-----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, TPoWQ2fpMR5CgxvIFxeedCZyuNxKukNszsW0YyNjR/VFuNx2E6OK0NB0iJ3MyBh/ AFxX9mfWn5HwWzAMWpD7vw== 0000891618-96-003151.txt : 19961224 0000891618-96-003151.hdr.sgml : 19961224 ACCESSION NUMBER: 0000891618-96-003151 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961223 SROS: CSX SROS: NYSE SROS: PSE 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09430 FILM NUMBER: 96684524 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-K405 1 FORM 10-K FOR YEAR END SEPTEMBER 30, 1996 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-9134 ------------------------ TANDEM COMPUTERS INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2266618 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 19333 VALLCO PARKWAY 95014-2599 CUPERTINO, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 285-6000 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED: - --------------------------------------------- --------------------------------------------- COMMON STOCK, $.025 PAR VALUE, AND NEW YORK STOCK EXCHANGE, RIGHTS TO PURCHASE SERIES A MIDWEST STOCK EXCHANGE, PARTICIPATING PREFERRED STOCK PACIFIC STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE ------------------------ 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by nonaffiliates of the registrant as of December 2, 1996: $1,624,023,884. The number of shares of Common Stock outstanding as of December 2, 1996: 118,667,378. DOCUMENTS INCORPORATED BY REFERENCE (1) The Registrant is incorporating by reference into Parts II (Items 5, 6, 7 and 8) and IV (Item 14) of this Form 10-K certain portions of the Registrant's 1996 Annual Report to Stockholders. (2) The Registrant is incorporating by reference into Part III (Items 10, 11, 12 and 13) of this Form 10-K certain portions of the Registrant's definitive Proxy Statement dated December 10, 1996, for the 1997 Annual Meeting of Stockholders. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS. Tandem Computers Incorporated (Tandem(R) or the Company), a Delaware corporation founded in 1974, provides its customers with reliable, scalable computer systems and client/server solutions. Tandem designs, develops, manufactures, markets, and supports a full range of computer systems, software and services, ranging from the workgroup to the data center, to deliver complete customer solutions. The Company's product offerings during fiscal 1996 included the NonStop(R) Himalaya(R) K-series of parallel processing servers and the UNIX(R) System V, Release 4 (SVR4)-based Integrity(R) line of servers. In October 1996 the Company expanded its product offering with the announcement of the Himalaya S-series and the Microsoft(R) Windows NT(R) Server-based line of symmetric multiprocessing servers. Tandem leverages its fundamental strengths in three major application areas: commercial online transaction processing (OLTP), decision support, and electronic commerce. With the advent of the internet and growing corporate intranets, the Company believes OLTP will be expanded in the future to include internet transaction processing (iTP(TM)). The Company believes that it is well positioned to provide the computing solutions to meet the demand for reliability and scalability in these internet transaction processing computing infrastructures. In 1996 the Company reorganized into product line business units, including Parallel Systems Group, Communications Platforms, ServerWare(TM), ServerNet(TM), and Atalla. PARALLEL SYSTEMS -- HIMALAYA AND WINDOWS NT SERVER-BASED SYSTEMS NonStop Himalaya servers, together with the Tandem NonStop Kernel operating system, deliver data integrity, linear scalability, distributed processing, and distributed data capability. The parallel architecture of NonStop servers means processors work in parallel so multiple units of work can be processed reliably and simultaneously. All NonStop servers allow substantial linear expansion of processing power within a single system through the addition of processors. This enables the user to expand the system's transaction processing capacity without sacrificing the initial investment in hardware and software. Himalaya servers are based on reduced instruction-set computing (RISC) technology. Himalaya servers connect to a wide range of client platforms and operating systems, including Microsoft Windows(R), MS-DOS(R), OS/2, SCO UNIX, SunOS, HP-UX, Microsoft Windows NT, and Apple System 7 operating systems. NonStop Himalaya servers also support a wide range of open database gateways and open networking - --------------- All references to years throughout Parts I, II, and IV represent the Company's fiscal years ended September 30, unless otherwise indicated. Tandem, Atalla, Himalaya, Integrity, iTP, NonStop, ServerNet, ServerWare, and the Tandem logo are trademarks or registered trademarks of Tandem Computers Incorporated in the United States and/or other countries. Microsoft, MS-DOS, Windows, and Windows NT are either registered trademarks or trademarks of Microsoft corporation in the United States and/or other countries. UB Networks, GeoLAN, GeoRim/E, GeoStax, 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 Ltd. X/Open is a registered trademark, and the X device is a trademark, of X/Open Company Ltd. TUXEDO is a registered trademark of Novell, Inc., exclusively licensed to BEA Systems, Inc. MIPS is a registered trademark of MIPS Technologies, Inc., a wholly owned subsidiary of Silicon Graphics, Inc. Java is a trademark of Sun MicroSystems, Inc. All other brand and product names are trademarks or registered trademarks of their respective companies. "System Area Network" and the acronym "SAN" are being used by Tandem as generic descriptive terms and neither are intended to be interpreted as trademarks of Tandem. Third parties are encouraged to use these terms as they are generic and descriptive. 1 3 standards, including TCP/IP, NetBIOS, RSC, ODBC, AppleTalk, SNA, and OSI. In addition, NonStop Himalaya servers support portability requirements through their Open System Services. In October 1996 the Company announced its S-series servers -- ServerNet(TM) technology-enabled NonStop Himalaya servers and Windows NT Server-based systems. The S-series Himalaya servers use ServerNet technology to provide direct, high-speed interconnections between system components -- processors, input/output (I/O) devices, and storage. The S-series Himalaya servers scale to massive levels of I/O bandwidth, processing power, and storage. The S-series Himalaya servers are designed to meet the high-bandwidth requirements of the media-rich, megadata-intensive transactions that are anticipated in the future over corporate intranets and the internet, as well as data warehousing and decision support applications. Based on the Intel Pentium Pro microprocessor, Tandem's S-series Windows NT Server-based systems are designed to extend Tandem's strengths into the market for commodity-based servers that support enterprise-wide business-critical applications. These servers incorporate industry-standard symmetric multiprocessing (SMP) technology, scale from one to four processors, and are available in both deskside tower and data center rack-mounted configurations. In 1997, using optional software and either Ethernet or Tandem ServerNet technology, customers can expect to connect these servers together into highly reliable server clusters for improved application availability and scalability. Tandem's S-series Windows NT Server-based systems are certified compatible with the Microsoft Windows NT Server operating system, versions 3.51 and 4.0, ensuring compatibility with numerous existing applications developed for the Windows NT Server operating system, plus an extensive selection of development tools and middleware. In addition, the S-series Windows NT Server-based systems will fully support the Microsoft clustering environment when it becomes available in early 1997. Tandem's parallel servers are tailored for business-critical applications in the finance, telecommunications, and retail industries, addressing transaction processing, interactive customer service, decision support, and electronic commerce. COMMUNICATIONS PLATFORMS -- INTEGRITY SERVERS The RISC-based Integrity servers are designed to extend Tandem's strengths, particularly reliability and scalability, to the market for UNIX systems. Integrity servers can detect, isolate, and recover from component failures without the operating system or applications being affected. During 1996 Tandem began shipping the Integrity S4000 server. The S4000 employs the ServerNet architecture as the system area network for scalable I/O bandwidth. Integrity servers conform to the System V Interface Definition (SVID), the IEEE POSIX standards, the X/Open(R) Portability Guide Base Profile, and the MIPS(R) ABI standard. Accordingly, numerous, existing applications based on the UNIX operating system are available to users of Integrity servers. Integrity servers also support application development tools and databases from a variety of independent software vendors, as well as a variety of open middleware from suppliers such as Oracle Corporation and Informix. Tandem markets its Integrity servers to both telecommunications equipment and telecommunications service providers. Within the Communications Platforms business unit, Tandem Telecom Network Systems provides home location register solutions for the wireless industry, authentication service management systems, customer wireless applications, and telecommunications hardware and software for "off-switch" service control solutions. The Electronic Commerce division markets internet transaction processing solutions, including call center, intranet servicers, and messaging, to internet service providers and communications companies. SERVERNET(TM) ARCHITECTURE Designed to provide reliable, scalable communications between processors and peripherals, the ServerNet technology, or system area network (SAN), provides a core interconnect architecture for clustering -- a chip- 2 4 level I/O subsystem allowing components to interconnect without mandatory processor intervention. ServerNet technology uses multiple high-speed, low-cost routers to switch data rapidly and directly between multiple data sources and destinations, including processors, storage, and communications devices. By providing the intelligent switching that previously could be supplied only by a processor, ServerNet architecture eliminates the need for a processor in every data path. With the ServerNet switch controlling the data path, data can flow directly from processor to processor, from processor to device, from device to processor, and from device to device. ServerNet technology provides the architecture for Tandem's most recent generation of NonStop Himalaya servers, Windows NT Server-based systems, and Integrity servers. The Company also licenses the technology and sells interconnect hardware and software on commodity boards to other leading hardware vendors for inclusion in their products. SERVERWARE(TM) SOFTWARE Tandem's ServerWare software, originally developed on the Company's NonStop Himalaya platform, is middleware that provides a robust, scalable infrastructure for business-critical applications. ServerWare software is intended to run on any vendor's Intel based Windows NT Server hardware, as well as on Tandem's Himalaya and Windows NT Server-based platforms. ServerWare software solutions are well suited to the high-performance, high-availability capabilities of clustered systems, while providing the ease of management associated with a single system. ServerWare products comprise ServerWare database, a relational database system derived from Tandem's NonStop SQL/MP product; transaction APIs that are compatible with the TUXEDO(R) product from BEA Systems, Inc.; a new initiative called TPObjects which will enable object-oriented transaction processing with Java(TM); and the Information Matrix, a messaging infrastructure for rapid and reliable delivery of high volumes of transactions. ATALLA Atalla provides robust hardware-based encryption technology for financial institutions and retail merchants. Atalla designs, manufactures, and supports online transaction automation systems for financial, retail, and other business applications. Atalla's products include security processors for the internet and other networks; point-of-sale, point-of-entry, credit/debit payment terminals, check readers, and customer authorization PIN selection terminals that secure enrollment products for banks, retailers, and state electronic bank transfers. PERIPHERALS For complete solutions, the Company offers high-quality, industry-standard peripherals -- including high-performance UNIX system-based workstations and servers, storage devices, and printing products -- through original equipment manufacturer (OEM) and value-added reseller (VAR) relationships. The Company adds hardware and software enhancements to several of these products prior to resale. NETWORKING -- UB NETWORKS, INC. UB Networks, Inc. (UB Networks), a separate major line of business, is a supplier of networking hardware and software products for shared and switched environments. The full line of enterprise-wide networking products includes the GeoLAN/500 fault tolerant super-switching hub, the GeoSwitch/155 ATM Switch, the GeoRim/E Ethernet switch, and the GeoStax stackable workgroup hubs. UB Networks also provides network management and application products, including its EMPower distributed management system and Virtual Network Architecture. Its service division offers innovative support solutions such as comprehensive integration services and advanced interactive support via the internet. 3 5 During 1996 the Company adopted a plan to sell UB Networks and engaged Lehman Brothers to assist in executing the sale. The results of UB Networks have been segregated and accounted for as a discontinued operation in the Company's Consolidated Financial Statements, incorporated herein by reference. MARKETING, SALES, AND SUPPORT Tandem markets its products primarily through its own organization, which includes marketing, direct sales, training, field support, and professional services personnel. The Company also markets its products through distributors, VARs, and OEMs. The Company's OEM and reseller relationships are principally with major U.S. and Japanese telecommunications switching vendors. Tandem has also established marketing relationships with leading systems integrators. The Company intends to continue its expansion of alternate distribution channels worldwide. Applications are typically developed and provided by application software providers and resellers or by the customer's own programmers. To facilitate the development and availability of applications on Tandem systems, the Company established the Tandem Alliance program for selected software houses, systems integrators, VARs, and other related businesses. The Company offers Alliance members a variety of licensing, marketing, technical, and sales support programs. More than 350 Alliance members work with Tandem to develop solutions for customers in a wide range of industries. To enhance its international marketing, sales, and support efforts, Tandem has established joint ventures in Chile, Japan, Mexico, Peru, Singapore, China, and a number of European countries. The Company's joint ventures in Chile, Mexico, and Peru distribute and support Tandem products. Other joint ventures provide project management and contract consulting services to Tandem customers, and develop and support customized application software to meet the needs of the local marketplace. They may also assist Tandem Alliance members with the distribution and support of their software products. During 1996, approximately 70 percent of the Company's hardware sales were to end users. The remaining sales were to distributors and to resellers. No customer accounted for 10 percent or more of the Company's total 1996 revenues. The Company strives to minimize the time between receipt of orders and shipment of systems. Typically, Tandem ships within 90 days of receiving the order. For this reason, and because customers may change delivery schedules or cancel orders, the order backlog at any particular date may not be representative of the Company's actual sales for any succeeding fiscal period. Tandem offers professional services and education, including design consulting, systems integration, operations management guidance, and system requirements planning. Tandem's support centers can perform system diagnostics remotely on both hardware and software. The Company also offers on-site service. PRODUCT DEVELOPMENT Tandem continues to develop new products and enhance existing products to give its customers improved price/performance, to broaden Tandem's customer base by providing industry-specific platforms and solutions, and to make Tandem systems and their benefits more accessible in a client/server environment. Tandem is committed to providing open systems that deliver connectivity, interoperability, and portability. The Company expects to introduce additional products in the future based on the NonStop Kernel, Microsoft Windows NT, and UNIX operating systems, incorporating the Company's ServerNet technology. The computer industry is characterized by rapid technological advances. To remain competitive, computer companies must pursue technical development. Accordingly, the Company continues to incur substantial engineering and software development expenses. During 1996, 1995, and 1994, the Company's research and development expenses, excluding discontinued operations, were $287.7 million, $282.4 million, and $232.3 million, respectively. Reference is made to the information found under the caption "Software development costs" in the Notes to Consolidated Financial Statements of the Company's Annual Report, incorporated herein by reference. 4 6 COMPETITION The market for computer systems is highly competitive. Potential purchasers consider many factors: price/performance and cost of ownership, openness, system capability, availability, scalability, compatibility, reliability and maintainability, and the manufacturer's ability to develop new products and enhance existing ones. Tandem believes that its Himalaya, Integrity, and Windows NT Server-based products compete favorably with respect to these factors. Tandem systems compete with those of three classes of competitors. Competitors for traditional fault-tolerant systems include IBM, Digital Equipment Corporation (DEC), and Stratus Computer, Inc. (Stratus). The new pricing and open features of Himalaya servers position them in a broader market and against a wider range of competitors, including Sequent Computers, Inc. (Sequent); Sun Microsystems, Inc. (Sun); and Hewlett-Packard Company (HP). Certain massively parallel configurations of NonStop servers are competitive with products from other providers of parallel systems. Recent increased industry focus on commercial parallelism has placed Tandem in competition with nontraditional competitors. Specifically, in parallel database applications such as decision support, AT&T Global Information Solutions and the IBM SP/2 product family are competitors. Tandem's Windows NT Server-based systems compete in the emerging market for enterprise servers, running the Windows NT Server operating system. Major competitors include HP, Compaq, DEC, NCR, and IBM. The Integrity server family competes with UNIX system-based offerings from HP, IBM, Sequent, Stratus, and Sun. In the highly competitive LAN market, UB Networks competes with several established and emerging computer communications and LAN companies, including IBM, DEC, Cabletron Systems, Bay Networks, 3Com Corporation, and Cisco Systems, Inc. MANUFACTURING The Company's manufacturing facilities are located in Fremont, California, and in Stirling, Scotland. Manufacture of Tandem computer systems requires the testing of integrated circuits, circuit boards, peripheral subsystems, power supplies, and other items, as well as final assembly, integration, and testing of completed computer systems. All inspection, final assembly, and system integration tests are performed by Company personnel. In general, the Company assembles its systems from components and prefabricated parts manufactured by others. Tandem's Windows NT Server-based systems are assembled by an outside system integrator, based on Tandem specifications and using components specified by Tandem. A number of the custom and semicustom integrated circuits, printed circuit boards, and power supplies are manufactured by others to the Company's specifications. Tandem purchases terminals, workstations, printers, disk drive head disk assemblies, tape drives, cable assemblies, power supplies, and other subassemblies and peripheral equipment. Most of the components and peripherals used in the Company's systems are available from a number of different suppliers. The Company believes that alternative sources could be developed, if required, for present single-sourced components or peripherals. Although the Company has not experienced any significant problem in obtaining its required supplies, future shortages of components or peripherals could result in production delays that could adversely affect business. ENVIRONMENTAL REGULATIONS The Company's objectives include providing products and services that are environmentally sound, and conducting business operations in an environmentally responsible manner. Compliance with federal, state, and local provisions related to the discharge of materials into the environment or otherwise related to protection of the environment by the Company has not had, nor is expected to have, a material effect on the capital expenditures, earnings, or competitive position of the Company. 5 7 PATENTS Tandem has been awarded patents in the United States and other countries for various aspects of its computer systems. Additional patent applications are pending in the United States and other countries. There can be no assurance that any of these applications will result in the award of a patent or that the Company would be successful in asserting its patent rights in any subsequent infringement actions. The patents and patent applications, although of significant value to the Company, are not considered to be of material importance to the business as a whole. Because a large number of patents exist in the computer field and new patents are issued frequently, it is not economically practical to determine in advance whether a new product or any of its components infringe any patent. Some of the Company's products have been alleged to infringe patents, and additional allegations may be made in the future. In the event of an infringement, the Company believes that, based on industry practice, any necessary licenses or rights under such patents may be obtained on terms that would not have a material adverse financial effect on the Company. EMPLOYEES As of September 30, 1996, the Company had 7,938 full-time equivalent employees, including 1,070 full-time equivalent employees of UB Networks. FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Reference is made to the information found in the Company's Annual Report under the caption "Outlook and Risks" in Management's Discussion and Analysis of Financial Condition and Results of Operations and under the caption "Segment Information" in the Notes to Consolidated Financial Statements, incorporated herein by reference. ITEM 2. PROPERTIES. The Company is headquartered in Cupertino, California, where it owns 18 buildings and leases one, totaling approximately 1.7 million square feet. Approximately 60 percent of the space is devoted to product development functions, while the remaining 40 percent houses marketing and administration. In addition, Tandem owns approximately 18.2 acres of unimproved property, situated near its Cupertino headquarters, for future expansion. The Company also owns a 12.5 acre unimproved site and a 10 acre improved site, which are both currently under contract to be sold. In 1996, the Company sold its Cupertino retail shopping center and also leased, to another company, a 100,666 square foot owned building. Outside of Cupertino, the Company leases approximately 495,000 square feet in Fremont, California, where it has consolidated all U.S. manufacturing. Additionally, the Company leases a 70,809 square foot facility, devoted to development, marketing and administration in Plano, Texas. The Company owns a 134,500 square foot manufacturing facility in Stirling, Scotland. In addition, Tandem owns a product development facility of approximately 190,000 square feet in Austin, Texas. The Company also leases sales, field service and training offices at more than 180 locations in North America, Europe, Asia and the Pacific Rim. In 1988, Tandem entered into a prepaid 999 year lease for property near London, that serves as its United Kingdom headquarters. The Company's UB Networks, Inc. subsidiary leases six buildings in Santa Clara, California. For information about Tandem's lease commitments, reference is made to the information found under the caption "Property, Plant and Equipment" in the Notes to Consolidated Financial Statements, incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS. Mark Gaffney v. Tandem Computers Inc. 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 6 8 filed in the United States District Court for the Northern District of California on July 19, 1995. The class action is purported to be on behalf of purchasers of the Company's Common Stock between March 8 and July 12, 1995. The complaint alleges violations of Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 in connection with public statements about the Company's expected revenues for the second and third quarters of 1995. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Reference is made to the information regarding the principal United States markets for the Company's Common Stock, market stock price range, dividends, and holders of record of the Common Stock of the Company found under the caption "Quarterly Financial Data" in the Notes to Consolidated Financial Statements incorporated herein by reference from page 42 of the Company's 1996 Annual Report to Stockholders. ITEM 6. SELECTED FINANCIAL DATA. The information required by this item is incorporated by reference from page 18 of the Company's 1996 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this item is incorporated by reference from pages 8 through 17 of the Company's 1996 Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following financial statements and supplementary information included in the 1996 Annual Report to Stockholders from pages 20 through 43 are incorporated herein by reference:
ANNUAL REPORT PAGES -------------- Consolidated Statements of Operations.............................. 20 Consolidated Balance Sheets........................................ 21 Consolidated Statements of Stockholders' Investment................ 22 Consolidated Statements of Cash Flows.............................. 23 Notes to Consolidated Statements................................... 24-42 Quarterly Financial Data........................................... 42 Report of Ernst & Young LLP........................................ 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 7 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
NAME AGE POSITION OR OFFICE AND PRINCIPAL OCCUPATION - --------------------------------- --- ---------------------------------------------------- EXECUTIVE OFFICERS OF THE REGISTRANT Roel Pieper...................... 40 Chief Executive Officer since January 8, 1996 and Vice Chairman since October 22, 1996. President from January 8, 1996 to October 22, 1996. Senior Vice President, President and Chief Executive Officer of UB Networks, Inc. from 1993 to January 1996. President and Chief Executive Officer from 1991 to 1993 of UNIX Systems Laboratories, Inc. Chief Technical Officer and Senior Vice President of Software AG from 1981 to 1991. Director of Smart Valley Inc., Veritas Software Corporation, Lincoln National Corporation and General Magic Inc. Enrico L. Pesatori............... 56 President and Chief Operating Officer of the Company since October 22, 1996. Vice President and General Manager, Computer Systems Division of Digital Equipment Corporation from February 1993 to July 1996. President and Chief Executive Officer of Zenith Data Systems from January 1991 to January 1993. Various management positions with Ing. C. Olivetti & C., S.p.A., including President and Chief Executive Officer of Olivetti North America, Chief Executive Officer of Docutel-Olivetti, Vice President of Corporate Product Strategy and head of Olivetti Systems Group from August 1969 to December 1990. Jack W. Chapman.................. 62 Vice President and Chairman, Tandem Europe since October 1990. Vice President, Sales from 1988 to 1990, Vice President, International Sales Operations from 1986 to 1988, and Vice President and Managing Director, European Division from 1983 to 1986. Mr. Chapman joined Tandem in 1978 as Managing Director of Tandem Computers Limited in the United Kingdom. He has also held the positions of Director of the Northwest Europe Region and General Manager of Central Europe. Eric L. Doggett.................. 37 Senior Vice President and General Manager, Communications Platforms Business Unit and responsible for UNIX and Telecommunications Networks Solutions divisions of the Company since 1996. Vice President of Technology, Vice President Marketing, Vice President/General Manager International Switching, Vice President Operations-Japan and other management positions with Public Carrier Network Group of Nortel from 1984 to 1996.
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NAME AGE POSITION OR OFFICE AND PRINCIPAL OCCUPATION - --------------------------------- --- ---------------------------------------------------- Kurt L. Friedrich................ 47 Senior Vice President, General Manager and Chief Technology Officer, Parallel Systems Business Unit since 1996. Senior Vice President and General Manager, Systems Development Group from 1993 to 1996. Prior to joining Tandem, Mr. Friedrich was General Manager, Software Development, at Hewlett Packard Company from 1992 to 1993, and was Vice President, Software Development, and held other software and product management positions, at Digital Equipment Corporation from 1974 to 1992. William W. Heil, Jr.............. 39 Senior Vice President and General Manager, ServerWare Business Unit since 1996. Senior Vice President, Marketing from 1995 to 1996. Vice President, Product Management/Marketing from 1991 to 1995. Director of Systems Product Management from 1989 to 1991. Product Manager, Distributed Systems from 1986 to 1989. Lawrence A. Laurich.............. 53 Vice President, Systems Development since 1992, and General Manager, Austin Unit Operations since 1995. Vice President, Systems and Manufacturing Development from 1988 to 1992, Vice President, Transaction Systems Division from 1987 to 1988, Vice President, Engineering from 1985 to 1987, Vice President, Hardware Development from 1983 to 1985, and Vice President, Engineering from 1978 to 1983. John T. Losier................... 43 Senior Vice President, Worldwide Sales and Services since March 1996. President of Large Business Services, Bell Atlantic, 1996. President of Bell Atlantic Meridian Systems from 1993 to 1996. Vice President Marketing, Private Networks, of Northern Telecom, from 1991 to 1993. Held other key positions with Northern Telecom, AT&T Information, Sperry Information, and IBM. Josephine T. Parry............... 48 Vice President, General Counsel and Secretary since 1992. Assistant General Counsel and Director of Law from 1989 to 1992. Ms. Parry joined Tandem in 1987 from Atari Corporation where she served as Corporate Counsel from 1984 to 1987. Gerald L. Peterson............... 51 Senior Vice President and General Manager, ServerNet Business Unit since 1996. Senior Vice President and General Manager, Tandem Sales and Support Group from 1993 to 1996. Senior Vice President and General Manager, Tandem Sales and Marketing Group from 1988 to 1993. Vice President, Marketing from 1985 to 1988, Vice President, International Marketing and Product Management from 1984 to 1985, and Vice President, International Marketing from 1982 to 1984. He joined Tandem in 1980 as Director of Marketing.
