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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File No. 01-11779
ELECTRONIC DATA SYSTEMS CORPORATION
(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
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 604-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 Par Value New York Stock Exchange
London 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. [ ]
As of February 18, 1997, the aggregate market value of the voting stock
held by non-affiliates of the registrant (based on the closing price on such
date as reported on the New York Stock Exchange Composite Transactions) was
approximately $22.7 billion.
There were 487,160,497 shares of the registrant's common stock outstanding
as of February 18, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1996 Annual Report to Stockholders are
incorporated by reference in Parts II and IV and portions of the registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on June 5,
1997 are incorporated by reference in Part III.
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PART I
ITEM 1 BUSINESS
Electronic Data Systems Corporation ("EDS") was incorporated in Delaware in
1994 and succeeded to the business and assets of Electronic Data Systems
Corporation, a Texas corporation which was incorporated in 1962, at the time of
the split-off (the "Split-Off") of EDS from General Motors Corporation ("GM") on
June 7, 1996. In October 1984, GM acquired all of the capital stock of the Texas
corporation, which prior to that time had been an independent, publicly held
corporation. As a result of the Split-Off, EDS once again became an independent
publicly held corporation with its Common Stock listed for trading on the New
York and London Stock Exchanges.
EDS is a world leader in applying information technology ("IT"), with 35
years of experience in using advanced computer and communications technologies
to meet its clients' business needs. As of December 31, 1996, EDS employed
approximately 100,000 persons and served clients in the United States and 41
other countries. Unless the context otherwise requires, references herein to EDS
include its predecessor and subsidiaries.
Services
EDS offers its clients a continuum of services worldwide, including the
management of computers, networks, information systems, information processing
facilities, business operations and related personnel, providing to its clients
advantages in cost-effectiveness, speed of implementation and state-of-the-art
technology. In delivering this continuum of services, EDS generally performs one
or more of five basic functions:
. Management Consulting Services. Through its A.T. Kearney subsidiary, EDS
offers management consulting services, including business and market
strategy, benchmarking and best practices analysis, business process
reengineering, manufacturing and operations improvement, organizational
effectiveness, global sourcing and logistics and supply chain
management.
. Creation of IT Systems--Systems Development. EDS designs, develops and
implements information systems or adds features that may increase the
capabilities of existing systems.
. Assembly of IT Platforms--Systems Integration. EDS selects technologies
and assembles integrated systems that may include software, hardware,
telecommunications and systems support and maintenance.
. Management of IT Operations--Systems Management. EDS assumes and manages
the operation of part or all of a client's IT operations, which may
include equipment, personnel, information processing systems and
communications networks.
. Management of Business Operations--Process Management. EDS manages an
entire business function within the client's enterprise, which may
include IT operations as well as other activities such as remittance
processing, marketing, sales, customer service and training.
EDS' service offerings continue to evolve in response to the rapid
technological changes occurring within the computer industry. EDS offers a full
range of internet related services to assist clients in participating in
electronic markets. These services include the construction and operation of
corporate intranets, interactive marketing services (website design,
development, implementation and operation) and the application of internet and
intranet technology to the conduct of electronic commerce among EDS' clients and
their customers and suppliers.
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EDS is able to leverage its extensive technical infrastructure and other
numerous resources to offer IT services at clients' sites or through large scale
information processing centers or specialized distributed service centers
located worldwide. EDS' digital telecommunications network, EDSNET(R), is
capable of worldwide transmission of clients' voice, digital and video data
using the integrated fiber optic, microwave and satellite facilities of what EDS
believes is one of the world's largest digital telecommunications networks,
excluding government networks and common carriers. EDS constantly examines and
tests computer hardware and software offered by suppliers worldwide as part of
its efforts to assess and use in its operations, and offer to EDS' clients, the
technological improvements that continuously occur within the computer industry,
including developments in distributed computing and client/server architecture.
EDS has developed computer-aided software engineering tools to assist in
generating new software to keep pace with rapidly evolving strategies involving
hardware technologies and information processing theories and to facilitate the
rapid deployment of its products and services to the market.
Business Areas
EDS conducts its sales, marketing and service activities on a global basis
principally through business units that focus both geographically and vertically
along the lines of specified industries. By combining the skills of an industry-
focused business unit with a geographic business unit where appropriate, EDS is
able to respond to a client's requirements with people who are knowledgeable
about a specific industry and the client's business.
Additionally, certain services provided by EDS are concentrated in specific
business units which provide services directly to EDS clients as well as in
coordination with EDS' geographical or vertical business units having primary
responsibility for a particular client. These business units include EDS' A.T.
Kearney management consulting subsidiary, EDS' Unigraphics unit which offers
computer assisted design, manufacturing and engineering ("CAD," "CAM" and "CAE")
software and services, EDS' direct marketing unit which offers telemarketing,
customer service, data mining and data warehousing services and EDS' internet
and new media unit.
The industry areas to which EDS provides IT services can be broadly
categorized as follows:
. Manufacturing. EDS assists numerous manufacturing companies in their
worldwide operations and in their implementation of global competitive
strategies, providing them with advanced capabilities in information
processing, information management and telecommunications. EDS offers
manufacturing clients expertise in electronic data interchange,
engineering information systems, integrated document processing,
inventory control, materials handling, process control, synchronous
manufacturing, artificial intelligence techniques and capabilities in
CAD/CAM/CAE on an integrated basis.
. Financial Services. EDS offers a full range of IT services to the global
financial services industry. The industry's expansion of products and
services has led to an unprecedented dependence on IT and its
integration with a financial institution's business processes and
strategy. Through strategic alliances and acquisitions, EDS has
positioned itself to support a wide range of industry segments,
including commercial banks, consumer finance companies, commercial
insurance companies, investment banks, regional and community banks,
credit unions, brokerage and securities firms, thrifts and mortgage
lenders. EDS' services are augmented by a full range of industry-
specific products and services, including data processing, automated
teller machines ("ATMs"), debit and credit card services, voice and
teller automation, item and remittance processing, cross-border funds
transfer and currency exchange, consumer asset management, customer
service technology, remote/home banking and business-process
improvement.
. Government. EDS performs IT services for national, state and local
governments in the U.S. and around the world. At the national level, EDS
targets its services at both civil and defense organizations with
complex, large-scale information needs. Within state and local
governments, key markets of EDS include human services, transportation,
public safety and administration and
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finance. EDS' core competency for managing complexity and its proven
ability to leverage process performance improvement techniques and
technologies from the private sector into the public sector have allowed
EDS to expand its government presence worldwide.
. Communications. EDS offers a full spectrum of IT services to the global
communications market in addition to industry specific technology
platforms tailored to the information needs of each industry segment.
These services include clearinghouse, roaming and billing services and
systems for the wireless industry, information management and billing
systems for the cable television industry, and operational support
systems and billing systems for the telecommunications industry. EDS
also offers multimedia-based services designed to satisfy the predicted
demand of emerging full service network operators within the interactive
multimedia segment.
. Health. EDS offers IT services to companies in the health care industry,
providing the management of information required in this highly
regulated industry in a rapidly-changing, record-intensive environment.
EDS' services go beyond traditional outsourcing and include solution
sets to improve specific business areas, including sales and marketing,
customer service and claims management.
. Travel and Transportation. EDS' travel and transportation group offers
IT services to customers worldwide in the air transportation, freight,
computer reservation system, vehicle rental, travel agency, cruise line
and hospitality industries. EDS' IT services to these industries are
designed to meet customer requirements for reducing operating costs,
improving quality and increasing responsiveness to rapidly changing
market conditions.
. Energy. EDS provides IT services on a global basis to companies in the
petroleum, natural gas, chemical, pharmaceutical, mining and utility
industries. EDS' services in the energy industry are intended to improve
inventory control, reduce time to market, lower product cost, improve
rate case approval, improve capacity planning and increase efficiency in
regulatory and environmental compliance.
In certain of these markets, EDS provides services, such as ATM and travel
related services, directly to individual consumers.
Acquisitions and Strategic Alliances
From time to time EDS has made acquisitions and entered into strategic
alliances in an effort to obtain a competitive advantage or a new or expanded
presence in targeted geographic or service markets. EDS believes that a
convergence of the computing and software, communication, media and
entertainment and electronic commerce industries is occurring and will continue.
As a result, acquisitions, joint ventures and strategic alliances are expected
to be increasingly important to EDS' ability to compete effectively.
Revenues
EDS receives fees for all aspects of its continuum of services. The fees
are generally paid pursuant to predetermined rates set forth in contracts. EDS'
customer contracts generally have terms of one to 10 years. The following table
sets forth the percentage of revenues for each of the years in the three-year
period ended December 31, 1996 derived by EDS from the identified principal
business areas.
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<TABLE>
<CAPTION>
Percentage of Revenues
for the Years Ended
Business Area December 31,
------------- --------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Manufacturing............................... 45% 47% 49%
Financial Services.......................... 14 14 14
Government.................................. 13 12 10
Communications.............................. 7 8 7
Health...................................... 6 7 8
Travel and Transportation................... 4 4 4
Energy...................................... 3 3 4
Other....................................... 8 5 4
---- ---- ----
Total............................... 100% 100% 100%
---- ---- ----
</TABLE>
Other than GM, no one client accounted for more than 5% of EDS' total
revenues in 1996, 1995 or 1994.
Backlog
EDS' backlog represents an estimate of the remaining future revenue from
existing signed contracts. Using the best available information, EDS determines
this estimate on an annual basis as of December 31 of each year. The estimate
includes contracts which have a term of 12 months or longer and is calculated
for each of the next ten years plus a summary amount for contracts with terms
extending beyond such ten-year period. The EDS backlog estimate includes
revenues expected under current terms of executed contracts, revenues from
government contracts in which quantities are not definite but estimable, and a
risk-adjusted estimate of renewals and extensions for those contracts which
contain renewal or extension provisions.
Changes in the backlog calculation from year to year result from (i)
additional revenue from the signing of new contracts, (ii) reduction in revenue
from fulfilling contracts during the most recent year, (iii) reduction in
revenue from early termination of contracts, and (iv) adjustments to estimates
of previously included contracts. On an annual basis, EDS reviews each contract
included in the calculation and adjusts estimates for those contracts based on
the latest available information.
At December 31, 1996 and 1995, EDS' firm backlog for services was
approximately $72.5 billion and $39.8 billion, respectively. The estimate at
December 31, 1995 did not include estimates for future revenues from GM and its
subsidiaries because of the inter-company relationships that existed with these
entities prior to the consummation of the Split-Off in June 1996. However, the
estimate at December 31, 1996 does include an estimate for such GM revenues.
Competition
EDS experiences competition in the IT industry and in the broader
information industry, which includes the computing, communications and
media/entertainment industries. EDS has historically faced competition
principally from other companies providing information technology systems and
services. Today, EDS' principal competitors in the IT services industry include
International Business Machines Corporation, Andersen Consulting LLP, Computer
Sciences Corporation and MCI Communications Corporation/SHL Systemhouse Inc. As
the markets for IT services continue to grow and as the services demanded by
customers expand and increase in complexity, EDS faces increasing competition
from niche-oriented and geographically-focused companies as they expand and
become broader competitors through acquisitions, alliances or otherwise.
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Technology in the IT industry is in a rapid and continuing state of change
as new technologies continue to be developed, introduced and implemented. EDS
management believes that its ability to continue to compete effectively will
depend upon its ability to develop and market services and products that meet
changing user needs and respond to technological changes on a timely and cost-
effective basis, as well as its ability to finance and acquire the resources
necessary to offer such services and products.
Employees
As of December 31, 1996, EDS employed approximately 100,000 persons located
in the United States and 41 other countries. None of EDS' United States or
Canadian employees is currently employed under an agreement with a collective
bargaining unit, and EDS believes that its relations with employees are good. To
maintain its technical expertise and its responsiveness to evolving client
needs, EDS provides its employees with extensive continuing education and
training, as well as leadership and professional development programs.
Patents, Proprietary Rights and Licenses
EDS holds a number of patents and pending patent applications in the United
States and in foreign countries. EDS' policy generally is to pursue patent
protection that it considers necessary or advisable for the patentable
inventions and technological improvements of its business. EDS also relies
significantly on trade secrets, copyrights, technical expertise and know-how,
continuing technological innovations and other means, such as confidentiality
agreements with employees, consultants and customers, to protect and enhance its
competitive position.
Some of the business areas in which EDS is engaged are highly patent-
intensive. Many of EDS' competitors have obtained, and may be expected to obtain
in the future, patents that cover or affect services or products directly or
indirectly related to those offered by EDS. EDS routinely receives
communications from third parties asserting patent or other rights covering EDS'
services or products. There can be no assurance that EDS is aware of all patents
containing claims that may pose a risk of infringement by its services or
products. In addition, patent applications in the United States are confidential
until a patent is issued and, accordingly, EDS cannot evaluate the extent to
which its services or products may infringe claims contained in pending patent
applications. In general, if it were determined that one or more of the services
or products offered by EDS infringe patents held by others, EDS would be
required to cease developing or marketing such services or products, to obtain
licenses to develop or market such services from the holders of the patents or
to redesign such services or products in such a way as to avoid infringing the
patent claims. The extent to which EDS may be required in the future to obtain
licenses with respect to patents held by others and the availability and cost of
any such licenses are currently unknown. There can be no assurance that EDS
would be able to obtain such licenses on commercially reasonable terms or, if it
were unable to obtain such licenses, that it would be able to redesign its
services or products to avoid infringement or that litigation would not ensue.
EDS management is not aware of any pending patent or proprietary right
disputes against EDS that would have a material adverse effect on EDS'
consolidated financial position or results of operations.
Regulation
Various aspects of EDS' business are subject to federal and state
regulation, noncompliance with which, depending upon the nature of the
noncompliance, may result in the suspension or revocation of any license or
registration at issue, the termination or loss of any contract at issue or the
imposition of contractual damages, civil fines or criminal penalties. EDS has
experienced no material difficulties in complying with the various laws and
regulations affecting its business.
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Services for General Motors
Approximately 30% of EDS' total revenues in 1996 was attributable to GM and
its affiliates. EDS provides substantially all of the worldwide data processing
and telecommunications activities for GM and its affiliates (other than Hughes
Electronics Corporation ("Hughes"), with the exception of its Delco Electronics
Corporation ("Delco") subsidiary), including integrated information systems for
payroll, health and benefits, office automation, communications and plant
automation functions. The loss of GM as an ongoing major customer of EDS would
have a material adverse effect on EDS.
Immediately prior to the Split-Off, GM and EDS entered into a new Master
Service Agreement (the "MSA") that serves as a framework for the negotiation and
operation of service agreements between GM and EDS related to certain "in-scope"
IT services as defined in the MSA ("MSA Services") to be provided by EDS to GM
on a worldwide basis (collectively, together with the MSA, the "IT Services
Agreements"). The IT Services Agreements replaced the Master Agreement (the
"Prior Master Agreement") that, prior to the Split-Off, served as a framework
for individual services agreements between GM and EDS (collectively, together
with the Prior Master Agreement, the "Prior IT Services Agreements"). IT
services that are considered to be MSA Services accounted for approximately $3.8
billion of the approximately $4.3 billion of revenues received by EDS from GM in
1996. The balance of EDS' 1996 revenues from GM was attributable to goods and
services provided outside the scope of the Master Service Agreement.
Set forth below is a summary description of certain of the principal
provisions of the IT Services Agreements. Such description does not purport to
be complete, and to the extent it relates to the MSA, is qualified in its
entirety by reference to the MSA, a copy of which has been filed with the
Securities and Exchange Commission.
Term. The term of the MSA commenced on June 7, 1996, the date of the Split-
Off, and will continue for a period of ten years thereafter. The term may be
extended for an additional period or periods by mutual agreement between GM and
EDS. Although EDS has historically been able to achieve high renewal rates with
its customers upon the expiration of long-term contracts, there can be no
assurance as to whether or to what extent EDS will continue to provide IT
services to GM after the initial term of the MSA.
Service Agreements. Pursuant to the Prior Master Agreement, GM business
units and EDS had entered into a number of Service Agreements ("Service
Agreements") setting forth the terms and provisions applicable to specific
services or projects undertaken by EDS on behalf of various GM organizations.
Such Service Agreements remained in effect after the Split-Off and, in many
cases, were extended or otherwise modified as provided in the MSA. In addition,
EDS expects that it will continue to negotiate and enter into additional Service
Agreements with GM business units providing for the performance of IT services
on mutually agreed terms. In negotiating future Service Agreements, the parties
will endeavor to agree upon fixed-price service arrangements which meet the
standards of competitiveness described below. The provisions of the MSA apply to
all Service Agreements, whether entered into before or after the Split-Off.
At the time of the Split-Off, the terms of the largest domestic Service
Agreements then in effect were extended for additional terms of between one and
three years. In particular, the Service Agreement with Delphi Automotive Systems
was extended through December 31, 1998 and the Service Agreements with GM's
North American Operations ("NAO"), General Motors Acceptance Corporation (U.S.
and Canada) and Motors Insurance Corporation (U.S. and Canada) were each
extended through December 31, 1999. Each other Service Agreement entered into
prior to the Split-Off will continue in effect for the duration of its agreed
term.
