-----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, EPh8sXnCxhJayPUE1oLT7XvDSjkyf7SkitajMGG0vLqYx4+WcmX+IBKPs9yIA1xC gJxH7NWQgc/yN2aM9q6gnQ== 0000950008-97-000054.txt : 19970222 0000950008-97-000054.hdr.sgml : 19970222 ACCESSION NUMBER: 0000950008-97-000054 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TANDEM COMPUTERS INC /DE/ CENTRAL INDEX KEY: 0000315180 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 942266618 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09430 FILM NUMBER: 97533834 BUSINESS ADDRESS: STREET 1: 19333 VALLCO PKWY CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4087256000 MAIL ADDRESS: STREET 1: 10435 N TANUTA AVE LOC 200 16 CITY: CUPERTINO STATE: CA ZIP: 95014 FORMER COMPANY: FORMER CONFORMED NAME: TCI DELAWARE INC DATE OF NAME CHANGE: 19600201 10-Q 1 QUARTERLY REPORT ON FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File No. 0-9134 ------ TANDEM COMPUTERS INCORPORATED Delaware 94-2266618 -------- ---------- (State of incorporation) (IRS Employer Id. No.) 19333 Vallco Parkway, Cupertino, California ------------------------------------------- 95014-2599 ---------- (408)285-6000 ------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class: Common Stock, Outstanding at January 31, 1997 $.025 par value 118,843,001 shares PART I -- FINANCIAL INFORMATION Item 1. Financial Statements The following consolidated financial statements have been prepared by the Company without audit by independent public accountants, but in accordance with the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Securities and Exchange Commission rules and regulations, the Company believes the financial disclosures made are sufficient to make the information presented not misleading. In addition, the consolidated financial statements reflect, in the opinion of management, all adjustments (limited to normal, recurring adjustments) necessary to present fairly the consolidated financial position, results of operations, and cash flows for the periods indicated. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and related notes included in the Company's 1996 Annual Report to Stockholders and Annual Report on Form 10-K for the year ended September 30, 1996. Such consolidated financial statements and related notes are filed with the Securities and Exchange Commission. The results of operations for the three-month period ended December 31, 1996 are not necessarily indicative of results to be expected in the future. [STATEMENTS ON FOLLOWING PAGES] TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited)
- ----------------------------------------------------------------------------------------------------- For the three months ended ------------------------------------------------ December 31, December 31, (In thousands except per share amounts) 1996 1995 - ----------------------------------------------------------------------------------------------------- Revenues Product revenues $342,762 $328,352 Service and other revenues 92,970 92,627 - ----------------------------------------------------------------------------------------------------- Total revenues 435,732 420,979 - ----------------------------------------------------------------------------------------------------- Costs and expenses Cost of product revenues 145,231 139,269 Cost of service and other revenues 63,652 68,113 Research and development 66,182 72,435 Marketing, general, and administrative 147,103 156,493 - ----------------------------------------------------------------------------------------------------- Total costs and expenses 422,168 436,310 - ----------------------------------------------------------------------------------------------------- Operating income (loss) 13,564 (15,331) Gain on sale of real estate 5,463 -- Net interest income 737 343 - ----------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes 19,764 (14,988) Provision for income taxes 8,000 6,944 - ----------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 11,764 (21,932) Income from discontinued operations, net of income taxes -- 23,898 - ----------------------------------------------------------------------------------------------------- Net income $ 11,764 $ 1,966 ===================================================================================================== Earnings (loss) per share - continuing operations $ .10 $ (.18) Earnings per share - discontinued operations -- .20 - ----------------------------------------------------------------------------------------------------- Earnings per share $ .10 $ .02 ===================================================================================================== Weighted average shares outstanding 120,830 117,452 ===================================================================================================== See accompanying notes.
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited)
- --------------------------------------------------------------------------------------------- December 31, September 30, (In thousands except per share amount) 1996 1996 - --------------------------------------------------------------------------------------------- Assets - --------------------------------------------------------------------------------------------- Current assets Cash and equivalents $ 128,326 $ 87,813 Accounts receivable, net 399,510 475,464 Current portion of lease receivables 75,738 74,624 Inventories 119,140 115,320 Prepaid expenses and other 65,307 43,749 Net current assets of discontinued operations 60,985 62,593 - --------------------------------------------------------------------------------------------- Total current assets 849,006 859,563 - --------------------------------------------------------------------------------------------- Property, plant, and equipment, at cost 1,255,413 1,246,950 Accumulated depreciation and amortization (721,634) (696,140) Net property, plant, and equipment of discontinued operations 29,533 30,402 - --------------------------------------------------------------------------------------------- Net property, plant, and equipment 563,312 581,212 - --------------------------------------------------------------------------------------------- Lease receivables 91,214 86,618 - --------------------------------------------------------------------------------------------- Other assets 230,311 217,580 - --------------------------------------------------------------------------------------------- Total assets $1,733,843 $1,744,973 ============================================================================================= Liabilities and stockholders' investment - --------------------------------------------------------------------------------------------- Current liabilities Accounts payable $ 133,099 $ 135,821 Accrued liabilities 326,213 353,765 Current maturities of long-term obligations 91,195 93,740 - --------------------------------------------------------------------------------------------- Total current liabilities 550,507 583,326 - --------------------------------------------------------------------------------------------- Long-term obligations 77,171 75,225 - --------------------------------------------------------------------------------------------- Stockholders' investment Common stock $.025 par value, authorized 400,000 shares, outstanding 122,020 shares at December 31 and 121,318 shares at September 30 3,050 3,033 Additional paid-in capital 717,474 710,264 Retained earnings 432,043 420,363 Accumulated translation adjustments 4,460 3,629 Treasury stock, at cost (50,862) (50,867) - --------------------------------------------------------------------------------------------- Total stockholders' investment 1,106,165 1,086,422 - --------------------------------------------------------------------------------------------- Total liabilities and stockholders' investment $1,733,843 $1,744,973 ============================================================================================= See accompanying notes.
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
- --------------------------------------------------------------------------------------------------- For the three months ended ------------------------------------------ December 31, December 31, (In thousands) 1996 1995 - --------------------------------------------------------------------------------------------------- Cash flows from operating activities Net income $ 11,764 $ 1,966 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 48,672 48,190 Gain on sale of real estate (5,463) -- Gain on sale of investment of discontinued operation -- (30,628) Loss on dispositions of property, plant, and equipment 146 1,391 Changes in : Accounts receivable 91,032 87,598 Inventories (2,603) (30,273) Lease receivables (5,702) 387 Non-debt current liabilities and other (95,737) (81,333) - -------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 42,109 (2,702) - -------------------------------------------------------------------------------------------------- Cash flows from investing activities Investment in property, plant, and equipment (30,889) (44,392) Proceeds from dispositions of property, plant, and equipment 2,244 5,215 Proceeds from sale of investment of discontinued operation 29,764 34,802 Proceeds from sale of real estate 16,856 -- Increase in other assets (26,442) (17,908) - -------------------------------------------------------------------------------------------------- Net cash used in investing activities (8,467) (22,283) - -------------------------------------------------------------------------------------------------- Cash flows from financing activities Borrowings 22,180 30,748 Repayments (21,696) (25,314) Issuance of Common Stock under stock plans, including tax benefits 7,232 3,102 - -------------------------------------------------------------------------------------------------- Net cash provided by financing activities 7,716 8,536 - -------------------------------------------------------------------------------------------------- Effect of exchange rate fluctuations on cash and equivalents 36 (863) - -------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and equivalents 41,394 (17,312) Cash and equivalents at beginning of period 87,813 121,230 Net change in cash of discontinued operations (881) -- - -------------------------------------------------------------------------------------------------- Cash and equivalents at end of period $128,326 $103,918 ================================================================================================== See accompanying notes.
