-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UGrI9+zp/wGzanO89AC+Dq2bvLmB4cfKj7E7GaEpcEiuQegrd0vPL94Es1xyLmuD uoOITwYiXnSgsLXOFPG5lg== 0000891618-96-000484.txt : 19960621 0000891618-96-000484.hdr.sgml : 19960621 ACCESSION NUMBER: 0000891618-96-000484 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NYSE 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: 96566293 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 FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File No. 0-9134 TANDEM COMPUTERS INCORPORATED Delaware 94-2266618 (State of incorporation) (IRS Employer Id. No.) 19333 Vallco Parkway, Cupertino, California 95014-2599 (408)285-6000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class: Common Stock, Outstanding at May 10, 1996 $.025 par value 117,593,478 shares 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The following consolidated financial statements have been prepared by the Company without audit by independent public accountants, but in accordance with the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Securities and Exchange Commission rules and regulations, the Company believes the financial disclosures made are sufficient to make the information presented not misleading. In addition, the consolidated financial statements reflect, in the opinion of management, all adjustments (limited to normal, recurring adjustments) necessary to present fairly the consolidated financial position, results of operations, and cash flows for the periods indicated. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and related notes included in the Company's 1995 Annual Report to Stockholders and Annual Report on Form 10-K for the year ended September 30, 1995. Such consolidated financial statements and related notes are filed with the Securities and Exchange Commission. The results of operations for the three and six month period ended March 31, 1996, are not necessarily indicative of results to be expected in the future. [STATEMENTS ON FOLLOWING PAGES] 3 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended For the six months ended -------------------------- ------------------------ March 31, March 31, March 31, March 31, (In thousands except per share amounts) 1996 1995 1996 1995 ============================================== =========== =========== =========== =========== REVENUES Product revenues $ 456,073 $ 409,814 $ 856,843 $ 846,801 Service and other revenues 120,125 106,128 231,797 203,741 - - ---------------------------------------------- ----------- ----------- ----------- ----------- Total revenues 576,198 515,942 1,088,640 1,050,542 - - ---------------------------------------------- ----------- ----------- ----------- ----------- COSTS AND EXPENSES Cost of product revenues 219,625 183,667 402,759 370,196 Cost of service and other revenues 88,963 74,610 171,992 140,021 Research and development 78,572 78,500 161,148 153,486 Marketing, general, and administrative 178,831 164,345 364,624 332,839 Restructuring charge 52,000 - 52,000 - - - ---------------------------------------------- ----------- ----------- ----------- ----------- Total costs and expenses 617,991 501,122 1,152,523 996,542 - - ---------------------------------------------- ----------- ----------- ----------- ----------- OPERATING INCOME (LOSS) (41,793) 14,820 (63,883) 54,000 Gain on sale of subsidiaries and investments - 8,677 30,628 8,677 Net interest income 236 1,700 664 2,745 - - ---------------------------------------------- ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES (41,557) 25,197 (32,591) 65,422 Provision for income taxes 8,000 3,511 15,000 8,511 - - ---------------------------------------------- ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ (49,557) $ 21,686 $ (47,591) $ 56,911 ============================================== =========== =========== =========== =========== EARNINGS (LOSS) PER SHARE $ (.42) $ .18 $ (.41) $ .48 ============================================== =========== =========== =========== =========== Weighted average shares outstanding 117,311 119,084 117,152 118,535 ============================================== =========== =========== =========== ===========
See accompanying notes. 4 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- - ---------------------------------------------------------------------------- ----------- ----------- March 31, September 30, (In thousands except per share amount) 1996 1995 - - ---------------------------------------------------------------------------- ----------- ----------- ASSETS - - ---------------------------------------------------------------------------- ----------- ----------- CURRENT ASSETS Cash and equivalents $ 94,365 $ 121,230 Accounts receivable, net 499,587 539,993 Current portion of lease receivables 67,048 73,555 Inventories 191,814 169,948 Prepaid expenses and other 58,908 65,759 - - ---------------------------------------------------------------------------- ----------- ----------- Total current assets 911,722 970,485 - - ---------------------------------------------------------------------------- ----------- ----------- PROPERTY, PLANT, AND EQUIPMENT, at cost 1,312,337 1,297,481 Accumulated depreciation and amortization (712,198) (700,813) - - ---------------------------------------------------------------------------- ----------- ----------- Net property, plant, and equipment 600,139 596,668 - - ---------------------------------------------------------------------------- ----------- ----------- LEASE RECEIVABLES 88,402 86,173 - - ---------------------------------------------------------------------------- ----------- ----------- OTHER ASSETS 217,403 203,368 - - ---------------------------------------------------------------------------- ----------- ----------- TOTAL ASSETS $ 1,817,666 $ 1,856,694 ============================================================================ =========== =========== LIABILITIES AND STOCKHOLDERS' INVESTMENT - - ---------------------------------------------------------------------------- ----------- ----------- CURRENT LIABILITIES Accounts payable $ 176,220 $ 195,793 Accrued liabilities 436,628 409,520 Current maturities of long-term obligations 62,517 65,123 - - ---------------------------------------------------------------------------- ----------- ----------- Total current liabilities 675,365 670,436 - - ---------------------------------------------------------------------------- ----------- ----------- LONG-TERM OBLIGATIONS 90,092 75,923 - - ---------------------------------------------------------------------------- ----------- ----------- STOCKHOLDERS' INVESTMENT Common stock $.025 par value, authorized 400,000 shares, outstanding 120,543 shares at March 31 and 119,808 shares at September 30 3,013 2,995 Additional paid-in capital 697,640 691,097 Retained earnings 395,319 450,086 Accumulated translation adjustments 7,109 17,064 Treasury stock, at cost (50,872) (50,907) - - ---------------------------------------------------------------------------- ----------- ----------- Total stockholders' investment 1,052,209 1,110,335 - - ---------------------------------------------------------------------------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 1,817,666 $ 1,856,694 ============================================================================ =========== ===========
See accompanying notes. 5 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- - ---------------------------------------------------------- ------------------------- For the six months ended ------------------------- March 31, March 31, (In thousands) 1996 1995 ========================================================== ========= ========= CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (47,591) $ 56,911 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 97,443 80,818 Restructuring charge 52,000 - Gain on sale of subsidiaries and investments (30,628) (8,677) Loss on dispositions of property, plant, and equipment 1,689 1,014 Changes in : Accounts receivable 32,664 57,606 Inventories (23,089) (5,144) Lease receivables 3,930 1,818 Non-debt current liabilities and other (47,988) (55,104) - - ---------------------------------------------------------- --------- --------- Net cash provided by operating activities 38,430 129,242 - - ---------------------------------------------------------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in property, plant, and equipment (89,500) (79,430) Proceeds from dispositions of property, plant, and equipment 8,147 2,898 Sale of subsidiaries and investments, net of cash disposed 34,802 11,642 Increase in other assets (41,360) (30,749) - - ---------------------------------------------------------- --------- --------- Net cash used in investing activities (87,911) (95,639) - - ---------------------------------------------------------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings 61,626 29,709 Repayments (43,634) (36,361) Issuance of Common Stock under stock plans, including tax benefits 6,596 35,915 - - ---------------------------------------------------------- --------- --------- Net cash provided by financing activities 24,588 29,263 - - ---------------------------------------------------------- --------- --------- Effect of exchange rate fluctuations on cash and equivalents (1,972) 5,674 - - ---------------------------------------------------------- --------- --------- NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (26,865) 68,540 Cash and equivalents at beginning of period 121,230 124,042 --------- --------- CASH AND EQUIVALENTS AT END OF PERIOD $ 94,365 $ 192,582 ========================================================== ========= =========
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. Loss per share is calculated using the weighted average number of common shares outstanding during the period. 2. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventories were as follows:
- - ----------------------------------------------------- --------------------- --------------------- March 31, September 30, (In thousands) 1996 1995 ===================================================== ===================== ===================== Purchased parts and subassemblies $ 90,765 $ 71,455 Work in process 18,282 29,097 Finished goods 82,767 69,396 - - ----------------------------------------------------- --------------------- --------------------- Total $191,814 $169,948 ===================================================== ===================== =====================
3. INVESTMENTS During the first quarter of 1996, Compaq Computer Corporation acquired, for cash, all of the outstanding shares of NetWorth Inc., an investment of the Company. The Company received $34.8 million in proceeds from the transaction for a realized gain of $30.6 million. During the quarters ended March 31, 1996 and 1995, the Company realized $0.4 million and $1.9 million, respectively, in gains on available-for-sale securities. Except for the transactions described above, there were no other realized gains or losses on available-for-sale securities during the six months ended March 31, 1996 and 1995. The net adjustment to unrealized holding gains (losses) on available-for-sale securities for these periods was not significant. 4. ACCOUNTS RECEIVABLE At March 31, 1996, $82 million of financing was available to the Company under its accounts receivable purchase agreement, including the balance outstanding at the end of the quarter of $10 million. The maximum amount outstanding under this agreement during the second quarter and first six months of 1996 was $53 million and $65 million, respectively. There were no amounts outstanding as of September 30, 1995. In March 1996 the Company renegotiated its accounts receivable purchase agreement, adjusting the maximum size of the eligible pool of accounts receivable to $100 million. The current agreement expires during the first quarter of 1997. 7 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. RESTRUCTURING During the second quarter of 1996, the Company initiated a new restructuring program as a result of decisions by its new Chief Executive Officer and management team to transform the Company's organizational structure in order to align resources with a new strategic business model and to lower the Company's cost structure. The restructuring actions result in a charge of $52 million and include reducing headcount, vacating leased facilities, and disposing of assets related to discontinuing certain product programs and other activities. Approximately $39 million of the charge will require cash expenditures. Information relating to restructuring activity for the six months ended March 31, 1996 is presented below.
