SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 27, 1996
Commission file no. 1-7713
AMDAHL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-1728548
(State of incorporation) (I.R.S. Employer
Identification No.)
1250 East Arques Avenue
Sunnyvale, California 94088-3470
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (408) 746-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X
No ___
Number of shares of common stock, $.05 par value, outstanding at November
4, 1996: 121,330,655.
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PART I. FINANCIAL INFORMATION
AMDAHL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited consolidated financial statements reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position as of the dates
and results of operations for the periods indicated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission rules and regulations. Amdahl Corporation (the Company) believes the
information included in the following report on Form 10-Q, when read in
conjunction with the financial statements and related notes included in the
Company's 1995 Annual Report to Stockholders, not to be misleading.
CERTAIN OF THE STATEMENTS CONTAINED IN THIS REPORT ON FORM 10-Q ARE FORWARD
LOOKING AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES WHICH ARE DESCRIBED IN
THE SECTION OF THIS REPORT TITLED MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, THE COMPANY'S 1995 ANNUAL REPORT
TO STOCKHOLDERS AND IN OTHER DOCUMENTS FILED FROM TIME TO TIME WITH THE U.S.
SECURITIES AND EXCHANGE COMMISSION, INCLUDING WITHOUT LIMITATION, THE REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 29, 1995. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE PROJECTED.
The results of operations for the nine months ended September 27, 1996, are not
necessarily indicative of results for the entire year ending December 27, 1996.
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AMDAHL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, 1996 and DECEMBER 29, 1995
(Dollars in thousands)
1996 1995
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 167,962 $ 192,980
Restricted cash 56,770 -
Short-term investments 224,190 444,006
Receivables, net of allowances 408,060 319,777
Inventories -
Purchased materials 20,255 18,879
Systems in process 38,422 168,322
Finished goods 49,534 87,612
Prepaid expenses and deferred tax benefit 85,648 69,115
----------- -----------
Total current assets 1,050,841 1,300,691
----------- -----------
Long-term receivables and other assets 33,178 28,083
----------- -----------
Property and equipment, at cost:
Leased systems 44,344 37,937
System spares 363,532 379,797
Production and data processing equipment 325,256 327,051
Office furniture, equipment, and improvements 142,133 173,691
Land and buildings 89,939 111,715
----------- -----------
965,204 1,030,191
Less - Accumulated depreciation and amortization (715,453) (757,523)
----------- -----------
Property and equipment, net 249,751 272,668
----------- -----------
Excess of cost over net assets acquired, net of amortization 198,520 106,756
----------- -----------
$ 1,532,290 $ 1,708,198
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Notes payable and short-term debt $ 27,506 $ 22,026
Short-term debt - stockholder (Fujitsu Limited) 80,000 -
Accounts payable 135,450 111,871
Accounts payable - stockholder (Fujitsu Limited) 27,361 29,152
Accrued liabilities 512,904 431,600
----------- -----------
Total current liabilities 783,221 594,649
----------- -----------
Long-term debt - stockholder (Fujitsu Limited) - 80,000
----------- -----------
Long-term liabilities 42,314 51,152
----------- -----------
Deferred income taxes 60,065 48,573
----------- -----------
Stockholders' equity:
Common stock, $.05 par value -
Authorized - 200,000,000 shares
Outstanding - 120,995,000 shares in 1996
and 119,259,000 shares in 1995 6,050 5,963
Additional paid-in capital 551,230 542,269
Retained earnings 78,203 370,995
Cumulative translation adjustments 9,058 10,932
Unrealized holding gains on securities 2,149 3,665
----------- -----------
Total stockholders' equity 646,690 933,824
----------- -----------
$ 1,532,290 $ 1,708,198
=========== ===========
The accompanying notes are an integral part of these financial statements.