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NAME AGE POSITION OR OFFICE AND PRINCIPAL OCCUPATION - --------------------------------- --- ---------------------------------------------------- John T. Reece.................... 52 Vice President and Corporate Controller of the Company since January 1996. Director of Finance of the Company from 1990 to January 1996. Held key finance positions with IBM Corporation from 1965 to 1990. David J. Rynne................... 56 Senior Vice President and Chief Financial Officer since 1988. Vice President and Chief Financial Officer from 1983 to 1988. Prior to joining Tandem in 1983, Mr. Rynne was with the Burroughs Corporation (now Unisys Corporation) for 18 years, where he held key finance positions. Gerd Stoecker.................... 53 Vice President and Treasurer since 1988. Treasurer from 1987 to 1988. Prior to joining Tandem in 1984 as Controller of Marketing, Mr. Stoecker was with Atari, Inc. DIRECTORS OF THE REGISTRANT Morton Collins................... 60 General Partner of DSV Partners III and DSV Management, Ltd., Princeton, New Jersey, private investment partnerships, since 1981, 1982 and 1985, respectively; General Partner, DSV Associates, private investment partnership, from 1974 to 1986; Director of Kopin Corporation, The Liposome Company and TermoTrex Corporation. Robert M. Kavner................. 53 President and Chief Executive Officer of On Command Corp. since September 1996; independent internet, entertainment and telecommunications consultant from August 1995 to September 1996; head of Business Advisory Group of Creative Artists Agency from June 1994 to August 1995; Executive Vice President of AT&T, Chief Executive Officer of Multimedia Products and Services Group and member of Executive Committee of AT&T from 1992 to June 1994 and held various other positions with AT&T from 1984 to 1992; Director of Fleet Financial Group and Ascent Entertainment Inc. Roel Pieper...................... 40 See page 8. Alex S. Vieux.................... 39 Chairman of DASAR Inc., a company providing strategic and marketing support for technology companies and organizing international tradeshows and industry conferences, since 1989; Special Advisor to the French Ministry of Industry since 1990; U.S. business correspondent for French daily, LeMonde, from 1986 to 1992; Consultant for Andersen Consulting from 1982 to 1985; taught economics at Universite de Paris-La Sorbonne from 1981 to 1984; Director of NetSource Communications and AI Tech International Corp.
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NAME AGE POSITION OR OFFICE AND PRINCIPAL OCCUPATION - --------------------------------- --- ---------------------------------------------------- CLASS II Franklin P. Johnson, Jr.......... 68 General Partner of Asset Management Partners, a Palo Alto, California private investment partnership, since 1982; Owner of Asset Management Company, a Palo Alto, California investment management proprietorship, since 1967; Member of the Advisory Board of the Center for Economic Policy Research, Stanford University; Director of AMGen, Boole & Babbage, and Idec Pharmaceuticals Corporation. Thomas J. Perkins................ 64 Chairman of the Board of the Company since 1974; General Partner of Kleiner & Perkins and Kleiner Perkins Caufield & Byers, San Francisco, California, private investment partnerships, since 1972 and a general or limited partner of the ensuing Kleiner Perkins Caufield & Byers funds; Director of Philips Electronics N.V. and the News Corporation, Ltd. CLASS III Vera Stephanie Shirley........... 63 Life President of F.I. Group, PLC, a computer services, training and recruitment company, since 1962; Master of the Worshipful Company of Information Technologists, 1992 through 1993; Director of AEA Technology plc and UK Atomic Energy Authority; Chair, the Kingwood Trust. Enrico L. Pesatori............... 56 See page 8. Robert G. Stone, Jr.............. 73 Chairman Emeritus and Director of the Board of Kirby Corporation, a diversified corporation engaged, through its subsidiaries, in inland and offshore transportation and diesel repairs, since 1983; Director of Core Industries, Inc., NovaCare, Russell Reynolds Associates, Inc. and Tejas Gas Corporation; Director emeritus of The Chubb Corporation, Corning Incorporated, The Pittson Company, Japan Fund Inc. and various funds managed by Scudder, Stevens & Clark. Walter B. Wriston................ 77 Chairman and Chief Executive Officer of Citicorp and Citibank, N.A., from 1970 to 1984; President and Chief Executive Officer of Citicorp from 1968 to 1970; President and Chief Executive Officer of Citibank, N.A., from 1967 to 1970; Director of AEA Investors, Inc., Cygnus, Inc., Vion Pharmaceuticals, Inc., United Meridian Corporation, York International Corporation, WMNB Acquisition Corp. and ICOS Corporation.
There are no family relationships among the executive officers. Reference is made to the information regarding Section 16(a) of the Securities Exchange Act of 1934 on page 6 of the Company's definitive Proxy Statement dated December 10, 1996 for its 1997 Annual Meeting of Stockholders (the "Proxy Statement"), which information is incorporated in this Form 10-K by reference. ITEM 11. EXECUTIVE COMPENSATION. Reference is made to the information appearing under the captions "Compensation of Executive Officers and Directors" appearing on pages 7-12 and 17 and "Certain Transactions and Employment Agreements" on pages 18 through 20 of the Proxy Statement, which information is incorporated in this Form 10-K by reference. 11 13 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Reference is made to the information appearing under the caption "Stock Ownership" on pages 5 and 6 of the Proxy Statement, which information is incorporated in this Form 10-K by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Reference is made to the information appearing under the caption "Certain Transactions and Employment Agreements" on pages 18 through 20 of the Proxy Statement, which information is incorporated in this Form 10-K by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as a part of the report: 1. All financial statements.*
ANNUAL REPORT INDEX TO FINANCIAL STATEMENTS PAGES ------------------------------------------------------------------------ ------------- Consolidated Statements of Operations................................... 20 Consolidated Balance Sheets............................................. 21 Consolidated Statements of Stockholders' Investment..................... 22 Consolidated Statements of Cash Flows................................... 23 Notes to Consolidated Financial Statements.............................. 24-42 Report of Ernst & Young LLP, Independent Auditors....................... 43
- --------------- * Incorporated herein by reference from the indicated pages of the 1996 Annual Report to Stockholders. 2. Financial statement schedules.
INDEX TO FINANCIAL STATEMENT SCHEDULES ------------------------------------------------------------------------ Financial Statement Schedules II. Valuation and Qualifying Accounts................................... S-1
All other schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements or notes thereto. 3. Exhibits required by Item 601 of Regulation S-K.
EXHIBIT NUMBER EXHIBIT - ------ ----------------------------------------------------------------------------------- 3.1* Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1994. 3.2 By-laws of the Company, as amended. 4.1* First Amended and Restated Rights Agreement, dated June 17, 1988, between the Company and Bank of America, N.T. & S.A., as Rights Agent, filed as Exhibit 4.1 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1988. 10.1*+ Form of Non-Qualified Stock Option Plan and Agreement between the Company and Walter B. Wriston, dated as of October 9, 1991, filed as Exhibit 10.3 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1991. 10.2*+ Tandem Computers Incorporated 1979 Stock Option Plan, as amended, filed as Exhibit 10.6 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1988.
12 14
EXHIBIT NUMBER EXHIBIT - ------ ----------------------------------------------------------------------------------- 10.3*+ Tandem Computers Incorporated 1981 Stock Option Plan, as amended, filed as Exhibit 10.7 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1988. 10.4*+ Tandem Computers Incorporated 1989 Stock Plan, as amended, filed as Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended December 31, 1994. 10.5*+ Tandem Computers Incorporated Stock Option Plan for Non-Employee Directors, filed as Exhibit 10.8 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1987. 10.6*+ Form of Non-Qualified Stock Option Plan and Agreement between the Company and Vera Stephanie Shirley, dated as of December 8, 1992, filed as Exhibit 10.6 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1993. 10.7*+ Form of Non-Qualified Stock Option Plan and Agreement between the Company and Sir Campbell Fraser, dated as of September 28, 1993, filed as Exhibit 10.7 to the Company's Report on Form 10-K for the fiscal Year ended September 30, 1993. 10.8*+ Tandem Computers Incorporated Deferred Compensation Plan, as amended and restated as of October 1, 1995, filed as Exhibit 10.8 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1995. 10.9*+ Form of Employment Agreement entered into during the quarter ended June 30, 1995, between the Company and the following former and current executive officers: James G. Treybig, Robert C. Marshall, David J. Rynne, Donald E. Fowler, Kurt L. Friedrich, Gerald L. Peterson and Roel Pieper, filed as Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 1995. 10.10*+ Amendment to Employment Agreement dated as of October 20, 1995 between the Company and Donald E. Fowler, filed as Exhibit 10.10 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1995. 10.11*+ Amendment to Employment Agreement dated as of October 20, 1995 between the Company and Robert C. Marshall, filed as Exhibit 10.11 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1995. 10.12+ Amendments to Employment Agreement dated January 1, 1996 and May 2, 1996 between the Company and Kurt L. Friedrich. 10.13+ Amendment to Employment Agreement dated January 1, 1996 between the Company and Gerald L. Peterson. 10.14+ Amendment to Employment Agreement dated January 1, 1996 between the Company and David J. Rynne. 10.15+ Employment Agreement dated January 8, 1996 between the Company and Roel Pieper. 10.16+ Amendment to Employment Agreement dated January 10, 1996 between the Company and James G. Treybig. 10.17+ Employment Agreement dated February 21, 1996 between John T. Losier and the Company. 10.18+ The Tandem Computers Incorporated 1997 Stock Plan.
13 15
EXHIBIT NUMBER EXHIBIT - ------ ----------------------------------------------------------------------------------- 13.0 1996 Annual Report to Stockholders. Except for the portions expressly incorporated by reference, this Annual Report is not deemed to be filed as part of this Annual Report on Form 10-K. 22.1 Subsidiaries of the Company. 23.1 Consent of Ernst & Young LLP (see page 15). 27 Financial Data Schedules.
- --------------- * Incorporated by reference. + Director or officer compensatory plan. (b) Reports on Form 8-K during the fourth quarter: None. 14 16 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Tandem Computers Incorporated of our report dated October 22, 1996, included in the 1996 Annual Report to Stockholders of Tandem Computers Incorporated. Our audits also included the financial statement schedule of Tandem Computers Incorporated, listed in Item 14(a)(2). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth herein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-2635, 33-12572, 33-15875, 33-29773, 33-55421, 33-58759 and 333-17139) and in the Registration Statement (Form S-3 No. 33-20902) of Tandem Computers Incorporated and in the related Prospectuses of our report dated October 22, 1996, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Tandem Computers Incorporated. ERNST & YOUNG LLP San Jose, California December 17, 1996 15 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. December 17, 1996 TANDEM COMPUTERS INCORPORATED By /s/ DAVID J. RYNNE ------------------------------------ David J. Rynne Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Chief Executive Officer and By /s/ ROEL PIEPER Director (Principal Executive December 17, 1996 - ------------------------------------------ Officer) Roel Pieper Senior Vice President and By /s/ DAVID J. RYNNE Chief Financial Officer December 17, 1996 - ------------------------------------------ (Principal Financial Officer) David J. Rynne Vice President and Corporate By /s/ JOHN T. REECE Controller (Principal December 17, 1996 - ------------------------------------------ Accounting Officer) John T. Reece President, Chief Operating By /s/ ENRICO L. PESATORI Officer and Director December 17, 1996 - ------------------------------------------ Enrico L. Pesatori By /s/ THOMAS J. PERKINS Director December 17, 1996 - ------------------------------------------ Thomas J. Perkins By /s/ JACK F. BENNETT Director December 17, 1996 - ------------------------------------------ Jack F. Bennett By /s/ MORTON COLLINS Director December 17, 1996 - ------------------------------------------ Morton Collins By /s/ FRANKLIN P. JOHNSON, JR. Director December 17, 1996 - ------------------------------------------ Franklin P. Johnson, Jr. By /s/ ROBERT M. KAVNER Director December 17, 1996 - ------------------------------------------ Robert M. Kavner
16 18 By /s/ VERA STEPHANIE SHIRLEY Director December 17, 1996 - ------------------------------------------ Vera Stephanie Shirley By /s/ ROBERT G. STONE, JR. Director December 17, 1996 - ------------------------------------------ Robert G. Stone, Jr. By /s/ WASHINGTON SYCIP Director December 17, 1996 - ------------------------------------------ Washington SyCip By /s/ ALEX S. VIEUX Director December 17, 1996 - ------------------------------------------ Alex S. Vieux By /s/ WALTER B. WRISTON Director December 17, 1996 - ------------------------------------------ Walter B. Wriston
17 19 SCHEDULE II TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996 (IN THOUSANDS)
COLUMN C --------------------- COLUMN B ADDITIONS ---------- --------------------- COLUMN D COLUMN E COLUMN A BALANCE AT CHARGED TO CHARGED ----------- ----------- - ------------------------------------------ BEGINNING COSTS AND TO OTHER AMOUNTS BALANCE AT DESCRIPTION OF YEAR EXPENSES ACCOUNTS WRITTEN OFF END OF YEAR - ------------------------------------------ ---------- ---------- -------- ----------- ----------- Accounts Receivable Allowance 1996.................................... $ 17,721 $8,021 $ (3,446)(1) $ 2,434 $19,862 ======= ====== ======= ====== ======= 1995.................................... $ 17,931 $2,738 -- $ 2,948 $17,721 ======= ====== ======= ====== ======= 1994.................................... $ 17,745 $2,684 -- $ 2,498 $17,931 ======= ====== ======= ====== =======
- --------------- (1) Accounts receivable allowance of UB Networks has been reclassified and presented as part of net current assets of discontinued operations. S-1 20 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBITS PAGE - ------ ----------------------------------------------------------------------------- 3.1* Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1994. 3.2 By-laws of the Company, as amended. 4.1* First Amended and Restated Rights Agreement, dated June 17, 1988, between the Company and Bank of America, N.T. & S.A., as Rights Agent, filed as Exhibit 4.1 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1988. 10.1*+ Form of Non-Qualified Stock Option Plan and Agreement between the Company and Walter B. Wriston, dated as of October 9, 1991, filed as Exhibit 10.3 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1991. 10.2*+ Tandem Computers Incorporated 1979 Stock Option Plan, as amended, filed as Exhibit 10.6 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1988. 10.3*+ Tandem Computers Incorporated 1981 Stock Option Plan, as amended, filed as Exhibit 10.7 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1988. 10.4*+ Tandem Computers Incorporated 1989 Stock Plan, as amended, filed as Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended December 31, 1994. 10.5*+ Tandem Computers Incorporated Stock Option Plan for Non-Employee Directors, filed as Exhibit 10.8 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1987. 10.6*+ Form of Non-Qualified Stock Option Plan and Agreement between the Company and Vera Stephanie Shirley, dated as of December 8, 1992, filed as Exhibit 10.6 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1993. 10.7*+ Form of Non-Qualified Stock Option Plan and Agreement between the Company and Sir Campbell Fraser, dated as of September 28, 1993, filed as Exhibit 10.7 to the Company's Report on Form 10-K for the fiscal Year ended September 30, 1993. 10.8*+ Tandem Computers Incorporated Deferred Compensation Plan, as amended and restated as of October 1, 1995, filed as Exhibit 10.8 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1995. 10.9*+ Form of Employment Agreement entered into during the quarter ended June 30, 1995, between the Company and the following former and current executive officers: James G. Treybig, Robert C. Marshall, David J. Rynne, Donald E. Fowler, Kurt L. Friedrich, Gerald L. Peterson and Roel Pieper, filed as Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 1995. 10.10*+ Amendment to Employment Agreement dated as of October 20, 1995 between the Company and Donald E. Fowler, filed as Exhibit 10.10 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1995. 10.11*+ Amendment to Employment Agreement dated as of October 20, 1995 between the Company and Robert C. Marshall, filed as Exhibit 10.11 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1995. 10.12+ Amendments to Employment Agreement dated January 1, 1996 and May 2, 1996 between the Company and Kurt L. Friedrich. 10.13+ Amendment to Employment Agreement dated January 1, 1996 between the Company and Gerald L. Peterson. 10.14+ Amendment to Employment Agreement dated January 1, 1996 between the Company and David J. Rynne. 10.15+ Employment Agreement dated January 8, 1996 between the Company and Roel Pieper.
21
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBITS PAGE 10.16+ Amendment to Employment Agreement dated January 10, 1996 between the Company and James G. Treybig. 10.17+ Employment Agreement dated February 21, 1996 between John T. Losier and the Company. 10.18+ The Tandem Computers Incorporated 1997 Stock Plan. 13.0 1996 Annual Report to Stockholders. Except for the portions expressly incorporated by reference, this Annual Report is not deemed to be filed as part of this Annual Report on Form 10-K. 22.1 Subsidiaries of the Company. 23.1 Consent of Ernst & Young LLP (see page 15). 27 Financial Data Schedules.
- --------------- * Incorporated by reference. + Director or officer compensatory plan. (b) Reports on Form 8-K during the fourth quarter: None. EX-3.2 2 BY-LAWS OF TANDEM COMPUTERS 1 Exhibit 3.2 B Y - L A W S of TANDEM COMPUTERS INCORPORATED Adopted January 15, 1980 Amended: July 31, 1984 July 28, 1988 February 13, 1989 February 20, 1990 November 11, 1996 2 B Y - L A W S of TANDEM COMPUTERS INCORPORATED TABLE OF CONTENTS Page ARTICLE I - Offices Section 1. Registered Office.......................... 1 Section 2. Other Offices.............................. 1 ARTICLE II - Meetings of Stockholders Section 1. Election of Directors...................... 1 Section 2. Annual Meetings............................ 2 Section 3. Notice of Annual Meeting................... 3 Section 4. Stock Ledger............................... 3 Section 5. Special Meetings........................... 4 Section 6. Notice of Special Meetings................. 4 Section 7. Business at Special Meeting................ 4 Section 8. Quorum; Adjourned Meetings................. 4 Section 9. Required Vote.............................. 5 Section 10. Vote Per Share; Proxies.................... 5 Section 11. Written Consent............................ 6 ARTICLE III - Directors Section 1. Number..................................... 8 Section 2. Vacancies.................................. 9 Section 3. Duties..................................... 9 Section 4. Meetings................................... 10 Section 5. Organizational Meeting..................... 10 Section 6. Regular Meetings........................... 10 Section 7. Special Meetings; Notice................... 11 Section 8. Quorum; Required Vote; Adjourned Meetings................................... 12 Section 9. Written Consent............................ 12 Section 10. Telephone Meetings......................... 13 Section 11. Committees................................. 13 Section 12. Compensation............................... 14 Section 13. Removal.................................... 15 Section 14. Nominations................................ 15 Section 15. Rights Agreement........................... 17 -i- 3 ARTICLE IV - Notices Section 1. Manner........................................... 17 Section 2. Waiver........................................... 17 ARTICLE V - Officers Section 1. Required Officers................................ 18 Section 2. Other Officers................................... 18 Section 3. Salaries......................................... 18 Section 4. Term; Removal.................................... 19 Section 5. Chief Executive Officer.......................... 19 Section 6. President........................................ 19 Section 7. Chief Operating Officer.......................... 20 Section 8. Vice President................................... 20 Section 9. Secretary........................................ 20 Section 10. Assistant Secretary.............................. 21 Section 11. Treasurer........................................ 22 Section 12. Assistant Treasurer.............................. 22 ARTICLE VI - Stock Certificates Section 1. Required Signatures.............................. 23 Section 2. Facsimile Signatures............................. 23 Section 3. Partly Paid Shares............................... 23 Section 4. Classes of Stock................................. 24 Section 5. Lost Certificates................................ 24 Section 6. Transfer......................................... 25 Section 7. Record Date...................................... 25 Section 8. Record Owners.................................... 26 ARTICLE VII - Indemnification Section 1. General.......................................... 26 Section 2. Non-Exclusivity.................................. 27 ARTICLE VIII - General Provisions Section 1. Dividends........................................ 28 Section 2. Reserves......................................... 28 Section 3. Annual Statement................................. 28 Section 4. Checks........................................... 28 Section 5. Fiscal Year...................................... 29 Section 6. Seal............................................. 29 ARTICLE IX - Amendments Section 1. Procedure........................................ 29 Section 2. Stockholder Amendments........................... 29 -ii- 4 B Y - L A W S of TANDEM COMPUTERS INCORPORATED, a Delaware corporation ARTICLE I Offices Section 1. Registered Office. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle, State of Delaware. The board of directors may change the location of the registered office to any other place in Delaware. Section 2. Other Offices. The corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II Meetings of Stockholders Section 1. Election of Directors. All meetings of the stockholders for the election of directors shall be held in the City of Cupertino, State of California, at such place as may be fixed from time to time by the board of directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the board of directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and -1- 5 place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual Meetings. Annual meetings of stockholders shall be held at such date and time as shall be designated from time to time by the board of directors and stated in the notice of the meeting. At each annual meeting, directors shall be elected for the class of directors whose terms are then expiring and the stockholders shall transact such other business as may properly be brought before such meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the secretary must have received written notice from the stockholder not less than thirty (30) days nor more than sixty (60) days prior to the meeting. Such written notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting, (b) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the corporation which are beneficially owned by the stockholder and (d) any material interest of the -2- 6 stockholder in such business. Notwithstanding any other provision in the by-laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 2. Section 3. Notice of Annual Meeting. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. Section 4. Stock Ledger. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during -3- 7 the whole time thereof and may be inspected by any stockholder who is present. Section 5. Special Meetings. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by the General Corporation Law of the State of Delaware or by the certificate of incorporation, may be called by the president and shall be called by the president or secretary at the request in writing of a majority of the board of directors. Such request shall state the purpose or purposes of the proposed meeting. Section 6. Notice of Special Meetings. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. Section 7. Business at Special Meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 8. Quorum; Adjourned Meetings. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute -4- 8 or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time until a quorum shall be present or represented. Except as hereinafter provided, no notice of the adjourned meeting need be given if the time and place thereof are announced at the meeting at which the adjournment is taken. At any adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. Required Vote. When a quorum is present at any meeting of stockholders, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting unless the question is one upon which, by express provision of the General Corporation Law of the State of Delaware or of the certificate of incorporation, a different vote is required, in which case such express provision shall govern and control the vote on such question. Section 10. Vote Per Share; Proxies. Unless otherwise provided in the certificate of incorporation, each stockholder shall at every meeting of the stockholders be entitled to one -5- 9 vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on or after three years from its date, unless the proxy provides for a longer period. At all elections of directors of the corporation each stockholder having voting power shall be entitled to exercise the right of cumulative voting as provided in the certificate of incorporation. Section 11. Written Consent. Unless otherwise provided in the Certificate of Incorporation, any action required by law to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, which consent shall be delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. To be valid, a written consent must be signed by each and every record owner for which such written consent is being -6- 10 given. No written consent shall be valid for longer than sixty (60) days after its execution. In addition to any other applicable requirements, for business to be properly submitted to the stockholders for action by written consent by a stockholder, the stockholder must have given timely notice thereof in writing (the "Stockholder Notice") to the secretary of the corporation, in order that the board of directors may fix a record date pursuant to this Section 11. A Stockholder Notice must be delivered to or mailed and received at the principal executive office of the corporation, addressed to the attention of the secretary of the corporation. A Stockholder Notice shall set forth as to each matter the stockholder proposes to submit to the stockholders for action by written consent (a) a brief description of the business desired to be so submitted, (b) the name and record address of the stockholder proposing such business, and (c) the class and number of shares of the corporation which are beneficially owned by the stockholder. In order that the corporation may determine the stockholders entitled to act by written consent, the board of directors shall fix in advance a record date, which shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the board of directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall in its Stockholder Notice request the board of directors to fix a record date. The board of directors shall, promptly, but in all -7- 11 events not more than ten (10) days after the date on which such Stockholder Notice is received, adopt a resolution fixing the record date. If no record date has been fixed by the board of directors within ten (10) days of the date on which such Stockholder Notice is received, the record date for determining stockholders entitled to act by written consent, when no prior action by the board of directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its secretary. Delivery made to the Company's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the board of directors and prior action by the board of directors is required by applicable law, the record date for determining stockholders entitled to act by written consent shall be at the close of business on the date on which the board of directors adopts the resolution taking such prior action. ARTICLE III Directors Section 1. Number. The number and classes of directors which shall constitute the whole board shall be as provided in the certificate of incorporation. At each annual meeting of the stockholders, directors shall be elected for that class of directors whose terms are then expiring, except as provided in Section 2 of this Article, and each director so elected shall -8- 12 hold office until his successor is elected and qualified or until his earlier resignation or removal. Directors need not be stockholders. Section 2. Vacancies. Sole power to fill vacancies and newly created directorships resulting from any increase in the authorized number of directors shall be vested in the board of directors through action by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and each director so chosen shall hold office in that class until the next annual election for directors of that class and until his successor is duly elected and qualified or until his earlier resignation or removal. If there are no directors in office, then an election of directors may be held in the manner provided by the General Corporation Law of the State of Delaware. If, at the time of filling any vacancy or newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery of the State of Delaware, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, may summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 3. Duties. The business and affairs of the corporation shall be managed by the board of directors. -9- 13 Section 4. Meetings. The board of directors may hold meetings, both regular and special, either within or without the State of Delaware. Section 5. Organizational Meeting. The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. Section 6. Regular Meetings. Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be designated by the board. In the absence of such designation regular meetings shall be held at the principal executive office of the corporation. There shall be a regular meeting of the board of directors at or about the time of the annual meeting of stockholders, for the purpose of organization, election of officers, and the transaction of other business. Other regular meetings of the board shall be held without call on such date -10- 14 and time as may be fixed by the board of directors; provided, however that should any such day fall on a legal holiday, then said meeting shall be held at the same time on the next following day which is not a legal holiday. Section 7. Special Meetings; Notice. Special meetings of the board may be held for any purpose or purposes and may be called at any time by the chairman of the board of directors, the president and chief executive officer or the chief operating officer, as appointed by the board, or, if all are absent or unable or refuse to act, by a majority of the directors then in office. