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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ______________________
Commission file number 01-11779
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Electronic Data Systems Corporation
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(Exact name of registrant as specified in its charter)
Delaware 75-2548221
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5400 Legacy Drive, Plano, Texas 75024-3199
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(Address of principal executive offices)
(Zip Code)
(214) 604-6000
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(Registrant's telephone number, including area code)
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 ___.
---
As of July 31, 1996, there were outstanding 485,722,130 shares of the
registrant's Common Stock, $.01 par value per share.
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ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I -- Financial Information (Unaudited)
Item 1. Financial Statements
Condensed Consolidated Statements of Operations.................... 3
Condensed Consolidated Balance Sheets.............................. 4
Condensed Consolidated Statements of Cash Flows.................... 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of
Operations...................................................... 8
Part II -- Other Information
Item 1. Legal Proceedings............................................... 13
Item 6. Exhibits and Reports on Form 8-K................................ 13
Signatures.................................................................. 14
</TABLE>
Exhibit 10(m) Form of Change in Control Agreement entered into by EDS and each
of its executive officers (incorporated by reference to Exhibit
99 to the Registration Statement on Form S-3 (File No.
333-06655))
Exhibit 27 Financial Data Schedule (for SEC information only)
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------- --------------
1996 1995 1996 1995
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Systems and other contracts revenues $3,497.8 $2,950.1 $6,864.7 $5,726.4
-------- -------- -------- --------
Costs and expenses
Cost of revenues 2,845.7 2,295.2 5,543.8 4,471.3
Selling, general, and administrative 308.1 284.4 618.0 565.4
Restructuring charge 285.6 -- 285.6 --
Asset writedowns 503.9 -- 503.9 --
-------- -------- -------- --------
Total costs and expenses 3,943.3 2,579.6 6,951.3 5,036.7
-------- -------- -------- --------
Operating income (loss) (445.5) 370.5 (86.6) 689.7
One-time split-off costs (45.5) -- (45.5) --
Interest and other income, net (19.2) (16.0) (36.2) (27.7)
-------- -------- -------- --------
Income (loss) before income taxes (510.2) 354.5 (168.3) 662.0
Provision (benefit) for income taxes (183.7) 127.6 (60.6) 238.3
-------- -------- -------- --------
Net income (loss) $ (326.5) $ 226.9 $ (107.7) $ 423.7
======== ======== ======== ========
Earnings (loss) per share $ (0.67) $ 0.47 $ (0.22) $ 0.89
======== ======== ======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 565.1 $ 548.9
Accounts receivable 3,194.5 3,169.0
Other current assets 616.1 663.6
--------- ---------
Total current assets 4,375.7 4,381.5
--------- ---------
Property and equipment, net 2,963.2 3,242.4
--------- ---------
Operating and other assets
Land held for development, at cost 106.0 105.1
Investment in leases and other 1,495.0 1,573.5
Software, goodwill, and other intangibles, net 1,444.3 1,529.9
--------- ---------
Total operating and other assets 3,045.3 3,208.5
--------- ---------
Total Assets $10,384.2 $10,832.4
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 502.5 $ 603.9
Accrued liabilities 1,726.7 1,704.5
Deferred revenue 595.5 629.3
Income taxes 71.1 75.9
Notes payable, current portion 243.7 247.8
--------- ---------
Total current liabilities 3,139.5 3,261.4
Deferred income taxes 493.1 739.7
Notes payable, less current portion 2,474.9 1,852.8
--------- ---------
Total liabilities 6,107.5 5,853.9
--------- ---------
Stockholders' equity
Common stock, without par value; authorized
1,000 shares; issued and outstanding 483.7
shares at December 31, 1995 -- 517.7
Common stock, $.01 par value;
2,000 shares authorized;
488.2 shares issued at June 30, 1996 4.9 --
Additional paid-in capital 597.5 --
Retained earnings 3,694.6 4,460.8
Less - cost of treasury shares,
2.0 shares at June 30, 1996,
none at December 31, 1995 20.3 --
--------- ---------
Total stockholders' equity 4,276.7 4,978.5
--------- ---------
Total Liabilities and Stockholders' Equity $10,384.2 $10,832.4
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------- ------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 108.2 $ 298.1 $ 620.3 $ 426.0
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of marketable securities 11.4 47.2 37.4 89.9
Proceeds from investment in leases and other assets 23.0 67.0 103.8 72.8
Payments for purchase of property and equipment (247.1) (349.1) (491.5) (608.4)
Payments for investments in leases and other assets (52.1) (96.8) (142.5) (227.7)