Scope of Services. The MSA established a contractual framework for the
provision on a worldwide basis of MSA Services by EDS to GM and all entities (i)
in which GM owns 65% or more of the outstanding equity and over which it
exercises management control (if EDS was providing services in
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support of the business operations of that entity as of August 1, 1995) or (ii)
in which GM owns 80% or more of the outstanding equity (if EDS was not providing
services in support of the business operations of that entity as of August 1,
1995). The MSA contains a flexible description of the MSA Services that is based
on functional service categories so as to take into account possible future
changes in business operations or technologies that result in the replacement of
existing processes and technologies. The MSA Services to be provided by EDS
include IT goods and services related to the following functional service
categories: (i) computing and communications infrastructure; (ii) development of
application software and implementation of commercial off-the-shelf application
software; (iii) data management; (iv) cross-functional IT-related services; and
(v) certain services related to specified plant floor operations.
Under the MSA, services for certain GM units or operations or in certain
geographic areas were specifically excluded from the scope of work to be
performed by EDS. In particular, such agreement provides that GM will not be
required to obtain from EDS any MSA Services (i) for Hughes, with the exception
of its subsidiary, Delco, (ii) for any other business or entity acquired by GM
after January 1, 1985 (other than (x) GMAC Mortgage Corporation, with the
exception of its subsidiary, Residential Funding Corporation, and (y) any other
entity which executed a Service Agreement prior to August 1, 1995), (iii) in any
country where the provision of such services by EDS would violate any national
law of that country, (iv) in specified emerging geographic markets outside of
North America and Western Europe where, as of August 1, 1995, EDS had not
previously provided such services for the same GM business function and line of
business in that emerging market, and (v) with respect to any plant floor
services (other than under the agreement to provide such services for NAO and
Delphi North American entities, excluding Saturn, entered into at the time of
the Split-Off and certain other arrangements then in effect between the
parties). Furthermore, the provisions of the MSA relating to the scope of
services to be, provided by EDS are subject to GM's right, under certain
circumstances, to competitively bid and award a portion of such services to
third party service providers as described under "--Market Testing and
Outsourcing" below.
Competitiveness. The MSA provides that the MSA Services to be provided by
EDS will be competitive with respect to quality, service, price and technology
giving due consideration to GM's requirements and other relevant factors. The
provisions of the MSA with respect to competitiveness apply to the negotiation
or renegotiation of (i) new or replacement Service Agreements, (ii) the terms
and conditions applicable to new or replacement MSA Services and (iii) the
pricing of any MSA Services when such negotiation or renegotiation is
contractually provided for in a Service Agreement. When the applicable EDS and
GM organizations reach a mutually acceptable agreement as to the competitiveness
of any services, the standards of competitiveness provided for in the MSA will
be deemed satisfied for the term of such agreement. In situations where the
applicable GM and EDS organizations are unable to reach a mutually acceptable
agreement as to the competitiveness of any MSA Services, the MSA provides a
procedure whereby the negotiating impasse will be escalated to senior
management, the services of a standing neutral mediator may (and, in some cases,
must) be utilized, and, in the absence of an agreement, (i) any impasse as to
uniform published rates for applicable items will be resolved by binding
arbitration and (ii) any impasse as to any other services will be resolved by
EDS providing the services on the basis of the standard terms and conditions
provided in the MSA and a modified cost-plus pricing methodology.
Pricing of Services. Depending on the type of services to be provided by
EDS, the parties may utilize (i) fixed-price arrangements, (ii) cost-based
pricing methods or (iii) uniform published rates for off-the-shelf, commercially
available products and services. However, the parties have agreed to endeavor to
incorporate fixed-price arrangements into new Service Agreements entered into
under the MSA to the extent practicable. With respect to certain information
processing services to be performed by EDS, the parties have agreed to annual
reductions in the rates to be charged by EDS to all GM organizations worldwide,
which reduced rates were applied retroactively as of January 1, 1996 and will be
in effect through December 31, 2000. In addition, with respect to certain
communication services to be performed by EDS, the parties have agreed to annual
reductions in the rates to be charged by EDS to all GM organizations in the
United States, which reduced rates were applied retroactively as of January 1,
1996 and will be in effect through December 31, 1998. During the respective
periods that these reduced rates
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are in effect, the information processing and communications services to which
the reduced charges apply will not be subject to the provisions of the MSA
relating to market testing or outsourcing described below.
Market Testing and Outsourcing. The MSA provides for certain market testing
procedures in order to test the competitiveness of the MSA Services provided by
EDS. Under these procedures, EDS will have the opportunity to bid on any and all
MSA Services and any bid submitted by EDS will be evaluated on the same criteria
as bids submitted by other service providers. During 1996 and 1997, GM's
International Operations unit ("GMIO") may expose to competitive bidding MSA
Services that would otherwise be provided by EDS so long as the revenues that
would be reasonably paid to EDS by GM for such MSA Services during such years do
not exceed an aggregate of $60 million (and EDS has been advised that GMIO has
submitted requests for quotes for such MSA Services). Following such competitive
bidding, GMIO may award contracts to one or more third party service providers
with respect to any or all of the MSA Services exposed to competitive bidding.
Thereafter, during each year beginning in 1998, GM will be permitted to expose
to competitive bidding specified percentages of the prior year's revenues paid
to EDS for MSA Services. In each year from 1998 through 2000, GM may expose to
competitive bidding and award to third parties contracts for MSA Services for
which GM would otherwise have reasonably paid EDS up to an average of
approximately 6% of the prior year's revenues paid to EDS for MSA Services. For
the years 2001 through 2006, GM may expose to competitive bidding and award to
third parties contracts for MSA Services for which GM would otherwise have
reasonably paid EDS up to an average of approximately 2.4% of the prior year's
revenues paid to EDS for MSA Services. Subject to certain limitations, GM will
select the MSA Services to be exposed to competitive bidding after consultation
with EDS. In addition to the aforementioned annual limitations, the following
aggregate limitations apply: through the year 2000, in no single calendar year
may the amount paid to third parties for MSA Services exceed 15% of the
aggregate amount of revenue paid to EDS for MSA Services performed during the
prior year; and after the year 2000, in no single calendar year may the amount
paid to third parties for MSA Services exceed 25% of the aggregate amount of
revenue paid to EDS for MSA Services performed during the prior year. Although
EDS may bid on any and all of such MSA Services, it is expected that third party
service providers will be awarded some portion of the services exposed to
competitive bidding. There can be no assurance as to whether or to what extent
EDS will be successful in bidding on such MSA Services.
Structural Cost Reductions. The MSA established specified structural cost
reduction targets for the first four years of the agreement. In each of the
years 1996 through 1998, the annual cost reduction targets are $100 million. In
1999, the target is $50 million. These targets are not intended to be
performance guarantees, but rather represent firm good faith business
commitments on the part of GM and EDS. As such, the MSA does not provide for any
gain sharing or similar incentives in the event that the targets are exceeded
and does not impose any penalties or other liabilities in the event that they
are not met. No assurance can be given that any of the specific targets for
structural cost reductions will be achieved.
Payment Terms. The Prior IT Services Agreements provided for GM to pay EDS
on the 15th day of the month in which services were provided with respect to a
substantial portion of services, especially in North America. International
payment terms in the Prior IT Services Agreements were often more favorable to
GM and were generally governed by the commercial standards prevailing in each
particular country. Under the IT Services Agreements, there will be a transition
of payment terms to the 20th day of the month following service for all
agreements which do not have payment terms at least that favorable to GM
(principally in North America). The transition will be accomplished as follows:
(i) through 1996, no change; (ii) beginning in 1997, payment on the 30th day of
the month when services are provided; (iii) beginning in 1998, payment on the
20th day of the month following service for certain business units; and (iv)
beginning in 1999, payment on the 20th day of the month following service for
all remaining business units, including NAO.
Termination. The MSA may be terminated (i) by either party, if the other
party defaults in any material respect in the performance of its obligations
thereunder and such default is not cured as provided therein after notice
thereof, (ii) by EDS, if GM defaults in the payment when due of any material
amount owing to EDS thereunder and such default is not cured as provided therein
after notice thereof, (iii) by either party, if the other party becomes
insolvent or (iv) by GM, if there occurs a "change of control" of
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EDS and certain additional conditions are met. For purposes of the termination
provisions of the MSA, a "change of control" means the occurrence of any of the
following events: (i) any person files (or is required to file) a Schedule 13D
or 14D-1 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), disclosing that such person has become the beneficial owner of Common
Stock representing 50% or more of the aggregate voting power of the outstanding
shares of Common Stock; (ii) any person files (or is required to file) a
Schedule 13D or 14D-1 under the Exchange Act disclosing that such person has
become the beneficial owner of Common Stock representing 30% or more of the
aggregate voting power of the outstanding shares of Common Stock, or commences a
proxy solicitation subject to Rule 14a-11 of the Exchange Act with respect to
the election or removal of members of EDS' Board of Directors, and, within two
years, individuals who constituted a majority of the members of such board at
the time of such acquisition or solicitation, together with certain persons
elected, recommended or nominated by such directors, cease to constitute a
majority of the board, or (iii) there is consummated any transaction (or
transactions) resulting in a number of shares of Common Stock which represents
50% or more of the aggregate voting power of the outstanding shares of Common
Stock being beneficially owned by persons who did not either own such securities
as Common Stock immediately prior to such transaction or receive such securities
in respect of the conversion or exchange of Common Stock in such transaction.
In the event of a change of control, GM may elect to terminate the MSA if
its Board of Directors determines that there is substantial uncertainty about
EDS' ability to perform its obligations under the IT Services Agreements in all
material respects or any other significant threat to the business relationship
between EDS and the GM units that are provided MSA Services by EDS. GM may also
terminate the MSA in the event of a change of control in which EDS is acquired
by a manufacturer of cars or trucks that competes with GM (a "core competitor")
and as a result of which GM determines that there is a reasonable likelihood of
a significant competitive threat to GM. In addition, if there is a change of
control in which EDS is acquired by a competitor of GM (other than a core
competitor) and there is a reasonable likelihood of a significant competitive
threat to one or more significant GM units that contract with EDS for MSA
Services under the MSA, GM may terminate the Service Agreements between EDS and
such units; provided, that EDS may instead elect to terminate the MSA if the
revenues associated with those Service Agreements accounted for more than 60% of
the revenues paid to EDS for MSA Services during the preceding year. In the
event that GM elects to terminate the MSA or any Service Agreement as a result
of a change in control of EDS, then GM (i) will be obligated to pay EDS for
transition services in accordance with the provisions therefor in the MSA, and
(ii) may, under certain circumstances, be obligated to pay for all or a portion
(depending on the status of the party acquiring control of EDS) of certain
cancellation charges intended to reimburse EDS for certain wind-down expenses,
losses relating to capital assets and long-term leases, and personnel expenses.
ITEM 2 PROPERTIES
As of December 31, 1996, EDS had approximately 428 locations operating in
46 states and 217 cities in the United States and approximately 226 additional
locations in 99 cities in 29 countries outside the United States. At such date,
approximately 5.7 million square feet of space was owned by EDS and an
additional approximately 14 million square feet of space was leased. EDS'
worldwide headquarters, which is located on a 363 acre campus in Plano, Texas,
contains approximately 3.5 million square feet of office and data center space.
Other than the 1.6 million square feet EDS Centre building, which is leased for
an initial term of 25 years and subject to certain fixed price purchase options
exercisable by EDS during and at the end of such initial term, all buildings and
real estate comprising the Plano campus are owned by EDS. EDS' two information
management centers, which monitor the EDSNET(R) global telecommunications
network, are located in Plano, Texas and Stockley Park, United Kingdom. EDS'
large scale information processing centers ("IPCs") are located throughout the
United States and in each of Australia, Brazil, Canada, France, Germany, the
Netherlands, Spain and the United Kingdom. In addition, EDS operates distributed
service centers ("DSCs") at customer owned sites or EDS owned or leased
facilities throughout the world. DSCs generally support a single or small number
of customers with more specialized requirements than those supported at the
large scale, multiple customer IPCs.
10
<PAGE>
Leased properties consist primarily of office, warehouse, DSC and non-
U.S. IPC facilities. Lease terms are generally five years or, with respect to
leases related to a specific customer contract, have a term concurrent with that
contract. Upon expiration of its leases, EDS does not anticipate any difficulty
in obtaining renewals or alternative space. In addition to the leased property
referred to above, EDS occupies office space at customer locations throughout
the world. Such space is generally occupied pursuant to the terms of the
respective customer contracts.
EDS management believes that its facilities are suitable and adequate
for its business; however, EDS periodically reviews its space requirements to
consolidate and dispose of or sublet facilities which are no longer required in
connection with its business and to acquire new space to meet the needs of its
business.
ITEM 3. LEGAL PROCEEDINGS
Three suits challenging the Split-Off, 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
converted into 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.
From time to time EDS is involved in various litigation matters arising
in the ordinary course of its business. EDS management does not believe that
disposition of any current matter will have a material adverse effect on EDS'
consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None submitted.
EXECUTIVE OFFICERS OF EDS
The following sets forth certain information with respect to the
executive officers of EDS as of February 20, 1997:
Lester M. Alberthal, Jr., 52, has been Chief Executive Officer of EDS
since December 1986 and Chairman of the Board since June 1989. He has been a
director of EDS since 1981. Mr. Alberthal is chair of EDS' Executive Council,
the company's chief policy making and strategy group. He joined EDS in 1968,
became responsible for EDS' health care division in 1974 and was named Senior
Vice President with responsibility for EDS' insurance group in 1979. Following
the acquisition of EDS by GM in 1984, Mr. Alberthal led all non-GM North
American operating groups. Mr. Alberthal served as President of EDS from 1986
until the consummation of the Split-Off.
Gary J. Fernandes 53, has been the Vice Chairman of EDS since the
consummation of the Split-Off and a director of EDS since 1981. He was a Senior
Vice President of EDS from October 1984 until the consummation of the Split-Off.
Mr. Fernandes has oversight responsibility for EDS' worldwide business
development and corporate development (including marketing and strategic
planning) and is Chairman of
11
<PAGE>
its A.T. Kearney management consulting services subsidiary. Mr. Fernandes joined
EDS in 1969 and has served in numerous management capacities in the United
States, Europe and Japan.
Jeffrey M. Heller, 57, has been the President and Chief Operating
Officer of EDS since the consummation of the Split-Off and a director of EDS
since 1983. He was a Senior Vice President of EDS from 1984 until the
consummation of the Split-Off. Mr. Heller is chair of EDS' Global Operations
Council, which is responsible for EDS' operating strategies and other business
issues. He joined EDS in 1968 and has served in numerous technical management
positions.
Hartmut W. Burger, 53, has been an Executive Vice President of EDS since
the consummation of the Split-Off and prior to that time had been a Vice
President since October 1992. He has responsibility for EDS' technical
infrastructure and internal information functions as well as for EDS' business
units serving customers in the communications industry. Prior to assuming his
current responsibilities, Mr. Burger was responsible for EDS' business units
serving customers in the manufacturing and commercial services industries.
John R. Castle, Jr., 54, has been an Executive Vice President of EDS
since the consummation of the Split-Off and prior to that time had been a Senior
Vice President since October 1988. He has oversight responsibility for EDS'
government affairs, communications and public relations groups and its legal
department. Prior to joining EDS in 1988, Mr. Castle was a partner in the Dallas
law firm of Hughes & Luce.
Paul J. Chiapparone, 57, has been an Executive Vice President of EDS
since the consummation of the Split-Off and prior to that time had been a Senior
Vice President since April 1986. He has responsibility for business units
serving customers in the manufacturing industry (including GM) and the financial
services and travel and transportation industries and for EDS' Asia/Pacific
operations. Mr. Chiapparone joined EDS in 1966 and has served in numerous
management capacities.
Joseph M. Grant, 58, has been Chief Financial Officer of EDS since
December 1990 and an Executive Vice President since the consummation of the
Split-Off. Prior to that time he had been a Senior Vice President since February
1992. Mr. Grant has oversight responsibility for EDS' administration and
corporate finance groups. Prior to joining EDS in December 1990, he served as
executive vice president and chief systems officer for American General
Corporation from 1989 to 1990 and as chairman of the board and chief executive
officer of Texas American Bancshares Inc. from 1986 to 1989.
Dean Linderman, 53, has been an Executive Vice President of EDS since
the consummation of the Split-Off and prior to that time had been a Senior Vice
President since April 1986. He has responsibility for EDS' global employee
development units, including the technical and leadership development, sales
leadership, quality and industry leadership and global diversity groups. Mr.
Linderman joined EDS in 1970 and has served in numerous management positions.
G. Stuart Reeves, 57, has been an Executive Vice President of EDS since
the consummation of the Split-Off and prior to that time had been a Senior Vice
President since February 1987. He has responsibility for EDS' business units
serving customers in government and in the energy and healthcare industries as
well as EDS' European, Canadian, Mexican and Central and South American
operations. Mr. Reeves joined EDS in 1967 and has held numerous technical and
management positions.
Executive officers serve at the discretion of the Board of Directors of
EDS.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the symbol "EDS." As a result of the Split-Off, on June 7, 1996 each share
of Class E Common Stock of GM was converted into one share of Common Stock. The
GM Class E Common Stock had been listed and traded on the NYSE under the symbol
"GME" through June 7, 1996 (the date of consummation of the Split-Off). The
table below shows the range of reported per share sales prices on the NYSE
Composite Tape for the Class E Common Stock (through June 7, 1996) and the
Common Stock (commencing June 10, 1996) for the periods indicated.
