-----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, RLUb7zunKg5kcIzRJ96GDWpltidoZm6jar0xjgy32WaSPgulz3s0+7Mv2/veSqyB TsnrnRHpf6j0Ha5EM5iBYg== 0000950149-96-001239.txt : 19960814 0000950149-96-001239.hdr.sgml : 19960814 ACCESSION NUMBER: 0000950149-96-001239 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 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: 96609928 BUSINESS ADDRESS: STREET 1: 19333 VALLCO PKWY CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4082854664 MAIL ADDRESS: STREET 1: 10435 N TANUTA AVE LOC 200 16 CITY: CUPERTINO STATE: CA ZIP: 95014 FORMER COMPANY: FORMER CONFORMED NAME: TCI DELAWARE INC DATE OF NAME CHANGE: 19600201 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 August 8, 1996 $.025 par value 118,201,961 shares
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The following consolidated financial statements have been prepared by the Company without audit by independent public accountants, but in accordance with the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Securities and Exchange Commission rules and regulations, the Company believes the financial disclosures made are sufficient to make the information presented not misleading. In addition, the consolidated financial statements reflect, in the opinion of management, all adjustments (limited to normal, recurring adjustments) necessary to present fairly the consolidated financial position, results of operations, and cash flows for the periods indicated. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and related notes included in the Company's 1995 Annual Report to Stockholders and Annual Report on Form 10-K for the year ended September 30, 1995. Such consolidated financial statements and related notes are filed with the Securities and Exchange Commission. The results of operations for the three- and nine-month period ended June 30, 1996, are not necessarily indicative of results to be expected in the future. [STATEMENTS ON FOLLOWING PAGES] 3 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------- For the three months ended For the nine months ended -------------------------- -------------------------- June 30, June 30, June 30, June 30, (In thousands except per share amounts) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------- REVENUES Product revenues $ 372,208 $ 399,009 $ 1,069,841 $ 1,103,666 Service and other revenues 93,570 100,142 286,857 270,061 - ------------------------------------------------------------------------------------------------------------------- Total revenues 465,778 499,151 1,356,698 1,373,727 - ------------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES Cost of product revenues 160,152 163,328 463,038 456,941 Cost of service and other revenues 66,859 74,439 207,699 189,593 Research and development 69,348 71,866 210,751 204,700 Marketing, general, and administrative 139,184 151,328 447,770 434,040 Restructuring charge -- -- 52,000 -- - ------------------------------------------------------------------------------------------------------------------- Total costs and expenses 435,543 460,961 1,381,258 1,285,274 - ------------------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) 30,235 38,190 (24,560) 88,453 Net interest income 22 1,135 730 4,221 - ------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 30,257 39,325 (23,830) 92,674 Provision for income taxes 6,919 11,324 21,757 19,349 - ------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS 23,338 28,001 (45,587) 73,325 INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES (15,440) 2,843 5,894 14,430 - ------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 7,898 $ 30,844 $ (39,693) $ 87,755 =================================================================================================================== EARNINGS (LOSS) PER SHARE - CONTINUING OPERATIONS $ .20 $ .24 $ (.39) $ .62 EARNINGS (LOSS) PER SHARE - DISCONTINUED OPERATIONS (.13) .02 .05 .12 - ------------------------------------------------------------------------------------------------------------------- EARNINGS (LOSS) PER SHARE $ .07 $ .26 $ (.34) $ .74 =================================================================================================================== Weighted average shares outstanding 118,978 118,055 117,346 118,375 ===================================================================================================================
See accompanying notes. 4 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ------------------------------------------------------------------------------------------------ June 30, September 30, (In thousands except per share amount) 1996 1995 - ------------------------------------------------------------------------------------------------ ASSETS - ------------------------------------------------------------------------------------------------ CURRENT ASSETS Cash and equivalents $ 73,950 $ 121,230 Accounts receivable, net 420,076 539,993 Current portion of lease receivables 68,171 73,555 Inventories 148,017 169,948 Prepaid expenses and other 49,162 65,759 Net assets of discontinued operations 95,984 -- - ------------------------------------------------------------------------------------------------ Total current assets 855,360 970,485 - ------------------------------------------------------------------------------------------------ PROPERTY, PLANT, AND EQUIPMENT, at cost 1,227,298 1,297,481 Accumulated depreciation and amortization (668,794) (700,813) - ------------------------------------------------------------------------------------------------ Net property, plant, and equipment 558,504 596,668 - ------------------------------------------------------------------------------------------------ LEASE RECEIVABLES 85,513 86,173 - ------------------------------------------------------------------------------------------------ OTHER ASSETS 225,343 203,368 - ------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 1,724,720 $ 1,856,694 ================================================================================================ LIABILITIES AND