Payments related to acquisitions, net of cash acquired -- (86.2) (37.0) (127.1)
Payments for purchase of softwareand other intangibles -- (58.0) (26.6) (54.0)
Payments for purchase of marketable securities (24.5) (37.0) (46.2) (47.8)
Other 17.5 .3 17.4 2.7
-------- -------- --------- --------
Net cash used in investing activities (271.8) (512.6) (585.2) (899.6)
-------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 2,452.4 2,601.1 3,937.3 4,353.6
Payments on notes payable (2,078.6) (2,242.9) (3,315.4) (3,826.8)
Net increase in current notes payable
with maturities less than 90 days -- (7.3) -- 41.5
Employee stock transactions and related tax benefits (2.6) 4.8 17.5 19.5
Cash dividends paid to GM (573.1) (62.9) (645.7) (125.5)
-------- -------- --------- --------
Net cash provided by (used in) financing activities (201.9) 292.8 (6.3) 462.3
-------- -------- --------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (5.3) .2 (12.6) 3.3
-------- -------- --------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (370.8) 78.5 16.2 (8.0)
Cash and Cash Equivalents at Beginning of Period 935.9 521.7 548.9 608.2
-------- -------- --------- --------
Cash and Cash Equivalents at End of Period $ 565.1 $ 600.2 $ 565.1 $ 600.2
======== ======== ========= ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND SPLIT-OFF FROM GENERAL MOTORS
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information. In the opinion of management, all adjustments
(consisting of only normal recurring items) which are necessary for a fair
presentation have been included. The results for interim periods are not
necessarily indicative of results which may be expected for any other interim
period or for the full year. For further information, refer to the Company's
consolidated financial statements and notes thereto included in the Current
Report on Form 8-K filed April 23, 1996.
General Motors Corporation ("GM") acquired all of the capital stock of
Electronic Data Systems Corporation ("EDS") in October 1984. Prior to that time,
EDS had been an independent, publicly held corporation. On June 7, 1996, GM
split-off (the "Split-Off") EDS to the holders of GM's Class E Common Stock in a
transaction that was tax-free for U.S. federal income tax purposes. In
connection therewith, EDS paid GM a one-time inter-company payment of $500.0
million. Under the terms of the Split-Off, one share of EDS common stock was
exchanged for each share of GM Class E Common Stock. In addition, General Motors
and EDS entered into a new 10-year agreement under which EDS will continue to be
GM's principal provider of information technology services.
The effects of purchase accounting adjustments reflected in GM's
Consolidated Financial Statements that are applicable to EDS were not material
to the Consolidated Statements of Operations for the three and six month periods
ended June 30, 1996 and 1995. At June 30, 1996, the remaining carrying value of
such purchase accounting adjustments would not be material to EDS' Consolidated
Financial Statements.
NOTE 2. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share for the three and six months ended June 30,
1996, have been calculated in accordance with Accounting Principles Board
Opinion (APB) No. 15, Earnings Per Share. Weighted average shares outstanding
were 486.3 million and 485.4 million for the three and six months ended June 30,
1996, respectively. Earnings per share for the three and six months ended June
30, 1995, represent earnings attributable to GM Class E Common Stock, and were
calculated based on the relative amounts available for the payment of dividends
to holders of such stock. Amounts calculated under this method are not
materially different from amounts calculated utilizing the weighted average
shares of EDS stock outstanding during those periods, including Common Stock
equivalents.
NOTE 3. NEW ACCOUNTING STANDARDS
Effective January 1, 1996, EDS adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The effects of
initially adopting SFAS No. 121 at January 1, 1996, were not material to EDS'
unaudited condensed consolidated financial statements.
NOTE 4. RESTRUCTURING ACTIVITIES AND ONE-TIME CHARGES
During the three months ended June 30, 1996, the Company completed
reviews of its worldwide business operations and market opportunities. Based on
these reviews, the Company identified certain actions necessary to maintain and
improve operating efficiencies and accelerate its move towards "user-centered"
computing. In order to effect these actions, the Company adopted formal
restructuring plans
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that consist of workforce reductions, asset writedowns, the exit of certain
business activities, and the consolidation of facilities. The one-time charges
included in the accompanying unaudited condensed consolidated financial
statements have been recorded in connection with the restructuring and exit
strategies that have been proposed and committed to by management.