- - ----------------------------------------------------------------------------------------------------------------------- Reduction of Internal Discontinued (In thousands) Work Force Facilities Systems Activities Other Total - - ----------------------------------------------------------------------------------------------------------------------- Balances, September 30, 1995 $17,677 $28,661 $ 7,414 $ 9,820 $ 7,033 $70,605 Provision, three months ended March 31, 1996 34,100 8,600 -- 9,300 -- 52,000 Utilized, six months ended March 31, 1996 16,696 7,309 4,243 658 3,381 32,287 - - ----------------------------- ------- ------- ------- ------- ------- ------- Balances, March 31, 1996 $35,081 $29,952 $ 3,171 $18,462 $ 3,652 $90,318 ============================= ======= ======= ======= ======= ======= ======= Cash used, six months ended March 31, 1996 $16,696 $ 4,761 $ 4,243 $ 106 $ 3,024 $28,830 ============================= ======= ======= ======= ======= ======= =======
The provision for reduction of work force includes severance, related medical and other benefits, and obligations relating to an employment agreement with the former Chief Executive Officer. The provision includes termination benefits for approximately 500 employees, of which approximately three-fourths are based in the United States. Approximately two-thirds of the planned terminations are in sales, marketing and administrative functions, approximately 20 percent in engineering and development functions, and the balance is in manufacturing, service and support functions. The Company's plan anticipates terminations to be substantially completed during 1996. The provision for facilities includes primarily lease payments, fixed costs and write-offs of related property, plant and equipment associated with plans to permanently exit sales, support and administrative operations in approximately fifteen leased facilities throughout the United States, Europe and Asia-Pacific geographic areas. The Company plans to vacate substantially all of these facilities during 1996 and the first quarter of 1997. Restructuring costs are expected to be incurred through 1999 as leases are either terminated early or expire. The provision for discontinued costs related to exiting the maintenance and support obligations of a third party product, asset write-offs associated with discontinuing imaging solutions products, and asset write-offs and other costs associated with discontinuing product initiatives and programs. The Company intends to begin outsourcing the above maintenance and support obligations and to complete the other actions during 1996. Of the approximately $32 million restructuring reserves utilized in 1996, approximately $6 million pertains to the 1996 second quarter provision. Of the total restructuring reserves remaining as of March 31, 1996, approximately $71 million is included in accrued liabilities, approximately $16 million is classified as a reduction of property, plant and equipment, and approximately $3 million is classified as a reduction of other assets. 8 6. INCOME TAXES The provision for income taxes for the three months and six months ended March 31, 1996 and 1995 arose principally from taxes currently payable in foreign jurisdictions. 7. CASH DIVIDENDS The Company has not declared or paid any cash dividends and has no plans to do so in the foreseeable future. 8. COMMITMENTS AND CONTINGENCIES The Company and three principal officers were named as defendants in a class action complaint for damages filed in the United States District Court for the Northern District of California on July 19, 1995. The class action is purported to be on behalf of purchasers of the Company's Common Stock between March 8, 1995 and July 12, 1995. The complaint alleges violations of Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5. Management believes that this complaint is without merit and that the outcome of the complaint will not have a material adverse effect on the financial position or overall trends in the results of operations of the Company. Two similar class action complaints were filed on November 2, 1995 and December 19, 1995, respectively. The plaintiffs in both of these cases voluntarily dismissed their complaints in January 1996. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SELECTED OPERATING STATISTICS The following tables summarize operating statistics for the second quarter and the first six months of fiscal 1996 and 1995. The first table shows the percentage relationship of revenue and expense items to total revenues, except cost of product and services which are shown in relation to product revenues and service revenues, respectively. The second table shows the percentage change in 1996 and 1995 from the comparable prior year periods. The Company's fiscal year ends on September 30. References to 1996 and 1995 in this section represent the Company's fiscal years. PERCENT OF TOTAL REVENUES (Except cost of product and service)
