-----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, FOEMH8G50LD6ccvWKyvitE4l604Utv4iWsHcCmPf0kxCiRSxnj6MwDG9s4qF3v6L k/Vi26FcXtTBLBhd1Wlgpw== 0000950149-95-000859.txt : 19951211 0000950149-95-000859.hdr.sgml : 19951211 ACCESSION NUMBER: 0000950149-95-000859 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951208 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09430 FILM NUMBER: 95600317 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-K 1 FORM 10-K ANNUAL REPORT 1 LOGO UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-9134 ------------------------ TANDEM COMPUTERS INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2266618 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 19333 VALLCO PARKWAY 95014-2599 CUPERTINO, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 285-6000 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED: COMMON STOCK, $.025 PAR VALUE AND NEW YORK STOCK EXCHANGE, RIGHTS TO PURCHASE SERIES A MIDWEST STOCK EXCHANGE, PARTICIPATING PREFERRED STOCK PACIFIC STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by nonaffiliates of the registrant as of December 4, 1995: $1,401,984,963. The number of shares of Common Stock outstanding as of December 4, 1995: 117,003,559. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the definitive Proxy Statement dated December 15, 1995, for the 1996 Annual Meeting of Stockholders are incorporated by reference in Part III. 2 PART I ITEM 1. BUSINESS Tandem Computers Incorporated (Tandem or the Company), a Delaware corporation founded in 1974, provides its customers with continuously available, open, parallel processing computer systems and client/server solutions, and enterprise networks. Tandem designs, develops, manufactures, markets, and supports a full range of computer systems and services, ranging from the desktop to the data center, as well as software to deliver complete customer solutions. The Company's current server offerings include the NonStop Himalaya K2(x) and K1(x) series of parallel processing servers and the UNIX(R) System V, Release 4 (SVR4)-based Integrity line of servers. Tandem provides networking products through its Ungermann-Bass Networks, Inc. (UB Networks) subsidiary. Tandem works to leverage its fundamental strengths in three major application areas: commercial online transaction processing (OLTP), decision support, and messaging. NONSTOP SERVERS NonStop Himalaya servers, together with the open Tandem NonStop Kernel operating system, deliver continuous availability, data integrity, linear scalability, distributed processing, and distributed data capability. The parallel architecture of NonStop servers means processors work in parallel so multiple units of work can be processed reliably and simultaneously. All NonStop servers allow substantial linear expansion of processing power within a single system through the addition of processors. This enables the user to expand the system's transaction processing capacity without sacrificing the initial investment in hardware and software. Himalaya servers are based on reduced instruction-set computing (RISC) technology, allowing the Company to introduce new products quickly, based on the latest high-performance processor chips, for continually improved price/performance. Accordingly, during 1995, Tandem introduced the Himalaya K2(x) series of servers, which provide a 50 percent price/performance improvement over previous Himalaya servers. For Himalaya servers, Tandem develops highly reliable and scalable software engines that drive popular open products such as Novell, Inc.'s TUXEDO(R) monitor and Open Software Foundation's Distributed Computing Environment (DCE). These products are optimized for Tandem's major markets: interactive customer service, decision support, and electronic commerce. This software derives the benefits of the Himalaya servers -- parallelism, nonshared memory, nonshared disk, and process pairs -- to provide the highest degree of scalability and reliability possible. Himalaya servers connect to a wide range of client platforms and operating systems, including Microsoft Windows, MS-DOS, OS/2, SCO UNIX, SunOS, HP-UX, Microsoft Windows NT, and Apple System 7 operating systems. NonStop Himalaya servers also support a wide range of open database gateways and open networking standards, including TCP/IP, NetBIOS, AppleTalk, SNA, and OSI. In addition, NonStop Himalaya servers support portability requirements through their Open System Services. INTEGRITY SERVERS The RISC-based Integrity server family is designed to extend Tandem's strengths, especially reliability, to the market for UNIX systems. Integrity FT servers can detect, isolate, and recover from component failures without the operating system or applications being affected. The architecture is based on three loosely synchronized CPU modules operating as one triple modular redundant processor, and power and cooling subsystems linked by redundant data paths to ensure that component failures do not cause the system to halt. Additionally, Tandem offers a complete line of highly scalable, general-purpose servers based on the UNIX operating system: Integrity NR servers. This product family ranges from low-level products such as the Indy(TM) and Indigo(R) workstations, to highly scalable symmetric multiprocessing servers. - ------------ All references to years throughout Parts I, II, and IV represent the Company's fiscal years ended September 30, unless otherwise indicated. 2 3 Integrity servers conform to the System V Interface Definition (SVID), the IEEE POSIX standards, the X/Open(R) Portability Guide Base Profile, and the MIPS(R) ABI standard. This makes thousands of existing applications based on the UNIX operating system available to users of Integrity servers. Integrity servers also support application development tools and databases from a variety of independent software vendors. Tandem markets a wide variety of open middleware from suppliers such as Oracle Corporation and Novell, Inc. SERVERNET TECHNOLOGY Designed to provide reliable, scalable communications between processors and peripherals, the ServerNet architecture provides a core interconnect technology that Tandem will build into its future servers. ServerNet technology uses multiple high-speed, low-cost routers to switch data rapidly and directly between multiple data sources and destinations, including processors, storage, and communications devices. By providing the intelligent switching that previously could be supplied only by a processor, ServerNet architecture eliminates the need for a processor in every data path. With the ServerNet router controlling the data path, data can flow directly from processor to processor, from processor to device, from device to processor, and from device to device. At the end of 1995, Tandem shipped its first beta UNIX system-based server with ServerNet technology: the Integrity S4000 server. PERIPHERALS For complete solutions, the Company offers high-quality, industry-standard desktop products and peripherals -- including high-performance UNIX system-based workstations and servers, PC-compatible computers, storage devices, and printing products -- through original equipment manufacturer (OEM) and value-added reseller (VAR) relationships. The Company adds hardware and software enhancements to several of these products prior to resale. NETWORKING, COMMUNICATIONS, AND NETWORK MANAGEMENT Tandem's networking products enable NonStop and Integrity servers to participate in complex multiprotocol networks employing a variety of industry-standard protocols, including SNA, TCP/IP, OSI, AppleTalk, and NetBIOS. Tandem's communications products allow NonStop servers to connect directly to a variety of transaction-generating devices such as terminals, workstations, automated teller machines, cash registers, and bar-code readers. Tandem offers a variety of network management tools to facilitate the efficient management of NonStop servers in an open environment. Distributed Systems Management (DSM) software provides an architecture and set of services that permit the management of remote systems and business applications. DSM software can be tailored to support centralized or decentralized management of operations, and provides the foundation for automated operations at central or remote sites. UB Networks UB Networks is a supplier of networking hardware and software products for shared and switched environments. The full line of enterprisewide networking products includes the GeoLAN/500 NonStop Super-Switching Hub, the GeoSwitch/155 ATM Switch, the GeoRim/E Ethernet Switch, and the GeoStax Stackable Workgroup hubs. UB Networks also provides network management and application products, including its EMPower distributed management system and Virtual Network Architecture. Its service division offers innovative support solutions such as comprehensive integration services and advanced interactive support via the Internet. MARKETING, SALES, AND SUPPORT Tandem markets its products primarily through its own organization, which includes marketing, sales, training, field support, and professional services personnel. The Company also markets its products through 3 4 distributors, VARs, and OEMs. The Company intends to continue its expansion of alternate distribution channels worldwide. Applications are typically developed and provided by application software providers and resellers or by the customer's own programmers. To facilitate the development and availability of applications on Tandem systems, the Company established the Tandem Alliance program for selected VARs, software houses, systems integrators, and other related businesses. The Company offers Alliance members a variety of licensing, marketing, technical, and sales support programs. More than 350 Alliance members work with Tandem to develop solutions for customers in a wide range of industries. To enhance its international marketing, sales, and support efforts, Tandem has established joint ventures in Chile, Japan, Mexico, Singapore, China, and a number of European countries. The Company's joint ventures in Chile and Mexico distribute and support Tandem products. Other joint ventures provide project management and contract consulting services to Tandem customers, and develop and support customized application software to meet the needs of the local marketplace. They may also assist Tandem Alliance members with the distribution and support of their software products. To increase its marketing efforts, the Company has established OEM and reseller relationships with multiple vendors, including AT&T; Cabledata; Motorola, Inc.; Sprint International; Nippon Telephone and Telegraph (NTT); and Nippon Electric Company (NEC). Tandem has also established marketing relationships with leading systems integrators such as Andersen Consulting, Logica plc, Electronic Data Systems Incorporated (EDS), and Unisys. During 1995, over 75 percent of the Company's hardware sales were to end users. The remaining sales were to distributors and to resellers that add their hardware and software products for specific applications. No customer accounted for 10 percent or more of the Company's total 1995 revenues. The Company strives to minimize the time between receipt of orders and shipment of systems. Typically, Tandem ships within 90 days of receiving the order. For this reason, and because customers may change delivery schedules or cancel orders, the order backlog at any particular date may not be representative of the Company's actual sales for any succeeding fiscal period. Tandem offers professional services and education, including design consulting, systems integration, operations management guidance, and system requirements planning. Tandem's support centers can perform system diagnostics remotely on both hardware and software. The Company also offers on-site service. PRODUCT DEVELOPMENT Tandem continues to develop new products and enhance existing products to give its customers improved price/performance; to broaden Tandem's customer base by providing industry-specific platforms and solutions; and to make Tandem systems and their benefits more accessible in a client/server environment. Tandem is committed to providing open systems that deliver connectivity, interoperability, and portability. The Company expects to introduce additional products in the future based on the NonStop Kernel, Microsoft Windows NT, and UNIX operating systems, incorporating the Company's new ServerNet technology. The computer industry is characterized by rapid technological advances. To remain competitive, computer companies must pursue technical development. Accordingly, the Company continues to incur substantial engineering and software development expenses. During 1995, 1994, and 1993, the Company's research and development expenses were $323.2 million, $269.3 million, and $313.3 million, respectively. Reference is made to the information found under the caption "Software development costs" in the Notes to Consolidated Financial Statements on pages 22 and 23. INDUSTRY SOLUTIONS Tandem and its Alliance members provide solutions designed to meet the specific requirements of particular industries and applications. Tandem's Alliance strategy offers customers the fundamental strengths 4 5 of Tandem products as well as the specific industry knowledge and advantages that our Alliance members build into their solutions. Telecommunications Tandem provides critical services to the world's major telecommunications companies. The applications cover a wide range of network and operational aspects of the industry. Particular emphasis is on business systems for operator services, call centers, call detail analysis, service ordering, and billing; network operation systems for network management and network control; value-added service systems for voice messaging, electronic messaging, fax, e-mail, and multimedia; and enhanced network services for intelligent networking and automatic wireless roaming devices. Banking and Securities Tandem continues to be a major provider of information technology solutions to the worldwide financial services industry. The Company's strong presence in banking is demonstrated by its customer base of more than 500 financial institutions worldwide. In addition, Tandem remains a significant presence in retail electronic funds transfer, international banking, and interbank payments by continually improving its solution offerings in these areas. In the securities industry, Tandem continues to expand its presence in stock and commodities exchanges globally. The Company now provides solutions to 45 exchanges worldwide. Electronic Commerce Tandem continues to broaden and extend its range of solutions and infrastructure products in the high-growth electronic commerce market that includes messaging and electronic data interchange (EDI). Decision Support Tandem provides end-to-end data warehouse solutions that scale to meet business needs. From midrange departmental systems to multi-terabyte, enterprisewide data warehouses, Tandem offers the right mix of scalable high-performance hardware, industry-standard software, and decision support tools and applications. COMPETITION The market for computer systems is highly competitive. Potential purchasers consider many factors: price/performance and cost of ownership, openness, system capability, availability, scalability, compatibility, reliability and maintainability, and the manufacturer's ability to develop new products and enhance existing ones. Tandem believes that with the introduction of the Himalaya server range, it competes favorably with respect to these factors. Tandem systems compete with those of three classes of competitors. Competitors for traditional fault-tolerant systems include IBM, Digital Equipment Corporation (DEC), and Stratus Computer, Inc. (Stratus). The new pricing and open features of Himalaya servers position them in a broader market and against a wider range of competitors, including Sequent Computers, Inc. (Sequent); Sun Microsystems, Inc. (Sun); and Hewlett-Packard Company (HP). Certain massively parallel configurations of NonStop servers are competitive with products from other providers of parallel systems. Recent increased industry focus on commercial parallelism has placed Tandem in competition with nontraditional competitors. Specifically, in parallel database applications such as decision support, AT&T Global Information Solutions and the IBM SP/2 product family are now competitors. The Integrity server family competes with UNIX system-based offerings from HP, IBM, Sequent, Stratus, and Sun. In the highly competitive LAN market, UB Networks faces substantial competition from several established and emerging computer communications and LAN companies, including IBM, DEC, Cabletron Systems, Bay Networks, 3Com Corporation, and Cisco Systems, Inc. 5 6 MANUFACTURING The Company's manufacturing facilities are located in Fremont, California, and in Stirling, Scotland. Manufacture of Tandem computer systems requires the assembly and testing of integrated circuits, circuit boards, peripheral subsystems, power supplies, and other items, as well as final assembly, integration, and testing of completed computer systems. All inspection, final assembly, and system integration tests are performed by Company personnel. In general, the Company assembles its systems from components and prefabricated parts manufactured by others. A number of the custom and semicustom integrated circuits, printed circuit boards, and power supplies are manufactured by others to the Company's specifications. Tandem purchases terminals, workstations, printers, disk drive head disk assemblies, tape drives, cable assemblies, power supplies, and other subassemblies and peripheral equipment. Most of the components and peripherals used in the Company's systems are available from a number of different suppliers. The Company believes that alternative sources could be developed, if required, for present single-sourced components or peripherals. Although the Company has not experienced any significant problem in obtaining its required supplies, future shortages of components or peripherals could result in production delays that could adversely affect business. ENVIRONMENTAL REGULATIONS The Company's objectives include providing products and services that are environmentally sound, and conducting business operations in an environmentally responsible manner. Compliance with federal, state, and local provisions related to the discharge of materials into the environment, or otherwise related to protection of the environment by the Company has not had, nor is expected to have, a material effect on the capital expenditures, earnings, or competitive position of the Company. PATENTS Tandem has been awarded patents in the United States and other countries for various aspects of its computer systems. Additional patent applications are pending in the United States and other countries. There can be no assurance that any of these applications will result in the award of a patent or that the Company would be successful in asserting its patent rights in any subsequent infringement actions. The patents and patent applications, although of significant value to the Company, are not considered to be of material importance to the business as a whole. Because a large number of patents exist in the computer field and new patents are issued frequently, it is not economically practical to determine in advance whether a new product or any of its components infringe any patent. Some of the Company's products have been alleged to infringe patents, and additional allegations may be made in the future. In the event of an infringement, the Company believes that, based on industry practice, any necessary licenses or rights under such patents may be obtained on terms that would not have a material adverse financial effect on the Company. EMPLOYEES As of September 30, 1995, the Company had 8,380 full-time equivalent employees. FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Reference is made to the information found under the caption "Outlook and Risks -- Foreign Operations" in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 16, and to the information under the caption "Segment Information" in the Notes to Consolidated Financial Statements on pages 35 and 36. ITEM 2. PROPERTIES The Company is headquartered in Cupertino, California, where it owns 18 and leases two buildings, totaling approximately 1.8 million square feet. Approximately 60 percent of the space is devoted to product 6 7 development functions, while the remaining 40 percent houses marketing and administration. In addition, Tandem owns approximately 40 acres of unimproved property situated near its Cupertino headquarters. This additional unimproved property will allow for expansion. The Company recently leased approximately 490,000 square feet in Fremont, California, where it has consolidated all U.S. manufacturing. The Company has entered into an agreement to sell, in 1996, the Cupertino retail shopping center owned by the Company since 1990. The Company's UB Networks, Inc., subsidiary leases six buildings in Santa Clara, California, for its corporate headquarters. Additionally, the Company leases a 77,000 square foot facility, devoted to development, marketing and administration in Plano, Texas. In 1993, the Company acquired a 134,500 square foot manufacturing facility in Stirling, Scotland. In addition, Tandem owns a product development facility of approximately 190,000 square feet in Austin, Texas. The Company also leases sales, field service and training offices at more than 180 locations in North America, Europe, Asia and the Pacific Rim. In 1988, Tandem entered into a prepaid 999 year lease for property near London that serves as its United Kingdom headquarters. For information about Tandem's lease commitments, reference is made to the information found under the caption "Property, Plant and Equipment" in the Notes to Consolidated Financial Statements on Page 27. ITEM 3. LEGAL PROCEEDINGS Mark Gaffney v. Tandem Computers Inc. The Company and three principal officers, James G. Treybig, David J. Rynne and Robert C. Marshall, were named as defendants in a class action complaint for damages 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. Peter Balkheimer and Ernst Balkheimer v. Tandem Computers Inc. This class action complaint for damages was filed in the United States District Court for the Northern District of California on November 2, 1995, and names the Company, two principal officers, James G. Treybig and David J. Rynne, and the Chairman of the Board, Thomas J. Perkins, as defendants. This class action is purported to be on behalf of purchasers of the Company's Common Stock between December 16, 1994 and October 26, 1995. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 in connection with public statements about the Company's expected revenues and earnings during 1995. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1995. - ------------------ Tandem, Himalaya, Integrity, NonStop, ServerNet, and the Tandem logo are trademarks of Tandem Computers Incorporated. UB Networks, GeoLAN, GeoRim/E and GeoSwitch are trademarks of Ungermann-Bass Networks, Inc. Indigo is a registered trademark and Indy is a trademark of Silicon Graphics, Inc. MIPS is a registered trademark of MIPS Technologies, Inc., a wholly owned subsidiary of Silicon Graphics, Inc. UNIX is a registered trademark in the United States and other countries, licensed exclusively through X/Open Company Ltd. X/Open is a registered trademark of X/Open Company Ltd. TUXEDO is a registered trademark of Novell, Inc. All other brand and product names are trademarks or registered trademarks of their respective companies. 7 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Reference is made to the information regarding the principal United States markets for the Company's Common Stock, market stock price range, dividends, and holders of record of the Common Stock of the Company found under the caption "Quarterly Financial Data" in the Notes to Consolidated Financial Statements on pages 36 and 37. ITEM 6. SELECTED FINANCIAL DATA
- ----------------------------------------------------------------------------------------------------------- TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES For the years ended September 30 - ----------------------------------------------------------------------------------------------------------- (In thousands except per share amounts) 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------------------------------------- REVENUES $2,284,962 $2,108,035 $2,030,960 $2,036,917 $1,922,179 - ----------------------------------------------------------------------------------------------------------- Cost of revenues 1,140,689 955,268 886,054 829,738 757,907 Research and development 323,197 269,267 313,298 285,117 266,627 Marketing, general, and administrative 695,772 726,906 847,047 851,477 838,504 Restructuring charges -- -- 451,000 106,000 -- - ----------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) 125,304 156,594 (466,439) (35,415) 59,141 Gain on sale of subsidiaries and investments 9,297 23,000 -- -- -- Net interest income (expense) 5,098 1,606 3,300 3,813 (1,952) Provision for income taxes (32,153) (11,000) (66,959) (9,582) (22,018) Cumulative effect of change in accounting for income taxes -- -- 12,371 -- -- - ----------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 107,546 $ 170,200 $ (517,727) $ (41,184) $ 35,171 =========================================================================================================== EARNINGS (LOSS) PER SHARE $ .91 $ 1.50 $ (4.61) $ (.38) $ .33 =========================================================================================================== Total assets $1,856,694 $1,761,885 $1,685,209 $2,045,424 $1,931,918 Long-term obligations $ 75,923 $ 86,481 $ 86,162 $ 93,626 $ 93,134 Stockholders' investment $1,110,335 $ 938,841 $ 736,825 $1,236,895 $1,247,945 ===========================================================================================================
Effective October 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Effective October 1, 1992, the Company adopted SFAS No. 109, "Accounting for Income Taxes." See the Notes to Consolidated Financial Statements. 8 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SELECTED OPERATING STATISTICS The table below summarizes the changes in selected operating statistics. The percentages in the left three columns show the relationship of revenue and expense items to total revenues, except cost of product and services, which are shown in relation to product revenues and service revenues, respectively. The percentages in the right columns measure the year-to-year changes. Operating results of business units sold are included in revenues, costs, and expenses through their respective disposition dates as follows: MPACT EDI Systems, Inc. -- June 30, 1993; Applied Communications, Inc. (ACI), and Applied Communications, Inc. Limited (ACI Ltd.) -- December 31, 1993; Array Technology Corporation -- March 15, 1994; and NetWorth, Inc. -- March 31, 1994. Fluctuations in income statement line items between 1995 and 1994 were not significantly affected by these business units sold, with less than a 2 percent impact in most cases. Where significant, discussions are provided on a basis that excludes the financial information of the above-mentioned businesses for the period prior to disposition. This basis is described in the text, for example, as "excluding the effects of business units sold" and reflects the fluctuations of the ongoing operations of the Company. The Company's fiscal year ends on September 30. References to 1995, 1994, and 1993 in this section represent the Company's fiscal years.