Restructuring Charge
The restructuring charge of approximately $286 million primarily
includes costs associated with workforce reductions announced in April 1996.
Expected workforce reductions of 4,700-5,000 employees consist of employees who
accepted the Company's early retirement offer and employees who have been
identified for involuntary termination under a planned workforce realignment.
This workforce realignment affected a broad base of the Company's managerial,
clerical, consulting and technical employees. The total employee-related
termination and early retirement offer charges amounted to approximately $275
million, $136 million of which relates to special termination benefits under the
Company's defined benefit pension plan. As of June 30, 1996, approximately 525
employees have been terminated and approximately $15 million has been paid in
termination benefits related to the involuntary termination plan. A majority of
all employee terminations will be completed by December 1996. The balance of the
restructuring charge relates to other exit costs resulting from the closure and
consolidation of facilities.
Asset Writedowns
As part of its plan to maintain and improve operating efficiencies,
EDS has written down certain of its assets by approximately $504 million during
the quarter ended June 30, 1996. Of this amount, approximately $262 million
relates to computer and other assets which have been written down to their
estimated fair values, determined by external market quotes. These assets have
been written down pursuant to SFAS No. 121 as a direct result of the Company's
formal plans to consolidate four of its information processing centers and 15
stand-alone data centers, and to accelerate the refreshment of certain
information technology assets. Such writedowns are required when the carrying
value of assets currently held for use exceed their expected future undiscounted
cash flows, including expected cash flows resulting from eventual disposition.
Also, included in this charge are asset writedowns of approximately $69 million
incurred as a direct result of the Company's decision to ultimately discontinue
certain business activities in the communications business sector. Additionally,
the Company has written down certain of its inventory by approximately $32
million to net realizable value as a direct result of its decision to exit the
computer product reseller market and to broker the sale of such inventory.
In addition to the items above, certain equipment and other assets
have been written down based on the projected use of such assets. Approximately
$21 million of these assets are related to a customer in reorganization and in
the process of being acquired by a third party. The remaining balance of the
charge for asset writedowns consists primarily of fixed assets, software
licenses and other assets which no longer will be used to support the Company's
operations because of its exit decisions.
Other Charges
Also included in the accompanying unaudited condensed consolidated
financial statements is approximately $60 million charged to cost of revenues,
the largest portion of which relates to current assets written down in
connection with the Company's decision to exit certain business activities. The
balance of the charge to cost of revenue relates to changes in estimated
contract costs. In addition, all costs directly associated with the Split-Off
activities have been charged to expense.
NOTE 5. ACCUMULATED DEPRECIATION AND AMORTIZATION
Property and equipment is stated net of accumulated depreciation of
$3,727.8 million and $3,319.4 million at June 30, 1996 and December 31, 1995,
respectively. Additionally, software, goodwill, and
7
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other intangibles are stated net of accumulated amortization of $1,085.5 million
and $908.1 million at June 30, 1996 and December 31, 1995, respectively.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
EDS is a provider of information technology ("IT") services using
computer and communication technologies to meet the business needs of its
clients. EDS offers its clients a continuum of services, including the
management and operation of computers, networks, information systems,
information processing facilities, business operations, and related personnel,
as well as management consulting services.
SPLIT-OFF OF EDS
On June 7, 1996, GM split-off (the "Split-Off") EDS to the holders of
GM's Class E Common Stock in a transaction that was tax-free for U.S. federal
income tax purposes. In connection therewith, EDS and GM entered into a new
Master Services Agreement (the "Master Services Agreement") with respect to IT
services to be provided to GM, and EDS paid GM a one-time inter-company payment
of $500.0 million (the "Special Inter-Company Payment"). Under the terms of the
Split-Off, one share of EDS common stock was exchanged for each share of GM
Class E Common Stock. The Split-Off was intended to accomplish three principal
objectives: (i) the removal of limitations on EDS' ability to participate in
major strategic alliances (including mergers and acquisitions which can be
effected using EDS Common Stock); (ii) the removal of limitations on EDS'
ability to obtain additional business from and establish new customer
relationships with companies that compete with GM or its subsidiaries; and (iii)
the enhancement of EDS' access to the capital necessary for investment in its
future growth.