<TABLE>
<CAPTION>
Calendar Year High Low
- ------------- ---- ---
<S> <C> <C> <C>
1995
First Quarter................................. $41.38 $36.88
Second Quarter................................ 45.25 38.38
Third Quarter................................. 47.50 41.50
Fourth Quarter................................ 52.63 43.88
1996
First Quarter................................. $58.00 $50.00
Second Quarter (through June 7, 1996)......... 58.63 52.25
Second Quarter (commencing June 10, 1996)..... 58.38 52.88
Third Quarter................................. 61.38 46.00
Fourth Quarter................................ 63.38 40.75
</TABLE>
The last reported sale price of the Common Stock on the NYSE on March 4,
1997 was $45.875 per share. As of March 4, 1997, the approximate number
of record holders of Common Stock was 260,498.
Since the consummation of the Split-Off, EDS declared third and fourth
quarter dividends on the Common Stock of $.15 per share in 1996. Prior to the
Split-Off, GM paid quarterly dividends on the GM Class E Common Stock of $.13
per share in 1995 and $.15 per share for the first and second quarters of 1996.
ITEM 6. SELECTED FINANCIAL DATA"
"Selected Financial Data" for the years ended December 31, 1992 through
1996 on page 53 of EDS' Annual Report to Stockholders for the year ended
December 31, 1996 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS"
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" on pages 29 through 34 of EDS' Annual Report to Stockholders for
the year ended December 31, 1996 is incorporated herein by reference.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of EDS included in EDS'
Annual Report to Stockholders for the year ended December 31, 1996 are
incorporated herein by reference:
Consolidated Statements of Income - Years ended December 31, 1996, 1995
and 1994.
Consolidated Balance Sheets - December 31, 1996 and 1995.
Consolidated Statements of Stockholders' Equity- Years ended December
31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows - Years ended December 31, 1996,
1995 and 1994.
Notes to Consolidated Financial Statements
Independent Auditors' Report.
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
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For Item 10, the names and ages of the executive officers of EDS as of February
20, 1997, and the position(s) each of them has held during the past five years,
are included in Part I of this Form 10-K as permitted by General Instruction
G(3). All other information required by Item 10, and the information required
by Items 11, 12 and 13, is incorporated by reference to the registrant's
definitive proxy statement for its Annual Meeting of Stockholders to be held on
June 5, 1997, which will be filed with the Securities and Exchange Commission
within 120 days after December 31, 1996.
14
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) 1. The following consolidated financial statements of Electronic Data
Systems Corporation and subsidiaries included in the registrant's 1996
Annual Report to Stockholders are incorporated by reference in Part II,
Item 8:
Consolidated Statements of Income -- Years ended December 31, 1996,
1995 and 1994.
Consolidated Balance Sheets -- December 31, 1996 and 1995.
Consolidated Statements of Stockholders' Equity -- Years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows -- Years ended December 31,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
2. The following financial statement schedule of Electronic Data Systems
Corporation and subsidiaries is included in Item 14(d):
Independent Auditors' Report on Schedule.
Schedule II - Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and,
therefore, have been omitted.
3. Exhibits
Exhibit No. Description
- ----------- -----------
3(a) Restated Certificate of Incorporation of Electronic Data Systems
Corporation, as amended through June 7, 1996 - incorporated herein by
reference to Exhibit 3(a) to the Current Report on Form 8-K of the
Registrant dated June 7, 1996.
3(b) Amended and Restated Bylaws of Electronic Data Systems Corporation,
as amended through June 7, 1996 - incorporated herein by reference to
Exhibit 3(b) to the Current Report on Form 8-K of the Registrant
dated June 7, 1996.
4(a) Rights Agreement dated as of March 12, 1996 between the Registrant
and The Bank of New York, as Rights Agent - incorporated herein by
reference to Exhibit 4(c) to the Registration Statement on Form S-4
of the Registrant (File No. 333-02543).
4(b) Indenture dated as of August 12, 1996, between the Registrant and
Texas Commerce Bank National Association, as Trustee - incorporated
herein by reference to Exhibit 4 to the Registration Statement on
Form S-3 of the Registrant (File No. 333-10145).
15
<PAGE>
4(c) Instruments defining the rights of holders of nonregistered debt of the
Registrant have been omitted from this exhibit index because the amount
of debt authorized under any such instrument does not exceed 10% of the
total assets of the Registrant and its subsidiaries. The Registrant
agrees to furnish a copy of any such instrument to the Securities and
Exchange Commission upon request.
10(a) Master Service Agreement dated June 7, 1996 between General Motors
Corporation and the Registrant (portions of which are subject to
confidential treatment granted by the Securities and Exchange
Commission) - incorporated herein by reference to Exhibit 10(a) to the
Current Report on Form 8-K of the Registrant dated June 7, 1996.
10(b) 1996 Incentive Plan of Electronic Data Systems Corporation -incorporated
herein by reference to Exhibit 10(b) to the Current Report on Form 8-K
of the Registrant dated June 7, 1996. *
10(c) Electronic Data Systems Corporation Supplemental Executive Retirement
Plan - incorporated herein by reference to Exhibit 10(d) to the
Registration Statement on Form S-4 of the Registrant (File No. 333-
02543). *
10(d) Electronic Data Systems Corporation Deferred Compensation Plan for Non-
Employee Directors - incorporated herein by reference to Exhibit 10(e)
to the Registration Statement on Form S-4 of the Registrant (File No.
333-02543). *
10(e) Form of Indemnification Agreement entered into between the Registrant
and each of its directors and executive officers - incorporated herein
by reference to Exhibit 10(f) to the Registration Statement on Form S-4
of the Registrant (File No. 333-02543). *
10(f) Revolving Credit and Term Loan Agreement dated as of October 4, 1995
among the Registrant, Citibank, N.A., as Administrative Agent, and the
other financial institutions identified therein as Arrangers, Managers
and Lenders -incorporated herein by reference to Exhibit 10(h) to the
Registration Statement on Form S-4 of the Registrant (File No. 333-
02543).
10(g) First Amendment to Revolving Credit and Term Loan Agreement dated
September 25, 1996 among the Registrant and the Lenders identified
therein -incorporated herein by reference to Exhibit 10(n) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
10(h) Multi-Currency Revolving Credit Agreement dated as of October 4, 1995
among the Registrant, Citibank, N.A., as Administrative Agent, and the
other financial institutions identified therein as Arrangers, Managers
and Lenders -incorporated herein by reference to Exhibit 10(i) to the
Registration Statement on Form S-4 of the Registrant (File No. 333-
02543).
10(i) First Amendment to Multi-Currency Revolving Credit Agreement dated
September 25, 1996 among the Registrant and the Lenders identified
therein -incorporated herein by reference to Exhibit 10(o) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
10(j) Registration Rights Agreement dated March 12, 1995 between General
Motors Corporation and United States Trust Company of New York, as
Trustee of the General Motors Corporation Hourly-Rate Employees Pension
Plan - incorporated herein by reference to Exhibit 10(j) to the
Registration Statement on Form S-4 of the Registrant (File No. 333-
02543).
16
<PAGE>
10(k) Succession Agreement dated June 7, 1996 among the Registrant, General
Motors Corporation and United States Trust Company of New York, as
Trustee of the General Motors Corporation Hourly-Rate Employees Pension
Plan, with respect to the Registration Rights Agreement filed as Exhibit
10(j) above.
10(l) Form of Change in Control Employment Agreement entered into by the
Registrant with each of its executive officers - incorporated herein by
reference to Exhibit 99 to the Registration Statement on Form S-3 of the
Registrant (File No. 333-06655). *
12 Computation of Ratios of Earnings to Fixed Charges for the three years
ended December 31, 1996.
13 Portions of the Registrant's 1996 Annual Report to Stockholders
expressly incorporated by reference herein: Pages 27 through 53.
21 Subsidiaries of the Registrant as of December 31, 1996.
23 Consent of Independent Auditors.
24 Powers of Attorney for Directors signing this Report on Form 10-K.
27 Financial Data Schedule for the year ended December 31, 1996, submitted
to the Securities and Exchange Commission in electronic format.
- -----------------
* Management contracts and compensatory plans and arrangements required to be
filed as exhibits to this Form 10-K pursuant to Item 14(c).
(b) Reports on Form 8-K.
One report on Form 8-K dated November 5, 1996 was filed during the quarter
ended December 31, 1996 reporting a press release under Item 5 - Other
Events and Item 7 - Exhibits.
(c) Exhibits.
The response to this portion of Item 14 is submitted as a separate section
of this report.
(d) Financial Statement Schedule.
The response to this portion of Item 14 is submitted as a separate section
of this report.
17
<PAGE>
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.
ELECTRONIC DATA SYSTEMS CORPORATION
Dated: March 5, 1997 By: /s/ LESTER M. ALBERTHAL, JR
--------------------------------
Lester M. Alberthal, Jr.
Chairman of the Board and
Chief Executive 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.
Dated: March 5, 1997 By: /s/ LESTER M. ALBERTHAL, JR
--------------------------------
Lester M. Alberthal, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Dated: March 5, 1997 By: /s/ GARY J. FERNANDES
--------------------------------
Gary J. Fernandes
Vice Chairman and Director
Dated: March 5, 1997 By: /s/ JEFFREY M. HELLER
--------------------------------
Jeffrey M. Heller
President, Chief Operating
Officer and Director
Dated: March 5, 1997 By: /s/ JOSEPH M. GRANT
--------------------------------
Joseph M. Grant
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: March 5, 1997 By: /s/ H. PAULETT EBERHART
--------------------------------
H. Paulett Eberhart
Vice President and Controller
(Principal Accounting Officer)
18
<PAGE>
By: *
--------------------------------
James A. Baker, III
Director
By: *
--------------------------------
Richard B. Cheney
Director
By: *
--------------------------------
William H. Gray, III
Director
By: *
--------------------------------
Ray J. Groves
Director
By: *
--------------------------------
Ray L. Hunt
Director
By: *
--------------------------------
C. Robert Kidder
Director
By: *
--------------------------------
Judith Rodin
Director
By: *
--------------------------------
Enrique J. Sosa
Director
* By:/s/ D. GILBERT FRIEDLANDER
---------------------------------------
D. Gilbert Friedlander, Attorney in Fact
March 5, 1997
19
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Electronic Data Systems Corporation:
Under date of January 31, 1997, we reported on the consolidated balance sheets
of Electronic Data Systems Corporation and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996, as contained in the 1996 annual report to stockholders. These
consolidated financial statements and our report thereon are incorporated by
reference in the annual report on Form 10-K for the year 1996. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule as listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
----------------------------------------
KPMG Peat Marwick LLP
Dallas, Texas
January 31, 1997
<PAGE>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
SCHEDULE II - ALLOWANCES
<TABLE>
<CAPTION>
Additions Additions
Balance at charged to charged to
beginning costs to other Balance at
Description of year expenses accounts Deductions end of year
- ----------- ----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996
Allowances Deducted from Assets
Accounts and notes receivable 99.5 93.4 -- 88.6 (a) 104.3
Inventories 19.5 15.5 -- 9.4 (b) 25.6
Valuation allowance for deferred taxes 126.3 -- 22.9 9.6 (c) 139.6
---------- --------- ----------- ---------- -----------
Total Allowances Deducted from Assets 245.3 108.9 22.9 107.6 269.5
========== ========= =========== ========== ===========
FOR THE YEAR ENDED DECEMBER 31, 1995
Allowances Deducted from Assets
Accounts and notes receivable 57.9 124.6 -- 83.0 (a) 99.5
Inventories 13.7 19.1 -- 13.3 (b) 19.5
Valuation allowance for deferred taxes 111.1 -- 20.8 5.6 (c) 126.3
---------- --------- ----------- ---------- -----------
Total Allowances Deducted from Assets 182.7 143.7 20.8 101.9 245.3
========== ========= =========== ========== ===========
FOR THE YEAR ENDED DECEMBER 31, 1994
Allowances Deducted from Assets
Accounts and notes receivable 53.0 50.6 -- 45.7 (a) 57.9
Inventories 15.0 28.2 -- 29.5 (b) 13.7
Valuation allowance for deferred taxes 92.3 -- 18.8 -- 111.1
---------- --------- ----------- ---------- -----------
Total Allowances Deducted from Assets 160.3 78.8 18.8 75.2 182.7
========== ========= =========== ========== ===========
</TABLE>
Notes:
(a) Accounts written off and foreign currency translation adjustments
(b) Obsolete parts written off and foreign currency translation adjustments
(c) Foreign currency translation adjustments
<PAGE>
Exhibit 10(k)
SUCCESSION AGREEMENT
This Agreement is entered into as of June 7, 1996 by and between
General Motors Corporation, a Delaware corporation ("GM"), and Electronic Data
Systems Corporation, a Delaware corporation ("EDS"). Capitalized terms used and
not otherwise defined herein shall have the meanings set forth in the
Registration Rights Agreement, dated as of March 12, 1995 (the "Registration
Agreement") by and between GM and United States Trust Company of New York, as
trustee (the "Trustee") of a trust established under the General Motors Hourly-
Rate Employees Pension Plan (the "Pension Plan"), for the account of and on
behalf of the Pension Plan.
WHEREAS, GM is currently the issuer of the securities referred to as
the "Registrable Securities" and "Class E Common Stock" in the Registration
Agreement and generally has the rights and the obligations of Issuer under the
Registration Agreement;
WHEREAS, in connection with the Split-Off of GM from EDS (the "Split-
Off"), each outstanding share of Class E Common Stock shall be converted into
one share of common stock, $.01 par value per share, of EDS (the "EDS Common
Stock"); and
WHEREAS, the Registration Agreement contemplates that in the event of
a transaction such as the Split-Off, EDS shall generally succeed to the rights
and obligations of Issuer under the Registration Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements set forth herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, GM and EDS hereby
agree as follows:
1. Succession.
----------
(a) Effective as of the consummation of the Split-Off, all rights,
obligations and restrictions with respect to shares of Class E Common Stock
(including Registrable Securities) set forth in the Registration Agreement shall
apply to the EDS Common Stock.
(b) Effective as of the consummation of the Split-Off, EDS shall be
bound by the Registration Agreement and shall succeed to all rights,
restrictions and obligations of Issuer set forth in the Registration Agreement,
all references to Issuer therein shall thereafter be deemed to be references to
EDS, and GM shall be released from all obligations under the Registration
Agreement.
(c) Notwithstanding subsections (a) and (b) above, (i) all rights and
obligations in Sections 1(a) through 1(e) of the Registration Agreement shall
remain rights and obligations of GM and (ii) GM shall not be released from any
obligations under Section 10 of the Registration Agreement with respect to any
registration of securities issued by GM.
<PAGE>
2. Cooperation. GM and EDS shall take such further action, and
-----------
execute such additional documents, as may be reasonably requested by either
party in order to carry out the purposes of this Agreement.
3. Counterparts. This Agreement may be executed in counterparts, and
------------
shall be deemed to have been duly executed and delivered by all parties when
each party has executed a counterpart hereof and delivered an original or
facsimile copy thereof to the other party. Each such counterpart hereof shall
be deemed to be an original, and all of such counterparts together shall
constitute one and the same instrument.
* * * * *
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto, being duly authorized, have
executed and delivered this Succession Agreement on the date first above
written.