- ----------------------------------------------------------------------------------------------------- Percent of Total Revenues (Except cost of product Percent Increase and service) (Decrease) - ----------------------------------------------------------------------------------------------------- 1995 1994 1993 1995 1994 - ----------------------------------------------------------------------------------------------------- p 80.8 81.5 81.3 Product revenues 7 4 19.2 18.5 18.7 Service and other revenues 13 3 100.0 100.0 100.0 Total revenues 8 4 44.5 40.7 37.7 Cost of product revenues 17 12 72.7 65.6 69.4 Cost of service and other revenues 25 (3) 49.9 45.3 43.7 Total cost of revenues 19 8 14.1 12.8 15.4 Research and development 20 (14) 30.5 34.5 41.7 Marketing, general, and administrative (4) (14) N/A N/A 22.2 Restructuring charges N/A N/M 5.5 7.4 (23.0) Operating income (loss) (20) N/M 4.7 8.1 (25.5) Net income (loss) (37) N/M =====================================================================================================
N/M = not meaningful N/A = not applicable OPERATING RESULTS REVENUES Total revenues in 1995 of $2.3 billion increased 8 percent over 1994. Product revenues for 1995 increased 7 percent over 1994, while service and other revenues increased 13 percent. Increases in product revenues were attributable primarily to an increased volume of unit shipments of the Company's computer systems, particularly high-end and midrange Himalaya servers, and to increased software license and support revenues, 9 10 offset by reduced networking revenues. The benefits of the increased unit shipments were partially offset by a shift from system add-on business to aggressively discounted trade-in activity on the NonStop product family, largely resulting from rapid Himalaya server product introductions. Increases in service and other revenues were the result of increased consulting revenues. Total revenues in 1994 increased 4 percent over 1993, but increased 8 percent excluding the effects of business units sold. The increase in product revenues resulted primarily from a large increase in unit shipments of the Company's Himalaya server products and increased revenues from networking products. The increase of unit shipments of the Himalaya servers exceeded the effect of lower unit pricing, a trend that increased throughout the year. The increase in service and other revenues was attributable primarily to a large consulting project that occurred in the third quarter of 1994. Product lines The table below summarizes total revenues by product line (which includes both product revenues and service and other revenues) and the percentage of total revenues each product line contributed for the indicated periods.
- ---------------------------------------------------------------------------------------------------- (Dollars in millions) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- $ % $ % $ % - ---------------------------------------------------------------------------------------------------- Computer systems 1,911.1 84 1,730.7 82 1,676.3 83 Networking 373.9 16 377.3 18 354.7 17 - ---------------------------------------------------------------------------------------------------- Total revenues 2,285.0 100 2,108.0 100 2,031.0 100 ====================================================================================================
Computer systems revenues increased 10 percent in 1995 compared to 1994. The increase was the result of increased unit shipments of high-end and midrange Himalaya servers, increased recurring software license and support revenues, and increased consulting revenues. The benefits of the strong growth in unit volumes were partially offset by the shift from system add-on business to aggressively discounted trade-in activity on the NonStop product family. Overall, unit shipments of computer system product lines increased 23 percent in 1995, compared to 1994 (based on the number of processors shipped excluding workstations and personal computers). High-end NonStop computer unit shipments increased 40 percent to 2,600 units during the year and midrange NonStop computer unit shipments increased 61 percent to more than 4,300 units. Compared to the prior year, units from the UNIX system family were relatively flat. Recurring software license and support revenues increased 16 percent for the year, compared to 1994, primarily from the effect of increased volumes discussed above. This increase contributed 24 percent to the net increase in the computer systems business. Consulting revenues attributable to the computer systems business increased 33 percent during 1995, compared to 1994. The growth in consulting revenues was attributable to changes made in the first quarter of 1995, whereby the Company organized to price, market, and sell certain consulting services more aggressively. The increase in consulting revenues accounted for 19 percent of the net increase in the computer systems business. Networking revenues decreased $3 million, or 1 percent, during 1995, in comparison to 1994. Excluding NetWorth, Inc., which was a consolidated subsidiary prior to April 1, 1994, networking revenues increased $9 million, or 2 percent. Networking product revenues decreased $7 million, offset by increased consulting and service revenues of $16 million. As noted above, service revenues increased as the Company began a formal program to market and sell certain consulting services. 10 11 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.
- ---------------------------------------------------------------------------------------------------- (Dollars in millions) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- $ % $ % $ % - ---------------------------------------------------------------------------------------------------- United States 1,149.6 50 1,127.5 54 1,087.7 54 Europe United Kingdom 179.8 8 161.9 8 139.9 7 Germany 97.5 4 92.3 4 100.2 5 Other Europe 300.6 13 258.0 12 298.0 14 - ---------------------------------------------------------------------------------------------------- Total Europe 577.9 25 512.2 24 538.1 26 Japan 338.6 15 265.3 13 233.1 12 Asia-Pacific 123.5 6 116.3 5 86.4 4 Americas Division (excluding the U.S.) 95.4 4 86.7 4 85.7 4 - ---------------------------------------------------------------------------------------------------- Total revenues 2,285.0 100 2,108.0 100 2,031.0 100 ====================================================================================================
Revenues in the United States in 1995 increased 2 percent compared to 1994, characterized by increased unit shipments of high-end and midrange servers and increased consulting revenues, offset by the shift to aggressively discounted trade-in activity on the NonStop product, as previously discussed. Revenues in Europe increased 13 percent during 1995, compared to 1994, as a result of the positive effects of foreign exchange fluctuations, estimated to be 10 percent year over year; increased consulting revenues; and increased unit shipments of high-end and midrange servers. The positive effects of foreign exchange fluctuations were somewhat offset by local product pricing reductions. In Japan, revenues increased 28 percent during 1995, compared to 1994. These increases were attributable to the positive effects of foreign exchange rate changes (favorable impact of approximately 14 percent), increased product shipments of high-end servers, and increased consulting revenues, offset by reduced revenues in the UNIX system family. Asia-Pacific revenues in 1995 increased by 6 percent as a result of foreign exchange rate changes since the prior year and increased revenues in the UNIX system family. COST OF REVENUES During 1995, product margins declined 4 percent to 55 percent. Computer system margins declined 5 percent to 58 percent in 1995, while networking margins declined 2 percent to 41 percent. The decline in computer system margin percentages was the result of several factors. With the availability of the new Himalaya K2(x) line of servers, there was an increase in the volume of aggressively priced trade-in activity and a decrease in add-on sales. In line with the Company's strategy to price products more competitively, the Company reduced prices on disk storage products early in the year, and sales volume of disk storage products increased for the year. Further, the shift in product mix to the Himalaya servers from the older NonStop products continued to impact the period over period comparison of product margins. The unfavorable impact on product margins from these factors was offset slightly by the strength of foreign currencies during the year. Networking margins were negatively affected by higher material and overhead costs, a shift to more indirect sales channels, and discounting of certain older product lines. Management expects product margins to continue to decline in 1996, although at a lower rate than in 1995. However, product margin predictions are difficult to make, as they are affected by foreign currency fluctuations, geographic revenue mix, product mix, and future competitive pricing actions. Margins on service and other revenues decreased 7 percent to 27 percent in 1995, as a result of a higher contribution to revenues from consulting activities, which generated lower margins than other service 11 12 activities. Margin dollars on the hardware servicing business, which is the majority of the service and other revenue business, were relatively flat in comparison to the prior year. Margin dollars on the professional services and systems integration businesses experienced more fluctuation, as these activities are significantly influenced by the nature of the projects conducted in any given year. Further, the Company implemented an organizational change in the first quarter of 1995 to price, market, and sell consulting services formally, resulting in a change of classification of certain costs associated with consulting services, which were previously reported as marketing expenses. This organizational change reflects the Company's continued transition to open systems' business practices. Management expects hardware servicing margins to decline slightly in 1996. Margins on the consulting business are expected to improve, but are dependent upon the mix of project revenue. Excluding the effects of business units sold, product margins in 1994 declined 4 percent, compared to 1993, as a result of the introduction of Himalaya server products at the beginning of the year and a shift in product mix to include the expanding UNIX system line. Both of these product families have lower, more aggressive prices than previous generations of Tandem systems. Networking margins declined primarily as a result of shifts in product mix. Margins on service and other revenues increased primarily because of lower service costs and overhead associated with cumulative restructuring actions. RESEARCH AND DEVELOPMENT EXPENSES Research and development spending in 1995 increased $54 million, or 20 percent. The increase was attributable to the Company's new product development efforts, including additional costs for outside contractors, increased salaries and benefits, and purchases of development material. Research and development expenses were approximately 14 percent and 13 percent of total revenues during 1995 and 1994, respectively. Research and development spending in 1994 decreased $44 million, or 14 percent, over 1993 because of reduced headcount -- approximately 50 percent of the spending reduction -- and higher levels of software capitalization as certain projects reached technological feasibility -- approximately 27 percent of the reduction. Approximately 23 percent of the decrease was the result of business units sold. Management anticipates that research and development spending will increase in dollars in 1996, but not as a percentage of revenues, as the Company prepares to introduce the next generation of products based on the Tandem NonStop Kernel, Microsoft Windows NT, and UNIX operating systems, incorporating the Company's new ServerNet technology. MARKETING, GENERAL, AND ADMINISTRATIVE EXPENSES In 1995, marketing, general, and administrative (MG&A) expenses declined $31 million, or 4 percent, compared to 1994. The impact of business units sold contributed 47 percent of the decline for the year. The remaining decrease reflects the Company's ongoing efforts to manage general and administrative expenses relative to gross margin levels. Specific to marketing expenses, the Company realized increased commissions generated by growing shipment volumes, and experienced increased salaries and benefits. These increased marketing expenses were fully offset by the impact of the change in reporting of certain consulting services costs as discussed previously. MG&A expenses in 1995 and 1994 included realized gains from the sale of strategic investments of $10.6 million and $6.3 million, respectively. In 1994, marketing, general, and administrative expenses declined $120 million, or 14 percent, compared to 1993, largely as the result of restructuring actions initiated in the third quarter of 1993. Management expects MG&A expenses to increase in dollars in 1996, but not as a percentage of revenue. RESTRUCTURING CHARGES In 1993 and 1992, the Company recorded restructuring charges of $451 million and $106 million, respectively, to reengineer the business, largely necessitated by the migration toward open systems and servers based on RISC technology, which resulted in lower-priced, yet more powerful parallel servers. The 12 13 restructuring provisions, supported by appropriate levels of specificity for planned actions, were established and approved by the Company's executive management and its Board of Directors. The restructuring charges covered reduction of work force, consolidation of facilities, disposal of assets no longer required, and the write-off of cost in excess of net assets acquired (goodwill) as discussed below. As of September 30, 1995, $61 million remained in accrued liabilities and $10 million remained as a reduction of net property, plant, and equipment. At September 30, 1994, $144 million remained in accrued liabilities and $29 million remained as a reduction of net property, plant, and equipment. Included in the 1993 restructuring charge was a $151 million write-off of goodwill associated with the 1988 acquisition of UB Networks, Inc. (formerly Ungermann-Bass, Inc.). As of June 30, 1993, the Company's UB Networks, Inc. subsidiary reported its second consecutive quarter of substantial and increased losses from operations. The results reflected an accelerating two-year decline in its financial performance. Due to the disappointing financial results, the lack of certain products in high-growth sectors of the market, and unsuccessful efforts by the subsidiary's management to attract public or private investment partners, management initiated a plan to restructure the operations, which included reducing headcount, consolidating facilities, and redirecting certain development programs. Additionally, based upon the then current undiscounted cash flow projections, it was concluded that the acquisition goodwill could no longer be assured of recovery and the balance of $151 million was written off and included in the 1993 restructuring charges. Information relating to restructuring activity, other than the goodwill write-off discussed above, is presented below. Minor adjustments were made during 1995, as certain actions were completed and other estimates were revised.