THREE MONTHS SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, --------------- --------------- 1996 1995 1996 1995 --------------- --------------- Product revenues 79 79 79 81 Service and other revenues 21 21 21 19 - - --------------------------------- --- --- --- --- TOTAL REVENUES 100 100 100 100 - - --------------------------------- --- --- --- --- Cost of product revenues 48 45 47 44 Cost of service and other revenues 74 70 74 69 - - --------------------------------- --- --- --- --- Total cost of revenues 54 50 53 48 Research and development 14 15 15 15 Marketing, general, and administrative 31 32 33 32 Restructuring charge 9 N/A 5 N/A - - --------------------------------- --- --- --- --- OPERATING INCOME (LOSS) (8) 3 (6) 5 - - --------------------------------- --- --- --- --- Gain on sale of subsidiaries and investments N/A 2 3 1 - - --------------------------------- --- --- --- --- INCOME (LOSS) BEFORE INCOME TAXES (8) 5 (3) 6 Provision for income taxes 1 1 1 1 - - --------------------------------- --- --- --- --- NET INCOME (LOSS) (9) 4 (4) 5 ================================= === === === ===
N/A - Not applicable 10 PERCENT INCREASE (DECREASE)
THREE MONTHS SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, --------------- --------------- 1996 1995 1996 1995 --------------- --------------- Product revenues 11 4 1 8 Service and other revenues 13 19 14 14 - - --------------------------------- --- --- --- ---- TOTAL REVENUES 12 7 4 9 - - --------------------------------- --- --- --- ---- Cost of product revenues 20 12 9 16 Cost of service and other revenues 19 37 23 18 - - --------------------------------- --- --- --- ---- Total cost of revenues 19 18 13 16 Research and development - 22 5 18 Marketing, general, and administrative 9 (5) 10 (7) Restructuring charge N/M N/A N/M N/A - - --------------------------------- --- --- --- ---- OPERATING INCOME N/M (47) N/M 69 - - --------------------------------- --- --- --- ---- Gain on sale of subsidiaries and investments N/M N/M N/M (62) - - --------------------------------- --- --- --- ---- Net interest income (86) 308 (76) 223 - - --------------------------------- --- --- --- ---- INCOME BEFORE INCOME TAXES N/M (11) N/M 17 Provision for income taxes 128 40 76 67 - - --------------------------------- --- --- --- ---- NET INCOME N/M (16) N/M 12 ================================= === === === ==== EARNINGS PER SHARE N/M (22) N/M 7 ================================= === === === ====
N/A - Not applicable N/M - Not meaningful OPERATING RESULTS REVENUES Total revenues of $576.2 million during the second quarter of 1996 increased $60 million, or 12 percent, compared to the second quarter of 1995. Product revenues of $456.1 million for the second quarter of 1996 increased $46 million, or 11 percent, over the same quarter of 1995. Service and other revenues for the second quarter of 1996 of $120.1 million increased $14 million or 13 percent over the second quarter of 1995. This revenue growth in the second quarter occurred principally in the United States. The growth was fueled by sales of high-end Himalaya servers, with successes in the decision support and finance marketplaces, as well as sales of networking products and UNIX(R) system-based servers. The increase in service and other revenues is primarily the result of increased consulting revenues. Hardware service revenues remained relatively flat. Total revenues of $1.1 billion for the first six months of 1996 increased $38 million, or 4 percent, compared to the first six months of 1995. Product revenues of $856.8 million increased $10 million, or 1 percent, over the same period of 1995. Service and other revenues of $231.8 million increased $28 million or 14 percent over the same six-month period of 1995. The six month product revenue comparison was negatively affected by the relatively weak revenue performance in the first quarter of 1996. The first half of 1996 was characterized by increased networking sales, somewhat offset by reduced computer system sales across most product families, particularly in the United States. 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 MARCH 31, SIX MONTHS ENDED MARCH 31, (Dollars in millions) 1996 1995 1996 1995 -------------------- ------------------ ------------------ ------------------- $ % $ % $ % $ % --------- --------- -------- -------- --------- ------- ---------- ------- Computer systems 467.6 81 426.7 83 886.0 81 871.3 83 Networking 108.6 19 89.2 17 202.6 19 179.2 17 --------- --------- -------- -------- --------- ------- ---------- ------- Total revenues 576.2 100 515.9 100 1,088.6 100 1,050.5 100 ========= ========= ======== ======== ========= ======= ========== =======
Computer systems revenues increased $41 million, or 10 percent, in the second quarter of 1996 when compared to the second quarter of 1995. This increase was attributable to increased unit shipments of high-end Himalaya products (18 percent over the 1995 second quarter), UNIX system-based sales, and increased consulting revenues, partially offset by reduced revenues from the mid-range line of Himalaya servers. Computer systems revenues increased $15 million, or 2 percent, for the six-month period ended March 31, 1996, compared to the same 1995 period. The six month results were characterized by increased consulting revenues offset by reduced unit shipments of low-end and mid-range Himalaya servers and UNIX system-based products. Networking revenues increased $19 million and $23 million, or 22 percent and 13 percent, respectively, in the second quarter and first six months of 1996 in comparison to the same 1995 periods. The increase in networking revenues is primarily a result of increased third party product sales and increased service and consulting revenues. Geographic--The table below summarizes revenues derived from Tandem's domestic and international operations and the percentage of revenues contributed by geographic location for the indicated periods.