STOCKHOLDERS' INVESTMENT - ------------------------------------------------------------------------------------------------ CURRENT LIABILITIES Accounts payable $ 120,434 $ 195,793 Accrued liabilities 380,203 409,520 Current maturities of long-term obligations 79,199 65,123 - ------------------------------------------------------------------------------------------------ Total current liabilities 579,836 670,436 - ------------------------------------------------------------------------------------------------ LONG-TERM OBLIGATIONS 78,720 75,923 - ------------------------------------------------------------------------------------------------ STOCKHOLDERS' INVESTMENT Common stock $.025 par value, authorized 400,000 shares, outstanding 120,987 shares at June 30 and 119,808 shares at September 30 3,024 2,995 Additional paid-in capital 707,242 691,097 Retained earnings 403,271 450,086 Accumulated translation adjustments 3,494 17,064 Treasury stock, at cost (50,867) (50,907) - ------------------------------------------------------------------------------------------------ Total stockholders' investment 1,066,164 1,110,335 - ------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 1,724,720 $ 1,856,694 ================================================================================================
See accompanying notes. 5 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------------ For the nine months ended ------------------------- June 30, June 30, (In thousands) 1996 1995 - ------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (39,693) $ 87,755 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 146,799 125,015 Restructuring charge 52,000 -- Gain on sale of subsidiaries and investments (30,628) (8,677) Loss on dispositions of property, plant, and equipment 1,585 1,473 Changes in : Accounts receivable 50,513 18,215 Inventories (34,068) (22,137) Lease receivables 5,708 2,026 Non-debt current liabilities and other (87,448) (90,337) - ------------------------------------------------------------------------------------ Net cash provided by operating activities 64,768 113,333 - ------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Investment in property, plant, and equipment (115,559) (119,030) Proceeds from dispositions of property, plant, and equipment 11,373 4,020 Sale of subsidiaries and investments, net of cash disposed 34,802 11,642 Increase in other assets (67,507) (37,981) - ------------------------------------------------------------------------------------ Net cash used in investing activities (136,891) (141,349) - ------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Borrowings 88,100 44,957 Repayments (62,842) (53,042) Issuance of Common Stock under stock plans, including tax benefits 10,514 40,550 Issuance of warrants 5,700 -- - ------------------------------------------------------------------------------------ Net cash provided by financing activities 41,472 32,465 - ------------------------------------------------------------------------------------ Effect of exchange rate fluctuations on cash and equivalents (5,462) 5,922 - ------------------------------------------------------------------------------------ NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (36,113) 10,371 Cash and equivalents at beginning of period 121,230 124,042 Cash of discontinued operations at June 30, 1996 (11,167) -- - ------------------------------------------------------------------------------------ CASH AND EQUIVALENTS AT END OF PERIOD $ 73,950 $ 134,413 ====================================================================================
See accompanying notes. 6 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. Loss per share is calculated using the weighted average number of common shares outstanding during the period. 2. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventories were as follows:
- ------------------------------------------------------------------------------- June 30, September 30, (In thousands) 1996 1995 =============================================================================== Purchased parts and subassemblies $ 85,345 $ 71,455 Work in process 13,593 29,097 Finished goods 49,079 69,396 - ------------------------------------------------------------------------------- Total $148,017 $169,948 ===============================================================================
3. INVESTMENTS During the quarter ended June 30, 1995, the Company realized $2.5 million in gains on available-for-sale securities. Realized gains on available-for-sale securities during the nine months ended June 30, 1996 and 1995 were $0.4 million and $4.5 million, respectively. Net adjustments to unrealized holding gains (losses) on available-for-sale securities for these periods were not significant. 4. ACCOUNTS RECEIVABLE At June 30, 1996, $91 million of financing was available to the Company under its accounts receivable purchase agreement, including the balance outstanding at the end of the quarter of $14 million. The maximum amount outstanding under this agreement during the third quarter and first nine months of 1996 was $37 million and $65 million, respectively. There were no amounts outstanding as of September 30, 1995. In March 1996 the Company renegotiated its accounts receivable purchase agreement, adjusting the maximum size of the eligible pool of accounts receivable to $100 million. The current agreement expires during the first quarter of 1997. 7 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. DISCONTINUED OPERATIONS During June 1996, the Company adopted a plan to sell the Company's networking business. UB Networks, Inc. (UB Networks), a wholly-owned subsidiary of the Company, is a supplier of networking hardware and software products for shared and switched environments. The Company has engaged Lehman Brothers to assist in executing the sale. The Company does not anticipate a loss on the disposal of this business. The results for UB Networks for the three and nine month periods ended June 30, 1996 and 1995 have been segregated in the Consolidated Statements of Operations, and accounted for as a discontinued operation. Revenues, results of operations and income taxes associated with the discontinued operation were as follows:
- --------------------------------------------------------------------------------------------------- For the three months ended For the nine months ended -------------------------- ------------------------- June 30, June 30, June 30, June 30, (In thousands) 1996 1995 1996 1995 - --------------------------------------------------------------------------------------------------- Total revenues $ 82,132 $ 95,263 $ 279,852 $ 271,229 Operating income (loss) $ (15,430) $ 2,948 $ (24,518) $ 6,685 Income (loss) before income taxes $ (15,359) $ 2,965 $ 6,137 $ 15,038 Income taxes $ 81 $ 122 $ 243 $ 608 Income (loss) from discontinued operations $ (15,440) $ 2,843 $ 5,894 $ 14,430 - ---------------------------------------------------------------------------------------------------
During the first quarter of 1996, Compaq Computer Corporation acquired, for cash, all of the outstanding shares of NetWorth Inc., an investment of UB Networks. UB Networks realized a non-operating gain of $30.6 million. During the second quarter of 1995, UB Networks realized a non-operating gain of $8.7 million from the sale of assets by one of its equity investments. The components of net assets of discontinued operations included in the Consolidated Balance Sheet as of June 30, 1996 were as follows: Cash and equivalents $ 11,167 Accounts receivable, net 59,736 Inventories 54,335 Prepaid expenses and other 12,871 Property, plant and equipment, at cost 92,402 Accumulated depreciation and amortization (63,008) Other assets 2,622 Accounts payable (39,380) Accrued liabilities (34,416) Long-term obligations (345) - -------------------------------------------------------------------------- Net assets of discontinued operations $ 95,984 ==========================================================================
8 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. RESTRUCTURING During the second quarter of 1996, the Company initiated a restructuring program as a result of decisions by its new Chief Executive Officer and management team to transform the Company's organizational structure in order to align resources with a new strategic business model and to lower the Company's cost structure. The restructuring actions resulted in a second quarter charge of $52 million and include reducing headcount, vacating leased facilities, and disposing of assets related to discontinuing certain product programs and other activities. Approximately $39 million of the charge is estimated to require cash expenditures. Information relating to restructuring activity for the nine months ended June 30, 1996 is presented below.
- --------------------------------------------------------------------------------------------------------------- Reduction of Internal Discontinued (In thousands) Work Force Facilities Systems Activities Other Total - --------------------------------------------------------------------------------------------------------------- Balances, September 30, 1995 $ 17,677 $ 28,661 $ 7,414 $ 9,820 $ 7,033 $ 70,605 Provision, nine months ended June 30, 1996 34,100 8,600 -- 9,300 -- 52,000 Utilized, nine months ended June 30, 1996 (29,260) (11,277) (5,755) (2,982) (5,946) (55,220) - --------------------------------------------------------------------------------------------------------------- Balances, June 30, 1996 $ 22,517 $ 25,984 $ 1,659 $ 16,138 $ 1,087 $ 67,385 =============================================================================================================== Cash used, nine months ended June 30, 1996 $ 29,260 $ 8,391 $ 5,755 $ 167 $ 5,374 $ 48,947 ===============================================================================================================
The provision for reduction of work force includes severance, related medical and other benefits, and obligations relating to an employment agreement with the former Chief Executive Officer. The provision includes termination benefits for approximately 500 employees, of which approximately three-fourths are based in the United States. Approximately two-thirds of the planned terminations are in sales, marketing and administrative functions, approximately 20 percent in engineering and development functions, and the balance is in manufacturing, service and support functions. The Company's plan anticipates these terminations to be substantially completed during 1996 and in early 1997. The provision for facilities includes primarily lease payments, fixed costs and write-offs of related property, plant and equipment associated with plans to permanently exit sales, support and administrative operations in approximately fifteen leased facilities throughout the United States, Europe and Asia-Pacific geographic areas. The Company plans to vacate substantially all of these facilities during 1996 and the first quarter of 1997. Restructuring costs are expected to be incurred through 1999 as leases are either terminated early or expire. The provision for discontinued activities includes costs related to exiting the maintenance and support obligations of a third party product, asset write-offs associated with discontinuing imaging solutions products, and asset write-offs and other costs associated with discontinuing product initiatives and programs. The Company intends to begin outsourcing the above maintenance and support obligations and to complete the other actions during 1996. Of the approximately $55 million restructuring reserves utilized in 1996, approximately $20 million pertains to the second quarter 1996 provision. Of the total restructuring reserves remaining as of June 30, 1996, approximately $50 million is included in accrued liabilities, approximately $16 million is classified as a reduction of property, plant and equipment, and approximately $1 million is classified as a reduction of other assets. 