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AMDAHL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands, except per common share amounts)
FOR THE THREE MONTHS ENDED
SEPT 27, 1996 SEPT 29, 1995
--------------- ---------------
<S> <C> <C>
REVENUES
Equipment sales $ 147,936 $ 191,848
Service, software and other 291,883 158,168
------------- -------------
439,819 350,016
------------- -------------
COST OF REVENUES
Equipment sales 99,321 113,292
Service, software and other 217,049 94,255
------------- -------------
316,370 207,547
------------- -------------
Gross margin 123,449 142,469
------------- -------------
OPERATING EXPENSES
Engineering and development 29,091 35,756
Marketing, general and administrative 102,401 91,432
------------- -------------
131,492 127,188
------------- -------------
Income (loss) from operations (8,043) 15,281
------------- -------------
INTEREST
Income 6,655 13,010
Expense (2,813) (2,584)
------------- -------------
3,842 10,426
------------- -------------
Income (loss) before provision for
income taxes (4,201) 25,707
PROVISION FOR INCOME TAXES 632 5,650
------------- -------------
NET INCOME (LOSS) $ (4,833) $ 20,057
============= =============
PER COMMON SHARE AMOUNTS:
Net income (loss) $ (.04) $ .17
============= =============
Average outstanding shares 120,881 120,603
============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<CAPTION>
AMDAHL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands, except per common share amounts)
FOR THE NINE MONTHS ENDED
SEPT 27, 1996 SEPT 29, 1995
--------------- ---------------
<S> <C> <C>
REVENUES
Equipment sales $ 348,795 $ 624,468
Service, software and other 790,906 475,740
------------- -------------
1,139,701 1,100,208
------------- -------------
COST OF REVENUES
Equipment sales 437,255 396,764
Service, software and other 583,309 267,389
------------- -------------
1,020,564 664,153
------------- -------------
Gross margin 119,137 436,055
------------- -------------
OPERATING EXPENSES
Engineering and development 91,852 114,403
Marketing, general and administrative 302,375 266,073
Purchased in-process engineering and development 20,700 -
------------- -------------
414,927 380,476
------------- -------------
Income (loss) from operations (295,790) 55,579
------------- -------------
INTEREST
Income 22,554 38,048
Expense (7,555) (7,884)
------------- -------------
14,999 30,164
------------- -------------
Income (Loss) before provision for
income taxes (280,791) 85,743
PROVISION FOR INCOME TAXES 12,001 18,850
------------- -------------
NET INCOME (LOSS) $ (292,792) $ 66,893
============= =============
PER COMMON SHARE AMOUNTS:
Net income (loss) $ (2.44) $ .56
============= =============
Average outstanding shares 120,223 120,267
============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<CAPTION>
AMDAHL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FOR THE NINE MONTHS ENDED
SEPTEMBER 27, OCTOBER 1,
1996 1995
------------ -------------
<S> <C> <C>
Cash and cash equivalents at beginning of period $192,980 $358,006
------------ -------------
Cash flows from operating activities:
Net income (loss) (292,792) 66,893
Adjustments to reconcile net income (loss)
to net cash:
provided by (used for) operating activities:
Depreciation and amortization 78,230 88,191
Write-off of purchased in-process engineering & development 20,700 -
Write-down of processor inventories and lease systems
to market 130,000 -
Deferred income tax provision 11,491 6,551
Gain on dispositions of assets (59) (330)
Changes in assets and liabilities net of effects from
purchase of Trecom:
(Increase) decrease in receivables (50,760) 61,001
(Increase) decrease in inventories 49,984 (17,265)
Increase in prepaid expenses and
deferred tax benefit (10,347) (13,035)
(Increase) decrease in long-term receivables
and other assets (4,095) 6,242
Increase (decrease) in accounts payable 19,265 (22,755)
Increase (decrease) in accrued liabilities 10,794 (96,142)
Decrease in long-term liabilities (2,588) (3,689)
------------ -------------
Net cash provided by (used for) operating activities (40,177) 75,662
------------ -------------
Cash flows from investing activities:
Purchases of available-for-sale short-term investments (109,743) (292,223)
Purchases of held-to-maturity short-term investments - (277,065)
Proceeds from sales and maturities of
available-for-sale short-term investments 266,066 15,482
Proceeds from maturities of held-to-maturity
short-term investments - 329,437
Payment for purchase of Trecom, net of cash acquired
and acquisition price payable (68,204) -
Capital expenditures:
Leased systems (34,016) (11,668)
System spares (11,260) (12,787)
Other property and equipment (35,913) (50,830)
Proceeds from property and equipment sales 14,848 44,154
------------ -------------
Net cash provided by (used for) investing activities 21,778 (255,500)
------------ -------------
Cash flows from financing activities:
Increase (decrease) in notes payable and short-term debt (13,878) 11,642
Repayments of long-term borrowings (143) -
Sale of common stock and exercise of options 9,048 19,793
------------ -------------
Net cash provided by (used for) financing activities (4,973) 31,435
------------ -------------
Effect of exchange rate changes on cash (1,646) 3,148
------------ -------------
Net decrease in cash and cash equivalents (25,018) (145,255)
------------ -------------
Cash and cash equivalents at end of period $167,962 $212,751
============ =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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AMDAHL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying interim financial statements and related notes should be read
in conjunction with the financial statements and related notes included in the
Company's 1995 Annual Report to Stockholders.
RELATIONSHIP WITH FUJITSU LIMITED
During the third quarter of 1996 the Company recognized equipment sales to
Fujitsu Limited (Fujitsu) under distributorship and other arrangements which
contributed $6,235,000 and $3,022,000 to equipment sales and gross margin,
respectively, compared to $14,023,000 and $8,425,000 in the third quarter of
1995 ($15,551,000 and $4,320,000 for the first nine months of 1996 and
$35,144,000 and $16,650,000 for the first nine months of 1995).
In 1995 the Company entered into a contract manufacturing agreement with HaL
Computer Systems, Inc. (HaL), a wholly-owned subsidiary of Fujitsu, whereby
Amdahl agreed to manufacture open system workstations for HaL. The Company also
performs circuit board assembly for Ross Technology, Inc., a majority-owned
subsidiary of Fujitsu. Both of these agreements were near completion and
contributed no revenue and a negative $102,000 to equipment sales and gross
margin, respectively, in the third quarter of 1996 compared to $868,000 and a
negative $84,000 to equipment sales and gross margin in the third quarter of
1995 ($5,630,000 and a negative $2,211,000 for the first nine months of 1996 and
$5,190,000 and $1,692,000 in the first nine months of 1995).