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31, (Dollars in millions) 1996 1995 1996 1995 ------------------- ------------------- ------------------- ------------------- $ % $ % $ % $ % ---------- ------- ---------- ------- ---------- ------- ---------- ------- United States 295.1 51 243.6 47 533.5 49 523.9 50 Europe United Kingdom 38.5 7 46.1 9 81.0 7 87.7 8 Germany 25.6 4 18.8 4 49.5 5 42.0 4 Other Europe 75.9 13 71.3 13 140.6 13 143.2 14 ---------- ------- ---------- ------- ---------- ------- ---------- ------- Total Europe 140.0 24 136.2 26 271.1 25 272.9 26 Japan 88.6 15 80.0 16 166.9 15 148.9 14 Asia/Pacific 27.2 5 33.8 7 68.0 6 61.3 6 Americas Division (excluding the U.S.) 25.3 5 22.3 4 49.1 5 43.5 4 ---------- ------- ---------- ------- ---------- ------- ---------- ------- Total revenues 576.2 100 515.9 100 1,088.6 100 1,050.5 100 ========== ======= ========== ======= ========== ======= ========== =======
12 Revenues in the United States increased 21 percent during the second quarter of 1996 compared to the same 1995 period. The increase in U.S. revenues is attributable primarily to increased computer product revenues -- increased volume of unit shipments of the Company's high-end Himalaya products -- as well as increased networking revenues. U.S. revenues increased 2 percent during the first six months of 1996, compared to the prior year. Revenues in Europe increased 3 percent during the second quarter of 1996 compared to the same 1995 period. This increase resulted primarily from increased shipments of UNIX system-based products and certain Himalaya products, and increased consulting revenues, partially offset by decreased shipments of mid-range Himalaya products. European revenues decreased 1 percent during the first six months of 1996, compared to the prior year. In Japan, revenues increased 11 percent and 12 percent in the second quarter and first six months of 1996, respectively, compared to the same 1995 periods. The increase is primarily due to increased networking revenues, increased consulting revenues, and increased unit shipments of mid-range computer systems. Asia/Pacific revenues decreased 20 percent during the second quarter of 1996 compared to the same 1995 period, primarily resulting from decreased unit shipments of high-end Himalaya products, offset somewhat by increased consulting revenues. Asia/Pacific revenues increased 11 percent during the first six months of 1996, compared to the prior year. The increase is primarily a result of a strong first quarter, with a high volume of high-end Himalaya product shipments. Current quarter and year-to-date growth rates in the various geographic regions are not necessarily representative of future trends. COST OF REVENUES During the second quarter and first six months of 1996, product margin percentages declined 3 percent to 52 percent and 53 percent, respectively, in comparison to the same 1995 periods. Computer system margins declined 2 percent to 56 percent and 57 percent, respectively, for the same comparative periods. Computer system margins were impacted by product mix and an increase in amortization of capitalized software, in comparison to the prior year. During the same comparative periods, networking margins declined 8 percent to 33 percent and 9 percent to 35 percent, respectively. Networking margins were negatively affected by an increased contribution to revenues from third party product sales and related service fees. Management expects product margins to continue to decline during the remainder of 1996. However, product margins are difficult to predict, as they are affected by future competitive pricing actions, geographic revenue mix, product mix, and foreign currency fluctuations. For additional discussion on the risks associated with these statements and other forward looking statements, refer to the Outlook and Risks section below. 13 Margins on service and other revenues decreased to 26 percent in the second quarter and first six months of 1996 from 30 percent in the 1995 second quarter and 31 percent in the first six months of 1995. Service and other revenues margins have been declining gradually over the past few quarters due to increased salaries and benefits, increased consulting costs, and the increased contribution to services revenue from consulting services. RESEARCH AND DEVELOPMENT EXPENSES The level of research and development (R&D) expenses reported for the second quarter of 1996 was consistent with that reported for the second quarter of 1995. However, certain elements of R&D expenses increased, such as salaries and benefits due to increased headcount and salary increases, spending on tooling and development material, and equipment depreciation. These increasing costs were offset by increased software capitalization, as many ongoing development projects reached technical feasibility during the second quarter of 1996. In comparing the first six month periods of 1996 and 1995, R&D costs increased $8 million or 5 percent. The increase in this six