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director, or sent by first-class mail or telegram or facsimile transmission, charges prepaid, addressed to him at his address as it appears upon the records of the corporation. In case such notice is mailed, it shall be deposited in the United States mail at least four days prior to the time of the holding of the meeting. In case such notice is telegraphed or sent by facsimile transmission, it shall be delivered to a common carrier for transmission to the director or actually transmitted by the person giving the notice by electronic means to the director at least 48 hours prior to the time of the holding of the meeting. In case such notice is delivered personally or by telephone as above provided, it shall be so delivered at least two hours prior to the time of the holding of the meeting. Any notice given personally or by telephone may be communicated to either the director or to a person at the office of the director whom -11- 15 the person giving the notice has reason to believe will promptly communicate it to the director. Such deposit in the mail, delivery to a common carrier, transmission by electronic means or delivery, personally or by telephone, as above provided, shall be due, legal and personal notice to such directors. The notice need not specify the place of the meeting if the meeting is to be held at the principal executive office of the corporation, and need not specify the purpose of the meeting. Section 8. Quorum; Required Vote; Adjourned Meetings. At all meetings of the board a majority of the total number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided in the certificate of incorporation. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, provided that any action taken is approved by at least a majority of the required quorum for such meeting. If a quorum shall not be present at any meeting of the board of directors, a majority of the directors present thereat may adjourn the meeting from time to time until a quorum shall be present. No notice of the adjourned meeting need be given if the time and place thereof are announced at the meeting at which the adjournment is taken. Section 9. Written Consent. Unless otherwise restricted by the certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the board of -12- 16 directors or of any committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of the proceedings of the board or committee. Section 10. Telephone Meetings. Unless otherwise restricted by the certificate of incorporation or these by-laws, members of the board of directors, or of any committee designated by the board of directors, may participate in a meeting of the board of directors, or such committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. Section 11. Committees. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, which director or directors may replace any absent or disqualified member or members at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent -13- 17 provided in the resolution of the board of directors or in these by-laws, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have such power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the corporation; and, unless the resolution or by-laws expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Any such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. Section 12. Compensation. Unless otherwise restricted by the certificate of incorporation or these by-laws, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall -14- 18 preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 13. Removal. Any director or the entire board of directors may be removed, but only for cause by vote of the holders of a majority of shares entitled to vote at an election of directors. Section 14. Nominations. Nominations for election to the board at a meeting of shareholders may be made by the board or a nominating committee appointed by the board, or by any shareholder of the corporation entitled to vote for the election of directors at such meeting. Such nominations, other than those made by or on behalf of the board or the nominating committee of the board, shall be made by notification in writing, delivered or mailed by first-class United States mail, postage prepaid, to the chairman of the board of the corporation not less than 30 days nor more than 60 days prior to any meeting of shareholders called for the election of directors; provided, however, that if less than 35 days notice of the meeting is given to shareholders, such nomination shall be mailed or delivered to the chairman of the board of the corporation not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. Other than nominations made by or on behalf of the board, every nomination for the board of directors at a meeting of shareholders shall include the submission, filed with the secretary of the -15- 19 corporation, of a statement setting forth the following information as to each proposed nominee who is not an incumbent director: (1) the name, age; residence address, and business address of such proposed nominee; (2) the current occupation and current employer of such proposed nominee and the name of all corporations whose boards of directors such proposed nominee serves or for whom he serves or acts as officer; (3) a statement as to whether or not either he or any person or firm with whom he has a relationship as partner, associate, employee or otherwise, is a shareholder, director, officer, employee, accountant, consultant, adviser, agent, broker, dealer, nominee, or attorney of or for any person, corporation, partnership or other entity, or affiliate or subsidiary thereof, which is a competitor of this corporation; (4) the amount of stock of the corporation owned beneficially, directly or indirectly, by such proposed nominee and by members of his family residing with him and the names of the registered owners thereof; and (5) a statement as to such proposed nominee describing any conviction for a felony or misdemeanor (other than for minor traffic violations) that occurred during the preceding 10 years. The chairman of the meeting may, in his discretion, determine and declare to the meeting that a nomination not made in accordance with the foregoing procedure shall be disregarded and of no effect. -16- 20 Section 15. Rights Agreement. Notwithstanding any of the foregoing, any action stated in the First Amended and Restated Rights Agreement, dated June 17, 1988, to be taken by the Board of Directors after a Person has become an Acquiring Person shall require the presence in office of Continuing Directors and the concurrence of a majority of the Continuing Directors. Capitalized terms in this paragraph shall have the meanings indicated in such Rights Agreement. ARTICLE IV Notices Section 1. Manner. Whenever, under the provisions of the General Corporation Law of the State of Delaware, the certificate of incorporation or these by-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given in the manner provided in Article III, Section 7 of these by-laws. Section 2. Waiver. Whenever any notice is required to be given under the provisions of the General Corporation Law of the State of Delaware, the certificate of incorporation or these by-laws, a waiver thereof in writing, signed by the person or -17- 21 persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. ARTICLE V Officers Section 1. Required Officers. The board of directors at its meeting held at or about the time of the annual meeting of stockholders shall choose a president, one or more vice presidents, a secretary, one or more assistant secretaries and a treasurer. Any number of offices may be held by the same person, unless the certificate of incorporation or these by-laws otherwise provide. Section 2. Other Officers. The board of directors may appoint such other officers and agents as it shall deem necessary, all of which officers and agents shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. Section 3. Salaries. The salaries of all officers and agents of the corporation shall be fixed by the board of directors. -18- 22 Section 4. Term; Removal. Each officer of the corporation shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors. Any vacancy occurring in any office of the corporation shall be filled by the board of directors. Section 5. Chief Executive Officer. The chief executive officer of the corporation shall preside at all meetings of the stockholders and, in the absence of the chairman of the board, at all meetings of the board of directors. Subject to the control of the board of directors, he shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the board of directors are carried into effect. He shall execute bonds, mortgages and other contracts requiring a seal under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation. He shall have all of the powers and shall perform all of the duties which are ordinarily inherent in the office of the chief executive officer, and he shall have such further powers and shall perform such further duties as may be prescribed for him by the board of directors. Section 6. President. The president shall have all of the powers and shall perform all of the duties which are ordinarily -19- 23 inherent in the office of the president, and he shall have such further powers and shall perform such further duties as may be prescribed for him by the board of directors. Section 7. Chief Operating Officer. The chief operating officer shall have all of the powers and shall perform all of the duties which are ordinarily inherent in the office of the chief operating officer, and he shall have such further powers and shall perform such further duties as may be prescribed for him by the board of directors. Section 8. Vice President. In the absence of the president or in the event of his inability or refusal to act, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated by the board of directors or, in the absence of any such designation, then in the order of their election) shall perform the duties of the president and, when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice presidents shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. Section 9. Secretary. The secretary shall attend all meetings of the board of directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special -20- 24 meetings of the board of directors and committees of the board required by the by-laws or by law to be given, and he shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision he shall be. He shall keep or cause to be kept at the principal executive office of the corporation or at the office of the corporation's transfer agent a record of stockholders or a duplicate record of stockholders showing the names of the stockholders and their addresses, the number of shares and classes of shares held by each, the number and date of certificate issued for the same and the number and date of cancellation of every certificate surrendered for cancellation. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it, and when so affixed it may be attested by his signature or by the signature of such assistant secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 10. Assistant Secretary. The assistant secretary (or in the event there be more than one assistant secretary, the assistant secretaries in the order designated by the board of directors or, in the absence of any such designation, then in the order of their election) shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and -21- 25 shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. Section 11. Treasurer. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the board of directors, at its regular meetings or when the board of directors so requires, and to the president an account of all his transactions as treasurer and of the financial condition of the corporation. If required by the board of directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 12. Assistant Treasurer. The assistant treasurer (or in the event there shall be more than one assistant treasurer, the assistant treasurers in the order designated by the board of directors or, in the absence of any such -22- 26 designation, then in the order of their election) shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. ARTICLE VI Stock Certificates Section 1. Required Signatures. Every holder of stock in the corporation shall be entitled to have a certificate signed by, or in the name of the corporation by, the president or a vice president and by the treasurer or an assistant treasurer or the secretary or an assistant secretary of the corporation, certifying the number of shares owned by such holder in the corporation. Section 2. Facsimile Signatures. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 3. Partly Paid Shares. Certificates may be issued for partly paid shares. Upon the face or back of the certificates issued to represent any such partly paid shares the -23- 27 total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Section 4. Classes of Stock. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions on such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in section 202 of the General Corporation Law of the State of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock a legend reciting that the corporation will furnish without charge to each stockholder who so requests a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions on such preferences and/or rights. Section 5. Lost Certificates. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When -24- 28 authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond sufficient to indemnify it against any claim that may be made against the corporation on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 6. Transfer. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 7. Record Date. In order that the corporation may determine the stockholders who are entitled to receive notice of or to vote at any meeting of stockholders or any adjournment thereof, to express consent to corporate action in writing without a meeting, to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any action. A -25- 29 determination of stockholders of record entitled to receive notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. Section 8. Record Owners. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner and to hold liable for calls and assessments a person registered on its books as the owner of shares. The corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the General Corporation Law of the State of Delaware. ARTICLE VII Indemnification Section 1. General. The corporation shall indemnify any person who was or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' -26- 30 fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, to the extent and under the circumstances permitted by the General Corporation Law of the State of Delaware. Such indemnification (unless ordered by a court) shall be made as authorized in a specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standards of conduct set forth in the General Corporation Law of the State of Delaware. Such determination shall be made (i) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding or (ii) if such quorum is not obtainable, or even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion or (iii) by the stockholders. Section 2. Non-Exclusivity. The foregoing right of indemnification shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. -27- 31 ARTICLE VIII General Provisions Section 1. Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to the General Corporation Law of the State of Delaware. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Section 2. Reserves. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. Section 3. Annual Statement. The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. Section 4. Checks. All checks or demands for money and notes of the corporation shall be signed by such officer or -28- 32 officers or such other person or persons as the board of directors may from time to time designate. Section 5. Fiscal Year. The fiscal year of the corporation shall end on September 30 of each year. Section 6. Seal. The corporate seal shall have inscribed thereon the name of the corporation, the date of its organization and the words "Seal" or "Incorporated" and "Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE IX Amendments Section 1. Procedure. These by-laws may be altered, amended or repealed or new by-laws may be adopted, at a regular or special meeting or by written consent, by the stockholders or by the board of directors when such power is conferred upon the board of directors by the certificate of incorporation. Section 2. Stockholder Amendments. If the power to adopt, amend or repeal by-laws is conferred upon the board of directors by the certificate of incorporation, it shall not divest or limit the power of stockholders to adopt, amend or repeal by-laws. -29- EX-10.12 3 AMENDMENT TO EMPLOYMENT AGREEMENT-KURT FRIEDRICH 1 Exhibit 10.12 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT, dated as of January 1, 1996, is entered into by and between Tandem Computers Incorporated ("Employer") and Kurt L. Friedrich ("Executive"), to amend the prior employment agreement previously entered into between Employer and Executive on May 19, 1995 (the "Employment Agreement"). Employer and Executive hereby agree that Section 2.01 of the Employment Agreement shall be amended to read as follows: "2.01 Period of Employment. The initial term of Executive's employment pursuant to this Agreement will commence on May 19, 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 September 30, 1998 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 Period of Employment under this Agreement shall be subject to extension in twelve month increments as follows. Prior to September 1 of each year during the Executive's Period of Employment, Employer may elect (which election shall be made in writing), in its sole discretion, to terminate Executive's employment on the third succeeding September 30. If no such election is made, the term of Executive's employment pursuant to the terms of this Agreement shall be automatically extended for an additional twelve month period, under the terms and conditions in effect at the time of such extension, or with such modifications as Employer and Executive may then agree." IN WITNESS WHEREOF, Employer and Executive have executed this Agreement as of the date set forth in the first paragraph hereof. EMPLOYER: TANDEM COMPUTERS INCORPORATED By: /s/ THOMAS J. PERKINS ----------------------------------------- Thomas J. Perkins Chairman of the Board EXECUTIVE: By: /s/ KURT L. FRIEDRICH ----------------------------------------- Kurt L. Friedrich Senior Vice President & General Manager, Systems Development Group 2 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT, dated as of May 2, 1996, is entered into by and between Tandem Computers Incorporated ("Employer") and Kurt Friedrich ("Executive"), to amend the employment agreement previously entered into between Employer and Executive on May 19, 1995, as amended prior to the date hereof (the "Employment Agreement"). Employer and Executive hereby agree that the Employment Agreement shall be amended as follows: 1. Section 3(a) is amended to change Executive's title and position from Senior Vice President and General Manager, Systems Development to Senior Vice President and General Manager of NSK/NT Product Business Unit and Chief Technology Officer. 2. Section 5.01(d) is amended to add the following provisions: (A) Executive will accept the new title and position identified in paragraph 1 above for a one year "trial period" through April 30, 1997. During this period the Chief Executive Officer of Employer will determine whether to offer to retain Executive in this position after April 30, 1997. (B) Executive will be entitled to terminate employment for "Good Reason" at any time between May 1 and July 31, 1997, due to the reduction which the new position identified in paragraph 1 above will represent from his current authorities, duties and responsibilities, whether or not Employer offers to retain Executive in this position after April 30, 1997. In such event, Executive will be entitled to receive all payments and benefits provided under Section 5.02(d). 3. Section 5.01(e) is amended to provide that Employer will not terminate the employment of Executive without "Cause" prior to May 1, 1997. 4. Section 5.02(d) (which applies in the event of termination of employment by Executive for Good Reason or by Employer without Cause) is amended to provide the following additional benefits: (A) If Employer decides to terminate Executive's employment without "Cause" prior to May 1, 1997, Employer will continue to employ Executive and to pay Executive's full compensation and benefits through April 30, 1997, and Executive's termination of employment will become effective on April 30, 1997. (B) Executive's rights under his outstanding stock options will be determined under the terms of the applicable plans and agreements, except that all of Executive's 3 stock options which are vested at the time of his termination of employment will remain outstanding and may be exercised at any time on or before (i) the third anniversary of his termination of employment or (ii) the original expiration date of the applicable stock option, whichever occurs first. (C) If Executive remains in this position after July 31, 1997, Executive will no longer be entitled to terminate employment for "Good Reason" as a result of the change in Executive's title and position identified in paragraph 1 above. (D) Executive may terminate employment for "Good Reason" due to the change identified in paragraph 1 above at any time between November 1, 1996 and January 31, 1997, and in such event will be entitled to receive one-third (1/3) of the payments and benefits provided under Section 5.02(d). (E) Executive may terminate employment for "Good Reason" due to the change identified in paragraph 1 above at any time between February 1 and April 30, 1997, and in such event will be entitled to receive two-thirds (2/3) of the payments and benefits provided under Section 5.02(d). (F) Executive may not terminate employment for "Good Reason" due to the change identified in paragraph 1 above at any time prior to November 1, 1996. In the event of any such termination of employment by Executive prior to November 1, 1996, Executive will not be entitled to receive any of the payments and benefits provided under Section 5.02(d). (G) Executive will retain the right to terminate employment for "Good Reason" in the future under Section 5.01(d) for reasons other than the change in Executive's title and position identified in paragraph 1 above. IN WITNESS WHEREOF, Employer and Executive have executed this Agreement as of the date set forth in the first paragraph hereof. EMPLOYER: TANDEM COMPUTERS INCORPORATED By: /s/ ROEL PIEPER ----------------------------------- Roel Pieper Chief Executive Officer EXECUTIVE: /s/ KURT FRIEDRICH ----------------------------------- Kurt Friedrich 2 EX-10.13 4 AMENDMENT TO EMPLOYMENT AGREEMENT-GERALD PETERSON 1 Exhibit 10.13 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT, dated as of January 1, 1996, is entered into by and between Tandem Computers Incorporated ("Employer") and Gerald L. Peterson ("Executive"), to amend the prior employment agreement previously entered into between Employer and Executive on May 19, 1995 (the "Employment Agreement"). Employer and Executive hereby agree that Section 2.01 of the Employment Agreement shall be amended to read as follows: "2.01 Period of Employment. The initial term of Executive's employment pursuant to this Agreement will commence on May 19, 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 September 30, 1998 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 Period of Employment under this Agreement shall be subject to extension in twelve month increments as follows. Prior to September 1 of each year during the Executive's Period of Employment, Employer may elect (which election shall be made in writing), in its sole discretion, to terminate Executive's employment on the third succeeding September 30. If no such election is made, the term of Executive's employment pursuant to the terms of this Agreement shall be automatically extended for an additional twelve month period, under the terms and conditions in effect at the time of such extension, or with such modifications as Employer and Executive may then agree." IN WITNESS WHEREOF, Employer and Executive have executed this Agreement as of the date set forth in the first paragraph hereof. EMPLOYER: TANDEM COMPUTERS INCORPORATED By: /s/ THOMAS J. PERKINS ________________________________ Thomas J. Perkins Chairman of the Board EXECUTIVE: By: /s/ GERALD L. PETERSON ________________________________ Gerald L. Peterson Senior Vice President & General Manager, Sales & Support Group EX-10.14 5 AMENDMENT TO EMPLOYMENT AGREEMENT-DAVID J. RYNNE 1 Exhibit 10.14 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT, dated as of January 1, 1996, is entered into by and between Tandem Computers Incorporated ("Employer") and David J. Rynne ("Executive"), to amend the prior employment agreement previously entered into between Employer and Executive on May 19, 1995 (the "Employment Agreement"). Employer and Executive hereby agree that Section 2.01 of the Employment Agreement shall be amended to read as follows: "2.01 Period of Employment. The initial term of Executive's employment pursuant to this Agreement will commence on May 19, 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 September 30, 1998 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 Period of Employment under this Agreement shall be subject to extension in twelve month increments as follows. Prior to September 1 of each year during the Executive's Period of Employment, Employer may elect (which election shall be made in writing), in its sole discretion, to terminate Executive's employment on the third succeeding September 30. If no such election is made, the term of Executive's employment pursuant to the terms of this Agreement shall be automatically extended for an additional twelve month period, under the terms and conditions in effect at the time of such extension, or with such modifications as Employer and Executive may then agree." IN WITNESS WHEREOF, Employer and Executive have executed this Agreement as of the date set forth in the first paragraph hereof. EMPLOYER: TANDEM COMPUTERS INCORPORATED By: /s/ THOMAS J. PERKINS _________________________________ Thomas J. Perkins Chairman of the Board EXECUTIVE: By: /s/ DAVID J. RYNNE _________________________________ David J. Rynne Senior Vice President & Chief Financial Officer EX-10.15 6 EMPLOYMENT AGREEMENT - ROEL PIEPER 1 Exhibit 10.15 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of January 8, 1996, is entered into by and between Tandem Computers Incorporated ("Employer") and Roel Pieper ("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 January 8, 1996 (the "Commencement Date") and, unless terminated at an earlier date in accordance with Section 5.01 of this Agreement, shall continue in effect until September 30, 1998 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 Period of Employment under this Agreement shall be subject to extension in twelve month increments as follows. Prior to September 1 of each year during the Executive's Period of Employment, Employer may elect (which election shall be made in writing), in its sole discretion, to terminate Executive's employment on the third succeeding September 30. If no such election is made, the term of Executive's employment pursuant to the terms of this Agreement shall be automatically extended for an additional twelve month period, under the terms and conditions in effect at the time of such extension, or with such modifications as Employer and Executive may then agree. 2.02 Expiration of Period 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. 2 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 President and Chief Executive Officer. 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 2 3 subject to the terms of the applicable plans and agreements adopted by Employer from time to time. 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 3 4 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 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 4 5 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 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(e)(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 (e) 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 is 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 100% vested Employer contribution in the amount of $750,000 on behalf of Executive to 5 6 Employer's Deferred Compensation Plan; (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. (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 Special 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 $750,000. 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. 6 7 (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 equal to one 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 to compensate Executive for 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 7 8 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 5.03(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 (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 8 9 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 (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). 9 10 (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. (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 10 11 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 be entitled to receive a Gross-Up Payment only if the amount of the payment defined in Section 280G(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 280G(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 280G(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 11 12 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 and local 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 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 this 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 be 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 12 13 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. 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 of 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 affiliates, shareholders, directors, officers, employees, agents, successors, attorneys, and assigns) 13 14 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 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, 14 15 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 confidentially 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 continuously as such Board member from and before the commencement of the transaction resulting in the Change in Control. "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 hereof. EMPLOYER: TANDEM COMPUTERS INCORPORATED By /s/ THOMAS J. PERKINS ------------------------ Its Chairman of the Board ----------------------- EXECUTIVE: /s/ ROEL PIEPER -------------------------- Roel Pieper 15 EX-10.16 7 AMENDMENT TO EMPLOYMENT AGREEMENT-JAMES TREYBIG 1 Exhibit 10.16 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT, dated as of January 10, 1996, is entered into by and between Tandem Computers Incorporated ("Employer") and James G. Treybig ("Executive"), to amend the prior employment agreement previously entered into between Employer and Executive on May 19, 1995 (the "Employment Agreement"). It supersedes and replaces in its entirety the Amendment to Employment Agreement previously entered into between Employer and Executive on December 11, 1995. In consideration of the respective undertakings of Employer and Executive set forth below, Employer and Executive agree as follows: 1. As previously agreed, Executive has continued to serve as President and Chief Executive Officer of Employer until his successor was appointed and assumed office. It is hereby agreed that Executive will retire from employment with Employer on January 10, 1996 (the "Transition Date"). It is hereby agreed that, unless otherwise expressly provided herein, Executive shall receive the same payments and benefits which he would be entitled to receive under the Employment Agreement if he terminated the Period of Employment of Executive for Good Reason (as such terms are used in the Employment Agreement) on June 30, 1996. 2. The following payments and benefits shall be due to Executive pursuant to Section 5.02(d) of the Employment Agreement: (i) Pursuant to Section 5.02(d)(i) of the Employment Agreement, Executive will receive a lump sum payment within seven days of the Transition Date in the amount of $310,155 in lieu of payment of his annual base salary at the current rate through June 30, 1996. (ii) Pursuant to Section 5.02(d)(ii) of the Employment Agreement, Executive has received any annual bonus to which he was entitled under the Employer's Senior Executive Incentive Plan or other applicable bonus plan or program for the fiscal year ended September 30, 1995, and Executive shall be entitled to receive three-fourths of the annual bonus which would be payable to him for the fiscal year ended September 30, 1996, if he had remained in employment with Employer through the end of such fiscal year. Any such bonus shall be paid to him when bonuses are paid to other executives for the fiscal year ended September 30, 1996. (iii) In satisfaction of Section 5.02(d)(iii) of the Employment Agreement, Executive will receive a lump sum -1- 2 payment in the amount of $2,977,488 within seven days of the Transition Date. (iv) Pursuant to Section 5.02(d)(iv) of the Employment Agreement, Executive will continue to receive the benefits described in Section 4.04 of the Employment Agreement for three years following June 30, 1996. (v) Pursuant to Section 5.02(d)(v) of the Employment Agreement, Executive will continue to receive the fringe benefits and perquisites described in Section 4.05 of the Employment Agreement for three years following June 30, 1996. (vi) Pursuant to Section 5.02(d)(vi) of the Employment Agreement, Executive will receive a lump sum payment in the amount of $1,500,000 within seven days of the Transition Date, in lieu of a 100% vested Employer contribution on behalf of Executive to Employer's Deferred Compensation Plan in this amount. (vii) In satisfaction of Section 5.02(d)(vii) of the Employment Agreement, Employer will make a lump sum payment of $50,000 to Executive within seven days of the Transition Date. (viii) Pursuant to Section 5.02(d)(viii) of the Employment Agreement, Employer will extend all Employer loan guarantees and renew any Employer loans to Executive for a period of three years following June 30, 1996. 