--The table below summarizes revenues derived from Tandem's domestic and international operations and the percentage of revenue contributed by geographic location for the indicated periods.
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30, (Dollars in millions) 1994 1993 1994 1993 $ % $ % $ % $ % --------------- ----------------- ----------------- ------------------ United States 259.0 48 241.5 51 774.2 52 764.9 52 Europe United Kingdom 66.7 12 32.0 7 130.7 9 103.8 7 Germany 22.8 4 31.0 6 64.6 4 80.2 5 Other Europe 72.8 14 66.8 14 196.5 13 229.7 16 ----- --- ----- --- ------ --- ------ --- Total Europe 162.3 30 129.8 27 391.8 26 413.7 28 Japan 68.8 13 59.5 13 194.9 13 171.1 12 Asia/Pacific 29.9 5 21.6 4 78.1 5 62.9 4 Americas Division (excluding the U.S.) 23.9 4 23.2 5 64.6 4 64.5 4 ----- --- ----- --- ------- --- ------- --- Total revenues 543.9 100 475.6 100 1,503.6 100 1,477.1 100 ===== === ===== === ======= === ======= ===
Revenues in the United States increased 7 percent and 1 percent, respectively, during the third quarter and first nine months of 1994 compared to the 1993 periods, but increased 18 percent and 6 percent excluding the effect of business units sold. These increases reflect a particularly strong 1994 third quarter and a comparatively weak 1993 third quarter as discussed above. Excluding the effect of business units sold in the United Kingdom, revenues in Europe increased 29 percent and declined 2 percent in these periods. The increase in 1994 third quarter resulted from product revenues in the United Kingdom more than doubling compared with the 1993 quarter, due in large part to completing the first phase of a contract with a new customer, and to general weakness in most European economies in the 1993 period. These increases were partially offset, however, by continued sluggish sales performance in Germany and by a generally stronger 14 U.S. dollar against most European currencies. The 1994 nine-month decline resulted from what management believes to be an overall weak economic environment in Europe, which the Company believes has hindered customers' investments in capital equipment, particularly during the first six months of 1994, and to a generally stronger U.S. dollar. In Japan, revenues increased 16 percent in the third quarter and 14 percent in the first nine months of 1994 compared to the 1993 periods due in large part to exchange rate changes and to increased product shipments in the 1994 periods. Asia/Pacific revenues increased in the third quarter and first nine months of 1994 by 39 percent and 24 percent, respectively, due primarily to increased product shipments. Product Lines--The table below summarizes total revenue by product lines (which includes both product revenues and service and other revenues) and the percentage of total revenue each product line contributed for the indicated periods.
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30, (Dollars in millions) 1994 1993 1994 1993 $ % $ % $ % $ % --------------- ---------------- ----------------- -------------------- Computer systems 451.7 83 390.6 82 1,222.3 81 1,208.7 82 Networking 92.2 17 85.0 18 281.3 19 268.4 18 ----- --- ----- --- ------- --- ------- --- Total revenues 543.9 100 475.6 100 1,503.6 100 1,477.1 100 ===== === ===== === ======= === ======= ===
Computer systems revenues increased 22 percent and 5 percent (excluding the effect of business units sold) in the third quarter and first nine months of 1994, respectively, compared to the 1993 periods primarily resulting from steadily increasing unit shipment volumes of the new lower-priced Himalaya server products, notwithstanding corresponding declines in per unit revenues. Networking products revenues increased in both the third quarter and first nine months of 1994 compared to the year earlier periods primarily as a result of strong demand for the Access/One and departmental Access/Stax products. On March 31, 1994, NetWorth, Inc. acquired approximately 1.6 million shares of its common stock held by the Company thereby reducing the Company's ownership from approximately 51 percent to approximately 31.5 percent. As a result, the Company's investment in NetWorth is now accounted for under the equity method of accounting and not as a consolidated subsidiary. Accordingly, NetWorth's revenues to customers not affiliated with the Company were not included in consolidation for the third quarter of 1994. Revenues prior to the 1994 third quarter represented approximately 4 percent of the above networking revenues for first nine months of 1994 and approximately 8 percent and 6 percent for the 1993 three-month and nine-month periods. COST OF REVENUES During the third quarter of 1994, product margins were essentially flat with the prior year quarter at 61 percent and for the first nine months of 1994 decreased to 60 percent from 64 percent in the 1993 period. The decline in product margin percentage for 15 the 1994 nine months compared to 1993 is due principally to the introduction of Himalaya server products during the first quarter of 1994 (which have lower prices and margins than