month comparison is attributable primarily to increased salaries and benefits due to increased headcount and salary increases and equipment depreciation. Management expects R&D spending to decline in the second half of the year, primarily due to restructuring actions initiated during the second quarter. However, the expected R&D spending pattern could be affected by delays or changes in product development schedules. For additional discussion on the risks associated with these statements and other forward looking statements, refer to the Outlook and Risks section below. MARKETING, GENERAL, AND ADMINISTRATIVE EXPENSES Marketing, general, and administrative (MG&A) expenses in the second quarter and first six months of 1996 increased $14 million or 9 percent, and $32 million or 10 percent, respectively, compared to the same 1995 periods. The increase in MG&A expenses in 1996 is attributable primarily to increased commissions, software house fees and other costs that vary with revenues, and increased salaries and benefits resulting from headcount and salary increases. As part of the restructure actions discussed below, management has reviewed and is implementing actions to reduce fixed and discretionary elements of MG&A spending and expects expenses to decline as actions are taken. However, certain expenses, such as commissions and incentive compensation for sales and marketing staff, vary with revenues. For additional discussion on the risks associated with these statements and other forward looking statements, refer to the Outlook and Risks section below. RESTRUCTURE CHARGE During the second quarter of 1996, the Company initiated a new restructuring program as a result of decisions by its new Chief Executive Officer (CEO) and management team to transform the Company's organizational structure in order to align resources with a new strategic business model and to lower the Company's cost structure. The restructuring actions result in a charge of $52 million and include reducing headcount, vacating leased facilities, and disposing of assets related to discontinuing certain product programs and other activities. Approximately $39 million of the charge will require cash expenditures. 14 Information relating to restructuring activity for the six months ended March 31, 1996 is presented below.
- - --------------------------------------------------------------------------------------------------------------------- Reduction of Internal Discontinued (In thousands) Work Force Facilities Systems Activities Other Total - - --------------------------------------------------------------------------------------------------------------------- Balances, September 30, 1995 $17,677 $28,661 $7,414 $ 9,820 $7,033 $70,605 Provision, three months ended March 31, 1996 34,100 8,600 -- 9,300 -- 52,000 Utilized, six months ended March 31, 1996 16,696 7,309 4,243 658 3,381 32,287 - - --------------------------------------------------------------------------------------------------------------------- Balances, March 31, 1996 $35,081 $29,952 $3,171 $18,462 $3,652 $90,318 ===================================================================================================================== Cash used, six months ended March 31, 1996 $16,696 $ 4,761 $4,243 $ 106 $3,024 $28,830 =====================================================================================================================
The provision for reduction of work force includes severance, related medical and other benefits, and obligations relating to an employment agreement with the former CEO. The provision includes termination benefits for approximately 500 employees, of which approximately three-fourths are based in the United States. Approximately two-thirds of the planned terminations are in sales, marketing and administrative functions, approximately 20 percent are in engineering and development functions, and the balance is in manufacturing, service and support functions. The Company's plan anticipates these terminations to be substantially completed during 1996. The provision for facilities includes primarily lease payments, fixed costs and write-offs of related property, plant and equipment associated with plans to permanently exit sales, support and administrative operations in approximately fifteen leased facilities throughout the United States, Europe and Asia-Pacific geographic areas. The Company plans to vacate substantially all of these facilities during 1996 and the first quarter of 1997. Restructuring costs are expected to be incurred through 1999 as leases are either terminated early or expire. The provision for discontinued activities includes costs related to exiting the maintenance and support obligations of a third party product, asset write-offs associated with discontinuing imaging solutions products, and asset write-offs and other costs associated with discontinuing product initiatives and programs. The Company intends to begin outsourcing the above maintenance and support obligations and to complete the other actions during 1996. Of the approximately $32 million restructuring reserves utilized in 1996, approximately $6 million pertains to the 1996 second quarter provision. Of the total restructuring reserves remaining as of March 31, 1996, approximately $71 million is included in accrued liabilities, approximately $16 million is classified as a reduction of property, plant and equipment, and approximately $3 million is classified as a reduction of other assets. 