The Master Services Agreement and certain related agreements between
GM and EDS with respect to IT services (collectively, the "IT Services
Agreements") stipulate that EDS will continue to serve as GM's principal
supplier of IT services for a term of ten years, which may be extended by
agreement of the parties, and that the IT services to be provided by EDS will
generally be similar to those provided to GM prior to the Split-Off. Certain of
the service arrangements applicable to particular units, sectors or other
organizations within GM were extended for additional terms of between
approximately one and three years beyond their previous expiration dates. In
addition, under the IT Services Agreements, EDS will provide certain plant floor
automation services in North America that it has not previously provided. The IT
Services Agreements also made certain significant changes to the pricing and
terms under which EDS will provide IT services to GM. Among other things, the IT
Services Agreements provide that the rates charged by EDS to GM for certain
information processing activities and communications services will be reduced
and that the parties will work together to achieve increased targets for
structural cost reductions. GM has also been given the right to competitively
bid and, subject to certain restrictions, outsource a limited portion of its IT
service requirements to third party providers. In addition, beginning in 1997,
the payment terms relating to IT services provided by EDS will be revised over a
two-year period to extend the due dates for payments from GM.
EDS expects that the changes in its arrangements with GM could reduce
its 1996 earnings per share by as much as $.14 (including $.07 in the first six
months of 1996). The long-term impact of the terms of the IT Services Agreements
cannot be precisely quantified at present, although such terms may have an
adverse effect on operating margins unless EDS is able to effect reductions in
the costs of
8
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providing services to GM. Although EDS plans to implement certain cost reduction
measures, there can be no assurance as to the extent, if any, to which such
measures will mitigate the possible adverse impact on its operating margins. In
general, there can be no assurance that the terms of the IT Services Agreements
would not have a material adverse effect in the long-term on the results of
operations of EDS.
The Special Inter-Company Payment was paid by EDS to GM at the date of
the Split-Off. Interest costs related to the Special Inter-Company Payment are
expected to be approximately $.03 per share in 1996. In addition to the Special
Inter-Company Payment, EDS incurred approximately $45.5 million, or
approximately $.06 per share in 1996, of one-time costs in connection with the
formulation and implementation of the Split-Off.
Statements about the effect of the Split-Off and the impact of the IT
Services Agreements after the Split-Off are forward-looking statements, which by
their nature are subject to numerous uncertainties that could cause actual
results to vary.
RESTRUCTURING ACTIVITIES AND ONE-TIME CHARGES
During the three months ended June 30, 1996, the Company completed
reviews of its worldwide business operations and market opportunities. Based on
these reviews, the Company identified certain actions necessary to maintain and
improve operating efficiencies and accelerate its move towards "user-centered"
computing. In order to effect these actions, the Company adopted formal
restructuring plans that consist of workforce reductions, asset writedowns, the
exit of certain business activities, and the consolidation of facilities. The
one-time charges included in the accompanying unaudited condensed consolidated
financial statements have been recorded in connection with the restructuring and
exit strategies that have been proposed and committed to by management.
Restructuring Charge
The restructuring charge of approximately $286 million primarily
includes costs associated with workforce reductions announced in April 1996.
Expected workforce reductions of 4,700-5,000 employees consist of employees who
accepted the Company's early retirement offer and employees who have been
identified for involuntary termination under a planned workforce realignment.
This workforce realignment affected a broad base of the Company's managerial,
clerical, consulting and technical employees and was designed to both reduce
labor costs and change the skill mix of EDS' workforce. The total employee-
related termination and early retirement offer charges amounted to approximately
$275 million, $136 million of which relates to special termination benefits
under the Company's defined benefit pension plan. As of June 30, 1996,
approximately 525 employees have been terminated and approximately $15 million
has been paid in termination benefits related to the involuntary termination
plan. A majority of all employee terminations will be completed by December
1996. The balance of the restructuring charge relates to other exit costs
resulting from the closure and consolidation of facilities.