Fujitsu reimburses Amdahl for certain specific engineering development
activities performed by Amdahl from time to time related to products which are
being jointly developed by Amdahl and Fujitsu. In connection with these
development efforts, Amdahl recorded $6,100,000 as an offset to engineering and
development expenses in the third quarter of 1996 ($18,500,000 in the first nine
months of 1996). No such reimbursements occurred in 1995.
Amounts due from Fujitsu and their subsidiaries included in receivables were
$22,483,000 and $35,795,000 as of September 27, 1996 and December 29, 1995,
respectively.
At September 27, 1996 and December 30, 1995, $80,000,000 was outstanding under
the loan agreement with Fujitsu. This amount was reclassified from long-term
debt to current debt in the first quarter of 1996, as the amount outstanding is
payable in January 1997. Interest expense associated with the loan was
$1,233,000 and $1,460,000 in the third quarters of 1996 and 1995, respectively
($4,155,000 and $4,459,000 in the first nine months of 1996 and 1995,
respectively), of which $917,000 and $958,000
7
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was payable and included in accrued liabilities at September 27, 1996 and
December 29, 1995, respectively.
SUPPLEMENTARY CASH FLOW DISCLOSURE
Income taxes of $1,602,000 (net of taxes refunded of $16,951,000) were paid by
the Company in the first nine months of 1996, and income taxes of $26,158,000
were paid by the Company in the first nine months of 1995. Interest paid on all
borrowings was $7,648,000 and $7,866,000 for the first nine months of 1996 and
1995, respectively.
NONCASH INVESTING ACTIVITIES
Transfers of Amdahl-manufactured systems from net property, plant and equipment
to inventories were $10,798,000 in the first nine months of 1996 and $12,071,000
in the first nine months of 1995.
8
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AMDAHL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis should be read in conjunction
with the Management's Discussion and Analysis included in the Company's 1995
Annual Report to Stockholders.
RESULTS OF OPERATIONS
THIRD QUARTER AND FIRST NINE MONTHS OF 1996 COMPARED TO THIRD QUARTER AND FIRST
NINE MONTHS OF 1995:
Total revenues increased 26% to $439,819,000 in the third quarter of 1996 from
$350,016,000 in the third quarter of 1995 and increased $39,493,000 or 4% in the
first nine months of 1996 compared to the first nine months of 1995. Equipment
sales revenues decreased 23% in the third quarter of 1996 from the third quarter
of 1995 and decreased 44% in the first nine months of 1996 compared to the first
nine months of 1995. Equipment sales were 34% and 55% of total revenues in the
third quarters of 1996 and 1995, respectively. The third quarter 1996 equipment
sales included the first revenues from limited shipments of the Company's new
Millennium CMOS mainframe systems. Revenues from equipment sales of 5995M
mainframe systems decreased 53% in the third quarter of 1996 from the third
quarter of 1995 despite increased volume, due to significant declines in pricing
year-to-year caused by severe price competition in the marketplace and the
transition from older ECL mainframe technology to CMOS technology. Revenues from
storage product equipment sales increased 61% in the third quarter of 1996 when
compared to the same period of 1995 as the Company began volume shipments of a
new generation of storage products. Equipment sales of high performance servers
increased 37% in the third quarter of 1996 compared to the same quarter a year
ago.
Service, software and other revenues were 66% and 45% of total revenues in the
third quarters of 1996 and 1995, respectively. Service, software and other
revenues increased 85% in the third quarter of 1996 from the third quarter of
1995 and 66% in the first nine months of 1996 from the first nine months of
1995, primarily reflecting increased consulting services revenues from DMR Group
Inc. (DMR), acquired in the fourth quarter of 1995, and Trecom Business Systems,
Inc. (Trecom), acquired in the second quarter of 1996.
Total gross margin was 28% of revenues in the third quarter of 1996, compared to
41% in the third quarter of 1995 and 10% of revenues in the first nine months of
1996, compared to 40% in the first nine months of 1995. The gross margin
percentage on equipment sales decreased to 33% in the third quarter of 1996 from
41% in the third quarter of 1995 and decreased to a negative 25% for the first
nine months of 1996 from 36% for the first nine
9
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months of 1995. The 1996 year-to-date total gross margin and gross margin from
equipment sales include a charge of $130 million taken in second quarter to
reduce end-of-life bipolar 5995M assets to market value. Without this charge,
the total gross margin and gross margin from equipment sales for the first nine
months of 1996 would have been 22% and 12%, respectively.
The gross margin on service, software and other revenues decreased to 26% in the
third quarter of 1996 from 40% in the third quarter of 1995 and decreased to 26%
in the first nine months of 1996 from 44% in the first nine months of 1995. The
primary cause of the decreases is that consulting and professional services
contributed a greater proportion of revenues during 1996, and these revenues
generate lower gross margins than the Company's traditional maintenance revenues
which predominated in 1995. In addition, the gross margin from the Company's
traditional maintenance business has been negatively effected by competitive
pricing pressures and a gradual erosion of the installed base of older
generations of mainframe systems.