15 IMPACT OF CURRENCY During the second quarter and first six months of 1996, in comparison to the second quarter and first six months of 1995, most currencies in Europe and Asia-Pacific strengthened against the U.S. The positive impact of translating revenues and operating results for these countries was somewhat offset by the unfavorable impact resulting from the U.S. dollar strengthening against the Japanese yen. In comparing 1996 to 1995 quarterly and six month operating results, the overall effect of currency movements, together with results from the Company's hedging program, was modestly positive. NET INCOME AND EARNINGS PER SHARE For the periods ended March 31, 1996, the Company reported a net loss of $49.6 million, or $0.42 per share, for the quarter, and $47.6 million, or $0.41 per share, for the six-month period. These results included the $52 million restructuring charge discussed above. The six month results also included a $31 million non-operating gain from the sale of an investment in NetWorth, Inc. For the same periods ended March 31, 1995, the Company reported net income of $21.7 million, or $0.18 per share, and $56.9 million, or $0.48 per share, respectively. Net income for the 1995 periods included a non-operating gain of $8.7 million from the sale of an equity investee, LightStream Corporation. The income tax provisions for the second quarters of 1996 and 1995 were $8 million and $4 million, respectively, arising principally from taxes currently payable in foreign jurisdictions. The Company expects to continue to report income for the remainder of 1996 in certain foreign jurisdictions, which will result in tax provisions despite loss carryforwards which are available primarily to offset U.S. and certain foreign income. FINANCIAL CONDITION During the first six months of 1996, cash and cash equivalents decreased by $27 million to $94 million. The Company generated $38 million positive cash flow from operations during the first six months of the year. Investing activities for the period consumed approximately $88 million, principally through the investment in capital equipment and software offset partially by proceeds from the sale of an investment in NetWorth, Inc. Financing activities provided approximately $25 million. At March 31, 1996, $82 million of financing was available to the Company under its accounts receivable purchase agreement, including the balance outstanding at the end of the quarter of $10 million. The maximum amount outstanding under this agreement during the first six months of 1996 was $65 million. There were no amounts outstanding as of September 30, 1995. In March 1996 the Company renegotiated its accounts receivable purchase agreement, adjusting the maximum size of the eligible pool of accounts receivable to $100 million. The current agreement expires during the first quarter of 1997. 16 Including the amounts sold under the receivables purchase agreement, accounts receivable days were 81 days at March 31, 1996, compared to 77 days at September 30, 1995 and 84 days at March 31, 1995. Inventory days were 57 days at March 31, 1996, compared to 46 days at September 30, 1995 and 59 days at March 31, 1995. At March 31, 1996, total debt of $159 million, including $131 million of nonrecourse borrowings against lease receivables, increased $16 million from September 30, 1995. Total debt as a percentage of total capital was approximately 13 percent as of March 31, 1996, compared to 11 percent as of September 30, 1995. Cash used for restructuring actions during the first half of 1996 aggregated approximately $29 million and was funded by cash from operations. Cash requirements for restructuring action for the remainder of 1996 are expected to be approximately $45 million. The Company's sources of working capital include cash generated from operations, amounts available under the accounts receivable purchase agreement, and other financing arrangements. Management believes that the financing sources available at March 31, 1996 can adequately meet Tandem's financing needs, both in the short and the long term. As of March 31, 1996, the Company had approximately 8,300 full-time equivalent employees. OUTLOOK AND RISKS OVERVIEW During the first six months of 1996, the Company experienced significant changes in top management, including the appointment of a new CEO in early January. The new CEO, together with the management team, has been reviewing Tandem's business opportunities, strategic direction, and organization and cost structure. As a result of this review, new product strategies and a new organizational model have been developed; implementation is in process. Restructuring actions are also in progress, which are aimed at reducing the cost structure of the Company. The success of these actions and their impact on the Company's operations cannot be fully measured at this time. OPERATING RESULTS The Company's future operating results and many of the forward looking statements contained in this document are dependent upon a number of factors, including the Company's ability to grow its traditional businesses, to expand successfully into