9 TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LONG-TERM OBLIGATIONS During the quarter ended June 30, 1996, the Company borrowed $8.4 million, at an interest rate of 6.8 percent. The loan matures in March 1997, but is renewable annually at the consent of both parties. This loan is secured by an underlying note receivable of the Company. The note receivable of $8.4 million, with an interest rate of 7.5 percent, is due in November 1998. The note receivable is included in other assets and the loan is included in current maturities of long-term obligations in the Consolidated Balance Sheet. The loan is included in the Company's total borrowings as shown in the Consolidated Statement of Cash Flows. 8. INCOME TAXES The provision for income taxes for the three months and nine months ended June 30, 1996 and 1995 arose principally from taxes currently payable in foreign jurisdictions. 9. CASH DIVIDENDS The Company has not declared or paid any cash dividends and has no plans to do so in the foreseeable future. 10. COMMITMENTS AND CONTINGENCIES The Company and three principal officers were named as defendants in a class action complaint for damages filed in the United States District Court for the Northern District of California on July 19, 1995. The class action is purported to be on behalf of purchasers of the Company's Common Stock between March 8, 1995 and July 12, 1995. The complaint alleges violations of Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5. Management believes that this complaint is without merit and that the outcome of the complaint will not have a material adverse effect on the financial position or overall trends in the results of operations of the Company. Two similar class action complaints were filed on November 2, 1995 and December 19, 1995, respectively. The plaintiffs in both of these cases voluntarily dismissed their complaints in January 1996. 10 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 the Company's networking business, UB Networks, Inc. (UB Networks). UB Networks, a wholly-owned subsidiary of the Company, is a supplier of networking hardware and software products for shared and switched environments. The Company has engaged Lehman Brothers to assist in executing the sale. The Company's Consolidated Statements of Operations have been restated, for all periods presented, 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 the first nine months of fiscal 1996 and 1995. The first table shows the percentage relationship of revenue and expense items to total revenues, except cost of product and services which are shown in relation to product revenues and service revenues, respectively. The second table shows the percentage change in 1996 and 1995 from the comparable prior year periods. The Company's fiscal year ends on September 30. References to 1996 and 1995 in this section represent the Company's fiscal years. PERCENT OF TOTAL REVENUES (Except cost of product and service)
THREE MONTHS NINE MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------------- -------------------- 1996 1995 1996 1995 -------------------- -------------------- Product revenues 80 80 79 80 Service and other revenues 20 20 21 20 - ---------------------------------------------------------------------------------------------------- TOTAL REVENUES 100 100 100 100 - ---------------------------------------------------------------------------------------------------- Cost of product revenues 43 41 43 41 Cost of service and other revenues 71 74 72 70 - ---------------------------------------------------------------------------------------------------- Total cost of revenues 49 48 49 47 Research and development 15 14 16 15 Marketing, general, and administrative 30 30 33 32 Restructuring charge N/A N/A 4 N/A - ---------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) 6 8 (2) 6 Net interest income -- -- -- 1 - ---------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 6 8 (2) 7 Provision for income taxes 1 2 1 2 - ---------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS 5 6 (3) 5 INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES (3) -- -- 1 - ---------------------------------------------------------------------------------------------------- NET INCOME (LOSS) 2 6 (3) 6 ====================================================================================================
N/A - Not applicable 11 PERCENT INCREASE (DECREASE)
THREE MONTHS NINE MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------------------------- ------------------------------- 1996 1995 1996 1995 -------------------------------- ------------------------------- Product revenues (7) 10 (3) 12 Service and other revenues (7) 8 6 10 - ------------------------------------------------------------------------------------------------------------- TOTAL REVENUES (7) 10 (1) 12 - ------------------------------------------------------------------------------------------------------------- Cost of product revenues (2) 26 1 26 Cost of service and other revenues (10) 17 10 15 - ------------------------------------------------------------------------------------------------------------- Total cost of revenues (5) 23 4 23 Research and development (4) 24 3 21 Marketing, general, and administrative (8) (5) 3 (6) Restructuring charge N/A N/A N/M N/A - ------------------------------------------------------------------------------------------------------------- OPERATING INCOME (21) (13) N/M 26 - ------------------------------------------------------------------------------------------------------------- Net interest income (98) 28 (83) 59 - ------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (23) (12) N/M (3) Provision for income taxes (39) 338 12 156 - ------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (17) (34) N/M (17) INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES N/M (55) (59) 30 - ------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) (74) (36) N/M (12) ============================================================================================================= EARNINGS (LOSS) PER SHARE (73) (40) N/M (16) =============================================================================================================