GENERAL MOTORS CORPORATION
By: /s/ Leon J. Krain
---------------------------
Name: Leon J. Krain
Title: Vice President
ELECTRONIC DATA SYSTEMS
CORPORATION
By: /s/ Joseph M. Grant
---------------------------
Name: Joseph M. Grant
Title: Senior Vice President
This Succession Agreement (including, without limitation, the release
of GM from obligations under the Registration Agreement as set forth herein
(except as provided in Section 1(c) above)) is acknowledged and agreed to as of
this 7th day of June, 1996
GENERAL MOTORS HOURLY-RATE
EMPLOYEES PENSION PLAN
By: UNITED STATES TRUST COMPANY
OF NEW YORK, as Trustee of the General
Motors Hourly Employees Pension Trust
By: /s/ Norman Goldberg
-------------------------------
Norman Goldberg
Authorized Agent
3
<PAGE>
EXHIBIT 12
ELECTRONIC DATA SYSTEMS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ----------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Income before cumulative
effect of accounting change $ 431.5 $ 938.9 $ 821.9 $ 724.0 $ 635.5
United States, foreign, and other
income taxes 242.6 528.1 462.3 407.3 365.3
Equity in (income) losses of
affiliates .4 8.8 6.2 4.9 (3.4)
-------- -------- -------- -------- --------
Income before income taxes,
undistributed (income) losses of
affiliates, and amortization of
capitalized interest 674.5 1,475.8 1,290.4 1,136.2 997.4
-------- -------- -------- -------- --------
Fixed charges included in net income:
Interest and related charges on debt 153.0 120.8 51.7 34.5 43.0
Portion of rentals deemed to be
interest 219.0 228.0 176.9 189.9 206.1
Minority interest-preferred stock
dividends 2.8 -- -- -- --
-------- -------- -------- -------- --------
Total fixed charges included in
net income 374.8 348.8 228.6 224.4 249.1
-------- -------- -------- -------- --------
Earnings available for fixed charges $1,049.3 $1,824.6 $1,519.0 $1,360.6 $1,246.5
======== ======== ======== ======== ========
Fixed charges:
Fixed charges included in
net income $ 374.8 $ 348.8 $ 228.6 $ 224.4 $ 249.1
Interest capitalized in the period -- -- 1.2 5.4 18.1
-------- -------- -------- -------- --------
Total fixed charges $ 374.8 $ 348.8 $ 229.8 $ 229.8 $ 267.2
-------- -------- -------- -------- --------
Fixed charge coverage $ 674.5 $1,475.8 $1,289.2 $1,130.8 $ 979.3
-------- -------- -------- -------- --------
Ratio of earnings to fixed charges 2.8 5.2 6.6 5.9 4.7
======== ======== ======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 13
Financial
Report
28 Independent Auditors' Report
28 Responsibilities for Financial Statements
29 Management's Discussion and Analysis
of Financial Condition and Results of Operations
35 Consolidated Statements of Income
36 Consolidated Balance Sheets
37 Consolidated Statements of Stockholders' Equity
38 Consolidated Statements of Cash Flows
39 Notes to Consolidated Financial Statements
53 Selected Financial Data
EDS 1996 Annual Report 27
<PAGE>
================================================================================
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Electronic Data Systems Corporation:
We have audited the accompanying consolidated balance sheets of Electronic Data
Systems Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Electronic
Data Systems Corporation and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Dallas, Texas
January 31, 1997
================================================================================
RESPONSIBILITIES FOR FINANCIAL STATEMENTS
The consolidated financial statements of EDS were prepared by management, which
is responsible for their integrity and objectivity. The statements have been
prepared in conformity with generally accepted accounting principles and, as
such, include amounts based on judgments of management. Financial information
elsewhere in this Annual Report is consistent with that presented in the
consolidated financial statements.
Management is further responsible for maintaining a system of internal
accounting controls designed to provide reasonable assurance that the books and
records reflect the transactions of the Company and that its established
policies and procedures are carefully followed. Perhaps the most important
feature in the system of control is that it is continually reviewed for its
effectiveness and is augmented by written policies and guidelines, the careful
selection and training of qualified personnel, and a strong program of internal
audit.
The Company's independent auditors, KPMG Peat Marwick LLP, have audited the
consolidated financial statements. Their audits were conducted in accordance
with generally accepted auditing standards, which include the consideration of
the Company's internal controls to the extent necessary to form an independent
opinion on the consolidated financial statements prepared by management.
The Board of Directors, through the EDS Audit Committee, is responsible for
assuring that management fulfills its responsibilities in the preparation of the
consolidated financial statements and for engaging the independent auditors. The
Committee reviews the scope of the audits and the accounting principles being
applied in financial reporting. The independent auditors, representatives of
management, and the internal auditors meet regularly (separately and jointly)
with the Committee to review the activities of each, to ensure that each is
properly discharging its responsibilities, and to discuss the effectiveness of
the system of internal accounting controls. It is management's conclusion that
the system of internal accounting controls as of and for the period ended
December 31, 1996, provides reasonable assurance that the books and records
reflect the transactions of the Company and that the Company complies with
established policies and procedures. To ensure complete independence, KPMG Peat
Marwick LLP have full and free access to meet with the Committee, without
management representatives present, to discuss the results of their audits and
the quality of the financial reporting.
/s/ Lester M. Alberthal Jr. /s/ Joseph M. Grant
Lester M. Alberthal, Jr. Joseph M. Grant
Chairman of the Board Executive Vice President
Chief Executive Officer Chief Financial Officer
28 EDS 1996 Annual Report
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Electronic Data Systems Corporation (EDS) is a provider of information
technology (IT) services, using computer and communications technologies to meet
the business needs of its clients. EDS offers its clients a continuum of
services, including management consulting, systems development, systems
integration, systems management, and process management.
Forward-Looking Statements
All statements other than historical statements contained herein constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Without limitation, these forward-looking
statements include estimates regarding future revenues from General Motors
Corporation (GM) and statements regarding first quarter 1997 revenue and
earnings growth. Any Form 10-K, Annual Report to Stockholders, Form 10-Q, or
Form 8-K of EDS may include forward-looking statements. In addition, other
written or oral statements that constitute forward-looking statements have been
made or may in the future be made by EDS, including statements regarding future
operating performance, short- and long-term revenue and earnings growth,
backlog, and industry growth rates and EDS' performance relative thereto. These
forward-looking statements rely on a number of assumptions concerning future
events and are subject to a number of uncertainties and other factors, many of
which are outside of EDS' control, that could cause actual results to differ
materially from such statements. These include, but are not limited to the
following: competition in the information technology industry and the impact of
such competition on pricing, revenues, and margins; the market acceptance of new
product or service offerings that provide higher margins than traditional
product or service offerings and costs associated with the development and
marketing of such offerings; the financial performance of current and future
client contracts, including the financial performance of EDS' contracts with GM;
the degree to which EDS can improve productivity; general economic conditions;
the degree to which business entities continue to outsource information
technology and business processes; and the cost of attracting and retaining
highly skilled personnel.
EDS disclaims any intention or obligation to update or revise any forward-
looking statements whether as a result of new information, future events, or
otherwise.
Split-Off of EDS
On June 7, 1996, GM and EDS consummated a split-off (the "Split-Off") of EDS to
the holders of GM's Class E common stock in a transaction that is tax-free for
U.S. federal income tax purposes. In connection with the Split-Off, GM and EDS
entered into a Master Services Agreement (the "Master Services Agreement") with
respect to IT services to be provided after the Split-Off, and a special payment
of $500.0 million was made by EDS to GM (the "Special Intercompany Payment").
The Master Services Agreement and certain related agreements between GM and
EDS, with respect to IT services to be provided after the Split-Off
(collectively, the "IT Services Agreements"), provide that EDS will continue to
serve as GM's principal supplier of IT services for a term of 10 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 provide for certain significant
changes to the pricing and terms under which EDS provides 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 related to IT services provided
by EDS will be revised over a two-year period to extend the due dates for
payments from GM. (See the "Liquidity and Capital Resources" section below.) The
impact of the terms of the IT Services Agreements cannot be precisely
quantified, although such terms may have an adverse effect on revenues and
operating margins, unless, among other things, EDS is able to continue to effect
cost reduction measures in the services provided to GM, to retain a significant
portion of the business subject to the competitive bidding provisions of the IT
Services Agreements, and to reach mutually acceptable agreements with GM with
respect to new or replacement services thereunder.
Revenues from GM in 1996 increased over 1995, although as a result of changes
in the IT Services Agreements, the rates charged for computing and
telecommunications services performed for GM in 1996 were slightly lower than
those charged for similar services in 1995. The increase in revenues from GM in
1996 was attributable to new projects subsequent to the Split-Off. EDS estimates
that revenues from GM in 1997 will be flat or will slightly decrease from 1996.
EDS 1996 Annual Report 29
<PAGE>
The Special Intercompany Payment of $500.0 million was paid by EDS to GM at
the date of the Split-Off. Interest costs related to the Special Intercompany
Payment were approximately $.03 per share in 1996. In addition to the Special
Intercompany 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.
Restructuring Activities and Other Related Charges
During 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. To effect these actions, the Company
adopted formal restructuring plans that consist of work force reductions, asset
writedowns, the exit of certain business activities, and the consolidation of
facilities. The other related charges included in the accompanying consolidated
financial statements have been recorded in connection with the restructuring and
exit strategies that have been committed to by management.
Restructuring Charge
The restructuring charge of $285.6 million primarily includes costs associated
with work force reductions announced in April 1996. Expected work force
reductions of approximately 4,900 employees consist of employees who accepted
the Company's early retirement offer and employees who have been identified for
involuntary termination under a planned work force realignment. This work force
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 $258.1 million, $137.0 million of
which relates to special termination benefits, including amounts under the
Company's defined benefit pension plan. As of December 31, 1996, 1,743 employees
had accepted the early retirement offer and 1,860 employees had been
involuntarily terminated. Termination benefits of $67.9 million have been paid
related to the involuntary termination plan, and the remaining $53.2 million is
expected to be paid in 1997. The balance of the restructuring charge relates to
other exit costs resulting from the closure and consolidation of facilities and
estimated legal costs.
Asset Writedowns
As part of its plan to maintain and improve operating efficiencies, the Company
recorded writedowns of certain of its assets by approximately $503.9 million
during the quarter ended June 30, 1996. Of this amount, $262.3 million related
to computer and other assets that were written down to their estimated fair
values, determined by external market quotes. These assets were written down
pursuant to 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, 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 were required when the carrying value of assets currently held for
use exceeded their expected future undiscounted cash flows, including expected
cash flows resulting from eventual disposition. Also included in this charge
were asset writedowns of approximately $68.7 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 recorded
writedowns of certain of its inventory by approximately $31.7 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 were
written down based on the projected use of such assets. Asset writedowns
totaling $21.4 million related to a client in reorganization and in the process
of being acquired by a third party. The remaining balance of the charge for
asset writedowns consisted primarily of fixed assets, software licenses, and
other assets that no longer will be used to support the Company's operations
because of its exit decisions.
Other Related Charges
Also included in the accompanying consolidated financial statements is
approximately $60.0 million charged to cost of revenues in the second quarter of
1996, the largest portion of which relates to current assets written down in
connection with the Company's decision to exit certain business activities
related to the aforementioned client in reorganization. The balance of the
charge to cost of revenues relates to changes in estimated contract costs. In
addition, all costs directly associated with the Split-Off activities, totaling
$45.5 million, have been charged to expense.
Savings from the implementation of the restructuring actions have been and are
expected to be utilized by EDS to offset the negative impact of the changes in
the IT Services Agreements and for reinvestment to position EDS for the future.
Results of Operations
Years Ended December 31, 1996, 1995, and 1994
Revenues. EDS conducts its sales, marketing, and service activities on a
global basis through business units that focus both geographically and
vertically along the lines of specified industries. The following table
summarizes EDS' systems and other contracts revenues in each geographic
operating segment for each of the years ended December 31, 1996, 1995, and 1994.
30 EDS 1996 Annual Report
<PAGE>
<TABLE>
<CAPTION>
Systems and Other Contracts
Revenues (in millions)
- ------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Non-GM Clients:
United States $ 6,577.2 $ 5,794.9 $4,611.2
Europe 2,687.0 2,001.5 1,308.1
Other 898.9 734.6 493.6
- ------------------------------------------------------------------
Total non-GM clients 10,163.1 8,531.0 6,412.9
- ------------------------------------------------------------------
GM and Affiliates:
United States 3,179.3 2,926.1 2,764.4
Europe 691.9 659.2 523.4
Other 407.0 305.8 259.4
- ------------------------------------------------------------------
Total GM and affiliates 4,278.2 3,891.1 3,547.2
- ------------------------------------------------------------------
Total revenues $14,441.3 $12,422.1 $9,960.1
- ------------------------------------------------------------------
Percentage of Total Revenues:
Non-GM clients 70% 69% 64%
GM and affiliates 30% 31% 36%
- ------------------------------------------------------------------
Total 100% 100% 100%
- ------------------------------------------------------------------
</TABLE>
Total revenues increased 16% in 1996 to $14,441.3 million from $12,422.1
million in 1995, which represented a 25% increase over 1994 total revenues of
$9,960.1 million. Revenues from non-GM clients grew 19% in 1996 to $10,163.1
million, compared with a 33% increase in 1995 from $6,412.9 million in 1994. The
lower rate of non-GM revenue growth in 1996 compared to 1995 is in part
attributable to the increasingly competitive environment in which EDS operates.
Total revenues related to GM and its affiliates were $4,278.2 million, $3,891.1
million, and $3,547.2 million in 1996, 1995, and 1994, respectively. The
increase in GM revenues in 1996 was due primarily to additional MIS and non-MIS
initiatives recognized during the year and to a corporate license agreement for
certain EDS-owned software for which approximately $100.0 million of revenues
were recognized in the fourth quarter of 1996. EDS estimates that revenues from
GM in 1997 will be flat or will slightly decrease from 1996. The percentage of
EDS' total revenues generated from GM and its affiliates declined to 30% in 1996
from 31% in 1995 and 36% in 1994. EDS expects this trend to continue as revenues
from non-GM clients continue to grow. In October 1996, EDS announced that the
slower new contract signings during the first six months of 1996 and certain
other factors would put some pressure on the rate of financial growth in the
fourth quarter of 1996. EDS expects that such slower new contract signings in
the first half of 1996 will continue to affect the rate of revenue and earnings
growth into the first quarter of 1997.
Total domestic revenues from non-GM clients increased 13% to $6,577.2 million
in 1996 from $5,794.9 million in 1995. This compares with growth rates of 26% in
1995 and 15% in 1994. The increase in 1996 was attributable principally to full-
year revenues on contracts that began in late 1995 and to full-year revenues
related to the acquisition of A.T. Kearney in August 1995. Domestic revenues
from non-GM clients in 1995 increased over 1994 results due principally to full-
year revenues on contracts that began in late 1994 and to revenues related to
acquisitions, primarily the A.T. Kearney acquisition.
During 1996, non-U.S. revenues from non-GM clients increased $849.8 million to
$3,585.9 million, compared with an increase of $934.4 million in 1995 from
$1,801.7 million in 1994. Growth in revenues from non-GM clients in Europe
increased $685.5 million, or 34%, to $2,687.0 million in 1996 due to revenues
associated with new contracts signed during 1995 and 1994. In 1995, revenues
from non-GM clients in Europe increased $693.4 million, or 53%, to $2,001.5
million.
Other non-U.S. revenues from non-GM clients grew $164.3 million over 1995, to
$898.9 million, due principally to new contracts signed in the Asia Pacific
region. Other non-U.S. revenues from non-GM clients in 1995 were up $241.0
million over 1994 due to new contracts signed in the Asia Pacific region and
Canada, as well as full-year revenues from acquisitions in New Zealand that
occurred in 1994.
The following table displays the percentage of revenues by industry area:
<TABLE>
<CAPTION>
Percentage of Revenues
for the Years Ended December 31,
- -----------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Industry Area:
Manufacturing 45% 47% 49%
Financial Services 14 14 14
Government 13 12 10
All others individually less than 10% 28 27 27
- -----------------------------------------------------------------------------
100% 100% 100%
- -----------------------------------------------------------------------------
</TABLE>
Other than GM, no one client accounted for more than 10% of EDS' total revenues
in 1996, 1995, or 1994. GM business, which has historically grown at a slower
rate than business from non-GM clients, is included primarily in the
Manufacturing industry area. The Government industry area has grown due to,
among other reasons, EDS' success in selling services related to newly
outsourced government functions in Europe.
EDS 1996 Annual Report 31
<PAGE>
Costs and expenses. Cost of revenues as a percentage of systems and other
contracts revenues was 79% in 1996, compared with 77% in 1995 and 76% in 1994.
For the year ended December 31, 1996, cost of revenues includes certain other
charges. (See the "Restructuring Activities and Other Related Charges" section
above.) In addition, cost of revenues includes charges related to the relocation
of certain business operations and other contract-related issues that were
recognized in the fourth quarter of 1996. Cost as a percentage of revenues has
increased due to higher labor costs for a skilled work force and pricing
pressures for new business as a result of the increasingly competitive
environment in which EDS operates. EDS is addressing this environment in part
through efficiencies gained from its restructuring activities described above
and its value-added business approach that includes the development and
marketing of new service offerings. Selling, general, and administrative
expenses increased 9% in 1996 to $1,403.3 million from $1,291.5 million in 1995,
which increased 9% from 1994. Selling, general, and administrative expenses were
10% of systems and other contracts revenues in 1996 and 1995, down from 12% in
1994 due to the fixed nature of certain of these costs.
Operating income. Operating income decreased $732.9 million in 1996 (including
certain other charges discussed above) to $796.1 million. Operating income was
$1,529.0 million and $1,243.6 million for 1995 and 1994, respectively. For the
year ended December 31, 1996, the operating margin declined to 5.5% (11.4%
excluding certain other charges discussed above) from 12.3% in 1995. The 1994
operating margin was 12.5%.
Interest expense and other, net. Interest expense and other, net, increased
$14.5 million in 1996 to $(76.5) million, compared with $(62.0) million in 1995
and $40.6 million in 1994. Interest expense increased to $153.1 million in 1996,
compared with $120.8 million in 1995 and $51.7 million in 1994. The increase in
both 1996 and 1995 was due primarily to increased interest expense associated
with the issuance of $650 million of notes payable as well as from other
borrowings in 1995 that were used for general corporate purposes. In addition,
interest expense increased in 1996 due to borrowings to fund the $500.0 million
Special Intercompany Payment and the issuance of redeemable preferred stock of a
subsidiary. (See the "Liquidity and Capital Resources" section below.) Interest
and other income increased to $76.6 million in 1996 from $58.8 million in 1995.
Interest and other income was $92.3 million in 1994.
Income taxes. The effective income tax rate was 36% in 1996, 1995, and 1994.