Third quarter 1996 engineering and development expenses decreased $7 million or
19% when compared to the third quarter of 1995, due in part to reimbursements
received from Fujitsu (see the Notes to the Consolidated Financial Statements)
and due to the increased reliance on Fujitsu for the development of the
Company's future mainframe and storage products. Third quarter 1996 marketing,
general and administrative expenses increased $11 million or 12% when compared
to the third quarter of 1995, due to increased marketing efforts directed
towards the Company's non-traditional product lines and the additional expenses
associated with DMR and Trecom.
Net interest income decreased $7 million in the third quarter of 1996 from the
third quarter of 1995 and decreased $15 million in the first nine months of 1996
from the first nine months of 1995 due primarily to lower cash levels after the
acquisition of DMR and Trecom.
10
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The effective income tax rate was negative 15% in the third quarter of 1996,
compared to 22% in the third quarter of 1995. The third quarter 1996 tax
provision included a provision for taxes currently payable in state and foreign
jurisdictions. No tax benefit was recorded for the loss incurred in the current
period. For financial reporting purposes, the valuation allowance at September
27, 1996 reduced net deferred tax assets to an amount realizable based upon
taxes paid for prior years without relying on future income. The Company
anticipates that the provision for income taxes in the fourth quarter of 1996
will consist only of minimum state and foreign taxes.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
While the Company's new CMOS based Millennium mainframe will achieve general
availability during the fourth quarter of 1996, revenues and margins associated
with the sale of these new systems will be subject to a number of uncertainties
over the near term. Among them are the volume of units to be shipped as
production schedules are ramped up, the size and configuration of delivered
systems, and system pricing, as the Company expects sales of these systems to be
subject to the same competitive pressures which have affected previous
generations of the Company's mainframe computers. Moreover, in light of the
transition from older technology systems to the new CMOS based mainframes, the
Company expects traditional hardware maintenance revenues to decline from
historical levels.
The above uncertainties, as well as competitive conditions in the marketplace,
require the Company to continually review and consider adjustments to its cost
structures. At the present time the Company is unable to quantify the size of
any cost reduction activities it might undertake, their impact on future
operating results, and whether any such actions would require a material
one-time charge to earnings.
FINANCIAL CONDITION
SEPTEMBER 27, 1996 COMPARED TO DECEMBER 29, 1995
The Company's net cash position (cash, restricted cash and short-term
investments net of short-term and long-term debt, excluding capitalized lease
obligations) decreased by $189 million from December 29, 1995 to September 27,
1996. Cash, cash equivalents, restricted cash and short-term investments
decreased $188 million, reflecting cash used for operations and the acquisition
of Trecom. Receivables increased $88 million, largely due to the addition of
Trecom's receivables of $50 million.
Inventories decreased $167 million, reflecting shipments of end- of-life 5995M
systems and the $105 million write-down of 5995M inventories to market value in
the second quarter of 1996.
Property and equipment decreased $23 million due to the $25 million write-down
of 5995M leased systems in the second quarter of 1996.
The excess of cost over net assets acquired (goodwill), net of
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amortization, increased $92 million due to the acquisition of
Trecom.
Accrued liabilities increased $81 million, primarily due to the present value of
the Trecom acquisition price payable, which was $63 million at September 27,
1996. Increases in other accruals were partially offset by charges against
accrued restructuring costs, which resulted in a decrease in the balance from
$55 million at December 29, 1995 to $19 million at September 27, 1996.
At September 27, 1996 and December 29, 1995, $80 million was outstanding under
the loan agreement with Fujitsu. This amount was reclassified from long-term
debt to current debt in the first quarter of 1996, as the amount outstanding is
payable in January 1997.
LIQUIDITY
The nature of the computer industry, combined with the current economic
environment, make it very difficult for the Company to predict future liquidity
requirements with certainty. However, the Company believes that existing cash
and short-term investments will be adequate to finance continuing operations,
investments in property and equipment, inventories and spare parts, expenditures
for the development of new products, repayment of outstanding debt and the
remaining liability for the acquisition of Trecom, at least through 1997.
12
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
Not applicable.
Item 2. Changes in Securities:
Not applicable.
Item 3. Defaults upon Senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
Not applicable
Item 5. Other information:
Not applicable.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
10 Termination agreement with named executive officer.
(b) Reports on Form 8-K:
Form 8-K/A filed July 3, 1996.
13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMDAHL CORPORATION
Date: November 11, 1996 By: /s/ John C. Lewis
---------------------
John C. Lewis
Chairman of the Board,
President and
Chief Executive Officer
Date: November 11, 1996 By: /s/ Ernest B. Thompson
-------------------------
Ernest B. Thompson
Vice President and Controller
(Principal Accounting Officer)
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Exhibit Index
Item Description
- ---- -----------
10 Termination Agreement with Named Executive Officer
27 Financial Data Schedule
Exhibit 10
July 3, 1996
Mr. E. Joseph Zemke
21891 Via Regina
Saratoga, California 95070
Dear Joe:
The purpose of this letter agreement is to document (i) the
severance benefits to which you are entitled in connection with your resignation
as the Company's President and Chief Executive Officer and as a member of the
Company's Board of Directors and (ii) the consulting arrangement and restrictive
covenants which will be in effect for you through March 14, 1998.