3. (i) Executive has or shall be entitled to receive the same compensation (including base salary, annual bonus, stock options and other benefits) which is currently provided under Section 4 of the Employment Agreement until the Transition Date. (ii) Following the Transition Date Executive will not be entitled to receive any further compensation or benefits, except as provided in Section 2 hereinabove. 4. Executive's rights under his outstanding stock options will be determined under the terms of the applicable plans and agreements based on full credit for employment as if Executive had remained in employment with Employer through June 30, 1996. All of Executive's unvested stock options which would have or may have by their terms vested on or before June 30, 1996, will vest on the Transition Date and will remain outstanding and may be exercised at any time on or before (i) three years following June 30, 1996 or (ii) the original expiration date of the applicable stock option, whichever occurs first. 5. Pursuant to Section 5.02(e) of the Employment Agreement, Executive will execute and deliver a release and 2 3 settlement agreement in favor of Employer in a form satisfactory to Employer within seven days of the Transition Date. 6. Except as provided below, the special provisions contained in Section 5.03 of the Employment Agreement which apply in connection with a Change in Control will continue to apply if a Change in Control of Employer is publicly announced on or before June 30, 1996. In particular, Section 5.03(a) will apply if a Change in Control of Employer is publicly announced on or before June 30, 1996. However, it is agreed that Section 5.03(b) will no longer apply to Executive. It is further agreed that Sections 5.03(e), (f) and (g) will not apply to Executive due to the payments which are to be made to Executive pursuant to Sections 2(iii), (iv), (v), (vi) and (vii) hereinabove. Further, it is agreed that Section 5.03(h) will apply to Executive after June 30, 1996, and Executive shall be entitled to receive a full "Gross-Up Payment" thereunder, in the event that any payments which are made to Executive by Employer are subject to an Excise Tax (as defined therein). 7. Employer will pay legal fees charged by Munger, Tolles & Olson in connection with entering into this Amendment to Employment Agreement. Employer will make a tax gross up payment to Executive, if necessary, to offset any taxable income which is reportable for or realized by Executive with respect to these legal fees. 8. Executive agrees that he will not within one year of the Transition Date be or become (i) interested or engaged in any manner, directly or indirectly, either alone or with any person, firm or corporation now existing or hereafter created, in any business which is or may be engaged primarily in the design, development, manufacture, production, marketing, sale or servicing of fault-tolerant computers or (ii) directly or indirectly a stockholder or officer, director or employee of, or in any manner associate with, or aid or abet or give information or financial assistance to, any such business. This non-competition provision shall not be deemed to prohibit Executive's purchase or ownership, as a passive investment, of not more than one percent (1%) of the issued and outstanding stock of a corporation listed on a national securities exchange or traded in the over-the-counter market. Executive further agrees that within one year of the Transition Date, he will not induce or attempt to induce any person who at the time of such inducement is a Senior Vice President of the Tandem Development Group, a person who reports directly to such Senior Vice President, a technical Director in such Group, a Senior Vice President for Sales and Support, a Marketing, Sales or Support Vice President, or a technical Director who reports to the Senior Vice President for Tandem Sales and Support. The validity, enforceability and interpretation of this Section 8 shall be determined in accordance with the laws of the state in which the principal office of the competing business is or is proposed to be located. 3 4 9. Except as otherwise expressly provided in this Amendment to Employment Agreement, all provisions of the Employment Agreement shall remain in full force and effect. IN WITNESS WHEREOF, Employer and Executive have executed this Amendment to Employment Agreement as of the date set forth in the first paragraph hereof. EMPLOYER: TANDEM COMPUTERS INCORPORATED By: /s/ THOMAS J. PERKINS ---------------------------------- Its Chairman of the Board EXECUTIVE: /s/ JAMES G. TREYBIG ---------------------------------- James G. Treybig 4 EX-10.17 8 EMPLOYMENT AGREEMENT-JOHN LOSIER 1 Exhibit 10.17 EMPLOYMENT AGREEMENT THIS AGREEMENT, dated as of February 21, 1996, is entered into by and between Tandem Computers Incorporated ("Employer") and John T. Losier ("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 March 1, 1996 (the "Commencement Date") and, unless terminated at an earlier date in accordance with Section 5.01 of this Agreement, shall continue in effect until September 30, 1998 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 Period of Employment under this Agreement shall be subject to possible extension in twelve month increments in the sole discretion of Employer as follows. Prior to September 1 of each year during the Executive's Period of Employment, Employer may elect (which election shall be made in writing), in its sole discretion, to terminate Executive's employment on the third succeeding September 30. If no such election is made, the term of Executive's employment pursuant to the terms of this Agreement shall be automatically extended for an additional twelve month period, under the terms and conditions in effect at the time of such extension, or with such modifications as Employer and Executive may then agree. 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. 1 2 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 Senior Vice President and General Manager of Worldwide Sales. 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 3 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 4 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 5.0l(c) or (f) above, Employer will have no further obligations 4 5 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 (e) 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 $500,000.00 or, in the alternative, if Executive elects in writing within thirty (30) days from commencement of employment, a $500,000.00 one hundred percent (100%) vested Employer contribution to the Tandem Computers Incorporated Deferred Compensation Plan; (vii) pay for individual outplacement counseling services to Executive up to a maximum of $50,000; and 5 6 (viii) extend any Employer loan guarantees and renew any Employer loans to Executive for a period of three years from the date of termination. (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 $300,000.00. 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 6 7 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 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 7 8 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 (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. 8 9 (v) If Employer does offer to retain Executive as a full-time employee pursuant to subparagraph (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 sha11 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 10 (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 11 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 12 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. 7.08 Notices. All notices under this Agreement will be in 12 13 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 administrative action in any way related to any 13 14 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. "Person" shall mean any individual firm, partnership, corporation or other entity and shall include any successor of such entity and all 14 15 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 /s/ ROEL PIEPER --------------------------------- Its Chief Executive Officer --------------------------------- EXECUTIVE: /s/ JOHN LOSIER ------------------------------------ John Losier 15 EX-10.18 9 1997 STOCK PLAN 1 Exhibit 10.18 TANDEM COMPUTERS INCORPORATED 1997 STOCK PLAN 1. Establishment, Purpose, and Definitions. (a) There is hereby adopted the 1997 Stock Plan (the "Plan") of TANDEM COMPUTERS INCORPORATED (the "Company"). (b) The purpose of the Plan is to provide a means whereby eligible individuals (as defined in paragraph 4, below) can acquire common stock of the Company (the "Stock"). The Plan provides employees (including officers and directors who are employees) of the Company and of Subsidiaries an opportunity to purchase shares of Stock pursuant to options which may qualify as incentive stock options under Section 422 of the Internal Revenue Code, as amended (referred to as "incentive stock options"), and employees (including officers and directors who are employees), directors who are not employees ("Non-Employee Directors"), independent contractors, and consultants of the Company and of Affiliates an opportunity to purchase shares of Stock pursuant to options which are not described in Section 422 or 423 of the Internal Revenue Code (referred to as "nonqualified stock options"). The Plan also provides for the transfer or sale of Stock to eligible individuals in connection with the performance of services for the Company or Affiliates. (c) The term "Subsidiary" as used in the Plan means any corporation at least 50 percent of the voting stock of which is owned, directly or indirectly, by the Company. The term "Affiliates" refers to Subsidiaries and any entity which has a business relationship with the Company. The terms "Subsidiaries" and "Affiliates" include entities which become Subsidiaries or Affiliates after the adoption of the Plan. 2. Administration of the Plan. (a) The Plan shall be administered by the Committee. The Committee shall consist exclusively of two or more directors of the Company, who shall be appointed by the Board. In addition, the compensation of the Committee shall satisfy: (i) Such requirements as the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act; and (ii) Such requirements as the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under section 162(m)(4)(C) of the Code. The Board may also appoint one or more separate committees of the Board, each composed of one or more directors of the Company who need not satisfy the foregoing requirements, who may administer the Plan with respect to Employees and Consultants who are not considered officers or directors of the Company under section 16 of the Exchange Act, may grant Awards under the Plan to such Employees and Consultants and 2 may determine all terms of such Awards. (b) The Committee shall determine which eligible individuals (as defined in paragraph 4, below) shall be granted options under the Plan, the timing of such grants, the terms thereof (including any restrictions on the Stock), and the number of shares for which an option or options shall be granted to an optionee. The Committee may establish a standard schedule of options to be granted automatically on an eligible individual's date of hire and date of promotion. (c) The Committee may amend the terms of any outstanding option granted under this Plan, but any amendment which would adversely affect the optionee's rights under an outstanding option shall not be made without the optionee's written consent. The Committee may cancel any outstanding stock option or accept any outstanding stock option in exchange for a new option. (d) The Committee shall also determine which eligible individuals (as defined in paragraph 4, below) shall be issued Stock under the Plan, the timing of such grants, the terms thereof (including any restrictions), and the number of shares to be granted. The Stock shall be issued for such consideration as the Committee deems appropriate, including past services; provided, however, that such consideration shall have a fair market value at least equal to fifty percent (50%) of the fair market value of the Stock on the date of issuance. Stock issued subject to restrictions shall be evidenced by a written agreement (the "Restricted Stock Agreement"). The Committee may amend any Restricted Stock Agreement, but any amendment which would adversely affect the individual's rights to the Stock shall not be made without his or her written consent. (e) The Committee shall have the sole authority, in its absolute discretion, to adopt, amend and rescind such rules and regulations as, in its opinion, may be advisable in the administration of the Plan, to construe and interpret the Plan, the rules and the regulations, and the instruments evidencing options or Stock granted under the Plan and to make all other determinations deemed necessary or advisable for the administration of the Plan. All decisions, determinations and interpretations of the Committee shall be binding on all optionees. (f) Notwithstanding the foregoing, the Committee shall have no discretion as to certain grants to Non-Employee Directors pursuant to paragraph 7 below, including the Non- Employee Directors to whom options are to be granted, the timing of such grants, the number of shares subject to any such option, and the exercise price of any such option, which, in each case, shall be as provided pursuant to paragraph 7. 3. Stock Subject to the Plan. (a) The number of shares of Stock available for the grant of options or the issuance of Stock under the Plan to eligible individuals shall be equal to the sum of (i) 1,115,000 shares plus (ii) the number of shares remaining available for issuance under the Tandem Computers Incorporated 1989 Stock Plan (the "Prior Plan") as of January 28, 1997. If an option granted under this Plan or the Prior Plan for any reason ceases to be exercisable in whole or in part (including options cancelled in exchange for new grants), the shares which were subject to such option but as to which the option had not been exercised shall continue to 2 3 be available under this Plan. Shares of Stock repurchased by the Company pursuant to repurchase rights retained under this Plan or the Prior Plan and shares of Stock withheld by the Company under paragraph 12 to satisfy applicable tax obligations shall not be available for subsequent option grants or Stock issuances under this Plan. (b) In the event of a subdivision of the outstanding shares of Stock, a declaration of a dividend of more than two percent payable in shares of Stock, a declaration of a dividend payable in a form other than shares of Stock in an amount that has a material effect of the price of shares of Stock, a combination or consolidation of the outstanding shares of Stock (by reclassification or otherwise) into a lesser number of shares of Stock, a recapitalization, a spin-off or a similar occurrence, the Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of the (i) the number of shares of Stock available for future grants under paragraph 3(a), above, (ii) the limitation set forth in paragraph 6(e), below, (iii) the number of shares of Stock covered by each outstanding option, (iv) the exercise price under each outstanding option and (v) the number of options to be granted to Non-Employee Directors under paragraph 7, below. Except as provided in this paragraph 3(b), a participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of Stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of Stock of any class. (c) In the event that the Company is a party to a merger or other reorganization, outstanding options and shares subject to a Restricted Stock Agreement shall be subject to the agreement of merger or reorganization. Such agreement may provide, without limitation, for the assumption of outstanding grants by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting and accelerated expiration, or for settlement in cash. 4. Eligible Individuals. Individuals who shall be eligible to have granted to them the options or Stock provided for by the Plan shall be such employees (including officers and directors who are bona fide employees), Non-Employee Directors, independent contractors, and consultants of the Company or an Affiliate as the Committee, in its discretion, shall designate from time to time. Only employees of the Company or a Subsidiary shall be eligible to receive incentive stock options. 5. The Option Price. (a) The exercise price of the Stock covered by each incentive stock option shall be not less than the per share fair market value of such Stock on the date the option is granted. The exercise price of the Stock covered by each nonqualified stock option shall be as determined by the Committee, but in no event shall such price be less than fifty percent (50%) of the per share fair market value of the Stock on the date the option is granted. Notwithstanding the foregoing, in the case of an incentive stock option granted to a person possessing more than ten percent of the combined voting power of the Company or a Subsidiary, the exercise price shall be not less than 110 percent of the fair market value of the Stock on the date the option is granted. The exercise price of an option shall be subject to adjustment to the extent provided in paragraph 3(b), above. 3 4 (b) For purposes of paragraph 5(a) above and for all other valuation purposes under the Plan, the fair market value per share of Stock on any relevant date shall be the closing selling price per share of Stock on the New York Stock Exchange on the date in question, as such price is quoted on the composite tape of transactions on such exchange. If there is no reported sale of the Stock on the New York Stock Exchange on the date in question, then the fair market value shall be the closing selling price on such exchange on the last preceding date for which such quotation exists. 6. Terms and Conditions of Options. (a) Each option granted pursuant to the Plan will be evidenced by a written Stock Option Agreement executed by the Company and the person to whom such option is granted. (b) The Committee shall determine the term of each option granted under the Plan which shall not be for more than ten years; provided, however, that in the case of an option granted to a person possessing more than ten percent of the combined voting power of the Company or a Subsidiary the term of each incentive stock option shall be for no more than five years. (c) The Stock Option Agreement may contain such other terms, provisions, and conditions as may be determined by the Committee (not inconsistent with this Plan). If an option, or any part thereof is intended to qualify as an incentive stock option, the Stock Option Agreement shall contain those terms and conditions which are necessary to so qualify it. (d) Notwithstanding any provision of the Plan to the contrary, the Stock Option Agreement evidencing options granted to an employee who is a "French Employee" (as that term is defined in Appendix A to the Plan) or a "Dutch Employee" (as that term is defined in Appendix B to the Plan) shall include the provisions set forth in Appendix A or B, respectively. (e) Options granted to any employee in a single fiscal year shall in no event cover more than 700,000 shares of stock, subject to adjustment in accordance with paragraph 3(b), above. 7. Additional Terms and Conditions of Options Granted to Non-Employee Directors. (a) On February 15, 1996, each person who was a Non-Employee Director as of February 15, 1996 shall automatically receive an option for 15,000 shares of Stock. In addition, on February 15, 1996, each person who was both a Non-Employee Director and the chairman of the Audit Committee, the Compensation/Option Committee and/or the Nominating Committee as of February 15, 1996 shall automatically receive an option for 10,000 shares Stock with respect to each chairmanship. (b) On the date that a person first becomes a Non-Employee Director (other than a person who previously had been an employee) which occurs after February 15, 1996, such person shall automatically receive an option for 15,000 shares of Stock. (c) On the date that a Non-Employee Director first becomes the chairman of the Audit Committee, the Compensation/Option Committee and/or the Nominating Committee which occurs after February 15, 1996, such Non-Employee Director shall automatically receive an option for 10,000 shares of Stock with respect to each chairmanship. 4 5 (d) Each option granted to Non-Employee Directors pursuant to the Plan shall be evidenced by a written Stock Option Agreement executed by the Company and the person to whom such option is granted. (e) The term of each option granted to Non-Employee Directors pursuant to the Plan shall be ten years. (f) The exercise price of the Stock covered by each option granted to Non-Employee Directors pursuant to the Plan shall be equal to the per share fair value of such Stock on the date the option is granted. (g) On the date that a Non-Employee Director ceases to be a member of the Board for any reason (the "Cessation Date"), all unexercisable options held by the Non-Employee Director as of the Cessation Date shall immediately terminate and all exercisable options held by the Non-Employee Director as of the Cessation Date shall terminate at the earlier of (i) the end of the 12-month period following the Cessation Date or (ii) the date the option would otherwise expire, pursuant to paragraph 7(e), above. Notwithstanding the foregoing, an option granted to a Non-Employee Director pursuant to the Plan within the six-month period that ends on the Cessation Date shall automatically and immediately terminate on the Cessation Date. (h) The Stock Option Agreement may contain such other terms, provisions, and conditions as may be determined by the Committee (not inconsistent with this Plan). 8. Use of Proceeds. Any cash proceeds realized from the sale of Stock pursuant to options granted or Stock issued under the Plan shall constitute general funds of the Company. 9. Amendment, Suspension or Termination of the Plan. (a) The Board or the Committee may at any time amend, suspend or terminate the Plan as it deems advisable; provided, however, except as provided in paragraph 3(b), above, the Board or the Committee shall not amend the Plan without the consent of stockholders to the extent required by applicable law, regulation or rule. (b) No option may be granted nor any Stock issued under the Plan during any suspension or after the termination of the Plan, and no amendment, suspension or termination of the Plan shall, without the affected individual's consent, alter or impair any rights or obligations under any option previously granted under the Plan. The Plan shall terminate on February 15, 2006 unless previously terminated by the Board pursuant to this paragraph 9. 10. Assignability. Each option granted pursuant to the Plan shall, during the optionee's lifetime, be exercisable only by him, and neither the option nor any right thereunder shall be transferable by the optionee by operation of law or otherwise, other than by will or the laws of descent and distribution. Stock subject to a Restricted Stock Agreement shall be transferable only as provided in such Agreement. 11. Payment Upon Exercise. 5 6 Payment of the purchase price upon exercise of any option granted under this Plan shall be made (i) in cash, (ii) with shares of Stock owned by the optionee, (iii) by delivery of an irrevocable direction to a securities broker approved by the Committee to sell shares and deliver all or a portion of the proceeds to the Company in payment for the Stock, (iv) by delivery of the optionee's promissory note with such recourse, interest, security and redemption provisions as the Committee in its discretion determines appropriate, or (v) in any combination of the foregoing. Any Stock used to exercise options shall be valued at its fair market value on the date of the exercise of the option. 12. Withholding of Shares. To the extent permitted by the option agreement, an optionee may satisfy federal, state and local tax obligations incident to the exercise of stock options under the Plan, or other purchase or receipt of Stock under the Plan, with shares of the Company's Common Stock (whether acquired through exercise of a stock option or otherwise). 13. Restrictions on Transfer of Shares. The Stock acquired pursuant to the Plan shall be subject to such restrictions and agreements regarding sale, assignment, encumbrances, or other transfer as are in effect among the stockholders of the Company at the time such Stock is acquired, as well as to such other restrictions as the Committee shall deem advisable. 14. Stockholder Approval. This Plan shall become effective upon its approval by a majority of the stockholders voting (in person or by proxy) at a stockholders' meeting held within 12 months of the Board's adoption of the Plan. The Committee may grant options under the Plan prior to the stockholders' meeting, but until stockholder approval of the Plan is obtained, Stock shall not be issued pursuant to the Plan (whether or not for consideration) and no option shall be exercisable. 15. Change in Control. Upon the actual consummation of a Change in Control, all outstanding repurchase rights of the Company shall automatically expire and cease to have effect with respect to any and all shares of Stock purchased under the Plan. Upon the actual consummation of a Change in Control, all outstanding options shall immediately become exercisable in full. The foregoing not withstanding, the Board may otherwise provide in connection with such Change in Control or any attempt to effect such Change in Control. For purposes of applying the vesting acceleration provisions of this paragraph 15, the following provisions shall be controlling: A "Change in Control" shall be deemed to be effected upon: (i) the acquisition by any Person, other than the Company or one or more persons controlling, controlled by or under common control with the Company, of bene ficial 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 the Company's outstanding voting securities pursuant to a transaction which the 6 7 majority of the Continuing Directors does not at any time recommend the Company's stockholders to accept or approve, or (ii) a change in the composition of 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 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. Continuing Director shall mean any member of the Board who has served continuously as such Board member from and before the commencement of the transaction resulting in the Change in Control. 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. 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 the Company and (ii) employee stock plans in which employee-participants do not have the right to determine confidentially whether shares held subject to the plan are to be tendered in a tender or exchange offer. 7 8 APPENDIX A OPTION GRANTS TO FRENCH EMPLOYEES This Appendix A to the Tandem Computers Incorporated 1997 Stock Plan (the "Plan") sets forth special rules under which options shall be granted to individuals who are employees of Tandem Computers Europe Incorporated or of a Tandem Subsidiary in France (collectively referred to as the "French Companies") and whose salary is paid in French currency on the date of the grant. To the extent the rules in this Appendix A are not consistent with the provisions of the Plan, this Appendix A shall govern. To the extent that there is no inconsistency between the provisions of the Plan and this Appendix A, the provisions of the Plan shall govern. 1. ELIGIBILITY. Options shall not be granted to French Employees possessing shares representing ten percent (10%) or more of Tandem's capital stock. 2. VESTING. Options granted shall vest daily over a four-year period that begins on the effective date of the option and ends on the earlier of (i) the fourth (4th) anniversary of the effective date or (ii) the date the French Employee terminates employment with the French Companies. 3. OPTION PRICE. The purchase price of the shares of stock covered by an option shall not be less than eighty percent (80%) of the closing stock price on the NYSE, averaged over a period of twenty (20) consecutive trading days ending on the date of grant. The option price shall not be changed and shall be adjusted only upon the occurrence of the events specified under the July 24, 1966 corporate law, section 208-5, in accordance with French law. 4. EXERCISE OF OPTIONS. (a) When Exercisable. An option cannot be exercised by a French Employee unless it is vested pursuant to paragraph 2 above. (b) Death. Upon the death of a French Employee, his or her options shall remain exercisable for a period of six (6) months following the date of death to the extent that such options were vested pursuant to paragraph 2 above on the date of death. (c) Method of Exercise. An option is exercisable by a French Employee upon written notice to Tandem. This written notice must state the number of shares being exercised and must be accompanied by full payment for the stock being purchased. Payment may be in the form of cash, check or money order. 5. TERM OF PLAN. No options with respect to treasury shares shall be granted to French Employees more than five (5) years after the date when the stockholders of Tandem approve the Plan. 6. DEFINITIONS. (a) "French Employee" shall mean an individual who is an employee of Tandem Computers Europe Incorporated or of a Tandem Subsidiary or Affiliate, in France, and whose salary is paid in French currency on the date the option is granted. (b) "Tandem Subsidiary" shall mean a company in which Tandem has a fifty percent 8 9 (50%) or greater equity interest, directly or indirectly, or a corporation of which Tandem owns fifty percent (50%) or more of the voting shares, either directly or indirectly. (c) "Tandem Affiliate" shall mean a company with which Tandem has a business relationship. 9 10 APPENDIX B OPTION GRANTS TO DUTCH EMPLOYEES This Appendix B to the Tandem Computers Incorporated 1997 Stock Plan (the "Plan") sets forth special rules under which options shall be granted to individuals who are employees of Tandem Computers Europe Incorporated or a Tandem Subsidiary in The Netherlands (collectively referred to as the "Dutch Companies") whose salary is paid in Dutch currency on the date of grant. To the extent the rules in this Appendix B are not consistent with the provisions of the Plan, this Appendix B shall govern. To the extent that there is no inconsistency between the provisions of the Plan and this Appendix B, the provisions of the Plan shall govern. 1. VESTING. Options granted to a Dutch Employee will vest immediately upon grant. 2. RIGHT OF REPURCHASE. If a Dutch Employee ceases to be employed by the Dutch Companies before the fourth anniversary of the Effective Date, Tandem shall have the right to repurchase a limited number of shares from the Dutch Employee. The repurchase price shall be the option price. The number of shares to which this right of repurchase applies shall be determined according to the following formula: (Total Number of Shares Purchased) minus [(Total Number of Shares Under Option) x (Number of Days of Continuous Employment Following the Effective Date) x (0.000685)] 3. EXERCISE OF OPTIONS. An option granted to a Dutch Employee cannot be exercised after the fifth anniversary of the date of grant. 4. DEFINITIONS. (a) "Dutch Employee" shall mean an individual who is an employee of Tandem Computers Europe Incorporated or of a Tandem Subsidiary or Affiliate, in the Netherlands, and whose salary is paid in Dutch currency on the date the option is granted. (b) "Tandem Subsidiary" shall mean a company in which Tandem has a 50 percent equity interest, directly or indirectly or a corporation of which Tandem owns 50 percent or more of the voting shares, either directly or indirectly. (c) "Tandem Affiliate" shall mean a company with which Tandem has a business relationship. 