- ------------------------------------------------------------------------------------------------------ Reduction of Internal Discontinued (In thousands) Work Force Facilities Systems Activities Other Total - ------------------------------------------------------------------------------------------------------ Provision: 1992 $ 44,000 $ 38,000 -- $18,000 $ 6,000 $106,000 1993 103,000 79,000 $34,000 24,000 60,000 300,000 - ------------------------------------------------------------------------------------------------------ Total 147,000 117,000 34,000 42,000 66,000 406,000 - ------------------------------------------------------------------------------------------------------ Utilized: 1992 32,088 16,838 -- 6,649 2,865 58,440 1993 28,278 10,860 -- 20,026 5,825 64,989 1994 34,568 34,560 10,178 4,614 25,473 109,393 1995 36,000 26,036 19,482 933 20,122 102,573 - ------------------------------------------------------------------------------------------------------ Total 130,934 88,294 29,660 32,222 54,285 335,395 - ------------------------------------------------------------------------------------------------------ Adjustments -- 1995 1,611 (45) 3,074 42 (4,682) 0 - ------------------------------------------------------------------------------------------------------ Balances, September 30, 1995 $ 17,677 $ 28,661 $7,414 $ 9,820 $ 7,033 $ 70,605 ====================================================================================================== Cash used: 1992 $ 32,088 $ 6,296 -- $ 4,356 $ 2,865 $ 45,605 1993 28,278 9,142 -- 4,999 5,825 48,244 1994 34,568 25,075 $10,178 (5,037) 23,680 88,464 1995 36,000 20,674 19,482 57 19,093 95,306 Expected future 17,677 21,692 7,414 2,718 6,424 55,925 - ------------------------------------------------------------------------------------------------------ Total $148,611 $ 82,879 $37,074 $ 7,093 $57,887 $333,544 ======================================================================================================
13 14 IMPACT OF CURRENCY AND INFLATION The Company's international operations generally consist of sales and support organizations that generate revenues and incur service costs and marketing, general, and administrative expenses in local currencies. Product costs, research and development, and corporate marketing and administrative expenses are mostly incurred in U.S. dollars. Thus, a strengthening of local currencies against the U.S. dollar has a positive influence on international revenues translated into dollars and a negative effect on translated local costs and expenses. A weakening of local currencies has a negative effect on translated international revenues and a positive effect on translated local costs and expenses. Tandem's hedging program moderates the impact of exchange rate changes on profitability and cash flows. During 1995, the currencies in most foreign countries where Tandem has significant operations strengthened against the U.S. dollar, positively affecting consolidated revenues and operating results of the Company, as stated in U.S. dollars. However, this impact is somewhat mitigated as the Company responds to such movements in currency exchange rates with pricing and other management actions in the local markets. The impact is further mitigated by the Company's hedging program, the objective of which is to neutralize the impact of foreign currency exchange rate movements on the Company's operating results. Understanding that the net impact of currency is difficult to quantify, particularly when measuring the effects of local currency pricing actions, management estimates that, compared to 1994, foreign exchange rate movements had a positive impact on the change in operating income of approximately $15 million to $20 million. During 1994, currencies in Europe and Latin America generally weakened against the U.S. dollar compared to the prior year periods, negatively affecting revenues and operating results. The negative impact on operating results from these countries, however, was more than offset by the favorable impact resulting from the U.S. dollar weakening against the Japanese yen and other Asia-Pacific currencies. The resulting overall effect of currency movements in 1994, though positive, had no material impact on the operating results for the year. The effect of inflation on the Company's financial position has not been significant. NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE Net income for 1995 was $108 million, or $0.91 per share, compared with $170 million, or $1.50 per share for 1994. Net income for 1995 included a $9 million pretax nonoperating gain from the sale of an equity investment, Lightstream Corporation. Net income for 1994 included a $23 million pretax nonoperating gain from the sales of ACI and ACI, Ltd. The 1993 net loss of $518 million included a $12 million positive adjustment representing the cumulative effect as of October 1, 1992, of adopting Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes," and a $451 million restructuring charge. The effective tax rates for 1995 and 1994 were 23 percent and 6 percent, respectively, arising principally from taxes currently payable in foreign jurisdictions. Similarly, although the Company incurred a loss in 1993, there was a provision for income taxes consisting of taxes currently payable in foreign jurisdictions and the reduction of deferred tax assets. Tandem expects to continue to report income in certain foreign jurisdictions, which will result in tax provisions despite loss carryforwards that are available primarily to offset U.S. and certain foreign income. At September 30, 1995, net deferred tax assets of $11 million represent the tax effects of temporary differences existing in certain foreign jurisdictions that the Company believes are more likely than not to be realized, based upon the strong earnings history in these jurisdictions. Weighted average shares outstanding increased from 1994 because of dilutive stock options and sales of stock to employees under stock plans. FINANCIAL CONDITION During the year, cash and cash equivalents decreased by $3 million, from $124 million to $121 million. The Company generated $161 million positive cash flow from operations during 1995 compared with $116 million in 1994. Net cash used in investing activities was $208 million during 1995, compared with 14 15 $116 million in 1994. Investing activities in 1995 consisted mainly of investment in property, equipment, and software development. Financing activities, consisting of sales of stock and net borrowings, provided $42 million compared with $15 million in 1994. Accounts receivable days remained unchanged at 77 days for 1995. Inventory days decreased to 46 days at 1995 year end versus 54 days at the end of 1994. At September 30, 1995, total debt and short-term borrowings were $142 million compared with $145 million at September 30, 1994, of which $120 million and $122 million, respectively, represented limited recourse borrowings against lease receivables. Repayments on the lease borrowings are sourced from the underlying lease receivables that are collected directly by the lending institution and are scheduled as follows (in millions): $56 (1996), $39 (1997), $20 (1998), and $5 (1999). Repayments on the remaining debt will be funded through operations and are as follows (in millions): $10 (1996), $7 (1997), $2 (1998), $1 (1999), and $2 (thereafter). Total debt as a percentage of total capital decreased to 11 percent at September 30, 1995, from 13 percent at September 30, 1994. Cash used for restructuring actions aggregated $95 million, $88 million, and $48 million for 1995, 1994, and 1993, respectively. Cash requirements for restructure actions for 1996 are expected to be approximately $40 million and will be funded by cash generated from operations. In December 1993, Tandem secured a three-year financing facility (Financing Facility), whereby the Company can sell a percentage ownership interest in an eligible pool of accounts receivable, up to $150 million, on a limited recourse basis. One component of the Financing Facility, which allows for sales of an interest in accounts receivable up to $75 million, expires in 1996, but is renewable annually with the consent of both parties. A second component of the Financing Facility, which allows for sales of an interest in accounts receivable up to $75 million, expires in 1997. At September 30, 1995, $114 million of financing was available to the Company under the agreement. The maximum amount outstanding at any point during 1995 was $50 million, and there were no amounts outstanding at year end. In addition to the Financing Facility, other possible sources of working capital include cash generated from operations and other financing arrangements. Management believes that the financing sources available at September 30, 1995, are adequate to meet Tandem's financing needs, both for the short and long term. Effective October 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt and Equity Securities." Previously, the Company's equity securities were recorded at the lower of cost or market. Under SFAS No. 115, the Company's equity securities are classified as available-for-sale. In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect of adopting SFAS No. 115, as of October 1, 1994, increased the beginning balance of stockholders' investment by $4.1 million to reflect the net unrealized holding gain on available-for-sale securities. OUTLOOK AND RISKS OVERVIEW The Company's future operating results are dependent upon a number of factors, including the Company's ability to increase market share, to expand successfully into new markets, to improve upon cost control efforts, and to continue the Company's migration to open platforms. A key challenge to the Company's continued growth is continuing to sell increased unit volumes of computer systems and networking products at competitive prices, while concurrently controlling the cost structure of the Company. Increased volume shipments is dependent upon continued demand for the Himalaya K2(x) series of servers, acceptance of new product introductions by the Company's existing customer base -- including the new UNIX system server incorporating the ServerNet technology -- as well as successful expansion into new markets, such as decision support, data warehousing, and commercial uses of the Internet. As additional products become available based on the ServerNet technology, the Company must 15 16 successfully implement its strategy to sell computer components into the open systems market. With continued pressures on product margins, cost control remains a key management focus. Early in 1996, the Company announced that it would undergo significant management changes. The timing and impact of these management changes on the operations of the Company cannot be predicted. CORE COMPUTER OPERATIONS During the year, Tandem continued to position itself to compete in an open systems environment based on client/server computing. This trend will continue in the future with the introduction of new hardware and related software that is based on Tandem's new ServerNet technology. The ServerNet architecture is currently planned to be the basis of Tandem's future product lines, including servers that support NonStop Kernel, UNIX, and Windows NT operating environments. The success of these product introductions is dependent on a number of factors, including timeliness to market, market acceptance, the Company's ability to manage the risks associated with product transitions, and the effective management of inventory levels. Accordingly, the Company cannot determine the ultimate effect that the ServerNet technology or the new products will have on revenues and operating results. Tandem also plans to sell ServerNet products and manufacturing rights to other companies on an original equipment manufacturer (OEM) basis, a new type of business for Tandem. Accordingly, 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. Historically, Tandem recognizes a large percentage of its revenues in the latter part of each quarter. This trend makes it difficult to forecast revenues and could subject the Company to fluctuations in revenues and earnings. UB NETWORKS, INC. At the end of 1995, UB Networks introduced and began shipping three new products -- GeoLAN 500, GeoSwitch, and GeoRim. Accordingly, UB Networks' 1996 operating results are dependent upon market acceptance of these new products by UB Networks' existing customer base, as well as successful expansion into new accounts. UB Networks' operating results have been, and in the future may be, affected by competitive pricing pressures, changes in mix of products sold, delays in shipping new products, and inventory management. Accordingly, UB Networks' future success is dependent on its ability to enhance existing products; to develop and introduce, on a timely and cost-effective basis, new products that keep pace with technological developments and emerging industry standards; to address increasingly sophisticated customer requirements; and to manage the product transition process. FOREIGN OPERATIONS Although the Company's operating and pricing strategies and currency hedging practices take into account changes in foreign currency exchange rates over time, the Company's operating results can be affected by fluctuations in foreign currency exchange rates. 16 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------- TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES For the years ended September 30 - ---------------------------------------------------------------------------------------------------------------- (In thousands except per share amounts) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------- REVENUES Product revenues $1,846,075 $1,719,026 $1,651,597 Service and other revenues 438,887 389,009 379,363 - ---------------------------------------------------------------------------------------------------------------- Total revenues 2,284,962 2,108,035 2,030,960 - ---------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES Cost of product revenues 821,780 699,976 622,640 Cost of service and other revenues 318,909 255,292 263,414 Research and development 323,197 269,267 313,298 Marketing, general, and administrative 695,772 726,906 847,047 Restructuring charge -- -- 451,000 - ---------------------------------------------------------------------------------------------------------------- Total costs and expenses 2,159,658 1,951,441 2,497,399 - ---------------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) 125,304 156,594 (466,439) Gain on sale of subsidiaries and investments 9,297 23,000 -- Interest income 18,200 14,579 18,985 Interest expense (13,102) (12,973) (15,685) - ---------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES 139,699 181,200 (463,139) Provision for income taxes 32,153 11,000 66,959 - ---------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 107,546 170,200 (530,098) Cumulative effect as of October 1, 1992, of change in accounting for income taxes -- -- 12,371 - ---------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 107,546 $ 170,200 $ (517,727) ================================================================================================================ EARNINGS (LOSS) PER SHARE BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ .91 $ 1.50 $ (4.72) Per share cumulative effect of accounting change -- -- .11 - ---------------------------------------------------------------------------------------------------------------- EARNINGS (LOSS) PER SHARE $ .91 $ 1.50 $ (4.61) ================================================================================================================ Weighted average shares outstanding 118,217 113,449 112,292 ================================================================================================================
See accompanying notes. 17 18 CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------- TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES At September 30 - ------------------------------------------------------------------------------------------------- (In thousands except per share amount) 1995 1994 - ------------------------------------------------------------------------------------------------- ASSETS - ------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and equivalents $ 121,230 $ 124,042 Accounts receivable, net of allowances of $17,721 in 1995 and $17,931 in 1994 539,993 512,334 Current portion of lease receivables 73,555 61,516 Inventories 169,948 159,609 Prepaid expenses and other 65,759 70,529 - ------------------------------------------------------------------------------------------------- Total current assets 970,485 928,030 - ------------------------------------------------------------------------------------------------- PROPERTY, PLANT, AND EQUIPMENT, at cost 1,297,481 1,178,888 Accumulated depreciation and amortization (700,813) (630,652) - ------------------------------------------------------------------------------------------------- Net property, plant, and equipment 596,668 548,236 - ------------------------------------------------------------------------------------------------- LEASE RECEIVABLES 86,173 76,765 - ------------------------------------------------------------------------------------------------- OTHER ASSETS 203,368 208,854 - ------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,856,694 $1,761,885 ================================================================================================= LIABILITIES AND STOCKHOLDERS' INVESTMENT - ------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Accounts payable $ 195,793 $ 150,933 Accrued liabilities 409,520 527,510 Current maturities of long-term obligations 65,123 58,120 - ------------------------------------------------------------------------------------------------- Total current liabilities 670,436 736,563 - ------------------------------------------------------------------------------------------------- LONG-TERM OBLIGATIONS 75,923 86,481 - ------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES -- -- - ------------------------------------------------------------------------------------------------- STOCKHOLDERS' INVESTMENT Common stock $.025 par value, authorized 400,000 shares, outstanding 119,808 shares in 1995 and 116,237 shares in 1994 2,995 2,905 Additional paid-in capital 691,097 646,256 Retained earnings 450,086 332,460 Accumulated translation adjustments 17,064 9,192 Treasury stock, at cost (50,907) (9,062) Deferred ESOP compensation -- (42,910) - ------------------------------------------------------------------------------------------------- Total stockholders' investment 1,110,335 938,841 - ------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $1,856,694 $1,761,885 =================================================================================================
See accompanying notes. 18 19 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
- -------------------------------------------------------------------------------------------------------------------------------- TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES For the years ended September 30 - -------------------------------------------------------------------------------------------------------------------------------- Common Stock Additional Accumulated Deferred Total ---------------- Paid-In Retained Translation Treasury ESOP Stockholders' (In thousands) Shares Amount Capital Earnings Adjustments Stock Compensation Investment - -------------------------------------------------------------------------------------------------------------------------------- BALANCES, SEPTEMBER 30, 1992 110,651 $2,766 $593,578 $ 679,987 $ 7,008 $ (3,086) $(43,358) $ 1,236,895 Sale of Common Stock under stock plans 3,015 76 27,149 -- -- -- -- 27,225 Reissuance of treasury stock under stock plans -- -- (430) -- -- 5,702 -- 5,272 Acquisition of treasury stock -- -- -- -- -- (11,487) -- (11,487) ESOP compensation -- -- -- -- -- -- 448 448 Translation adjustments -- -- -- -- (3,801) -- -- (3,801) Net loss -- -- -- (517,727) -- -- -- (517,727) - -------------------------------------------------------------------------------------------------------------------------------- BALANCES, SEPTEMBER 30, 1993 113,666 2,842 620,297 162,260 3,207 (8,871) (42,910) 736,825 Sale of Common Stock under stock plans 2,571 63 25,935 -- -- -- -- 25,998 Reissuance of treasury stock under stock plans -- -- 24 -- -- 426 -- 450 Acquisition of treasury stock -- -- -- -- -- (617) -- (617) Translation adjustments -- -- -- -- 5,985 -- -- 5,985 Net income -- -- -- 170,200 -- -- -- 170,200 - -------------------------------------------------------------------------------------------------------------------------------- BALANCES, SEPTEMBER 30, 1994 116,237 2,905 646,256 332,460 9,192 (9,062) (42,910) 938,841 Effect of adoption of SFAS No. 115 -- -- -- 4,117 -- -- -- 4,117 - -------------------------------------------------------------------------------------------------------------------------------- BALANCES, OCTOBER 1, 1994 116,237 2,905 646,256 336,577 9,192 (9,062) (42,910) 942,958 Sale of Common Stock under stock plans 3,571 90 44,277 -- -- -- -- 44,367 Reissuance of treasury stock under stock plans -- -- (4) -- -- 19 -- 15 Termination of ESOP -- -- (1,046) -- -- (41,864) 42,910 -- Gain from change of interest in NetWorth, Inc. -- -- 1,614 -- -- -- -- 1,614 Translation adjustments -- -- -- -- 7,872 -- -- 7,872 Net unrealized gains on available-for-sale securities -- -- -- 5,963 -- -- -- 5,963 Net income -- -- -- 107,546 -- -- -- 107,546 - -------------------------------------------------------------------------------------------------------------------------------- BALANCES, SEPTEMBER 30, 1995 119,808 $2,995 $691,097 $ 450,086 $17,064 $(50,907) $ -- $ 1,110,335 ================================================================================================================================
See accompanying notes. 19 20 CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------- TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES For the years ended September 30 - ----------------------------------------------------------------------------------------------- (In thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 107,546 $ 170,200 $(517,727) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 170,834 163,277 170,340 Gain on sale of subsidiaries and investments (9,297) (23,000) -- Cumulative effect of accounting change -- -- (12,371) Restructuring charge -- -- 451,000 Loss on dispositions of property, plant, and equipment 5,885 3,530 195 Changes in (net of dispositions): Accounts receivable (20,125) (68,398) (1,044) Inventories (8,501) (2,399) (24,022) Lease receivables (23,046) 4,017 2,998 Non-debt current liabilities and other (62,477) (131,397) 65,240 - ----------------------------------------------------------------------------------------------- Net cash provided by operating activities 160,819 115,830 134,609 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in property, plant, and equipment (188,030) (152,807) (146,437) Proceeds from dispositions of property, plant, and equipment 14,495 41,036 22,082 Purchase of short-term investments -- -- (18,588) Sale of businesses, net of cash disposed 12,262 70,519 -- Increase in other assets (47,086) (74,373) (49,843) - ----------------------------------------------------------------------------------------------- Net cash used in investing activities (208,359) (115,625) (192,786) - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings 65,772 73,480 73,348 Repayments (68,208) (84,864) (83,788) Acquisitions of treasury stock -- -- (11,487) Proceeds from sale of stock by a subsidiary, net of Company's participation -- -- 13,690 Issuance of Common Stock to ESOP and under other stock plans 44,382 25,998 27,225 - ----------------------------------------------------------------------------------------------- Net cash provided by financing activities 41,946 14,614 18,988 - ----------------------------------------------------------------------------------------------- Effect of exchange rate fluctuations on cash and equivalents 2,782 3,044 (3,616) - ----------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (2,812) 17,863 (42,805) Cash and equivalents at beginning of year 124,042 106,179 148,984 - ----------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS AT END OF YEAR $ 121,230 $ 124,042 $ 106,179 =============================================================================================== Supplementary cash flow information -- cash paid during the year for: Income taxes $ 12,099 $ 20,214 $ 30,301 Interest $ 13,074 $ 13,069 $ 15,551 ===============================================================================================