PART ONE -- SEVERANCE BENEFITS
1. Your resignation as the Company's President and Chief
Executive Officer and as a member of the Company's Board of Directors is
effective as of March 14, 1996. Your employment with the Company also terminated
as of that date.
2. You will receive your normal salary through March 14, 1996,
and all regular and mandatory payroll deductions will be taken from your final
paycheck. Your final paycheck will also include payment for all your accrued but
unused vacation days through March 14, 1996, subject to the collection of
applicable withholding taxes. Your participation in the Company's employee
benefit programs, including (without limitation) the group term life insurance
plan, the disability income plan, the accidental death and dismemberment
insurance program, the flexible dollars benefit program, the Employee Savings
Program (including your ability to make pre-tax and after-tax contributions),
the Employee Stock Purchase Plan and the 1994 Stock Incentive Plan, will cease
as of your March 14, 1996 termination date, except to the limited extent
provided in Paragraphs 6 and 9 of this Part One. You will also cease to
participate in any special executive benefit programs, effective with your March
14, 1996 termination date.
3. Effective with your March 14, 1996 termination
<PAGE>
date, you will cease to have any further access to confidential and other
non-public information concerning the Company and its business operations,
except to the limited extent necessary to perform any consulting services
required of you pursuant to Part Two of this letter agreement.
4. You will receive an aggregate of $2,382,000 of salary and
bonus continuation payments over the two-year period beginning March 15, 1996
and ending March 14, 1998. These payments will be made in equal installments at
bi-weekly intervals over the two-year period, with the first payment to be made
as of March 29, 1996. All payments will be subject to the Company's collection
of applicable withholding taxes. In addition to these bi-weekly payments, you
will also receive a total of $120,000 over the two-year consulting period to be
in effect under Part Two of this letter agreement. However, all such
continuation payments and consulting fees will immediately terminate in the
event of a material breach of any of your covenants under Paragraph 15 of this
letter agreement.
<PAGE>
Mr. E. Joseph Zemke
July 3, 1996
Page 2
5. During your period of employment with the Company, you
received restricted stock awards for a total of 190,400 shares of the Company's
common stock. As of July 3, 1996; 137,400 of those shares were unvested. The
specific break-down of your vested and unvested restricted stock awards as of
July 3, 1996 is attached as Schedule A. All of your remaining unvested shares
will vest on August 30, subject to your compliance with Paragraph 15. Prior to
August 30, you will designate the number of shares of restricted stock to be
issued to you and the number to be issued to your wife. At the time of such
vesting, you will recognize immediate taxable income equal to the fair market
value of those previously unvested shares, less the issue price you paid for
such shares, and you will have to satisfy the applicable withholding taxes on
that income before the certificates for the shares will be released.
6. You currently hold outstanding stock options for 364,000
shares of the Company's common stock. As of July 3, 1996, those options are
exercisable for a total of 232,400 shares. The specific break-down of your
vested and unvested stock options as of July 3, 1996 is also included in
attached Schedule A. Upon execution of this letter agreement, each of your
options will be fully vested and may be exercised for any or all of the
outstanding option shares at any time prior to March 14, 1998, except for the
August 5, 1986 option grant which you have already exercised in full. Prior to
your exercise, you will designate the number of shares to be issued to you and
the number to be issued to your wife. Since all of your outstanding options are
non-qualified options under the federal income tax laws, you will recognize
compensation income in connection with your exercise of those options, and you
must satisfy all applicable withholding taxes associated with each such
exercise.
7. You are currently vested in your entire account balance
under the Long-Term Executive Incentive Performance Plan, and you will
immediately vest in all your outstanding accounts under the Short-Term Executive
Incentive Performance Plan upon your execution of this letter agreement. On
August 30, 1996, you will receive a lump sum payment of your outstanding
account balances under both the Short-Term and Long-Term Executive Incentive
Performance Plans, subject to the Company's collection of applicable withholding
taxes. Prior to August 30, you will designate the amount to be paid to you and
the amount to be paid to your wife. As of July 3, 1996, the aggregate balance of
your outstanding accounts under the Short-Term Plan was $185,353.59 (inclusive
of interest through December 31, 1995) and your outstanding account balance
under the Long-Term Plan was $1,879,390 (inclusive of interest through December
31, 1995).
<PAGE>
Your lump sum payment will also include interest on your Short-Term and
Long-Term Plan accounts at the rate of 6.5 percent per annum for the period
January 1, 1996 through the payment date.
8. At the time you receive your lump sum payment under
Paragraph 7, you will repay to the Company your outstanding loans under the
Company's Officer Loan Program. On July 3, 1996, the outstanding balance of
those loans will be $444,844.06. A specific break-down of your outstanding loans
as of July 3, 1996 is set forth in attached Schedule B. This schedule will be
updated to state the amount owed as of November 1, 1996, the lump sum date
referred to in Paragraph 7.