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. Earnings (loss) per share - ----------------------------- Earnings per share are based on the weighted average number of common and common equivalent shares outstanding. Common equivalent shares result from the assumed exercise of outstanding stock options, which have a dilutive effect when applying the treasury stock method. 2. Inventories - --------------- Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventories were as follows:
- ------------------------------------------------------------------------------ December 31, September 30, (In thousands) 1996 1996 - ------------------------------------------------------------------------------ Purchased parts and subassemblies $ 71,436 $ 62,511 Work in process 17,778 19,986 Finished goods 29,926 32,823 - ------------------------------------------------------------------------------ Total $119,140 $115,320 ==============================================================================
3. Investments - --------------- There were no realized gains or losses on available-for-sale securities during the quarters ended December 31, 1996 and 1995. The net adjustment to unrealized holding gains (losses) on available-for-sale securities for these periods was not significant. 4. Accounts Receivable - ----------------------- The Company has a receivables purchase agreement with a group of financial institutions whereby the Company can sell a percentage ownership in an eligible pool of accounts receivable. Under the terms of the agreement, the Company retains collection and servicing responsibilities for the receivables and retains substantially the same risk of credit loss as if the interest in receivables had not been sold. The agreement allows for maximum borrowings of up to $100 million and expires in October 1997. At December 31, 1996, $68 million of financing was available to the Company under its accounts receivable purchase agreement. The maximum amount outstanding under this agreement during the first quarter 1997 was $25 million. There were no amounts outstanding as of December 31, 1996 or September 30, 1996. TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements 5. Discontinued Operations - --------------------------- During June 1996, the Company adopted a plan to sell its networking business, UB Networks, Inc. (UB Networks), and on January 17, 1997 sold all of the outstanding capital stock of UB Networks to Newbridge Networks Inc., a wholly-owned subsidiary of Newbridge Networks Corporation, effective December 31, 1996. The Company received initial gross proceeds (the "Base Purchase Price") of $118.0 million ($106.2 million in cash and $11.8 million deposited to a one-year escrow account) of which $13 million is attributable to estimated cash disbursements by the Company to or on behalf of UB Networks during the period January 1, 1997 through January 17, 1997. The Base Purchase Price is subject to certain adjustments that the Company estimates will be immaterial in the aggregate and is to be increased by amounts, if any, received by the Company in the future pursuant to an earn-out provision the details of which have not yet been finalized. Based upon the Base Purchase Price, the December 31, 1996 carrying value of UB Networks and estimated costs and expenses expected to be incurred in connection with the transaction, the Company anticipates that it will record a gain of approximately $3 million from this transaction in its second quarter ending March 31, 1997. The results of operations for UB Networks for the three months ended December 31, 1996, which were deferred by the Company as part of net assets of discontinued operations, included revenues of $67.5 million, an operating loss of $23.3 million, and a non-operating gain from the sale of an investment of $29.6 million. The results of operations for UB Networks for the three months ended December 31, 1995 included revenues of $91.5 million, an operating loss of $6.8 million, a non-operating gain from the sale of an investment of $30.6 million, and income from discontinued operations of $23.9 million, or $0.20 per share. 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 December 31, 1996 and September 30, 1996 were as follows:
- -------------------------------------------------------------------------------- December 31, September 30, (In thousands) 1996 1996 - -------------------------------------------------------------------------------- Cash and equivalents $ 9,338 $ 8,457 Accounts receivable, net 53,787 66,734 Inventories 41,184 42,805 Prepaid expenses and other 12,391 14,839 Other assets 2,315 2,473 Accounts payable (15,147) (33,203) Accrued liabilities (42,359) (39,164) Long-term obligations (524) (348) - -------------------------------------------------------------------------------- Net current assets $ 60,985 $ 62,593 ================================================================================ Property, plant and equipment, at cost $ 96,192 $ 94,719 Accumulated depreciation and amortization (66,659) (64,317) - -------------------------------------------------------------------------------- Net property, plant, and equipment $ 29,533 $ 30,402 ================================================================================
TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements 6. Restructuring - ----------------- Information relating to restructuring activity for the three months ended December 31, 1996 is presented below.
- --------------------------------------------------------------------------------------------------- Reduction of Discontinued (In thousands) Work Force Facilities Activities Total - --------------------------------------------------------------------------------------------------- Balances, September 30, 1996 $17,939 $24,794 $13,488 $56,221 Utilized, three months ended December 31, 1996 (7,308) (2,239) (141) (9,688) - --------------------------------------------------------------------------------------------------- Balances, December 31, 1996 $10,631 $22,555 $13,347 $46,533 =================================================================================================== Cash used, three months ended December 31, 1996 $ 7,308 $ 2,013 $ 125 $ 9,446 ===================================================================================================
Of the total restructuring reserves remaining as of December 31, 1996, approximately $31 million is included in accrued liabilities and approximately $16 million is classified as a reduction of property, plant and equipment. 7. Income taxes - ----------------- The provision for income taxes for the three months ended December 31, 1996 and 1995 arose principally from taxes currently payable in foreign jurisdictions. 8. Cash dividends - ------------------- The Company has not declared or paid any cash dividends and has no plans to do so in the foreseeable future. 9. Commitments and contingencies - ---------------------------------- The Company and three principal officers were named as defendants in a class action complaint for damages filed in the United States District Court for the Northern District of California on July 19, 1995. The class action is purported to be on behalf of purchasers of the Company's Common Stock between March 8, 1995 and July 12, 1995. The complaint alleges violations of Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5. Management believes that this complaint is without merit and that the outcome of the complaint will not have a material adverse effect on the financial position or overall trends in the results of operations of the Company. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview During June 1996, the Company adopted a plan to sell its networking business, UB Networks, Inc. (UB Networks), and on January 17, 1997 sold all of the outstanding capital stock of UB Networks to Newbridge Networks, Inc., a wholly-owned subsidiary of Newbridge Networks Corporation, effective December 31, 1996. The Company's consolidated financial statements have been presented for all periods to reflect UB Networks as a discontinued operation. The discussion of operating results and financial tables that follow pertain to the Company's continuing operations, the computer systems business. Discontinued operations are discussed separately. Selected Operating Statistics The following tables summarize operating statistics for the first quarter of fiscal 1997 and 1996. The percentages in the left two 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 show the percentage change in 1997 and 1996 from the comparable prior year period. The Company's fiscal year ends on September 30. References to 1997 and 1996 in this section represent the Company's fiscal years.
Percent of Total Revenues (Except cost of product and service) Percent Increase (Decrease) Three Months Three Months Ended December 31, Ended December 31, - ------------------------------------------------------------------------------------------------------ 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------- 79 78 Product revenues 4 (10) 21 22 Service and other revenues -- 14 - ------------------------------------------------------------------------------------------------------- 100 100 Total revenues 4 (6) - ------------------------------------------------------------------------------------------------------- 42 42 Cost of product revenues 4 (7) 68 74 Cost of service and other revenues (7) 28 - ------------------------------------------------------------------------------------------------------- 48 49 Total cost of revenues 1 2 15 18 Research and development (9) 12 Marketing, general, and 34 37 administrative (6) 9 - ------------------------------------------------------------------------------------------------------- 3 (4) Operating income (loss) N/M N/M 1 -- Gain on sale of real estate N/M N/A -- -- Net interest income 115 (77) - ------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 4 (4) before income taxes N/M N/M 1 1 Provision for income taxes 15 51 - ------------------------------------------------------------------------------------------------------- 3 (5) Income (loss) from continuing operations N/M N/M Income from discontinued operations, -- 5 net of income taxes N/M 489 - ------------------------------------------------------------------------------------------------------- 3 -- Net income 498 (94) ======================================================================================================= N/A N/A Earnings per share 482 (94) ======================================================================================================= N/A - Not applicable N/M - Not meaningful
Operating Results Revenues Total revenues of $435.7 million during the first quarter of 1997 increased $14.8 million, or 4 percent, compared to the first quarter of 1996. Product revenues of $342.8 million for the first quarter of 1997 increased $14.4 million, or 4 percent, from the same quarter of 1996. Service and other revenues of $93.0 million for the first quarter of 1997 were essentially flat compared to the first quarter of 1996. The increase in product revenues is primarily attributable to increased unit shipments of the high-end Himalaya K20000 product (approximately 75 percent increase from the 1996 first quarter). This increase is partially offset by decreased unit shipments of the low-end and mid-range Himalaya products (approximately 26 percent decrease from the 1996 first quarter) and the negative impact resulting from the stronger U.S. dollar versus European and Japanese currencies from a year ago. Geographic--The table below summarizes revenues derived from Tandem's domestic - ---------- and international operations and the percentage of revenues contributed by geographic location for the indicated periods. Current quarter growth rates in the various geographic regions are not necessarily representative of future trends.