N/A - Not applicable N/M - Not meaningful OPERATING RESULTS REVENUES Total revenues of $465.8 million during the third quarter of 1996 decreased $33.4 million, or 7 percent, compared to the third quarter of 1995. Product revenues of $372.2 million for the third quarter of 1996 decreased $26.8 million, or 7 percent, from the same quarter of 1995. The decline in product revenues is attributable to reduced unit shipments of Himalaya products (approximately 28 percent from the 1995 third quarter, based on the number of processors shipped excluding workstations and personal computers) and the negative impact of changes in European and Japanese currencies from a year ago. This decline is partially offset by higher revenue per processor shipped in the third quarter of 1996, than in the third quarter of 1995. The later half of 1995 was characterized by a high volume of processor only trade-in activity. Service and other revenues for the third quarter of 1996 of $93.6 million decreased $6.6 million, also 7 percent, from the third quarter of 1995. The decrease in service and other revenues is primarily the result of reduced consulting revenues; however, hardware service revenues were also down slightly. 12 Total revenues of $1.4 billion for the first nine months of 1996 decreased $17.0 million, or 1 percent, compared to the first nine months of 1995. Product revenues of $1.1 billion decreased $33.8 million, or 3 percent, from the same period of 1995. The decline in product revenues is attributable to reduced unit shipments of Himalaya products (approximately 15 percent in the nine month comparison) and the negative impact of changes in the Japanese currency from a year ago, offset somewhat by increases in software related revenues and improved revenue per processor shipped. Service and other revenues of $286.9 million increased $16.8 million, or 6 percent, over the same nine-month period of 1995. Growth in service and other revenues were primarily attributable to increased consulting revenues. Hardware service revenues were relatively flat in the nine month comparison. Geographic--The table below summarizes revenues derived from Tandem's domestic and international operations and the percentage of revenues contributed by geographic location for the indicated periods.
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30, (Dollars in millions) 1996 1995 1996 1995 ------------------- ------------------- ------------------- -------------------- $ % $ % $ % $ % ---------- ------- ---------- ------- ---------- ------- ---------- ------- United States 219.7 47 235.5 47 630.3 46 651.3 47 Europe United Kingdom 35.5 8 40.7 8 105.2 8 118.9 9 Germany 27.0 6 30.0 6 76.3 6 72.1 5 Other Europe 66.7 14 67.1 14 191.8 14 189.8 14 ---------- ------- ---------- ------- ---------- ------- ---------- ------- Total Europe 129.2 28 137.8 28 373.3 28 380.8 28 Japan 66.8 14 77.4 16 196.5 14 199.9 15 Asia/Pacific 28.8 6 26.3 5 91.9 7 80.9 6 Americas Division (excluding the U.S.) 21.3 5 22.2 4 64.7 5 60.8 4 ---------- ------- ---------- ------- ---------- ------- ---------- ------- Total revenues 465.8 100 499.2 100 1,356.7 100 1,373.7 100 ========== ======= ========== ======= ========== ======= ========== =======
Revenues in the United States decreased 7 percent and 3 percent, respectively, in the three and nine month periods ended June 30, 1996, in comparison to the same 1995 periods. Reduced unit shipments of Himalaya servers and reduced revenues from the UNIX system-based products were modestly offset by increased software related revenues. Revenues in Europe decreased 6 percent and 2 percent, respectively, during the third quarter and first nine months of 1996, compared to the same 1995 periods. This decrease resulted primarily from decreased unit shipments of most product families and the negative impact of changes in currency between the periods. In Japan, revenues decreased 14 percent and 2 percent, respectively, in the three and nine month periods ended June 30, 1996, in comparison to the same 1995 periods. The decrease is due to the impact of currency movements between the two periods, offset partially by increased sales of the mid-range line of Himalaya servers and the UNIX system-based products. 13 Asia/Pacific revenues increased 10 percent during the third quarter of 1996 compared to the same 1995 period, primarily resulting from increased consulting revenues and the favorable impact of changes in currency, offset by reduced unit shipments of computer systems. Asia/Pacific revenues increased 14 percent during the first nine months of 1996, compared to the prior year. The increase is primarily the result of a high volume of high-end Himalaya product shipments in the first quarter of 1996. Current quarter and year-to-date growth rates in the various geographic regions are not necessarily representative of future trends. COST OF REVENUES During the third quarter and first nine months of 1996, product margin percentages declined 2 percent to 57 percent, in comparison to the same 1995 periods. Computer system margins were impacted by increases in third party royalty payments, increases in amortization of capitalized software, and changes in product mix. Management expects product margins to decline further during the fourth quarter of 1996. 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 29 percent in the 1996 third quarter and 28 percent in the first nine months of 1996, compared to 26 percent in the 1995 third quarter and 30 percent in the first nine months of 1995. The improved margins over the 1995 third quarter are mainly attributable to improved profitability in the Company's consulting activities, offset somewhat by increased costs in the hardware servicing business. The decline in the nine month comparison is reflective of the increase in salaries and benefits and the increase in the proportion of consulting revenue to total service and other revenues that has occurred over the past year. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses of $69.3 million for the third quarter of 1996 decreased $2.5 million, or 4 percent, compared to the same 1995 quarter. Research and development (R&D) expenses of $210.8 million for the first nine months of 1996 increased $6.1 million, or 3 percent, compared to 1995 spending. In the quarterly comparison, increases in salaries and benefits and equipment depreciation were more than offset by higher levels of software capitalization and external funding received for joint development projects. The increase in the nine month comparison is attributable primarily to increased salaries and benefits and equipment depreciation. Management expects R&D spending to decline slightly in the fourth quarter. 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. 14 MARKETING, GENERAL, AND ADMINISTRATIVE EXPENSES Marketing, general, and administrative (MG&A) expenses of $139.2 million in the third quarter of 1996 decreased $12.1 million, or 8 percent, in comparison to the third quarter of 1995. The decline in MG&A expenses is attributable mainly to restructuring actions initiated in the prior quarter which reduced sales and marketing headcount and to strict management of certain variable costs, such as travel and entertainment expenses and promotional events. MG&A expenses for the first nine months of 1996 increased $13.7 million, or 3 percent, to $447.8 million. The increase in MG&A expenses in the 1996 nine month period is attributable to increased commissions, software house fees, and salaries and benefits. Management expects MG&A expenses to increase in the fourth quarter, but not 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. RESTRUCTURE CHARGE During the second quarter of 1996, the Company initiated a restructuring program as a result of decisions by its new Chief Executive Officer (CEO) and management team to transform the Company's organizational structure in order to align resources with a new strategic business model and to lower the Company's cost structure. The restructuring actions resulted in a second quarter charge of $52 million and included reducing headcount, vacating leased facilities, and disposing of assets related to discontinuing certain product programs and other activities. Approximately $39 million of the charge is estimated to require cash expenditures. Information relating to restructuring activity for the nine months ended June 30, 1996 is presented below.
- --------------------------------------------------------------------------------------------------------------------- Reduction of Internal Discontinued (In thousands) Work Force Facilities Systems Activities Other Total - --------------------------------------------------------------------------------------------------------------------- Balances, September 30, 1995 $17,677 $28,661 $7,414 $ 9,820 $7,033 $70,605 Provision, three months ended March 31, 1996 34,100 8,600 -- 9,300 -- 52,000 Utilized, nine months ended June 30, 1996 (29,260) (11,277) (5,755) (2,982) (5,946) (55,220) - --------------------------------------------------------------------------------------------------------------------- Balances, June 30, 1996 $22,517 $25,984 $1,659 $16,138 $1,087 $67,385 ===================================================================================================================== Cash used, nine months ended June 30, 1996 $29,260 $8,391 $5,755 $167 $5,374 $48,947 =====================================================================================================================
The provision for reduction of work force includes severance, related medical and other benefits, and obligations relating to an employment agreement with the former CEO. The provision includes termination benefits for approximately 500 employees, of which approximately three-fourths are based in the United States. Approximately two-thirds of the planned terminations are in sales, marketing and administrative functions, approximately 20 percent are in engineering and development functions, and the balance 15 is in manufacturing, service and support functions. The Company's plan anticipates these terminations to be substantially completed during 1996 and early 1997. The provision for facilities includes primarily lease payments, fixed costs and write-offs of related property, plant and equipment associated with plans to permanently exit sales, support and administrative operations in approximately fifteen leased facilities throughout the United States, Europe and Asia-Pacific geographic areas. The Company plans to vacate substantially all of these facilities during 1996 and the first quarter of 1997. Restructuring costs are expected to be incurred through 1999 as leases are either terminated early or expire. The provision for discontinued activities includes costs related to exiting the maintenance and support obligations of a third party product, asset write-offs associated with discontinuing imaging solutions products, and asset write-offs and other costs associated with discontinuing product initiatives and programs. The Company intends to begin outsourcing the above maintenance and support obligations and to complete the other actions during 1996. Of the approximately $55 million restructuring reserves utilized in 1996, approximately $20 million pertains to the 1996 second quarter provision. Of the total restructuring reserves remaining as of June 30, 1996, approximately $50 million is included in accrued liabilities, approximately $16 million is classified as a reduction of property, plant and equipment, and approximately $1 million is classified as a reduction of other assets. IMPACT OF CURRENCY During the third quarter of 1996, in comparison to the third quarter of 1995, 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. Giving effect for the results of the Company's hedging program, management estimates that foreign exchange rate movements contributed to approximately 75% of the reduction in operating income between the two quarterly periods. In comparing the nine month periods ended June 30, 1996 and 1995, the effect of foreign exchange rate movements on changes in operating income was insignificant. EARNINGS FROM CONTINUING OPERATIONS For the three month period ended June 30, 1996, the Company reported income from continuing operations of $23.3 million, or $0.20 per share. 