See accompanying notes. 20 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements include the accounts of Tandem Computers Incorporated and its majority-owned subsidiaries (the Company) after the elimination of intercompany accounts and transactions. REVENUE RECOGNITION The Company generally recognizes revenue from hardware and software product sales at the time of shipment. When significant obligations remain after products are delivered, revenue is recognized only after such obligations are fulfilled. Product support and other revenues are recognized ratably over the contractual period or as the services are provided. TRANSLATION OF NON-U.S. CURRENCY AMOUNTS The Company's non-U.S. subsidiaries use as their functional currency the local currencies of the countries in which they operate. Their assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at average rates of exchange prevailing during the period. In addition, all ongoing adjustments resulting from the process of translating each subsidiary's financial statements into U.S. dollars have been accumulated and recorded within a separate component of stockholders' investment. Foreign currency transaction gains and losses are not material and are included in the determination of net earnings. INCOME TAXES Effective October 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are recognized for the expected tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities and their tax bases. The Company accounts for research and development tax credits as a reduction of the provision for income taxes in the year in which the credits are realizable. In general, the Company's practice is to provide U.S. federal taxes on undistributed foreign earnings. EARNINGS (LOSS) PER SHARE Earnings per share is based on the weighted average number of common and common equivalent shares outstanding. Common equivalent shares result from the assumed exercise of outstanding stock options, which have a dilutive effect when applying the treasury stock method. Loss per share is calculated using the weighted average number of common shares outstanding during the period. Fully diluted earnings per share are substantially the same as reported earnings per share. As a result of terminating the Employee Stock Ownership Plan (ESOP) during 1993, the approximately 2.4 million unallocated common shares previously held by the ESOP trust were returned to Tandem's treasury in 1995 and are excluded from the 1995 and 1994 weighted average common shares and shares outstanding calculations. Common and common equivalent shares were as follows:
- ------------------------------------------------------------------------------------------------- Outstanding Common (In thousands) Shares Equivalents Total - ------------------------------------------------------------------------------------------------- 1995 weighted average 115,746 2,471 118,217 At September 30, 1995 116,721 1,054 117,775 =================================================================================================
21 22 CASH AND EQUIVALENTS Cash equivalents are valued at cost, which approximates market value; have original maturity dates not exceeding 90 days; and generally consist of certificates of deposit, time deposits, treasury notes, money market deposits and preferred stocks, municipal notes, and commercial paper. INVESTMENTS Effective October 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt and Equity Securities." Previously, the Company's equity securities were recorded at lower of cost or market. Under SFAS No. 115, the Company's equity securities are classified as available-for-sale. Available-for-sale securities are included in prepaid expenses and other and are stated at fair value, with the unrealized gains and losses, net of taxes, reported in stockholders' investment. Realized gains and losses, and declines in value judged to be other than temporary on available-for-sale securities are included in results of operations. The cost of securities sold is based on the average cost method. In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. When a subsidiary or investee sells additional shares of its common stock to third parties, thus reducing the Company's percentage ownership interest in the investee, the Company records any increase in its share value of the investee directly to paid-in capital. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventories at September 30 were as follows:
- ------------------------------------------------------------------------------- (In thousands) 1995 1994 - ------------------------------------------------------------------------------- Purchased parts and subassemblies $ 71,455 $ 52,370 Work in process 29,097 29,234 Finished goods 69,396 78,005 - ------------------------------------------------------------------------------- Total $169,948 $159,609 ===============================================================================
PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over estimated useful lives. COST IN EXCESS OF NET ASSETS ACQUIRED The excess acquisition cost over the fair value of net assets of businesses acquired is being amortized using the straight-line method over estimated lives ranging from 3 to 10 years. The amount of unamortized cost in excess of net assets acquired, included in other assets at September 30, 1995 and 1994, was $5.8 million and $6.6 million, respectively. Amortization expense for 1995, 1994, and 1993 was $1.9 million, $3.9 million, and $14.9 million, respectively. During 1993, $151 million of unamortized cost in excess of net assets acquired was written off. See the Restructuring note to the Consolidated Financial Statements. SOFTWARE DEVELOPMENT COSTS The Company capitalizes software development costs when the resulting products become "technologically feasible" and amortizes those costs when, and as, the products are shipped. The annual amortization of the capitalized amounts is the greater of the amount computed based on the estimated revenue distribution over the products' remaining life or a straight-line method, generally three years, from the date of product release. The amounts of unamortized software development costs included in other assets at September 30, 22 23 1995 and 1994, were $128.9 million and $117.7 million, respectively. The amortization expense for 1995, 1994, and 1993 was $44.4 million, $36.0 million, and $33.1 million, respectively. ADVERTISING EXPENSES The Company accounts for advertising costs as expense in the period in which they are incurred. Advertising expense for 1995, 1994, and 1993 was $24.0 million, $28.5 million, and $32.3 million, respectively. FINANCIAL INSTRUMENTS OFF BALANCE SHEET RISK The Company enters into foreign currency forward exchange and option contracts to reduce the impact of currency fluctuations on intercompany and other foreign currency denominated balance sheet positions, and on certain anticipated revenue transactions related to sales by its foreign subsidiaries that are expected to occur within 12 months. The objective of these contracts is to neutralize the impact of foreign currency exchange rate movements on the Company's operating results. The gains and losses on forward exchange contracts and option contracts are included in earnings when the underlying foreign currency denominated transaction is recognized. Costs associated with entering forward and option contracts are amortized over the life of the instruments. The cash flows related to gains and losses on these contracts are classified as operating activities in the Consolidated Statements of Cash Flows. The foreign currency forward exchange contracts described above generally require the Company to sell foreign currencies for U.S. dollars at rates agreed to at the inception of the contracts. Foreign currency option contracts generally provide the Company with the right, but not the obligation, to sell a specified amount of foreign currency at a fixed price on a specified future date. The forward contracts generally have maturities that do not exceed 3 months. The option contracts generally have maturities that range from 6 to 12 months. These contracts do not subject the Company to significant market risk from exchange rate movements because the contracts offset gains and losses on the balances and transactions being hedged. At September 30, 1995, the Company had $158 million of foreign exchange forward contracts outstanding and $70 million of option contracts outstanding in 15 different currencies. At September 30, 1994, the Company had $142 million of foreign exchange forward contracts outstanding and $65 million of option contracts outstanding in 16 different currencies. Contracts to exchange European currencies and the Japanese yen represent approximately 88 percent of the total in 1995 and 94 percent of the total in 1994. Unrealized gains and losses related to these instruments at September 30, 1995 and 1994, are not material. The Company does not anticipate any material adverse effect on its financial position resulting from the use of these instruments. FAIR VALUES OF FINANCIAL INSTRUMENTS For certain of the Company's financial instruments, including cash and equivalents, accounts receivable and payable, notes payable, and accrued liabilities, the carrying amounts approximate fair value due to their short maturities. The following tables provide information regarding the estimated fair values of other financial instruments at September 30:
- ----------------------------------------------------------------------------------------------------- 1995 1994 -------------------------------- -------------------------------- (Asset)/Liability (Asset)/Liability --------------------- --------------------- Contract Carrying Estimated Contract Carrying Estimated (In thousands) Amount Amount Fair Value Amount Amount Fair Value - ----------------------------------------------------------------------------------------------------- Long-term obligations: Japanese yen notes payable -- $12,838 $13,185 -- $12,923 $13,153 Mortgages -- $ 7,626 $ 8,239 -- $ 9,613 $ 9,907 Foreign exchange: Forward contracts, accrued (gains)/losses $158,000 $ (917 ) $(1,365) $142,000 $ 306 $ 363 Option contracts, unamortized premium $ 70,000 $(1,019 ) $(1,178) $ 65,000 $(1,013 ) $ 1,293 ===================================================================================================
23 24 The fair values for long-term obligations have been estimated using a discounted cash flow analysis based upon interest rates that approximate current interest rates for similar borrowings. The fair value of the foreign exchange forward contracts is based upon quoted market prices for the same or similar instruments. The fair value of option contracts is estimated using option pricing models. These values represent general approximations of potential value and are not necessarily the values that will be ultimately realized. INVESTMENTS During 1995, one of the Company's equity investees, Lightstream Corporation, entered into an agreement to sell its assets. Accordingly, the Company received $12.3 million in proceeds from the transaction, for a gain of $9.3 million. Additional proceeds of $1.2 million may be received in the future, subject to certain contingencies, and will not be recognized until received. The cumulative effect of adopting SFAS No. 115, as of October 1, 1994, increased the beginning balance of stockholders' investment by $4.1 million to reflect the net unrealized holding gains on securities classified as available-for-sale. During 1995, the Company received $14.0 million in proceeds, and realized gains of $7.6 million from sales of available-for-sale securities. These realized gains were reported in marketing, general, and administrative expenses in the Consolidated Statement of Operations. At September 30, 1995, the Company held available-for-sale securities with estimated fair values of $16 million, consisting of gross unrealized gains of $10 million and cost basis of $6 million. Available-for-sale securities are reported in prepaid expenses and other. CONCENTRATIONS OF CREDIT RISK Credit risk with respect to trade receivables is generally diversified due to the number of entities that make up the Company's customer base and their dispersion across many different industries and geographies. Credit risk is also limited by the Company's credit evaluation process and reasonably short collection terms. Bad debt expenses have been insignificant, and generally, the Company does not require collateral or other security to support accounts receivable. The Company also has short-term cash and foreign exposure management policies that limit the amount of credit exposure to any one financial institution and restrict placement of the investments and contracts to financial institutions evaluated as highly creditworthy. RESTRUCTURING During 1992, the Company developed a restructuring program aimed principally at reducing its cost structure and improving employee productivity on a worldwide basis. The restructuring actions resulted in a $106 million charge during 1992. During 1993, the Company initiated a separate restructuring program designed to streamline operations and lower its worldwide cost structure in anticipation of shipping the Himalaya product line. These restructuring actions resulted in a charge of $451 million and included a reduction of headcount, consolidation of facilities, disposal of assets no longer required, and the write-off of cost in excess of net assets acquired (goodwill) as discussed below. As of September 30, 1995, $61 million remained in accrued liabilities and $10 million remained as a reduction of net property, plant, and equipment. At September 30, 1994, $144 million remained in accrued liabilities and $29 million remained as a reduction of net property, plant, and equipment. As of June 30, 1993, the Company's UB Networks, Inc. subsidiary (formerly Ungermann-Bass, Inc.) reported its second consecutive quarter of substantial and increased losses from operations. The results reflected a continuing and accelerating two-year decline in its financial performance. Due to the disappointing financial results, the lack of certain products in high-growth sectors of the market, and unsuccessful efforts by the subsidiary's management to attract public or private investment partners, management initiated a plan to restructure the operations, which included reducing headcount, consolidating facilities, and redirecting certain development programs. Additionally, based upon the then current financial projections, which were signifi- 24 25 cantly lower than at acquisition, it was concluded the acquisition goodwill could no longer be assured of recovery and the balance of $151 million was written off and included in the 1993 restructuring charges. The goodwill write-off was calculated by comparing the balance with future undiscounted cash flow projections at the subsidiary. The cash flow projections anticipated the cost and probable future savings from the restructuring actions as well as the benefits from products and technologies that were in the latter stages of development. The projections indicated that undiscounted cash flows from operations were expected to be negative for the next several years and cumulatively negative for the remaining life of the goodwill. The restructuring provisions, supported by appropriate levels of specificity for planned actions, were established and approved by the Company's executive management and its Board of Directors. Actual restructuring costs are recognized as reductions in related restructuring reserves in the period incurred. Information relating to restructuring activity, other than the goodwill write-off discussed above, is presented below.
- ------------------------------------------------------------------------------------------------------ Reduction of Internal Discontinued (In thousands) Work Force Facilities Systems Activities Other Total - ------------------------------------------------------------------------------------------------------ Provision: 1992 $ 44,000 $ 38,000 -- $18,000 $ 6,000 $106,000 1993 103,000 79,000 $34,000 24,000 60,000 300,000 - ------------------------------------------------------------------------------------------------------ Total 147,000 117,000 34,000 42,000 66,000 406,000 - ------------------------------------------------------------------------------------------------------ Utilized: 1992 32,088 16,838 -- 6,649 2,865 58,440 1993 28,278 10,860 -- 20,026 5,825 64,989 1994 34,568 34,560 10,178 4,614 25,473 109,393 1995 36,000 26,036 19,482 933 20,122 102,573 - ------------------------------------------------------------------------------------------------------ Total 130,934 88,294 29,660 32,222 54,285 335,395 - ------------------------------------------------------------------------------------------------------ Adjustments -- 1995 1,611 (45) 3,074 42 (4,682) 0 - ------------------------------------------------------------------------------------------------------ Balances, September 30, 1995 $ 17,677 $ 28,661 $ 7,414 $ 9,820 $ 7,033 $ 70,605 ====================================================================================================== Cash used: 1992 $ 32,088 $ 6,296 -- $ 4,356 $ 2,865 $ 45,605 1993 28,278 9,142 -- 4,999 5,825 48,244 1994 34,568 25,075 $10,178 (5,037) 23,680 88,464 1995 36,000 20,674 19,482 57 19,093 95,306 Expected future 17,677 21,692 7,414 2,718 6,424 55,925 - ------------------------------------------------------------------------------------------------------ Total $148,611 $ 82,879 $37,074 $ 7,093 $57,887 $333,544 ======================================================================================================
The provisions for reduction of work force included severance, related medical and other benefits, and in the 1993 provision, retention incentives paid in 1995 to a limited number of employees critical to the Company's ongoing operations. The provisions included termination benefits for approximately 2,500 employees, of which approximately two-thirds were based in the United States. Approximately one-half of the planned terminations were in sales, marketing, and administrative functions, and the balance was evenly distributed among manufacturing, service and support, development, and UB Networks. Approximately 650 employees were terminated during each of the 1992, 1993, and 1994 fiscal years, and approximately 325 were terminated during fiscal 1995. A significant and unanticipated level of voluntary employee terminations since 1993 has complicated work force restructuring actions. Due to geographic and compensation mixes, in 1995 the Company increased its estimate for severance costs, and average employee termination payments in 1996 are expected to exceed those for employees terminated from 1992 through 1995. 25 26 The provisions for facilities included lease payments and fixed costs on idle facilities, write-offs of related facility improvements, moving and other expenses associated with the closure of approximately 2 million square feet of office and manufacturing space throughout all principal geographic areas, and the write-down of properties no longer to be developed. As of September 30, 1995, facilities restructure reserves included approximately $22 million representing lease payments and expenses for idle facilities, approximately $4 million representing related improvements, and approximately $3 million of estimated future losses on properties not to be developed. The above leases have remaining terms generally not exceeding five years. The provision for internal systems included estimated costs to reengineer and accelerate the implementation of new systems and processes required to support significant consolidation, centralization, and reorganization in nearly every business function and to facilitate the significant work force reductions referred to above. The 1995 actual costs incurred slightly exceeded original estimates. Remaining estimated costs to complete these efforts are expected to be completed during 1996. The provision for discontinued activities in 1992 included, principally, lease and other costs and losses associated with closing a manufacturing operation in Germany during 1992 and the sale of the Company's Watsonville, California printed circuit board manufacturing operation in early 1993. The 1993 provision included, principally, costs and losses associated with discontinuing two product initiatives at the Company's telecommunications division and with exiting and eventually selling certain assets and the disk drive business of the Company's Array Technology subsidiary in 1994. The above provisions were net of approximately $6 million and $10 million cash proceeds received in 1993 and 1994, respectively. As of September 30, 1995, estimated losses on assets not yet disposed aggregated approximately $7 million. Future cash utilization represents primarily the present value of a long-term land lease in Germany. The provisions for other costs consisted principally of moving, travel, temporary living, and other expenses in connection with reorganizing and centralizing general and administrative functions of the Europe division and with reorganizing and relocating headquarters' operations in Asia/Pacific and Latin America; costs associated with the relaunch of a new corporate image at the UB Networks subsidiary and asset write-offs as a result of redirecting product strategies; temporary living, travel, and duplicate development laboratory costs associated with an offshore software development organization for certain development and support activities; relocation expenses and equipment write-offs in connection with consolidating and moving manufacturing activities to a new facility in Fremont, California in 1995; and duplicate costs and expenses associated with opening a new manufacturing facility in Scotland during 1994. During 1995, the Company incurred lower than anticipated levels of asset write-offs associated with the duplicate development laboratory, consolidating manufacturing and reorganizing the Europe division. Related restructure reserves were adjusted accordingly. Remaining actions are expected to be completed during 1996. ACCOUNTS RECEIVABLE In December 1993, the Company entered into a three-year 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, up to $150 million, on a limited recourse basis. 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. One component of the agreement for up to $75 million will expire in 1997, and the other component for up to $75 million will expire in 1996 but is renewable annually with the consent of both parties. The maximum amount outstanding at any point during the years ended September 30, 1995 and 1994 was $50 million and $25 million, respectively. At September 30, 1995, $114 million of financing was available to the Company under the agreement. There were no amounts outstanding at the end of either year. 26 27 PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment balances at September 30 were as follows:
- ------------------------------------------------------------------------------ (In thousands) 1995 1994 - ------------------------------------------------------------------------------ Land and buildings $ 399,294 $ 380,760 Machinery and equipment 197,235 180,500 Computer equipment 534,748 480,811 System spares 94,348 95,743 Leasehold improvements 64,802 54,157 Construction in progress 16,645 15,766 Restructuring reserves (9,591) (28,849) - ------------------------------------------------------------------------------ Total $1,297,481 $1,178,888 ==============================================================================
