-----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, Crz91kZ0YOW6HAlq+aJP+ZrqTqaSRwzF4NjgWvcMK1YH9nTJn9CplvRnkNODRec9 13oBbKCsgXpmRHyQ/wfksw== 0000950008-97-000291.txt : 19970815 0000950008-97-000291.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950008-97-000291 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97659905 BUSINESS ADDRESS: STREET 1: 19333 VALLCO PKWY CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4082856000 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 June 30, 1997 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 July 28, 1997 $.025 par value 118,074,615 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 and nine month periods ended June 30, 1997 are not necessarily indicative of results to be expected in the future. [STATEMENTS ON FOLLOWING PAGES] Page 2 of 22 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------- For the three months ended For the nine months ended -------------------------- ------------------------- June 30, June 30, June 30, June 30, (In thousands, except per share amounts) 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- REVENUES Product revenues $ 392,692 $ 372,208 $ 1,099,028 $ 1,069,841 Service and other revenues 109,882 93,570 306,601 286,857 - ---------------------------------------------------------------------------------------------------------------------- Total revenues 502,574 465,778 1,405,629 1,356,698 - ---------------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES Cost of product revenues 154,375 160,152 452,345 463,038 Cost of service and other revenues 80,979 66,859 219,627 207,699 Research and development 69,433 69,348 202,798 210,751 Marketing, general, and administrative 147,600 139,184 434,961 447,770 Restructuring charge -- -- -- 52,000 - ---------------------------------------------------------------------------------------------------------------------- Total costs and expenses 452,387 435,543 1,309,731 1,381,258 - ---------------------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) 50,187 30,235 95,898 (24,560) Gain on sale of real estate -- -- 5,463 -- Net interest income 2,049 22 4,143 730 - ---------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 52,236 30,257 105,504 (23,830) Provision for income taxes 9,000 6,919 25,500 21,757 - ---------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS 43,236 23,338 80,004 (45,587) INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES -- (15,440) -- 5,894 GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF INCOME TAXES -- -- 989 -- - ---------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 43,236 $ 7,898 $ 80,993 $ (39,693) ====================================================================================================================== PRIMARY EARNINGS (LOSS) PER SHARE CONTINUING OPERATIONS $ .36 $ .20 $ .66 $ (.39) DISCONTINUED OPERATIONS -- (.13) -- .05 GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS -- -- .01 -- - ---------------------------------------------------------------------------------------------------------------------- EARNINGS (LOSS) PER SHARE $ .36 $ .07 $ .67 $ (.34) ====================================================================================================================== Primary weighted average shares outstanding 119,524 118,978 120,201 117,346 ====================================================================================================================== FULLY DILUTED EARNINGS (LOSS) PER SHARE CONTINUING OPERATIONS $ .35 $ .20 $ .64 $ (.39) DISCONTINUED OPERATIONS -- (.13) -- .05 GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS -- -- .01 -- - ---------------------------------------------------------------------------------------------------------------------- EARNINGS (LOSS) PER SHARE $ .35 $ .07 $ .65 $ (.34) ====================================================================================================================== Fully diluted weighted average shares outstanding 124,238 119,512 125,497 117,346 ====================================================================================================================== See accompanying notes.
Page 3 of 22 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------- June 30, September 30, (In thousands, except per share amount) 1997 1996 - -------------------------------------------------------------------------------------------------------------- ASSETS - -------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and equivalents $ 227,822 $ 87,813 Accounts receivable, net 430,712 475,464 Current portion of lease receivables 85,702 74,624 Inventories 97,304 115,320 Prepaid expenses and other 76,904 43,749 Net current assets of discontinued operations -- 62,593 - -------------------------------------------------------------------------------------------------------------- Total current assets 918,444 859,563 - -------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT, AND EQUIPMENT, at cost 1,267,894 1,246,950 Accumulated depreciation and amortization (744,821) (696,140) Net property, plant, and equipment of discontinued operations -- 30,402 - -------------------------------------------------------------------------------------------------------------- Net property, plant, and equipment 523,073 581,212 - -------------------------------------------------------------------------------------------------------------- LEASE RECEIVABLES 92,286 86,618 - -------------------------------------------------------------------------------------------------------------- OTHER ASSETS 256,552 217,580 - -------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,790,355 $1,744,973 ============================================================================================================== LIABILITIES AND STOCKHOLDERS' INVESTMENT - -------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Accounts payable $ 140,632 $ 135,821 Accrued liabilities 344,436 353,765 Current maturities of long-term obligations 82,888 93,740 - -------------------------------------------------------------------------------------------------------------- Total current liabilities 567,956 583,326 - -------------------------------------------------------------------------------------------------------------- LONG-TERM OBLIGATIONS 87,078 75,225 - -------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' INVESTMENT Common stock $.025 par value, authorized 400,000 shares, outstanding 123,531 shares at June 30 and 121,318 shares at September 30 3,088 3,033 Additional paid-in capital 736,015 710,264 Retained earnings 499,697 420,363 Accumulated translation adjustments (6,816) 3,629 Treasury stock, at cost (96,663) (50,867) - -------------------------------------------------------------------------------------------------------------- Total stockholders' investment 1,135,321 1,086,422 - -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $1,790,355 $1,744,973 ============================================================================================================== See accompanying notes.