<PAGE>
Mr. E. Joseph Zemke
July 3, 1996
Page 3
9. The Company will, at its expense, provide you and your
spouse with continued health care coverage under the Company's executive officer
medical/dental plan. Your individual coverage will continue until the earlier of
(i) your attainment of age 65 or (ii) the first date that you are covered under
another employer's health benefit program which provides substantially the same
level of benefits without exclusion for pre-existing medical conditions. The
coverage for your spouse will continue until the earlier of (i) March 31, 1998
or (ii) the first date that she is covered under another employer's health
benefit program which provides substantially the same level of benefits without
exclusion for pre-existing medical conditions. The Company believes that such
continued health care coverage will not constitute taxable income to you under
current federal tax laws, regulations and rulings. The coverage provided you and
your spouse under this Paragraph 9 will be in lieu of any other continued health
care coverage to which you or your spouse would otherwise be entitled pursuant
to the requirements of Code Section 4980B by reason of your termination of
employment or your subsequent divorce, and neither you nor your spouse will
accordingly be entitled to any further health care coverage under Code Section
4980B following the coverage period in effect under this Paragraph 9.
10. You also acknowledge that you will remain subject to the
reporting requirements in effect under Section 16(a) of the Securities Exchange
Act of 1934, as amended, until September 14, 1996, and you will work with Ms.
Patricia Boepple of the Company in filing all required Section 16 (a) reports
for your transactions in the Company's common stock through that date.
11. You have previously been provided with certain computer
and telephone equipment for home use. That equipment may be retained by you. All
copies of proprietary information and other confidential information of the
Company currently in your possession, whether in hard copy, diskette or other
computer-readable format, must either be destroyed or returned to Mr. Anthony M.
Pozos at the time you execute this letter agreement, and you may not retain any
files, documents or other tangible manifestations of such proprietary or
confidential information.
12. You will be entitled to indemnification, in accordance
with the applicable provisions of Article Eleventh of the Company's Articles of
Incorporation and Article IX of the Company's Bylaws (copies of which are
attached as Schedule C), against all expense, liability and loss (including
attorney fees and settlement payments) which you may incur by reason of
<PAGE>
any action, suit or proceeding arising from or relating to the performance of
your duties as an officer or director of the Company prior to your March 14,
1996 termination date.
PART TWO -- CONSULTING ARRANGEMENT AND RESTRICTIVE COVENANTS
13. You will make yourself available to perform consulting
services reasonably requested of you during the two (2) year period beginning
March 15, 1996 and ending March 14, 1998 (the "Consultancy Period"). You will be
paid a monthly retainer fee of $5,000 at the start of each month during the
period April 1, 1996 through February 28, 1998. In addition, you will receive a
pro-rated retainer fee of $2,500 for the period March 15, 1996 to March 31, 1996
(to be paid upon your execution of this letter agreement) and a pro-rated
retainer fee of $2,500 for the period March 1, 1998 to March 14, 1998 (to be
paid on March 1, 1998). In consideration of the monthly retainer fee, you will
make yourself available to render up to 10 hours of consulting
<PAGE>
Mr. E. Joseph Zemke
July 3, 1996
Page 4
services per month (5 hours per month for a pro-rated retainer) during the
Consultancy Period. All assignments will come from the Chairman of the Company's
Board of Directors, and you will report directly to such person with respect to
each assignment. Should you be requested to render more than the required 5 or
10 hours of consulting services per month, then you will be compensated for
those additional hours at an hourly rate to be agreed upon by you and the
Chairman of the Company's Board of Directors at the time such consulting
services are to be rendered. You will be reimbursed for all reasonable
out-of-pocket expenses incurred in rendering such consulting services upon your
submission of appropriate documentation for those expenses.
14. During the Consultancy Period, you will not make any
representations to any third party that you are an officer, director or employee
of the Company. Any proprietary information or other confidential information of
the Company to which you may have access in the performance of your consulting
services will be held in confidence and will not be disclosed to any third party
or otherwise directly or indirectly used by you, except to the extent necessary
to perform your consulting services.
15. As a condition to, and in consideration for, the severance
benefits you are to receive under Part One and the additional retainer fees you
are to receive under this Part Two, you will not at any time during the two (2)
year period beginning March 15, 1996 and ending March 14, 1998:
(i) directly or indirectly, whether for your own
account or as an employee, director, consultant or advisor, provide services to
any business enterprise which is at the time in competition with any of the
Company's then existing or formally planned product lines and which is located
geographically in an area where the Company maintains substantial business
activities, unless you obtain the prior written consent of the Company's Board
of Directors, or
(ii) directly or indirectly encourage or solicit
any individual to leave the Company's employ for any reason or interfere in any
other manner with the employment relationships at the time existing between the
Company and its current or prospective employees, or
(iii) induce or attempt to induce any customer,
supplier, distributor, licensor, licensee or other business relation
of the Company to cease doing business with the Company or in any way interfere
with the existing business
<PAGE>
relationship between any such customer, supplier, distributor, licensor,
licensee or other business relation and the Company.