10 EX-13 10 1996 ANNUAL REPORT 1 LETTER TO OUR SHAREHOLDERS 2 EXHIBIT 13.0 Shareholder's Letter Through hard work and the commitment of a great team of employees, we created a new vision for Tandem(R) in fiscal 1996 -- one that leverages our clustered computing solutions into new opportunities in the fast emerging online world. It was a challenging year for us, one in which we had to make tough decisions. We are confident that our new direction in technology, marketing strategies, industry partnerships, and management and organizational changes will enable us to build an even stronger, more competitive Tandem. At Tandem, we like to say our goal is to provide more Tandem technology to more people by bringing our core strengths to the broader market. It is clear we are now entering a new age of computing. Millions upon millions of users -- individuals and businesses worldwide -- are going online. Simultaneously, the speed and quantity of data available online -- from text and music to videos, advertising, electronic commerce, training, and much, much more - -- are growing exponentially. The dramatic explosion in services and media-rich, data-intensive transactions is expected to create a huge demand for computing systems that offer high levels of reliability and scalability. For example, a massive computing "infostructure" will be required behind the browsers to support this unprecedented transaction volume and complexity. Tandem's high-performance, scalable, continuous computing is a requirement for any company competing in this environment. Today, Tandem is delivering new clustering technology that provides enormous leaps in throughput, reliability, scalability, and security compared with previous generations of products. This will create a huge opportunity in the marketplace -- benefiting infostructure builders like telecommunications companies and Internet service providers, as well as customers in the banking, finance, retail, and transportation industries. As this market unfolds, we see a fundamental shift taking place: from online transaction processing (OLTP) to interactive, media-rich Internet-based transactions, or what we call ITP. For Internet and intranet solutions, there is no company as well positioned as Tandem to be the leader in building the ITP server engines and the ITP infostructure. These solutions require quantum leaps in both data throughput (for next-generation applications) and scalability (for rapid growth in response to unpredictable business growth). In addition, ITP solutions must meet the same requirements as traditional OLTP: continuous availability, secure transactions, and data integrity. As the world moves from transactions to interactions, we will continue to bring our core strengths of reliability, availability, scalability, and parallel processing based on clustering to the new world of computing and the Internet/intranet explosion. In particular, our vision is to extend the attributes of our NonStop(R) Himalaya(R) platform and UNIX(R) system-based Integrity(R) servers to a much broader market: Microsoft's Windows NT(R) operating system. 2 Tandem Computers Incorporated 3 The new Tandem -- A strategy for growth: reliability, no limits. As an established leader in enterprise computing, we intend to grow our core business with our iTP(TM) solutions for the Himalaya and Windows NT Server platforms, which taken together yield a "best of both worlds" environment. In other words, our customers get the low cost of PC-based servers and the scalability of NonStop Himalaya servers -- both with outstanding reliability. By deploying the NonStop Himalaya server and Windows NT Server-based systems in various configurations, companies can take advantage of a full spectrum of capabilities as dictated by their business requirements. During fiscal 1996, we put a strategy in place that focuses on achieving the following goals. Growing the core business. Building on more than 20 years of OLTP leadership, we are expanding our focus to include new products and solutions that target high-growth opportunities in the Windows NT Server environment and the Internet. Our fault-tolerant technology launched OLTP, and today our next-generation ServerNet(TM) technology -- a system area network (SAN) -- is launching ITP with reliable, high-bandwidth clustered servers. Tandem's ServerNet interconnect and cluster technology is designed to deliver unprecedented response times, throughput, linear scalability, and reliability. With ServerNet technology, we are effectively clearing the server bandwidth bottleneck -- as significant a development as Tandem's fault-tolerant technology was some 20 years ago. The ServerNet architecture provides the interconnect technology for our range of S-series for Windows NT Server products announced in October 1996 and for Tandem's new NonStop Himalaya S-series parallel processing servers as well as the UNIX system-based Integrity S4000 server shipped earlier in fiscal 1996. With ServerNet technology's any-to-any system interconnect, the Himalaya servers can start small and scale up flexibly to meet the massive throughput requirements of data-intensive applications such as multimedia-enhanced Internet transactions and large-scale relational data mining and data warehousing, as well as the requirements of the telecommunications industry. Breaking into new markets. In May 1996, we formed a strategic alliance with Microsoft Corporation to accelerate customer adoption of the Microsoft Windows NT Server platform. Through this alliance, we are extending our database, transaction processing, and messaging software (ServerWare(TM) solutions) to the Windows NT Server environment. Along with our ServerNet cluster technology, we are making this software available across multiple computing platforms. Already adopted by Compaq, Dell, NEC, Siemens Nixdorf and other industry leaders -- and with Microsoft slated to include ServerNet technology drivers in its Windows NT Server clustering software (code-named "Wolfpack") -- ServerNet technology is emerging as the de facto standard for high-speed, high-availability interconnections for clustered systems. In October 1996, we announced the first iTP solutions designed to create a secure, reliable environment for next-generation commerce on public networks such as the Internet. All six powerful new iTP solution servers provide Internet and intranet customers with the reliability, scalability, security, and performance currently enjoyed by 1996 Annual Report 3 4 Tandem's OLTP customers. Each iTP solution has been customized to meet six core business needs: secure business-to-consumer commerce on the Internet; cost-effective distribution of digital assets, videos, electronic catalogs, music, and large databases; secure messaging capabilities over both public and private networks; computer telephony integration; intranet capabilities; and integration of legacy, off-the-shelf, and custom applications with each other and with information delivery technologies such as the World Wide Web. These new iTP solutions target telecommunications companies and Internet service providers (ISPs) that will build the ITP infrastructure, companies building intranets, and companies in the banking, finance, transportation, and retail industries. We also introduced the S-series for Windows NT Server -- the first to provide failover software through Tandem CAS (Cluster Availability Software) that will support the easy, compatible migration to Microsoft's Windows NT Server-based clustering standard when it becomes available next year. In the data warehousing arena, we continued to build momentum by offering innovative, customized, and packaged data warehouse solutions that are providing tangible results for our customers. As we evolve toward powerful new Knowledge Discovery through Database (KDD) solutions, we will continue to increase our focus on data mining products that allow customers to derive even greater value and insight from their data. To further support our Internet strategy, all data warehousing solutions will ultimately be Web-enabled, thereby allowing intranet and Internet Web access. Partnering with industry leaders. While the Microsoft alliance is an important one, it is only part of the Tandem partnership story. A major component of Tandem's strategy has been to move quickly to an open business model, one that leverages strategic relationships with market makers in the industry. We believe that this trend toward "competition" is a necessity, not a luxury, for the new Tandem. In keeping with this strategy, during fiscal 1996 we entered into a number of strategic partnerships with key market makers. By establishing relationships with companies such as Microsoft, Computer Associates, Compaq, Lucent, Baan, BEA, Informix, and Motorola, we are further expanding the market for our technology. For example, we are collaborating with Computer Associates to jointly develop a clustered version of the CA-Unicenter. We are also teaming with Informix to enable the handling of new data types, including video, voice, and images, by integrating the Informix DataBlade technology into Tandem's ServerWare software for the NonStop Himalaya and Windows NT Server systems. Through the Tandem Alliance Program, we are continuing to encourage third parties to develop application software for Tandem systems. More than 350 companies worldwide now focus on developing Tandem software solutions for our key markets. 4 Tandem Computers Incorporated 5 Organizing for efficiency and speed. During the year, we made significant changes to our overall management structure, executive team, and sales organization. In January 1996, Roel Pieper, formerly president and chief executive officer of Tandem's wholly owned subsidiary, UB Networks, was named CEO. At the beginning of fiscal year 1997, Enrico Pesatori joined Tandem as president and chief operating officer. Pesatori, who formerly served as vice president and general manager of Digital Equipment Corporation's Computer Systems Division, will be responsible for strategic execution of the new product business unit structure and our global sales, service, and marketing organization. To increase the effectiveness of our sales force, we named John Losier, formerly president of the large business services and chairman of the network integration subsidiary at Bell Atlantic Corp., to the position of senior vice president of Worldwide Sales and Services. We also reorganized into six product line business units, each chartered with establishing the requisite partnerships to drive Tandem's success. The six groups are Parallel Systems under Kurt Friedrich, Communications Platforms under Eric Doggett, ServerNet Technology under Jerry Peterson, ServerWare Software under Bill Heil, the Atalla Division under Bob Gargus, and Tektonic Software under Harald Sammer. We believe all these changes are a vital and necessary part of bringing more Tandem products to more people. However, despite our best efforts, our UB Networks subsidiary has not performed to our expectations. The networking segment of the industry has become fiercely competitive in the last year, driven by acquisitions and steep price declines. In July, we announced plans to sell UB Networks and began working with Lehman Brothers to divest the subsidiary. To date, several interested parties are reviewing this networking company as a potential acquisition candidate. Creating a new image, a new Tandem. Achieving success in new markets is about building mind share -- not just with our traditional customers, but with new partners and customers. Toward that end, we are beginning to change the way we think about ourselves and the way we create and communicate image and awareness of Tandem in the market. The Challenge 2000 program, a global gathering of Tandem employees, has been instrumental in setting the course for the new Tandem. We have also redesigned our corporate logo to better reflect this new vision. In addition, we are reshaping the Tandem image through global projects in such areas as entertainment, sports, environmental education, and healthcare. We are demonstrating our technology to the world and are driving innovation in these arenas. Through a joint venture with Informix and Planet Hollywood Online, Inc., we are participating in the development of a major entertainment destination in cyberspace. Through E-Spaces, Inc., we are participating in the development of "televirtual" online services and applications, such as customer 3-D interactive worlds for Web sites, interactive 3-D catalogs, and online showrooms for products and services. We are also providing the technology backbone for a number of other World Wide Web activities. For example, for Whitbread, an around-the-world yacht race, Tandem is sponsoring an innovative interactive Web site. Starbright World is a virtual playhouse for 1996 Annual Report 5 6 hospitalized children, chaired by filmmaker Steven Spielberg. One Step Beyond links the world to explorer Robert Swan of the UNESCO South Pole expedition as he becomes one of the first people to walk across the Antarctic continent, and to 35 Young Explorers as they voyage across the Antarctic Ocean. Given the extraordinary pace of change sweeping the globe, we recognize that our effort to establish Tandem as a visionary market maker must be an evolving, ongoing process. We would like to thank all of our stakeholders -- our employees, customers, partners, suppliers, and stockholders -- for supporting Tandem through this transition. Because of your commitment, Tandem is more strongly positioned than ever to provide our hallmark scalability, reliability, and data integrity to the fast emerging online world. /s/Roel Pieper /s/Thomas J. Perkins Roel Pieper Thomas J. Perkins Vice Chairman and Chief Executive Officer Chairman of the Board 6 Tandem Computers Incorporated 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 Selected Operating Statistics The table below summarizes the changes in selected operating statistics. The percentages in the left three columns show the 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 percentages in the right columns measure the year-to-year changes. The Company's fiscal year ends on September 30. References to 1996, 1995, and 1994 in this section represent the Company's fiscal years.
Percent of Total Revenues Percent Increase (Except cost of product and service) (Decrease) 1996 1995 1994 1996 1995 - --------------------------------- ------------- 79.0 80.9 81.0 Product revenues (3) 10 21.0 19.1 19.0 Service and other revenues 9 11 100.0 100.0 100.0 Total revenues (1) 10 43.4 42.4 37.8 Cost of product revenues (1) 24 72.8 72.3 64.7 Cost of service and other revenues 9 24 49.6 48.1 42.9 Total cost of revenues 2 24 15.1 14.7 13.3 Research and development 2 22 31.4 30.8 35.9 Marketing, general, and administrative 1 (5) 2.7 N/A N/A Restructuring charge N/M N/A 1.2 6.4 7.9 Operating income (81) (11) (0.3) 5.0 8.9 Income (loss) -- continuing operations N/M (37) (0.9) 0.6 0.9 Income (loss) -- discontinued operations N/M (35) (1.2) 5.6 9.8 Net income (loss) N/M (37) ================================= ============= ===============================================================================================
N/M = not meaningful N/A = not applicable Operating Results The discussion of operating results and financial tables that follow pertain to the Company's continuing operations, the computer systems business. Discontinued operations are discussed separately. REVENUES -- Total 1996 revenues of $1.9 billion decreased 1 percent from 1995. Product revenues for 1996 of $1.5 billion decreased $52 million, or 3 percent, from 1995, while service and other revenues of $398 million increased $32 million, or 9 percent. The decline in product revenues is primarily attributable to reduced unit shipments of NonStop Himalaya processors (approximately 19 percent from 1995) and the negative impact of exchange rate changes in the Japanese currency from a year ago, offset somewhat by improved revenue per processor shipped and increased revenues from UNIX system-based Integrity products. Processor shipments were positively affected and revenue per processor shipped was negatively affected, in 1995, due to a high volume of processor-only trade-in activity. Growth in service and other revenues was primarily attributable to increased consulting revenues. Hardware service revenues were relatively flat year over year. 8 Tandem Computers Incorporated 9 Total 1995 revenues of $1.9 billion increased 10 percent over 1994. Product revenues for 1995 increased 10 percent over 1994, while service and other revenues increased 11 percent. Increases in product revenues were primarily attributable to an increased volume of unit shipments of the Company's computer systems and to increased software license and support revenues. The benefits of the increased unit shipments were partially offset by a shift from system add-on business to aggressively discounted trade-in activity on the NonStop product family, largely resulting from rapid Himalaya server product introductions. Increases in service and other revenues were the result of increased 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.
1996 1995 1994 ---------------- ---------------- ---------------- (Dollars in millions) $ % $ % $ % ---------------------------------------------------------- United States $ 896.1 47 $ 926.8 48 $ 889.6 51 Europe United Kingdom 159.1 8 161.0 8 142.8 8 Germany 112.7 6 97.5 5 92.3 5 Other Europe 255.3 13 262.1 14 222.8 13 ---------------------------------------------------------- Total Europe 527.1 27 520.6 27 457.9 26 Japan 258.7 14 277.3 14 211.7 12 Asia-Pacific 129.0 7 109.7 6 103.0 6 Americas (excluding the U.S.) 89.0 5 86.0 5 76.6 5 ---------------------------------------------------------- Total revenues $1,899.9 100 $1,920.4 100 $1,738.8 100 ==========================================================
Revenues in the United States in 1996 decreased 3 percent compared to 1995, primarily as a result of reduced unit shipments of Himalaya processors (approximately 30 percent from 1995) and reduced revenues from Integrity products, offset somewhat by improved revenue per processor shipped and increased consulting services. Revenues in Europe increased 1 percent during 1996, compared to 1995. Increased revenues from high-end Himalaya servers, Integrity servers, and consulting services were offset by reduced revenues in the mid-range and low-end Himalaya product offerings and by the negative impact of changes in currency. In Japan, revenues decreased 7 percent during 1996, compared to 1995. The decrease is due to the negative impact of currency movements between 1996 and 1995, offset partially by increased sales of the mid-range line of Himalaya servers and Integrity products. Asia-Pacific revenues in 1996 increased by 18 percent, compared to the previous year. The increase is primarily the result of a higher volume of high-end and mid-range Himalaya product shipments, particularly in the first quarter of 1996, and increased revenues from consulting services. Revenues in the United States in 1995 increased 4 percent compared to 1994, due to increased unit shipments of high-end and mid-range servers and increased consulting revenues, offset by the shift from system add-on business to aggressively discounted trade-in activity on the NonStop products. Revenues in Europe increased 14 percent in 1996 Annual Report 9 10 the 1995 to 1994 comparison as a result of the positive effects of foreign exchange rate changes, increased consulting revenues, and increased unit shipments of high-end and mid-range servers. The positive effects of foreign exchange rate changes were somewhat offset by local product pricing reductions. In Japan, revenues increased 31 percent during 1995, compared to 1994. These increases were attributable to the positive effects of foreign exchange rate changes, increased product shipments of high-end servers, and increased consulting revenues, offset by reduced revenues in the Integrity product line. Asia-Pacific revenues in 1995 increased by 6 percent as a result of foreign exchange rate changes from 1994 and increased revenues of Integrity products. COST OF REVENUES -- During 1996, product margins declined to 57 percent, from 58 percent in 1995. Product margins were negatively affected by increases in amortization of capitalized software and increases in royalty payments, offset somewhat by changes in product mix and improved management of discounting and other pricing programs. Margins on service and other revenues decreased to 27 percent in 1996, from 28 percent in 1995, reflecting a general increase in hardware servicing costs evident throughout the year in areas such as salaries and benefits and an increase in the proportion of consulting business to the total services business. Management expects product margins to continue to decline in 1997. However, product margins are difficult to predict, as they are affected by future competitive pricing actions, geographic revenue mix, product mix, and changes in foreign currency. Management does not expect hardware servicing margins to change significantly in 1997. Margins in the consulting business are expected to improve, but can vary significantly period to period, as consulting margins are influenced by the mix of the consulting activities conducted. For additional discussion on the risks associated with these statements and other forward-looking statements, refer to the Outlook and Risks section below. During 1995, product margins declined 4 percent to 58 percent, in comparison to 1994. With the availability of the new NonStop Himalaya K-series line of servers in 1995, there was an increase in the volume of aggressively priced trade-in activity and a decrease in add-on sales. Further, the Company reduced prices on disk storage products early in 1995, and sales volume of these products increased for the year. Also, the shift in product mix to the Himalaya servers from the older NonStop products continued to affect the comparison of product margins in these periods. The unfavorable impact on product margins from these factors was offset slightly by the strength of foreign currencies during 1995. Margins on service and other revenues decreased by 7 percent to 28 percent in 1995, as compared to 1994, as a result of a higher contribution to revenues from consulting activities. Further, the Company implemented an organizational change in the first quarter of 1995 to price, market, and sell consulting services, resulting in a change of classification of certain costs associated with consulting services, which were reported as marketing expenses in 1994 and earlier years. RESEARCH AND DEVELOPMENT EXPENSES -- Research and development (R&D) spending in 1996 increased $5 million, or 2 percent, compared to 1995. The increase was primarily attributable to increased salaries and benefits, write-offs of capitalized software and equipment depreciation, somewhat offset by higher levels of software capitalization and external funding received on joint development projects. Capitalized software write-offs 10 Tandem Computers Incorporated 11 were a result of management decisions made during the fourth quarter to reprioritize development efforts and were associated with software products not yet introduced. Management expects R&D spending to decline slightly in 1997. However, the expected R&D spending pattern could be affected by delays or changes in product development schedules, by changes in product strategy, and by changes in external funding. For additional discussion of the risks associated with these statements and other forward-looking statements, refer to the Outlook and Risks section below. Research and development spending in 1995 increased $50 million, or 22 percent, compared to 1994. The increase was attributable to the Company's new product development efforts, including additional costs for outside contractors, increased salaries and benefits, and purchases of development material. MARKETING, GENERAL, AND ADMINISTRATIVE EXPENSES -- In 1996, marketing, general, and administrative (MG&A) expenses increased $4 million, or less than 1 percent, compared to 1995. The increase in MG&A expenses is attributable to increased commissions and outside consulting costs, offset somewhat by benefits achieved from the second quarter restructuring actions, which reduced sales and marketing headcount, and by strict management of certain variable costs, such as travel and entertainment expenses. MG&A expenses in 1995 included realized gains from the sale of strategic investments of approximately $8 million. Realized gains in 1996 were insignificant. Management expects MG&A expense to decline slightly in 1997. For additional discussion of the risks associated with these statements and other forward-looking statements, refer to the Outlook and Risks section. In 1995, MG&A expenses declined $31 million, or 5 percent, compared to 1994, primarily due to the Company's ongoing efforts to manage general and administrative expenses relative to gross margin levels. Approximately one-quarter of the decrease was attributable to the sales of Applied Communications, Inc. (ACI), and Applied Communications, Inc. Limited (ACI, Ltd.), in December 1993. Specific to marketing expenses, the Company realized increased commissions generated by growing shipment volumes, and experienced increased salaries and benefits. These increased marketing expenses were fully offset by the impact of the change in reporting of certain consulting services costs as discussed previously. RESTRUCTURING CHARGES -- During 1996, the Company initiated a 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 resulted in a charge of $52 million and included reducing headcount, vacating leased facilities, and disposing of assets to discontinue certain product programs and other activities. The restructuring provisions, supported by appropriate levels of specificity for planned actions, were established and approved by the Company's executive management and its Board of Directors. Actual restructuring costs are recognized as reductions in related restructuring reserves in the period incurred. Information relating to restructuring activity is presented on the following page. 1996 Annual Report 11 12
Reduction of Internal Discontinued (In thousands) Work Force Facilities Systems Activities Other Total --------------------------------------------------------------------------------- Balances, September 30, 1993 $ 86,634 $ 89,302 $ 34,000 $ 15,325 $ 57,310 $ 282,571 Utilized -- 1994 (34,568) (34,560) (10,178) (4,614) (25,473) (109,393) --------------------------------------------------------------------------------- Balances, September 30, 1994 52,066 54,742 23,822 10,711 31,837 173,178 Adjustments -- 1995 1,611 (45) 3,074 42 (4,682) -- Utilized -- 1995 (36,000) (26,036) (19,482) (933) (20,122) (102,573) --------------------------------------------------------------------------------- Balances, September 30, 1995 17,677 28,661 7,414 9,820 7,033 70,605 Provision -- 1996 34,100 8,600 -- 9,300 -- 52,000 Utilized -- 1996 (33,838) (12,467) (7,414) (5,632) (7,033) (66,384) --------------------------------------------------------------------------------- Balances, September 30, 1996 $ 17,939 $ 24,794 $ -- $ 13,488 $ -- $ 56,221 ================================================================================= Cash used: 1994 $ 34,568 $ 25,075 $ 10,178 $ (5,037) $ 23,680 $ 88,464 1995 36,000 20,674 19,482 57 19,093 95,306 1996 33,838 9,369 7,414 991 6,461 58,073 Expected future 17,939 19,106 -- 2,819 -- 39,864 --------------------------------------------------------------------------------- Total $ 122,345 $ 74,224 $ 37,074 $ (1,170) $ 49,234 $ 281,707 =================================================================================
The 1996 provision for reduction of work force included severance, related medical and other benefits, and an employment agreement with the former Chief Executive Officer. The 1996 provision included termination benefits for approximately 500 employees, of which approximately three-fourths were based in the United States. Approximately two-thirds of the planned terminations were in sales, marketing, and administrative functions; approximately 20 percent in engineering and development functions; and the balance was in manufacturing, service, and support functions. The Company's plan anticipates these terminations to be substantially completed during early 1997. The 1996 provision for facilities included 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 by the first half of 1997. As of September 30, 1996, facilities restructure reserves included approximately $19 million representing lease payments and expenses for idle facilities, and approximately $6 million representing related improvements. The above leases have remaining terms generally not exceeding four years. The 1996 provision for discontinued activities included 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 initiated negotiations to outsource the above maintenance and support obligations in 1996 and expects to begin outsourcing this activity early in 1997. Future cash utilization represents the present value of a long-term land lease in Germany. 12 Tandem Computers Incorporated 13 IMPACT OF CURRENCY AND INFLATION -- The Company's international operations generally consist of sales and support organizations that generate revenues and incur service costs and marketing, general, and administrative expenses in local currencies. Product costs, research and development, and corporate marketing and administrative expenses are mostly incurred in U.S. dollars. Thus, a weakening of local currencies has a negative effect on translated international revenues and a positive effect on translated local costs and expenses. A strengthening of local currencies against the U.S. dollar has a positive influence on international revenues translated into dollars and a negative effect on translated local costs and expenses. The impact of exchange rate changes on profitability and cash flows is somewhat 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. During 1996, in comparison to 1995, the currencies in most foreign countries where Tandem has significant operations generally weakened against the U.S. dollar, negatively affecting consolidated revenues and operating results of the Company, as stated in U.S. dollars. This impact was mitigated by Tandem's hedging program. In comparing fiscal years 1996 and 1995, the net effect of foreign currency exchange rate movements on changes in operating income was not material. During 1995, in comparison to 1994, the currencies in most foreign countries where Tandem has significant operations strengthened against the U.S. dollar, positively affecting consolidated revenues and operating results of the Company, as stated in U.S. dollars. This impact was somewhat mitigated by pricing and other management actions in the local markets and by the Company's hedging program. 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 1994, foreign exchange rate movements had a positive impact on the change in operating income of approximately $15 million to $20 million. The effect of inflation on the Company's financial position has not been significant. RESULTS FROM CONTINUING OPERATIONS -- For the year ended September 30, 1996, the Company reported a loss from continuing operations of $5 million, or $0.04 per share, including the $52 million restructuring charge. Income from continuing operations for 1995 and 1994 was $96 million and $154 million, or $0.82 and $1.35 per share, respectively. Income from continuing operations for 1994 included a $23 million pretax non-operating gain from the sales of ACI and ACI, Ltd. The Company recorded a provision for income taxes of $29 million in 1996, consisting primarily of taxes currently payable in foreign jurisdictions. The effective tax rates for 1995 and 1994 were 24 percent and 6 percent, respectively, also arising principally from taxes currently payable in foreign jurisdictions. Tandem expects to continue to report income in certain foreign jurisdictions, which will result in tax provisions despite loss carryforwards that are available primarily to offset U.S. and certain foreign income. At September 30, 1996, net deferred tax assets of $18 million represent the tax effects of temporary differences existing in certain foreign jurisdictions that the Company believes are more likely than not to be realized, based upon the strong earnings history in these jurisdictions. 1996 Annual Report 13 14 Results from Discontinued Operations During June 1996, the Company adopted a plan to sell the Company's networking business, UB Networks, Inc. (UB Networks). UB Networks, a wholly owned subsidiary of the Company, is a supplier of networking hardware and software products for shared and switched environments. The Company has engaged Lehman Brothers to assist in executing the sale. Although UB Networks is expected to continue to incur operating losses until disposition, management does not expect to incur a net loss on the overall disposition of UB Networks' net assets. Management's estimates are based on discussions with and analyses provided by the Company's financial advisors, as well as preliminary discussions with potential buyers. The actual amount the Company will ultimately realize upon disposition of the net assets of UB Networks is subject to risks and uncertainties and could differ materially from these estimates. The table below summarizes revenues and results of operations associated with the discontinued operation for the indicated periods.