Three Months Ended December 31, (Dollars in millions) 1996 1995 ---------------------- ---------------------- $ % $ % ---------------------- ---------------------- United States 208.6 48 180.2 43 Europe United Kingdom 33.3 8 37.2 9 Germany 32.0 7 23.8 6 Other Europe 58.4 13 57.1 13 ---------------------- ---------------------- Total Europe 123.7 28 118.1 28 Japan 58.1 13 62.8 15 Asia/Pacific 31.9 7 38.4 9 Americas Division (excluding the 13.4 4 21.5 5 U.S.) ---------------------- ---------------------- Total revenues 435.7 100 421.0 100 ====================== ======================
Revenues in the United States increased 16 percent in the first quarter of 1997, in comparison to the same 1996 period. Increased unit shipments and revenues of high-end Himalaya servers were modestly offset by reduced revenues from the UNIX system-based products. Revenues in Europe increased 5 percent during the first quarter of 1997, compared to the same 1996 period. Increased unit shipments and revenues of high-end Himalaya products and UNIX system-based products were partially offset by reduced unit shipments and revenues of mid-range Himalaya products and the negative impact of changes in currency between the periods. In Japan, revenues decreased 7 percent in the first quarter of 1997 in comparison to the same 1996 period. Reduced unit shipments and revenues of mid-range and low-end Himalaya products, reduced consulting revenues and the negative impact of changes in currency between the periods were partially offset by increased unit shipments and revenues of high-end Himalaya products and UNIX system-based products. Asia/Pacific revenues decreased 17 percent during the first quarter of 1997, compared to a particularly strong quarter for unit shipments and revenues of high-end Himalaya products in the first quarter of 1996. Cost of revenues During the first quarter of 1997 product margin percentages remained relatively level at 58 percent, in comparison to the same 1996 period. Computer system margins were positively impacted by improved management of discounting and other pricing programs but were offset by the negative impact on revenues of changes in foreign currencies. Management expects product margins to decline modestly during the remainder of 1997. However, product margins are difficult to predict, as they are affected by future competitive pricing actions, geographic revenue mix, product mix, and changes in foreign currency. For additional discussion on the risks associated with these statements and other forward looking statements, refer to the Outlook and Risks section below. Margins on service and other revenues were 32 percent in the 1997 first quarter compared to 26 percent in the 1996 first quarter. The improved margins over the 1996 first quarter were mainly attributable to improved profitability in the Company's consulting activities and by reduced costs in the hardware servicing business. Research and development expenses Research and development (R&D) expenses of $66.2 million for the first quarter of 1997 decreased $6.3 million, or 9 percent, compared to the same 1996 quarter. Increases in salaries and benefits were more than offset by higher levels of software capitalization and external funding received for joint development projects. Management expects R&D spending to decline slightly from the 1997 first quarter level in the remainder of the year. However, the expected R&D spending pattern could be affected by delays or changes in product development schedules and by changes in external funding. For additional discussion on the risks associated with these statements and other forward looking statements, refer to the Outlook and Risks section below. Marketing, general, and administrative expenses Marketing, general, and administrative (MG&A) expenses of $147.1 million in the first quarter of 1997 decreased $9.4 million, or 6 percent, in comparison to the first quarter of 1996. The decline in MG&A expenses is attributable mainly to restructuring actions initiated in the prior year which reduced sales and marketing headcount and reduced depreciation and occupancy expenses. These decreases were partially offset by increased spending for new product introductions and promotional costs in the first quarter of 1997. Management expects MG&A expenses to decrease modestly in the second quarter. For additional discussion on the risks associated with these statements and other forward looking statements, refer to the Outlook and Risks section below. Restructuring activity Information relating to restructuring activity for the three months ended December 31, 1996 is presented below.
- --------------------------------------------------------------------------------------------------- Reduction of Discontinued (In thousands) Work Force Facilities Activities Total - --------------------------------------------------------------------------------------------------- Balances, September 30, 1996 $17,939 $24,794 $13,488 $56,221 Utilized, three months ended December 31, 1996 (7,308) (2,239) (141) (9,688) - --------------------------------------------------------------------------------------------------- Balances, December 31, 1996 $10,631 $22,555 $13,347 $46,533 =================================================================================================== Cash used, three months ended December 31, 1996 $ 7,308 $ 2,013 $ 125 $ 9,446 ===================================================================================================
Impact of currency During the first quarter of 1997, in comparison to the first quarter of 1996, most currencies in Europe and Japan weakened against the U.S. dollar. Consequently, the translation of revenues and operating results had a negative impact on the consolidated results of the Company. Comparing the first quarter of 1997 to the first quarter of 1996, and giving effect for the results of the Company's hedging program, management estimates that foreign exchange rate movements caused a decrease in operating income of approximately $5 million. Results from continuing operations For the three month period ended December 31, 1996, the Company reported income from continuing operations of $11.8 million, or $0.10 per share, including a non-operating gain from the sale of real estate of $5.5 million. For the three month period ended December 31, 1995, the Company reported a loss from continuing operations of $21.9 million, or $0.18 per share. The income tax provisions for the first quarters of 1997 and 1996 were $8.0 million and $6.9 million, respectively, arising principally from taxes currently payable in foreign jurisdictions. The Company expects to continue to report income for the remainder of 1997 in certain foreign jurisdictions, which will result in tax provisions despite loss carryforwards which are available primarily to offset U.S. and certain foreign income. Results from discontinued operations During June 1996, the Company adopted a plan to sell its networking business, UB Networks, Inc. (UB Networks), and on January 17, 1997 sold all of the outstanding capital stock of UB Networks to Newbridge Networks, Inc., a wholly-owned subsidiary of Newbridge Networks Corporation, effective December 31, 1996. The Company received initial gross proceeds (the "Base Purchase Price") in the amount of $118.0 million ($106.2 million in cash and $11.8 million deposited to a one-year escrow account) of which $13 million is attributable to estimated cash disbursements by the Company to or on behalf of UB Networks during the period January 1, 1997 through January 17, 1997. The Base Purchase Price is subject to certain adjustments that the Company estimates will be immaterial in the aggregate and is to be increased by amounts, if any, received by the Company in the future pursuant to an earn-out provision the details of which have not yet been finalized. Based upon the Base Purchase Price, the December 31, 1996 carrying value of UB Networks and estimated costs and expenses expected to be incurred in connection with this transaction, the Company anticipates that it will record a gain of approximately $3 million from this transaction in its second quarter ending March 31, 1997. The results of operations for UB Networks for the three months ended December 31, 1996, which were deferred by the Company as part of net assets of discontinued operations, included revenues of $67.5 million, an operating loss of $23.3 million, and a non-operating gain from the sale of an investment of $29.6 million. The results of operations for UB Networks for the three months ended December 31, 1995 included revenues of $91.5 million, an operating loss of $6.8 million, a non-operating gain from the sale of an investment of $30.6 million, and income from discontinued operations of $23.9 million, or $0.20 per share. Networking revenues decreased $24.0 million, or 26 percent, in the first quarter of 1997, compared to the first quarter of 1996. Networking revenues were affected by a decline in sales of more mature products and a decline in the resale of certain third party products. Networking margins declined to 27 percent in the first quarter of 1997, compared to 36 percent in the same 1996 quarter. Networking margins were negatively affected by lower sales of proprietary ethernet switching enclosures and related peripheral products, and an increased proportion of revenues from lower margin service offerings. Research and development expenses of $9.4 million in the first quarter of 1997 decreased 7 percent from the first quarter of 1996. MG&A expenses of $32.1 million in the first quarter of 1997 increased 10 percent over the first quarter of 1996. The increase in MG&A expenses is due to increased marketing and advertising expenses and to expenses associated with employee transition programs. Financial Condition During the first quarter of 1997, cash and cash equivalents increased by $41 million to $128 million. The Company generated $42 million positive cash flow from operations during the first three months of the year. Investing activities for the period consumed approximately $9 million, principally through the investment in capital equipment and software, partially offset by proceeds from the sales of real estate and an investment. Financing activities provided approximately $8 million. In January 1997, the Company received the cash portion of sales proceeds from the sale of UB Networks of approximately $93 million, net of January funding by the Company. The Company has a receivables purchase agreement with a group of financial institutions whereby the Company can sell a percentage ownership interest in an eligible pool of accounts receivable. Under the terms of the agreement, the Company retains collection and servicing responsibilities for the receivables and retains substantially the same risk of credit loss as if the interest in receivables had not been sold. The agreement allows for maximum borrowings of up to $100 million and expires in October 1997. At December 31, 1996, $68 million of financing was available to the Company under its accounts receivable purchase agreement. The maximum amount outstanding at any point during the first quarter of 1997 was $25 million. There were no amounts outstanding as of December 31, 1996 or September 30, 1996. Accounts receivable days were 84 at December 31, 1996, excluding receivables of discontinued operations, compared to 80 days at September 30, 1996. Inventory days increased to 52 days at December 31, 1996, compared to 39 days at September 30, 1996, excluding inventories of discontinued operations. Total debt and short-term borrowings of $174 million at December 31, 1996, including $129 million of limited recourse borrowings against lease receivables, decreased $0.8 million from September 30, 1996. Total debt as a percentage of total capital was approximately 14 percent as of December 31, 1996 and September 30, 1996. Cash used for restructuring actions during the first quarter of 1997 aggregated approximately $9 million and was funded by cash from operations. Cash requirements for restructuring actions for the remainder of 1997 are expected to be approximately $20 million and will be funded by cash generated from operations. 