0000891618-95-000462.txt : 19950815 0000891618-95-000462.hdr.sgml : 19950815 ACCESSION NUMBER: 0000891618-95-000462 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TANDEM COMPUTERS INC /DE/ CENTRAL INDEX KEY: 0000315180 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [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: 95562226 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 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, 1995 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 7, 1995 ------------- ----------------------------- $.025 par value 116,700,555 shares
2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements The following consolidated financial statements have been prepared by the Company without audit by independent public accountants, but in accordance with the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Securities and Exchange Commission rules and regulations, the Company believes the financial disclosures made are sufficient to make the information presented not misleading. In addition, the consolidated financial statements reflect, in the opinion of management, all adjustments (limited to normal, recurring adjustments) necessary to present fairly the consolidated financial position, results of operations, and cash flows for the periods indicated. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and related notes included in the Company's 1994 Annual Report to Stockholders and Annual Report on Form 10-K for the year ended September 30, 1994. Such consolidated financial statements and related notes are filed with the Securities and Exchange Commission. The results of operations for the three-month period ended June 30, 1995, 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 For the nine months ended --------------------------------- --------------------------------- June 30, June 30, June 30, June 30, (In thousands except per share amounts) 1995 1994 1995 1994 -------------------------------------------------------------------------------------------------------------------------------- REVENUES Product revenues $475,592 $434,176 $1,322,393 $1,215,273 Service and other revenues 118,822 109,765 322,563 288,349 -------------------------------------------------------------------------------------------------------------------------------- Total revenues 594,414 543,941 1,644,956 1,503,622 -------------------------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES Cost of product revenues 206,250 170,055 576,446 490,475 Cost of service and other revenues 88,294 75,214 228,315 193,956 Research and development 81,800 66,849 235,286 196,914 Marketing, general, and administrative 176,932 181,141 509,771 539,658 -------------------------------------------------------------------------------------------------------------------------------- Total costs and expenses 553,276 493,259 1,549,818 1,421,003 -------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 41,138 50,682 95,138 82,619 Gain on sale of subsidiaries and investments -- -- 8,677 23,000 Net interest income 1,152 328 3,897 1,178 -------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 42,290 51,010 107,712 106,797 Provision for income taxes 11,446 2,500 19,957 7,600 -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 30,844 $ 48,510 $ 87,755 $ 99,197 ================================================================================================================================ EARNINGS PER SHARE $ .26 $ .43 $ .74 $ .88 ================================================================================================================================ Weighted average shares outstanding 118,055 113,508 118,375 112,942 ================================================================================================================================
See accompanying notes. 4 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
------------------------------------------------------------------------------------------------------------ June 30, September 30, (In thousands except per share amount) 1995 1994 ------------------------------------------------------------------------------------------------------------ ASSETS ------------------------------------------------------------------------------------------------------------ CURRENT ASSETS Cash and equivalents $ 134,413 $ 124,042 Accounts receivable, net 515,624 512,334 Current portion of lease receivables 61,068 61,516 Inventories 184,964 159,609 Prepaid expenses and other 77,480 70,529 ------------------------------------------------------------------------------------------------------------ Total current assets 973,549 928,030 ------------------------------------------------------------------------------------------------------------ PROPERTY, PLANT, AND EQUIPMENT, at cost 1,278,848 1,178,888 Accumulated depreciation and amortization (699,926) (630,652) ------------------------------------------------------------------------------------------------------------ Net property, plant, and equipment 578,922 548,236 ------------------------------------------------------------------------------------------------------------ COST IN EXCESS OF NET ASSETS ACQUIRED, NET 5,192 6,560 ------------------------------------------------------------------------------------------------------------ LEASE RECEIVABLES 73,605 76,765 ------------------------------------------------------------------------------------------------------------ OTHER ASSETS 212,561 202,294 ------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $1,843,829 $1,761,885 ============================================================================================================ LIABILITIES AND STOCKHOLDERS' INVESTMENT ------------------------------------------------------------------------------------------------------------ CURRENT LIABILITIES Short-term borrowings $ 694 $ -- Accounts payable 176,911 150,933 Accrued liabilities 438,856 527,510 Current maturities of long-term obligations 62,088 58,120 ------------------------------------------------------------------------------------------------------------ Total current liabilities 678,549 736,563 ------------------------------------------------------------------------------------------------------------ LONG-TERM OBLIGATIONS 76,735 86,481 ------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' INVESTMENT Common stock $.025 par value, authorized 400,000 shares, outstanding 119,515 shares at June 30 and 116,237 shares at September 30 2,988 2,905 Additional paid-in capital 687,279 646,256 Retained earnings 421,998 332,460 Accumulated translation adjustments 27,194 9,192 Treasury stock, at cost (50,914) (9,062) Deferred ESOP compensation - (42,910) ------------------------------------------------------------------------------------------------------------ Total stockholders' investment 1,088,545 938,841 ------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $1,843,829 $1,761,885 ============================================================================================================
See accompanying notes. 5 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
------------------------------------------------------------------------------------------------------ For the nine months ended -------------------------------------- June 30, June 30, (In thousands) 1995 1994 ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 87,755 $ 99,197 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 125,015 123,514 Gain on sale of subsidiaries (8,677) (23,000) Loss (gain) on dispositions of property, plant, and equipment 1,473 (804) Changes in: Accounts receivable 18,215 (16,858) Inventories (22,137) (21,677) Lease receivables 2,026 9,933 Non-debt current liabilities and other (90,337) (128,746) ------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 113,333 41,559 ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Investment in property, plant, and equipment (119,030) (90,894) Proceeds from dispositions of property, plant, and equipment 4,020 23,509 Sale of subsidiaries and investments, net of cash disposed 11,642 70,519 Increase in other assets (37,981) (51,155) ------------------------------------------------------------------------------------------------------ Net cash used in investing activities (141,349) (48,021) ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Borrowings 44,957 51,698 Repayments (53,042) (67,956) Issuance of Common Stock under stock plans, including tax benefits 40,550 18,763 ------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 32,465 2,505 ------------------------------------------------------------------------------------------------------ Effect of exchange rate fluctuations on cash and equivalents 5,922 2,542 ------------------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 10,371 (1,415) Cash and equivalents at beginning of period 124,042 106,179 ------------------------------------------------------------------------------------------------------ CASH AND EQUIVALENTS AT END OF PERIOD $ 134,413 $ 104,764 ======================================================================================================
See accompanying notes. 6 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. EARNINGS PER SHARE Earnings per share are based on the weighted average number of common and common equivalent shares outstanding. Common equivalent shares result from the assumed exercise of outstanding stock options, which have a dilutive effect when applying the treasury stock method. As a result of terminating the Employee Stock Ownership Plan (ESOP), the approximately 2.4 million unallocated common shares held by the ESOP trust were returned to Tandem's treasury in January 1995 and are excluded from the weighted average shares outstanding calculations for all periods presented. 2. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventories are as follows:
-------------------------------------------------------------------------------------------- June 30, September 30, (In thousands) 1995 1994 -------------------------------------------------------------------------------------------- Purchased parts and subassemblies $ 66,498 $ 52,370 Work in process 36,815 29,234 Finished goods 81,651 78,005 -------------------------------------------------------------------------------------------- Total $184,964 $159,609 ============================================================================================