previous generations of Tandem systems) and to increased networking revenues at lower margins. Third quarter 1994 product margins were slightly higher than in earlier 1994 periods due to geographical mix and to networking and the Company's family of UNIX server products comprising a lower percentage of total product revenues. Margins on service and other revenues increased to 31 percent in the third quarter of 1994 from 25 percent in the 1993 quarter and increased to 33 percent from 31 percent for the nine month periods. The third quarter margin improvement is due primarily to lower service costs and overhead associated with cumulative restructuring actions. Higher than anticipated costs on certain systems integration projects earlier in 1994 partially offset lower service costs and overhead in the 1994 nine month period compared to 1993. In both the third quarter and first nine months of 1993 product margin percentages declined compared with the year earlier periods primarily as a result of realizing lower prices due to geographic and channel mix, decreased margins on networking products and increased volumes by some of the Company's operations which traditionally sell lower margin products. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses decreased $16 million and $38 million from the 1993 third quarter and first nine months periods due primarily to restructuring actions taken since 1993 and higher levels of software capitalization. Approximately 20 percent of the decrease for each period is due to the effect of business units sold. Tandem believes that the levels of spending will rise slightly for the remainder of 1994, but not as a percentage of revenues. Compared with the 1992 periods, research and development expenses increased in both the third quarter and first nine months of 1993 due primarily to hiring development engineers to support the Company's development plans at the time and, in the third quarter, to receiving a lower level of external funding for joint development projects than in the prior year period. MARKETING, GENERAL, AND ADMINISTRATIVE EXPENSES Marketing, general and administrative expenses were down sharply in the third quarter ($34 million) and first nine months ($93 million) of 1994 from the 1993 periods, largely as the result of restructuring actions initiated in the third quarter of 1993. Of these decreases, approximately 40 percent for the third quarter and approximately 30 percent for the first nine months of 1994 pertain to business units sold. Marketing, general and administrative expenses increased in the 1993 third quarter compared with the 1992 quarter due primarily to higher advertising and certain employee costs, translating international spending into United States dollars and higher costs associated with the Company's currency hedging programs. Due to year-over-year decreases in the first half of 1993 as a result of earlier restructuring and cost containment actions, marketing, general and administrative expenses for the first nine months of 1993 were essentially flat with the prior year. 16 Aggressive cost containment and restructuring actions have progressively reduced the on-going level of fixed expenses. However, certain expenses such as commissions and incentive compensation for sales and marketing staff will vary as revenues fluctuate and the Company has reinstated a limited, competitive salary increase plan for U.S. employees beginning in the fourth quarter. As part of the Company's cost containment program, salaries for most U.S. employees were reduced and the salary increase program was suspended effective August 1993. IMPACT OF CURRENCY AND INFLATION During the first nine months of 1994, especially earlier in the year, the currencies in most foreign countries where Tandem has significant operations weakened against the U.S. dollar compared to the prior year periods, particularly in Europe. The negative impact from translating revenues and operating results for these countries was modestly offset by the favorable impact resulting from the U.S. dollar weakening against the Japanese yen. In the 1993 periods, the strength of the U.S. dollar against international currencies also had a slightly negative influence on international revenues and operating results. NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE In addition to the factors discussed above, net income in the first nine months of 1994 was impacted by a $23 million first quarter pretax non-operating gain from the sales of ACI and ACI, Ltd. The net loss for the first nine months of 1993 included a $12 million positive adjustment representing the cumulative effect as of October 1, 1992 of adopting Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109) and for both the 1993 third quarter and first nine months included the previously reported $451 million restructuring charges. The effective tax rate for the three and nine month periods ended June 30, 1994 was 4.9 percent and 7.1 percent, respectively, arising principally from taxes currently payable in foreign jurisdictions. Tandem expects to continue to report income for