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. The results for the nine month period included the $52 million restructuring charge discussed above. For the same periods ended June 30, 1995, the Company reported income from continuing operations of $28.0 million, or $0.24 per share, and $73.3 million, or $0.62 per share, respectively. The income tax provisions for the third quarters of 1996 and 1995 were $6.9 million and $11.3 million, respectively, arising principally from taxes currently payable in foreign jurisdictions. The Company expects to continue to report income for the remainder of 16 1996 in certain foreign jurisdictions, which will result in tax provisions despite loss carryforwards which are available primarily to offset U.S. and certain foreign income. EARNINGS FROM DISCONTINUED OPERATIONS During June 1996, the Company adopted a plan to sell the Company's networking business, UB Networks, Inc. (UB Networks). UB Networks, a wholly-owned subsidiary of the Company, is a supplier of networking hardware and software products for shared and switched environments. The Company has engaged Lehman Brothers to assist in executing the sale. The Company does not anticipate a loss on the disposal of this business. Revenues and results of operations associated with the discontinued operation were as follows:
- ------------------------------------------------------------------------------------------------------------- For the three months ended For the nine months ended -------------------------------- ----------------------------- June 30, June 30, June 30, June 30, (In thousands) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------- Total revenues $ 82,132 $95,263 $279,852 $271,229 Operating income (loss) $(15,430) $ 2,948 $(24,518) $ 6,685 Income (loss) from discontinued $(15,440) $ 2,843 $ 5,894 $ 14,430 operations Earning (loss) per share $ (0.13) $ 0.02 $ 0.05 $ 0.12 - -------------------------------------------------------------------------------------------------------------
During the first quarter of 1996, Compaq Computer Corporation acquired, for cash, all of the outstanding shares of NetWorth Inc., an investment of UB Networks. UB Networks realized a non-operating gain of $30.6 million on the transaction. During the second quarter of 1995, UB Networks realized a non-operating gain of $8.7 million from the sale of assets by one of its equity investments. Networking revenues decreased $13.1 million, or 14 percent, in the third quarter of 1996, compared to the third quarter of 1995. Sales of newer products were not sufficient to offset the decline in sales of the more mature products. Networking margins declined to 29 percent and 32 percent, respectively, in the three and nine month periods ended June 30, 1996, compared to 40 percent and 42 percent in the same 1995 periods. Networking margins were negatively affected by lower sales of proprietary ethernet switching enclosures and related peripheral products, and an increased proportion of revenues from third party product sales and related service fees. Research and development expenses of $9.6 million and $29.3 million, respectively, in the three and nine months ended June 30, 1996, decreased 4 percent of the same 1995 periods. MG&A expenses of $29.4 million and $85.5 million, respectively, in the third quarter and first nine months of 1996 increased 15 percent and 13 percent, respectively, over the same 1995 periods. The increase in MG&A expenses is due to international geographic expansion, an increase in the number of sales representatives and associated travel costs, and increased marketing and advertising. 17 FINANCIAL CONDITION During the first nine months of 1996, cash and cash equivalents decreased by $47 million to $74 million. The Company generated $65 million positive cash flow from operations during the first nine months of the year. Investing activities for the period consumed approximately $137 million, principally through the investment in capital equipment and software offset partially by proceeds from the sale of an investment in NetWorth, Inc. Financing activities provided approximately $41 million. At June 30, 1996, $91 million of financing was available to the Company under its accounts receivable purchase agreement, including the balance outstanding at the end of the quarter of $14 million. The maximum amount outstanding under this agreement during the first nine months of 1996 was $65 million. There were no amounts outstanding as of September 30, 1995. In March 1996 the Company renegotiated its accounts receivable purchase agreement, adjusting the maximum size of the eligible pool of accounts receivable to $100 million. The current agreement expires during the first quarter of 1997. Management is currently negotiating to replace this agreement with a new credit facility with similar terms and conditions. Including the amounts sold under the receivables purchase agreement, accounts receivable days were 85 days at June 30, 1996, compared to 78 days at September 30, 1995 and 82 days at June 30, 1995. Inventory days were 60 days at June 30, 1996, compared to 42 days at September 30, 1995 and 55 days at June 30, 1995. Total debt of $165 million at June 30, 1996, including $129 million of nonrecourse borrowings against lease receivables, increased $23 million from September 30, 1995. Total debt as a percentage of total capital was approximately 13 percent as of June 30, 1996, compared to 11 percent as of September 30, 1995. During the quarter ended June 30, 1996, the Company borrowed $8.4 million, at an interest rate of 6.8 percent. The loan matures in March 1997, but is renewable annually with the consent of both parties. This loan is secured by an underlying note receivable of the Company. The note receivable of $8.4 million, with an interest rate of 7.5 percent, is due in November 1998. Cash used for restructuring actions during the first nine months of 1996 aggregated approximately $49 million and was funded by cash from operations. Cash requirements for restructuring action for the remainder of 1996 are expected to be approximately $20 million. 