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 December 31, 1996 can adequately meet Tandem's financing needs, both in the short and the long term. As of December 31, 1996, the Company had approximately 7,900 full-time equivalent employees, including approximately 1,050 full-time equivalent employees employed by UB Networks. 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, 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. Historically, Tandem recognizes a large percentage of its revenues in the latter part of each quarter. Further, the Company's performance in the latter half of a fiscal year is typically stronger than in the beginning of a fiscal year. These trends make it difficult to forecast revenues and could subject the Company to fluctuations in revenues and earnings. Although the Company's operating and pricing strategies and currency hedging practices take into account changes in foreign currency exchange rates over time, the Company's operating results can be affected by foreign currency exchange rates. Forward-looking statements in this document are based on management's current expectations and involve numerous risks and uncertainties, some of which have been outlined above, that could cause actual results to differ materially. Tandem, Himalaya, Integrity, iTP, NonStop, ServerNet, ServerWare, and the Tandem Logo are trademarks or registered trademarks of Tandem Computers Incorporated in the United States and/or other countries. Windows NT is either a registered trademark or a trademark of Microsoft Corporation in the United States and/or other countries. UB Networks is a trademark of Ungermann-Bass Networks, Inc. UNIX is a registered trademark in the United States and other countries, licensed exclusively through X/Open Company Ltd. All other brand and product names are trademarks or registered trademarks of their respective companies. PART II -- OTHER INFORMATION Item 1. Legal Proceedings. The Company and three principal officers, James G. Treybig, David J. Rynne and Robert C. Marshall, were named as defendants in a class action complaint for damages filed in the United States District Court for the Northern District of California on July 19, 1995. The class action is purported to be on behalf of purchasers of the Company's Common Stock between March 8 and July 12, 1995. The complaint alleges violations of Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 in connection with public statements about the Company's expected revenues for the second and third quarters of 1995. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits required by Item 601 of Regulation S-K Exhibit Number Exhibit ------- ------- 10.19* Tandem Computers Incorporated Deferred Compensation Plan, Amended and Restated as of October 1, 1996. 10.20* Settlement Agreement and General Release dated January 10, 1996 between the Company and James G. Treybig. 27 Financial Data Schedule - -------------- * Director or officer compensatory plan. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the first fiscal quarter. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Cupertino, State of California. TANDEM COMPUTERS INCORPORATED (Registrant) Date: February 14, 1997 By: /s/ ENRICO L. PESATORI ----------------------------------------- Enrico L. Pesatori President, Chief Operating Officer and Interim Chief Financial Officer Date: February 14, 1997 By: /s/ KENNETH R. BARBER ----------------------------------------- Kenneth R. Barber Senior Vice President and Corporate Controller EX-10.19 2 DEFERRED COMPENSATION PLAN TANDEM COMPUTERS INCORPORATED DEFERRED COMPENSATION PLAN Amended and Resated as of October 1, 1996 TABLE OF CONTENTS ----------------- Page ---- ARTICLE 1 INTRODUCTION................................................1 1.1 Establishment of Plan.......................................1 1.2 Purpose of Plan.............................................1 ARTICLE 2 DEFINITIONS.................................................1 2.1 Administration Committee....................................1 2.2 Base Salary.................................................1 2.3 Beneficiary.................................................2 2.4 Board.......................................................2 2.5 Bonus.......................................................2 2.6 Code........................................................2 2.7 Commission..................................................2 2.8 Company.....................................................2 2.9 Compensation/Option Committee...............................2 2.10 Deferral Account............................................2 2.11 Deferred Compensation Agreement.............................2 2.12 Disability..................................................2 2.13 Eligible Employee...........................................2 2.14 Enrollment Period...........................................3 2.15 ERISA.......................................................3 2.16 Hardship....................................................3 2.17 Insolvent...................................................3 2.18 Investment Fund or Funds....................................3 2.19 Participant.................................................3 2.20 Plan........................................................3 2.21 Plan Year...................................................3 2.22 Retirement Age..............................................4 ARTICLE 3 PARTICIPATION...............................................4 3.1 Eligibility.................................................4 3.2 Participation...............................................4 3.3 Election Procedure..........................................4 3.4 Deferred Compensation Agreement.............................5 3.5 Irrevocable Elections.......................................6 3.6 Community and Marital Property..............................6 ARTICLE 4 PARTICIPANT ACCOUNT BALANCES................................6 4.1 Establishment of Accounts...................................6 4.2 Bookkeeping.................................................6 4.3 Crediting Deferred Compensation.............................6 4.4 Establishment of Investment Funds...........................7 4.5 Crediting Investment Results................................7 4.6 Notification to Participants................................7 ARTICLE 5 DISTRIBUTION OF ACCOUNTS....................................7 5.1 Distribution in the Event of Hardship.......................7 5.2 Distribution Upon Separation From Employment................8 5.3 Distribution of Small Accounts..............................9 5.4 Distribution Upon Death.....................................9 -i- 5.5 Distribution at a Specific Date..............................9 5.6 Unscheduled Lump Sum Distribution.......................... 10 5.7 Modification of Distribution............................... 10 5.8 Cash Payments Only......................................... 10 ARTICLE 6 PLAN ADMINISTRATION........................................ 10 6.1 Plan Administrator......................................... 10 6.2 Amendment or Termination................................... 11 6.3 Administration of the Plan................................. 11 6.4 Indemnification............................................ 11 ARTICLE 7 MISCELLANEOUS.............................................. 12 7.1 Trust...................................................... 12 7.2 Nonalienation.............................................. 12 7.3 Limitation of Rights....................................... 12 7.4 Governing Law.............................................. 13 APPENDIX A TRANFERRED OBLIGATIONS APPENDIX B PARTICIPATION BY BOARD MEMBERS APPENDIX C CONTRIBUTIONS PURSUANT TO EMPLOYMENT OR SEVERANCE AGREEMENTS -ii- TANDEM COMPUTERS INCORPORATED ----------------------------- DEFERRED COMPENSATION PLAN -------------------------- ARTICLE 1 INTRODUCTION ------------ 1.1 Establishment of Plan. Tandem Computers Incorporated hereby establishes --------------------- the Tandem Computers Incorporated Deferred Compensation Plan effective as of October 1, 1994. 1.2 Purpose of Plan. Tandem Computers Incorporated has established this --------------- Plan to provide select executives with the opportunity to defer the receipt of compensation and a vehicle through which to do so. Tandem Computers Incorporated intends to maintain the Plan primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, within the meaning of sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended. The Plan will be interpreted in a manner consistent with these intentions. ARTICLE 2 DEFINITIONS ----------- Definitions are contained in this article and throughout other sections of the Plan. The location of a definition is for convenience only and should not be given any significance. A word or term defined in this article (or in any other article) will have the same meaning throughout the Plan unless the context clearly requires a different meaning. 