3. INVESTMENTS During January 1995, one of the Company's equity investees entered into an agreement to sell its assets for $120 million. The Company has or will receive approximately $13.6 million in proceeds from the transaction, for an estimated gain on the transaction of $10.6 million, $1.9 million of which is subject to certain contingencies. Accordingly, the Company recorded $8.7 million of the gain in the second quarter of 1995. The remaining gain will not be recognized until the related contingencies are satisfied. Effective October 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt and Equity Securities." Previously, the Company's equity securities were recorded at lower of cost or market. Under SFAS No. 115, the Company's equity securities are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of taxes, reported in stockholders' investment. Realized gains and losses, and declines in value judged to be other than temporary on available-for-sale securities are included in results of operations. In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect of adopting SFAS No. 115, as of October 1, 1994, increased the beginning balance of stockholders' investment by $4.1 million to reflect the net unrealized holding gains on securities classified as available-for-sale. Realized gains on available-for-sale securities during the quarter ended June 30, 1995 totaled $2.5 million. The net adjustment to unrealized holding gains (losses) on available-for-sale securities for the quarter was not material. 7 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. RESTRUCTURING Information related to restructuring activity for the nine months ended June 30, 1995 is as follows:
-------------------------------------------------------------------------------------------------------------------------- Reduction of Internal Discontinued (In thousands) Work Force Facilities Systems Activities Other Total -------------------------------------------------------------------------------------------------------------------------- Balances, September 30, 1994 $52,066 $54,742 $23,822 $10,711 $31,837 $173,178 Utilized, nine months ended June 30, 1995 30,418 22,291 14,051 870 12,405 80,035 -------------------------------------------------------------------------------------------------------------------------- Balances, June 30, 1995 $21,648 $32,451 $ 9,771 $ 9,841 $19,432 $ 93,143 ========================================================================================================================== Cash used, nine months ended June 30, 1995 $30,418 $17,405 $14,051 $ 51 $12,205 $ 74,130 ==========================================================================================================================
5. BUSINESS COMBINATIONS The consolidated results of operations for the quarter ended December 31, 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. 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 in the quarter ended March 31, 1994, and no gain or loss was realized for financial reporting purposes. In October 1994, NetWorth, Inc. (NetWorth) completed a second public offering of its common stock in which it received net proceeds of $20.7 million. In conjunction with NetWorth's second offering, the Company sold 315,000 shares of its NetWorth stock for cash of $3.4 million, realizing a $1.8 million gain for financial accounting purposes and reducing the Company's ownership interest in NetWorth from 32 percent to 15 percent. Further, as the net offering price was in excess of the Company's average per share carrying value of the investment, the Company also recorded a $1.6 million increase in the investment value. This change of interest gain was recorded directly to additional paid-in capital. On March 10, 1995, NetWorth entered into a merger agreement providing for a merger with Network Resources Corporation (NRC), an equity investee of the Company. The transaction became effective during the quarter ended June 30, 1995. As a result, the Company's shares of NRC were exchanged for shares of NetWorth. The Company recorded a gain on the transaction of $1.2 million for financial reporting purposes. 8 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. INCOME TAXES The provision for income taxes for the three- and nine-month periods ended June 30, 1995 and 1994 arose principally from taxes currently payable in foreign jurisdictions. 7. CASH DIVIDENDS The Company has not declared or paid any cash dividends and has no plans to do so in the foreseeable future. 8. SUBSEQUENT EVENT 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 complaint alleges violations of Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5. The Company has just begun the investigation of this matter. Accordingly, the Company is not yet able to predict the probable outcome of the case or to estimate the potential financial impact, if any. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SELECTED OPERATING STATISTICS The following tables summarize operating statistics for the third quarter and the first nine months of fiscal 1995 and 1994. The first table shows the percentage relationship of revenue and expense items to total revenues, except cost of product and services which are shown in relation to product revenues and service revenues, respectively. The second table shows the percentage change in 1995 and 1994 from the comparable prior year periods. Operating results of business units sold are included in revenues, costs, and expenses through their respective disposition dates as follows: 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. Throughout Management's Discussion and Analysis of Financial Condition and Results of Operations, certain fluctuations in financial statement line items are provided on a basis which excludes the financial information of the above-mentioned businesses for the period prior to disposition. This basis is described in the text, for example, as "excluding business units sold" and reflects the fluctuations of the ongoing operations of the Company. The Company's fiscal year ends on September 30. References to 1995, 1994, and 1993 in Item 2 represent the Company's fiscal years. PERCENT OF TOTAL REVENUES (Except cost of product and service)
THREE MONTHS NINE MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------ ------------------- 1995 1994 1995 1994 ------------------ ------------------- Product revenues 80 80 80 81 Service and other revenues 20 20 20 19 ------------------------------------------------------------------------------------------------------- TOTAL REVENUES 100 100 100 100 ------------------------------------------------------------------------------------------------------- Cost of product revenues 43 39 44 40 Cost of service and other revenues 74 69 71 67 ------------------------------------------------------------------------------------------------------- Total cost of revenues 49 45 49 46 Research and development 14 12 14 13 Marketing, general, and administrative 30 34 31 36 ------------------------------------------------------------------------------------------------------- OPERATING INCOME 7 9 6 5 Gain on sale of subsidiaries and investments N/A N/A 1 2 ------------------------------------------------------------------------------------------------------- Net interest income -- -- -- -- ------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 7 9 7 7 Provision for income taxes 2 -- 2 -- ------------------------------------------------------------------------------------------------------- NET INCOME 5 9 5 7 =======================================================================================================
N/A - Not applicable 10 PERCENT INCREASE (DECREASE)
THREE MONTHS NINE MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------------- --------------------- 1995 1994 1995 1994 -------------------- --------------------- Product revenues 10 15 9 2 Service and other revenues 8 11 12 1 ------------------------------------------------------------------------------------------------------- TOTAL REVENUES 9 14 9 2 ------------------------------------------------------------------------------------------------------- Cost of product revenues 21 15 18 13 Cost of service and other revenues 17 1 18 (1) ------------------------------------------------------------------------------------------------------- Total cost of revenues 20 11 18 9 Research and development 22 (19) 19 (16) Marketing, general, and administrative (2) (16) (6) (15) ------------------------------------------------------------------------------------------------------- OPERATING INCOME (19) N/M 15 N/M ------------------------------------------------------------------------------------------------------- Gain on sale of subsidiaries and investments N/A N/A (62) N/M ------------------------------------------------------------------------------------------------------- Net interest income 251 (50) 231 (50) ------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES (17) N/M 1 N/M Provision for income taxes 358 N/M 163 N/M ------------------------------------------------------------------------------------------------------- NET INCOME (36) N/M (12) N/M ======================================================================================================= EARNINGS PER SHARE (40) N/M (16) N/M =======================================================================================================
N/A - Not applicable N/M - Not meaningful OPERATING RESULTS REVENUES Total revenues of $594.4 million during the third quarter of 1995 increased $50 million, or 9 percent, compared to the third quarter of 1994. Product revenues of $475.6 million for the third quarter of 1995 increased $41 million, or 10 percent, over the same quarter of 1994. Service and other revenues for the third quarter of 1995 of $118.8 million increased 8 percent over the third quarter of 1994. Total revenues for the first nine months of 1995 of $1.6 billion increased $141 million, or 9 percent, compared to the first nine months of 1994. Excluding business units sold, total revenues for the nine-month period increased approximately 11 percent. Product revenues of $1.3 billion increased $107 million, or 9 percent, over the same period of 1994; excluding business units sold, product revenues increased 11 percent for the same period comparison. Service and other revenues of $322.6 million, with and without business units sold, increased 12 percent and 13 percent, respectively, over the same nine-month period of 1994. Increases in product revenues are attributable primarily to increased volume of unit shipments of the Company's computer systems, particularly high-end and mid-range NonStop servers. Increases in service and other revenues are the result of increased consulting revenues. 11 Product Lines--The table below summarizes total revenue by product lines (which includes both product revenues and service and other revenues) and the percentage of total revenues each product line contributed for the indicated periods.