Included in land and buildings at September 30, 1995 and 1994 was approximately $55.9 million of costs relating to land and land improvements on undeveloped parcels located near the Company's Cupertino, California, headquarters. Depreciation expense was $123.5 million, $122.6 million, and $122.3 million in 1995, 1994, and 1993, respectively. The Company leases certain equipment, automobiles, and some of its operating facilities and offices under operating lease agreements. Future minimum lease payments as of September 30, 1995, net of amounts included in restructuring, are as follows (in millions): $50.6 (1996), $37.6 (1997), $28.5 (1998), $20.1 (1999), $14.6 (2000), and $82.2 (2001 and thereafter). Rent expense was $59.1 million, $62.7 million, and $79.8 million in 1995, 1994, and 1993, respectively. BUSINESS COMBINATIONS On March 31, 1994, NetWorth, Inc. (NetWorth) acquired a portion of the Company's investment in NetWorth for a cash purchase price of $20 million, thereby reducing the Company's ownership in NetWorth to approximately 32 percent. The Company realized no gain or loss on the transaction for financial accounting purposes. From March 31, 1994, the investment in NetWorth was accounted for under the equity method of accounting. In October 1994, in conjunction with a secondary offering by NetWorth, the Company sold 315,000 shares of its NetWorth stock for cash of $3.4 million, realizing a $1.8 million gain for financial accounting purposes and reducing the Company's ownership interest in NetWorth to below 20 percent. This realized gain was reported in marketing, general, and administrative expenses. Further, as the net offering price was in excess of the Company's average per share carrying value of the investment, the Company also recorded a $1.6 million increase in the investment value. This change of interest gain was recorded directly to additional paid-in capital. From October 1994, the investment in NetWorth is accounted for as available-for-sale in accordance with SFAS No. 115. On March 10, 1995, NetWorth entered into a merger agreement providing for a merger with Network Resources Corporation (NRC), an equity investment of the Company. As a result, the Company's shares of NRC were exchanged for shares of NetWorth. The Company recorded a gain on the transaction of $1.2 million for financial reporting purposes, which was reported in marketing, general, and administrative expenses. In 1994 the Company sold 100 percent of its interest in Applied Communications, Inc. (ACI), and Applied Communications, Inc. Limited (ACI Ltd.), for approximately $53.6 million net cash. The sales of these subsidiaries resulted in a gain for financial accounting purposes of $23 million. The consolidated results of operations include the results of ACI and ACI Ltd., from their respective acquisition dates through December 31, 1993, their disposition date. On March 15, 1994, the Company sold its interest in Array Technology Corporation, together with certain assets, for approximately $10 million cash. As part of its 1993 restructuring plan and related provision, 27 28 the Company had decided to sell or otherwise dispose of this business unit. Accordingly, the transaction was recorded as part of restructuring activity and no gain or loss was realized for financial accounting purposes. LEASING PROGRAM The Company offers lease financing of selected products to its customers. Sales-type leases are originated by the Company and either sold on a nonrecourse basis or used as collateral for borrowings from certain third-party financial institutions. Under lease borrowings, the Company receives all proceeds at the inception of the lease in the form of a limited recourse borrowing. The third-party financial institution assumes the administrative responsibility for collection of the lease receivables and the credit risk, subject to the limited recourse provisions. In the event of a default by a lessee, recourse by the financial institutions is limited to the collateralized computer equipment and a recourse amount, if any, from a limited recourse pool established as a percentage of each associated group of financed lease transactions. The Company may also be required to participate in remarketing the computer equipment on a "best efforts" basis on behalf of the financial institutions. The following table relates the borrowing and repayment activity in the lease-related installment notes to the investment in sales leases:
- --------------------------------------------------------------------------- (In thousands) 1995 1994 1993 - --------------------------------------------------------------------------- Total borrowings, beginning balance $121,674 $114,274 $129,860 Current year borrowings 64,447 72,878 50,195 Current year repayments (65,883) (65,478) (65,781) - --------------------------------------------------------------------------- Total borrowings, ending balance 120,238 121,674 114,274 Leases not funded at year-end 39,490 16,558 25,864 Insured residual values -- 49 70 - --------------------------------------------------------------------------- Investment in sales leases 159,728 138,281 140,208 Less current lease receivables (73,555) (61,516) (60,376) - --------------------------------------------------------------------------- Lease receivables $ 86,173 $ 76,765 $ 79,832 ===========================================================================
The borrowings and repayments shown above are included in the Company's total borrowings and repayments as shown in the Consolidated Statements of Cash Flows. Sales of lease receivables in 1995, 1994, and 1993 were $11.3 million, $9.0 million, and $28.6 million, respectively. At September 30, 1995 and 1994, reserves for recourse liabilities on lease receivables were approximately $3.4 million and $5.5 million, respectively. 28 29 LONG-TERM OBLIGATIONS Long-term obligations at September 30 consisted of the following:
- ----------------------------------------------------------------------------------------------------------- (In thousands) 1995 1994 - ----------------------------------------------------------------------------------------------------------- Installment notes due through 2000, collateralized by lease receivables(1) $120,238 $121,674 Japanese yen notes payable, due 1996 to 1997(2) 12,838 12,923 Mortgages (9.3% - 14.5%)(3) 7,626 9,613 Other 344 391 - ----------------------------------------------------------------------------------------------------------- Total obligations 141,046 144,601 Less current portion (65,123) (58,120) - ----------------------------------------------------------------------------------------------------------- Long-term obligations $ 75,923 $ 86,481 ===========================================================================================================
- --------------- (1) Weighted average interest rates were 8.7% and 8.5% at September 30, 1995 and 1994, respectively. (2) Weighted average interest rates were 4.6% and 4.4% at September 30, 1995 and 1994, respectively. (3) Payable monthly; maturing 1997 to 2001; weighted average interest rates were 11.1% and 11.4% at September 30, 1995 and 1994, respectively. The mortgages are secured by certain land and buildings, with a carrying value of approximately $44 million. Principal repayments required in the future are as follows (in millions): $65.1 (1996), $46.1 (1997), $21.5 (1998), $6.4 (1999), $1.2 (2000), and $0.7 (thereafter). The Company has guaranteed payment of personal bank loans made to officers and other employees totaling $3.8 million and $4.1 million at September 30, 1995 and 1994, respectively, under a bank credit line of $5.0 million. ACCRUED LIABILITIES Accrued liabilities at September 30 were as follows:
- ----------------------------------------------------------------------------------------------------------- (In thousands) 1995 1994 - ----------------------------------------------------------------------------------------------------------- Accrued salaries and related items $ 76,264 $ 74,690 Accrued commissions to third parties 11,281 15,118 Deferred income 171,415 170,957 Restructuring reserves 61,014 144,329 Other 89,546 122,416 - ----------------------------------------------------------------------------------------------------------- Total $409,520 $527,510 ===========================================================================================================
Short-term borrowings, included above in Other, consisted of notes payable of $1.4 million at September 30, 1995. Notes payable generally consist of notes, bankers acceptances, and borrowings under uncommitted credit lines at a weighted average interest rate of 14.0 percent at September 30, 1995. The carrying value of short-term borrowings approximates fair values due to their short-term nature. INCOME TAXES Income (loss) before income taxes and cumulative effect of accounting change is as follows:
- ----------------------------------------------------------------------------------------------------------- (In thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------- U.S. $ 10,517 $114,077 $(319,106) Foreign 129,182 67,123 (144,033) - ----------------------------------------------------------------------------------------------------------- Total $139,699 $181,200 $(463,139) ===========================================================================================================
29 30 The provision for income taxes included the following:
- ----------------------------------------------------------------------------------------------- (In thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------- Federal: Current -- $ 1,046 -- Deferred -- -- $52,359 - ----------------------------------------------------------------------------------------------- -- 1,046 52,359 - ----------------------------------------------------------------------------------------------- State: Current $ 781 1,459 -- Deferred -- -- 3,152 - ----------------------------------------------------------------------------------------------- 781 1,459 3,152 - ----------------------------------------------------------------------------------------------- Foreign: Current 42,111 8,495 9,747 Deferred (10,739) -- 1,701 - ----------------------------------------------------------------------------------------------- 31,372 8,495 11,448 - ----------------------------------------------------------------------------------------------- Total provision for income taxes $ 32,153 $11,000 $66,959 ===============================================================================================
Although the Company incurred a loss in 1993, there was a provision for income taxes consisting primarily of taxes currently payable in foreign jurisdictions and the reduction of deferred tax assets. A significant portion of the 1993 operating loss provided no current tax benefit. The provision for income taxes differed from the amount obtained by applying the federal statutory income tax rate to income (loss) before income taxes, as follows:
- ----------------------------------------------------------------------------------------------- (In thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------- Federal statutory tax rate 35.0% 35.0% (35.0)% Losses with no current tax benefit 1.6 2.8 24.1 Foreign earnings at other than U.S. statutory rate 4.6 -- .7 Valuation allowance (utilization)/provision (17.3) (34.1) 11.9 State taxes, net of federal income tax benefit .6 .8 -- Amortization and write-off of cost in excess of net assets acquired -- .3 12.3 Other (1.5) 1.3 .5 - ----------------------------------------------------------------------------------------------- Effective tax rate 23.0% 6.1% 14.5% ===============================================================================================
30 31 Significant components of the Company's deferred tax assets (liabilities) as of September 30 are as follows:
- ---------------------------------------------------------------------------------------------- (In thousands) 1995 1994 - ---------------------------------------------------------------------------------------------- Deferred tax assets: Restructuring accruals $ 32,380 $ 71,567 Inventory reserves 13,937 26,031 Deferred income 17,492 18,894 Intercompany profit eliminations 29,576 33,126 Federal tax credit carryovers (expire beginning 1997) 44,050 29,991 Federal net operating loss carryover (expires in 2010) 53,982 -- Foreign net operating loss carryovers (expire beginning 1997) 20,573 32,268 Foreign taxes on unremitted foreign earnings, net of the related U.S. tax liability 54,295 40,345 Expenses not currently deductible 28,051 25,220 Other 11,046 15,566 - ---------------------------------------------------------------------------------------------- Total deferred tax assets 305,382 293,008 Valuation allowance for deferred tax assets (198,232) (196,873) - ---------------------------------------------------------------------------------------------- Net deferred tax assets $ 107,150 $ 96,135 - ---------------------------------------------------------------------------------------------- Deferred tax liabilities: Capitalized software $ (43,145) $ (41,415) Operating leases for income tax reporting (41,208) (44,412) Accelerated depreciation (12,058) (10,308) - ---------------------------------------------------------------------------------------------- Total deferred tax liabilities $ (96,411) $ (96,135) - ---------------------------------------------------------------------------------------------- Total net deferred tax assets $ 10,739 $ -- ==============================================================================================
At September 30, 1995, net deferred tax assets of $10.7 million represent the tax effects of temporary differences existing in certain foreign jurisdictions that the Company believes are more likely than not to be realized, based upon the strong earnings history in those jurisdictions. Accordingly, the valuation allowance at September 30, 1995 and 1994, reduced deferred tax assets to an amount deemed realizable. The valuation allowance includes $30.0 million and $24.5 million in 1995 and 1994, respectively, attributable to stock option deductions, the benefit of which will be credited to paid-in capital when realized. CAPITAL STOCK The Company's authorized capital stock consists of 2.4 million shares of preferred stock, of which .8 million shares are designated as Series A Participating Preferred Stock; 4.0 million shares of Junior Common Stock; and 396.0 million shares of Common Stock. No shares of preferred stock or Junior Common Stock have been issued. At September 30, 1995 and 1994, 26.3 million shares and 21.1 million shares of Common Stock, respectively, were reserved for future issuance under stock option plans and the employee stock purchase plan. TREASURY STOCK Treasury shares are carried at cost and are being used to satisfy requirements under employee stock and benefit plans. At September 30, 1995 and 1994, the Company held 3.1 million and .7 million shares, respectively, with an aggregate cost of $50.9 million and $9.1 million, respectively. 31 32 STOCK RIGHTS The Company has a stock rights plan (the Plan), which is intended to protect stockholders from unfair takeover practices. Under the Plan, each share of Common Stock carries one right to obtain additional stock or other property with equivalent value on terms provided in the Plan. The rights will not be exercisable or transferable apart from the Common Stock until another person or group of persons (subject to certain exceptions) acquires at least 20 percent of the Common Stock or commences, or announces its intention to commence, a tender offer for at least 30 percent of the Common Stock. The rights are redeemable by the Board of Directors or upon vote of the stockholders for $.05 per right or property with an equivalent value, and expire on June 17, 1998. EMPLOYEE BENEFITS STOCK OPTION PLANS The Company has stock option plans under which eligible individuals may be granted options to purchase shares of Common Stock, generally at fair market value at the time of the grant. In general, options become exercisable six months after the effective date, vest over four years, and expire no more than ten years after the effective date. At the discretion of the Board of Directors, options granted under the stock option plans may qualify as incentive stock options under the Internal Revenue Code of 1986. In 1993, options were granted to acquire 2.6 million shares, which generally vest upon obtaining certain performance targets. If these targets are not met, these options will become fully vested after four years. In 1994, 1.1 million of these shares became fully vested. At September 30, 1995 and 1994, options for 9.5 million shares and 2.3 million shares, respectively, were available for future grant. EMPLOYEE STOCK PURCHASE PLAN Under the employee stock purchase plan, the Company may offer shares to employees in two ways. Under the first method, eligible employees may elect to purchase shares of Common Stock at the lower of 85 percent of fair market value as of the first trading day of each quarterly participation period, or as of the last trading day of each quarterly participation period. Under this method, in 1995, 1994, and 1993, employees purchased 876,000 shares for aggregate proceeds of $11.0 million; 1,111,000 shares for aggregate proceeds of $10.4 million; and 1,351,000 shares for aggregate proceeds of $13.6 million, respectively. Under the second method, the Company may grant to all eligible employees an option to purchase an identical number of shares of Common Stock at not less than 85 percent of fair market value at the grant date. As of September 30, 1995 and 1994, the Company has reserved 1.2 million shares and 2.1 million shares, respectively, for future issuance under its employee stock purchase plan. 32 33 STOCK OPTION ACTIVITY Information concerning the combined option activity during the years ended September 30, under the stock option plans and the option portion of the employee stock purchase plan is as follows:
- --------------------------------------------------------------------------------------------------- (In millions except per share amounts) 1995 1994 1993 - --------------------------------------------------------------------------------------------------- Aggregate Aggregate Aggregate Shares Price Shares Price Shares Price - --------------------------------------------------------------------------------------------------- Beginning of year 16.7 $ 222.0 19.4 $ 254.7 19.2 $ 288.6 Options granted 3.2 47.8 .8 9.8 9.3 108.7 Options exercised ($8.88 to $19.00 per share) (2.7) (33.0) (1.5) (16.9) (1.7) (16.3) Options canceled (1.6) (21.7) (2.0) (25.6) (7.4) (126.3) - -------------------------------------------------------------------------------------------------- End of year 15.6 $ 215.1 16.7 $ 222.0 19.4 $ 254.7 ================================================================================================== Options vested at year-end 11.4 12.4 10.9 ==================================================================================================
Included in the 1993 activity are the cancellation of options for 3.7 million shares and regrants of options for 2.9 million shares, at exercise prices equal to the fair market value on the dates of the regrants. The regrants did not affect the vested status of the shares. Although stock options may be exercised before they are fully vested and the effect of all dilutive stock options is considered in the determination of earnings per share, the following tables show the maximum number of shares that would be issued based on the number of options vesting in each future year and the maximum number of shares expiring in each future year. The option vesting table does not reflect any anticipated early vesting based upon stock price performance.
- ---------------------------------------------------------------------------------------------------- Maximum number of existing options vesting each year - ---------------------------------------------------------------------------------------------------- 1995 and 1999 and Total Exercise Price Range Prior 1996 1997 1998 Thereafter Shares - ---------------------------------------------------------------------------------------------------- (In thousands except price range amounts) - ---------------------------------------------------------------------------------------------------- Under $9.00 1 -- -- -- -- 1 $9.00 -- $9.99 1,186 49 770 10 -- 2,015 $10.00 -- $10.99 569 255 156 8 -- 988 $11.00 -- $11.99 483 139 45 20 -- 687 $12.00 -- $12.99 1,392 224 83 46 -- 1,745 $13.00 -- $13.99 2,642 494 458 422 6 4,022 $14.00 -- $14.99 2,334 80 45 26 -- 2,485 $15.00 -- $15.99 156 28 20 12 -- 216 $16.00 -- $16.99 610 39 36 33 4 722 $17.00 -- $17.99 977 201 201 201 36 1,616 $18.00 -- $18.99 203 38 37 37 9 324 $19.00 -- $19.99 561 -- -- -- -- 561 Over $20.00 243 -- -- -- -- 243 - ---------------------------------------------------------------------------------------------------- 11,357 1,547 1,851 815 55 15,625 ====================================================================================================
33 34
- ---------------------------------------------------------------------------------------------------- Maximum number of existing options expiring each year - ---------------------------------------------------------------------------------------------------- 2000 and Total Exercise Price Range 1996 1997 1998 1999 Thereafter Shares - ---------------------------------------------------------------------------------------------------- (In thousands except price range amounts) - ---------------------------------------------------------------------------------------------------- Under $9.00 -- -- -- -- 1 1 $9.00 -- $9.99 -- -- 24 -- 1,991 2,015 $10.00 -- $10.99 1 -- 10 -- 977 988 $11.00 -- $11.99 6 2 5 -- 674 687 $12.00 -- $12.99 4 17 16 1 1,707 1,745 $13.00 -- $13.99 7 3 406 40 3,566 4,022 $14.00 -- $14.99 4 716 632 321 812 2,485 $15.00 -- $15.99 2 4 -- 61 149 216 $16.00 -- $16.99 9 10 52 424 227 722 $17.00 -- $17.99 6 301 281 171 857 1,616 $18.00 -- $18.99 2 -- 134 27 161 324 $19.00 -- $19.99 24 313 56 70 98 561 Over $20.00 2 66 -- 8 167 243 - ---------------------------------------------------------------------------------------------------- 67 1,432 1,616 1,123 11,387 15,625 ====================================================================================================
OPTION LOAN PROGRAM The Company has the Tandem Computers Incorporated Option Loan Program (the Program) to enable employees to exercise certain outstanding options. Under the Program, the Company can issue full recourse loans that are secured by a pledge of the Company's Common Stock. Loan agreements entered into between the Company and participants provide that in the event of a change in control of the Company (as defined), principal and interest will be forgiven over a four-year period. The amounts outstanding at September 30, 1995 and 1994, were insignificant. 401(K) INVESTMENT PLAN The Company has a 401(k) investment plan (the Investment Plan) covering substantially all of its U.S. employees. Under the Investment Plan, participating employees may defer up to 18 percent of their pretax earnings, subject to the Internal Revenue Service annual contribution limit ($9,240 for calendar year 1995). The Company matches 63 percent to 100 percent of each employee's contribution up to a maximum 2.5 percent of the employee's earnings. The Company's matching contributions to the Investment Plan for 1995, 1994, and 1993 were $8.1 million, $7.9 million, and $7.3 million, respectively. DEFERRED COMPENSATION PLAN The Company has the Tandem Computers Incorporated Deferred Compensation Plan that permits eligible officers and employees to defer a portion of their compensation. Funds deferred under the plan are held by the Company in an irrevocable trust established for the benefits of the participants. The deferred compensation is distributable in cash after retirement or termination of employment. At September 30, 1995, the liability for deferred compensation included in other liabilities totaled $1.9 million. The Company can insure the lives of the participants in the Deferred Compensation Plan to assist in the funding of the deferred compensation liability. The life insurance policies are owned by and payable to the trust. At September 30, 1995, the cash surrender value of these insurance policies included in other assets was $2.6 million. EMPLOYEE STOCK OWNERSHIP PLAN In 1989, the Company adopted the Tandem Computers Incorporated Employee Stock Ownership Plan (ESOP). During 1993, contributions to the ESOP were suspended and the Company announced its intention to terminate the ESOP and reacquire all of the unallocated shares from the ESOP trust. Total compensation 34 35 expense from all contributions to the ESOP was $4.3 million in 1993. Included in the ESOP compensation expense was the contribution of 279,000 shares of treasury stock in 1993. All allocated shares in the ESOP were automatically vested to the participants on September 30, 1993. As of September 30, 1994, there were approximately 2.4 million unallocated outstanding shares in the ESOP trust, which were returned to Tandem's treasury in 1995. For financial accounting purposes, the reacquisition and termination of the ESOP did not require an outlay of cash, nor did it impact the Company's results of operations. 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 complaint alleges violations of Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5. The Company filed a motion for dismissal on October 13, 1995. Management believes that this complaint is without merit and that the outcome of the complaint will not have a material adverse effect on the financial position or overall trends in the results of operations of the Company. The Company is subject to other legal proceedings and claims that arise in the normal course of its business. In the opinion of management, these proceedings will not have a material adverse effect on the financial position or overall trends in the results of operations of the Company. See the Property, Plant, and Equipment note to the Consolidated Financial Statements for a discussion of the Company's operating lease commitments. SEGMENT INFORMATION The Company operates primarily in one industry segment, which includes the development, manufacturing, marketing, and servicing of computer systems, servers, networks, and software. The Company operates in five geographic regions: the United States (internally, included in the Americas Division), Americas, Europe, Japan, and Asia-Pacific. Americas includes operations in North and South America outside of the United States, principally Canada and Latin America. The following table sets forth information about the Company's operations in these different geographic regions for the fiscal years ended September 30. Certain prior year amounts have been reclassified to conform to current year presentation.