Asset Writedowns
As part of its plan to maintain and improve operating efficiencies,
EDS has written down certain of its assets by approximately $504 million during
the quarter ended June 30, 1996. Of this amount, approximately $262 million
relates to computer and other assets which have been written down to their
estimated fair values, determined by external market quotes. These assets have
been written down pursuant to SFAS No. 121 as a direct result of the Company's
formal plans to consolidate four of its information processing centers and 15
stand-alone data centers, and to accelerate the refreshment of certain
information technology assets. Such writedowns are required when the carrying
value of assets currently held for use exceed their expected future undiscounted
cash flows, including expected cash flows resulting from eventual disposition.
Also included in this charge are asset writedowns of approximately $69 million
incurred as a direct result of the Company's decision to ultimately discontinue
certain business activities in the communications business sector. In addition,
the Company has written down
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certain of its inventory by approximately $32 million to net realizable value as
a direct result of its decision to exit the computer product reseller market and
to broker the sale of such inventory.
In addition, certain equipment and other assets have been written down
based on the projected use of such assets. Approximately $21 million of these
assets are related to a customer in reorganization and in the process of being
acquired by a third party. The remaining balance of the charge for asset
writedowns consists primarily of fixed assets, software licenses and other
assets which no longer will be used to support the Company's operations because
of its exit decisions.
Other Charges
Also included in the accompanying unaudited condensed consolidated
financial statements is approximately $60 million charged to cost of revenues,
the largest portion of which relates to current assets written down in
connection with the Company's decision to exit certain business activities. The
balance of the charge to cost of revenue relates to changes in estimated
contract costs. In addition, all costs directly associated with the Split-Off
activities have been charged to expense.
EDS expects that any restructuring actions implemented by it will
result in savings commencing in the third quarter of 1996. The amount and timing
of these savings, while difficult to quantify precisely, are expected to
gradually build to approximately $50 million per quarter ($.07 per share) by
1997 and continue at that approximate level through 1998. During this period,
these savings will be available to offset the anticipated negative impact to
earnings per share from the changes in the Master Services Agreement and for
reinvestment to position the Company for the future.
Statements about the effect of EDS' actions and savings from the
charges are forward-looking statements which by their nature are subject to
numerous uncertainties that could cause actual results to vary.
RESULTS OF OPERATIONS
Revenues. Total systems and other contracts revenues for the quarter
ended June 30, 1996, rose $547.7 million, or 19%, over the corresponding quarter
in 1995 to $3,497.8 million. Revenues from non-GM customers for the quarter
ended June 30, 1996, rose 24% to $2,447.3 million compared to $1,967.6 million
for the same period in 1995.
Revenues from non-GM customers comprised 70% and 67% of total revenues
for the three months ended June 30, 1996 and 1995, respectively. While it is
anticipated that GM will continue to contribute a significant portion of total
systems and other contracts revenues, EDS expects the percentage of revenues
from GM and its affiliates to continue to decline as revenues from other
customers continue to increase.
Costs and Expenses. Cost of revenues as a percentage of systems and
other contracts revenues increased to 81% for the three months ended June 30,
1996, compared with 78% for the corresponding period in 1995. For the three and
six month periods ended June 30, 1996, cost of revenues includes approximately
$60 million in one-time costs. See "Restructuring Activities and One-time
Charges" above. Cost as a percentage of revenues has increased due to higher
labor costs for skilled workforce and pricing pressures for new business as a
result of the increasingly competitive environment in which EDS operates. This
environment results in part from a long-term trend of convergence occurring in
the computing, communications and media/entertainment sectors of the information
industry. EDS is addressing this environment in part through expected
efficiencies to be gained from its restructuring activities described above and
its value-added business approach. Selling, general and administrative expenses
as a percentage of systems and other contracts revenues were 9% for the three
months ended June 30, 1996, down from 10% in the corresponding period in 1995
due to the Company's ability to leverage off the fixed nature of certain of
these costs.
10
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Interest and Other Income, Net. Interest and other income, net
decreased $3.2 million in the second quarter of 1996 to $(19.2) million,
compared with $(16.0) million in 1995. The primary reason for the decrease in
1996 was interest expense associated with the issuance in May, 1995, of $350.0
million of 6.85% notes due May 15, 2000 (the "Five-year Notes") and $300.0
million of 7.125% notes due May 15, 2005 (the "Ten-year Notes"), as well as from
other borrowings. The Company expects additional interest expense beginning in
the third quarter as a result of its financing of the Special Inter-Company
Payment through borrowings under its existing commercial paper facility.