Net income. EDS' net income decreased to $431.5 million in 1996, compared with
$938.9 million for 1995 and $821.9 million in 1994. Net income for 1996 was
unfavorably affected by charges in the fourth quarter related to the relocation
of certain business operations and other contract-related issues in addition to
the recognition of an other-than-temporary decline in the fair value of an
investment. These unfavorable impacts on net income were offset by the favorable
impact on operating income resulting from the corporate license agreement with
GM. (See the "Revenues" section above.) Earnings per share decreased to $0.89
per share in 1996 from $1.96 per share in 1995 and $1.71 per share in 1994.
Earnings per share for the year ended December 31, 1996, was negatively affected
by $1.18 per share related to the $850 million charge related to restructuring
activities and other related charges and $45.5 million of one-time Split-Off
costs.
EDS and its clients may, from time to time, modify their contractual
arrangements. For client contracts accounted for under the percentage-of-
completion method, such changes would be reflected in results of operations as a
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 clients. In addition, revenues have
generally increased from quarter to quarter as a result of new business added
throughout the year. EDS believes that inflation generally had little effect on
its results of operations for each of the years ended December 31, 1996, 1995,
and 1994.
Financial Position
Assets. In 1996, EDS' total assets increased to $11,192.9 million, a 3%
increase over total assets of $10,832.4 million at December 31, 1995. This
change primarily represents increases in cash and cash equivalents and accounts
receivable.
At December 31, 1996, EDS held cash and cash equivalents of $879.9 million,
had working capital of $1,845.5 million, and a current ratio of 1.6-to-1. This
compares with cash and cash equivalents of $548.9 million, $1,160.0 million in
working capital, and a 1.4-to-1 current ratio at December 31, 1995. Return on
assets was 3.9% (8.9% excluding the impact on net income and assets of the
restructuring and other related charges discussed above) in 1996, compared with
9.6% for 1995 and 10.5% for 1994.
Liabilities and stockholders' equity. Total long-term debt, including current
portion, and redeemable preferred stock of subsidiaries, was $2,897.9 million
and $2,100.6 million at December 31, 1996 and 1995, respectively, which
primarily consisted of commercial paper and short- and long-term notes payable.
The total debt-to-capital ratio (which includes current portion of long-term
debt and
32 EDS 1996 Annual Report
<PAGE>
redeemable preferred stock of subsidiaries as components of debt and capital)
was 37.7% and 29.7% at December 31, 1996 and 1995, respectively. The ratio of
noncurrent debt-to-capital was 36.0% and 26.2% at December 31, 1996 and 1995,
respectively. Additionally, EDS maintains an agreement with a syndicate of banks
that provides EDS with committed lines of credit of up to $2,500.0 million. At
December 31, 1996, EDS had unused uncommitted short-term lines of credit
totaling $692.1 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 December 31, 1996, EDS
had total committed lines of credit of $2,521.3 million.
Stockholders' equity was $4,783.1 million at December 31, 1996, and $4,978.5
million at December 31, 1995. Return on stockholders' equity was 8.8% (19.4%
excluding the impact on net income and equity of the restructuring and other
related charges discussed above) in 1996, compared with 20.4% in 1995 and 20.9%
in 1994.
The Financial Accounting Standards Board has issued SFAS No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, which provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The provisions
of SFAS No. 125 generally are effective for transactions occurring after
December 31, 1996; however, the effective dates for certain of the provisions
have been delayed. Adoption of SFAS No. 125 is not expected to have a material
impact on the Company's financial statements.
Foreign exchange risk management. The translation effects of changes in
exchange rates on EDS' consolidated financial statements can be found in the
currency translation adjustment in the consolidated statement of stockholders'
equity and in the effect of exchange rate changes on cash and cash equivalents
in the EDS consolidated statements of cash flows. The disclosure of
non-functional currency transactions gains (losses) is contained in the "Summary
of Significant Accounting Policies" in Note 1. All other effects of changes in
exchange rates on EDS' consolidated financial statements are immaterial due to
the general nature of EDS' business and its risk management strategies described
below. EDS' foreign subsidiaries conduct nearly all aspects of their respective
operations using their respective functional currencies. Accordingly, such
operations are not expected to yield significant currency risks.
EDS hedges predominantly all its transaction risk associated with material
monetary assets and liabilities. EDS does not hedge the foreign exchange risk
related to either the translation of foreign earnings into U.S. dollars or the
translation of its net investment in foreign subsidiaries into U.S. dollars. EDS
has no material unhedged monetary assets or liabilities denominated in
currencies other than its foreign operations' functional currencies.
EDS conducts business in the United States and more than 40 other countries.
EDS' most significant foreign currency transaction exposures relate to Canada,
Western European countries (primarily Germany, the United Kingdom, Italy, the
Netherlands, and Switzerland), and New Zealand. EDS manages the foreign exchange
transaction exposure resulting from its multinational operations primarily by
utilizing short-term forward contracts that are used to hedge the aggregate net
exposure in each currency. Derivatives involve, to varying degrees, elements of
credit risk, in the event a counterparty should default, and market risk, as the
instruments are subject to rate and price fluctuations. Credit risk is managed
by dealing solely with major commercial banks with high-quality credit and,
therefore, EDS management does not expect to incur any cost due to counterparty
default. Market risk is inherently limited by the fact that EDS holds offsetting
asset or liability positions. Pursuant to its prescribed policies, EDS does not
hold or issue financial instruments for trading purposes.
Liquidity and Capital Resources
For the year ended December 31, 1996, net cash provided by operating activities
was $1,551.8 million, up $340.3 million from the same period in 1995 due
primarily to the increase in operating income (excluding noncash write-offs
regarding the restructuring and other related charges) and decreased levels of
accounts receivable as a percentage of revenue. For the year ended December 31,
1995, net cash provided by operating activities was $1,211.5 million, down
$271.4 million from $1,482.9 million in 1994 due primarily to increases in
accounts receivable.
For the year ended December 31, 1996, net cash used in investing activities
decreased $463.2 million, to $1,270.8 million, when compared with the same
period for 1995. Net cash used in investing activities increased $243.9 million,
to $1,734.0 million in 1995 from $1,490.1 million in 1994. Cash used in
investing activities consisted largely of payments for purchases of property and
equipment of $1,158.2 million, $1,276.5 million, and $1,203.6 million in 1996,
1995, and 1994, respectively. Additionally, EDS used cash for investments in
leases and other assets and for payments related to acquisitions.
Net cash provided by financing activities was $66.3 million for the year ended
December 31, 1996, down $398.8 million from the corresponding period in 1995,
due primarily to the $500.0 million Special Intercompany Payment paid to GM in
connection with the Split-Off. For the year ended December 31, 1995, net cash
provided by financing activities was $465.1 million, compared with cash provided
by financing activities of $206.5 million in 1994. EDS paid cash dividends
totaling $291.4 million, $251.3 million, and $231.1 million in 1996, 1995, and
1994, respectively. EDS also paid a $500.0 million Special Intercompany Payment
to GM at the time of the Split-Off.
EDS 1996 Annual Report 33
<PAGE>
EDS expects that its principal uses of funds for the foreseeable future will
be for capital expenditures, debt repayment, 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 1997 are approximately
$1,500.0 million to $2,000.0 million. However, actual capital expenditures will
depend to a significant extent on the level of 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 IT Services Agreements existing between GM and EDS 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 signed at the time of the Split-Off, 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 that 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 funded the Special
Intercompany Payment through borrowings under its existing commercial paper
facilities. EDS currently anticipates that it may seek to refinance such
commercial paper or bank borrowings as part of its general plan to extend
maturities of its indebtedness.
During 1996, consolidated subsidiaries of the Company issued 265.0 million
British pounds (440.3 million U.S. dollars) of redeemable preferred stock to
third parties. Holders of such preferred stock have the right to redeem such
shares from 2001-2003 for cash equal to the issue amount plus cumulative unpaid
dividends. Dividends on such preferred shares are cumulative from the effective
date of issue at fixed rates ranging from 6.14% to 7.7%. In January 1997, a
consolidated subsidiary of the Company issued 200.0 million British pounds
(339.0 million U.S. dollars) of redeemable preferred stock to third parties.
Both the holders of such preferred stock and the Company may call such shares at
any time for cash equal to the issue amount plus cumulative unpaid dividends.
Dividends on such preferred shares are cumulative from the effective date of
issue at a blended fixed rate of 6.07%.
The competitive environment and changing market forces are increasing the
capital intensity of EDS' business. Increasing amounts of capital will be
required by EDS 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 client contracts
frequently require 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 is 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 did while a subsidiary of GM. As a result, EDS' financial
leverage may increase in the future. To the extent that EDS becomes more highly
leveraged, EDS may be required to pay higher interest rates on its outstanding
borrowings. 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.
34 EDS 1996 Annual Report
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
Years Ended December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Systems and other contracts revenues $14,441.3 $12,422.1 $9,960.1
- --------------------------------------------------------------------------------
Costs and expenses
Cost of revenues (Note 21) 11,452.4 9,601.6 7,529.4
Selling, general, and administrative 1,403.3 1,291.5 1,187.1
Restructuring charge (Note 21) 285.6 -- --
Asset writedowns (Note 21) 503.9 -- --
- --------------------------------------------------------------------------------
Total costs and expenses 13,645.2 10,893.1 8,716.5
- --------------------------------------------------------------------------------
Operating income 796.1 1,529.0 1,243.6
One-time split-off costs (Note 21) (45.5) -- --
Interest expense and other, net (76.5) (62.0) 40.6
- --------------------------------------------------------------------------------
Income before income taxes 674.1 1,467.0 1,284.2
- --------------------------------------------------------------------------------
Provision for income taxes 242.6 528.1 462.3
- --------------------------------------------------------------------------------
Net income $ 431.5 $ 938.9 $ 821.9
- --------------------------------------------------------------------------------
Earnings per share of common stock $ .89 $ 1.96 $ 1.71
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
EDS 1996 Annual Report 35
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
December 31,
- --------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 879.9 $ 548.9
Marketable securities 82.6 89.7
Accounts receivable, net 3,513.0 3,169.0
Inventories 141.6 181.2
Prepaids and other 391.2 392.7
- --------------------------------------------------------------------------------
Total current assets 5,008.3 4,381.5
- --------------------------------------------------------------------------------
Property and equipment, net 3,097.0 3,242.4
Operating and other assets
Land held for development, at cost 89.1 105.1
Investment in leases and other 1,591.7 1,573.5
Software, goodwill, and other intangibles, net 1,406.8 1,529.9
- --------------------------------------------------------------------------------
Total operating and other assets 3,087.6 3,208.5
- --------------------------------------------------------------------------------
Total assets $11,192.9 $10,832.4
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 465.8 $ 603.9
Accrued liabilities 1,843.6 1,664.6
Deferred revenue 592.6 629.3
Income taxes 127.5 75.9
Current portion of long-term debt 133.3 247.8
- --------------------------------------------------------------------------------
Total current liabilities 3,162.8 3,221.5
- --------------------------------------------------------------------------------
Deferred income taxes 429.4 739.7
Long-term debt 2,324.3 1,852.8
Redeemable preferred stock of subsidiaries and
minority interest 493.3 39.9
Commitments and contingent liabilities
Stockholders' equity
Preferred stock, $.01 par value; authorized
200,000,000 shares; none issued -- --
Common stock, without par value; authorized
1,000,000,000 shares; issued and outstanding
483,693,854 shares at December 31, 1995 -- 517.7
Common stock, $.01 par value; authorized
2,000,000,000 shares;
issued 487,590,995 shares at December 31, 1996 4.9 --
Additional paid-in capital 682.8 --
Retained earnings 4,200.6 4,560.5
Currency translation adjustments and other (98.2) (99.7)
Treasury stock, at cost, 440,488 shares at
December 31, 1996 (7.0) --
- --------------------------------------------------------------------------------
Total stockholders' equity 4,783.1 4,978.5
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $11,192.9 $10,832.4
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
36 EDS 1996 Annual Report
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions)
Common Stock Currency Treasury Stock
------------ Additional Translation -------------- Consolidated
Shares Paid-in Adjustments Retained Shares Stockholders'
Outstanding Amount Capital and Other Earnings Held Amount Equity
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 480.9 $421.2 $ -- $(85.9) $3,282.1 -- $ -- $3,617.4
Net income -- -- -- -- 821.9 -- -- 821.9
Dividends declared -- -- -- -- (231.1) -- -- (231.1)
Stock award transactions 0.8 33.9 -- -- -- -- -- 33.9
Currency translation
adjustment -- -- -- (3.0) -- -- -- (3.0)
Unrealized loss on
securities, net -- -- -- (6.6) -- -- -- (6.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 481.7 455.1 -- (95.5) 3,872.9 -- -- 4,232.5
Net income -- -- -- -- 938.9 -- -- 938.9
Dividends declared -- -- -- -- (251.3) -- -- (251.3)
Stock award transactions 2.0 62.6 -- -- -- -- -- 62.6
Currency translation
adjustment -- -- -- (6.6) -- -- -- (6.6)
Unrealized gain on
securities, net -- -- -- 2.4 -- -- -- 2.4
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 483.7 517.7 -- (99.7) 4,560.5 -- -- 4,978.5
Recapitalization (Note 1) -- (512.8) 512.8 -- (500.0) 2.0 (20.3) (520.3)
Net income -- -- -- -- 431.5 -- -- 431.5
Dividends declared -- -- -- -- (291.4) -- -- (291.4)
Stock award transactions 3.5 -- 170.0 -- -- (1.6) 13.3 183.3
Currency translation
adjustment -- -- -- 1.6 -- -- -- 1.6
Unrealized loss on
securities, net -- -- -- (0.1) -- -- -- (0.1)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 487.2 $ 4.9 $682.8 $(98.2) $4,200.6 0.4 $(7.0) $4,783.1
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
EDS 1996 Annual Report 37
<PAGE>
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 431.5 $ 938.9 $ 821.9
- -------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating activities:
Asset writedowns 503.9 -- --
Depreciation and amortization 1,180.8 1,107.8 771.1
Deferred compensation 81.9 58.8 62.0
Other 46.2 34.1 30.9
Changes in operating assets and liabilities, net of effects of acquired companies:
Accounts receivable (374.1) (839.3) (554.3)
Inventories (8.4) (41.9) (1.9)
Prepaids and other (307.0) (214.5) (199.4)
Accounts payable and accrued liabilities 274.4 30.2 546.0
Deferred revenue (27.4) 81.0 79.1
Taxes payable (250.0) 56.4 (72.5)
- -------------------------------------------------------------------------------------------------------------------------------
Total adjustments 1,120.3 272.6 661.0
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,551.8 1,211.5 1,482.9
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sales of marketable securities 78.9 162.5 374.4
Proceeds from investments in leases and other assets 184.9 87.9 136.0
Payments for purchases of property and equipment (1,158.2) (1,276.5) (1,203.6)
Payments for investments in leases and other assets (244.4) (307.8) (347.5)
Payments related to acquisitions, net of cash acquired (46.7) (234.9) (186.6)
Payments for purchases of software and other intangibles (107.5) (92.0) (77.0)
Payments for purchases of marketable securities (79.3) (100.9) (253.3)
Other 101.5 27.7 67.5
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,270.8) (1,734.0) (1,490.1)
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from long-term debt 11,238.6 7,466.7 10,821.0
Payments on long-term debt (10,871.2) (6,776.3) (10,300.7)
Net decrease in current portion of long-term debt with maturities less than 90 days -- -- (102.9)
Proceeds from sale of redeemable preferred stock of subsidiaries 431.1 -- --
Employee stock transactions and related tax benefit 59.2 26.0 20.2
One-time intercompany payment to GM (500.0) -- --
Dividends paid (291.4) (251.3) (231.1)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 66.3 465.1 206.5
- -------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (16.3) (1.9) 25.5
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 331.0 (59.3) 224.8
Cash and cash equivalents at beginning of year 548.9 608.2 383.4
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 879.9 $ 548.9 $ 608.2
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
38 EDS 1996 Annual Report
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995, and 1994
================================================================================
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Electronic Data Systems Corporation (EDS) is a provider of information
technology services using advanced computer and communications technologies to
meet the business needs of its clients. These services include management
consulting, systems development, systems integration, systems management, and
process management. (See Note 14 for geographic segment information.) As used
herein, the terms "EDS" and "the Company" refer to Electronic Data Systems
Corporation, its predecessor, and its consolidated subsidiaries. EDS offers its
clients a continuum of services in more than 40 countries worldwide.
General Motors Corporation (GM) acquired all of the capital stock of 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, and EDS once again became a publicly held company. In
connection therewith, EDS paid GM a one-time intercompany payment of $500.0
million in cash. Under the terms of the Split-Off, one share of EDS common stock
was exchanged for each share of GM Class E common stock.
Principles of Consolidation
The consolidated financial statements include the accounts of EDS and all
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The Company's investments in companies in
which it has the ability to exercise significant influence over operating and
financial policies are accounted for under the equity method, with the remaining
investments carried at cost.
Basis of Reporting
During the period of GM's ownership of EDS, purchase accounting adjustments
reflected in GM's consolidated financial statements that were applicable to EDS
were not reflected in the accompanying consolidated financial statements. The
effects of such purchase accounting adjustments and their remaining carrying
value were not material to the consolidated financial statements for each of the
years ended December 31, 1996, 1995, and 1994.