Page 4 of 22 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------------------------------- For the nine months ended --------------------------------------- June 30, June 30, (In thousands) 1997 1996 - --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 80,993 $ (39,693) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 138,277 146,799 Gain on disposal of discontinued operation (989) -- Gain on sale of real estate (5,463) -- Restructuring charge -- 52,000 Gain on sale of investment of discontinued operation -- (30,628) (Gain) Loss on dispositions of property, plant, and equipment (2,232) 1,585 Changes in: Accounts receivable 49,098 50,513 Inventories 19,064 (34,068) Lease receivables (16,986) 5,708 Non-debt current liabilities and other (71,724) (87,448) - --------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 190,038 64,768 - --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in property, plant, and equipment (104,635) (115,559) Proceeds from dispositions of property, plant, and equipment 21,106 11,373 Proceeds from sale of discontinued operation 93,200 -- Proceeds from sale of investment of discontinued operation 29,764 34,802 Proceeds from sale of real estate 16,856 -- Increase in other assets (79,111) (67,507) - --------------------------------------------------------------------------------------------------------- Net cash used in investing activities (22,820) (136,891) - --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings 84,267 88,100 Repayments (82,138) (62,842) Repurchase of treasury stock (45,817) -- Issuance of Common Stock under stock plans, including tax benefits 24,841 10,514 Issuance of warrants -- 5,700 - --------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (18,847) 41,472 - --------------------------------------------------------------------------------------------------------- Effect of exchange rate fluctuations on cash and equivalents (7,481) (5,462) - --------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 140,890 (36,113) Cash and equivalents at beginning of period 87,813 121,230 Net change in cash of discontinued operations (881) (11,167) - --------------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS AT END OF PERIOD $227,822 $ 73,950 ========================================================================================================= See accompanying notes.
Page 5 of 22 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. EARNINGS (LOSS) PER SHARE - ----------------------------- Earnings per share (EPS) 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 and warrants that have a dilutive effect when applying the treasury stock method. Loss per share is calculated using the weighted average number of common shares outstanding during the period. Fully diluted earnings per share also reflect additional dilution related to stock options and warrants due to the use of the market price at the end of the period, when higher than the average price for the period. In February 1997, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 128 (SFAS No. 128), EARNINGS PER SHARE. The Statement is effective for periods ending after December 15, 1997, at which time the Company will be required to change the method currently used to compute EPS. SFAS No. 128 will require entities to report "basic" and "diluted" earnings per share. For the Company, the basic earnings per share calculation is equivalent to its present EPS calculation, excluding the effect of dilutive stock options and warrants. The diluted earnings per share calculation is equivalent to the existing primary EPS calculation. The Company has determined that, on a pro forma basis, basic earnings per share and diluted earnings per share would have been as follows:
- --------------------------------------------------------------------------------------------------------------------------- For the three months ended For the nine months ended ------------------------------------ ------------------------------ June 30, June 30, June 30, June 30, 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Pro forma basic earnings (loss) per share Continuing operations $ .37 $ .20 $ .68 $ (.39) Discontinued operations -- (.13) -- .05 Gain on disposal of discontinued operations -- -- .01 -- - --------------------------------------------------------------------------------------------------------------------------- Pro forma basic earnings (loss) per share $ .37 $ .07 $ .69 $ (.34) =========================================================================================================================== Pro forma diluted earnings (loss) per share Continuing operations $ .36 $ .20 $ .66 $ (.39) Discontinued operations -- (.13) -- .05 Gain on disposal of discontinued operations -- -- .01 -- - --------------------------------------------------------------------------------------------------------------------------- Pro forma diluted earnings (loss) per share $ .36 $ .07 $ .67 $ (.34) ===========================================================================================================================
2. INVENTORIES - ----------------- Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventories were as follows:
- -------------------------------------------------------------------------------- June 30, September 30, (In thousands) 1997 1996 - -------------------------------------------------------------------------------- Purchased parts and subassemblies $45,508 $ 62,511 Work in process 20,277 19,986 Finished goods 31,519 32,823 - -------------------------------------------------------------------------------- Total $97,304 $115,320 ================================================================================