Net Income (Loss). For the three month period ended June 30, 1996,
EDS incurred a net loss of $326.5 million, or $.67 per share, compared to net
income of $226.9 million, or $.47 per share, for the corresponding period of
1995. Earnings (loss) per share for the second quarter of 1996 were negatively
impacted by $1.18 per share related to the $850 million one-time charges and
$45.5 million of one-time split-off costs. In addition, earnings (loss) per
share for the second quarter were negatively impacted by $.04 per share as a
result of certain rate adjustments under the terms of the new 10-year Master
Services Agreement entered into by EDS and GM.
In the first six months of 1996, return on assets and return on
stockholders' equity have been significantly impacted by the $850 million one-
time charges and the $45.5 million one-time split-off costs discussed above.
Overall, the capital intensity of EDS' business is increasing, as customers
frequently require front-end investments in computers and telecommunications
equipment, software, and other property and equipment. These types of
investments have caused return on assets to decline. EDS' effective tax rate
remained constant at 36% for the three months ended June 30, 1996 and 1995.
EDS and its customers may, from time to time, modify their contractual
arrangements. For customer contracts accounted for under the percentage of
completion method, such changes would be reflected in results of operations as a
cumulative change in accounting estimate in the period the revisions are
determined.
Seasonality and Inflation. EDS' revenues vary over the calendar year,
with the fourth quarter generally reflecting the highest revenues for the year
due to certain EDS services that are purchased more heavily in the fourth
quarter as a result of the spending patterns of several customers. In addition,
revenues have generally increased from quarter to quarter as a result of new
business added throughout the year.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, EDS held cash and cash equivalents of $565.1
million, had working capital of $1,236.2 million, and a current ratio of 1.4-to-
1. This compares to cash equivalents of $548.9 million, $1,120.1 million in
working capital and a current ratio of 1.3-to-1 at December 31, 1995. The
increase in working capital primarily results from a decrease in accounts
payable.
In May 1995, EDS issued Five-year and Ten-year notes. During the
second quarter of 1996, EDS issued an additional $369.1 million of commercial
paper. EDS' capitalization at June 30, 1996, consisted of $2,474.9 million in
noncurrent notes payable and $4,276.7 million in stockholders' equity. Total
debt was $2,718.6 million at June 30, 1996, which consisted of short- and long-
term notes payable. This compared with total debt of $2,100.6 million at
December 31, 1995. The total debt-to-capital ratio (which includes current notes
payable as a component of capital) was 39% at June 30, 1996, and 30% at December
31, 1995. The ratio of non-current debt to capital was 37% at June 30, 1996 and
27% at December 31, 1995. At June 30, 1996, EDS had unused uncommitted short-
term lines of credit totaling $772.5 million and unused committed lines of
credit of $2,500.0 million. The unused committed lines of credit of $2,500.0
million serve as a backup facility for EDS' commercial paper borrowings. At June
30, 1996, and December 31, 1995, EDS had total committed lines of credit of
$2,515.5 million.
11
<PAGE>
Cash flows from operations decreased $189.9 million during the second
quarter of 1996 to $108.2 million compared with the second quarter of 1995 due
primarily to increases in prepaid and other assets, decreases in deferred
revenue and taxes payable, and a decrease in net income as a result of the one-
time charges. Cash used in investing activities during the second quarter of
1996 was $271.8 million compared with $512.6 million in the corresponding period
of last year. Net cash used in financing activities was $201.9 million in the
second quarter of 1996 compared with net cash provided by financing activities
of $292.8 million in the corresponding period of last year.
EDS paid cash dividends to GM totaling $573.1 million for the second
quarter of 1996, and $62.9 million for the same period in 1995. Included in the
1996 amount is the $500.0 million Special Inter-Company Payment made to GM in
connection with the Split-Off.
EDS expects that its principal uses of funds for the foreseeable
future will be for capital expenditures, debt repayments and working capital.
Capital expenditures may consist of purchases of computer and telecommunications
equipment, buildings and facilities, land, and software, as well as
acquisitions. EDS' projected capital expenditures for 1996 are approximately
$1,400.0 million to $1,700.0 million. However, actual capital expenditures are
somewhat dependent on acquisition and joint venture activities by EDS, as well
as capital requirements for new business. EDS anticipates that cash flows from
operations and unused borrowing capacity under its existing lines of credit will
provide sufficient funds to meet its needs for at least the next year.