You acknowledge that monetary damages may not be sufficient to compensate
the Company for any economic loss which may be incurred by reason of your breach
of the foregoing restrictive covenants. Accordingly, in the event of any such
breach, the Company will, in addition to the cessation of the severance benefits
and consulting fees provided you under this agreement and any remedies available
to the Company at law, be entitled to obtain equitable relief in the form of an
injunction precluding you from continuing to engage in such breach.
PART THREE -- MUTUAL RELEASES
16. In consideration of the various payments and benefits to
be provided you pursuant to this letter agreement, you do hereby for yourself,
your heirs, executors, administrators and assigns agree as follows:
<PAGE>
Mr. E. Joseph Zemke
July 3, 1996
Page 5
a. You fully and forever release and discharge
the Company, Fujitsu Limited, their respective affiliates and their respective
officers, directors, employees, agents and assigns (jointly and severally the
"Releasees"), or any of them, from any claims, demands, damages and causes of
action you have or may have against the Releasees and covenant not to sue or
otherwise institute or cause to be instituted or in any way participate in
(except at the request of the Company or as otherwise required by law) legal or
administrative proceedings against the Releasees with respect to any matter
arising out of or connected with your employment with the Company, your service
on the Company's Board of Directors or the termination of that employment or
service, including any and all liabilities, claims, demands, contracts, debts,
obligations and causes of action of every nature, kind and description, in law,
equity or otherwise, whether or not now known or ascertained, which heretofore
do or may exist. However, the foregoing release shall not apply with respect to
any claims arising under this letter agreement or your existing indemnification
rights under the Company's Articles of Incorporation and Bylaws.
b. You hereby waive and release any and all
rights you may have had or now have to pursue any and all remedies available to
you under any employment-related cause of action against the Releasees,
including (without limitation) claims of wrongful discharge, emotional distress,
defamation, breach of contract, breach of the covenant of good faith and fair
dealing, violation of the provisions of the California Labor Code, the Employee
Retirement Income Security Act, and any other laws and regulations relating to
employment.
c. You hereby waive and release any and all
rights you may have had or now have to pursue any claim of discrimination,
including (without limitation) any claim of discrimination based on sex, age,
race, national origin or other basis, under Title VII of the Civil Rights Act of
1964, as amended, the California Fair Employment and Housing Act, the California
Constitution, the Equal Pay Act of 1963, the Age Discrimination in Employment
Act of 1967, the Civil Rights Act of 1866, and all other laws and regulations
relating to employment.
17. In consideration of the various promises and releases made
by you under this letter agreement, the Company will, upon the expiration of the
seven (7)-day period measured from the date you execute this letter agreement,
become fully bound by the following releases and waivers, provided you do not
exercise your right to revoke your general release under this Part Three during
that period:
<PAGE>
The Company hereby fully and forever releases and
discharges you from any and all claims, demands, damages and causes of action
the Company has or may have against you and covenants not to sue or otherwise
institute or cause to be instituted or in any way participate in legal or
administrative proceedings against you with respect to any matter arising out of
or connected with your employment with the Company, your service on the
Company's Board of Directors or the termination of that employment or service,
including any and all liabilities, claims, demands, contracts, debts,
obligations and causes of action of every nature, kind and description, in law,
equity or otherwise, whether or not now known or ascertained, which heretofore
do or may exist. However, the foregoing release shall not apply with respect to
any claims arising under this letter agreement.
<PAGE>
Mr. E. Joseph Zemke
July 3, 1996
Page 6
18. The mutual releases effected by you and the Company under
this Part Three extend to all claims of every nature and kind, known or unknown,
suspected or unsuspected, past or present, arising from or attributable to your
employment by the Company, your service as a member of the Company's Board of
Directors, or the termination of that employment or service. Any and all rights
granted to you and the Company under Section 1542 of the California Civil Code
or any analogous state law or federal law or regulation are hereby expressly
waived by you and the Company, respectively. Section 1542 of the Civil Code of
the State of California reads as follows:
A general release does not extend to claims which
the creditor does not know or suspect to exist in his favor at the time of
executing the release, which, if known by him, must have materially affected his
settlement with the debtor.
PART FOUR -- MISCELLANEOUS PROVISIONS
19. It is the belief of both you and the Company that none of
the payments and benefits provided under this letter agreement are in the nature
of parachute payments under Internal Revenue Code Section 280G, and neither you
nor the Company (or its successors) will take any action or reporting position
contrary to such belief. However, should the Company undergo a "change in
ownership or effective control" or a "change in the ownership of a substantial
portion" of its assets (within the meaning of those terms under Internal Revenue
Code Section 280G and the applicable Treasury Regulations) prior to March 15,
1997 and you incur in connection therewith, whether through tax withholdings
made by the Company (or its successor) or upon an audit by the Internal Revenue
Service, an excise tax liability under Internal Revenue Code Section 4999 with
respect to one or more of the payments or benefits provided to you under this
letter agreement, then the Company will provide you with a tax gross-up payment
to cover (i) the initial excise tax liability you so incur plus (ii) the federal
and state income tax liability and the additional Internal Revenue Code Section
4999 excise tax liability you incur by reason of the gross-up. In no event,
however, will the Company be obligated to provide you with a total tax gross-up
payment under this Paragraph 19 in excess of $1,250,000 (before reduction for
all applicable taxes).