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30, (Dollars in millions) 1995 1994 1995 1994 --------------- -------------- --------------- --------------- $ % $ % $ % $ % --------------- -------------- --------------- --------------- Computer systems 496.3 83 451.7 83 1,367.7 83 1,222.3 81 Networking 98.1 17 92.2 17 277.3 17 281.3 19 --------------- -------------- --------------- --------------- Total revenues 594.4 100 543.9 100 1,645.0 100 1,503.6 100 =============== ============== =============== ===============
Computer systems revenues increased $45 million, or 10 percent, in the third quarter of 1995 and increased $161 million, or 13 percent, for the nine-month period ended June 30, 1995, compared to the same 1994 periods, excluding the effects of business units sold. The increase is a result of increased unit shipments of high-end and mid-range Himalaya servers, recurring software license and support revenues, and increased consulting revenues. Unit shipments of all computer system product lines increased 26 percent and 28 percent, respectively, in the third quarter and first nine months of 1995, compared to the same 1994 periods (based on the number of processors shipped excluding workstations and personal computers). For the quarter and nine-month periods respectively, high-end NonStop computer unit shipments increased 8 percent and 30 percent. Mid-range NonStop computer unit shipments increased 63 percent and 54 percent. These increases were partially offset in the nine-month period by reductions in the low-end NonStop units of 11 percent. Compared to the third quarter and first nine months of 1994, revenues from the Integrity product family increased by 28 percent and 24 percent, respectively. Recurring software license and support revenues increased 12 percent and 15 percent, respectively, for the third quarter and first nine months of 1995, compared to the same 1994 periods. These increases contributed 19 percent and 20 percent, respectively, to the net increases in computer systems business, excluding the effects of business units sold. Consulting revenues attributable to the computer systems business increased 18 percent and 29 percent, respectively, for the third quarter and first nine months of 1995 compared to the same 1994 periods. These increases comprised 15 percent of the net increases in the computer systems business for both periods, excluding business units sold. Networking revenues increased $6 million, or 6 percent, in the third quarter of 1995 in comparison to the third quarter of 1994. Networking product revenues and service revenues each increased $3 million, or 3 percent and 20 percent, respectively, in this quarterly comparison. Networking revenues increased 3 percent during the first nine months of the year in comparison to the first nine months of 1994, excluding business units sold. 12 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.
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30, (Dollars in millions) 1995 1994 1995 1994 ------------- ------------- --------------- --------------- $ % $ % $ % $ % ------------- ------------- --------------- --------------- United States 292.7 49 259.0 48 816.7 50 774.2 52 Europe United Kingdom 45.4 8 66.7 12 133.1 8 130.7 9 Germany 30.0 5 22.8 4 72.0 4 64.6 4 Other Europe 76.2 13 72.8 14 219.4 14 196.5 13 ------------- ------------- --------------- --------------- Total Europe 151.6 26 162.3 30 424.5 26 391.8 26 Japan 96.2 16 68.8 13 245.1 15 194.9 13 Asia/Pacific 29.8 5 29.9 5 91.1 5 78.1 5 Americas Division (excluding the U.S.) 24.1 4 23.9 4 67.6 4 64.6 4 ------------- ------------- --------------- --------------- Total revenues 594.4 100 543.9 100 1,645.0 100 1,503.6 100 ============= ============= =============== ===============
Revenues in the United States increased 13 percent during the third quarter of 1995 compared to the same 1994 period. The increase in U.S. revenues is attributable primarily to increased computer product revenues -- increased volume of unit shipments of the Company's high-end and mid-range NonStop servers. Excluding business units sold, U.S. revenues increased 8 percent during the first nine months of 1995, compared to the prior year. Domestic results for this nine-month period are attributable to sales growth into the communications industry, offset somewhat by reduced computer product revenues across most other industries. Revenues in Europe decreased 7 percent during the third quarter of 1995 compared to the same 1994 period. Computer systems revenues in the United Kingdom were impacted, quarter over year ago quarter, due to the completion of the first phase of a large contract in the third quarter of 1994. In the quarter over quarter comparison, the reduced U.K. computer systems revenues were offset somewhat by increased revenues in Germany and other parts of Europe. Excluding the effects of business units sold, European revenues increased 9 percent during the first nine months of 1995, compared to the prior year. The revenue increase is attributable to increased unit shipments of over 25 percent, mainly in mid-range systems, and to foreign currency fluctuations between the periods, estimated to be 11 percent between the two nine-month periods. 13 In Japan, revenues increased 40 percent and 26 percent in the third quarter and first nine months of 1995, respectively, compared to the same 1994 periods. The increase is primarily due to increased unit shipments of high-end computer systems, increased consulting revenues, and the impact on revenues of foreign currency fluctuations, estimated to be 24 percent for the quarter over the year-ago quarter and 16 percent between the two nine-month periods. Asia/Pacific revenues decreased 1 percent during the third quarter of 1995 compared to the same 1994 period, primarily as a result of reduced Networking revenue. Excluding business units sold, Asia/Pacific revenues increased 19 percent during the first nine months of 1995, compared to the prior year. The increase is primarily a result of increased unit shipments of high-end Himalaya servers, increased consulting revenues, and the impact on revenues of foreign currency fluctuations, estimated to be 7 percent between the two nine-month periods. COST OF REVENUES During the third quarter and first nine months of 1995, product margin percentages declined 4 points to 57 percent and 56 percent, respectively, in comparison to the same 1994 periods. The decline in product margin percentages is the result of mix shifts from the direct sales channel to expanding business through distributor and reseller channels and to an increased contribution to total revenue from third-party products. Further, shipments of the new Himalaya K2(x) servers generated higher trade-ins of older NonStop systems. The unfavorable impact on product margins from these factors was offset slightly by the strength of foreign markets, where the Company achieves higher unit prices measured in U.S. dollars. Management expects product margins to decline in the fourth quarter, compared to the third quarter. Margins on service and other revenues decreased to 26 percent in the third quarter of 1995 from 31 percent in the 1994 third quarter. This margin decline is attributable primarily to a higher contribution to revenues from consulting and other service activities that generate lower margins. For the first nine months of 1995, service margins were 29 percent, compared to 33 percent in the same 1994 period. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses for the third quarter and first nine months of 1995 increased $15 million or 22 percent, and $38 million or 19 percent, respectively, compared to 1994 spending. Excluding the effects of business units sold, research and development expenses increased 22 percent for the nine-month period ended June 30, 1995. The increase is attributable to the Company's new product development efforts, including additional costs for outside contractors, increased salaries and benefits, and purchases of development material. Research and development expenses were approximately 14 percent and 12 percent of total revenues during the third quarters of 1995 and 1994, respectively. Research and development spending is expected to increase in the fourth quarter, but not as a percentage of revenues. 