The service agreements between EDS and GM that existed prior to the
Split-Off provided for GM to pay EDS on the 15th day of the month in which
services are provided with respect to a substantial portion of services. Under
the IT Services Agreements, there will be a transition over a two-year period,
beginning in 1997, to payment on the 20th day of the month following service for
all agreements which do not already have payment terms at least that favorable
to GM. These revised payment terms are expected to result in an increase in EDS'
working capital requirements. EDS will obtain the funds for this working capital
impact through borrowings under its existing commercial paper or bank credit
facilities. EDS currently anticipates that it will seek to refinance such
commercial paper or bank borrowings as part of its general plan to extend
maturities of its indebtedness.
The competitive environment and changing market forces are increasing
the capital intensity of EDS' business. Increasing amounts of capital will be
required by EDS in order to make investments in acquisitions, joint ventures,
and strategic alliances in other parts of the information industry and in new
product development. In addition, information technology customer contracts
frequently now require front-end investments in computers and telecommunications
equipment, software, and other property and equipment. For these reasons, EDS'
ability to continue to access the capital markets on an efficient basis will
become increasingly important to its ability to compete effectively.
The Split-Off was intended, among other things, to afford EDS more
flexible access to capital markets to meet its growing needs without regard to
competing considerations of GM and its affiliates. EDS may over time incur
substantially more debt than it had while a subsidiary of GM. As a result, EDS'
financial leverage may increase in the future. To the extent that EDS would
become more highly leveraged, EDS may be required to pay higher interest rates
on its outstanding borrowings. In order to provide the funds necessary for EDS'
future acquisition and expansion goals, EDS expects that it might incur, from
time to time, additional bank financing and/or issue equity or debt securities,
depending on market and other conditions.
12
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
As previously reported, three suits challenging the split-off (the
"Split-Off") of EDS from GM, Stephen A. Solomon v. General Motors Corporation,
et al., TRV Holding Company v. General Motors Corporation, et al., and Melvin
Ward et al. v. General Motors Corporation, et al. were consolidated. The
consolidated case purports to be a class action brought on behalf of the former
holders of GM's Class E common stock, all of which was exchanged for EDS common
stock in connection with the Split-Off, as well as a double derivative action
brought on behalf of EDS against certain present and former directors of GM and
certain former directors of EDS (all of whom were also directors or officers of
GM). EDS is named in the complaint only as a nominal defendant with respect to
the double derivative action. On May 23, 1996, plaintiffs withdrew their
application for expedited proceedings and preliminary injunctive relief and on
June 7, 1996 the Split-Off was consummated. Since then, plaintiffs have advised
that they intend to move to file a third amended consolidated complaint. EDS
believes that the suits are without merit and, to the extent it is a party
thereto, intends to defend them vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
---------------------------------------------------------------------------
[S]
10(m) Form of Change of Control Agreement entered into by EDS and each of
its executive officers (incorporated by reference to Exhibit 99 to
the Registration Statement on Form S-3 (File No. 333-06655))
27 Financial Data Schedule (for SEC information only)
(b) Reports on Form 8-K
The following three reports on Form 8-K were filed by the Registrant
during the quarter ended June 30, 1996: (i) Current Report on Form 8-K
dated April 23, 1996 reporting Item 5 - Other Events (including the audited
consolidated balance sheets of the Registrant as of December 31, 1995 and
1994 and the related consolidated statements of income and cash flows for
each of the years in the three-year period ended December 31, 1995) and
Item 7 - Exhibits; (ii) Current Report on Form 8-K dated June 7, 1996
reporting a press release under Item 5 -Other Events and Item 7 - Exhibits;
and (iii) Current Report on Form 8-K dated June 18, 1996 reporting a press
release under Item 5 - Other Events and Item 7 - Exhibits.
13
<PAGE>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
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 hereunto duly authorized.
ELECTRONIC DATA SYSTEMS
CORPORATION
--------------------------------------------------
(Registrant)
By /s/ Joseph M. Grant
---------------------------------------------------
(Joseph M. Grant, Executive Vice
Date August 12, 1996 President and Chief Financial Officer)
- ---------------------
By /s/ H. Paulett Eberhart
---------------------------------------------------
(H. Paulett Eberhart, Vice President and
Date August 12, 1996 Controller)
- ---------------------
14
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