Earnings per share for periods ended subsequent to June 7, 1996, is computed
using the weighted average number of EDS common shares outstanding during the
period. Common-equivalent shares consisting of incremental shares issuable upon
the exercise of stock options and awards are excluded from the weighted average
share computation as their effect is immaterial. Earnings per share for periods
ended prior to June 7, 1996, was determined based on the relative amounts
available for the payment of dividends to holders of GM Class E common stock
(the "Available Separate Consolidated Net Income"). The Available Separate
Consolidated Net Income of EDS was equal to the consolidated net income of EDS
multiplied by a fraction, the numerator of which was the weighted average number
of shares of GM Class E common stock outstanding during the period and the
denominator of which was the number of EDS common shares outstanding at the end
of the respective period. Earnings per share for the year ended December 31,
1996, was computed using the weighted average number of EDS common shares
outstanding during the year (485.8 million shares). Amounts calculated under
this method are not materially different from amounts calculated under the
method used during the period that GM Class E common shares were outstanding.
The following table summarizes the calculations used to determine earnings
attributable to GM Class E common shares mentioned above for the years ended
December 31, 1995 and 1994 (in millions, except per share amounts):
<TABLE>
<CAPTION>
Years Ended December 31,
- --------------------------------------------------------------------------------
1995 1994
<S> <C> <C>
Separate consolidated net income $938.9 $821.9
Available separate consolidated
net income $795.6 $444.4
Average number of shares of GM
Class E common stock outstanding
(numerator) 404.6 260.3
Class E dividend base (denominator) 483.7 481.7
Average number of shares of EDS
common stock outstanding 483.7 481.7
Earnings attributable to GM Class E
common stock on a per share basis $ 1.96 $ 1.71
</TABLE>
Debt and Marketable Equity Securities
Marketable securities at December 31, 1996 and 1995, consist of securities
issued by the U.S. Treasury, states, and political subdivisions, as well as
mortgage-backed debt, corporate debt, and corporate equity securities. The
Company classifies all of its debt and marketable equity securities as
available-for-sale. Management determines the appropriate classification of all
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Noncurrent available-for-sale securities are reported within
the balance sheet classification "Investment in Leases and Other." The Company's
available-for-sale securities are recorded at fair value. Unrealized holding
gains and losses, net of the related tax effect, totaling $(4.3) million and
$(4.2) million at December 31, 1996 and 1995, respectively, are excluded from
EDS 1996 Annual Report 39
<PAGE>
earnings and are reported as a component of stockholders' equity until realized.
A decline in the fair value of any available-for-sale security below cost that
is deemed other than temporary is charged to earnings, resulting in the
establishment of a new cost basis for the security. (See Note 3.)
Inventory Valuation
Inventories, primarily consisting of computer equipment, are stated principally
at the lower of cost or market using the first-in, first-out method.
Property and Equipment
Property and equipment are carried at cost. Depreciation of property and
equipment is calculated using the straight-line method over the lesser of the
asset's estimated useful life, the life of the related client contract, or the
term of the lease in the case of leasehold improvements. The ranges of estimated
useful lives are as follows:
<TABLE>
<CAPTION>
Years
<S> <C>
Buildings 20-40
Facilities 5-20
Computer equipment 3-8
Other equipment and furniture 3-15
</TABLE>
Software, Goodwill, and Other Intangibles
Software purchased by the Company and utilized in designing, installing, and
operating business information and communications systems is capitalized and
amortized on a straight-line basis over a five- to eight-year period. Costs of
developing and maintaining software systems are incurred primarily in connection
with client contracts and are considered contract costs. Software development
costs that meet the capitalization and recoverability requirements of Statement
of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed, are capitalized and
generally amortized on a straight-line basis over three years. Such amounts were
not significant.
The cost of acquired companies is allocated first to identifiable assets based
on estimated fair values. Costs allocated to identifiable intangible assets are
amortized on a straight-line basis over the remaining estimated useful lives of
the assets as determined by underlying contract terms or independent appraisals.
Such lives range from five to 10 years. The excess of the purchase price over
the fair value of identifiable assets acquired, net of liabilities assumed, is
recorded as goodwill and amortized on a straight-line basis over the useful
life. This is determined based on the individual characteristics of the acquired
entity, which is five to 40 years.
The Company periodically evaluates the carrying amounts of goodwill, as well
as the related amortization periods, to determine whether adjustments to these
amounts or useful lives are required based on current events and circumstances.
The evaluation is based on the Company's projection of the undiscounted future
operating cash flows of the acquired operation over the remaining useful lives
of the related goodwill. To the extent such projections indicate that future
undiscounted cash flows are not sufficient to recover the carrying amounts of
related goodwill, the underlying assets are written down by charges to expense
so that the carrying amount is equal to future undiscounted cash flows. The
assessment of the recoverability of goodwill will be affected if estimated
future operating cash flows are not achieved.
Revenue Recognition
The Company provides services under level-of-effort and fixed-price contracts,
with the length of the Company's contracts extending up to 10 years. Under
level-of-effort types of contracts, revenue is earned based on agreed-upon
billing amounts as services are provided to the client. For certain fixed-price
contracts, revenue is recognized on the percentage-of-completion method. Revenue
earned on the percentage-of-completion method is based on the percentage that
incurred contract costs to date bear to total estimated contract costs after
giving effect to the most recent estimates of total cost. Changes to total
estimated contract costs, if any, are recognized in the period they are
determined. Provisions for estimated losses, if any, are made in the period in
which the loss first becomes apparent. Revenue under nonrefundable fixed-price
contracts for software licenses is recognized after the software has been
delivered, all significant obligations of the Company have been fulfilled, and
all significant uncertainties regarding client acceptance have expired. The
portion of the fixed-price revenue related to maintenance is unbundled,
deferred, and recognized ratably over the contract period.
Deferred revenues of $592.6 million and $629.3 million at December 31, 1996
and 1995, respectively, represent billings in excess of costs and related
profits on certain contracts. Included in accounts receivable are unbilled
receivables of $950.2 million and $706.9 million at December 31, 1996 and 1995,
respectively. Such unbilled receivables for certain contracts in progress
represent costs and related profits in excess of billings, and such amounts were
not billable at the balance sheet date, but are recoverable over the remaining
life of the contract. These billings on fixed-price contracts will be made in
the future in accordance with contractual agreements. Of the unbilled
receivables at December 31, 1996, billings to such clients amounting to $206.6
million are expected to be collected in 1998 and thereafter.
40 EDS 1996 Annual Report
<PAGE>
Currency Translation
Assets and liabilities of non-U.S. subsidiaries whose functional currency is not
the U.S. dollar are translated at current exchange rates. Revenue and expense
accounts are translated using an average rate for the period. Translation gains
(losses) are not included in determining net income, but are reflected as a
separate component of stockholders' equity. Cumulative currency translation
adjustments included in stockholders' equity were $(93.9) million and $(95.5)
million at December 31, 1996 and 1995, respectively. Nonfunctional currency
transaction gains (losses) are included in determining net income and were
$(11.8) million, $(3.8) million, and $4.5 million, net of income taxes, for the
years ended December 31, 1996, 1995, and 1994, respectively.
Income Taxes
The Company provides for deferred taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered. The deferral method is used to account
for investment tax credits. Prior to the Split-Off, the Company was included in
the consolidated federal tax returns filed by GM. Current federal income taxes
were calculated on a separate return basis and remitted to GM.
Statements of Cash Flows
The Company uses the indirect method to present cash flows from operating
activities and considers certificates of deposit, as well as the following items
with original maturities of three months or less, to be cash equivalents:
commercial paper, repurchase agreements, and money market funds. (See Note 20.)
Derivatives
Derivative financial instruments are used by the Company in the management of
its interest rate and foreign currency exposures. Net payments or receipts under
the Company's interest rate swap agreements are recorded as adjustments to
interest expense. For foreign exchange forward contracts that are designated as
a hedge of a firm commitment, gains and losses are deferred and included in the
measurement of the hedged transaction upon settlement. Deferred gains and losses
relating to these instruments were not material in the years ended December 31,
1996, 1995, and 1994. Gains and losses on other foreign currency forward
contracts are reflected in other income in the period in which the currency
fluctuation occurs.
Financial Instruments
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1996 and 1995 (in millions):
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
1996 1995
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Available-for-sale marketable
securities (Note 3) $ 82.6 $ 82.6 $ 89.7 $ 89.7
Investment in securities,
joint ventures, and part-
nerships, under the
cost method of
accounting (Note 6) 500.0 565.2 482.0 582.6
Noncurrent notes
receivable (Note 6) 34.4 34.4 89.6 86.0
Long-term debt (Note 9) 2,457.6 2,498.6 2,100.6 2,168.4
Redeemable preferred
stock of subsidiaries
and related interest
rate swap agreements
(Note 10) 440.3 440.3 -- --
Foreign exchange forward
contracts, net liability
(Note 15) (12.0) (12.0) (5.4) (5.4)
Currency swap agreement,
net asset (Note 15) 8.2 8.2 -- --
</TABLE>
The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments:
Available-for-sale marketable securities - These investments are classified as
available-for-sale and carried at their estimated fair value based on current
market quotes.
Investment in securities, joint ventures, and partnerships and noncurrent
notes receivable - The fair values of certain long-term investments are
estimated based on quoted market prices for these or similar investments. For
other investments and noncurrent notes receivable, various methods are used to
estimate fair value, including external valuations and discounted cash flows.
Long-term debt and redeemable preferred stock of subsidiaries, including
related interest rate swap agreements - The fair value of these instruments is
estimated based on the current rates offered to the Company for instruments with
similar terms, degree of risk, and remaining maturities.
EDS 1996 Annual Report 41
<PAGE>
Foreign exchange forward contracts - The fair value of foreign exchange
forward contracts is based on the estimated amount to settle based on market
exchange rates.
Currency swap agreement - The fair value of this instrument is estimated based
on quotes from the market makers of these instruments and represents the
estimated amount that the Company would expect to receive or pay to terminate
the agreement.
Other - The carrying value of other financial instruments such as cash
equivalents, accounts receivable, and accounts payable approximate their fair
value.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those estimates.
Significant Clients
Immediately prior to the Split-Off, EDS and GM entered into a new Master
Services Agreement (the "Master Services Agreement") that serves as a framework
for the negotiation and operation of service agreements between GM and EDS
related to certain "in-scope" information technology (IT) services to be
provided by EDS to GM on a worldwide basis (collectively, together with the
Master Services Agreement, the "IT Services Agreements"). The IT Services
Agreements replaced the master agreement that, prior to the Split-Off, served as
a framework for individual services agreements between GM and EDS.
During the years ended December 31, 1996, 1995, and 1994, the portion of EDS
revenues attributable to GM was 30%, 31%, and 36%, respectively. Due to the
signing of the new IT Services Agreements prior to the Split-Off, EDS does not
anticipate the loss of GM as an ongoing major client in the near future.
Concentrations of credit risk with respect to accounts receivable are limited
due to the large number of clients forming the Company's client base and their
dispersion across different industry and geographic areas. Accounts receivable
are shown net of allowances of $104.3 million and $99.5 million as of December
31, 1996 and 1995, respectively.
Other than GM, no single client accounted for more than 10% of the Company's
revenues in 1996, 1995, or 1994.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted the disclosure provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, which requires pro forma
disclosure of net income and earnings per share as if the SFAS No. 123 fair
value method had been applied. The Company continues to apply the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, for the preparation of its basic consolidated financial statements.
(See Note 12.)
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amounts of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. Initial adoption of SFAS No. 121 as of January 1, 1996, did not
have a material impact on the Company's financial position or results of
operations.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements to conform to the 1996 presentation.
================================================================================
NOTE 2: NATIONAL HERITAGE INSURANCE COMPANY
National Heritage Insurance Company (NHIC), a wholly owned subsidiary of EDS,
acts as underwriter for claims benefit payments for the Medicaid welfare program
contract for the state of Texas (the "State"). NHIC also acts as an
administrator for the Medicare Part B claims in certain counties in California.
The underwriting contract provides that certain payments from the State be
deposited in trust accounts that are not included in the consolidated financial
statements. In accordance with contractual provisions, these funds will be
returned to the State if total benefit claims are less than the amounts
received. Of such payments received during the years ended December 31, 1996,
1995, and 1994, $3,454.1 million, $3,440.1 million, and $4,188.7 million,
42 EDS 1996 Annual Report
<PAGE>
respectively, were designated for the payment of benefit claims or to be
returned to the State. At December 31, 1996 and 1995, designated funds at
amortized costs of $645.1 million and $664.7 million, respectively, remained in
the trust accounts. Approximate market values of these invested funds at
December 31, 1996 and 1995, were $644.4 million and $663.3 million,
respectively. These investments primarily consist of corporate and government
bonds. NHIC has the ability and intent to hold these investments until their
full face value can be realized. Gains and losses from the sale of these
investments held in trust accounts are combined with gains and losses from the
Company's other investments.
================================================================================
3: DEBT AND MARKETABLE EQUITY SECURITIES
Following is a summary of current available-for-sale securities (in millions):
<TABLE>
<CAPTION>
December 31, 1996
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. government and
agency obligations $43.0 $-- $0.1 $42.9
Other debt securities 35.4 -- 2.5 32.9
- --------------------------------------------------------------------------------
Total debt securities 78.4 -- 2.6 75.8
Equity securities 7.0 -- 0.2 6.8
- --------------------------------------------------------------------------------
Total current available-
for-sale securities $85.4 $-- $2.8 $82.6
- --------------------------------------------------------------------------------
<CAPTION>
December 31, 1995
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S.government and
agency obligations $33.2 $0.1 $0.1 $33.2
Other debt securities 35.6 0.1 1.8 33.9
- --------------------------------------------------------------------------------
Total debt securities 68.8 0.2 1.9 67.1
Equity securities 23.4 -- 0.8 22.6
- --------------------------------------------------------------------------------
Total current available-
for-sale securities $92.2 $0.2 $2.7 $89.7
- --------------------------------------------------------------------------------
</TABLE>
Noncurrent available-for-sale securities are included in "Investment in Leases
and Other" (Note 6) and are not significant.
The amortized cost and estimated fair value of current debt securities at
December 31, 1996, by contractual maturity, are shown below (in millions).
Expected maturities will differ from contractual maturities because the issuers
of the securities may have the right to repay obligations without prepayment
penalties.
<TABLE>
<CAPTION>
December 31, 1996
- --------------------------------------------------------------------------------
Estimated
Amortized Fair
Cost Value
<S> <C> <C>
Debt securities
Due in one year or less $26.9 $26.9
Due after one year through five years 32.7 32.6
Due after five years through 10 years -- --
Due after 10 years 1.6 1.6
Mortgage-backed securities 17.2 14.7
- --------------------------------------------------------------------------------
Total debt securities $78.4 $75.8
- --------------------------------------------------------------------------------
</TABLE>
The following table summarizes sales of available-for-sale securities (in
millions):
<TABLE>
<CAPTION>
Years Ended December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Proceeds from sales $78.9 $162.5 $374.4
Gross realized gains $ 0.2 $ 0.7 $ 17.4
Gross realized losses $(1.7) $ (1.1) $ (4.1)
</TABLE>
Specific identification was used to determine cost in computing realized gain or
loss.
================================================================================
NOTE 4: PROPERTY AND EQUIPMENT (IN MILLIONS)
<TABLE>
<CAPTION>
December 31, 1996
- --------------------------------------------------------------------------------
Accumulated
Cost Depreciation Net
<S> <C> <C> <C>
Land $ 134.8 $ -- $ 134.8
Buildings and facilities 1,007.1 420.8 586.3
Computer equipment 5,201.5 3,150.9 2,050.6
Other equipment and furniture 645.7 320.4 325.3
- --------------------------------------------------------------------------------
Total $6,989.1 $3,892.1 $3,097.0
- --------------------------------------------------------------------------------
<CAPTION>
December 31, 1995
- --------------------------------------------------------------------------------
Accumulated
Cost Depreciation Net
<S> <C> <C> <C>
Land $ 136.9 $ -- $ 136.9
Buildings and facilities 925.1 383.5 541.6
Computer equipment 4,836.2 2,571.3 2,264.9
Other equipment and furniture 663.6 364.6 299.0
- --------------------------------------------------------------------------------
Total $6,561.8 $3,319.4 $3,242.4
- --------------------------------------------------------------------------------
</TABLE>
EDS 1996 Annual Report 43
<PAGE>
================================================================================
NOTE 5: LAND HELD FOR DEVELOPMENT
At December 31, 1996, land held for development consisted of approximately 1,882
acres located throughout the Dallas metropolitan area. Approximately 1,425 acres
of land, site of a commercial real estate development, are located in Plano,
Texas. The carrying value of land is periodically compared to current sales,
market analyses, and appraisals to determine whether an adjustment is required.