14 MARKETING, GENERAL, AND ADMINISTRATIVE EXPENSES Marketing, general, and administrative expenses in the third quarter and for the first nine months of 1995 declined $4 million or 2 percent, and $30 million or 6 percent, respectively, compared to the same 1994 periods. The impact of business units sold contributed to 49 percent of the decline for the nine-month period. The remaining decline in the quarter and the nine-month period is due primarily to reductions in headcount occurring since the third quarter of 1994. Marketing, general, and administrative expenses are expected to increase in the fourth quarter, but not as a percentage of revenues. Aggressive cost containment and restructuring actions have progressively reduced the ongoing level of fixed expenses. However, certain expenses such as commissions and incentive compensation for sales and marketing staff will vary as revenues fluctuate. IMPACT OF CURRENCY During the third quarter and first nine months of 1995, in comparison to the third quarter and first nine months of 1994, the currencies in most foreign countries where Tandem has significant operations strengthened against the U.S. dollar. Consequently, the translation of foreign revenues and operating results had a positive impact on the consolidated results of the Company, as stated in U.S. dollars. However, this impact is somewhat mitigated as the Company responds to such movements in currency exchange rates with pricing and other management actions in the local markets. The impact is further mitigated by the Company's hedging program, the objective of which is to neutralize the impact of foreign currency exchange rate movements on the Company's operating results. Understanding that the net impact of currency is difficult to quantify, particularly when measuring the effects of local currency pricing actions, management estimates that, compared to the third quarter of 1994, foreign exchange rate movements had a positive impact on the change in operating income of approximately $9 million to $11 million. NET INCOME AND EARNINGS PER SHARE Net income for the third quarter of 1995 was $30.8 million, or $0.26 per share, compared to $48.5 million, or $0.43 per share, for the third quarter of 1994. Net income for the first nine months of 1995 was $87.8 million, or $0.74 per share, compared to $99.2 million, or $0.88 per share, for the first nine months of 1994. Net income for the nine months ended June 30, 1995 included an $8.7 million, or $0.07 per share, non-operating gain from the sale of an equity investment, Lightstream Corporation. The nine-month net income in 1994 included a $23.0 million, or approximately $0.20 per share, non-operating gain from the sales of ACI and ACI Ltd. The effective tax rates for the nine month periods ended June 30, 1995 and 1994 were 19 percent and 7 percent, respectively. Excluding the 1995 gain on sale of subsidiaries and investments which will be offset fully by available net operating loss carryforwards in the U.S., the effective tax rate for the nine month period ended June 30, 1995 is 20 percent. The tax provision arises principally from taxes payable in foreign jurisdictions. The effective tax rate for the third quarter of 1995 includes an adjustment relating to an 15 increase in the annual effective tax rate due to changes in both the overall level and geographic distribution of earnings. Tandem is generating income in specific foreign jurisdictions, which will result in tax provisions despite loss carryforwards which are available primarily to offset U.S. and certain other foreign income. Weighted average shares outstanding increased from 1994 due to sales of stock to employees under stock plans and to increased dilutive stock options. FINANCIAL CONDITION During the first nine months of 1995, cash and cash equivalents increased by $10 million, to $134 million. The Company generated $113 million positive cash flow from operations during the first nine months of the year. Investing activities in the first nine months of the year consumed approximately $141 million, principally through the investment in capital equipment and software. Financing activities provided approximately $32 million, primarily from the sales of common stock under employee stock plans. Accounts receivable days increased to 79 days at June 30, 1995, compared to 77 days at September 30, 1994. Inventory days increased to 57 days at June 30, 1995, compared to 54 days at September 30, 1994. At June 30, 1995, total debt of $140 million, including $115 million of nonrecourse borrowings against lease receivables, decreased $5 million from September 30, 1994. Total debt as a percentage of total capital is approximately 11 percent at June 30, 1995, as compared to 13 percent at September 30, 1994. Cash used for restructuring actions during the first nine months of 1995 aggregated approximately $74 million and was funded by cash generated from operations. The Company's sources of working capital include cash generated from operations, a $150 million financing facility, and other financing arrangements. Management believes that the financing sources available at June 30, 1995 can adequately meet Tandem's financing needs, both in the short and the long term. As of June 30, 1995, the Company had approximately 8,300 full-time equivalent employees. Headcount is expected to increase slightly during the remainder of the year. Effective October 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt and Equity Securities." Previously, the Company's equity securities were recorded at the lower of cost or market. Under SFAS No. 115, the Company's equity securities are classified as available-for-sale. In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect of adopting SFAS No. 115, as of October 1, 1994, increased the beginning balance of stockholders' investment by $4.1 million to reflect the net unrealized holding gain on available-for-sale securities. 16 OUTLOOK AND RISKS The Company's future operating results may be affected by a number of factors, including the Company's ability to increase market share, to expand successfully into new markets, to improve upon cost control efforts, and to continue the Company's migration to open platforms. A key challenge to the Company's continued growth is selling sufficiently increased unit volumes of computer systems and networking products to achieve increased revenues, while concurrently controlling the cost structure of the Company. Increased volume shipments of the Himalaya product family is dependent upon product acceptance of the K2(x) series of servers by the Company's existing customer base, as well as successful expansion into new markets, such as decision support and commercial uses of the Internet. With continued pressures on product margins, cost control remains a key management focus. UB Networks' contribution to the Company's operating results is dependent upon its ability to enhance its existing products and to develop and introduce, on a timely and cost-effective basis, new products that keep pace with the increasing technological requirements of the marketplace. 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 in the short term by significant fluctuations in foreign currency exchange rates. Tandem, Himalaya, Integrity, and NonStop are trademarks of the Tandem Computers Incorporated. UB Networks is a trademark of Ungermann-Bass Networks, Inc. UNIX is a registered trademark in the United States and other countries, licensed exclusively through X/Open Company Limited. All other brand names and product names are trademarks or registered trademarks of their respective companies. 17 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. 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 complaint alleges violations of Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits required by Item 601 of Regulation S-K Exhibit Number Exhibit ------- ------- 10.1 Form of Employment Agreement entered into during the quarter ended June 30, 1995, between the Company and the following executive officers: James G. Treybig, Robert C. Marshall, David J. Rynne, Donald E. Fowler, Kurt Friedrich, Gerald L. Peterson and Roel Pieper. 27 Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed during the third fiscal quarter. 18 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Cupertino, State of California. TANDEM COMPUTERS INCORPORATED (Registrant) Date: August 11, 1995 By: DAVID J. RYNNE ------------------------------ David J. Rynne Senior Vice President and Chief Financial Officer Date: August 11, 1995 By: ANTHONY H. LEWIS, JR. ------------------------------ Anthony H. Lewis, Jr. Vice President and Corporate Controller EX-10.1 2 FORM OF EMPLOYMENT AGREEMENT 1 Exhibit 10.1 FORM OF EMPLOYMENT AGREEMENT During the quarter ended June 30, 1995, the Company entered into employment agreements with the following executive officers: James G. Treybig, Robert C. Marshall, David J. Rynne, Donald E. Fowler, Kurt Friedrich, Gerald L. Peterson, and Roel Pieper. Such employment agreements provide generally for an initial term of eighteen months and contain certain severance payments and other benefits in the event that the executive is terminated during the period of employment without cause as defined in the employment agreements or in the event that the executive terminates employment during the period of employment for good reason as defined in the employment agreement. The employment agreements also provide for certain additional severance payments and other benefits in connection with a change of control of the Company. 