- ------------------------------------------------------------------------------------------------- (In thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------- Revenues United States -- customers $1,149,598 $1,127,518 $1,087,665 United States -- intercompany 494,270 512,700 547,298 Americas -- customers 95,352 86,727 85,755 Americas -- intercompany 1,309 811 27,620 Europe -- customers 577,866 512,162 538,068 Europe -- intercompany 22,827 23,186 9,383 Japan -- customers 338,613 265,277 233,078 Japan -- intercompany 2,398 825 6,304 Asia-Pacific -- customers 123,533 116,351 86,394 Asia-Pacific -- intercompany 749 4,734 1,595 - ------------------------------------------------------------------------------------------------- 2,806,515 2,650,291 2,623,160 Eliminations (521,553) (542,256) (592,200) - ------------------------------------------------------------------------------------------------- Total revenues $2,284,962 $2,108,035 $2,030,960 =================================================================================================
35 36
- ------------------------------------------------------------------------------------------------- (In thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------- Pretax income (loss) United States $ 15,885 $ 149,971 $ (281,862) Americas 5,688 (1,947) (16,551) Europe 66,073 20,723 (140,893) Japan 45,515 5,168 2,532 Asia-Pacific (9,615) (3,980) (24,067) - ------------------------------------------------------------------------------------------------- 123,546 169,935 (460,841) Eliminations 16,153 11,265 (2,298) - ------------------------------------------------------------------------------------------------- Total pretax income (loss) $ 139,699 $ 181,200 $ (463,139) ================================================================================================= Identifiable assets United States $1,327,352 $1,277,554 $1,279,318 Americas 44,654 35,880 35,760 Europe 343,774 351,386 316,320 Japan 157,359 134,716 124,123 Asia-Pacific 75,561 71,998 50,409 - ------------------------------------------------------------------------------------------------- 1,948,700 1,871,534 1,805,930 Eliminations (92,006) (109,649) (120,721) - ------------------------------------------------------------------------------------------------- Total identifiable assets $1,856,694 $1,761,885 $1,685,209 =================================================================================================
Intercompany transfers are made at arm's-length prices. Pretax income (loss) for 1993 includes restructuring charges for United States, Americas, Europe, Japan, and Asia-Pacific in the approximate amounts of $358 million, $8 million, $70 million, $8 million, and $7 million, respectively. Identifiable assets are those assets of the Company that are identified with the operations of the corresponding geographic area. United States customer revenues include export sales of $132 million in 1995, $97 million in 1994, and $51 million in 1993. QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------------------------------------------------ (In thousands except per share amounts) - ------------------------------------------------------------------------------------------------ Fiscal 1995 Quarters Ended Dec. 31 March 31 June 30 Sept. 30 - ------------------------------------------------------------------------------------------------ Total revenues $534,600 $515,942 $594,414 $640,006 Gross margin $282,660 $257,665 $299,870 $304,078 Income before income taxes $ 40,225 $25,197 $ 42,290 $ 31,987 Net income $ 35,225 $21,686 $ 30,844 $ 19,791 Earnings per share $ .30 $ .18 $ .26 $ .17 Market stock price range High $ 19.13 $ 19.75 $ 17.25 $ 17.50 Low $ 15.50 $ 15.38 $ 13.38 $ 11.75 ================================================================================================
36 37
- ------------------------------------------------------------------------------------------------ (In thousands except per share amounts) - ------------------------------------------------------------------------------------------------ Fiscal 1994 Quarters Ended Dec. 31 March 31 June 30 Sept. 30 - ------------------------------------------------------------------------------------------------ Total revenues $475,553 $484,128 $543,941 $604,413 Gross margin $254,662 $265,857 $298,672 $333,576 Income before income taxes $ 27,504 $28,283 $ 51,010 $ 74,403 Net income $ 24,904 $25,783 $ 48,510 $ 71,003 Earnings per share $ .22 $ .23 $ .43 $ .62 Market stock price range High $ 13.63 $ 16.38 $ 15.25 $ 16.75 Low $ 10.00 $ 10.88 $ 10.50 $ 11.25 ================================================================================================
Tandem Computers Incorporated Common Stock is traded on the New York, Midwest, and Pacific Stock Exchanges under the trading symbol TDM. All quotations shown represent the high and low sale prices. The Company has not declared or paid any cash dividends on its Common Stock and has no plans to do so in the foreseeable future. As of December 4, 1995, there were approximately 8,576 holders of record of the Common Stock of the Company. SUBSEQUENT EVENTS (UNAUDITED) The Company, two principal officers, and one additional Board member 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 November 2, 1995. The complaint alleges violations of Sections 10(b) and 20(a) 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. On November 6, 1995, Compaq Computer Corporation announced that it had reached a definitive agreement to acquire, for cash, all of the outstanding shares of NetWorth for $42.00 per share. As of September 30, 1995 and November 6, 1995, the Company owned 545,095 shares of NetWorth, with a cost basis of $4 million. The Company also holds options and warrants to purchase additional NetWorth shares. Completion of the transaction is subject to certain conditions, including shareholder approval and the Hart-Scott-Rodino Antitrust Improvements Act. 37 38 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Tandem Computers Incorporated: We have audited the accompanying consolidated balance sheets of Tandem Computers Incorporated and subsidiaries as of September 30, 1995 and 1994, and the related consolidated statements of operations, stockholders' investment, and cash flows for each of the three years in the period ended September 30, 1995. Our audits also include the financial statement schedule listed in the Index at Item 14(a)2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tandem Computers Incorporated and subsidiaries at September 30, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in the Notes to the Consolidated Financial Statements, in 1993 the Company changed its method of accounting for income taxes. ERNST & YOUNG LLP San Jose, California October 24, 1995 38 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors. Reference is made to the information regarding directors appearing under the caption "Election of Directors" on pages 2 and 3 of the Company's definitive Proxy Statement dated December 15, 1995, for its 1996 Annual Meeting of Stockholders (the "Proxy Statement"), which information is incorporated in this Form 10-K by reference. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION OR OFFICE AND PRINCIPAL OCCUPATION ---- --- ------------------------------------------- James G. Treybig............ 55 President and Chief Executive Officer since 1974. Mr. Treybig is the principal founder of the Company and has been its president since its formation. Mr. Treybig has been a director of the Company since 1974. Jack W. Chapman............. 61 Vice President and Chairman, Tandem Europe since October 1990. Vice President, Sales from 1988 to 1990, Vice President, International Sales Operations from 1986 to 1988, and Vice President and Managing Director, European Division from 1983 to 1986. Mr. Chapman joined Tandem in 1978 as Managing Director of Tandem Computers Limited in the United Kingdom. He has also held the positions of Director of the Northwest Europe Region and General Manager of Central Europe. Donald E. Fowler............ 57 Senior Vice President and General Manager, Solutions Products Group since 1993. Senior Vice President and General Manager, Tandem Companies Group from 1988 to 1993. Vice President, Strategy and Corporate Development from 1986 to 1988. Prior to joining Tandem, Mr. Fowler held various management positions at Bechtel Group, Inc., from 1976 to 1986, and at IBM from 1965 to 1976. Mr. Fowler has announced his retirement from the Company effective December 31, 1995. Kurt L. Friedrich........... 46 Senior Vice President and General Manager, Systems Development Group since 1993. Prior to joining Tandem, Mr. Friedrich was General Manager, Software Development, at Hewlett Packard Company from 1992 to 1993, and was Vice President, Software Development, and held other software and product management positions, at Digital Equipment Corporation from 1974 to 1992. Lawrence A. Laurich......... 52 Vice President, Systems Development since 1992, and General Manager, Austin Unit Operations since 1995. Vice President, Systems and Manufacturing Development from 1988 to 1992, Vice President, Transaction Systems Division from 1987 to 1988, Vice President, Engineering from 1985 to 1987, Vice President, Hardware Development from 1983 to 1985, and Vice President, Engineering from 1978 to 1983.
39 40
NAME AGE POSITION OR OFFICE AND PRINCIPAL OCCUPATION ---- --- ------------------------------------------- Robert C. Marshall.......... 64 Senior Vice President and Chief Operating Officer since 1980. Vice President and Chief Operating Officer from 1979 to 1980. Mr. Marshall joined the Company in 1975 as Vice President of Manufacturing and has been a director of the Company since 1980. In October 1995, Mr. Marshall announced his retirement from the Company and his resignation from the Board of Directors effective December 31, 1995. Josephine T. Parry.......... 47 Vice President, General Counsel and Secretary since 1992. Assistant General Counsel and Director of Law from 1989 to 1992. Ms. Parry joined Tandem in 1987 from Atari Corporation where she served as Corporate Counsel from 1984 to 1987. Gerald L. Peterson.......... 50 Senior Vice President and General Manager, Tandem Sales and Support Group since 1993. Senior Vice President and General Manager, Tandem Sales and Marketing Group from 1988 to 1993. Vice President, Marketing from 1985 to 1988, Vice President, International Marketing and Product Management from 1984 to 1985, and Vice President, International Marketing from 1982 to 1984. He joined Tandem in 1980 as Director of Marketing. Roel Pieper................. 39 Senior Vice President and President and Chief Executive Officer of Ungermann-Bass Networks, Inc., since 1993. President and Chief Executive Officer from 1991 to 1993 of UNIX Systems Laboratories, Inc. Mr. Pieper was Chief Technical Officer and Senior Vice President of Software AG USA from 1981 to 1991. David J. Rynne.............. 55 Senior Vice President and Chief Financial Officer since 1988. Vice President and Chief Financial Officer from 1983 to 1988. Prior to joining Tandem in 1983, Mr. Rynne was with the Burroughs Corporation (now Unisys Corporation) for 18 years, where he held key finance positions. Gerd Stoecker............... 52 Vice President and Treasurer since 1988. Treasurer from 1987 to 1988. Prior to joining Tandem in 1984 as Controller of Marketing, Mr. Stoecker was with Atari, Inc.
There are no family relationships among the executive officers. Reference is made to the information regarding Section 16(a) of the Securities Exchange Act of 1934 on page 5 of the Proxy Statement, which information is incorporated in this Form 10-K by reference. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the information appearing under the captions "Compensation of Executive Officers and Directors" appearing on page 6 and "Certain Transactions and Employment Agreements" on pages 12 and 13 of the Proxy Statement, which information is incorporated in this Form 10-K by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the information appearing under the caption "Stock Ownership" on pages 4 and 5 of the Proxy Statement, which information is incorporated in this Form 10-K by reference. 40 41 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the information appearing under the caption "Certain Transactions and Employment Agreements" on pages 12 and 13 of the Proxy Statement, which information is incorporated in this Form 10-K by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as a part of the report: 1. All financial statements.
INDEX TO FINANCIAL STATEMENTS PAGE ----- Consolidated Statements of Operations..................... 17 Consolidated Balance Sheets............................... 18 Consolidated Statements of Stockholders' Investment....... 19 Consolidated Statements of Cash Flows..................... 20 Notes to Consolidated Financial Statements................ 21-37 Report of Ernst & Young LLP, Independent Auditors......... 38
2. Financial statement schedules.
INDEX TO FINANCIAL STATEMENT SCHEDULES Financial Statement Schedules II. Valuation and Qualifying Accounts.................. S-1
All other schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements or notes thereto. 3. Exhibits required by Item 601 of Regulation S-K.
EXHIBIT NUMBER EXHIBIT - ------- ------- 3.1* Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1994. 3.2* By-laws of the Company, as amended, filed as Exhibit 4.3 to the Company's Report onForm 10-Q for the quarter ended June 30, 1990. 4.1* First Amended and Restated Rights Agreement, dated June 17, 1988, between theCompany and Bank of America, N.T. & S.A., as Rights Agent, filed as Exhibit 4.1 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1988. 10.1*+ Form of Non-Qualified Stock Option Plan and Agreement between the Company and Walter B. Wriston, dated as of October 9, 1991, filed as Exhibit 10.3 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1991. 10.2*+ Tandem Computers Incorporated 1979 Stock Option Plan, as amended, filed as Exhibit 10.6 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1988. 10.3*+ Tandem Computers Incorporated 1981 Stock Option Plan, as amended, filed as Exhibit 10.7 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1988. 10.4*+ Tandem Computers Incorporated 1989 Stock Plan, as amended, filed as Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended December 31, 1994.
41 42
EXHIBIT NUMBER EXHIBIT - ------- ------- 10.5*+ Tandem Computers Incorporated Stock Option Plan for Non-Employee Directors, filed as Exhibit 10.8 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1987. 10.6*+ Form of Non-Qualified Stock Option Plan and Agreement between the Company and Vera Stephanie Shirley, dated as of December 8, 1992, filed as Exhibit 10.6 to the Company's Report on Form 10-K for the fiscal year ended September 30, 1993. 10.7*+ Form of Non-Qualified Stock Option Plan and Agreement between the Company and Sir Campbell Fraser, dated as of September 28, 1993, filed as Exhibit 10.7 to the Company's Report on Form 10-K for the fiscal Year ended September 30, 1993. 10.8 + Tandem Computers Incorporated Deferred Compensation Plan, as amended and restated as of October 1, 1995. 10.9*+ Form of Employment Agreement entered into during the quarter ended June 30, 1995, between the Company and the following executive officers: James G. Treybig, Robert C. Marshall, David J. Rynne, Donald E. Fowler, Kurt L. Friedrich, Gerald L. Peterson and Roel Pieper, filed as Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 1995. 10.10+ Amendment to Employment Agreement between the Company and Donald E. Fowler, dated as of October 20, 1995. 10.11+ Amendment to Employment Agreement between the Company and Robert C. Marshall, dated as of October 20, 1995. 22.1 Subsidiaries of the Company. 23.1 Consent of Ernst & Young LLP (See page 43). 27 Financial Data Schedule.
- --------------- * Incorporated by reference. + Director or officer compensatory plan. (b) Reports on Form 8-K during the fourth quarter: None. 42 43 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-2635, 33-12572, 33-15875, 33-29773, 33-55421 and 33-58759) and in the Registration Statement (Form S-3 No. 33-20902) of Tandem Computers Incorporated and in the related Prospectuses of our report dated October 24, 1995, with respect to the consolidated financial statements and schedule of Tandem Computers Incorporated included in this Annual Report (Form 10-K) for the year ended September 30, 1995. ERNST & YOUNG LLP San Jose, California December 8, 1995 43 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TANDEM COMPUTERS INCORPORATED December 8, 1995 By DAVID J. RYNNE ------------------------------ David J. Rynne Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By JAMES G. TREYBIG President, Chief Executive Officer December 8, 1995 - ----------------------------- and Director (Principal James G. Treybig Executive Officer) By DAVID J. RYNNE Senior Vice President and Chief December 8, 1995 - ----------------------------- Financial Officer (Principal David J. Rynne Financial and Principal Accounting Officer) By THOMAS J. PERKINS Director December 8, 1995 - ----------------------------- Thomas J. Perkins By JACK F. BENNETT Director December 8, 1995 - ----------------------------- Jack F. Bennett By MORTON COLLINS Director December 8, 1995 - ----------------------------- Morton Collins By SIR CAMPBELL FRASER Director December 8, 1995 - ----------------------------- Sir Campbell Fraser By FRANKLIN P. JOHNSON, JR. Director December 8, 1995 - ----------------------------- Franklin P. Johnson, Jr. By ROBERT C. MARSHALL Director December 8, 1995 - ----------------------------- Robert C. Marshall By VERA STEPHANIE SHIRLEY Director December 8, 1995 - ----------------------------- Vera Stephanie Shirley By ROBERT G. STONE, JR. Director December 8, 1995 - ----------------------------- Robert G. Stone, Jr. By WALTER B. WRISTON Director December 8, 1995 - ----------------------------- Walter B. Wriston
44 45 SCHEDULE II TANDEM COMPUTERS INCORPORATED AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED SEPTEMBER 30, 1995 (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ----------- ---------- ------------------------- ----------- ----------- ADDITIONS ------------------------- BALANCE AT CHARGED TO CHARGED TO BEGINNING COSTS AND OTHER AMOUNTS BALANCE AT DESCRIPTION OF YEAR EXPENSES ACCOUNTS WRITTEN OFF END OF YEAR ----------- ---------- ---------- ---------- ----------- ----------- Accounts Receivable Allowance 1995............................. $17,931 $2,738 -- $2,948 $17,721 ======= ====== == ====== ======= 1994............................. $17,745 $2,684 -- $2,498 $17,931 ======= ====== == ====== ======= 1993............................. $13,982 $7,557 -- $3,794 $17,745 ======= ====== == ====== =======
S-1 EX-10.8 2 DEFERRED COMPENSATION PLAN 1 EXHIBIT 10.8 TANDEM COMPUTERS INCORPORATED DEFERRED COMPENSATION PLAN AMENDED AND RESTATED AS OF OCTOBER 1, 1995 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 INTRODUCTION............................................ 1 1.1 Establishment of Plan................................... 1 1.2 Purpose of Plan......................................... 1 ARTICLE 2 DEFINITIONS............................................. 1 2.1 Base Salary............................................. 1 2.2 Beneficiary............................................. 1 2.3 Board................................................... 2 2.4 Bonus................................................... 2 2.5 Code.................................................... 2 2.6 Commission.............................................. 2 2.7 Committee............................................... 2 2.8 Company................................................. 2 2.9 Deferral Account........................................ 2 2.10 Deferred Compensation Agreement......................... 2 2.11 Disability.............................................. 2 2.12 Eligible Employee....................................... 2 2.13 Enrollment Period....................................... 3 2.14 ERISA................................................... 3 2.15 Hardship................................................ 3 2.16 Insolvent............................................... 3 2.17 Investment Fund or Funds................................ 3 2.18 Participant............................................. 3 2.19 Plan.................................................... 3 2.20 Plan Year............................................... 3 2.21 Retirement Age.......................................... 3 ARTICLE 3 PARTICIPATION........................................... 3 3.1 Eligibility............................................. 3 3.2 Participation........................................... 3 3.3 Election Procedure...................................... 4 3.4 Deferred Compensation Agreement......................... 4 3.5 Irrevocable Elections................................... 5 3.6 Community and Marital Property.......................... 5 ARTICLE 4 PARTICIPANT ACCOUNT BALANCES............................ 6 4.1 Establishment of Accounts............................... 6 4.2 Bookkeeping............................................. 6 4.3 Crediting Deferred Compensation......................... 6 4.4 Establishment of Investment Funds....................... 6 4.5 Crediting Investment Results............................ 6 4.6 Notification to Participants............................ 7 ARTICLE 5 DISTRIBUTION OF ACCOUNTS................................ 7 5.1 Distribution in the Event of Hardship................... 7 5.2 Distribution Upon Separation From Employment............ 7 5.3 Distribution of Small Accounts.......................... 8 5.4 Distribution Upon Death................................. 8 5.5 Distribution at a Specific Date......................... 9 5.6 Unscheduled Lump Sum Distribution....................... 9 5.7 Modification of Distribution............................ 9
-i- 3