(In thousands) 1996 1995 1994 ----------------------------------- Total revenues $368,270 $364,526 $369,285 Operating income (loss) $(48,106) $ 3,158 $ 19,476 Income (loss) before income taxes $(17,332) $ 12,269 $ 17,529 Income taxes $ -- $ 1,134 $ 947 Income (loss) from discontinued operations $(17,332) $ 11,135 $ 16,582 Earnings (loss) per share from discontinued operations, net of income taxes $ (.15) $ .09 $ .15 ===================================
Income (loss) from discontinued operations in 1996 included a loss of $23.2 million for the period from the date of adoption of the plan, June 30, 1996, through September 30, 1996. Income (loss) from discontinued operations in 1996 and 1995 included non-operating gains of $30.6 million and $9.3 million, respectively, from the sale of investments. In comparison to 1995, networking product revenues in 1996 decreased $3 million, while consulting and service revenues increased $7 million. Customer demand for UB Networks' next generation of intelligent switching hubs was significantly less than anticipated in 1996, partially due to product availability. The market for ATM (Asynchronous Transfer Mode) did not accelerate as quickly as expected, resulting in lower than planned sales of a new ATM switching product. As a result, sales of newer products were not sufficient to offset the decline in sales of the more mature products. Networking margins declined to 30 percent for the year ended September 30, 1996, compared to 40 percent in 1995. Networking margins were negatively affected by lower sales of proprietary ethernet switching enclosures and related peripheral products, an increased proportion of revenues from third-party product sales, related service fees, and increased provisioning for excess inventory. Research and development expenses of $39 million in 1996 decreased 4 percent from 1995. MG&A expenses of $120 million in 1996 increased 16 percent over 1995. The increase in MG&A expenses was due to international 14 Tandem Computers Incorporated 15 geographic expansion, an increase in the average number of sales representatives and associated travel costs, costs associated with retaining key employees, and increased marketing and advertising. Networking revenues decreased $5 million, or 1 percent, during 1995, in comparison to 1994. Excluding NetWorth, Inc., which was a consolidated subsidiary prior to April 1, 1994, networking revenues increased $9 million, or 2 percent. Networking product revenues decreased $7 million, offset by increased consulting and service revenues of $16 million. Financial Condition Cash and cash equivalents decreased $33 million during 1996. The Company generated $117 million positive cash flow from operations during 1996, compared with $161 million in 1995. Net cash used in investing activities was $191 million during 1996, compared with $208 million in 1995. Investing activities in 1996 consisted mainly of investment in property, equipment, and software development. Financing activities, consisting of borrowing activity and sales of stock, provided $55 million in 1996, compared with $42 million in 1995. Accounts receivable days were 80 days for 1996, excluding receivables of discontinued operations, compared to 78 days for 1995. Inventory days decreased to 39 days at 1996 year-end versus 42 days at the end of 1995, excluding inventories of discontinued operations. The Company has a receivables purchase agreement with a group of financial institutions whereby the Company can sell a percentage ownership interest in an eligible pool of accounts receivable. Under the terms of the agreement, the Company retains collection and servicing responsibilities for the receivables and retains substantially the same risk of credit loss as if the interest in receivables had not been sold. The agreement allows for maximum borrowings of up to $100 million and expires in October 1997. The maximum amount outstanding at any point during the years ended September 30, 1996 and 1995, was $65 million and $50 million, respectively. There were no amounts outstanding at the end of either year. At September 30, 1996, total debt and short-term borrowings were $175 million compared with $142 million at September 30, 1995, of which $127 million and $120 million, respectively, represented limited recourse borrowings against lease receivables. Repayments on the lease borrowings are sourced from the underlying lease receivables that are collected directly by the lending institution and are scheduled as follows (in millions): $65 (1997), $41 (1998), $17 (1999), and $4 (2000). Repayments on the remaining debt and short-term borrowings will be funded through operations and are as follows (in millions): $35 (1997), $1 (1998), $10 (1999), $1 (2000), and $1 (thereafter). Total debt as a percentage of total capital was 14 percent at September 30, 1996, compared to 11 percent at September 30, 1995. Cash used for restructuring actions aggregated $58 million, $95 million, and $88 million for 1996, 1995, and 1994, respectively. Cash requirements for restructure actions for 1997 are expected to be approximately $28 million and will be funded by cash generated from operations. 1996 Annual Report 15 16 In October 1996, UB Networks received cash of approximately $30 million from the sale of an investment. The Company's sources of working capital include cash generated from operations; amounts available under the accounts receivable purchase agreement; certain uncommitted, unsecured credit lines; and other financing arrangements available to the Company. Management believes that the financing sources available at September 30, 1996, can adequately meet Tandem's financing needs, both in the short and the long term. To provide additional flexibility, the Company is exploring opportunities for term debt financing. Outlook and Risks Tandem's core competencies have historically centered around providing reliable, scalable hardware and software solutions for business-critical applications, such as online transaction processing (OLTP), decision support, and messaging. With the advent of the Internet and growing corporate intranets, the Company believes that computer applications will emerge that will result in media-rich, high-volume transactions, causing OLTP to be expanded to include Internet transaction processing (ITP), increasing the demand for reliability and scalability in computing infrastructures. The Company believes that it is well positioned to provide the computing solutions to meet this demand. In response to this opportunity, Tandem plans to extend its fundamentals, integral to the high-end Himalaya platform, to the Windows NT Server market. In October 1996 the Company introduced its S-series servers--ServerNet interconnect technology-enabled NonStop Himalaya servers and introductory Windows NT Server-based systems--joining the UNIX system-based Integrity servers which were introduced in fiscal 1996. Tandem plans to continue to invest in Himalaya and Integrity servers and to leverage that investment into the Windows NT Server market. The Company is also working to extend its business-critical software applications to the Windows NT Server market. In the context of the Company's new product strategy, the Company's future operating results are dependent upon the Company's ability to execute its new strategy, to introduce new products on a timely basis, and to manage product transitions effectively. Future operating results are also dependent upon continued demand for Himalaya and Integrity servers and the market's acceptance of the Company's new product offerings. Another aspect of the Company's vision addresses strategic partnerships. The Company has entered into strategic partnerships with other technology companies for joint development, OEM distribution, and product licensing associated with the Company's ServerNet clustering technology and ServerWare "middleware" software. Future operating results are dependent upon the Company's ability to manage these new partnership relationships, and associated competitive risks, effectively. To prepare for the changes in business strategy briefly outlined above, the Company changed its organizational structure during 1996 into product line business units and refocused its North American sales organization first by geography and then by line of business. These organizational changes, together with the 1996 restructuring actions, 16 Tandem Computers Incorporated 17 have resulted in substantial changes in the Company's management team, including, but not limited to, appointment of a new Chief Executive Officer (CEO) and a new President and Chief Operating Officer (COO). Going forward, changes of management and organizational structure may continue to occur. The impact of such changes on the Company's future operating results cannot be predicted. As previously discussed, the Company has adopted a plan to sell UB Networks. There can be no assurances that the sale of UB Networks will be completed within management's plans. Historically, Tandem recognizes a large percentage of its revenues in the latter part of each quarter. Further, the Company's performance in the latter half of a fiscal year is typically stronger than in the beginning of a fiscal year. These trends make it difficult to forecast revenues and could subject the Company to fluctuations in revenues and earnings. Although the Company's operating and pricing strategies and currency hedging practices take into account changes in foreign currency exchange rates over time, the Company's operating results can be affected by foreign currency exchange rates. Forward-looking statements in this document are based on management's current expectations and involve numerous risks and uncertainties, some of which have been outlined above, that could cause actual results to differ materially. 1996 Annual Report 17 18 SELECTED FINANCIAL DATA
(In thousands except per share amounts) For the years ended September 30, 1996 1995 1994 1993 1992 --------------------------------------------------------------------------- Revenues $1,899,943 $1,920,436 $1,738,750 $1,682,646 $1,689,333 Cost of revenues $ 941,610 $ 923,515 $ 745,637 $ 695,948 $ 656,994 Research and development $ 287,693 $ 282,446 $ 232,321 $ 267,452 $ 238,995 Marketing, general, and administrative $ 596,033 $ 592,329 $ 623,674 $ 711,391 $ 720,828 Restructuring charges $ 52,000 -- -- $ 258,204 $ 102,600 ------------------------------------------------------------------------ Operating income (loss) $ 22,607 $ 122,146 $ 137,118 $ (250,349) $ (30,084) Income (loss) from continuing operations $ (5,425) $ 96,411 $ 153,618 $ (307,723) $ (32,683) Income (loss) from discontinued operations, net of income taxes $ (17,332) $ 11,135 $ 16,582 $ (222,375) $ (8,501) Net income (loss) $ (22,757) $ 107,546 $ 170,200 $ (517,727) $ (41,184) ------------------------------------------------------------------------ Earnings (loss) per share -- continuing operations $ (.04) $ .82 $ 1.35 $ (2.74) $ (.30) Earnings (loss) per share -- discontinued operations $ (.15) $ .09 $ .15 $ (1.98) $ (.08) Earnings (loss) per share $ (.19) $ .91 $ 1.50 $ (4.61) $ (.38) ------------------------------------------------------------------------ Total assets $1,744,973 $1,856,694 $1,761,885 $1,685,209 $2,045,424 Long-term obligations $ 75,225 $ 75,923 $ 86,481 $ 86,162 $ 93,626 Stockholders' investment $1,086,422 $1,110,335 $ 938,841 $ 736,825 $1,236,895 ---------------------------------------------------------------------------
Certain prior year amounts have been restated to reflect UB Networks, Inc., as a discontinued operation. Income (loss) from discontinued operations for 1996 and 1995 includes gains on sale of investments of $30.6 million and $9.3 million, respectively. Income (loss) from discontinued operations for 1993 and 1992 includes restructuring charges of $192.8 million and $3.4 million, respectively. Effective October 1, 1992, the Company adopted SFAS No. 109, "Accounting for Income Taxes." Net income (loss) for 1993 includes a positive cumulative effect of a change in accounting for income taxes of $12.4 million ($0.11 per share). See the Notes to Consolidated Financial Statements. 18 Tandem Computers Incorporated 19 CONSOLIDATED FINANCIAL STATEMENTS 20 CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended September 30, (In thousands except per share amounts) 1996 1995 1994 --------------------------------------------- Revenues Product revenues $ 1,501,614 $ 1,553,852 $ 1,408,047 Service and other revenues 398,329 366,584 330,703 --------------------------------------------- Total revenues 1,899,943 1,920,436 1,738,750 --------------------------------------------- Costs and expenses Cost of product revenues 651,680 658,548 531,710 Cost of service and other revenues 289,930 264,967 213,927 Research and development 287,693 282,446 232,321 Marketing, general, and administrative 596,033 592,329 623,674 Restructuring charge 52,000 -- -- --------------------------------------------- Total costs and expenses 1,877,336 1,798,290 1,601,632 --------------------------------------------- Operating income 22,607 122,146 137,118 Gain on sale of subsidiaries -- -- 23,000 Interest income 16,024 17,948 13,900 Interest expense (15,056) (12,664) (10,347) --------------------------------------------- Income from continuing operations before income taxes 23,575 127,430 163,671 Provision for income taxes 29,000 31,019 10,053 --------------------------------------------- Income (loss) from continuing operations (5,425) 96,411 153,618 Income (loss) from discontinued operations, net of income taxes (17,332) 11,135 16,582 --------------------------------------------- Net income (loss) $ (22,757) $ 107,546 $ 170,200 ============================================= Earnings (loss) per share -- continuing operations $ (.04) $ .82 $ 1.35 Earnings (loss) per share -- discontinued operations (.15) .09 .15 --------------------------------------------- Earnings (loss) per share $ (.19) $ .91 $ 1.50 ============================================= Weighted average shares outstanding 117,536 118,217 113,449 =============================================
See accompanying notes. 20 Tandem Computers Incorporated 21 CONSOLIDATED BALANCE SHEETS
At September 30, (In thousands except per share amount) 1996 1995 ------------------------------ Assets Current assets Cash and equivalents $ 87,813 $ 121,230 Accounts receivable, net of allowances of $19,862 in 1996 and $17,721 in 1995 475,464 539,993 Current portion of lease receivables 74,624 73,555 Inventories 115,320 169,948 Prepaid expenses and other 43,749 65,759 Net current assets of discontinued operations 62,593 -- ------------------------------ Total current assets 859,563 970,485 ------------------------------ Property, plant, and equipment, at cost 1,246,950 1,297,481 Accumulated depreciation and amortization (696,140) (700,813) Net property, plant, and equipment of discontinued operations 30,402 -- ------------------------------ Net property, plant, and equipment 581,212 596,668 ------------------------------ Lease receivables 86,618 86,173 ------------------------------ Other assets 217,580 203,368 ------------------------------ Total assets $ 1,744,973 $ 1,856,694 ============================== Liabilities and stockholders' investment Current liabilities Accounts payable $ 135,821 $ 195,793 Accrued liabilities 353,765 409,520 Current maturities of long-term obligations 93,740 65,123 ------------------------------ Total current liabilities 583,326 670,436 ------------------------------ Long-term obligations 75,225 75,923 ------------------------------ Commitments and contingencies -- -- ------------------------------ Stockholders' investment Common stock $.025 par value, authorized 400,000 shares, outstanding 121,318 shares in 1996 and 119,808 shares in 1995 3,033 2,995 Additional paid-in capital 710,264 691,097 Retained earnings 420,363 450,086 Accumulated translation adjustments 3,629 17,064 Treasury stock, at cost (50,867) (50,907) ------------------------------ Total stockholders' investment 1,086,422 1,110,335 ------------------------------ Total liabilities and stockholders' investment $ 1,744,973 $ 1,856,694 ==============================
See accompanying notes. 1996 Annual Report 21 22 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
For the years ended September 30 Additional Accumulated Common Stock Paid-In Retained Translation (In thousands) Shares Amount Capital Earnings Adjustments ------------------------------------------------------------------------------------- Balances, September 30, 1993 113,666 $2,842 $620,297 $162,260 $3,207 Sale of Common Stock under stock plans 2,571 63 25,935 -- -- Reissuance of treasury stock under stock plans -- -- 24 -- -- Acquisition of treasury stock -- -- -- -- -- Translation adjustments -- -- -- -- 5,985 Net income -- -- -- 170,200 -- ------------------------------------------------------------------------------------- Balances, September 30, 1994 116,237 2,905 646,256 332,460 9,192 Effect of adoption of SFAS No. 115 -- -- -- 4,117 -- ------------------------------------------------------------------------------------- Balances, October 1, 1994 116,237 2,905 646,256 336,577 9,192 Sale of Common Stock under stock plans 3,571 90 44,277 -- -- Reissuance of treasury stock under stock plans -- -- (4) -- -- Termination of ESOP -- -- (1,046) -- -- Gain from change of interest in NetWorth, Inc. -- -- 1,614 -- -- Translation adjustments -- -- -- -- 7,872 Net unrealized gains on available-for-sale securities -- -- -- 5,963 -- Net income -- -- -- 107,546 -- ------------------------------------------------------------------------------------- Balances, September 30, 1995 119,808 2,995 691,097 450,086 17,064 Sale of Common Stock under stock plans 1,510 38 13,480 -- -- Reissuance of treasury stock under stock plans -- -- (13) -- -- Issuance of warrants -- -- 5,700 -- -- Translation adjustments -- -- -- -- (13,435) Net changes in unrealized gains on available-for- sale securities -- -- -- (6,966) -- Net loss -- -- -- (22,757) -- ------------------------------------------------------------------------------------- Balances, September 30, 1996 121,318 $3,033 $710,264 $420,363 $3,629 =====================================================================================
For the years ended September 30 Deferred Total Treasury ESOP Stockholders' (In thousands) Stock Compensation Investment ---------------------------------------------------- Balances, September 30, 1993 $ (8,871) $(42,910) $ 736,825 Sale of Common Stock under stock plans -- -- 25,998 Reissuance of treasury stock under stock plans 426 -- 450 Acquisition of treasury stock (617) -- (617) Translation adjustments -- -- 5,985 Net income -- -- 170,200 ---------------------------------------------------- Balances, September 30, 1994 (9,062) (42,910) 938,841 Effect of adoption of SFAS No. 115 -- -- 4,117 ---------------------------------------------------- Balances, October 1, 1994 (9,062) (42,910) 942,958 Sale of Common Stock under stock plans -- -- 44,367 Reissuance of treasury stock under stock plans 19 -- 15 Termination of ESOP (41,864) 42,910 -- Gain from change of interest in NetWorth, Inc. -- -- 1,614 Translation adjustments -- -- 7,872 Net unrealized gains on available-for-sale securities -- -- 5,963 Net income -- -- 107,546 ---------------------------------------------------- Balances, September 30, 1995 (50,907) -- 1,110,335 Sale of Common Stock under stock plans -- -- 13,518 Reissuance of treasury stock under stock plans 40 -- 27 Issuance of warrants -- -- 5,700 Translation adjustments -- -- (13,435) Net changes in unrealized gains on available-for- sale securities -- -- (6,966) Net loss -- -- (22,757) ---------------------------------------------------- Balances, September 30, 1996 $ (50,867) $ -- $ 1,086,422 ====================================================
See accompanying notes. 22 Tandem Computers Incorporated 23 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, (In thousands) 1996 1995 1994 -------------------------------------------- Cash flows from operating activities Net income (loss) $ (22,757) $ 107,546 $ 170,200 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 197,667 170,834 163,277 Gain on sale of subsidiaries and investments (30,628) (9,297) (23,000) Restructuring charge 52,000 -- -- Write-off of capitalized software 10,867 -- -- Loss on dispositions of property, plant, and equipment 5,884 5,885 3,530 Changes in (net of dispositions): Accounts receivable (12,223) (20,125) (68,398) Inventories 10,263 (8,501) (2,399) Lease receivables (1,821) (23,046) 4,017 Non-debt current liabilities and other (92,638) (62,477) (131,397) -------------------------------------------- Net cash provided by operating activities 116,614 160,819 115,830 -------------------------------------------- Cash flows from investing activities Investment in property, plant, and equipment (151,258) (188,030) (152,807) Proceeds from dispositions of property, plant, and equipment 9,571 14,495 41,036 Sale of businesses and investments, net of cash disposed 34,802 12,262 70,519 Increase in other assets (83,650) (47,086) (74,373) -------------------------------------------- Net cash used in investing activities (190,535) (208,359) (115,625) -------------------------------------------- Cash flows from financing activities Borrowings 119,513 65,772 73,480 Repayments (83,865) (68,208) (84,864) Issuance of warrants 5,700 -- -- Issuance of Common Stock under stock plans 13,545 44,382 25,998 -------------------------------------------- Net cash provided by financing activities 54,893 41,946 14,614 -------------------------------------------- Effect of exchange rate fluctuations on cash and equivalents (5,932) 2,782 3,044 -------------------------------------------- Net increase (decrease) in cash and equivalents (24,960) (2,812) 17,863 Cash and equivalents at beginning of year 121,230 124,042 106,179 Cash of discontinued operations at end of year (8,457) -- -- -------------------------------------------- Cash and equivalents at end of year $ 87,813 $ 121,230 $ 124,042 ============================================ Supplementary cash flow information -- cash paid during the year for: Income taxes $ 41,983 $ 12,099 $ 20,214 Interest $ 15,169 $ 13,074 $ 13,069 ============================================
See accompanying notes. 1996 Annual Report 23 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25 Summary of Significant Accounting Policies CONSOLIDATED FINANCIAL STATEMENTS -- The consolidated financial statements include the accounts of Tandem Computers Incorporated and its majority-owned subsidiaries (the Company) after the elimination of intercompany accounts and transactions. Certain prior year amounts have been restated to reflect UB Networks, Inc. (UB Networks), a wholly owned subsidiary of the Company, as a discontinued operation. REVENUE RECOGNITION -- The Company generally recognizes revenue from hardware and software product sales at the time of shipment. When significant obligations remain after products are delivered, revenue is recognized only after such obligations are fulfilled. Product support and other revenues are recognized ratably over the contractual period or as the services are provided. TRANSLATION OF NON-U.S. CURRENCY AMOUNTS -- The Company's non-U.S. subsidiaries use as their functional currency the local currencies of the countries in which they operate. Their assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at average rates of exchange prevailing during the period. In addition, all ongoing adjustments resulting from the process of translating each subsidiary's financial statements into U.S. dollars have been accumulated and recorded within a separate component of stockholders' investment. Foreign currency transaction gains and losses are not material and are included in the determination of net earnings. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INCOME TAXES -- Deferred tax assets and liabilities are recognized for the expected tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities and their tax bases. The Company accounts for research and development tax credits as a reduction of the provision for income taxes in the year in which the credits are realizable. In general, the Company's practice is to provide U.S. federal taxes on undistributed foreign earnings. EARNINGS (LOSS) PER SHARE -- Earnings per share is based on the weighted average number of common and common equivalent shares outstanding. Common equivalent shares result from the assumed exercise of outstanding stock options and warrants, 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. Fully diluted earnings per share are substantially the same as reported earnings per share. CASH AND EQUIVALENTS -- Cash equivalents are valued at cost, which approximates market value; have original maturity dates not exceeding 90 days; and generally consist of certificates of deposit, time deposits, treasury notes, money market deposits and preferred stocks, municipal notes, and commercial paper. 1996 Annual Report 25 26 INVESTMENTS -- 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 included in prepaid expenses and other and 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. The cost of securities sold is based on the average cost method. In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. When a subsidiary or investee sells additional shares of its common stock to third parties, thus reducing the Company's percentage ownership interest in the investee, the Company records any increase in its share value of the investee directly to paid-in capital. INVENTORIES -- Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventories at September 30 were as follows:
(In thousands) 1996 1995 ---------------------- Purchased parts and subassemblies $ 62,511 $ 71,455 Work in process 19,986 29,097 Finished goods 32,823 69,396 ---------------------- Total $115,320 $169,948 ======================
PROPERTY, PLANT, AND EQUIPMENT -- Property, plant, and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over estimated useful lives. SOFTWARE DEVELOPMENT COSTS -- The Company capitalizes software development costs when the resulting products become "technologically feasible" and amortizes those costs when, and as, the products are shipped. The annual amortization of the capitalized amounts is the greater of the amount computed based on the estimated revenue distribution over the products' remaining life or a straight-line method, generally three years, from the date of product release. The amounts of unamortized software development costs included in other assets at September 30, 1996 and 1995, were $148.7 million and $128.9 million, respectively. The amortization expense for 1996, 1995, and 1994 was $57.7 million, $43.8 million, and $34.1 million, respectively. ADVERTISING EXPENSES -- The Company accounts for advertising costs as expense in the period in which they are incurred. Advertising expense for 1996, 1995, and 1994 was $18.5 million, $23.0 million, and $23.9 million, respectively. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS -- In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires that long-lived assets and certain identifiable intangibles, to be held and used, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The Company is 26 Tandem Computers Incorporated 27 required to adopt SFAS No. 121 in 1997. The Company has evaluated the implications of SFAS No. 121 and does not expect it to have a material impact on the Company's financial condition or results of operations. In October 1995, the FASB issued Statement of Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." The Company is required to adopt SFAS No. 123 in 1997. SFAS No. 123 allows companies to choose whether to account for stock-based compensation on a fair value method or to continue to account for stock-based compensation under the current intrinsic value method and provide pro forma disclosures of net income and earnings per share as if the accounting provisions of this statement had been adopted. The Company plans to adopt only the disclosure requirements of SFAS No. 123, therefore the Company does not expect the adoption of SFAS No. 123 to have a material impact on the Company's financial condition or results of operations. In June 1996, the FASB issued Statement of Accounting Standards No. 125 (SFAS No. 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125 is effective for all such transactions occurring after December 31, 1996. The Company does not expect the implementation of SFAS No. 125 to have a material impact on the Company's financial condition or results of operations. Discontinued Operations During June 1996, the Company adopted a plan to sell the Company's networking business. UB Networks is a supplier of networking hardware and software products for shared and switched environments. The Company has engaged Lehman Brothers to assist in executing the sale. Although UB Networks is expected to continue to incur operating losses until disposition, management does not expect to incur a net loss on the overall disposition of UB Networks' net assets. Management's estimates are based on discussions with and analyses provided by the Company's financial advisors, as well as preliminary discussions with potential buyers. The actual amount the Company will ultimately realize upon disposition of the net assets of UB Networks is subject to risks and uncertainties and could differ materially from these estimates. The results for UB Networks have been segregated in the Consolidated Statements of Operations and accounted for as a discontinued operation, as the networking subsidiary represents a separate major line of business for the Company. Revenues, results of operations, and income taxes associated with the discontinued operation were as follows:
(In thousands) 1996 1995 1994 ------------------------------------- Total revenues $368,270 $364,526 $369,285 Operating income (loss) $(48,106) $ 3,158 $ 19,476 Income (loss) before income taxes $(17,332) $ 12,269 $ 17,529 Income taxes $ -- $ 1,134 $ 947 Income (loss) from discontinued operations $(17,332) $ 11,135 $ 16,582 Earnings (loss) per share from discontinued operations, net of income taxes $ (.15) $ .09 $ .15 =====================================
Income (loss) from discontinued operations in 1996 includes a loss of $23.2 million for the period from the date of adoption of the plan, June 30, 1996, through September 30, 1996. Income (loss) from discontinued operations for 1996 and 1995 includes gains on sale of investments of $30.6 million and $9.3 million, respectively. 1996 Annual Report 27 28 The components of net current assets of discontinued operations and net property, plant, and equipment of discontinued operations included in the Consolidated Balance Sheet at September 30, 1996, are outlined below. Similar information as of September 30, 1995, has been provided for comparative purposes only.