20. The benefits to which you may become entitled
under this letter agreement (except those attributable to your
<PAGE>
outstanding stock options and restricted stock awards) will be paid, when due,
from the general assets of the Company. Your right (or the right of the
executors or administrators of your estate) to receive any such payments will at
all times be that of a general creditor of the Company and will have no priority
over the claims of other general creditors of the Company.
21. Should you die before receipt of all benefits to which you
become entitled under this letter agreement, then the payment of such benefits
will be made, on the due date or dates hereunder had you survived, to the
executors or administrators of your estate. Should you die before you exercise
your outstanding stock options, then each such option may be exercised, during
the applicable exercise period in effect hereunder for those options, by the
executors or administrators of your estate or by person to whom the option is
transferred pursuant to your will or in accordance with the laws of inheritance.
<PAGE>
Mr. E. Joseph Zemke
July 3, 1996
Page 7
22. The provisions of this letter agreement will be construed
and interpreted under the laws of the State of California. This agreement
incorporates the entire agreement between you and the Company relating to the
subject of severance benefits and supersedes all prior agreements and
understandings with respect to such subject matter. This agreement may only be
amended by written instrument signed by you and a duly-authorized officer of the
Company. If any provision of this letter agreement as applied to any party or to
any circumstance should be adjudged by a court of competent jurisdiction to be
void or unenforceable for any reason, the invalidity of that provision will in
no way affect (to the maximum extent permissible by law) the application of such
provision under circumstances different from those adjudicated by the court, the
application of any other provision of this letter agreement, or the
enforceability or invalidity of this letter agreement as a whole. Should any
provision of this letter agreement become or be deemed invalid, illegal or
unenforceable in any jurisdiction by reason of the scope, extent or duration of
its coverage, then such provision shall be deemed amended to the extent
necessary to conform to applicable law so as to be valid and enforceable or, if
such provision cannot be so amended without materially altering the intention of
the parties, then such provision shall be stricken and the remainder of this
letter agreement shall continue in full force and effect.
23. All rights and remedies provided pursuant to this letter
agreement or by law will be cumulative, and no such right or remedy will be
exclusive of any other. A party may pursue any one or more rights or remedies
hereunder or may seek damages or specific performance in the event of another
party's breach hereunder or may pursue any other remedy by law or equity,
whether or not stated in this letter agreement.
24. Any controversy which may arise between you and the
Company with respect to the construction, interpretation or application of any
of the terms, provisions or conditions of this letter agreement or any monetary
claim arising from or relating to this agreement will be submitted to final and
binding arbitration in San Francisco, California in accordance with the rules of
the American Arbitration Association then in effect.
25. The provisions of this letter agreement will be binding
upon and inure to the benefit of (i) you and your heirs, executors,
administrators and assigns and (ii) the Company and its successors and assigns.
<PAGE>
PART FIVE -- SPECIAL RIGHTS
26. You have twenty-one (21) days after your July 3, 1996
receipt of this letter agreement within which you may review and consider,
discuss with an attorney of your own choosing, and decide whether or not to
execute this letter agreement.
27. You will have seven (7) days after you execute this letter
agreement within which to revoke such agreement.
28. In order to revoke this letter agreement, you must deliver
to the Chairman of the Company's Board of Directors, on or before the end of the
seven (7)-day period following the date you execute this letter agreement, a
letter stating that you are revoking such agreement.
<PAGE>
Mr. E. Joseph Zemke
July 3, 1996
Page 8
29. The provisions of this letter agreement will not become
effective or enforceable until after the expiration of the seven (7)-day period
following the date you execute this letter agreement.
If the provisions of this letter agreement are in accordance
with your understanding of the severance benefits, consulting arrangement and
mutual releases we have previously discussed, we ask that you execute the
Acceptance and Agreement section below after you have had the opportunity to
discuss this document with your attorney and return the executed agreement to
me.
Very truly yours,
/s/ Anthony M. Pozos
Anthony M. Pozos
Senior Vice President,
Human Resources and
Corporate Services
AMP/cvv
Attachments
ACCEPTANCE AND AGREEMENT
I have read and understand the provisions of the foregoing
letter agreement and affix my signature hereto voluntarily and without coercion.
Accordingly, I hereby accept and agree to all the terms and provisions of the
foregoing letter agreement, and I shall accordingly be entitled to all the
benefits provided under such letter agreement and be bound by all my covenants,
releases and waivers set forth therein. I acknowledge that I have been given an
opportunity to consult with an attorney of my own choosing concerning the
releases and waivers contained in this letter agreement, and that the releases
and waivers I have made and the terms to which I have agreed in such letter
agreement are knowing, conscious, and with full appreciation that I am forever
foreclosed from pursuing any of the rights so released or waived.
<PAGE>
/s/ E. Joseph Zemke
----------------------
E. JOSEPH ZEMKE
DATED: July 3, 1996
<PAGE>
The termination and consulting agreement between Amdahl and Mr. E. Joseph
Zemke was amended so that the references in Sections 5 and 7 to August 30 or
August 30, 1996 were changed to November 1 or November 1, 1996.
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