2 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of_______________, 1995, is entered into by and between Tandem Computers Incorporated ("Employer") and ______________________ ("Executive"), and supersedes and replaces any prior employment agreement previously entered into between Employer or any subsidiary thereof and Executive. In consideration of the respective undertakings of Employer and Executive set forth below, Employer and Executive agree as follows: 1. Employment. Employer hereby employs Executive, and Executive accepts such employment and agrees to perform services for Employer, for the period and upon the other terms and conditions set forth in this Agreement. 2. Term of Employment. 2.01 Period of Employment. The initial term of Executive's employment pursuant to this Agreement will commence on ________________, 1995 (the "Commencement Date") and, unless terminated at an earlier date in accordance with Section 5.01 of this Agreement, shall continue in effect until the date eighteen months after the Commencement Date or as extended to a later date under Section 5.03(a) or 5.03(e) of this Agreement. The term of Executive's employment under the terms of this Agreement commencing on the Commencement Date and ending pursuant to the terms hereof is hereinafter referred to as the "Period of Employment." The initial eighteen month Period of Employment under this Agreement shall be subject to possible extension in twelve month increments in the sole discretion of Employer as follows. Within one month prior to each anniversary of the Commencement Date during the Executive's Period of Employment, Employer may elect (which election shall be made in writing), in its sole discretion, to extend the term of Executive's employment pursuant to the terms of this Agreement for an additional twelve month period, under the terms and conditions in effect at the time of such election, or with such modifications as Employer and Executive may then agree. Failure of Employer to make any such election shall mean that there is no extension of the Period of Employment hereunder. 2.02 Expiration of Employment. Executive may continue employment with Employer after the expiration of the Period of Employment in which case Executive's employment relationship with Employer will be governed by such other terms as Executive and Employer may agree or as may apply under applicable law, and Executive's only rights continuing under this Agreement shall be those rights that have vested during the Period of Employment or otherwise continue after the Period of Employment under Section 5.03 or other express terms of this Agreement. 3 3. Position and Duties. (a) During the Period of Employment, Executive agrees to perform such duties and executive functions as Employer shall assign to him from time to time and shall have the title of _______________________________. Executive shall devote his best efforts and (except as provided in Section 5.03(e) hereof) full-time attention to the performance of his duties. (b) Except upon the prior written consent of Employer, Executive, during the Period of Employment, shall not (i) accept any other employment; or (ii) engage, directly or indirectly, in any other business, commercial or professional activity (whether or not pursued for pecuniary advantage) that is or may be competitive with Employer, that might create a conflict of interest with Employer, or that otherwise might interfere with the business of Employer, or any affiliate of Employer. 4. Compensation. 4.01 Base Salary. Employer will pay to Executive during the Period of Employment an annual base salary to be paid in substantially equal installments in accordance with Employer's standard payroll procedures and policies. The initial annual base salary will be at the rate currently being paid to Executive, and the annual base salary may be increased from time to time in the sole discretion of Employer (and may not be decreased except pursuant to a reduction comparable to reductions generally applicable to similarly situated employees of Employer imposed as part of a company wide cost-savings initiative). 4.02 Annual Bonus. During the Period of Employment, Executive will be entitled to participate in Employer's Targeted Income Plan, or any other bonus plan or program made generally available to Employer's senior executives (the "Plan"). The award of an annual bonus shall be subject to the terms and provisions of the Plan, which may be modified from time to time, and the Executive's annual incentive target bonus may be increased in the sole discretion of Employer (and may not be decreased except pursuant to a reduction comparable to reductions generally applicable to similarly situated employees of Employer imposed as part of a company wide cost-savings initiative). 4.03 Stock Options. During the Period of Employment, Executive will be eligible to receive grants of Employer's stock options or other stock incentive awards under programs which are made generally available to Employer's senior executives from time to time. Such grants are highly discretionary and will be subject to the terms of the applicable plans and agreements adopted by Employer from time to time. 2 4 4.04 Participation in Other Benefit Plans. During the Period of Employment, Executive will be entitled to participate in Employer's retirement plans, medical and dental plans, disability plans, life insurance plans, and other Employer benefits not described elsewhere in this Section 4 which are made generally available to Employer's senior executives from time to time to the extent that Executive's age, position and other factors qualify him for such benefits. 4.05 Fringe Benefits and Perquisites: Vacation and Sick Leave. During the Period of Employment, Employer will provide Executive with such fringe benefits, perquisites, vacation and sick leave as Employer from time to time makes generally available to its senior executives. 5. Termination and Change in Control. 5.01 Grounds for Termination. The Period of Employment will terminate prior to the expiration of the term set forth in Section 2 of this Agreement in the event that: (a) Executive dies. (b) Executive becomes permanently disabled and qualifies for payments under Employer's disability plans for a period covering 90 consecutive days. (c) Employer terminates the Period of Employment for Cause. "Cause" means termination upon (i) willful and substantial failure by Executive to perform his duties with Employer (other than due to disability); (ii) willful engaging by Executive in conduct which is demonstrably and materially injurious to Employer or that demonstrates gross unfitness for service; (iii) Executive's conviction of a felony which impairs his ability substantially to perform his duties with Employer or other felony involving dishonesty or breach of trust; or (iv) any material breach by Executive of the terms of this Agreement. Executive will not be subject to termination for "Cause" without (A) reasonable written notice to Executive setting forth the reasons for Employer's intention to terminate Executive and (B) an opportunity for Executive to cure any of the actions or omissions forming the basis for such intended termination, if possible, within 15 days after receipt of such written notice. (d) Executive terminates the Period of Employment for Good Reason. "Good Reason" means termination by Executive due to (i) a material reduction in Executive's position (status, offices, titles, or reporting requirements) , authorities, duties or responsibilities; (ii) a reduction in Executive's annual base salary or target annual bonus, other than a reduction comparable to 3 5 reductions generally applicable to similarly situated employees of Employer imposed as part of a company wide cost-savings initiative; (iii) a requirement for Executive to move his principal office in excess of 30 miles from the present location of Executive's principal office; or (iv) any material breach by Employer of the terms of this Agreement. Executive may not terminate his employment for "Good Reason" without (A) reasonable written notice to Employer setting forth the reasons for Executive's intention to terminate employment and (B) an opportunity for Employer to cure any of the actions or omissions forming the basis for such intended termination, if possible, within 15 days after receipt of such written notice. (e) Employer terminates the Period of Employment without Cause, other than pursuant to Section 5.01(a) or (b) above. (f) Executive voluntarily terminates the Period of Employment without Good Reason, other than pursuant to Section 5.01(a) or (b) above. 