Page ---- 5.8 Cash Payments Only...................................... 9 ARTICLE 6 PLAN ADMINISTRATION..................................... 9 6.1 Plan Administrator...................................... 9 6.2 Amendment or Termination................................ 10 6.3 Administration of the Plan.............................. 10 6.4 Indemnification......................................... 10 ARTICLE 7 MISCELLANEOUS........................................... 10 7.1 Trust................................................... 10 7.2 Nonalienation........................................... 11 7.3 Limitation of Rights.................................... 11 7.4 Governing Law........................................... 11 APPENDIX A TRANSFERRED OBLIGATIONS................................. 13 APPENDIX B PARTICIPATION BY BOARD MEMBERS.......................... 14
-ii- 4 TANDEM COMPUTERS INCORPORATED DEFERRED COMPENSATION PLAN ARTICLE 1 INTRODUCTION 1.1 Establishment of Plan. Tandem Computers Incorporated hereby establishes the Tandem Computers Incorporated Deferred Compensation Plan effective as of October 1, 1994. 1.2 Purpose of Plan. Tandem Computers Incorporated has established this Plan to provide select executives with the opportunity to defer the receipt of compensation and a vehicle through which to do so. Tandem Computers Incorporated intends to maintain the Plan primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, within the meaning of sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended. The Plan will be interpreted in a manner consistent with these intentions. ARTICLE 2 DEFINITIONS Definitions are contained in this article and throughout other sections of the Plan. The location of a definition is for convenience only and should not be given any significance. A word or term defined in this article (or in any other article) will have the same meaning throughout the Plan unless the context clearly requires a different meaning. 2.1 Base Salary means a participant's base salary for a Plan Year, and excludes any other form of compensation such as bonuses, commissions, income from the exercise of stock options or stock appreciation rights, severance payments, moving expenses, car or other special allowances, or any other amounts included in an Eligible Employee's taxable income that are not compensation for services. For purposes of applying base salary reduction elections, a Participant's Base Salary is determined before taking into account any reduction in taxable income by salary reduction under Code section 125 or 401(k), or under this Plan. 2.2 Beneficiary means the individual(s) or entity designated by a Participant, or under the Plan, to receive any benefit payable upon the death of a Participant or Beneficiary. A Beneficiary designation must be completed by the Participant and delivered to the Committee on such form as specified by the Committee. In the absence of a valid or -1- 5 effective Beneficiary designation, the Beneficiary will be the Participant's surviving spouse, or if there is no surviving spouse, the Participant's estate. 2.3 Board means the Board of Directors of the Company. 2.4 Bonus means the compensation paid to a Participant in accordance with the applicable bonus program sponsored by the Company. 2.5 Code means the Internal Revenue Code of 1986, as amended from time to time. 2.6 Commission means variable compensation related to sales revenue. 2.7 Committee means the Deferred Compensation Plan Committee, the members of which are to be appointed by the Board. 2.8 Company means Tandem Computers Incorporated, a corporation organized under the laws of the state of Delaware, and any successor thereto. 2.9 Deferral Account means a bookkeeping account established for and maintained on behalf of a Participant to which deferred compensation amounts, and net income (or losses) thereon, are credited. 2.10 Deferred Compensation Agreement means an agreement entered into by a Participant and the Company to reduce the Participant's Base Salary, Bonus and/or Commissions for a specified period and contribute such amounts to the Plan, in accordance with Article III. 2.11 Disability means "disability" (or similar term) as defined in the Company's long-term disability program and which results in payments to the Participant under such program. 2.12 Eligible Employee means a common law employee of the Company who (i) in the twelve (12) month period preceding July 1 had total compensation from Base Salary, Bonus and Commissions of at least two (2) times the social security wage base, or (ii) currently has an annual Base Salary rate of $100,000 and Base Salary plus target Bonus equaling at least two (2) times the social security wage base; provided that the Committee may amend the Plan's definition of Eligible Employee from time to time and may exclude any employee to comply with any applicable laws or any exemption from applicable laws, including ERISA; provided further, that an employee of the Company shall not become an Eligible Employee until he or she is designated by the Company as an Eligible Employee. -2- 6 2.13 Enrollment Period means the period designated by the Committee during which the enrollment for the upcoming Plan Year takes place. 2.14 ERISA means the Employee Retirement Income Security Act of 1974, as amended. 2.15 Hardship means an unforeseeable and unanticipated emergency which is caused by an event beyond the control of the Participant or Beneficiary, and which would result in severe financial hardship to the Participant or Beneficiary if a distribution or revocation of a deferral election were not permitted. Hardship conditions will be evaluated in accordance with the terms of Treasury Regulation section 1.457-2(h)(4). The Committee will have sole discretion to determine whether a Hardship condition exists and the Committee's determination will be final. 2.16 Insolvent means the Company is: (a) unable to pay its debts as they become due, or (b) subject to a pending proceeding as a debtor under the U.S. Bankruptcy Code. 2.17 Investment Fund or Funds mean the investment vehicles designated by the Committee as the basis for determining the investment return to Participants' Deferral Accounts. 2.18 Participant means a current or former Eligible Employee who participates in the Plan in accordance with Article III or a member of the Board who participates in the Plan in accordance with Appendix B. 2.19 Plan means the Tandem Computers Incorporated Deferred Compensation Plan, as set forth in this document, as amended from time to time. 2.20 Plan Year means the twelve (12) month period from October 1 through September 30. 2.21 Retirement Age means, while employed by the Company, attaining age 55 with ten (10) years of service, or attaining age 65. ARTICLE 3 PARTICIPATION 3.1 Eligibility. An Eligible Employee of the Company shall participate in the Plan only to the extent and for the period that the Eligible Employee satisfies the requirements of Section 2.12. 3.2 Participation. An Eligible Employee may elect to defer the receipt of Base Salary, Bonus and/or Commissions that otherwise would be earned by the Eligible Employee. The Eligi- -3- 7 ble Employee may make such election in accordance with Section 3.3. The Company shall withhold amounts deferred by the Participant in accordance with this election. The Participant's deferred amounts shall be credited to the Deferral Account as provided in Article IV and distributed in accordance with Article V. An election to defer receipt of compensation shall continue in effect for the periods described in Section 3.4 below unless the Participant's election is terminated or modified in accordance with the provisions of Section 3.5. A Participant who ceases to be an Eligible Employee shall continue to participate in the Plan with respect to any Deferred Compensation Agreement in effect as of the Plan Year in which he or she ceases to be an Eligible Employee, but shall not be permitted to enter into any new Deferred Compensation Agreement with the Company until the individual again becomes an Eligible Employee. 3.3 Election Procedure. An election to defer Base Salary, Bonus and/ or Commissions is made by executing a Deferred Compensation Agreement on such form, at such time and in such manner as may be prescribed by the Committee. Such Deferred Compensation Agreement must be properly completed, signed and delivered to the Company prior to the first day of the Plan Year for which such compensation shall be earned; provided, however, that: (i) an Eligible Employee who became an employee of the Company for the first time during the Plan Year shall be permitted, within the thirty (30) day period that begins on the day the Eligible Employee became an employee of the Company, to make an election to defer Base Salary, Bonus and/or Commissions that will be earned after his or her date of hire; (ii) an employee of the Company who becomes an Eligible Employee for the first time during the Plan Year shall be permitted, in accordance with procedures established by the Company from time to time, but no later than the end of the thirty (30) day period that begins on the day the employee became an Eligible Employee, to make an election to defer Base Salary earned during such Plan Year after the effective date of such election; and (iii) the individuals who are eligible to participate in the Plan when the Plan is initially adopted shall be permitted, within the thirty (30) day period that ends on the date the Plan is effective, to make an election to defer Base Salary, Bonus and/or Commissions that will be earned after the effective date of the Plan. 3.4 Deferred Compensation Agreement. A Deferred Compensa- tion Agreement shall remain in effect and shall be applicable to Base Salary earned during the Plan Year following the delivery of the Deferred Compensation Agreement, subject to the excep- -4- 8 tions set forth in Section 3.3(i), (ii) and (iii). A Deferred Compensation Agreement shall remain in effect and shall be applicable to Bonus and/or Commissions earned during the calendar year commencing in the Plan Year following the delivery of the Deferred Compensation Agreement. The Agreement shall set forth the whole percentage of Base Salary, Bonus and Commissions that shall be deferred for the Plan Year or calendar year, as applicable, subject to the following: (a) Base Salary. A Participant shall be per- mitted to defer a maximum of fifty percent (50%) of Base Salary earned in a Plan Year. (b) Commission and Bonus. A Participant shall be permitted to defer a maximum of one hundred percent (100%) of Commissions and/or one hundred percent (100%) of Bonus with respect to the calendar year commencing in a Plan Year. (c) Minimum Deferral. A Participant who elects to defer any amount must elect to defer a minimum of $3,000 for the Plan Year. (d) Hardship Distribution Request. All Base Salary, Bonus and Commissions deferrals with respect to a Plan Year shall cease in the event the Committee approves a request for Hardship distribution for that Plan Year or in the event of Disability. No reduction or cessation of Base Salary, Bonus and/or Commission deferrals shall affect the limits set forth above, and no part of the Hardship distribution shall be deferred under this Plan. 3.5 Irrevocable Elections. Except to the extent provided in Sections 3.4, 5.1 and 5.6, a Participant's Deferred Compensation Agreement shall be irrevocable and cannot be amended by the Participant. A Participant may request to amend or revoke a Deferred Compensation Agreement in the event of a Hardship. Such request will be made in writing on such form and in such manner as prescribed by the Committee. The Committee may grant such request if and to the extent that it determines that the revocation of the election would serve to alleviate the Hardship, in a manner consistent with Sections 2.15 and 5.1. The Company reserves the right to modify any Deferred Compensation Agreement in any case or class of cases to reflect a change in Plan provisions or for administrative convenience. 3.6 Community and Marital Property. The spouse of a Participant may have a community or marital property interest in the Participant's Deferral Account which the spouse may pass to a third party upon his or her death. If it is intended that a spouse relinquish his or her community or marital property interest in the Participant's Deferral Account, the spouse must execute a waiver in which he or she clearly states an intention -5- 9 to relinquish his or her rights under community or marital property law with respect to the Deferral Account. A spouse's consent to a Participant's designation of a nonspouse Beneficiary is not sufficient to effect such a waiver. ARTICLE 4 PARTICIPANT ACCOUNT BALANCES 4.1 Establishment of Accounts. The Committee will select an independent recordkeeper who will establish and maintain a Deferral Account on behalf of each Participant. Contributions and net income (or losses) will be credited to such accounts in accordance with the provision of this Article. 4.2 Bookkeeping. Deferral Accounts will be maintained for accounting purposes and will not restrict the operation of the Plan or require separate earmarked assets to be allocated to any account. The establishment of a Deferral Account will not give any Participant the right to receive any asset held by the Company in connection with the Plan or otherwise. 4.3 Crediting Deferred Compensation. The Committee will credit to a Participant's Deferral Account the amount of any Base Salary, Bonus and/or Commissions deferred by the Participant as soon as administratively possible following the month in which such Base Salary, Bonus and/or Commissions would have been paid absent a Deferred Compensation Agreement. 4.4 Establishment of Investment Funds. The Committee will establish one or more Investment Funds which will be maintained for the purpose of determining the investment return to be credited to a Participant's Deferral Account. The Committee may change the number, identity or composition of the Investment Funds from time to time. Each Participant will indicate the Investment Funds based on which contributions under Sections 4.3 and 4.4 and any existing Deferral Account balance are to be adjusted for investment performance. Investment fund elections must be made in whole percentage increments and at such times and in such manner as the Committee will specify. A Participant may change his or her Investment Fund election periodically in such manner as the Committee may specify. 4.5 Crediting Investment Results. No less frequently than as of the last day of each quarter, a Participant's Deferral Account balance will be increased or decreased to reflect investment results. Deferral Accounts will be credited with the investment return of the Investment Funds in which the Participant elected to be deemed to participate. The credited investment return is intended to reflect the actual performance of the Investment Funds net of any applicable administrative charges determined by the Company. -6- 10 4.6 Notification to Participants. The Committee shall notify each Participant with respect to the status of such Participant's Deferral Account as soon as practical after the end of a quarter, but in no event less than once for each Plan Year. Neither the Company nor the Committee to any extent warrants, guarantees or represents that the value of any Participant's Deferral Account at any time will equal or exceed the amount previously allocated or contributed thereto. ARTICLE 5 DISTRIBUTION OF ACCOUNTS 5.1 Distribution in the Event of Hardship. Prior to a distribution under Section 5.2, 5.3, 5.4, 5.5 or 5.6, payment of all or a portion of a Participant's Deferral Account may be made in the event of Hardship. The amount of any Hardship distribution will not exceed the amount required to meet the Hardship, including any taxes or penalties due on the distribution. A Participant or Beneficiary must submit a written request for a Hardship distribution to the Committee on such form and in such manner as the Committee prescribes. The Hardship distribution request must: (i) certify as to the Hardship condition and the severe financial need; and (ii) state whether the Participant requests a distribution of all or a portion of his Deferral Account to meet the severe financial need. The Committee will have sole discretion to determine whether a Hardship exists and to determine whether to make a Hardship distribution and the amount of any such Hardship distribution; provided, however, that the Compensation and Option Committee of the Board shall have the sole discretion to grant or deny a Hardship distribution to any Participant subject to the short-swing trading restrictions of Section 16 of the Securities Exchange Act of 1934. Regardless of whether the Participant desires to reduce or cease any deferrals of Base Salary, Bonus and/or Commissions after the Hardship request is made, the Participant will be precluded from deferring compensation until the Enrollment Period that begins at least one (1) year from the date of the Hardship approval. A Hardship distribution shall be made in a single lump sum payment as soon as practicable after the Committee approves the Hardship distribution request. 5.2 Distribution Upon Separation From Employment. Subject to Section 5.3, a Participant who separates from employment with the Company shall receive amounts credited to his Deferral Account in the manner selected by the Participant when the Participant first commenced participation in the Plan or as modified in accordance with Section 5.7. An election regarding the time and manner of payment of the Participant's Deferral Account balance must be made concurrent with the Participant's initial election to defer compensation under Section 3.3 and can only be modified as expressly provided under this Article V. -7- 11 (a) Time of Payment. Subject to earlier distribution pursuant to Section 5.5, a Participant's Deferral Account balance shall be paid (or commence to be paid) within sixty (60) days after the end of the month in which separation of employment occurs. (b) Manner of Payment. A Participant's Deferral Account will be paid in annual installments over a fifteen (15) year period, commencing as of the January 1 next following the Participant's separation from employment, unless the Participant has elected to receive payment in: (i) a lump sum cash payment; or (ii) substantially equal annual installment payments over a period of five (5) or ten (10) years (as selected by the Participant). (c) Value of Deferral Account Balance. The value of a Participant's Deferral Account to be distributed shall be determined as of the last day of the calendar month preceding the date a payment is to be made. To the extent payment is to be made in installments, the amount of the installment for a particular year shall be adjusted to take into account the value of the Participant's Deferral Account (as adjusted) and the number of remaining years over which the installment payments are to be made, in a manner determined by the Plan recordkeeper. 5.3 Distribution of Small Accounts. At the Committee's discretion, following the date a Participant separates from employment with the Company, if the amount credited to the participant's Deferral Account is $10,000 or less as of the last day of a calendar month, such amount shall be distributed to the Participant in a lump sum payment as soon as practicable after such last day of the calendar month. 5.4 Distribution Upon Death. The Beneficiary of a Participant who dies prior to receiving any payments under this Article V (other than Hardship distributions), shall receive the Participant's Deferral Account: (i) in a lump sum payment if the amount credited to the Participant's Deferral Account is $10,000 or less as of the date the Company receives written proof of the Participant's death, with such amount to be paid as soon as reasonably practicable after receipt of such written proof, or (ii) in the manner selected by the Participant when the Participant first commenced participation in the Plan among the options set forth in Section 5.2 or later modified under Section 5.7, and commencing in accordance with the Participant's distribution option elections. If payment is to be made in installments, the amount of the installment for a particular year shall be adjusted to take into account the value of the Participant's Deferral Account (as adjusted) and the number of remaining years over which the installment payments are to be made, in a manner determined by the Plan recordkeeper. If a Participant dies after installment payments have begun, the Participant's Beneficiary will continue to receive -8- 12 the Participant's unpaid Deferral Account balance in installment payments for the remaining period of time. 5.5 Distribution at a Specific Date. A Participant can elect to receive a lump sum distribution of his Deferral Account at any date after the end of the Plan Year when the Participant first commenced participation in the Plan; provided that (i) no distributions shall be made under the Plan prior to March 1, 1996, (ii) the election of the specific date for distribution shall be made within the time period specified within Section 5.2, and (iii) notwithstanding the election of a specific date for distribution, distribution shall be made no later than the date specified in Section 5.2(a). If a Participant terminates employment prior to the elected distribution date, the lump sum distribution of his Deferral Account will be paid out within sixty (60) days after the month in which termination occurred. 5.6 Unscheduled Lump Sum Distribution. A Participant may request in writing a lump sum distribution of a Participant's entire Deferral Account balance attributable to one or more Plan Years of participation with a ten percent (10%) penalty forfeited to the Company. The value of a Participant's Deferral Account less the ten percent (10%) penalty to be distributed shall be determined as of the last day of the month in which the request is submitted, and distribution shall be made as soon as practicable thereafter. The request for an unscheduled distribution must be approved by the Committee and will be paid out within sixty (60) days after the month in which the distribution is approved. The Participant will not be allowed to participate under the Plan until the Plan Year that commences at least one (1) year from the date of distribution. 