================================================================================
NOTE 6: INVESTMENT IN LEASES AND OTHER (IN MILLIONS)
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
Lease contracts receivable (net of principal
and interest on nonrecourse debt) $ 362.5 $ 385.9
Estimated residual values of leased assets
(not guaranteed) 318.2 335.3
Unearned income, including deferred
investment tax credits (235.5) (246.8)
- --------------------------------------------------------------------------------
Investment in leveraged leases (excluding
deferred taxes of $323.7 and $303.0 at
December 31, 1996 and 1995, respectively) 445.2 474.4
Investment in securities, joint ventures, and
partnerships 651.8 636.6
Investment in direct financing leases,
net of unearned income 141.9 148.2
Long-term prepaid software license fees 108.0 43.4
Noncurrent notes receivable 34.4 89.6
Other 210.4 181.3
- --------------------------------------------------------------------------------
Total $1,591.7 $1,573.5
- --------------------------------------------------------------------------------
</TABLE>
Financing leases that are financed with nonrecourse borrowings at lease
inception are accounted for as leveraged leases. Such borrowings are secured by
substantially all of the lessor's rights under the lease plus the residual value
of the asset. For federal income tax purposes, the Company receives the
investment tax credit (if available) at lease inception and has the benefit of
tax deductions for depreciation on the leased asset and for interest on the
nonrecourse debt. A portion of the Company's leveraged lease portfolio is
concentrated within the airline industry. The Company historically has not
experienced credit losses from these transactions, and the portfolios are
diversified among unrelated lessees.
Investment in securities, joint ventures, and partnerships includes
investments accounted for under the equity method of $151.8 million and $154.6
million at December 31, 1996 and 1995, respectively. A decline in the market
value of any of these investments that is deemed to be other than temporary
would be charged to earnings. At December 31, 1996 and 1995, "Investment in
Leases and Other" was net of allowances of $34.7 and $26.6 million,
respectively.
================================================================================
NOTE 7: SOFTWARE, GOODWILL, AND OTHER INTANGIBLES (IN MILLIONS)
<TABLE>
<CAPTION>
December 31, 1996
- --------------------------------------------------------------------------------
Accumulated
Cost Amortization Net
<S> <C> <C> <C>
Software $1,010.8 $ 712.7 $ 298.1
Goodwill 1,046.8 218.4 828.4
Other intangibles 450.1 169.8 280.3
- --------------------------------------------------------------------------------
Total $2,507.7 $1,100.9 $1,406.8
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
- --------------------------------------------------------------------------------
Accumulated
Cost Amortization Net
<S> <C> <C> <C>
Software $ 966.6 $606.8 $ 359.8
Goodwill 977.9 121.8 856.1
Other intangibles 493.5 179.5 314.0
- --------------------------------------------------------------------------------
Total $2,438.0 $908.1 $1,529.9
- --------------------------------------------------------------------------------
</TABLE>
================================================================================
NOTE 8: ACCRUED LIABILITIES (IN MILLIONS)
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
Contract-related $1,164.0 $1,044.8
Payroll-related 313.1 291.4
Operating expenses 146.3 157.7
Property, sales, and franchise taxes 108.5 135.1
Other 111.7 35.6
- --------------------------------------------------------------------------------
Total $1,843.6 $1,664.6
- --------------------------------------------------------------------------------
</TABLE>
44 EDS 1996 Annual Report
<PAGE>
================================================================================
NOTE 9: LONG-TERM DEBT (IN MILLIONS)
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
Commercial paper, 3.1% to 6.3% $1,537.9 $1,078.0
Lines of credit, variable rate, 5.8% to
6.9%, due 1997 27.0 118.9
Notes, variable rate, 2.5% to 9.1%,
due 1997 to 2006 8.3 9.3
Notes to banks, fixed rate, 1.2% to 11.7%,
due 1997 to 2003 102.1 121.6
Notes payable, fixed rate, 6.9% to 7.1%,
due 2000 to 2005, net of discount 646.4 645.8
Notes payable, fixed rate, 6.0% to 12.9%,
due 1997 to 2001 135.9 127.0
- --------------------------------------------------------------------------------
Total 2,457.6 2,100.6
Less current portion of
long-term debt (133.3) (247.8)
- --------------------------------------------------------------------------------
Long-term debt $2,324.3 $1,852.8
- --------------------------------------------------------------------------------
</TABLE>
Commercial paper is classified as noncurrent debt, as it is intended to be
maintained on a long-term basis with ongoing credit availability provided by the
Company's revolving, committed lines of credit. During 1995, the Company revised
its agreement with a syndicate of banks, which increased to $2,500.0 million its
committed lines of credit, of which $1,250.0 million expires in 1997 with the
option to convert any outstanding amounts under these lines into term loans that
mature in 1999. The remaining $1,250.0 million expires in 2001. The Company pays
commitment fees of .045-.065% on the unused portion of the lines of credit. Upon
expiration of the commitment periods, the lenders and EDS have the option to
extend the commitment.
In addition, as of December 31, 1996, the Company had available and had used
another $21.3 million in committed lines of credit. The Company also had
available $697.8 million in uncommitted short-term lines of credit, of which
$692.1 million remained unused at December 31, 1996.
In May 1995, EDS issued $350.0 million of its 6.85%, five-year notes and
$300.0 million of its 7.125%, 10-year notes in a private placement to accredited
investors.
Notes payable relate to land held for development, property and equipment,
acquisitions, and other items.
Maturities of long-term debt for years subsequent to December 31, 1996, are as
follows (in millions):
<TABLE>
<S> <C>
1997 $ 133.3
1998 46.5
1999 292.8
2000 353.5
2001 1,254.6
Thereafter 376.9
- --------------------------------------------------------------------------------
Total $2,457.6
- --------------------------------------------------------------------------------
</TABLE>
The Company's credit facilities and the indenture governing its medium-term
notes contain certain financial and other covenants, including the maintenance
of a minimum net worth and restrictions on mergers, consolidations, and sales of
substantially all the assets of the Company. As of December 31, 1996, the
Company was in compliance with all of these covenants.
================================================================================
NOTE 10: REDEEMABLE PREFERRED STOCK OF SUBSIDIARIES
During 1996, consolidated subsidiaries of the Company issued 265.0 million
British pounds (440.3 million U.S. dollars) of redeemable preferred stock to
third parties. Holders of such preferred shares have the right to redeem such
shares from 2001-2003 for cash equal to the issue amount plus cumulative unpaid
dividends. Dividends on such preferred shares are cumulative from the effective
date of issue at fixed rates ranging from 6.14% to 7.7%. (See Note 15 for a
discussion of related interest rate swap agreements.) The preferred shares are
nonvoting and provide the holders with a priority position with respect to any
class of the issuing subsidiary's stock in the event of dissolution. The Company
may call such shares for an amount equal to the issue amount plus cumulative
unpaid dividends upon the fifth anniversary of issue date.
In January 1997, a consolidated subsidiary of the Company issued 200.0 million
British pounds (339.0 million U.S. dollars) of redeemable preferred stock to
third parties. Dividends on such preferred shares are cumulative from the
effective date of issue at a blended fixed rate of 6.07%. The preferred shares
are nonvoting and provide the holders with a priority position with respect to
any class of the issuing subsidiary's stock in the event of dissolution. Both
the holders of the preferred stock and the Company may call such shares at any
time for an amount equal to the issue amount plus cumulative unpaid dividends.
EDS 1996 Annual Report 45
<PAGE>
================================================================================
NOTE 11: INCOME TAXES
The current and deferred income tax liabilities (assets) are summarized as
follows (in millions):
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
Current payable (receivable) $(11.0) $ 4.3
Current deferred 138.5 71.6
- --------------------------------------------------------------------------------
Total income taxes - current 127.5 75.9
Noncurrent deferred 429.4 739.7
- --------------------------------------------------------------------------------
Total current and noncurrent
income taxes $556.9 $815.6
- --------------------------------------------------------------------------------
</TABLE>
The provision for income tax expense is summarized as follows (in millions):
<TABLE>
<CAPTION>
U.S.
Year Ended December 31, 1996 Federal Non-U.S. State Total
<S> <C> <C>
Current $303.2 $ 69.1 $42.4 $414.7
Deferred (94.6) (77.2) (0.3) (172.1)
- --------------------------------------------------------------------------------
Total $208.6 $ (8.1) $42.1 $242.6
- --------------------------------------------------------------------------------
Year Ended December 31, 1995
Current $342.0 $ 85.6 $35.4 $463.0
Deferred 42.3 20.6 2.2 65.1
- --------------------------------------------------------------------------------
Total $384.3 $106.2 $37.6 $528.1
- --------------------------------------------------------------------------------
Year Ended December 31, 1994
Current $296.8 $150.1 $32.6 $479.5
Deferred 3.9 (33.0) 11.9 (17.2)
- --------------------------------------------------------------------------------
Total $300.7 $117.1 $44.5 $462.3
- --------------------------------------------------------------------------------
</TABLE>
Income before income taxes included the following components (in millions):
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
U.S. income $705.1 $1,220.8 $1,011.4
Non-U.S. income (loss) (31.0) 246.2 272.8
- -------------------------------------------------------------------------------
Total $674.1 $1,467.0 $1,284.2
- -------------------------------------------------------------------------------
</TABLE>
A reconciliation of income tax expense using the statutory federal income tax
rate of 35.0% to the actual income tax expense follows (in millions):
<TABLE>
<CAPTION>
Years Ended December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Income before income taxes $674.1 $1,467.0 $1,284.2
Statutory federal income tax 235.9 513.4 449.5
Non-U.S. taxes, net of credit (3.9) 4.1 18.9
State income tax, net 27.4 24.4 28.9
Investment tax credit -
leveraged leases (3.2) (3.0) (3.1)
Research and experimenta-
tion credits (13.1) (7.5) (11.3)
Other (0.5) (3.3) (20.6)
- --------------------------------------------------------------------------------
Total $242.6 $ 528.1 $ 462.3
- --------------------------------------------------------------------------------
Effective income tax rate 36.0% 36.0% 36.0%
- --------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences and carryforwards, which result in a
significant portion of the deferred tax assets and liabilities, are as follows
(in millions):
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Assets Liabilities Assets Liabilities
<S> <C> <C> <C> <C>
Basis differences attributable
to leasing activities $ -- $ 510.6 $ 1.6 $ 488.4
Adjustments necessary to
convert accruals to a tax basis 127.9 258.8 129.9 246.8
Employee benefit plans 23.8 67.6 27.1 57.8
Accumulated tax depreciation/
amortization versus
accumulated financial
statement depreciation/
amortization 9.0 109.8 12.0 259.5
Effect on deferred taxes
of carryforwards 213.8 -- 122.3 --
Unpaid claims and unearned
premiums related to NHIC 9.6 71.0 12.1 72.8
Employee-related compensation 132.1 -- 94.0 --
Allowance for doubtful accounts 29.1 -- 19.3 --
Adjustments from conversion
from cash to accrual basis
on open tax years 43.5 -- 43.5 --
Book to tax differences on
securities 15.2 -- 17.0 --
Effect of lower tax rate on
distributable foreign earnings 47.3 -- 31.7 --
Other 96.5 158.3 87.6 157.8
- --------------------------------------------------------------------------------
Subtotal 747.8 1,176.1 598.1 1,283.1
Less valuation allowance (139.6) -- (126.3) --
- --------------------------------------------------------------------------------
Total deferred taxes $ 608.2 $1,176.1 $ 471.8 $1,283.1
- --------------------------------------------------------------------------------
</TABLE>
46 EDS 1996 Annual Report
<PAGE>
The net changes in the total valuation allowance for the years ended December
31, 1996 and 1995, were increases of $13.3 million and $15.2 million,
respectively. Certain of the Company's foreign subsidiaries have net operating
loss carryforwards that will be available to offset taxable income, if any, of
such subsidiaries and expire in varying periods beginning in 1997 and extending
over an indefinite period. A majority of such carryforwards are included in the
valuation allowance. In assessing the realizability of deferred tax assets, the
Company considers whether it is more likely than not that some portion or all of
the deferred tax assets will be realized.
================================================================================
NOTE 12: STOCK PURCHASE AND INCENTIVE PLANS
The 1996 Electronic Data Systems Corporation Stock Purchase Plan (the "EDS Stock
Purchase Plan") and the 1996 Incentive Plan of Electronic Data Systems
Corporation (the "Incentive Plan") are both continuations of plans in effect
prior to the Split-Off to reward certain officers and employees of EDS. In 1996,
a broad-based nonqualified stock option plan (the "Broad-Based Plan") was
adopted to provide additional financial incentives for certain employees. The
EDS Incentive and Compensation Committee was replaced at the time of the Split-
Off by the Compensation and Benefits Committee of the EDS Board of Directors
(the "Committee"). The Committee has exclusive power to administer these plans.
All references to common stock prior to the Split-Off are to GM Class E common
stock.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, in accounting for its plans. Compensation cost that has been charged
against income in connection with stock plans is $81.9 million, $58.8 million,
and $62.0 million for the years ended December 31, 1996, 1995, and 1994,
respectively. The difference between the quoted market price as of the date of
the grant and the purchase price of shares has been charged to operations over
the vesting period. No compensation cost has been recognized for fixed stock
options and shares acquired by employees under the EDS Stock Purchase Plan. Had
compensation cost for the Company's stock-based compensation plans been
determined in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below (in millions, except per share
amounts):
<TABLE>
<CAPTION>
Years Ended December 31,
- --------------------------------------------------------------------------------
1996 1995
<S> <C> <C> <C>
Net income As reported $431.5 $938.9
Pro forma $416.6 $928.9
Earning per share As reported $.89 $1.96
Pro forma $.86 $1.94
</TABLE>
The EDS Stock Purchase Plan enables EDS employees to purchase up to 57.5
million shares of EDS common stock at 85% of the quoted market price through
payroll deductions of up to 10% of their compensation. Shares of EDS common
stock purchased under the EDS Stock Purchase Plan may not be sold or transferred
within two years of the date of purchase unless they are first offered to EDS at
the lesser of the original purchase price or the fair market value on the date
of sale. The number of shares available for future sale under the EDS Stock
Purchase Plan was 56.6 million shares at December 31, 1996.
The Incentive Plan covers up to 60.0 million shares of EDS common stock, in
addition to 17.0 million unvested shares that were outstanding at the date of
the Split-Off. The Incentive Plan permits the granting of stock-based awards in
the form of restricted shares, restricted stock units, stock options, or stock
appreciation rights to eligible employees, officers, and nonemployee directors.
The maximum number of shares for which additional shares, rights, or options may
be granted or sold under the provisions of the Incentive Plan was 53.3 million
shares at December 31, 1996.
The Broad-Based Plan covers up to 20 million shares of EDS common stock. The
Broad-Based Plan permits the granting of stock-based awards in the form of
stock options to eligible employees. As of December 31, 1996, no shares had been
granted under this plan.
During the years ended December 31, 1996, 1995, and 1994, 0.6 million, 6.6
million, and 9.5 million restricted stock units, respectively, were granted. A
restricted stock unit is the right to receive shares. All units granted are
generally scheduled to vest over a period of 10 years. The quoted market price
as of the date of grant is charged to operations over the vesting period. The
total unvested number of units as of December 31, 1996, was 16.6 million.
In 1996, the Committee also granted to employees stock options to acquire 5.1
million shares of EDS common stock that vest over 10 years, subject to
accelerated vesting based on the appreciation in the quoted market price of the
Company's common stock. The Company also granted options to acquire 1.0 million
shares of EDS common stock that vest 100% after 10 years of service, with
ratable accelerated vesting available after five years of service to eligible
participants under certain conditions. The exercise prices of the options are
$45.06 and $60.75 per share, respectively, and are equal to the market prices on
the dates of the grants. At December 31, 1996, none of these options was
exercisable. The fair value of each option granted is $17.24 and $25.99 per
share, respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model. The following
assumptions were used: dividend yields of 1.33% and .99%, respectively; expected
volatility of 23.9%; risk-free interest rate of 6.46%; and expected lives of
eight and nine years, respectively.
EDS 1996 Annual Report 47
<PAGE>
In 1996, nonemployee directors were automatically granted a total of 3,500
restricted shares of EDS common stock and a total of 10,500 stock options under
the Incentive Plan. Both of these grants vest over a three-year period. The
quoted market price on the date of grant is charged to expense over the vesting
period for the restricted shares. The exercise price of the options is $57.03
per share and is equal to the market price on the date of grant. At December 31,
1996, none of these options was exercisable. The remaining contractual life of
the stock options and the maximum term are both 10 years. The fair value of each
stock option granted is $15.77 per share. The assumptions used in the Black-
Scholes model are as follows: dividend yield of 1.05%, expected volatility of
23.9%, risk-free interest rate of 6.67%, and expected life of four years.
================================================================================
NOTE 13: DEFERRED COMPENSATION PLANS
The EDS Deferred Compensation Plan provides a long-term savings program for
participants. This plan allows eligible employees to contribute a percentage of
their compensation to a savings program and to defer income taxes until the time
of distribution. In addition, the EDS Nonemployee Director Deferred Compensation
Plan allows nonemployee directors of the Company to defer all or a portion of
their director's fees in an interest-bearing account or in units denominated by
EDS common stock.
================================================================================
NOTE 14: SEGMENT INFORMATION
Industry Segments
The Company's business involves operations in principally one industry segment:
the design, installation, and operation of business information and
communications systems.