5.02 Effect of Termination. (a) In the event of termination of the Period of Employment pursuant to the provisions of Section 5.01(a) above, Executive's estate will be entitled to be paid the annual base salary otherwise payable to Executive pursuant to Section 4.01 of this Agreement only through the date of termination, and Employer will continue to provide Executive with the benefits described in Sections 4.04 and 4.05 above through the date of termination. In addition, Executive's beneficiaries will be entitled to any benefits provided under Employer's life insurance plans. (b) In the event of termination of the Period of Employment pursuant to the provisions of Section 5.01(b) above, Executive will be entitled to be paid the annual base salary otherwise payable to Executive pursuant to Section 4.01 of this Agreement only through the date of termination, and Employer will continue to provide Executive with the benefits described in Sections 4.04 and 4.05 above through the date of termination. Executive will also be entitled to benefits in accordance with the terms and conditions of Employer's disability plans. (c) In the event of termination of the Period of Employment pursuant to the provisions of Section 5.01(c) or (f) above, Employer will have no further obligations 4 6 hereunder, except that (i) Employer will pay Executive his annual base salary and continue to provide Executive with the benefits described in Sections 4.04 and 4.05 above through the date of termination and shall remain obligated under Sections 5.03(h) and the first and third sentences of Section 7.06 (a), and (ii) in the event of a termination pursuant to Section 5.01(f) because Executive does not accept Employer's offer under clause (A) of Section 5.03(e)(ii), Employer shall remain obligated under Section 5.03(c)(v) and (viii). Executive will not be paid any annual bonus pursuant to Section 4.02 of this Agreement for the fiscal year in which the termination occurs or any subsequent fiscal year, unless otherwise provided in section 5.03(e). (d) In the event of termination of the Period of Employment pursuant to the provisions of Section 5.01(d) or (a) above, Employer will (i) pay Executive his annual base salary through the date of termination at the rate in effect at the time notice of termination is given; (ii) pay Executive a pro-rated annual bonus for the fiscal year in which termination occurs for the portion of the fiscal year prior to the date of termination, based on Employer's performance through the end of the fiscal quarter in which the termination occurs; (iii) (except as provided in section 5.03(f)) pay to Executive, not later than 30 days following the date of termination, a lump sum payment equal to three times the sum of (A) Executive's annual base salary at the rate in effect at the time notice of termination is given plus (B) Executive's annual incentive target bonus under the Plan at the time notice of termination is given as if such bonus in paid at 100% of the potential payout under such Plan; (iv) continue to provide for a period of three years from the date of termination the benefits described in Section 4.04 (with disability benefits to be calculated as of the date of termination) to which Executive was entitled on the date of termination; (v) continue to provide for a period of three years from the date of termination the fringe benefits and perquisites described in Section 4.05 to which Executive was entitled on the date of termination; (vi) (except as provided in section 5.03(e)) make a lump sum payment to Executive in the amount of _____________; (vii) pay for individual outplacement counseling services to Executive up to a maximum of $50,000; and (viii) extend any Employer loan guarantees and renew any Employer loans to Executive for a period of three years from the date of termination. 5 7 (e) Notwithstanding any other provision of this Agreement, Employer shall have the right in its sole discretion at any time, upon notice to Executive, to terminate Executive's employment without Cause as provided in Section 5.01(e). In the event of any such termination, Employer may condition making payment of the amounts contemplated to be paid under this Agreement upon Executive's execution and delivery of a release and settlement agreement in favor of Employer of all claims by Executive for payments under this Agreement or otherwise arising out of Executive's employment with Employer, except for any claims which Executive may have based on race, sex or age discrimination. Any decision of Employer to terminate Executive's employment without Cause shall not be subject to arbitration under this Agreement, nor may a termination without Cause be challenged for any reason in any court of law or before any federal or state administrative agency or in any other legal proceeding; provided that nothing in this paragraph (e) shall preclude arbitration of any claim for failure to pay amounts owed to Executive as expressly provided herein. 5.03 Provisions For Change In Control. The following special provisions will apply in connection with a Change in Control which is publicly announced during the Period of Employment. As used in this Agreement, "Change in Control" shall have the meaning given to it in Section 7.12. Unless otherwise expressly provided, the benefits under this Section 5.03 will be in addition to all other benefits to which Executive may be entitled under other provisions of this Agreement. (a) When Employer publicly announces during the Period of Employment execution by Employer of a letter of intent or definitive agreement to consummate a transaction that would constitute a Change in control, Employer will pay to Executive a special incentive bonus in the amount of $______________. The period following such announcement until the Change in Control occurs or the transaction is abandoned shall be included within the period of Employment for all purposes of this Agreement, and the Period of Employment shall thereby be extended to the expiration of such period. (b) Upon the change in Control contemplated by the announcement described in Section 5.03(a), if Executive has remained in Employer's employment through the Change in Control or Executive's employment is terminated after the announcement described in Section 5.03(a) either by Employer without Cause or by Executive for Good Reason, Employer will pay to Executive a special extraordinary efforts bonus for 6 8 special efforts to accomplish the successful consummation of the Change in Control transaction. (c) Upon the Change in Control aforementioned in Section 5.03(b), if Executive has remained in Employer's employment through the Change in Control or Executive's employment is terminated after the announcement described in Section 503(a) either by Employer without Cause or by Executive for Good Reason, Employer shall use its best efforts to cause all stock options then held by Executive which have not yet vested to be assumed by the acquiring company, or to cause stock options with similar terms and conditions in the acquiring company to be substituted therefor, and, in either case, Executive shall continue to vest in such stock options in the acquiring company in accordance with their terms during additional employment and consulting periods described in paragraph (e) below and during such other periods as may apply pursuant to the terms of such stock options. The time to exercise any stock options in the acquiring company shall not terminate before 90 days following the end of the additional employment and consulting periods described in paragraph (e) below. (d) Upon the Change in Control aforementioned in Section 5.03(b), if Executive has remained in Employer's employment through the Change in Control or Executive's employment is terminated after the announcement described in Section 5.03(a) either by Employer without Cause or by Executive for Good Reason, Employer will pay to Executive the full (instead of pro-rated) annual bonus which would be payable to Executive for the entire fiscal year in which the Change in Control occurs, based on the assumption that Employer would have continued to perform for the full fiscal year at the same level of performance which it had achieved through the date of the Change in Control. All special payments which are made and expenses which are incurred on account of the Change in Control will be disregarded in measuring Employer's performance. Upon receipt of such payment, Executive shall not thereafter be entitled to receive any payment pursuant to Section 5.02 (d)(ii). (e) (i) Employer agrees to employ Executive, and Employee hereby accepts employment, as a full-time employee for the first six months following the Change in Control aforementioned in Section 3.03(b) and to pay Executive (I) a monthly base salary at twice the monthly rate of base salary in effect immediately prior to the change in Control and 7 9 (II) a bonus equal to Executive's annual incentive target bonus under the Plan at the time of the Change in Control (for the entire