5.7 Modification of Distribution. Subject to Committee approval, a Participant may request in writing a change regarding the manner (e.g., lump sum or installment) of payment of the Participant's Deferral Account balance following attainment of Retirement Age; provided that if the modification is elected less than twelve (12) months before Retirement Age, such change shall be permitted only after a ten percent (10%) penalty is forfeited to the Company. 5.8 Cash Payments Only. All distributions under the Plan will be made in cash by check. ARTICLE 6 PLAN ADMINISTRATION 6.1 Plan Administrator. The Company shall be the Plan Administrator, and shall act through the Committee. The -9- 13 Committee members shall be appointed by and serve at the pleasure of the Company. 6.2 Amendment or Termination. The Board may amend all or any provision of this Plan, and may terminate the Plan in its entirety, at any time and for any reason. No amendment or termination of the Plan will reduce any Participant's Deferral Account balance as of the effective date of such amendment or termination. Upon termination of the Plan, the Company shall have the right to immediately distribute the amount credited to Participants' Deferral Accounts to Participants; provided that no such immediate distribution shall be permitted if the Plan is terminated following a Change of Control (as defined in the trust agreement entered into pursuant to this Plan). 6.3 Administration of the Plan. The Committee shall have the sole authority to control and manage the operation and administration of the Plan and have all powers, authority and discretion necessary or appropriate to carry out the Plan provisions, and to interpret and apply the terms of the Plan to particular cases or circumstances. All decisions, determinations and interpretations of the Committee will be binding on all interested parties, subject to the claims and appeal procedure necessary to satisfy the minimum standard of ERISA section 503, and will be given the maximum deference allowed by law. The Committee may delegate in writing its responsibilities as it sees fit. Committee members who are Participants will abstain from voting on any Plan matters that relate primarily to themselves or that would cause them to be in constructive receipt of amounts credited to their respective Deferral Account. In the event that all Committee members must abstain from voting, the Board will identify three or more individuals to serve as a temporary replacement of the Committee members. 6.4 Indemnification. The Company will and hereby does indemnify and hold harmless any of its employees, officers, directors or members of the Committee who have fiduciary or administrative responsibilities with respect to the Plan from and against any and all losses, claims, damages, expenses and liabilities (including reasonable attorneys' fees and amounts paid, with the approval of the Board, in settlement of any claim) arising out of or resulting from the implementation of a duty, act or decision with respect to the Plan, so long as such duty, act or decision does not involve gross negligence or willful misconduct on the part of any such individual. ARTICLE 7 MISCELLANEOUS 7.1 Trust. It is the intention of the Company that the Plan be unfunded for tax purposes and for purposes of Title I of -10- 14 ERISA. However, such amounts as the Committee deems necessary or appropriate to meet the obligation to pay Deferral Accounts will be held in trust by an independent third party trustee selected by the Committee of the Board, and as such are earmarked to pay benefits under the terms of the Plan. The Committee will direct the Company to make periodic contributions to the trust at such times and in such amounts as the Committee deems appropriate. Trust assets cannot be diverted to, or used for, any purpose except payments to Participants and Beneficiaries under the terms of the Plan or, if the Company is Insolvent, to pay the Company's creditors; provided, however, that the trust agreement for the trust established under the Plan may provide for the withdrawal of any trust assets in excess of the sum of all Deferral Account balances under the Plan. Participants and Beneficiaries will have no right against the Company with respect to the payment of any portion of the Participant's Deferral Account, except as a general unsecured creditor of the Company. 7.2 Nonalienation. No benefit or interest of any Participant or Beneficiary under this Plan will be subject to any manner of assignment, alienation, anticipation, sale transfer, pledge or encumbrance, whether voluntary or involuntary. Notwithstanding the foregoing, the Committee will honor a court order regarding the payment of alimony or other support payments, or the establishment of community property or other marital property rights, to the extent required by law. Prior to distribution to a Participant or Beneficiary, no Deferral Account balance will be in any manner subject to the debts, contracts, liabilities, engagements or torts of the Participant or Beneficiary. Assets held in trust to fund this Plan may, however, be diverted to pay the Company's creditors, if the Company is Insolvent. 7.3 Limitation of Rights. Nothing in this Plan will be constructed to give a Participant the right to continue in the employ of the Company at any particular position or to interfere with the right of the Company to discharge, lay off or discipline a Participant at any time and for any reason, or to give the Company the right to require any Participant to remain in its employ or to interfere with the Participant's right to terminate his or her employment. 7.4 Governing Law. To the extent that state law applies, the provisions of this Plan will be construed, enforced and -11- 15 administered in accordance with the laws of the state of California, except to the extent preempted by ERISA. IN WITNESS WHEREOF, the Company by its duly authorized officer has executed this Tandem Computers Incorporated Deferred Compensation Plan as of the effective date set forth above. TANDEM COMPUTERS INCORPORATED By -------------------------------- Its -------------------------------- -12- 16 APPENDIX A TRANSFERRED OBLIGATIONS As of December 31, 1994, the amounts credited to active employees of the Company who were participants under the Company's Supplemental Retirement Plan were transferred to Deferral Accounts under this Plan and all such participants in the Supplemental Retirement Plan became Participants under this Plan. Amounts held in such transferred Deferral Accounts shall be distributed at the time and manner specified under the deferral elections submitted under the Supplemental Retirement Plan, but shall be credited with investment performance in accordance with an Investment Fund election completed by the Participant in a manner consistent with Section 4.4. -13- 17 APPENDIX B PARTICIPATION BY BOARD MEMBERS This Appendix B shall be effective only if the Board has expressly determined to implement this Appendix B. Members of the Board may elect to defer their directors fees by making a fee deferral election prior to the period for which such fees are earned, in accordance with procedures established by the Committee. Such deferrals will be contributed to Deferral Accounts and credited with investment performance in accordance with Article IV. A Board member's Deferral Account shall be distributed, in accordance with the fee deferral elections made by the Board member, (i) upon termination of Board membership or at a specified date and (ii) in a manner specified in Section 5.2(b). A Board member may request a Hardship distribution in accordance with Section 5.1, provided that a Board member who is also a member of the Compensation and Option Committee of the Board shall abstain from any discussion of such Board member's Hardship distribution request. A Board member may also request an unscheduled distribution in accordance with Section 5.6. -14- EX-10.10 3 AMEND. TO EMPLOYEE AGREEMENT 1 EXHIBIT 10.10 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT, dated as of October 20, 1995, is entered into by and between Tandem Computers Incorporated ("Employer") and Donald E. Fowler ("Executive"), to amend the prior employment agreement previously entered into between Employer and Executive on May 19, 1995 (the "Employment Agreement"). In consideration of the respective undertakings of Employer and Executive set forth below, Employer and Executive agree as follows: 1. Executive will retire from employment with Employer on December 31, 1995. However, for all purposes of the Employment Agreement it is agreed that Executive shall be treated in the same manner as if Employer terminated the Period Employment of Executive without Cause (as such terms are used in the Employment Agreement) on December 31, 1995. 2. The following payments and benefits shall be due to Executive pursuant to Section 5.02(d) of the Employment Agreement: (i) Pursuant to Section 5.02(d)(i) of the Employment Agreement, Executive will be paid his annual base salary at the current rate through December 31, 1995. (ii) Section 5.02(d)(ii) of the Employment Agreement is modified as follows. Executive shall receive any annual bonus to which he may be entitled under the Employer's Targeted Income Plan or other applicable bonus plan or program for the fiscal year ended September 30, 1995. Executive shall receive the special bonus described in Section 3 below, in lieu of any other bonus for the period from October 1 through December 31, 1995. (iii) In satisfaction of Section 5.02(d)(iii) of the Employment Agreement, Executive will receive a lump sum payment in the amount of $1,350,000 on January 5, 1996. (iv) Pursuant to Section 5.02(d)(iv) of the Employment Agreement, Executive will continue to receive the benefits described in Section 4.04 of the Employment Agreement for three years beginning on January 1, 1996 and ending on December 31, 1998. (v) Pursuant to Section 5.02(d)(v) of the Employment Agreement, Executive will continue to receive the fringe benefits and perquisites described in Section 4.05 of the Employment Agreement for three years beginning on January 1, 1996 and ending on December 31, 1998. 2 (vi) Pursuant to Section 5.02(d)(vi) of the Employment Agreement, Employer will make a lump sum payment to Executive in the amount of $500,000 on January 5, 1996. (vii) In satisfaction of Section 5.02(d)(vii) of the Employment Agreement, Employer will make a lump sum payment of $50,000 to Executive on January 5, 1996. (viii) Section 5.02(d)(viii) of the Employment Agreement is modified as follows. Employer will extend all Employer loan guarantees and renew any Employer loans to Executive only for a period of one year through December 31, 1996. 3. Employer will pay a special lump sum bonus to Executive in the amount of $300,000 on January 5, 1996. This bonus will be in lieu of any other bonus for the period from October 1 through December 31, 1995, and may be utilized by Executive to reduce his outstanding loans which are guaranteed by Employer. 4. Executive's rights under his outstanding stock options will be determined under the terms of the applicable plans and agreements based on termination of Executive's employment on December 31, 1995, except that all of Executive's stock options which are vested at the time of his termination of employment will remain outstanding and may be exercised at any time on or before (i) December 31, 1998, or (ii) the original expiration date of the applicable stock option, whichever occurs first. 5. Pursuant to Section 5.02(e) of the Employment Agreement, Executive will execute and deliver a release and settlement agreement in favor of Employer in a form satisfactory to Employer on or before January 5, 1996. 6. The special provisions contained in Section 5.03 of the Employment Agreement which apply in connection with a Change in Control will continue to apply if a Change in Control of Employer is publicly announced on or before December 31, 1995. However, it is agreed that Section 5.03(h) will apply to Executive after December 31, 1995, and Executive shall be entitled to receive a full "Gross-Up Payment" thereunder, in the event that any payments which are made to Executive by Employer are subject to an Excise Tax (as defined therein). 7. Executive shall be entitled to retain, without charge, the AST Notebook computer which he currently uses. 8. Executive will resign from the Boards of Directors of subsidiaries of Employer effective as of December 31, 1995. 9. Employer will pay legal fees charged by Munger, Tolles & Olson in connection with entering into this Amendment to Employment Agreement. Employer will make a tax gross up payment 2 3 to Executive, if necessary, to offset any taxable income which is reportable for or realized by Executive with respect to these legal fees. 10. Except as otherwise expressly provided in this Amendment to Employment Agreement, all provisions of the Employment Agreement shall remain in full force and effect. IN WITNESS WHEREOF, Employer and Executive have executed this Amendment to Employment Agreement as of the date set forth in the first paragraph hereof. EMPLOYER: TANDEM COMPUTERS INCORPORATED By Thomas J. Perkins ----------------------- Its Chairman of the Board ----------------------- EXECUTIVE: Donald E. Fowler ----------------------- Donald E. Fowler 3 EX-10.11 4 AMEND. TO EMPLOYEE AGREE. 1 EXHIBIT 10.11 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT, dated as of October 20, 1995, is entered into by and between Tandem Computers Incorporated ("Employer") and Robert C. Marshall ("Executive"), to amend the prior employment agreement previously entered into between Employer and Executive on May 19, 1995 (the "Employment Agreement"). In consideration of the respective undertakings of Employer and Executive set forth below, Employer and Executive agree as follows: 1. Executive will retire from employment with Employer on December 31, 1995. However, for all purposes of the Employment Agreement it is agreed that Executive shall be treated in the same manner as if Employer terminated the Period Employment of Executive without Cause (as such terms are used in the Employment Agreement) on December 31, 1995. 2. The following payments and benefits shall be due to Executive pursuant to Section 5.02(d) of the Employment Agreement: (i) Pursuant to Section 5.02(d)(i) of the Employment Agreement, Executive will be paid his annual base salary at the current rate through December 31, 1995. (ii) Section 5.02(d)(ii) of the Employment Agreement is modified as follows. Executive shall receive any annual bonus to which he may be entitled under the Employer's Targeted Income Plan or other applicable bonus plan or program for the fiscal year ended September 30, 1995. Executive shall receive the special bonus described in Section 3 below, in lieu of any other bonus for the period from October 1 through December 31, 1995. (iii) In satisfaction of Section 5.02(d)(iii) of the Employment Agreement, Executive will receive a lump sum payment in the amount of $1,274,334 on January 5, 1996. (iv) Pursuant to Section 5.02(d)(iv) of the Employment Agreement, Executive will continue to receive the benefits described in Section 4.04 of the Employment Agreement for three years beginning on January 1, 1996 and ending on December 31, 1998. (v) Pursuant to Section 5.02(d)(v) of the Employment Agreement, Executive will continue to receive the fringe benefits and perquisites described in Section 4.05 of the Employment Agreement for three years beginning on January 1, 1996 and ending on December 31, 1998. 2 (vi) Pursuant to Section 5.02(d)(vi) of the Employment Agreement, Employer will make a 100% vested Employer contribution on behalf of Executive to Employer's Deferred Compensation Plan in the amount of $500,000 on December 31, 1995. (vii) In satisfaction of Section 5.02(d)(vii) of the Employment Agreement, Employer will make a lump sum payment of $50,000 to Executive on January 5, 1996. (viii) Section 5.02(d)(viii) of the Employment Agreement is modified as follows. Employer will extend all Employer loan guarantees and renew any Employer loans to Executive only for a period of one year through December 31, 1996. 3. Employer will pay a special lump sum bonus to Executive in the amount of $375,000 on January 5, 1996. This bonus will be in lieu of any other bonus for the period from October 1 through December 31, 1995, and may be utilized by Executive to reduce his outstanding loans which are guaranteed by Employer. 4. Executive's rights under his outstanding stock options will be determined under the terms of the applicable plans and agreements based on termination of Executive's employment on December 31, 1995, except that all of Executive's stock options which are vested at the time of his termination of employment will remain outstanding and may be exercised at any time on or before (i) December 31, 1998, or (ii) the original expiration date of the applicable stock option, whichever occurs first. 5. Pursuant to Section 5.02(e) of the Employment Agreement, Executive will execute and deliver a release and settlement agreement in favor of Employer in a form satisfactory to Employer on or before January 5, 1996. 6. The special provisions contained in Section 5.03 of the Employment Agreement which apply in connection with a Change in Control will continue to apply if a Change in Control of Employer is publicly announced on or before December 31, 1995. However, it is agreed that Section 5.03(h) will apply to Executive after December 31, 1995, and Executive shall be entitled to receive a full "Gross-Up Payment" thereunder, in the event that any payments which are made to Executive by Employer are subject to an Excise Tax (as defined therein). 7. Executive shall be entitled to retain, without charge, the Apple Power Book Model 540C which he currently uses. 8. Executive will resign from the Boards of Directors of Employer and its subsidiaries effective as of December 31, 1995. 9. Employer will pay legal fees charged by Munger, Tolles & Olson in connection with entering into this Amendment to 2 3 Employment Agreement. Employer will make a tax gross up payment to Executive, if necessary, to offset any taxable income which is reportable for or realized by Executive with respect to these legal fees. 10. Except as otherwise expressly provided in this Amendment to Employment Agreement, all provisions of the Employment Agreement shall remain in full force and effect. IN WITNESS WHEREOF, Employer and Executive have executed this Amendment to Employment Agreement as of the date set forth in the first paragraph hereof. EMPLOYER: TANDEM COMPUTERS INCORPORATED By Thomas J. Perkins ------------------------------------ Its Chairman of the Board ------------------------------------ EXECUTIVE: Robert C. Marshall ------------------------------------ Robert C. Marshall 3 EX-22.1 5 SUBSIDIARIES OF TANDEM COMPUTERS INC. 1 EXHIBIT 22.1 SUBSIDIARIES OF TANDEM COMPUTERS INCORPORATED
NAME OF SUBSIDIARY AND JURISDICTION NAME UNDER WHICH DOING BUSINESS OF INCORPORATION - ------------------------------- ---------------- ACI Canada EFTS, Ltd. Nebraska Australasian On Line Systems Pty. Ltd. Delaware Computer Technologies, Ltd. Bermuda NonStop Manufacturing Pty. Ltd. Delaware PT Tandem Computers Indonesia Indonesia Tandem Applied Communications Pty. Ltd. Nebraska Tandem Computers AB Sweden Tandem Computers AG Switzerland Tandem Computers A/O Russia Tandem Computers A/S Denmark Tandem Computers Asia Ltd. Delaware Tandem Computers Asia-Pacific Incorporated Delaware Tandem Computers B.V. Netherlands Tandem Computers Canada Limited Canada Tandem Computers Credit Corporation Delaware Tandem Computers de Mexico, S.A. de C.V. Mexico Tandem Computers del Peru S.A. Peru Tandem Computers do Brasil Inc. Delaware Tandem Computers do Brasil Inc. & Cia Brazil Tandem Computers Europe Incorporated Delaware Tandem Computers Export Corporation California Tandem Computers FSC, Inc. Barbados Tandem Computer Ges.m.b.H. Austria Tandem Computers GmbH Germany Tandem Computers Holding Incorporated Delaware Tandem Computers (Hong Kong) Limited Hong Kong Tandem Computers (Hungary) Incorporated Delaware Tandem Computers Iberica, S.A. Spain Tandem Computers India Ltd. Delaware Tandem Computers International Incorporated Delaware Tandem Computers Investment Corporation Delaware Tandem Computers Investments do Brasil Inc. Delaware Tandem Computers Italia S.p.A. Italy Tandem Computers Japan, Limited Japan Tandem Computers KKT Hungary Tandem Computers Korea, Ltd. Korea Tandem Computers Limited United Kingdom Tandem Computers Manufacturing, Inc. California Tandem Computers Marketing, Inc. Delaware Tandem Computers (Norway) A/S Norway Tandem Computers Pty. Ltd. Delaware
2
NAME OF SUBSIDIARY JURISDICTION NAME UNDER WHICH DOING BUSINESS OF INCORPORATION - ------------------------------- ---------------- Tandem Computers S.A. France Tandem Computers S.A./N.V. Belgium Tandem Computers South Asia Ltd. Delaware Tandem Computer Systems Sdn BHD Malaysia Tandem Employees Emergency Relief Fund, Inc. Delaware Tandem PRC Incorporated Delaware Tandem South Africa(Pty) Ltd. South Africa Tandem Taiwan Incorporated Delaware Twinco A/S Norway UB Networks, a division of Ungermann-Bass Australia Pty. Ltd. UB Networks Canada Limited Canada UB Networks Czech Republic, Inc. Delaware UB Networks do Brasil Limitada Brazil UB Networks European Corporation Delaware UB Networks Hong Kong, Inc. Delaware UB Networks International, Inc. Delaware UB Networks Korea Limited Korea UB Networks Limited England UB Networks Norway, Inc. Delaware UB Networks Singapore, Inc. Delaware Ungermann-Bass (Europe), Inc. Delaware Ungermann-Bass Financial Corporation Delaware Ungermann-Bass Networks AB Sweden Ungermann-Bass Networks Benelux S.A.-N.V. Belgium Ungermann-Bass Networks Espanola Limited Delaware Ungermann-Bass Networks, Inc. Delaware Ungermann-Bass Networks Kabushiki Kaisha Japan Ungermann-Bass Networks SA France Yura Corp. Colorado
EX-27 6 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-K FOR THE PERIOD ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 12-MOS SEP-30-1995 SEP-30-1995 121,230 0 557,714 17,721 169,948 970,485 1,297,481 700,813 1,856,694 670,436 75,923 2,995 0 0 1,107,340 1,856,694 1,846,075 2,284,962 821,780 1,140,689 323,197 3,635 13,102 139,699 32,153 107,546 0 0 0 107,546 0.91 0.91
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