the remainder of 1994 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. The tax provision for the third quarter of 1993 was $55 million, representing an additional allowance against deferred tax assets established in prior periods which the Company determined no longer met the realizability criteria under SFAS No. 109. The tax provision for the first nine months of 1993 also included $9.5 million for currently payable foreign incom e taxes which were established in the first two quarters. The 1993 tax provisions do not include tax benefits related to the restructuring charges and a significant portion of the operating losses recorded in the third quarter of 1993. Weighted average shares outstanding increased from the 1993 periods due to sales of stock to employees under stock plans and to dilutive stock options but these increases were partially offset by a decrease relating to the termination of Tandem's Employee Stock Ownership Plan (ESOP). 17 FINANCIAL CONDITION During the third quarter of 1994, cash and cash equivalents decreased by $9 million. The Company generated $12 million positive cash flow from operations during the quarter. Investing activities in the third quarter included $49 million of investment in capital equipment and software. Cash used in investing activities was partially offset by $8 million representing returns of deposits on terminated facility leases. Financing activities, consisting of sales of stock and net borrowings, provided $6 million. Accounts receivable days, excluding business units sold, decreased from 80 days at September 30, 1993 to 77 days at June 30, 1994. Inventory days, excluding these business units, decreased from 70 days at September 30, 1993 to 66 days at June 30, 1994. At June 30, 1994, total debt was $139 million compared with $155 million at September 30, 1993, of which $116 million and $114 million, respectively, represent nonrecourse borrowings against lease receivables. Total debt as a percentage of total capital decreased from 17 percent at September 30, 1993 to 14 percent at June 30, 1994. In December 1993, Tandem secured a three-year Financing Facility (Financing Facility) to replace the multiple option financing facility, which was canceled in the fourth quarter of 1993. Under the Financing Facility, the Company can sell up to $150 million of qualified domestic receivables on a limited recourse basis. One component of the Financing Facility, which allows for sales of accounts receivable up to $75 million, expires in 1995, but is renewable annually with the consent of both parties. A second component of the Financing Facility, which allows for sales of accounts receivable up to $75 million, expires in 1997. The total financing available under the Financing Facility is limited to a pool of qualified domestic receivables. In addition to the Financing Facility, other possible sources of working capital include other financing arrangements and sales of noncritical assets such as land and buildings. Management believes that the financing sources available at June 30, 1994 can adequately meet Tandem's financing needs. As of June 30, 1994, the Company had approximately 8,600 full-time equivalent employees. Headcount decreased approximately 200 during the quarter, due in part to business units sold, and is down approximately 2,100 since the Company initiated its restructuring actions during the third quarter of 1993. OUTLOOK AND RISKS Management expects the shift to lower-priced, lower-margin Himalaya servers and a product mix shift to lower margin UNIX and networking products will result in a continuing decline in product margins, although the decline may slow over the next few quarters. A key challenge in meeting the Company's 1994 operating plan includes shipping sufficiently increased unit volumes of new lower-priced products to achieve increased revenues, and concurrently controlling the cost structure of the Company. Management is encouraged by the increasingly favorable cost containment results during 18 the fourth quarter of 1993 through the third quarter of 1994, but key challanges remain to meet the Company's revenue goals. Tandem, Himalaya, Integrity, Ungermann-Bass, Access/One and Access/Stax are trademarks of the Company. UNIX is a trademark of UNIX Systems Laboratories, Inc. 19 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES - FORM 10-Q PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits required by Item 601 of Regulation S-K: None (b) Reports on Form 8-K: No reports on Form 8-K were filed during the first fiscal quarter. 20 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES - FORM 10-Q SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Cupertino, State of California. TANDEM COMPUTERS INCORPORATED (Registrant) /s/ DAVID J. RYNNE Date: August 15, 1994 By:___________________________________ David J. Rynne Senior Vice President and Chief Financial Officer /s/ ANTHONY H. LEWIS, JR. Date: August 15, 1994 By:__________________________________ Anthony H. Lewis, Jr. Vice President and Corporate Controller
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