new markets, to effectively manage resources, to successfully implement a new organizational model and to continue the Company's product migration to open platforms. A key challenge to the Company's continued growth is selling increased unit volumes of computer systems and networking products at competitive prices, while concurrently controlling the cost structure of the Company. Increased volume shipments are dependent upon continued demand for existing products, timeliness to market with new products, identification of new competitive products, acceptance of new product introductions by 17 the Company's existing customer base, as well as successful expansion into new markets, such as decision support, data warehousing, and electronic commerce. The Company has embarked on a strategy of entering partnering relationships with major technology companies and has recently entered into strategic relationships with Compaq Computer Corporation and Microsoft Corporation. Future operating results may be affected by the Company's ability to implement this strategy and to manage the underlying alliance agreements and associated competitive risks. The Compaq agreement calls for joint development relating to the Company's ServerNet clustering technology and OEM distribution by Compaq of ServerNet products. The Microsoft relationship covers, among other things, porting of the Company's "middleware" software to the Windows NT operating system, the addition of the Company's clustering technology to Microsoft's clustering initiative and a patent cross license. These relationships represent a new way of doing business for the Company. The Company does not anticipate any immediate significant impact on the operating results of the Company from these relationships. The ultimate success of these projects and their contribution to the Company's operating results cannot be predicted or fully measured at this time. Historically, Tandem recognizes a large percentage of its revenues in the latter part of each quarter. This trend makes it difficult to forecast revenues and could subject the Company to fluctuations in revenues and earnings. UB NETWORKS, INC. At the end of 1995, UB Networks introduced and began shipping three new products -- GeoLAN 500, GeoSwitch, and GeoRim. Accordingly, UB Networks' 1996 operating results are dependent upon market acceptance of these new products by UB Networks' existing customer base, as well as successful expansion into new accounts. UB Networks' operating results have been, and in the future may be, affected by competitive pricing pressures, changes in mix of products sold, delays in shipping new products, and inventory management. Accordingly, UB Networks' future success is dependent on its ability to enhance existing products; to develop and introduce, on a timely and cost-effective basis, new products that keep pace with technological developments and emerging industry standards; to address increasingly sophisticated customer requirements; and to manage the product transition process. FOREIGN OPERATIONS Although the Company's operating and pricing strategies and currency hedging practices take into account changes in foreign currency exchange rates over time, the Company's operating results can be affected by foreign currency exchange rates. Tandem, Himalaya, Integrity, NonStop, and ServerNet are trademarks of the Tandem Computers Incorporated. UB Networks, GeoLAN, GeoRim/E, and GeoSwitch are trademarks of Ungermann-Bass Networks, Inc. UNIX is a registered trademark in the United States and other countries, licensed exclusively through X/Open Company Limited. All other brand and product names are trademarks or registered trademarks of their respective companies. 18 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company and three principal officers, James G. Treybig, David J. Rynne and Robert C. Marshall, were named as defendants in a class action complaint for damages filed in the United States District Court for the Northern District of California on July 19, 1995. The class action is purported to be on behalf of purchasers of the Company's Common Stock between March 8 and July 12, 1995. The complaint alleges violations of Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 in connection with public statements about the Company's expected revenues for the second and third quarters of 1995. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits required by Item 601 of Regulation S-K Exhibit Number Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed during the second fiscal quarter. 19 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Cupertino, State of California. TANDEM COMPUTERS INCORPORATED (Registrant) Date: May 15, 1996 By: /s/ DAVID J. RYNNE ------------------------------ David J. Rynne Senior Vice President and Chief Financial Officer Date: May 15, 1996 By: /s/ JOHN T. REECE ------------------------------ John T. Reece Vice President and Corporate Controller 20 EXHIBIT INDEX Exhibit 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1000 6-MOS SEP-30-1996 MAR-31-1996 94365 0 516576 17759 191814 911722 1312337 712198 1817666 675365 90092 0 0 3013 1049196 1817666 856843 1088640 402759 574751 161148 2907 7602 (32591) 15000 (47591) 0 0 0 (47591) (0.41) (0.41)
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