(In thousands) 1996 1995 ------------------------ Cash and equivalents $ 8,457 $ 13,545 Accounts receivable, net 66,734 71,005 Inventories 42,805 42,403 Prepaid expenses and other 14,839 23,283 Other assets 2,473 2,624 Accounts payable (33,203) (35,666) Accrued liabilities (39,164) (34,432) Long-term obligations (348) (343) ------------------------ Net current assets $ 62,593 $ 82,419 ======================== Property, plant and equipment, at cost $ 94,719 $ 90,672 Accumulated depreciation and amortization (64,317) (67,420) ------------------------ Net property, plant and equipment $ 30,402 $ 23,252 ========================
SUBSEQUENT EVENT -- On October 14, 1996, UB Networks received approximately $30 million from the sale of an investment. Other Dispositions In 1994 the Company sold 100 percent of its interest in Applied Communications, Inc. (ACI), and Applied Communications, Inc. Limited (ACI Ltd.), providers of financial services software, for approximately $53.6 million net cash. The sales of these subsidiaries resulted in a gain for financial accounting purposes of $23 million. The consolidated results of operations include the results of ACI and ACI Ltd. from their respective acquisition dates through December 31, 1993, their disposition date. In 1994 the Company sold its interest in the storage subsystems business of Array Technology Corporation, together with certain assets, for approximately $10 million cash. As part of its 1993 restructuring plan and related provision, the Company had decided to sell or otherwise dispose of this business unit. Accordingly, the transaction was recorded as part of restructuring activity and no gain or loss was realized for financial accounting purposes. Financial Instruments OFF BALANCE SHEET RISK -- The Company enters into foreign currency forward exchange and option contracts to reduce the impact of currency fluctuations on intercompany and other foreign currency denominated balance sheet positions, and on certain anticipated revenue transactions related to sales by its foreign subsidiaries that are expected to occur within 12 months. The objective of these contracts is to neutralize the impact of foreign currency exchange rate movements on the Company's operating results. The gains and losses on forward exchange contracts 28 Tandem Computers Incorporated 29 and option contracts are included in earnings when the underlying foreign currency denominated transaction is recognized. Costs associated with entering forward and option contracts are amortized over the life of the instruments. The cash flows related to gains and losses on these contracts are classified as operating activities in the Consolidated Statements of Cash Flows. The foreign currency forward exchange contracts described above generally require the Company to sell foreign currencies for U.S. dollars at rates agreed to at the inception of the contracts. Foreign currency option contracts generally provide the Company with the right, but not the obligation, to sell a specified amount of foreign currency at a fixed price on a specified future date. The forward contracts generally have maturities that do not exceed 3 months. The option contracts generally have maturities that range from 6 to 12 months. These contracts do not subject the Company to significant market risk from exchange rate movements because the contracts offset gains and losses on the balances and transactions being hedged. At September 30, 1996, the Company had $156 million of foreign exchange forward contracts outstanding, including $26 million held on behalf of UB Networks, and $63 million of option contracts outstanding, in 16 different currencies. At September 30, 1995, the Company had $158 million of foreign exchange forward contracts outstanding, including $23 million held on behalf of UB Networks, and $70 million of option contracts outstanding, in 15 different currencies. Contracts to exchange European currencies and the Japanese yen represented approximately 94 percent of the total in 1996 and 88 percent of the total in 1995. Unrealized gains and losses related to these instruments at September 30, 1996 and 1995, were not material. The Company does not anticipate any material adverse effect on its financial position resulting from the use of these instruments. FAIR VALUES OF FINANCIAL INSTRUMENTS -- For certain of the Company's financial instruments, including cash and equivalents, accounts receivable and payable, notes receivable and payable, short-term borrowings, secured bank loans, and accrued liabilities, the carrying amounts approximate fair value due to their short maturities. The following tables provide information regarding the estimated fair values of other financial instruments at September 30:
1996 1995 ---------------------------------- ---------------------------------- (Asset)/Liability (Asset)/Liability ---------------------- ----------------------- Contract Carrying Estimated Contract Carrying Estimated (In thousands) Amount Amount Fair Value Amount Amount Fair Value -------------------------------------------------------------------------- Long-term obligations: Japanese yen notes payable -- $27,655 $27,815 -- $12,838 $13,185 Mortgages -- $ 5,375 $ 5,588 -- $ 7,626 $ 8,239 Foreign exchange: Forward contracts, accrued (gains)/losses $156,000 $(1,407) $(1,766) $158,000 $ (917) $(1,365) Option contracts, unamortized premium $ 63,000 $(1,080) $ (213) $ 70,000 $(1,019) $(1,178) ===========================================================================
1996 Annual Report 29 30 The fair values for long-term obligations have been estimated using a discounted cash flow analysis based upon interest rates that approximate current interest rates for similar borrowings. The fair value of the foreign exchange forward contracts is based upon quoted market prices for the same or similar instruments. The fair value of option contracts is estimated using option pricing models. These values represent general approximations of potential value and are not necessarily the values that will be ultimately realized. INVESTMENTS -- At September 30, 1996 and 1995, the Company held available-for-sale securities with estimated fair values of $3 million and $16 million, respectively, consisting of gross unrealized gains of $2 million and $10 million, respectively, and cost basis of $1 million and $6 million, respectively. Available-for-sale securities are reported in prepaid expenses and other. During 1996, the proceeds and realized gains from the sales of available-for-sale securities were not material. During 1995, the Company received $14.0 million in proceeds, and realized gains of $7.6 million from sales of available-for-sale securities. Realized gains were reported in marketing, general, and administrative expenses in the Consolidated Statement of Operations. See the Discontinued Operations footnote for information on sales of securities of UB Networks. 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. CONCENTRATIONS OF CREDIT RISK -- Credit risk with respect to trade receivables is generally diversified due to the number of entities that make up the Company's customer base and their dispersion across many different industries and geographies. Credit risk is also limited by the Company's credit evaluation process and reasonably short collection terms. Bad debt expenses have been insignificant, and generally, the Company does not require collateral or other security to support accounts receivable. The Company also has short-term cash and foreign exposure management policies that limit the amount of credit exposure to any one financial institution and restrict placement of the investments and contracts to financial institutions evaluated as highly creditworthy. RESTRUCTURING -- During 1996, the Company initiated a 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 resulted in a charge of $52 million and included reducing headcount, vacating leased facilities, and disposing of assets to discontinue certain product programs and other activities. In 1992 and 1993, the Company initiated separate restructuring programs designed to streamline operations and lower its worldwide cost structure. These restructuring actions included a reduction of headcount, consolidation of facilities, and disposal of assets no longer required. 30 Tandem Computers Incorporated 31 At September 30, 1996, $40 million remained in accrued liabilities and $16 million remained as a reduction on net property, plant, and equipment. At September 30, 1995, $61 million remained in accrued liabilities and $10 million remained as a reduction of net property, plant, and equipment. The restructuring provisions, supported by appropriate levels of specificity for planned actions, were established and approved by the Company's executive management and its Board of Directors. Actual restructuring costs are recognized as reductions in related restructuring reserves in the period incurred. Information relating to restructuring activity is presented below.
Reduction of Internal Discontinued (In thousands) Work Force Facilities Systems Activities Other Total ------------------------------------------------------------------------------ Balances, September 30, 1993 $ 86,634 $ 89,302 $ 34,000 $15,325 $ 57,310 $ 282,571 Utilized -- 1994 (34,568) (34,560) (10,178) (4,614) (25,473) (109,393) ------------------------------------------------------------------------------ Balances, September 30, 1994 52,066 54,742 23,822 10,711 31,837 173,178 Adjustments -- 1995 1,611 (45) 3,074 42 (4,682) -- Utilized -- 1995 (36,000) (26,036) (19,482) (933) (20,122) (102,573) ------------------------------------------------------------------------------ Balances, September 30, 1995 17,677 28,661 7,414 9,820 7,033 70,605 Provision -- 1996 34,100 8,600 -- 9,300 -- 52,000 Utilized -- 1996 (33,838) (12,467) (7,414) (5,632) (7,033) (66,384) ------------------------------------------------------------------------------ Balances, September 30, 1996 $ 17,939 $ 24,794 $ -- $13,488 $ -- $ 56,221 ============================================================================== Cash used: 1994 $ 34,568 $ 25,075 $ 10,178 $(5,037) $ 23,680 $ 88,464 1995 36,000 20,674 19,482 57 19,093 95,306 1996 33,838 9,369 7,414 991 6,461 58,073 Expected future 17,939 19,106 -- 2,819 -- 39,864 ------------------------------------------------------------------------------ Total $122,345 $ 74,224 $ 37,074 $(1,170) $ 49,234 $ 281,707 ==============================================================================
The 1996 provision for reduction of work force included severance, related medical and other benefits, and an employment agreement with the former Chief Executive Officer. The 1996 provision included termination benefits for approximately 500 employees, of which approximately three-fourths were based in the United States. Approximately two-thirds of the planned terminations were in sales, marketing, and administrative functions; approximately 20 percent in engineering and development functions; and the balance was in manufacturing, service, and support functions. The Company's plan anticipates these terminations to be substantially completed during early 1997. The 1996 provision for facilities included 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 by the first half of 1997. As of September 30, 1996, facilities restructure reserves included approximately $19 million representing lease payments and expenses for idle facilities, and approximately $6 million representing related improvements. The above leases have remaining terms generally not exceeding four years. 1996 Annual Report 31 32 The 1996 provision for discontinued activities included 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 initiated negotiations to outsource the above maintenance and support obligations in 1996 and expects to begin outsourcing this activity early in 1997. Future cash utilization represents the present value of a long-term land lease in Germany. Accounts Receivable The Company has a receivables purchase agreement with a group of financial institutions whereby the Company can sell a percentage ownership interest in an eligible pool of accounts receivable. Under the terms of the agreement, the Company retains collection and servicing responsibilities for the receivables and retains substantially the same risk of credit loss as if the interest in receivables had not been sold. The agreement allows for maximum borrowings of up to $100 million and expires in October 1997. The maximum amount outstanding at any point during the years ended September 30, 1996 and 1995, was $65 million and $50 million, respectively. There were no amounts outstanding at the end of either year. Property, Plant, and Equipment Property, plant, and equipment balances at September 30 were as follows:
(In thousands) 1996 1995 -------------------------- Land and buildings $ 392,861 $ 399,294 Machinery and equipment 180,103 197,235 Computer equipment 516,244 534,748 System spares 96,630 94,348 Leasehold improvements 60,613 64,802 Construction in progress 16,442 16,645 Restructuring reserves (15,943) (9,591) -------------------------- Total $1,246,950 $1,297,481 ==========================
The 1995 balances include the property, plant, and equipment of UB Networks. Included in land and buildings at September 30, 1996 and 1995, was approximately $59.5 million and $55.9 million, respectively, of costs relating to land and land improvements on undeveloped parcels located near the Company's Cupertino, California, headquarters. Depreciation expense from continuing operations was $125.4 million, $112.3 million, and $110.4 million in 1996, 1995, and 1994, respectively. Rent expense from continuing operations was $46.5 million, $48.2 million, and $53.8 million in 1996, 1995, and 1994, respectively. 32 Tandem Computers Incorporated 33 The Company leases certain equipment, automobiles, and some of its operating facilities and offices under operating lease agreements. Future minimum lease payments as of September 30, 1996, for continuing operations, net of amounts included in restructuring, are as follows (in millions): $36.4 (1997), $29.2 (1998), $19.5 (1999), $14.3 (2000), $11.0 (2001), and $73.9 (2002 and thereafter). Future minimum lease payments as of September 30, 1996, for discontinued operations, net of amounts included in restructuring, are as follows (in millions): $8.5 (1997), $6.3 (1998), $5.5 (1999), $5.0 (2000), $0.7 (2001), and $5.6 (2002 and thereafter). Leasing Program The Company offers lease financing of selected products to its customers. Sales-type leases are originated by the Company and either sold on a nonrecourse basis or used as collateral for borrowings from certain third-party financial institutions. Under lease borrowings, the Company receives all proceeds at the inception of the lease. The third-party financial institution assumes the administrative responsibility for collection of the lease receivables and the credit risk. In the event of a default by a lessee, recourse by the financial institutions is generally limited to the collateralized computer equipment. The Company may also be required to participate in remarketing the computer equipment on a "best efforts" basis on behalf of the financial institutions. The following table relates the borrowing and repayment activity in the lease-related installment notes to the investment in sales leases:
(In thousands) 1996 1995 1994 ------------------------------------- Total borrowings, beginning balance $120,238 $121,674 $114,274 Current year borrowings 80,564 64,447 72,878 Current year repayments (73,319) (65,883) (65,478) ------------------------------------- Total borrowings, ending balance 127,483 120,238 121,674 Leases not funded at year-end 33,759 39,490 16,558 Insured residual values -- -- 49 ------------------------------------- Investment in sales leases 161,242 159,728 138,281 Less current lease receivables (74,624) (73,555) (61,516) ------------------------------------- Lease receivables $ 86,618 $ 86,173 $ 76,765 =====================================
The borrowings and repayments shown above are included in the Company's total borrowings and repayments as shown in the Consolidated Statements of Cash Flows. Sales of lease receivables in 1996, 1995, and 1994 were $12.1 million, $11.3 million, and $9.0 million, respectively. 1996 Annual Report 33 34 Long-Term Obligations Long-term obligations at September 30 consisted of the following:
(In thousands) 1996 1995 ----------------------- Installment notes due through 2001, collateralized by lease receivables (1) $127,483 $120,238 Japanese yen notes payable, due 1997 to 1999 (2) 27,655 12,838 Secured bank loan (6.8%) (3) 8,376 -- Mortgages (9.3% - 14.5%) (4) 5,375 7,626 Other 76 344 ----------------------- Total obligations 168,965 141,046 Less current portion (93,740) (65,123) ----------------------- Long-term obligations $ 75,225 $ 75,923 =======================
(1) Weighted average interest rates were 8.5% and 8.7% at September 30, 1996 and 1995, respectively. (2) Weighted average interest rates were 2.2% and 4.6% at September 30, 1996 and 1995, respectively. (3) Secured by an underlying note receivable of the Company of $8.4 million, included in other assets, with an interest rate of 7.5%, and due in 1998. (4) Payable monthly; maturing 1997 to 2001; weighted average interest rates were 10.5% and 11.1% at September 30, 1996 and 1995, respectively. The mortgages are secured by certain land and buildings, with a carrying value of approximately $39 million. Repayments on the lease borrowings are sourced from the underlying lease receivables and are scheduled as follows (in millions): $65 (1997), $41 (1998), $17 (1999), and $4 (2000). Repayments on the remaining debt are as follows (in millions): $29 (1997), $1 (1998), $10 (1999), $1 (2000), and $1 (thereafter). The Company has guaranteed payment of personal bank loans made to officers and other employees totaling $2.4 million and $3.8 million at September 30, 1996 and 1995, respectively, under a bank credit line of $5.0 million. Accrued Liabilities Accrued liabilities at September 30 were as follows:
(In thousands) 1996 1995 ---------------------- Accrued salaries and related items $ 81,768 $ 76,264 Accrued commissions to third parties 9,789 11,281 Deferred income 136,377 171,415 Restructuring reserves 40,278 61,014 Other 85,553 89,546 ---------------------- Total $353,765 $409,520 ======================
Short-term borrowings, included above in Other, consisted of notes payable of $6.3 million and $1.4 million at September 30, 1996 and 1995, respectively. Notes payable generally consist of notes and borrowings under uncommitted credit lines at weighted average interest rates of 11.9 percent and 14.0 percent at September 30, 1996 and 1995, respectively. 34 Tandem Computers Incorporated 35 Income Taxes Income (loss) from continuing operations before income taxes is as follows:
(In thousands) 1996 1995 1994 ------------------------------------- U.S. $(70,251) $ (6,580) $101,938 Foreign 93,826 134,010 61,733 ------------------------------------- Total $ 23,575 $127,430 $163,671 =====================================
The provision for income taxes relating to continuing operations included the following:
(In thousands) 1996 1995 1994 ------------------------------------ Federal: Current $ -- $ -- $ 667 Deferred -- -- -- ------------------------------------ -- -- 667 ------------------------------------ State: Current $ 715 $ 555 $ 1,259 Deferred -- -- -- ------------------------------------ 715 555 1,259 ------------------------------------ Foreign: Current $35,625 $ 41,203 $ 8,127 Deferred (7,340) (10,739) -- ------------------------------------- 28,285 30,464 8,127 ------------------------------------- Total provision for income taxes $29,000 $ 31,019 $10,053 =====================================
The Company recorded a 1996 provision for income taxes consisting primarily of taxes currently payable in foreign jurisdictions. The 1996 domestic operating loss provided no current tax benefit. The provision for income taxes differed from the amount obtained by applying the federal statutory income tax rate to income (loss) before income taxes, as follows:
1996 1995 1994 ----------------------------------- Federal statutory tax rate 35.0% 35.0% 35.0% Losses with no current tax benefit 90.5 1.6 2.8 Foreign earnings at other than U.S. statutory rate 18.3 4.6 -- Valuation allowance utilization (30.1) (17.3) (34.1) State taxes, net of federal income tax benefit 3.0 .6 .8 Amortization of cost in excess of net assets acquired -- -- .3 Other 6.3 (.2) 1.3 ----------------------------------- Effective tax rate 123.0% 24.3% 6.1% ===================================
1996 Annual Report 35 36 Significant components of the Company's deferred tax assets (liabilities) as of September 30 are as follows:
(In thousands) 1996 1995 ------------------------ Deferred tax assets: Restructuring accruals $ 26,916 $ 32,381 Inventory reserves 19,192 10,108 Deferred income 12,975 17,492 Intercompany profit eliminations 25,885 28,408 Federal tax credit carryovers (expire beginning 1997) 53,621 36,470 Federal net operating loss carryover (expires in 2010) 53,077 50,497 Foreign net operating loss carryovers (expire beginning 1997) 11,311 10,504 Foreign taxes on unremitted foreign earnings, net of the related U.S. tax liability 53,349 49,811 Expenses not currently deductible 37,272 28,051 Other 21,536 6,593 ------------------------ Total deferred tax assets 315,134 270,315 Valuation allowance for deferred tax assets (200,043) (163,384) ------------------------ Net deferred tax assets $115,091 $ 106,931 ------------------------ Deferred tax liabilities: Capitalized software $(53,614) $ (43,084) Operating leases for income tax reporting (32,763) (41,208) Accelerated depreciation (10,635) (11,900) ------------------------ Total deferred tax liabilities $(97,012) $ (96,192) ------------------------ Total net deferred tax assets $ 18,079 $ 10,739 ========================
At September 30, 1996 and 1995, net deferred tax assets of $18.1 million and $10.7 million, respectively, represent the tax effects of temporary differences existing in certain foreign jurisdictions that the Company believes are more likely than not to be realized, based upon the strong earnings history in those jurisdictions. Accordingly, the valuation allowance at September 30, 1996 and 1995, reduced deferred tax assets to an amount deemed realizable. The valuation allowance includes $30.5 million and $30.0 million in 1996 and 1995, respectively, attributable to stock option deductions, the benefit of which will be credited to paid-in capital when realized. Capital Stock The Company's authorized capital stock consists of 2.4 million shares of preferred stock, of which .8 million shares are designated as Series A Participating Preferred Stock; 4.0 million shares of Junior Common Stock; and 396.0 million shares of Common Stock. No shares of preferred stock or Junior Common Stock have been issued. At September 30, 1996 and 1995, 28.7 million shares and 26.3 million shares of Common Stock, respectively, were reserved for future issuance under stock option plans, the employee stock purchase plan, and outstanding warrants. 36 Tandem Computers Incorporated 37 TREASURY STOCK -- Treasury shares are carried at cost and are being used to satisfy requirements under employee stock and benefit plans. At September 30, 1996 and 1995, the Company held 3.1 million shares with an aggregate cost of $50.9 million. STOCK RIGHTS -- The Company has a stock rights plan (the Plan), which is intended to protect stockholders from unfair takeover practices. Under the Plan, each share of Common Stock carries one right to obtain additional stock or other property with equivalent value on terms provided in the Plan. The rights will not be exercisable or transferable apart from the Common Stock until another person or group of persons (subject to certain exceptions) acquires at least 20 percent of the Common Stock or commences, or announces its intention to commence, a tender offer for at least 30 percent of the Common Stock. The rights are redeemable by the Board of Directors or upon vote of the stockholders for $.05 per right or property with an equivalent value, and expire on June 17, 1998. Employee Benefits STOCK OPTION PLANS -- The Company has stock option plans under which eligible individuals may be granted options to purchase shares of Common Stock, generally at fair market value at the time of the grant. In general, options become exercisable six months after the effective date, vest over four years, and expire no more than ten years after the effective date. At the discretion of the Board of Directors, options granted under the stock option plans may qualify as incentive stock options under the Internal Revenue Code of 1986. At September 30, 1996 and 1995, options for 5.0 million shares and 9.5 million shares, respectively, were available for future grant. EMPLOYEE STOCK PURCHASE PLAN -- Under the employee stock purchase plan, the Company may offer shares to employees in two ways. Under the first method, eligible employees may elect to purchase shares of Common Stock at the lower of 85 percent of fair market value as of the first trading day of each quarterly participation period, or as of the last trading day of each quarterly participation period. Under this method, in 1996, 1995, and 1994, employees purchased 1,287,000 shares for aggregate proceeds of $11.1 million; 876,000 shares for aggregate proceeds of $11.0 million; and 1,111,000 shares for aggregate proceeds of $10.4 million, respectively. Under the second method, the Company may grant to all eligible employees an option to purchase an identical number of shares of Common Stock at not less than 85 percent of fair market value at the grant date. As of September 30, 1996 and 1995, the Company had reserved 3.6 million shares and 1.2 million shares, respectively, for future issuance under its employee stock purchase plan. 1996 Annual Report 37 38 STOCK OPTION ACTIVITY -- Information concerning the combined option activity during the years ended September 30 under the stock option plans and the option portion of the employee stock purchase plan is as follows:
(In millions except 1996 1995 1994 per share amounts) ------------------------------------------------------------------------- Aggregate Aggregate Aggregate --------------------- ---------------------- --------------------- Shares Price Shares Price Shares Price ------------------------------------------------------------------------- Beginning of year 15.6 $215.1 16.7 $222.0 19.4 $254.7 Options granted 7.8 87.0 3.2 47.8 0.8 9.8 Options exercised ($8.88 to $19.00 per share) (0.2) (2.3) (2.7) (33.0) (1.5) (16.9) Options canceled (4.1) (56.6) (1.6) (21.7) (2.0) (25.6) ------------------------------------------------------------------------- End of year 19.1 $243.2 15.6 $215.1 16.7 $222.0 ========================================================================= Options vested at year-end 12.2 11.4 12.4 =========================================================================
Although stock options may be exercised before they are fully vested and the effect of all dilutive stock options is considered in the determination of earnings per share, the following tables show the maximum number of shares that would be issued based on the number of options vesting in each future year and the maximum number of shares expiring in each future year. The option vesting table does not reflect any anticipated early vesting based upon stock price performance.