2.1 Administration Committee means the Deferred Compensation Plan ------------------------------------------------------------- Administration Committee. - ------------------------ 2.2 Base Salary means a participant's base salary for a Plan Year, and ----------- excludes any other form of compensation such as bonuses, commissions, income from the exercise of stock options or stock appreciation rights, severance payments, moving expenses, car or other special allowances, or any other amounts included in an Eligible Employee's taxable income that are not compensation for services. For purposes of applying base salary reduction elections, a Participant's Base Salary is determined before taking into account any reduction in taxable income by salary reduction under Code section 125 or 401(k), or under this Plan. -1- 2.3 Beneficiary means the individual(s) or entity designated by a ----------- Participant, or under the Plan, to receive any benefit payable upon the death of a Participant or Beneficiary. A Beneficiary designation must be completed by the Participant and delivered to the Human Resources Department on such form as specified by the Administration Committee. In the absence of a valid or effective Beneficiary designation, the Beneficiary will be the Participant's surviving spouse, or if there is no surviving spouse, the Participant's estate. 2.4 Board means the Board of Directors of the Company. ----- 2.5 Bonus means the compensation paid to a Participant in accordance with ----- the applicable bonus program sponsored by the Company. 2.6 Code means the Internal Revenue Code of 1986, as amended from time to ---- time. 2.7 Commission means variable compensation related to sales revenue. ---------- 2.8 Company means Tandem Computers Incorporated, a corporation organized ------- under the laws of the state of Delaware, and any successor thereto. 2.9 Compensation/Option Committee means the Compensation/Option Committee ----------------------------- of the Board. 2.10 Deferral Account means a bookkeeping account established for and ---------------- maintained on behalf of a Participant to which deferred compensation amounts, and net income (or losses) thereon, are credited. 2.11 Deferred Compensation Agreement means an agreement entered into by a ------------------------------- Participant and the Company to reduce the Participant's Base Salary, Bonus and/or Commissions for a specified period and contribute such amounts to the Plan, in accordance with Article III. 2.12 Disability means "disability" (or similar term) as defined in the ---------- Company's long-term disability program and which results in payments to the Participant under such program. 2.13 Eligible Employee means a common law employee of the Company who is ----------------- designated by the Administration Committee as an Eligible Employee and who (i) in the twelve (12) month period preceding July 1 had total compensation from Base Salary, Bonus and Commissions of at least two (2) times the social security wage base, or (ii) currently has an annual Base Salary rate of $100,000 and Base Salary plus target Bonus equaling at least two (2) times the social security wage base; provided, however, that -2- no more than the top five percent (5%) of employees in the Company, determined by pay, shall be Eligible Employees. In all events, the Administration Committee may amend the Plan's definition of Eligible Employee from time to time and may exclude any employee to comply with any applicable laws or any exemption from applicable laws, including ERISA. 2.14 Enrollment Period means the period designated by the Administration ----------------- Committee during which the enrollment for the upcoming Plan Year takes place. 2.15 ERISA means the Employee Retirement Income Security Act of 1974, as ----- amended. 2.16 Hardship means an unforeseeable and unanticipated emergency which is -------- caused by an event beyond the control of the Participant or Beneficiary, and which would result in severe financial hardship to the Participant or Beneficiary if a distribution or revocation of a deferral election were not permitted. Hardship conditions will be evaluated in accordance with the terms of Treasury Regulation section 1.457-2(h)(4). The Administration Committee will have sole discretion to determine whether a Hardship condition exists and the Administration Committee's determination will be final. Any Participant who is subject to the short-swing trading restrictions of Section 16 of the Securities Exchange Act of 1934, as amended, may only obtain a financial hardship distribution with the approval of the Compensation/Option Committee. 2.17 Insolvent means the Company is: (a) unable to pay its debts as they --------- become due, or (b) subject to a pending proceeding as a debtor under the U.S. Bankruptcy Code. 2.18 Investment Fund or Funds mean the investment vehicles designated by ------------------------ the Administration Committee as the basis for determining the investment return to Participants' Deferral Accounts. 2.19 Participant means a current or former Eligible Employee who ----------- participates in the Plan in accordance with Article III or a member of the Board who participates in the Plan in accordance with Appendix B. 2.20 Plan means the Tandem Computers Incorporated Deferred Compensation ---- Plan, as set forth in this document, as amended from time to time. 2.21 Plan Year means the twelve (12) month period from October 1 through --------- September 30. -3- 2.22 Retirement Age means, while employed by the Company, attaining age 55 -------------- with ten (10) years of service, or attaining age 65. ARTICLE 3 PARTICIPATION ------------- 3.1 Eligibility. An Eligible Employee of the Company shall participate in ----------- the Plan only to the extent and for the period that the Eligible Employee satisfies the requirements of Section 2.13 3.2 Participation. An Eligible Employee may elect to defer the receipt of ------------- Base Salary, bonus and/or Commissions that otherwise would be earned by the Eligible Employee. The Eligible Employee may make such election in accordance with Section 3.3. The Company shall withhold amounts deferred by the Participant in accordance with this election. The Participant's deferred amounts shall be credited to the Deferral Account as provided in Article IV and distributed in accordance with Article V. An election to defer receipt of compensation shall continue in effect for the periods described in Section 3.4 below unless the Participant's election is terminated or modified in accordance with the provisions of Section 3.5. A Participant who ceases to be an Eligible Employee shall continue to participate in the Plan with respect to any Deferred Compensation Agreement in effect as of the Plan Year in which he or she ceases to be an Eligible Employee, but shall not be permitted to enter into any new Deferred Compensation Agreement with the Company until the individual again becomes an Eligible Employee. 3.3 Election Procedure. An election to defer Base Salary, Bonus and/or ------------------ Commissions is made by executing a Deferred Compensation Agreement on such form, at such time and in such manner as may be prescribed by the Administration Committee. Such Deferred Compensation Agreement must be properly completed, signed and delivered to the Company prior to the first day of the Plan Year for which such compensation shall be earned; provided, however, that: (i) an Eligible Employee who became an employee of the Company for the first time during the Plan Year shall be permitted, within the thirty (30) day period that begins on the day the Eligible Employee became an employee of the Company, to make an election to defer Base Salary, Bonus and/or Commissions that will be earned after his or her date of hire; (ii) an employee of the Company who becomes an Eligible Employee for the first time during the Plan -4- Year shall be permitted, in accordance with procedures established by the Company from time to time, but no later than the end of the thirty (30) day period that begins on the day the employee became an Eligible Employee, to make an election to defer Base Salary earned during such Plan Year after the effective date of such election; and (iii) the individuals who are eligible to participate in the Plan when the Plan is initially adopted shall be permitted, within the thirty (30) day period that ends on the date the Plan is effective, to make an election to defer Base Salary, Bonus and/or Commissions that will be earned after the effective date of the Plan. 3.4 Deferred Compensation Agreement. A Deferred Compensation Agreement ------------------------------- shall remain in effect and shall be applicable to Base Salary earned during the Plan Year following the delivery of the Deferred Compensation Agreement, subject to the exceptions set forth in Section 3.3(i), (ii) and (iii). A Deferred Compensation Agreement shall remain in effect and shall be applicable to Bonus and/or Commissions earned during the calendar year commencing in the Plan Year following the delivery of the Deferred Compensation Agreement. The Agreement shall set forth the whole percentage of Base Salary, Bonus and Commissions that shall be deferred for the Plan Year or calendar year, as applicable, subject to the following: (a) Base Salary. A Participant shall be permitted to defer a maximum of ----------- fifty percent (50%) of Base Salary earned in a Plan Year. (b) Commission and Bonus. A Participant shall be permitted to defer a -------------------- maximum of one hundred percent (100%) of Commissions and/or one hundred percent (100%) of Bonus with respect to the calendar year commencing in a Plan Year. (c) Minimum Deferral. A Participant who elects to defer any amount must ---------------- elect to defer a minimum of $3,000 for the Plan Year. (d) In-Service Distribution Request. All of a Participant's Base Salary, ------------------------------- Bonus and Commissions deferrals shall cease if the Administration Committee approves a request for Hardship distribution under Section 5.1 or an Unscheduled distribution under Section 5.6. The cessation of such deferrals shall continue for the periods required by Sections 5.1 or 5.6, whichever is applicable. No reduction or cessation of Base Salary, Bonus and/or Commission deferrals shall affect the limits set forth above, and no part of any such distribution shall be deferred under this Plan. -5- 3.5 Irrevocable Elections. Except to the extent provided in Sections 3.4, --------------------- 5.1 and 5.6, a Participant's Deferred Compensation Agreement shall be irrevocable and cannot be amended by the Participant. A Participant may request to amend or revoke a Deferred Compensation Agreement in the event of a Hardship. Such request will be made in writing on such form and in such manner as prescribed by the Administration Committee. The Administration Committee may grant such request if and to the extent that it determines that the revocation of the election would serve to alleviate the Hardship, in a manner consistent with Sections 2.16 and 5.1. The Administration Committee reserves the right to modify any Deferred Compensation Agreement in any case or class of cases to reflect a change in Plan provisions or for administrative convenience. 