Page 6 of 22 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. INVESTMENTS - --------------- Realized gains on available-for-sale securities during the three and nine month periods ended June 30, 1997 and 1996 were not significant. 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 June 30, 1997, $73 million of financing was available to the Company under its accounts receivable purchase agreement. The maximum amount outstanding under this agreement during the first nine months 1997 was $25 million. There were no amounts outstanding during the quarter ended June 30, 1997 or as of September 30, 1996. 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 $13.0 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 carrying value of UB Networks, and estimated costs and expenses incurred and expected to be incurred in connection with the transaction, the Company recorded a gain of $1.0 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 June 30, 1996, included revenues of $82.1 million, an operating loss of $15.4 million, and a loss from discontinued operations of $15.4 million, or $0.13 per share. The results of operations for UB Networks for the nine months ended June 30, 1996, included revenues of $279.9 million, an operating loss of $24.5 million, a non-operating gain from the sale of an investment of $30.6 million, and income from discontinued operations of $5.9 million, or $0.05 per share. Page 7 of 22 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. RESTRUCTURING - ----------------- Information relating to restructuring activity for the nine months ended June 30, 1997 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, nine months ended June 30, 1997 (17,535) (5,821) (1,130) (24,486) Applicable to discontinued operation -- (3,854) -- (3,854) - --------------------------------------------------------------------------------------------------- Balances, June 30, 1997 $ 404 $15,119 $12,358 $27,881 =================================================================================================== Cash used, nine months ended June 30, 1997 $17,535 $ 5,382 $ 848 $23,765 ===================================================================================================
Of the total restructuring reserves remaining as of June 30, 1997, approximately $12 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 and nine months ended June 30, 1997, and 1996, 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 was purported to be on behalf of purchasers of the Company's Common Stock between March 8, 1995, and July 12, 1995. The complaint alleged violations of Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5. On June 30, 1997, the court entered judgment in favor of the Company on all claims. The plaintiffs have waived their right of appeal and the judgment is, therefore, final. Page 8 of 22 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. PROPOSED MERGER WITH COMPAQ COMPUTER CORPORATION - -------------------------------------------------------- On June 23, 1997, the Company and Compaq Computer Corporation (Compaq) announced the execution of a merger agreement (Merger Agreement) in a stock-for-stock transaction. Under the terms of the Merger Agreement, shares of and options to purchase the Company's common stock were to be exchanged for shares of and options to purchase Compaq common stock at an exchange ratio of 1 share of the Company's common stock for 0.21 shares of Compaq common stock. The exchange ratio has been adjusted to 1 share of the Company's common stock to 0.525 shares of Compaq common stock to reflect Compaq's five-for-two stock split announced on July 1, 1997. The transaction is intended to qualify as a pooling of interests for accounting and financial reporting purposes, and is structured to qualify as a tax-free reorganization. The Company has filed required documents with various regulatory agencies regarding the proposed merger. The applicable waiting periods for certain filings have expired. The transaction is conditioned upon satisfactory completion of all regulatory requirements, obtaining approval of the Company's stockholders, and other customary closing conditions. The Company estimates that it will incur merger-related fees and expenses of approximately $16.8 million, consisting primarily of transaction costs for fees and expenses of investment bankers, attorneys and accountants. In addition, if the merger is consummated, the Company will become obligated to pay special bonuses totaling approximately $4.6 million. If the merger is terminated prior to consummation, Tandem may be required, among other things, to incur a termination fee of $55 million. 11. SUBSEQUENT EVENT - --------------------- Effective July 1, 1997, the Company acquired an additional 50 percent ownership interest in Tandem Computers de Mexico de C.V. (Tandem de Mexico) for a total acquisition cost of approximately $14.5 million. As a result, the Company has a 95 percent ownership interest in Tandem de Mexico. Tandem de Mexico is primarily engaged in selling and servicing products manufactured by the Company. The Company will account for this additional investment using the purchase method of accounting and will begin to report Tandem de Mexico as a consolidated subsidiary as of July 1, 1997. Page 9 of 22 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 third quarter and first nine months of fiscal 1997 and 1996. The first table shows the relationship of revenue and expense items to total revenues, except costs of product and services, which are shown in relation to product revenues and service revenues, respectively. The second table shows the percentage change in 1997 and 1996 from the comparable prior year periods. 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)