(In thousands except Maximum number of existing options vesting each year price range amounts) -------------------------------------------------------------------------- 1996 and 2000 and Total Exercise Price Range Prior 1997 1998 1999 Thereafter Shares -------------------------------------------------------------------------- Under $9.00 3 2 2 2 -- 9 $9.00 - $9.99 2,043 953 578 541 66 4,181 $10.00 - $10.99 775 230 127 106 19 1,257 $11.00 - $11.99 1,412 778 760 644 124 3,718 $12.00 - $12.99 1,350 96 81 67 2 1,596 $13.00 - $13.99 2,370 383 362 216 -- 3,331 $14.00 - $14.99 2,012 42 28 10 -- 2,092 $15.00 - $15.99 193 65 59 51 6 374 $16.00 - $16.99 542 28 27 11 -- 608 $17.00 - $17.99 641 26 25 7 -- 699 $18.00 - $18.99 229 81 81 61 6 458 $19.00 - $19.99 418 -- -- -- -- 418 Over $20.00 242 49 49 49 6 395 -------------------------------------------------------------------------- 12,230 2,733 2,179 1,765 229 19,136 ==========================================================================
38 Tandem Computers Incorporated 39
(In thousands except Maximum number of existing options expiring each year price range amounts) ------------------------------------------------------------------------ 2001 and Total Exercise Price Range 1997 1998 1999 2000 Thereafter Shares ------------------------------------------------------------------------ Under $9.00 -- -- -- -- 9 9 $9.00 - $9.99 8 20 57 -- 4,096 4,181 $10.00 - $10.99 12 8 70 5 1,162 1,257 $11.00 - $11.99 14 5 26 21 3,652 3,718 $12.00 - $12.99 40 16 36 4 1,500 1,596 $13.00 - $13.99 10 335 64 441 2,481 3,331 $14.00 - $14.99 629 499 363 174 427 2,092 $15.00 - $15.99 4 -- 46 10 314 374 $16.00 - $16.99 10 34 383 15 166 608 $17.00 - $17.99 224 219 137 10 109 699 $18.00 - $18.99 -- 98 23 8 329 458 $19.00 - $19.99 249 41 52 76 -- 418 Over $20.00 55 -- 5 135 200 395 ------------------------------------------------------------------------ 1,255 1,275 1,262 899 14,445 19,136 ========================================================================
OPTION LOAN PROGRAM -- The Company has the Tandem Computers Incorporated Option Loan Program (the Program) to enable employees to exercise certain outstanding options. Under the Program, the Company can issue full recourse loans that are secured by a pledge of the Company's Common Stock. Loan agreements entered into between the Company and participants provide that in the event of a change in control of the Company (as defined), principal and interest will be forgiven over a four-year period. The amounts outstanding at September 30, 1996 and 1995, were insignificant. 401(k) INVESTMENT PLAN -- The Company has a 401(k) investment plan (the Investment Plan) covering substantially all of its U.S. employees. Under the Investment Plan, participating employees may defer up to 18 percent of their pretax earnings, subject to the Internal Revenue Service annual contribution limit ($9,500 for calendar year 1996). The Company matches 63 percent to 100 percent of each employee's contribution up to a maximum 2.5 percent of the employee's earnings. The Company's matching contributions to the Investment Plan for 1996, 1995, and 1994 were $8.1 million, $7.5 million, and $7.7 million, respectively. DEFERRED COMPENSATION PLAN -- The Company has the Tandem Computers Incorporated Deferred Compensation Plan that permits eligible officers and employees to defer a portion of their compensation. Funds deferred under the plan are held by the Company in an irrevocable trust established for the benefit of the participants. The deferred compensation is distributable in cash after retirement or termination of employment. At September 30, 1996 and 1995, the liability for deferred compensation included in other liabilities totaled $4.4 million and $1.9 million, respectively. The Company can insure the lives of the participants in the Deferred Compensation Plan to assist in the funding of the deferred compensation liability. The life insurance policies are owned by and payable to the trust. At September 30, 1996 and 1995, the cash surrender value of these insurance policies included in other assets was $6.3 million and $2.6 million, respectively. 1996 Annual Report 39 40 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. The foregoing forward-looking statement is based on information presently known to management, and the future outcome could differ. 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. The Company is subject to other legal proceedings and claims that arise in the normal course of its business. In the opinion of management, these proceedings will not have a material adverse effect on the financial position or overall trends in the results of operations of the Company. See the Property, Plant, and Equipment note to the Consolidated Financial Statements for a discussion of the Company's operating lease commitments. Segment Information The Company's principal business is the development, manufacturing, marketing, and servicing of computer systems, servers, and software. The Company operates in five geographic regions: the United States (internally, included in the Americas Division), Americas, Europe, Japan, and Asia-Pacific. Americas includes operations in North and South America outside of the United States, principally Canada and Latin America. The following table sets forth information about the Company's operations in these different geographic regions for the fiscal years ended September 30. Prior year amounts for revenues and income (loss) from continuing operations before income taxes have been restated to reflect UB Networks, a separate major line of business, as a discontinued operation. 40 Tandem Computers Incorporated 41
(In thousands) 1996 1995 1994 ------------------------------------------------- Revenues United States -- customers $ 896,083 $ 926,844 $ 889,521 United States -- intercompany 376,031 377,116 403,497 Americas -- customers 89,045 86,040 76,580 Americas -- intercompany 540 1,309 811 Europe -- customers 527,111 520,541 457,948 Europe -- intercompany 24,828 22,827 23,186 Japan -- customers 258,734 277,332 211,706 Japan -- intercompany 4,773 2,398 806 Asia-Pacific -- customers 128,970 109,679 102,995 Asia-Pacific -- intercompany 3,421 749 4,734 ------------------------------------------------- 2,309,536 2,324,835 2,171,784 Eliminations (409,593) (404,399) (433,034) ------------------------------------------------- Total revenues $ 1,899,943 $ 1,920,436 $ 1,738,750 ================================================= Income (loss) from continuing operations before income taxes United States $ (60,257) $ 2,838 $ 119,664 Americas 5,380 5,604 (2,644) Europe 56,006 68,003 28,378 Japan 31,560 45,783 13,445 Asia-Pacific (21,906) (10,424) (5,166) ------------------------------------------------- 10,783 111,804 153,677 Eliminations 12,792 15,626 9,994 ------------------------------------------------- Total income from continuing operations before income taxes $ 23,575 $ 127,430 $ 163,671 ================================================= Identifiable assets United States $ 1,180,258 $ 1,327,352 $ 1,277,554 Americas 28,092 44,654 35,880 Europe 316,708 343,774 351,386 Japan 106,983 157,359 134,716 Asia-Pacific 86,859 75,561 71,998 ------------------------------------------------- 1,718,900 1,948,700 1,871,534 Eliminations (66,922) (92,006) (109,649) ------------------------------------------------- Total identifiable assets $ 1,651,978 $ 1,856,694 $ 1,761,885 =================================================
Intercompany transfers are made at arm's-length prices. Pretax income (loss) for 1996 includes restructuring charges for United States, Europe, and Asia-Pacific in the approximate amounts of $43 million, $6 million, and $3 million, respectively. Identifiable assets are those assets of the Company that are identified with the operations of the corresponding geographic area. United States customer revenues include export sales of $77 million in 1996, $56 million in 1995, and $41 million in 1994. 1996 Annual Report 41 42 Quarterly Financial Data (Unaudited)
(In thousands except per share amounts) Fiscal 1996 Quarters ended Dec. 31 March 31 June 30 Sept. 30 --------------------------------------------------------- Continuing operations: Total revenues $420,979 $469,941 $465,778 $543,245 Gross margin $213,597 $233,597 $238,767 $272,372 Income (loss) from continuing operations $(21,932) $(46,993) $ 23,338 $ 40,162 Earnings (loss) per share $ (.19) $ (.40) $ .20 $ .34 Discontinued operations: Total revenues $ 91,463 $106,257 $ 82,132 $ 88,418 Gross margin $ 32,682 $ 34,013 $ 23,559 $ 20,532 Income (loss) from discontinued operations $ 23,898 $ (2,564) $(15,440) $(23,226) Earnings (loss) per share $ .20 $ (.02) $ (.13) $ (.20) Net income (loss) $ 1,966 $(49,557) $ 7,898 $ 16,936 Earnings (loss) per share $ .02 $ (.42) $ .07 $ .14 Market stock price range High $ 12.75 $ 11.38 $ 15.25 $ 12.50 Low $ 10.00 $ 8.75 $ 8.38 $ 8.63 =========================================================
Income (loss) from discontinued operations for the quarter ended December 31, 1995, includes a gain on the sale of an investment of $30.6 million. Income (loss) from continuing operations for the quarter ended March 31, 1996, includes pretax restructuring charges of $52.0 million.
(In thousands except per share amounts) Fiscal 1995 Quarters ended Dec. 31 March 31 June 30 Sept. 30 -------------------------------------------------------- Continuing operations: Total revenues $445,893 $428,683 $499,151 $546,709 Gross margin $243,102 $222,707 $261,384 $269,728 Income from continuing operations $ 31,165 $ 14,159 $ 28,001 $ 23,086 Earnings per share $ .26 $ .12 $ .24 $ .20 Discontinued operations: Total revenues $ 88,707 $ 87,259 $ 95,263 $ 93,297 Gross margin $ 39,558 $ 34,958 $ 38,486 $ 34,350 Income (loss) from discontinued operations $ 4,060 $ 7,527 $ 2,843 $ (3,295) Earnings (loss) per share $ .03 $ .06 $ .02 $ (.03) Net income $ 35,225 $ 21,686 $ 30,844 $ 19,791 Earnings per share $ .30 $ .18 $ .26 $ .17 Market stock price range High $ 19.13 $ 19.75 $ 17.25 $ 17.50 Low $ 15.50 $ 15.38 $ 13.38 $ 11.75 ========================================================
Tandem Computers Incorporated Common Stock is traded on the New York, Midwest, and Pacific Stock Exchanges under the trading symbol TDM. All quotations shown represent the high and low sale prices. The Company has not declared or paid any cash dividends on its Common Stock and has no plans to do so in the foreseeable future. As of December 2, 1996, there were approximately 7,130 holders of record of the Common Stock of the Company. 42 Tandem Computers Incorporated 43 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Tandem Computers Incorporated: We have audited the accompanying consolidated balance sheets of Tandem Computers Incorporated and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of operations, stockholders' investment, and cash flows for each of the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tandem Computers Incorporated and subsidiaries at September 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP -------------------- San Jose, California October 22, 1996 1996 Annual Report 43 44
Board of Directors Corporate Officers Thomas J. Perkins, Chairman of the Board Roel Pieper General Partner, Kleiner Perkins Caufield & Byers Vice Chairman and Chief Executive Officer Jack F. Bennett Enrico L. Pesatori Retired, Formerly Senior Vice President and Director, President and Chief Operating Officer Exxon Corporation Eric L. Doggett Morton Collins Senior Vice President and General Manager, General Partner, DSV Partners Communications Platforms Business Unit Franklin P. Johnson, Jr. Kurt L. Friedrich General Partner, Asset Management Partners Senior Vice President, General Manager, and Chief Technology Officer, Robert M. Kavner Parallel Systems Business Unit President and Chief Executive Officer, On Command Corp. William W. Heil, Jr. Senior Vice President and General Manager, Enrico L. Pesatori ServerWare Business Unit President and Chief Operating Officer, Tandem Computers Incorporated John T. Losier Senior Vice President, Roel Pieper Worldwide Sales and Services Group Vice Chairman and Chief Executive Officer, Tandem Computers Incorporated Josephine T. Parry Vice President, General Counsel and Secretary Vera Stephanie Shirley Life President, Founder Director, F.I. Group PLC Gerald L. Peterson Senior Vice President and General Manager, Robert G. Stone, Jr. ServerNet Business Unit Chairman Emeritus and Director of the Board, Kirby Corporation John T. Reece Vice President and Corporate Controller Washington SyCip Founder, The SGV Group David J. Rynne Senior Vice President and Chief Financial Officer Alex S. Vieux Chairman, DASAR Inc. Gerd Stoecker Vice President and Treasurer Walter B. Wriston Corporate Director and Consultant
44 Tandem Computers Incorporated 45 International Advisory Council Tandem Computers Incorporated Manuel Somoza Alonso Mexico World Headquarters Eduardo Santos Andres Spain 19333 Vallco Parkway Dr. Marco Bono Italy Cupertino, California 95014-2599, USA Luigi Dusmet Switzerland +1 (408) 285 6000 Harry G.B. Faulkner Sweden Sir Campbell Fraser United Kingdom Americas Division Headquarters Sir Leslie Froggatt Australia 19191 Vallco Parkway Fredrick T. White Canada Cupertino, California 95014-2599, USA United States: 1 (800) 482 6336 Canada: 1 (800) 345 8636 Auditors Latin America: +1 (954) 983 7900 Ernst & Young LLP, San Jose, California European Division Headquarters Antareslaan 11 2132 JE Hoofddorp, The Netherlands Registrar and Transfer Agent +31 (23) 566 8000 Boston EquiServe, Canton, Massachusetts Asia-Pacific Division Headquarters 300 Beach Road #33-01 The Concourse, Singapore 199555 Annual Meeting +65 297 4866 The annual meeting of stockholders will be held at Japan Division Headquarters 10:00 a.m. on Tuesday, January 28, 1997, at 10435 Tennoz Central Tower 2-2-24 North Tantau Avenue, Cupertino, California. Higashi-Shinagawa, Shinagawa-ku Tokyo 140, Japan +81 (3) 5463 6600 Stockholder Information The Tandem home page can be found at A copy of the Company's Report on Form 10-K for the http://www.tandem.com. 1996 fiscal year, as filed with the Securities and Exchange Commission, is available on written request. Please contact: Manufacturing Facilities Investor Relations Loc 200-33 Fremont, California Tandem Computers Incorporated Stirling, Scotland 10435 North Tantau Avenue Cupertino, California 95014-2599 1 (800) 538 3107 The annual report is also available on-line at Tandem's Web site, www.tandem.com.
1996 Annual Report 45 46 Sales Offices and Distributors
The Americas Argentina Connecticut New Jersey Brazil Florida New York Canada Georgia North Carolina Chile Hawaii Ohio Colombia Illinois Oklahoma Ecuador Iowa Oregon Guatemala Kansas Pennsylvania Mexico Kentucky Puerto Rico Peru Louisiana Tennessee Uruguay Maryland Texas Venezuela Massachusetts Utah Alabama Michigan Virginia Arizona Minnesota Washington California Missouri Wisconsin Colorado Nebraska Europe Austria Greece Portugal Bahrain Hungary Russia Belgium Ireland Saudi Arabia Croatia Israel Slovenia Cyprus Italy South Africa Czech Republic Jordan Spain Denmark Kuwait Sweden Dubai Lebanon Switzerland Egypt Luxembourg Turkey Finland The Netherlands United Arab Emirates France Norway United Kingdom Germany Oman Zimbabwe Asia-Pacific and Japan Australia Malaysia Singapore Hong Kong New Zealand South Korea India People's Republic Sri Lanka Indonesia of China Taiwan Japan Philippines Thailand Commission Agent India
46 Tandem Computers Incorporated 47 Founded in 1974, Tandem(R) is a global information technology company that provides software, hardware, solutions, and services for business-critical electronic commerce, decision support, high-volume online transaction procession (OLTP), and the fast emerging online world of Internet transaction processing (ITP). As a result of Tandem's market recognition and the reliability of its products, businesses worldwide entrust their core business applications to Tandem systems. Stock exchanges processing the bulk of the world's security transactions use Tandem technology and equipment, and a significant percentage of all automated teller machines (ATMs) run on Tandem systems. Credit card transactions, electronic funds transfers, telecommunications, messaging systems, and public e-mail networks are all areas in which Tandem systems play a key role in promoting commerce around the world. With US$1.90 billion in 1996 revenue, Tandem and its subsidiaries employ approximately 8,000 people in 180 offices worldwide. The company is headquartered in Cupertino, California. 48 Tandem, Himalaya, Integrity, iTP, NonStop, ServerNet, ServerWare, and the Tandem Logo are trademarks or registered trademarks of Tandem Computers Incorporated in the United States and/or other countries. "System Area Network" and the acronym "SAN" are being used by Tandem as generic descriptive terms and neither is intended to be interpreted as a trademark of Tandem. Microsoft and Windows NT are either registered trademarks or trademarks of Microsoft Corporation in the United States and/or other countries. UB Networks is a trademark of Ungermann-Bass Networks, Inc. UNIX is a registered trademark in the United States and other countries, licensed exclusively through X/Open Company Ltd. All other brand and product names are trademarks or registered trademarks of their respective companies. (C) 1996 Tandem Computers Incorporated. Printed on recycled paper. 100631. 49 OUR MISSION Our business mission is to be the leading provider of reliable and scalable solutions for business-critical applications, using the best open, clustered, high-bandwidth computing and communications technologies, serving business and consumers. Our technical mission is to be the leader in clustered technologies for communication bandwidth, messaging, database, and transaction processing systems. EX-22.1 11 SUBSIDIARIES OF TANDEM 1 Exhibit 22.1 SUBSIDIARIES OF TANDEM COMPUTERS INCORPORATED Name of Subsidiary and Jurisdiction Name Under Which Doing Business: of Incorporation - -------------------------------- ---------------- ACI Canada EFTS Limited Nebraska NonStop Manufacturing Pty. Ltd. Delaware PT Tandem Computers Indonesia Indonesia PT Tandem Computers Indonesia Delaware Tandem Computers AB Sweden Tandem Computers AG Switzerland Tandem Computers A/O Russia Tandem Computers A/O Delaware Tandem Computers A/S Denmark Tandem Computers Asia Ltd. Delaware Tandem Computers Asia-Pacific Incorporated Delaware Tandem Computers B.V. Netherlands Tandem Computers Canada Limited Canada Tandem Computers Credit Corporation Delaware Tandem Computers del Peru S.A. Peru Tandem Computers do Brasil Inc. Delaware Tandem Computers Europe Incorporated Delaware Tandem Computers Export Corporation California Tandem Computers FSC, Inc. Barbados Tandem Computer Ges.m.b.H. Austria Tandem Computers GmbH Germany Tandem Computers (Hong Kong) Limited Hong Kong Tandem Computers (Hungary) Incorporated Delaware Tandem Computers Iberica, S.A. Spain Tandem Computers India Ltd. Delaware Tandem Computers International Incorporated Delaware Tandem Computers International (Thailand) Ltd. Thailand Tandem Computers Investment Corporation Delaware Tandem Computers Investments do Brasil Inc. Delaware Tandem Computers Italia S.p.A. Italy Tandem Computers Italia S.p.A. Delaware Tandem Computers Japan, Limited Japan Tandem Computers Korea Ltd. Korea Tandem Computers Korea Ltd. Delaware Tandem Computers Limited United Kingdom Tandem Computers Manufacturing, Inc. California Tandem Computers Marketing Inc. Delaware Tandem Computers (Norway) A/S Norway Tandem Computers Pty. Ltd. Delaware Tandem Computers S.A. France Tandem Computers S.A./N.V. Belgium Tandem Computers South Asia Ltd. Delaware Tandem Computer Systems Sdn BHD Malaysia Tandem Computer Systems Sdn BHD Delaware Tandem de Argentina Incorporated Delaware Tandem Employees Emergency Relief Fund, Inc. Delaware Tandem PRC Incorporated Delaware Tandem/Simplicity A, Inc. Delaware Tandem/Simplicity B, Inc. Delaware Tandem South Africa (Pty) Ltd. South Africa Tandem South Africa (Pty) Ltd. Delaware Tandem Taiwan Incorporated Delaware Ungermann-Bass Networks, Inc. Delaware Twinco A/S Norway Yura Corp. Colorado EX-27 12 FINANCIAL DATA SCHEDULE SEPTEMBER 30, 1994
5 1,000 YEAR SEP-30-1994 OCT-01-1993 SEP-30-1994 124,042 0 530,265 17,931 159,609 928,030 1,178,888 630,652 1,761,885 736,563 86,481 0 0 2,905 935,936 1,761,885 1,408,047 1,738,750 531,710 745,637 232,321 1,060 10,347 163,671 10,053 153,618 16,582 0 0 170,200 1.50 1.50
EX-27.1 13 FINANCIAL DATA SCHEDULE DECEMBER 31, 1994
5 1,000 3-MOS SEP-30-1995 OCT-01-1994 DEC-31-1994 157,204 0 486,747 17,157 155,961 917,349 1,214,024 661,754 1,765,741 683,889 79,431 0 0 2,953 999,468 1,765,741 364,902 445,893 149,568 202,791 64,616 2,001 2,783 35,756 4,591 31,165 4,060 0 0 35,225 0.30 0.30
EX-27.2 14 FINANCIAL DATA SCHEDULE MARCH 31, 1995
5 1,000 6-MOS SEP-30-1995 OCT-01-1994 MAR-31-1995 192,582 0 491,148 16,813 168,039 959,202 1,251,454 679,231 1,831,704 698,669 78,545 0 0 2,979 1,051,511 1,831,704 704,657 874,576 293,613 408,767 132,834 995 6,078 53,349 8,025 45,324 11,587 0 0 56,911 0.48 0.48
EX-27.3 15 FINANCIAL DATA SCHEDULE JUNE 30, 1995
5 1,000 9-MOS SEP-30-1995 OCT-01-1994 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 0 0 2,988 1,085,557 1,843,829 1,103,666 1,373,727 456,941 646,534 204,700 2,326 9,216 92,674 19,349 73,325 14,430 0 0 87,755 0.74 0.74
EX-27.4 16 FINANCIAL DATA SCHEDULE SEPTEMBER 30, 1995
5 1,000 YEAR SEP-30-1995 OCT-01-1994 SEP-30-1995 121,230 0 557,714 17,721 169,948 970,485 1,297,481 700,813 1,856,694 670,436 75,923 0 0 2,995 1,107,340 1,856,694 1,553,852 1,920,436 658,548 923,515 282,446 3,635 12,664 127,430 31,019 96,411 11,135 0 0 107,546 0.91 0.91
EX-27.5 17 FINANCIAL DATA SCHEDULE DECEMBER 31, 1995
5 1,000 3-MOS SEP-30-1996 OCT-01-1995 DEC-31-1995 103,918 0 467,950 18,698 199,733 891,438 1,308,631 705,729 1,800,655 614,920 81,356 0 0 3,002 1,101,377 1,800,655 328,352 420,979 139,269 207,382 72,435 2,178 3,986 (14,988) 6,944 (21,932) 23,898 0 0 1,966 0.02 0.02
EX-27.6 18 FINANCIAL DATA SCHEDULE MARCH 31, 1996
5 1,000 6-MOS SEP-30-1996 OCT-01-1995 MAR-31-1996 94,365 0 516,576 17,759 191,814 911,722 1,312,337 712,198 1,817,666 675,365 90,092 0 0 3,013 1,049,196 1,817,666 697,633 890,920 302,886 443,726 141,403 2,907 7,427 (54,087) 14,838 (68,925) 21,334 0 0 (47,591) (0.41) (0.41)
EX-27.7 19 FINANCIAL DATA SCHEDULE SEPTEMBER 30, 1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-K FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1996 OCT-01-1995 SEP-30-1996 87,813 0 495,326 19,862 115,320 859,563 1,246,950 696,140 1,744,973 583,326 75,225 0 0 3,033 1,083,389 1,744,973 1,501,614 1,899,943 651,680 941,610 287,693 8,021 15,056 23,575 29,000 (5,425) (17,332) 0 0 (22,757) (0.19) (0.19)
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