3.6 Community and Marital Property. The spouse of a Participant may have a ------------------------------ community or marital property interest in the Participant's Deferral Account which the spouse may pass to a third party upon his or her death. If it is intended that a spouse relinquish his or her community or marital property interest in the Participant's Deferral Account, the spouse must execute a waiver in which he or she clearly states an intention to relinquish his or her rights under community or marital property law with respect to the Deferral Account. A spouse's consent to a Participant's designation of a nonspouse Beneficiary is not sufficient to effect such a waiver. ARTICLE 4 PARTICIPANT ACCOUNT BALANCES ---------------------------- 4.1 Establishment of Accounts. The Administration Committee will select an ------------------------- independent recordkeeper who will establish and maintain a Deferral Account on behalf of each Participant. Contributions and net income (or losses) will be credited to such accounts in accordance with the provision of this Article. 4.2 Bookkeeping. Deferral Accounts will be maintained for accounting ----------- purposes and will not restrict the operation of the Plan or require separate earmarked assets to be allocated to any account. The establishment of a Deferral Account will not give any Participant the right to receive any asset held by the Company in connection with the Plan or otherwise. 4.3 Crediting Deferred Compensation. The Administration Committee will ------------------------------- credit to a Participant's Deferral Account the amount of any Base Salary, Bonus and/or Commissions deferred by the Participant as soon as administratively possible following -6- the month in which such Base Salary, Bonus and/or Commissions would have been paid absent a Deferred Compensation Agreement. 4.4 Establishment of Investment Funds. The Administration Committee will --------------------------------- establish one or more Investment Funds which will be maintained for the purpose of determining the investment return to be credited to a Participant's Deferral Account. The Administration Committee may change the number, identity or composition of the Investment Funds from time to time. Each Participant will indicate the Investment Funds based on which contributions under Sections 4.3 and 4.4 and any existing Deferral Account balance are to be adjusted for investment performance. Investment fund elections must be made in whole percentage increments and at such times and in such manner as the Administration Committee will specify. A Participant may change his or her Investment Fund election periodically in such manner as the Administration Committee may specify. 4.5 Crediting Investment Results. No less frequently than as of the last ---------------------------- day of each quarter, a Participant's Deferral Account balance will be increased or decreased to reflect investment results. Deferral Accounts will be credited with the investment return of the Investment Funds in which the Participant elected to be deemed to participate. The credited investment return is intended to reflect the actual performance of the Investment Funds net of any applicable administrative charges determined by the Company. 4.6 Notification to Participants. The Administration Committee shall notify ---------------------------- each Participant with respect to the status of such Participant's Deferral Account as soon as practical after the end of a quarter, but in no event less than once for each Plan Year. Neither the Company nor the Administration Committee to any extent warrants, guarantees or represents that the value of any Participant's Deferral Account at any time will equal or exceed the amount previously allocated or contributed thereto. ARTICLE 5 DISTRIBUTION OF ACCOUNTS ------------------------ 5.1 Distribution in the Event of Hardship. Prior to a distribution under ------------------------------------- Sections 5.2 through 5.7, payment of all or a portion of a Participant's Deferral Account may be made in the event of Hardship. The amount of any Hardship distribution will not exceed the amount required to meet the Hardship, including any taxes due on the distribution. A Participant or Beneficiary must submit a written request for a Hardship distribution to the Administration Committee on such form and in such manner as the -7- Administration Committee prescribes. The Hardship distribution request must: (i) certify as to the Hardship condition and the severe financial need; and (ii) state whether the Participant requests a distribution of all or a portion of his Deferral Account to meet the severe financial need. The Administration Committee will have sole discretion to determine whether a Hardship exists and to determine whether to make a Hardship distribution and the amount of any such Hardship distribution; provided, however, that the Compensation/Option Committee shall have the sole discretion to grant or deny a Hardship distribution to any Participant subject to the short-swing trading restrictions of Section 16 of the Securities Exchange Act of 1934. Regardless of whether the Participant desires to reduce or cease any deferrals of Base Salary, Bonus and/or Commissions after the Hardship request is made, the Participant will be precluded from deferring compensation until the Enrollment Period that begins at least one (1) year from the date of the Hardship approval. A Hardship distribution shall be made in a single lump sum payment as soon as practicable after the Administration Committee approves the Hardship distribution request. 5.2 Distribution Upon Separation From Employment. Subject to Section 5.3, -------------------------------------------- Section 5.5, and Section 5.7, a Participant who separates from employment with the Company shall receive amounts credited to his Deferral Account in the manner described below. (a) Time and Manner of Payment. At the time a Participant makes an initial -------------------------- election to defer compensation under Section 3.3, the Participant may elect to have his Deferral Account distributed after his separation from employment in the form of a lump sum payment or installment payments over a 5, 10, or 15 year period (valued as described below). In the absence of any election to the contrary, the Participant's Deferral Account shall be paid as soon as practicable after the January 1 following his separation from employment. If the Participant has elected installment payments, such payments shall be paid commencing as soon as practicable after the January 1 following the Participant's separation from employment and continuing to be paid in January for each successive year, subject to Section 5.4. (b) Value of Deferral Account Balance. The value of a Participant's --------------------------------- Deferral Account to be distributed shall be determined as of the last day of the calendar month preceding the date a payment is to be made. To the extent payment is to be made in installments, the amount of the installment for a particular year shall be adjusted to take into account the value of the Participant's Deferral Account (as adjusted) and the number of remaining years over which the installment payments are to be made, in a manner determined by the Plan recordkeeper. -8- 5.3 Distribution of Small Accounts. Notwithstanding anything in Section 5.2 ------------------------------ to the contrary, at the Administration Committee's discretion, if the amount credited to the participant's Deferral Account is $10,000 or less as of the December 31 coincident with or immediately following the date a Participant separates from employment with the Company, such amount shall be distributed to the Participant in a lump sum payment as soon as practicable after the January 1 following such separation from employment. 5.4 Distribution Upon Death. The Beneficiary of a Participant who dies ----------------------- prior to receiving any payments under this Article V (other than any in-service distributions under Sections 5.1 or 5.6), shall receive the Participant's Deferral Account as follows, following the Administration Committee's receipt of written proof of the Participant's death: (a) No Installment Payments in Effect. If the Participant had not --------------------------------- previously commenced installment payments at the time of his death, his Deferral Account shall be valued as of the December 31 following his death and paid to his Beneficiary as soon as practicable thereafter. (b) Death After Commencement of Installment Distributions. If a Participant ----------------------------------------------------- dies after installment payments have begun, the Participant's Beneficiary will continue to receive the Participant's unpaid Deferral Account balance in installment payments for the remaining period of installments and valued as described in Section 5.2. (c) Death After Commencement of Installment Distributions/Cash-Out -------------------------------------------------------------- Distribution. If a Participant dies after installment payments have begun, and - ------------ the remaining value of the Participant's Deferral Account as of the December 31 following his death does not exceed $10,000, such amount will be paid as soon as reasonably practicable thereafter in a single lump sum payment to the Participant's Beneficiary. 5.5 Distribution at a Specific Date. At the time a Participant elects to ------------------------------- make a deferral election under Section 3.3, the Participant may also elect to receive a lump sum distribution of his Deferral Account as soon as practicable after the end of the Plan Year when the Participant first commenced participation in the Plan or as soon as practicable after any subsequent Plan Year prior to his separation from employment; provided that all distributions will be made as soon as practicable after the January 1 of the year of distribution. A distribution under this Section 5.5 shall not preclude the Participant's ability to continue deferrals out of future Base Salary, Bonus and/or Commissions. Notwithstanding a Participant's election for a distribution as soon as practicable after a specific Plan Year, if a Participant separates from employment or dies prior to the elected distribution date, the -9- distribution of his Deferral Account will be paid out in accordance with the provisions of Section 5.2 (in the case of a separation from employment) or Section 5.4 (in the case of death). 