THREE MONTHS NINE MONTHS ENDED JUNE 30, ENDED JUNE 30, - ---------------------------------------------------------------------------------------------- 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------- Product revenues 78% 80% 78% 79% Service and other revenues 22 20 22 21 - ---------------------------------------------------------------------------------------------- TOTAL REVENUES 100 100 100 100 - ---------------------------------------------------------------------------------------------- Cost of product revenues 39 43 41 43 Cost of service and other revenues 74 71 72 72 - ---------------------------------------------------------------------------------------------- Total cost of revenues 47 49 48 49 Research and development 14 15 14 16 Marketing, general, and administrative 29 30 31 33 Restructuring charge -- -- -- 4 - ---------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) 10 6 7 (2) Gain on sale of real estate -- -- 1 -- - ---------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 10 6 8 (2) Provision for income taxes 1 1 2 1 - ---------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS 9 5 6 (3) INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES -- (3) -- -- - ---------------------------------------------------------------------------------------------- NET INCOME (LOSS) 9% 2% 6% (3)% ==============================================================================================
Page 10 of 22 PERCENT INCREASE (DECREASE)
THREE MONTHS NINE MONTHS ENDED JUNE 30, ENDED JUNE 30, - -------------------------------------------------------------------------------------------------- 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------------- Product revenues 6% (7)% 3% (3)% Service and other revenues 17 (7) 7 6 - -------------------------------------------------------------------------------------------------- TOTAL REVENUES 8 (7) 4 (1) - -------------------------------------------------------------------------------------------------- Cost of product revenues (4) (2) (2) 1 Cost of service and other revenues 21 (10) 6 10 - -------------------------------------------------------------------------------------------------- Total cost of revenues 4 (5) -- 4 Research and development -- (4) (4) 3 Marketing, general, and administrative 6 (8) (3) 3 Restructuring charge N/A N/A N/M N/M - -------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) 66 (21) N/M N/M Net interest income 9,214 (98) 468 (83) - -------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 73 (23) N/M N/M Provision for income taxes 30 (39) 17 12 - -------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS 85 (17) N/M N/M INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES N/M N/M N/M (59) - -------------------------------------------------------------------------------------------------- NET INCOME (LOSS) 447% (74)% N/M N/M ================================================================================================== PRIMARY EARNINGS (LOSS) PER SHARE 414% (73)% N/M N/M FULLY DILUTED EARNINGS (LOSS) PER SHARE 400% (73)% N/M N/M ================================================================================================== N/A - Not applicable N/M - Not meaningful
OPERATING RESULTS REVENUES Total revenues of $502.6 million during the third quarter of 1997 increased $36.8 million, or 8 percent, compared to the third quarter of 1996. Product revenues of $392.7 million for the third quarter of 1997 increased $20.5 million, or 6 percent, from the same quarter of 1996. This increase is primarily attributable to increased revenues from the mid-range Himalaya products and associated software and increased revenues from NT servers. This increase is partially offset by the negative impact of the stronger U.S. dollar versus certain European currencies and the Japanese Yen from a year ago. Service and other revenues of $109.9 million for the third quarter of 1997 increased $16.3 million, or 17 percent, compared to the third quarter of 1996. This increase is primarily due to increased consulting revenues, partially offset by the negative impact of certain currency exchange rate movements between the periods. Total revenues of $1.4 billion for the first nine months of 1997 increased $48.9 million, or 4 percent, compared to the first nine months of 1996. Product revenues of $1.1 billion increased $29.2 million, or 3 percent, from the same period of 1996. The increase in product revenues is primarily attributable to increased revenues from Page 11 of 22 the high-end and mid-range Himalaya products and initial revenues from NT servers in 1997. This increase is partially offset by the negative impact of certain currency exchange rate movements from the previous year. Service and other revenues of $306.6 million increased $19.7 million, or 7 percent, from the comparable 1996 period. The increase in service and other revenues is primarily due to increases in both consulting and hardware maintenance revenues, partially offset by the negative impact of certain currency exchange rate movements between the periods. 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 and year-to-date growth rates in the various geographic regions are not necessarily representative of future results.
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30, (Dollars in millions) 1997 1996 1997 1996 --------------------- --------------------- ----------------------- ----------------------- $ % $ % $ % $ % --------------------- --------------------- ----------------------- ----------------------- United States 245.3 49 219.7 47 671.6 48 630.3 46 Europe United Kingdom 42.4 8 35.5 8 117.7 8 105.2 8 Germany 25.9 5 27.0 6 83.2 6 76.3 6 Other Europe 63.1 13 66.7 14 179.6 13 191.8 14 --------------------- --------------------- ----------------------- ----------------------- Total Europe 131.4 26 129.2 28 380.5 27 373.3 28 Japan 70.9 14 66.8 14 199.9 14 196.5 14 Asia/Pacific 30.4 6 28.8 6 96.2 7 91.9 7 Americas Division (excluding the U.S.) 24.6 5 21.3 5 57.4 4 64.7 5 --------------------- --------------------- ----------------------- ----------------------- Total revenues 502.6 100 465.8 100 1,405.6 100 1,356.7 100 ===================== ===================== ======================= =======================