fiscal year in which the change in control occurs) as if such bonus is paid at 100% of the potential payout under such Plan. (ii) Employer further agrees to offer to retain Executive during the second six months following the Change in Control either: (A) as a full-time employee, in which event Employer will pay Executive seventy-five percent (75%) of the monthly base salary and bonus which is payable to Executive under the preceding sentence during the first six months following the Change in Control, or (B) as a part-time consultant or employee, in which event Employer will pay Executive fifty percent (50%) of the monthly base salary and bonus which is payable to Executive under the preceding sentence during the first six months following the Change in Control. (iii) If Employer does not offer to retain Executive as a full-time employee pursuant to subparagraph (ii)(A) above, such action by Employer shall be deemed to be a termination of Executive's employment by Employer without Cause for purposes of this Agreement, including Section 5.03(f) below; provided, however, that nothing in this Section 5.03(e) shall affect or interfere with Employer's right to terminate Executive for Cause during Executive's full-time employment in accordance with the provisions of Section 5.01(c). (iv) If Employer does offer to retain Executive as a full-time employee pursuant to subparagraph (ii)(A) above, and Executive accepts such offer and is employed as a full-time employee for such second six-month period, the Period of Employment will expire on the first anniversary of the Change in Control. Executive's employment with Employer shall continue thereafter at the level of monthly base salary and bonus which were in effect immediately prior to the Change in Control, or upon such other terms as Employer and Executive may agree, until terminated for any reason. (v) If Employer does offer to retain Executive as a full-time employee pursuant to subparagraph 8 10 (ii)(A) above, and Executive does not accept such offer, Executive may elect to be a part-time employee or consultant during the second six months following the Change in Control on the terms described in subparagraph (ii)(B) above. If Executive elects such position as a part-time employee or consultant, his employment with Employer shall terminate upon the expiration of such second six-month period. Such election by Executive shall be deemed to be a voluntary termination of employment by Executive without good Reason at the end of such second six month period for purposes of this Agreement, including section 5.03(f) below; provided, however, that nothing in this section 5.03(e) shall affect or interfere with Executive's right to terminate employment for Good Reason during Executive's full-time employment in accordance with the provisions of Section 5.01(d). (vi) The Period of Employment shall be extended to the expiration of both such six month periods described in subparagraphs (e)(i) and (ii) above, unless and until Executive declines Employer's offer of full or part-time employment or consultancy as described in subparagraphs (e)(i) and (ii) above, provided, that the compensation and bonus payments described in subparagraphs (e)(i) and (ii) above shall be in lieu of all amounts otherwise owing pursuant to Sections 4.01 or 4.02 hereof with respect to such periods. (vii) If Executive is employed as a full-time employee for the first six months and retained as a full or part-time employee or consultant for the second six months after the Change in Control under the terms described above in this paragraph (e), and Employer performs its obligations under this paragraph (e), Executive shall not be entitled to receive any contribution or payment pursuant to Section 5.02(d)(vi). (viii) Upon any breach of Employer's obligations under this paragraph (e) (which breach continues following written notice by Executive and the expiration of a reasonable opportunity for cure), Executive shall be entitled to receive the payment or contribution specified in Section 5.02(d)(vi), in addition to the amounts provided in section 5.03(f) below to the extent applicable. 9 11 (f) In the event of termination of Executive's employment by Employer without Cause (other than due to Executive's death or permanent disability) or by Executive for Good Reason at any time within 36 months after the Change in Control aforementioned in Section 5.03(b), Employer will pay to Executive, not later than 30 days following the date of termination, a lump sum Payment equal to two and one-half times the sum of (A) Executive's annual base salary at the rate in effect immediately prior to the Change in Control plus (B) Executive's annual incentive target bonus under the Plan at the time of the Change in Control as if such bonus is paid at 100% of the potential payout under such Plan. Upon receipt of such payment, Executive shall not be entitled to receive any payment pursuant to Section 5.02(d)(iii). (g) In the event of termination of Executive's employment by Employer without Cause (other than due to Executive's death or permanent disability) or by Executive for Good Reason any time within 36 months after the Change in Control aforementioned in Section 5.03(b), Employer will continue to provide the benefits described in Sections 5.02(d)(iv) and (v) for a period of three years from the date of termination and will pay for individual outplacement counseling services described in Section 5.02(d)(vii). If Employer is unable for any reason to continue Executive's coverage under its medical benefits plan, Employer shall provide equivalent benefits coverage through insurance. (h) In the event a Change in Control occurs and Executive becomes entitled to payments under this Agreement, Employer shall cause its independent auditors promptly to review, at Employer's sole expense, the applicability to such payments of Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"). If such auditors shall determine that any payment or distribution of any type by Employer to Executive or for his benefit, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the "Total Payments"), would be subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties are collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive an additional cash payment from Employer (a "Gross-Up Payment") within 30 days of such determination equal to an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax and employment taxes imposed upon the Gross-Up Payment, Executive would retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments; provided, however, that Executive will 10 12 be entitled to receive a Gross-Up Payment only if the amount of the payment defined in Section 28OG(b)(2) of the Code exceeds the sum of (A) $100,000 plus (B) 2.99 times the Executive's "base amount" as defined in Section 28OG(b)(3) of the Code, and provided further, that if Executive is not entitled to receive a Gross-Up payment, Executive will receive only an amount of Total Payments that would not include any payment defined in Section 28OG(b)(1) of the Code. For purposes of the foregoing determination, Executive's income tax rate shall be deemed to be the highest statutory marginal Federal and California income tax rates (on a combined basis) applicable to individuals which are then in effect. Employer's independent auditors shall make their determination based upon a substantial authority standard under Section 6662 of the Code. The intent of the parties is that Employer shall be solely responsible for, and shall pay, any Excise Tax on the Total Payments and Gross-up Payment and any income and employment taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payment, as well as any loss of tax deduction caused by the Gross-Up Payment. An example of the calculation of the Gross-Up Payment is set forth in Appendix A. If no determination by Employer's auditors is made prior to the time a tax return reflecting any portion of the Total Payments is required to be filed by Executive, Executive will be entitled to receive a Gross-Up Payment calculated on the basis of the Total Payments reported by Executive in such tax return, within 30 days of the filing of such tax return. In all events, if any tax authority determines that a greater Excise Tax should be imposed upon the Total Payments than is determined by Employer's independent auditors or reflected in Executive's tax returns, Executive shall be entitled to receive the full Gross-Up Payment calculated on the basis of the amount of Excise Tax determined to be payable by such tax authority from Employer within 30 days of such determination. 6. Taxes. All payments to be made to Executive under this Agreement will be net of required withholding of federal, state income and employment taxes. 7. Miscellaneous. 7.01 Governing Law. This Agreement is made under and shall be governed by and construed in accordance with the laws of the State of California. 