5.6 Unscheduled Lump Sum Distribution. Prior to a Participant's separation --------------------------------- from employment, a Participant may request in writing a lump sum distribution of a Participant's entire Deferral Account balance attributable to one or more Plan Years of participation with a ten percent (10%) penalty forfeited to the Company. The value of a Participant's Deferral Account less the ten percent (10%) penalty to be distributed shall be determined as of the last day of the month in which the request is submitted, and distribution shall be made as soon as practicable thereafter. The Participant will not be allowed to participate under the Plan until the Enrollment Period that begins at least one (1) year from the date of distribution. 5.7 Modification of Distribution. Subject to Administration Committee ---------------------------- approval, as to all previous and future deferrals, a Participant may request in writing a change regarding the manner (e.g., lump sum or installment) of payment of the Participant's Deferral Account balance following separation from employment, provided that such election is in effect for at least twelve (12) months prior to the date such amounts would otherwise have been distributed. If such election is not in effect for at least twelve (12) months prior to the date such amounts would otherwise have been distributed, the Participant's Deferral Account shall be distributed ln accordance with the last valid election on file with the Administration Committee. Notwithstanding the foregoing, a Participant who has previously elected to have distributions paid in installments following his separation from employment may elect to change that form of distribution to a lump sum at any time, with a penalty of ten percent (10%) of the total distribution being forfeited to the Company. 5.8 Cash Payments Only. All distributions under the Plan will be made in ------------------ cash by check. ARTICLE 6 PLAN ADMINISTRATION ------------------- 6.1 Plan Administrator. The Company shall be the Plan Administrator, and ------------------ shall act through the Administration Committee. The Administration Committee members shall be appointed by and serve at the pleasure of the Company. -10- 6.2 Amendment or Termination. The Administration Committee may amend all or ------------------------ any provision of this Plan at any time and for any reason unless: (a) a Plan amendment (or amendments) would increase the cost of the Plan to the Company by more than $250,000; or (b) a Plan amendment (or amendments) would apply to fewer than all Participants. The Compensation/Option Committee shall have the sole authority to amend the Plan if the resulting amendment (or amendments) would increase the cost of the Plan to the Company by more than $250,000 or would affect amounts credited (or to be credited) to any Participant's Deferral Account. The Compensation/Option Committee shall also have the sole authority to terminate this Plan in its entirety at any time and for any reason. No amendment or termination of the Plan will reduce any Participant's Deferral Account balance as of the effective date of such amendment or termination. Upon termination of the Plan, the Company shall have the right to immediately distribute the amount credited to Participants' Deferral Accounts to Participants; provided that no such immediate distribution shall be permitted if the Plan is terminated following a Change of Control (as defined in the trust agreement entered into pursuant to this Plan). 6.3 Administration of the Plan. The Administration Committee shall have the -------------------------- sole authority to control and manage the operation and administration of the Plan and have all powers, authority and discretion necessary or appropriate to carry out the Plan provisions, and to interpret and apply the terms of the Plan to particular cases or circumstances. All decisions, determinations and interpretations of the Administration Committee will be binding on all interested parties, subject to the claims and appeal procedure necessary to satisfy the minimum standard of ERISA section 503, and will be given the maximum deference allowed by law. The Administration Committee may delegate in writing its responsibilities as it sees fit. Administration Committee members who are Participants will abstain from voting on any Plan matters that relate primarily to themselves or that would cause them to be in constructive receipt of amounts credited to their respective Deferral Account. In the event that all Administration Committee members must abstain from voting, the Compensation/Option Committee will identify three or more individuals to serve as a temporary replacement of the Administration Committee members. 6.4 Indemnification. The Company will and hereby does indemnify and hold --------------- harmless any of its employees, officers, directors or members of the Administration Committee who have fiduciary or administrative responsibilities with respect to the Plan from and against any and all losses, claims, damages, expenses and liabilities (including reasonable attorneys' fees and amounts paid, with the approval of the Compensation/Option -11- Committee, in settlement of any claim) arising out of or resulting from the implementation of a duty, act or decision with respect to the Plan, so long as such duty, act or decision does not involve gross negligence or willful misconduct on the part of any such individual. ARTICLE 7 MISCELLANEOUS ------------- 7.1 Trust. It is the intention of the Company that the Plan be unfunded for ----- tax purposes and for purposes of Title I of ERISA. However, such amounts as the Administration Committee deems necessary or appropriate to meet the obligation to pay Deferral Accounts will be held in trust by an independent third party trustee selected by the Administration Committee, and as such are earmarked to pay benefits under the terms of the Plan. The Administration Committee will direct the Company to make periodic contributions to the trust at such times and in such amounts as the Administration Committee deems appropriate. Trust assets cannot be diverted to, or used for, any purpose except payments to Participants and Beneficiaries under the terms of the Plan or, if the Company is Insolvent, to pay the Company's creditors; provided, however, that the trust agreement for the trust established under the Plan may provide for the withdrawal of any trust assets in excess of the sum of all Deferral Account balances under the Plan. Participants and Beneficiaries will have no right against the Company with respect to the payment of any portion of the Participant's Deferral Account, except as a general unsecured creditor of the Company. 7.2 Nonalienation. No benefit or interest of any Participant or Beneficiary ------------- under this Plan will be subject to any manner of assignment, alienation, anticipation, sale transfer, pledge or encumbrance, whether voluntary or involuntary. Notwithstanding the foregoing, the Administration Committee will honor a court order regarding the payment of alimony or other support payments, or the establishment of community property or other marital property rights, to the extent required by law. Prior to distribution to a Participant or Beneficiary, no Deferral Account balance will be in any manner subject to the debts, contracts, liabilities, engagements or torts of the Participant or Beneficiary. Assets held in trust to fund this Plan may, however, be diverted to pay the Company's creditors, if the Company is Insolvent. 7.3 Limitation of Rights. Nothing in this Plan will be constructed to give -------------------- a Participant the right to continue in the employ of the Company at any particular position or to interfere with the right of the Company to discharge, lay off or -12- discipline a Participant at any time and for any reason, or to give the Company the right to require any Participant to remain in its employ or to interfere with the Participant's right to terminate his or her employment. 7.4 Governing Law. To the extent that state law applies, the provisions of ------------- this Plan will be construed, enforced and administered in accordance with the laws of the state of California, except to the extent preempted by ERISA. IN WITNESS WHEREOF, the Company by its duly authorized officer has executed this Tandem Computers Incorporated Deferred Compensation Plan as of the effective date set forth above. TANDEM COMPUTERS INCORPORATED By /s/ Josephine T. Parry ------------------------------------------- Its VP, General Counsel & Secretary -13- APPENDIX A TRANSFERRED OBLIGATIONS ----------------------- As of December 31, 1994, the amounts credited to active employees of the Company who were participants under the Company's Supplemental Retirement Plan were transferred to Deferral Accounts under this Plan and all such participants in the Supplemental Retirement Plan became Participants under this Plan. Amounts held in such transferred Deferral Accounts shall be distributed at the time and manner specified under the deferral elections submitted under the Supplemental Retirement Plan, but shall be credited with investment performance in accordance with an Investment Fund election completed by the Participant in a manner consistent with Section 4.4. APPENDIX B PARTICIPATION BY BOARD MEMBERS ------------------------------ This Appendix B shall be effective only if the Board has expressly determined to implement this Appendix B. Members of the Board may elect to defer their directors fees by making a fee deferral election prior to the period for which such fees are earned, in accordance with procedures established by the Administration Committee. Such deferrals will be contributed to Deferral Accounts and credited with investment performance in accordance with Article IV. A Board member's Deferral Account shall be distributed, in accordance with the fee deferral elections made by the Board member, (i) upon termination of Board membership or at a specified date and (ii) in a manner specified in Section 5.2(a). A Board member may request a Hardship distribution in accordance with Section 5.1, provided that a Board member who is also a member of the Administration Committee shall abstain from any discussion of such Board member's Hardship distribution request. A Board member may also request an unscheduled distribution in accordance with Section 5.6. APPENDIX C CONTRIBUTIONS PURSUANT TO EMPLOYMENT ------------------------------------ OR SEVERANCE AGREEMENTS ----------------------- Contributions may be made to the Plan by or on behalf