Revenues in the United States increased 12 percent in the third quarter of 1997 compared to the third quarter of 1996. This increase is primarily attributable to increased revenues from the mid-range Himalaya products and NT servers. Revenues in the United States increased 7 percent in the nine month period ended June 30, 1997, in comparison to the same 1996 period. This increase is primarily attributable to increased revenues from high-end Himalaya servers, increased revenues from the mid-range Himalaya products and NT servers, and an increase in hardware maintenance revenues, partially offset by reduced revenues from the UNIX system-based products. Revenues in Europe increased 2 percent during the third quarter of 1997, compared to the third quarter of 1996. In the quarterly comparison, increased consulting revenues and increased revenues from mid-range Himalaya products were partially offset by decreased revenues from high-end Himalaya products and by the negative impact of certain currency exchange rate movements between the periods. European revenues increased 2 percent in the first nine months of 1997, compared to the same 1996 period. For the nine month comparison, increased revenues from the mid-range Himalaya products, increased revenues from the UNIX system-based products and increased consulting revenues were partially offset by decreased revenues from high-end Himalaya products and by the negative impact of certain currency exchange rate movements between the periods. Page 12 of 22 In Japan, revenues increased 6 percent in the third quarter of 1997, compared to the same 1996 period. In the quarterly comparison, increased revenues from high-end Himalaya products were partially offset by the negative impact of currency exchange rate movements between the periods, and by decreased revenues from mid-range Himalaya products. Revenues in Japan increased 2 percent in the first nine months of 1997, compared to the same 1996 period. For the nine month comparison, increased revenues from high-end Himalaya products were generally offset by the negative impact of currency exchange rate movements between the periods, by decreased revenues from mid-range Himalaya products, and by reduced consulting revenues. Asia/Pacific revenues increased 6 percent during the third quarter of 1997, compared to the third quarter of 1996, primarily due to increased consulting revenues. Asia/Pacific revenues increased 5 percent during the first nine months of 1997, compared to the first nine months of 1996. This increase is primarily due to increased consulting and hardware maintenance revenues. COST OF REVENUES During the third quarter of 1997, product margin percentages increased to 61 percent as compared to 57 percent in the same 1996 period. During the first nine months of 1997, product margin percentages increased to 59 percent in comparison to 57 percent in the same 1996 period. Computer system margins were positively impacted by improvements in cost of purchased parts, a shift in product mix to higher margin software products and improved management of discounting and other pricing management programs. These improvements were partially offset by the negative impact on revenues of certain currency exchange rate movements and, in the third quarter, by increased provisions for obsolete inventory. Management expects product margins to decline modestly in the fourth quarter of 1997 from the third quarter level. However, product margins are difficult to predict, as they are affected by future competitive pricing actions, geographic revenue mix, product mix, cost of purchased parts, 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 26 percent in the third quarter of 1997 compared to 29 percent in the third quarter of 1996. The decline in margins was primarily attributable to a shift in the mix of revenues, which resulted in a higher proportion of lower margin consulting revenues. Margins on service and other revenues were 28 percent in the first nine months of both 1997 and 1996. Page 13 of 22 RESEARCH AND DEVELOPMENT EXPENSES Research and development (R&D) expenses of $69.4 million for the third quarter of 1997 were essentially flat compared to the same 1996 quarter. R&D expenses of $202.8 million for the first nine months of 1997 decreased $8.0 million, or 4 percent, compared to the same 1996 period. In both the quarterly and nine month comparisons, higher levels of external funding received for joint development projects, higher levels of software capitalization, and decreases in both development material and tooling costs were partially offset by increases in salaries and benefits. Management expects R&D spending to decline slightly in the fourth quarter of 1997 from the third quarter level. However, the expected R&D spending pattern could be affected by factors such as changes in product development schedules and changes in external funding levels. 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 $147.6 million in the third quarter of 1997 increased $8.4 million, or 6 percent, in comparison to the third quarter of 1996. The increase in MG&A expenses is primarily attributable to increased advertising and product promotional spending, amounts accrued for nonrecurring payments under certain employment agreements, and net increases in certain other expense items that are not fixed in nature. This increase was partially offset by lower sales and marketing personnel-related and occupancy-related expenses. MG&A expenses for the first nine months of 1997 decreased $12.8 million, or 3 percent, to $435.0 million, compared to the same period in 1996. This decrease is primarily attributable to reduced sales and marketing personnel-related and occupancy-related expenses, partially offset by increased spending for new product introductions, and advertising and promotional costs. In the fourth quarter of 1997, management expects MG&A expenses, excluding commissions, to increase slightly from the 1997 third quarter level, but to decline as a percentage of revenues. 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 During the second quarter of 1996, the Company initiated a restructuring program to transform the Company's organizational structure in order to align resources with a new strategic business model and to lower the Company's cost structure. The restructuring actions resulted in a charge of $52.0 million and included reducing headcount, vacating leased facilities, and disposing of assets to discontinue certain product programs and other activities. Page 14 of 22 Information relating to restructuring activity for the nine months ended June 30, 1997, 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, nine months ended June 30, 1997 (17,535) (5,821) (1,130) (24,486) Applicable to discontinued operation -- (3,854) -- (3,854) - --------------------------------------------------------------------------------------------------- Balances, June 30, 1997 $ 404 $ 15,119 $ 12,358 $ 27,881 =================================================================================================== Cash used, nine months ended June 30, 1997 $ 17,535 $ 5,382 $ 848 $ 23,765 ===================================================================================================