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 June 30, 1996 can adequately meet Tandem's financing needs, both in the short and the long term. As of June 30, 1996, the Company had approximately 8,000 full-time equivalent employees, including approximately 1,100 full-time equivalent employees employed by UB Networks. 18 OUTLOOK AND RISKS OVERVIEW Since the end of the prior fiscal year, the Company has experienced significant changes in top management, including the appointment of a new CEO in early January. The new CEO, together with the management team, has been reviewing Tandem's business opportunities, strategic direction, and organization and cost structure. As a result of this review, new product strategies and a new organizational model have been developed; implementation is in process. Restructuring actions are also in progress, which are aimed at reducing the cost structure of the Company. The success of these actions and their impact on the Company's operations cannot be fully measured at this time. As previously discussed, the Company has adopted a plan to sell UB Networks. There can be no assurances that the sale of UB Networks will be completed within management's plans. OPERATING RESULTS The Company's future operating results and many of the forward looking statements contained in this document are dependent upon a number of factors, including the Company's ability to grow its traditional businesses, to expand successfully into new markets, to effectively manage resources, to successfully implement a new organizational model and to continue the Company's product migration to open platforms. A key challenge to the Company's continued growth is selling increased unit volumes of computer systems at competitive prices, while concurrently controlling the cost structure of the Company. Increased volume shipments are dependent upon continued demand for existing products, timeliness to market with new products, identification of new competitive products, acceptance of new product introductions by the Company's existing customer base, as well as successful expansion into new markets, such as decision support, data warehousing, and electronic commerce. The Company has embarked on a strategy of entering partnering relationships with major technology companies and has entered into strategic relationships with companies such as Compaq Computer Corporation and Microsoft Corporation. Future operating results may be affected by the Company's ability to implement this strategy and to manage the underlying alliance agreements and associated competitive risks. The Compaq agreement calls for joint development relating to the Company's ServerNet clustering technology and OEM distribution by Compaq of ServerNet products. The Microsoft relationship covers, among other things, porting of the Company's "middleware" software to the Windows NT operating system, the addition of the Company's clustering technology to Microsoft's clustering initiative and a patent cross license. These relationships represent a new way of doing business for the Company. The Company does not anticipate any immediate significant impact on the operating results of the Company from these 19 relationships. The ultimate success of these projects and their contribution to the Company's operating results cannot be predicted or fully measured at this time. Historically, Tandem recognizes a large percentage of its revenues in the latter part of each quarter. This trend makes it difficult to forecast revenues and could subject the Company to fluctuations in revenues and earnings. FOREIGN OPERATIONS Although the Company's operating and pricing strategies and currency hedging practices take into account changes in foreign currency exchange rates over time, the Company's operating results can be affected by foreign currency exchange rates. Tandem, Himalaya, and ServerNet are trademarks of the Tandem Computers Incorporated. UB Networks, is a trademark of Ungermann-Bass Networks, Inc. UNIX is a registered trademark in the United States and other countries, licensed exclusively through X/Open Company Limited. All other brand and product names are trademarks or registered trademarks of their respective companies. 20 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company and three principal officers, James G. Treybig, David J. Rynne and Robert C. Marshall, were named as defendants in a class action complaint for damages filed in the United States District Court for the Northern District of California on July 19, 1995. The class action is purported to be on behalf of purchasers of the Company's Common Stock between March 8 and July 12, 1995. The complaint alleges violations of Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 in connection with public statements about the Company's expected revenues for the second and third quarters of 1995. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits required by Item 601 of Regulation S-K Exhibit Number Exhibit ------ ------- 27 Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed during the third fiscal quarter. 21 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Cupertino, State of California. TANDEM COMPUTERS INCORPORATED (Registrant) Date: August 14, 1996 By: DAVID J. RYNNE --------------------- David J. Rynne Senior Vice President and Chief Financial Officer Date: August 14, 1996 By: JOHN T. REECE -------------------- John T. Reece Vice President and Corporate Controller EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 9-MOS SEP-30-1996 OCT-01-1995 JUN-30-1996 1 73,950 0 435,029 14,953 148,017 855,360 1,227,298 668,794 1,724,720 579,836 0 0 0 3,024 1,063,140 1,724,720 1,069,841 1,356,698 463,038 670,699 210,751 2,236 11,190 (23,830) 21,757 (45,587) 5,894 0 0 (39,693) (0.34) (0.34)
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