of any present or former Eligible Employee pursuant to a written agreement between the Company and such Eligible Employee that has been approved by the Board, a designated committee of the Board, or a member of the Board (the "Agreement"). The Agreement shall be treated as a Deferred Compensation Agreement for all purposes of the Plan. The Agreement shall supersede any provision of the Plan to the extent that such provision is inconsistent with the Agreement, but the provisions of the Plan shall apply to amounts contributed pursuant to the Agreement to the extent that such provisions are consistent with the Agreement. Amounts contributed to the Plan pursuant to the Agreement may be credited to (a) an existing Deferral Account of the Eligible Employee or (b) a Deferral Account created for the Eligible Employee in order to implement the Agreement. EX-10.20 3 SETTLEMENT AGREEMENT AND GENERAL RELEASE SETTLEMENT AGREEMENT AND GENERAL RELEASE ---------------------------------------- INSTRUCTIONS TO EMPLOYEE: This is an important legal document. For that reason, you are advised that: You have the right to consult with an attorney, and you should consult with an attorney, before signing. You have up to twenty-one (21) days to consider this Agreement. After signing the Agreement, you may revoke the Agreement within seven (7) days. The Agreement will become effective seven (7) days after you sign it. James G. Treybig ("Treybig") and Tandem Computers Incorporated ("Tandem") entered into an employment agreement dated as of May 19, 1995 (the "Agreement"). As of January 10, 1996 Treybig and Tandem entered into an amendment to the Agreement (the "Amendment") which superseded an amendment entered into as of December 11, 1995, the Agreement as amended being hereinafter referred to as the Amended Agreement. This Settlement Agreement and General Release (the "Release") is being entered into pursuant to the requirements of Section 5 of the Amendment. Accordingly, for and in consideration of the commitments set forth herein and in the Amended Agreement, Treybig and Tandem agree as follows: 1. Tandem and Treybig agree (i) that Treybig's employment with Tandem was terminated effective as of January 10, 1996, (ii) that such date was the last day of Treybig's Period of Employment with Tandem for purposes of the Amended Agreement, and (iii) that Treybig will not be entitled to any of the benefits of any employee benefit program of Tandem accruing after said date except as set forth in the Amended Agreement. 2. Concurrently with the execution and delivery of this Release, Tandem shall pay Treybig $4,837,643 in full satisfaction of Treybig's claim pursuant to clauses (i), (iii), (vi) and (vii) of Section 2 and pursuant to Section 3 of the Amendment. The parties acknowledge that the payment required by clause (ii) of Section 2 of the Amendment will be made on the date referred to in such clause. 3. Except as provided in the Amended Agreement and by any indemnification agreement or bylaw applicable to Treybig in his capacity as an employee, officer or a director of Tandem or pursuant to California Labor Code Section 2802 or similar provision of law, Treybig, his representatives, heirs, successors, and assignees, do hereby completely release and forever discharge Tandem and its parent, affiliated, and subsidiary corporations, and their shareholders, officers, directors, agents, employees, attorneys, successors, and assigns (referred to hereinafter collectively as "Tandem") from all claims, rights, demands, actions, obligations, labilities, and causes of action of any and every kind, nature, and -1- character whatsoever, known or unknown, which Treybig may now have or has ever had against Tandem including, without limitation, those arising from or in any way connected with the employment of Treybig by Tandem or termination thereof, whether based on tort, contract or any federal, state or local law, statute or regulation, including but not limited to any claims Treybig may have under the federal Age Discrimination in Employment Act (29 U.S.C. Section 621, et seq.) or the California Fair Employment and Housing Act. It is understood and agreed that Treybig's rights to indemnification under Tandem's bylaws shall be determined under Tandem's bylaws as in effect on the date hereof, or as such bylaws may be amended from time to time hereafter to the extend any such amendment provides broader indemnification rights than were provided before such amendment. 4. Treybig further agrees that he will not file, nor cause to be filed, in any court or with any governmental agency, any action, claim, or charge against Tandem arising from or in any way connected with his employment with Tandem, including, without limitation, the termination thereof, except to enforce his rights under the Amended Agreement or under any indemnification agreement or bylaw applicable to Treybig in his capacity as an employee, officer or a director of Tandem or pursuant to California Labor Code Section 2801 or similar provision of law. 5. It is understood and agreed that this is a full and final release covering all known, unknown, anticipated, and unanticipated injuries, debts, claims, or damages to Treybig which may have arisen or may be connected with the employment of Treybig by Tandem or the termination thereof. Treybig hereby waives any and all rights or benefits which he may now have, or in the future may have, under the terms of Section 1542 of the California Civil Code which provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. In that regard, Treybig hereby acknowledges that he may have sustained losses which are presently unknown or unsuspected, that such damages and other losses as were sustained may give rise to additional complaints, actions, causes of action, claims, demands and debts in the future. Nevertheless, he acknowledges that this Release has been negotiated and agreed upon in light of this realization and, being fully aware of this situation, he does nevertheless intend hereby to release, acquit and forever discharge Tandem from any and all such unknown claims including damages which are unknown or unanticipated, except as provided in Paragraphs 3 and 4 above. 6. Treybig hereby agrees that he accepts the termination of his employment with Tandem and that he shall not seek reinstatement or reemployment with Tandem at any time. Treybig expressly waives any and all rights he may have to reemployment with Tandem; provided, however, that this Release shall not affect any written consulting agreement entered into between Tandem and Treybig either prior or subsequent to the date hereof. -2- 7. It is understood and agreed that except to the extend disclosed by Tandem, the Amended Agreement and this Release, and each and every provision thereof and hereof, shall be confidential and shall not be disclosed by Treybig to any person, firm, organization or entity, of any and every type, public or private, for any reason without the prior written consent of Tandem, unless required by law. 8. Treybig agrees to hold all Proprietary Information in confidence and not to, directly or indirectly, disclose, use, copy, publish, summarize, or remove from Tandem any Proprietary Information except as specifically authorized in writing by Tandem. As used in this paragraph, "Proprietary Information" means any information in whatever form, tangible or intangible, directly related to the business of Tandem or any affiliated company of Tandem, unless: (i) the information is or becomes publicly available through lawful means; (ii) the information was rightfully in Treybig's possession, or part of his general knowledge, prior to his employment by Tandem; or (iii) the information is disclosed to Treybig without confidential or proprietary restriction by a third party who rightfully possesses the information (without confidential or proprietary restriction) and did not learn of its, directly or indirectly, from Tandem. 9. It is understood and agreed that this is a compromise settlement of a disputed claim, or disputed claims, and that the furnishing of the consideration of this Release shall not be deemed or construed at any time or for any purpose as an admission of liability by Tandem. The liability for any and all claims is expressly denied by Tandem. 10. Treybig and Tandem agree that they have been represented in the negotiation of this Release by individuals of their own choosing, that they have read this Release and fully understand its legal effect, that this Release contains all of the promises which they have made, and that they are entering into this Release freely and not on the basis of promises which are not stated in this Release. Treybig specifically acknowledges that he has been advised to consult an attorney regarding the terms of this Release. Treybig further acknowledges that he has had at least twenty-one (21) days to consider and evaluate the terms of this agreement, and that he understands that this Release is revocable for seven (7) days after its execution. 11. Any dispute between Treybig and Tandem arising from Treybig's employment with Tandem, including termination thereof, and any dispute as to the violation of any provision of this Release shall be resolved by arbitration, which arbitration shall be conducted in accordance with the provisions of Section 7.11 of the Amended Agreement. 12. This Release shall not be construed as an admission by Tandem or Treybig or any violation of law, or breach of any legal or contractual duties, or of any other improper conduct by Tandem, Treybig or anyone else. -3- 13. The terms of this Release shall be governed by the laws of the State of California. In the event that any term of this Release shall be found to be null and void, the remaining terms shall continue to have full force and effect. /s/ James G. Treybig Dated January 18, 1996 ---------------------------------------- James G. Treybig Dated January 18, 1996 TANDEM COMPUTERS INCORPORATED By /s/ Thomas J. Perkins -------------------------------------- Thomas J. Perkins Dated January 18, 1996 MORRISON & FORESTER By /s/ Bruce Alan Mann -------------------------------------- Bruce Alan Mann Attorneys for Tandem Computers Incorporated Dated January 18, 1996 MUNGER TOLLES & OLSON By /s/ Robert K. Johnson -------------------------------------- Robert K. Johnson Attorneys for James G. Treybig -4- EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS. 1,000 3-MOS SEP-30-1997 OCT-01-1996 DEC-31-1996 128,326 0 423,095 23,585 119,140 849,006 1,225,413 721,634 1,733,843 550,507 77,171 0 0 3,050 1,103,115 1,733,843 342,762 435,732 145,231 208,883 66,182 3,572 3,204 19,764 8,000 11,764 0 0 0 11,764 0.10 0.10
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