IMPACT OF CURRENCY EXCHANGE RATES During the third quarter and first nine months of 1997, certain European currencies and the Japanese yen were weaker against the U.S. dollar than in the corresponding 1996 periods. If currency exchange rates had not changed since the respective periods in 1996, operating income for the third quarter of 1997 and the first nine months of 1997 would have been greater by approximately $8 million and $22 million, respectively, compared to the corresponding periods in 1996. During these same 1997 periods, the Company's hedging program generated income of approximately $2 million and $12 million in each respective period, which partially mitigated the above. RESULTS FROM CONTINUING OPERATIONS For the three month period ended June 30, 1997, the Company reported income from continuing operations of $43.2 million, or $0.35 per share on a fully diluted basis. For the nine month period ended June 30, 1997, the Company reported income from continuing operations of $80.0 million, or $0.64 per share on a fully diluted basis. For the three month period ended June 30, 1996, the Company reported income from continuing operations of $23.3 million, of $0.20 per share on a fully diluted basis. For the nine month period ended June 30, 1996, the Company reported a loss from continuing operations of $45.6 million, or $0.39 per share, including the $52.0 million restructuring charge. The income tax provisions for the third quarters of 1997 and 1996 were $9.0 million and $6.9 million, respectively, arising principally from taxes currently payable in foreign jurisdictions. The income tax provisions for the first nine months of 1997 and 1996 were $25.5 million and $21.8 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. Page 15 of 22 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 $13.0 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 carrying value of UB Networks and estimated costs and expenses incurred and expected to be incurred in connection with this transaction, the Company recorded a gain of $1.0 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 June 30, 1996, included revenues of $82.1 million, an operating loss of $15.4 million, and a loss from discontinued operations of $15.4 million, or $0.13 per share. The results of operations for UB Networks for the nine months ended June 30, 1996, included revenues of $279.9 million, an operating loss of $24.5 million, a non-operating gain from the sale of an investment of $30.6 million, and income from discontinued operations of $5.9 million, or $0.05 per share. FINANCIAL CONDITION During the first nine months of 1997, cash and cash equivalents increased by $140 million to $228 million. The Company generated $190 million positive cash flow from operations during the first nine months of the year. Investing activities for the period used approximately $23 million, principally through investment in capital equipment and software, partially offset by proceeds from the sale of discontinued operations of approximately $93 million and proceeds from the sale of real estate. Financing activities consumed approximately $19 million, primarily from the purchase of treasury stock, partially offset by issuances of common stock under the Company's stock plans. 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 Page 16 of 22 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 June 30, 1997, $73 million of financing was available to the Company under its accounts receivable purchase agreement. The maximum amount outstanding at any point during the first nine months of 1997 was $25 million. There were no amounts outstanding during the quarter ended June 30, 1997 or as of September 30, 1996. Accounts receivable days were 78 at June 30, 1997 compared to 80 days at September 30, 1996. Inventory days were 38 at June 30, 1997 compared to 39 days at September 30, 1996. Total debt and short-term borrowings of $176 million at June 30, 1997, including $139 million of limited recourse borrowings against lease receivables, increased $1 million from September 30, 1996. Total debt as a percentage of total capital was approximately 13 percent as of June 30, 1997 compared to 14 percent as of September 30, 1996. Cash used for restructuring actions during the first nine months of 1997 aggregated approximately $24 million and was funded by cash from operations. Cash requirements for restructuring actions for the remainder of 1997 are expected to be approximately $3 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 committed and uncommitted unsecured credit lines, and other financing arrangements available to the Company. Management believes that the financing sources available at June 30, 1997 can adequately meet Tandem's financing needs, both in the short and the long term. As of June 30, 1997, the Company had approximately 7,000 full-time equivalent employees. PROPOSED MERGER WITH COMPAQ COMPUTER CORPORATION On June 23, 1997, the Company and Compaq Computer Corporation (Compaq) announced the execution of a merger agreement (Merger Agreement) in a stock-for-stock transaction. Under the terms of the Merger Agreement, shares of and options to purchase the Company's common stock were to be exchanged for