7.02 Successors. This Agreement shall be binding upon and inure to the benefit of Executive and Executive's heirs and estate and of Employer and its successors. Employer will require any successor (whether by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of Employer to expressly assume this 11 13 Agreement. Failure of Employer to obtain such assumption of this Agreement prior to the consummation of any such succession shall be a breach of this Agreement. In any case where a successor assumes Employer's obligations under this Agreement by operation of law, the requirements imposed in thus Section 7.02 will be satisfied if the successor acknowledges to Executive in writing that it shall assume or has assumed Employer's obligations under this Agreement by operation of law within 30 days of receipt of a written notice from Executive requesting such acknowledgment. 7.03 Amendments. No amendment or modification of this Agreement will be deemed effective unless made in writing and signed by each party hereto. 7.04 No Waiver. No term or condition of this Agreement will be deemed to have been waived, nor will there by any estoppel to enforce any provisions of this Agreement, except by a statement in writing signed by the party against whom enforcement of the waiver or estoppel is sought. Any written waiver will not be deemed a continuing waiver unless specifically stated, will operate only as to the specific term or condition waived and will not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 7.05 Assignment. This Agreement is not assignable, in whole or in part, by any party without the written consent of the other party. 7.06 Legal and Accounting Fees. (a) Employer will pay legal and accounting fees charged by Munger, Tolles & Olson and Price Waterhouse in connection with entering into this Agreement. In addition, upon Executive's request, Employer will also pay or reimburse Executive for the cost, not to exceed $15,000, of professional accounting and tax services in connection with the receipt of payments under Section 5.03 of this Agreement unless the Period of Employment terminated under Section 5.01(c) or (f). Employer will make a tax gross-up payment to Executive, if necessary, to offset any taxable income which is reported for or realized by Executive with respect to these legal and accounting fees. (b) Each party will bear its own legal and accounting fees in connection with any claim or dispute arising out of or relating to this Agreement. 7.07 Severability. To the extent that any provision of this Agreement shall be determined to be invalid or unenforceable, the invalid or unenforceable portion of such provision will be deleted from this Agreement, and the validity and enforceability of the remainder of such provision and of this Agreement will not be affected. 12 14 7.08 Notices. All notices under this Agreement will be in writing and will be deemed effective when delivered in person (in Employer's case, to its Secretary) or twenty four (24) hours after deposit thereof in the U.S. mails, postage prepaid, for delivery as registered or certified mail -- addressed, in the case of Executive, to him at his last residential address known by Employer and, in the case of Employer, to its corporate headquarters, attention to its Secretary, or to such other address as Executive or Employer may designate in writing at any time or from time to time to the other party. In lieu of notice by deposit in the U.S. mails, a party may give notice by telegram, telex or telecopy, in which case such notice will be deemed effective upon receipt. 7.09 Counterparts. This Agreement may be executed by the parties hereto in counterparts, each of which will be deemed to be an original, but all such counterparts will together constitute one and the same instrument. 7.10 Headings. The headings of sections herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 7.11 Arbitration. (a) All disputes between Executive (and his attorneys, successors, and assigns) and Employer (and its employees, agents, successors, attorneys and assigns) of any kind whatsoever, including, without limitation, all disputes relating in any manner to the employment or termination of Executive and all disputes arising under this Agreement, but excluding any claims by Executive based on race, sex or age discrimination ("Arbitrable Claims") shall be resolved by arbitration. All persons and entities specified in the preceding sentence (other than Employer and Executive) shall be considered third party beneficiaries of the rights and obligations created by this Section on Arbitration. Arbitration shall be final and binding upon the parties and shall be the exclusive remedy for all Arbitrable Claims. THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS. (b) Arbitration of Arbitrable Claims shall be in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association ("AAA Employment Rules"), except as provided otherwise in this Agreement. The arbitrator shall be selected from a source provided by the Judicial Arbitration and Mediation Service ("J.A.M.S."). In any arbitration, the burden of proof shall be allocated as provided by applicable law. Either party may bring an action in court to compel arbitration under this Agreement and to enforce an arbitration award. Otherwise, neither party shall initiate or prosecute any lawsuit or 13 15 administrative action in any way related to any Arbitrable Claim. All arbitration hearings under this Agreement shall be conducted in San Francisco, California. The Federal Arbitration Act shall govern the interpretation and enforcement of this Section 7.11. The fees of the arbitrator shall be split between both parties equally. (c) All proceedings and all documents prepared in connection with any Arbitrable Claim shall be confidential and, unless otherwise required by law, the subject matter thereof shall not be disclosed to any person other than the parties to the proceedings, their counsel, witnesses and experts, the arbitrator, and, if involved, the court and court staff. (d) The rights and obligations of Executive and Employer set forth in this Section 7.11 with respect to arbitration shall survive the termination of Executive's employment and the expiration of this Agreement. 7.12 Change in Control. A "Change in Control" shall be deemed to have occurred upon: (i) the acquisition by any Person, other than Employer or one or more Persons controlling, controlled by or under common control with Employer, of beneficial ownership (as determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of eighty-five percent (85%) or more of Employer's outstanding voting securities, or (ii) a change in the composition of the Board of Directors of Employer (the "Board") over any period of thirty-six (36) consecutive months or less such that a majority of the Board members (determined by rounding up to the next whole number) cease to be comprised of individuals who either (A) were Continuing Directors at the start of such period or (B) were elected or nominated for election as Board members during such period by at least a majority of the Continuing Directors in office at the time such election or nomination was approved by the Board. The 85% test in subparagraph (i) of the Change in Control definition shall be measured at the time the transaction resulting in the Change in Control first commences, and there shall be excluded from such calculation, to the extent provided pursuant to Section 203 (or any successor provision) of the Delaware General Corporation Law, shares owned by (i) persons who are both officers and directors of Employer and (ii) employee stock plans in which employee participants do not have the right to determine confidentiality whether shares held subject to the plan are to be tendered in a tender or exchange offer. "Continuing Director" shall mean any member of the Board who has served continually as such Board member from and before the commencement of the transaction resulting in the Change of Control. 14 16 "Person" shall mean any individual firm, partnership, corporation or other entity and shall include any successor of such entity and all Affiliates, Associates and Subsidiaries (as such terms are defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended) of such entity. IN WITNESS WHEREOF, Employer and Executive have executed this Agreement as of the date set forth in the first paragraph above. EMPLOYER: TANDEM COMPUTERS INCORPORATED By____________________________ Its___________________________ EXECUTIVE: ______________________________ 15 EX-27 3 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 9-MOS SEP-30-1995 JUN-30-1995 134,413 0 533,669 18,045 184,964 973,549 1,278,848 699,926 1,843,829 678,549 76,735 2,988 0 0 1,085,557 1,843,829 1,322,393 1,644,956 576,466 804,761 235,286 2,326 9,669 107,712 19,957 87,755 0 0 0 87,755 0.74 0.74