shares of and options to purchase Compaq common stock at an exchange ratio of 1 share of the Company's common stock for 0.21 shares of Compaq common stock. The exchange ratio has been adjusted to 1 share of the Company's common stock for 0.525 shares of Compaq common stock to reflect Compaq's five-for-two stock split announced on July 1, 1997. The transaction is intended to qualify as a pooling of interests for accounting and financial reporting purposes, and is structured to qualify as a tax-free reorganization. The Company has filed required documents with various regulatory agencies regarding the proposed merger. The applicable waiting periods for certain filings have expired. The transaction is conditioned upon satisfactory completion of all regulatory requirements, Page 17 of 22 obtaining approval of the Company's stockholders, and other customary closing conditions. The Company estimates that it will incur merger-related fees and expenses of approximately $16.8 million, consisting primarily of transaction costs for fees and expenses of investment bankers, attorneys and accountants. In addition, if the merger is consummated, the Company will become obligated to pay special bonuses totaling approximately $4.6 million. If the merger is terminated prior to consummation, Tandem may be required, among other things, to incur a termination fee of $55 million. OUTLOOK AND RISKS TANDEM'S CORE COMPETENCIES HAVE HISTORICALLY CENTERED AROUND PROVIDING RELIABLE, SCALEABLE 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. TANDEM'S SERVERNET CLUSTERING TECHNOLOGY IS INCLUDED IN THE S-SERIES SERVERS NOW SHIPPING ACROSS ALL THREE PRODUCT FAMILIES AND THE CS150 CLUSTERED SERVER PRODUCT. FIRST CUSTOMER SHIPMENT DATES FOR THE S-SERIES PRODUCTS WERE: UNIX, FEBRUARY 1996; WINDOWS NT, NOVEMBER 1996; AND, HIMALAYA, JUNE 1997. THE FIRST CUSTOMER SHIPMENT DATE FOR THE CS150 PRODUCT WAS ALSO JUNE 1997. S-SERIES AND CS150 PRODUCT REVENUES ACCOUNTED FOR APPROXIMATELY 8 PERCENT OR $42 MILLION OF TOTAL REVENUES IN THE THIRD QUARTER OF FISCAL 1997, OF WHICH APPROXIMATELY $22 MILLION RELATED TO THE HIMALAYA S-SERIES SERVERS. THERE CAN BE NO ASSURANCE THAT REVENUES OF THESE PRODUCTS WILL CONTINUE AT THE SAME LEVEL. THE COMPANY EXPECTS NO SIGNIFICANT IMPACT ON THE OVERALL REVENUE ATTRIBUTABLE TO HIMALAYA SERVERS (K-SERIES AND S-SERIES) AS A RESULT OF THE INTRODUCTION OF THE S-SERIES SERVERS. S-SERIES HIMALAYA SERVERS INTEROPERATE WITH K-SERIES HIMALAYA SERVERS. SALES OF S-SERIES HIMALAYA SERVERS ARE EXPECTED TO REPLACE SALES OF K-SERIES SERVERS FOR NEW APPLICATIONS. THE COMPANY EXPECTS THAT SALES OF HIMALAYA SERVERS FOR ADDITIONAL CUSTOMER CAPACITY WILL BE SPLIT BETWEEN K-SERIES AND S-SERIES SERVERS FOR THE NEXT TWO TO THREE YEARS. THE S-SERIES HIMALAYA AND S-SERIES NT SERVERS HAVE NO IMPACT ON THE MARKET SUCCESS OF THE S-SERIES UNIX SERVERS, BECAUSE THE COMPANY'S UNIX PRODUCTS ARE FOCUSED ON SPECIFIC APPLICATION AREAS IN THE TELECOMMUNICATIONS INDUSTRY. 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 Page 18 of 22 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 NONSTOP 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. 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. Page 19 of 22 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits required by Item 601 of Regulation S-K Exhibit Number Exhibit 10.23** Settlement Agreement and General Release dated May 27, 1997, as amended, to Employment Agreement dated May 19, 1995 and amended as of January 18, 1996 and May 2, 1996 between the Company and Kurt Friedrich 27 Financial Data Schedule - -------------- * Incorporated by reference. ** Director or officer compensatory plan. (b) Reports on Form 8-K: (i) A report on Form 8-K, Item 2 was filed by the Company with the Commission on June 26, 1997, with respect to Compaq's proposed merger with Tandem. (ii) A report on Form 8-K, Item 5 was filed by the Company with the Commission on July 23, 1997, containing the Company's news release dated July 22, 1997, with respect to its financial results for the period ended June 30, 1997. Page 20 of 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TANDEM COMPUTERS INCORPORATED (Registrant) Date: August 12, 1997 By: /s/ Enrico L. Pesatori ---------------------------------- Enrico L. Pesatori President, Chief Operating Officer and Interim Chief Financial Officer Date: August 12, 1997 By: /s/ Kenneth R. Barber ---------------------------------- Kenneth R. Barber Senior Vice President and Corporate Controller Page 21 of 22 INDEX TO EXHIBITS EXHIBIT PAGE - ------- ---- 10.23* Settlement Agreement and General Release dated May 27, * 1997, as amended, to Employment Agreement dated May 19, 1995 and amended as of January 18, 1996 and May 2, 1996 between the Company and Kurt Friedrich. 27 Financial Data Schedule * Director or officer compensatory plan. Page 22 of 22 EX-10.23 2 SETTLEMENT AGREEMENT/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. Kurt Friedrich ("Friedrich") and Tandem Computers Incorporated ("Tandem") entered into an employment agreement dated as of May 19, 1995 (the "Agreement"). As of January 1, 1996, Friedrich and Tandem entered into an amendment to the Agreement (the "First Amendment"). As of May 2, 1996, Friedrich and Tandem entered into a second amendment to the Agreement (the "Second Amendment"). The Agreement, as amended, is 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 Amended Agreement. Accordingly, for and in consideration of the commitments set forth herein and in the Amended Agreement, Friedreich and Tandem agree as follows: 1. Tandem and Friedrich agree (I) that Friedrich's employment with Tandem will terminate effective as of April 30, 1997 ("Date of Termination"), (ii) that such date was the last day of Friedrich's Period of Employment with Tandem for purposes of the Amended Agreement, and (iii) that Friedrich 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. Pursuant to section 5 of the Amended Agreement, the Parties agree that for purposes of the Amended Agreement, the termination of Friedrich's employment shall be treated as if Tandem terminated the Period of Employment Without Cause (as such terms were used in the Amended Agreement). 3. Within thirty (30) days of the execution and delivery of this Release, Tandem will take the following actions and shall pay Friedrich the following amounts in full satisfaction of any and all obligations of Tandem -------------------- under the Amended Agreement: (a) Pursuant to, and in full satisfaction of, sections 5.02(d)(i),(iii), and (vi)of the Amended Agreement, Tandem shall pay Friedrich the sum of one million, nine hundred seventy nine thousand dollars ($1,979,000.00). (b) Pursuant to, and in full satisfaction of, section 1 5.02(d)(ii) of the Amended Agreement, Tandem shall pay Friedrich a pro-rated annual bonus for the fiscal year in which termination occurs, for the portion of the fiscal year prior to the date of termination, based on Tandem's performance through the end of the fiscal quarter in which termination occurs (October 1, 1996 through June 30, 1997.) (c) Pursuant to, and in full satisfaction of, section 5.02(d)(vii) of the Amended Agreement, Tandem shall pay for outplacement counseling services for Friedrich up to a maximum of thirty five thousand dollars ($35,000.00). (d) Pursuant to, and in full satisfaction of, section 2(B) of the Second Amendment, the Parties agree that Friedrich's rights under his outstanding stock options will be determined under the terms of the applicable plans and agreements, except that all of Friedrich's stock options which are vested at the time of the Termination Date will remain outstanding and may be exercised at any time on or before (i) the third anniversary of his termination of employment or (ii) the original expiration date of the applicable stock option, whichever occurs first. (e) Pursuant to, and in full satisfaction of, section 5.02(d) (iv) and (v) of the Amended Agreement, Tandem shall pay Friedrich the sum of seventy six thousand, six hundred eleven dollars ($76,611.00). 4. Except as provided in the Amended Agreement and by any indemnification agreement or by-law applicable to Friedrich 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, Friedrich, 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, liabilities and causes of action of any and every kind, nature and character whatsoever, known or unknown, which Friedrich may now have or has ever had against Tandem including, without limitation, those arising from or in any way connected with the employment of Friedrich 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 Friedrich 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 Friedrich's rights to indemnification under Tandem's by-laws shall be determined under Tandem's by-laws as in effect on the date hereof, or as such by-laws may be amended from time to time hereafter to the extent any such amendment provides broader indemnification rights than were provided before such amendment. It is further understood that this Agreement and General Release supersedes the Amended Agreement between Friedrich and Tandem from which Friedrich releases all claims, rights, demands, actions, obligations, liabilities and causes of action of any kind. 2 5. Friedrich further agrees that he will not file, in any court or with any governmental agency, any action, claims 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 by-law applicable to Friedrich in his capacity as an employee, officer or director of Tandem or pursuant to California Labor Code Section 2802 or similar provision of law. 6. 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 Friedrich which may have arisen or may be connected with the employment of Friedrich by Tandem or the termination thereof. Friedrich 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, Friedrich 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. 7. Friedrich 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. Friedrich expressly waives any and all rights he may have to reemployment with Tandem. 8. It is understood and agreed that except to the extent 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 Friedrich 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. 9. Friedrich 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 Friedrich's possession, or part of his general knowledge, prior to his employment by Tandem, or (iii) 3 the information is disclosed to Friedrich without confidential or proprietary restriction by a third party who rightfully possesses the information (without confidential or proprietary restriction) and did not learn of it, directly or indirectly, from Tandem. 10. 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. 11. Friedrich and Tandem agree that they have had the opportunity to be 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. Friedrich specifically acknowledges that he has been advised to consult an attorney regarding the terms of this Release. Friedrich 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. 12. Any dispute between Friedrich and Tandem arising from Friedrich'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. 13. This Release shall not be construed as an admission by Tandem or Friedrich of any violation of law, or breach of any legal or contractual duties, or of any other improper conduct by Tandem, Friedrich or anyone else. 14. 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 or void, the remaining terms shall continue to have full force and effect. Dated: 5/27/97 /s/ Kurt Friedrich ______________________________________ Kurt Friedrich Dated: 5/27/97 Tandem Computers Incorporated /s/ Phil Johnson By:___________________________________ Philip Johnson 4 EX-27 3 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS. 1,000 9-MOS SEP-30-1997 OCT-01-1996 JUN-30-1997 227,822 0 452,819 22,107 97,304 918,444 1,267,894 744,821 1,790,355 567,956 87,078 0 0 3,088 1,132,233 1,790,355 1,099,028 1,405,629 452,345 671,972 202,798 3,283 9,602 105,504 25,500 80,004 989 0 0 80,993 0.67 0.65
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