Geographic Segments
The following presents information about the Company's operations in different
geographic areas (in millions):
<TABLE>
<CAPTION>
As of and for the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
U.S. Europe Other Total
<S> <C> <C> <C> <C>
Systems and other
contracts revenues
Non-GM clients $6,577.2 $2,687.0 $ 898.9 $10,163.1
GM and affiliates 3,179.3 691.9 407.0 4,278.2
- --------------------------------------------------------------------------------
Total systems and other
contracts revenues $9,756.5 $3,378.9 $1,305.9 $14,441.3
- --------------------------------------------------------------------------------
Operating income $ 682.9 $ 45.6 $ 67.6 $ 796.1
- --------------------------------------------------------------------------------
Identifiable assets $7,097.1 $3,003.5 $1,092.3 $11,192.9
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
As of and for the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
U.S. Europe Other Total
<S> <C> <C> <C> <C>
Systems and other
contracts revenues
Non-GM clients $5,794.9 $2,001.5 $ 734.6 $ 8,531.0
GM and affiliates 2,926.1 659.2 305.8 3,891.1
- --------------------------------------------------------------------------------
Total systems and other
contracts revenues $8,721.0 $2,660.7 $1,040.4 $12,422.1
- --------------------------------------------------------------------------------
Operating income $1,164.0 $ 271.5 $ 93.5 $ 1,529.0
- --------------------------------------------------------------------------------
Identifiable assets $7,566.8 $2,490.1 $ 775.5 $10,832.4
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
As of and for the Year Ended December 31, 1994
- --------------------------------------------------------------------------------
U.S. Europe Other Total
<S> <C> <C> <C> <C>
Systems and other
contracts revenues
Non-GM clients $4,611.2 $1,308.1 $493.6 $6,412.9
GM and affiliates 2,764.4 523.4 259.4 3,547.2
- --------------------------------------------------------------------------------
Total systems and other
contracts revenues $7,375.6 $1,831.5 $753.0 $9,960.1
- --------------------------------------------------------------------------------
Operating income $1,008.6 $ 168.3 $ 66.7 $1,243.6
- --------------------------------------------------------------------------------
Identifiable assets $6,618.0 $1,573.8 $594.7 $8,786.5
- --------------------------------------------------------------------------------
================================================================================
NOTE 15: FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
</TABLE>
The Company operates on a global basis receiving revenues and incurring expenses
in many different countries. As a result of these activities, the Company has
exposure to market risks arising from changes in interest rates and foreign
exchange rates. Derivative financial instruments are used by the Company for the
purpose of hedging against these risks, to which the Company is exposed in the
normal course of business, by creating offsetting market positions. The
Company's use of such instruments in relation to such risks is explained below.
The Company does not hold or issue financial instruments for trading purposes.
The notional amounts of derivative contracts, summarized below as part of the
description of the instruments utilized, do not necessarily represent the
amounts exchanged by the parties and, thus, are not a measure of the exposure of
the Company through its use of derivatives. The amounts exchanged by the parties
are normally based on the notional amounts and the other terms of the
derivatives. The Company is not a party to leveraged derivatives.
Interest Risk Management
As of December 31, 1996, in connection with the preferred stock issuance
transactions discussed in Note 10, the Company had two fixed to variable
interest rate swaps outstanding in the combined
48 EDS 1996 Annual Report
<PAGE>
notional amount of $440.3 million, with floating-rate payments tied to the
London Interbank Offered Rate (LIBOR) and expiring in July through December
2001. At December 31, 1996, the floating rates to pay were 4.79% to 6.44% and
the fixed rates to receive were 7.55% to 7.7%. The Company also had a currency
swap outstanding at December 31, 1996, for $101.2 million and expiring in July
2001 that converts the British pound LIBOR paid by the Company in one of the
above swaps to U.S. dollar LIBOR. The Company had no outstanding interest rate
or currency swap agreements at December 31, 1995.
Foreign Exchange Risk Management
The Company uses derivative financial instruments, particularly foreign exchange
forward contracts, to hedge transactions denominated in different currencies on
a continuing basis. The purpose of the Company's hedging activities is to reduce
the levels of risk to which it is exposed resulting from exchange rate
movements. At December 31, 1996 and 1995, the Company had forward exchange
contracts maturing predominantly in the following year to purchase various
foreign currencies in the amount of $953.0 million and $651.9 million,
respectively, and to sell various foreign currencies in the amount of $1,709.0
million and $1,380.1 million, respectively.
The Company is exposed to credit risk in the event of nonperformance by
counterparties to interest rate swaps and foreign exchange contracts, but
because the Company deals only with major commercial banks with high-quality
credit ratings, the Company does not anticipate nonperformance by any of these
counterparties.
================================================================================
NOTE 16: RETIREMENT PLANS
The Company has pension plans (the "Plans") covering substantially all its
employees. The majority of the Plans are noncontributory. In general, employees
become fully vested upon attaining five years of service, and benefits are based
on years of service and earnings. The actuarial cost method currently used is
the projected unit credit cost method. The Company's U.S. funding policy is to
contribute amounts that fall within the range of deductible contributions for
federal income tax purposes.
The weighted average assumptions used for the Plans using a measurement date of
October 1 are as follows:
Years Ended December 31,
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Discount rate 8.0% 8.0% 8.9%
Rate of increase in compensation levels 5.4% 5.4% 5.7%
Long-term rate of return on assets 9.7% 9.9% 10.0%
</TABLE>
Net pension cost consisted of the following components (in millions):
<TABLE>
<CAPTION>
Years Ended December 31,
- -----------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Service cost of the current period $ 119.8 $ 87.6 $ 96.1
Interest cost on projected
benefit obligation 121.8 97.5 82.3
Actual return on assets (195.5) (158.6) (22.3)
Net amortization and deferral 78.3 59.9 (37.9)
- -----------------------------------------------------------------
Net pension cost $ 124.4 $ 86.4 $118.2
- -----------------------------------------------------------------
</TABLE>
At December 31, 1996 and 1995, the Plans' assets consisted primarily of equity
and fixed income securities, and U.S. government obligations. Accrued and/or
prepaid pension cost is included in "Accrued Liabilities" or "Investment in
Leases and Other" in the accompanying financial statements.
The following is a reconciliation of the funded status of the Plans (in
millions):
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------
Assets Accum. Assets Accum.
Exceed Benefits Exceed Benefits
Accum. Exceed Accum. Exceed
Benefits Assets Benefits Assets
<S> <C> <C> <C> <C>
Plans' assets at fair value $1,772.2 $ 8.0 $1,242.0 $ 8.2
- --------------------------------------------------------------------------
Actuarial present value of
benefit obligation
Vested benefits 1,178.5 86.6 750.7 81.2
Nonvested benefits 89.8 14.2 78.4 13.3
- --------------------------------------------------------------------------
Accumulated benefit
obligation 1,268.3 100.8 829.1 94.5
Effect of projected future
salary increases 513.8 57.0 462.9 57.9
- --------------------------------------------------------------------------
Projected benefit obligation 1,782.1 157.8 1,292.0 152.4
- --------------------------------------------------------------------------
Deficiency of Plans'
assets over projected
benefit obligation (9.9) (149.8) (50.0) (144.2)
Unrecognized net (gain) loss 68.4 (15.3) 126.7 (19.7)
Unrecognized net (asset)
obligation at date of
adoption (2.5) 22.2 (3.1) 26.0
Unrecognized prior
service cost 10.5 (0.8) 11.4 (0.9)
- --------------------------------------------------------------------------
Net prepaid (accrued)
pension cost $ 66.5 $(143.7) $ 85.0 $(138.8)
- --------------------------------------------------------------------------
</TABLE>
The curtailment loss incurred by the Company in connection with its
restructuring during 1996 was not material. (See Note 21.)
EDS 1996 Annual Report 49
<PAGE>
================================================================================
NOTE 17: COMMITMENTS AND RENTAL EXPENSE
Commitments for rental payments for each of the next five years ending December
31 and thereafter under noncancelable operating leases for computer equipment,
software, and facilities are as follows (in millions):
<TABLE>
<S> <C> <C> <C>
1997 $429.2 2000 $150.3
1998 245.9 2001 124.2
1999 197.8 Thereafter 552.5
</TABLE>
Total rentals under cancelable and noncancelable leases, principally computer
equipment, leased facilities, and other leased assets, included in costs and
charged to expenses were $654.7 million, $676.1 million, and $524.3 million for
the years ended December 31, 1996, 1995, and 1994, respectively. Total rentals
under cancelable and noncancelable leases for software included in costs and
charged to expenses were $337.3 million, $306.8 million, and $220.2 million for
the years ended December 31, 1996, 1995, and 1994, respectively.
At December 31, 1996, the Company had $40.9 million outstanding under standby
letters of credit related to payment and performance guarantees.
================================================================================
NOTE 18: CONTINGENT LIABILITIES
There are various claims and pending actions against the Company arising in the
ordinary course of the conduct of its business. Certain of these actions seek
damages in significant amounts. However, the amount of liability on claims and
pending actions at December 31, 1996, was not determinable. In the opinion of
management, the ultimate liability, if any, resulting from the aforementioned
contingencies will not have a material adverse effect on the Company's
consolidated results of operations or financial position.
In the normal course of business, the Company provides IT consulting and
processing services to its clients under contracts that sometimes require the
Company to comply with certain project-related performance criteria, including
project deadlines, defined IT system deliverables, or level-of-effort
measurements. Under certain contracts, the Company's noncompliance with such
criteria could require the Company to purchase project-related IT processing
assets of its clients totaling $365.0 million. In the opinion of management, the
Company is in compliance with the performance provisions of these contracts and
the ultimate liability, if any, incurred under these contracts will not have a
material adverse effect on the Company's consolidated results of operations or
financial position.
================================================================================
NOTE 19: ACQUISITIONS
On August 31, 1995, the Company acquired A.T. Kearney, a Chicago-based
international management consulting firm. At the acquisition date, the Company
paid approximately $112.7 million in cash and issued $162.3 million in short-
and long-term notes to A.T. Kearney stockholders and principals. Prior to
December 31, 1995, $80.9 million of short-term notes related to the acquisition
were retired.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the excess purchase price over net tangible assets acquired, based
on the fair value of such assets and liabilities at the date of acquisition, was
$252.1 million and is being amortized to expense over a 10-year period. The
accompanying financial statements include the operations of A.T. Kearney since
the date of acquisition. Pro forma disclosure related to A.T. Kearney's results
of operations is not presented, as the impact is immaterial to EDS.
The Company made various other acquisitions during the years ended December
31, 1996 and 1995, none of which had a material effect on the Company's
financial position or results of operations during those periods. In conjunction
with the aforementioned acquisitions, assets acquired and liabilities assumed
are summarized as follows (in millions):
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Fair value of assets acquired $ 78.1 $ 674.7 $ 427.8
Less:
Cash paid for stock and
assets, net of cash acquired (46.7) (234.9) (186.6)
Debt issued for stock and assets -- (184.9) (94.9)
- -------------------------------------------------------------------------------
Liabilities assumed $ 31.4 $ 254.9 $ 146.3
- -------------------------------------------------------------------------------
</TABLE>
================================================================================
NOTE 20: SUPPLEMENTARY FINANCIAL INFORMATION
The following summarizes certain costs charged to expense for the years
indicated (in millions):
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Depreciation of property
and equipment $873.8 $ 808.1 $ 577.5
- ------------------------------------------------------------------------------
Amortization $307.0 $ 299.7 $ 193.6
- ------------------------------------------------------------------------------
</TABLE>
50 EDS 1996 Annual Report
<PAGE>
The components of interest expense and other, net, are presented below (in
millions):
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Interest and other income $ 76.6 $ 58.8 $ 92.3
Interest expense (153.1) (120.8) (51.7)
- -------------------------------------------------------------------------------
Total $ (76.5) $ (62.0) $ 40.6
- -------------------------------------------------------------------------------
</TABLE>
Supplemental cash flow information is presented below (in millions):
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Cash paid for:
Income taxes, net of refunds $ 390.8 $ 407.8 $ 465.6
- -------------------------------------------------------------------------------
Interest $ 150.6 $ 108.3 $ 49.7
- -------------------------------------------------------------------------------
</TABLE>
================================================================================
NOTE 21: RESTRUCTURING ACTIVITIES AND OTHER RELATED CHARGES
During 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 toward "user-centered" computing. To effect these actions, the Company
adopted formal restructuring plans that consist of work force reductions, asset
writedowns, the exit of certain business activities, and the consolidation of
facilities. The other related charges included in the accompanying consolidated
financial statements have been recorded in connection with the restructuring and
exit strategies that have been committed to by management.
Restructuring Charge
The restructuring charge of $285.6 million primarily includes costs associated
with work force reductions announced in April 1996. Expected work force
reductions of approximately 4,900 employees consist of employees who accepted
the Company's early retirement offer and employees who have been identified for
involuntary termination under a planned work force realignment. This work force
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 $258.1 million, $137.0 million of
which relates to special termination benefits, including amounts under the
Company's defined benefit pension plan. As of December 31, 1996, 1,743 employees
had accepted the early retirement offer and 1,860 employees had been
involuntarily terminated. Termination benefits of $67.9 million have been paid
related to the involuntary termination plan, and the remaining $53.2 million is
expected to be paid in 1997. The balance of the restructuring charge relates to
other exit costs resulting from the closure and consolidation of facilities and
estimated legal costs.
Asset Writedowns
As part of its plan to maintain and improve operating efficiencies, the Company
recorded writedowns of certain of its assets by $503.9 million during the
quarter ended June 30, 1996. Of this amount, $262.3 million related to computer
and other assets that were written down to their estimated fair values,
determined by external market quotes. These assets were written down pursuant to
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, 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 were required when the carrying value of assets
currently held for use exceeded their expected future undiscounted cash flows,
including expected cash flows resulting from eventual disposition. Also included
in this charge were asset writedowns of $68.7 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
recorded writedowns of certain of its inventory by $31.7 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 were
written down based on the projected use of such assets. Asset writedowns
totaling $21.4 million related to a client in reorganization and in the process
of being acquired by a third party. The remaining balance of the charge for
asset writedowns consisted primarily of fixed assets, software licenses, and
other assets that no longer will be used to support the Company's operations
because of its exit decisions.
Other Related Charges
Also included in the accompanying consolidated financial statements is $60.0
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 related to the aforementioned client in
reorganization. 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, totaling $45.5 million, have been charged to expense.
EDS 1996 Annual Report 51
<PAGE>
================================================================================
NOTE 22: QUARTERLY FINANCIAL DATA (UNAUDITED)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
- ----------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
Systems and other contracts revenues $3,366.9 $3,497.8 $3,570.5 $4,006.1 $14,441.3
Gross profit from operations 668.8 652.1 759.4 908.6 2,988.9
Income (loss) before income taxes 341.9 (510.2)/(1)/ 416.2 426.2 674.1
Net income (loss) 218.8 (326.5)/(1)/ 266.4 272.8 431.5
Earnings (loss) per share of common stock 0.45 (0.67)/(1)/ 0.55 0.56 0.89
Cash dividends per share of common stock 0.15 0.15 0.15 0.15 0.60
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31, 1996
- ----------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
Systems and other contracts revenues $2,776.3 $2,950.1 $3,073.7 $3,622.0 $12,422.1
Gross profit from operations 600.2 654.9 687.6 877.8 2,820.5
Income before income taxes 307.5 354.5 384.0 421.0 1,467.0
Net income 196.8 226.9 245.7 269.5 938.9
Earnings per share of common stock 0.42 0.47 0.51 0.56 1.96
Cash dividends per share of common stock 0.13 0.13 0.13 0.13 0.52
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes restructuring charges, asset writedowns, and other related charges
discussed in Note 21
52 EDS 1996 Annual Report
<PAGE>
================================================================================
SELECTED FINANCIAL DATA
(in millions, except per share amounts)
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Operating results
Revenues $14,441.3 $12,422.1 $9,960.1 $8,507.3 $8,155.2
Cost of revenues 11,452.4 9,601.6 7,529.4 6,390.6 6,205.8
Selling, general, and administrative expenses 1,403.3 1,291.5 1,187.1 1,005.4 969.3
Restructuring charge 285.6 -- -- -- --
Asset writedowns 503.9 -- -- -- --
One-time split-off costs 45.5 -- -- -- --
Interest expense and other, net 76.5 62.0 (40.6) (20.0) (20.7)
Provision for income taxes 242.6 528.1 462.3 407.3 365.3
- ------------------------------------------------------------------------------------------------------------------
Net income $ 431.5 $ 938.9 $ 821.9 $ 724.0 $ 635.5
- ------------------------------------------------------------------------------------------------------------------
Per share data
Earnings per share $ 0.89 $ 1.96 $ 1.71 $ 1.51 $ 1.33
Cash dividends per share $ 0.60 $ 0.52 $ 0.48 $ 0.40 $ 0.36
Financial position
Current assets $ 5,008.3 $ 4,381.5 $3,354.1 $2,506.8 $2,157.0
Property and equipment, net 3,097.0 3,242.4 2,756.6 2,114.7 1,720.7
Operating and other assets 3,087.6 3,208.5 2,675.8 2,320.6 2,245.8
Total assets 11,192.9 10,832.4 8,786.5 6,942.1 6,123.5
Current liabilities 3,162.8 3,221.5 2,873.2 2,160.4 1,903.1
Long-term debt, less current portion 2,324.3 1,852.8 1,021.0 522.8 561.1
Redeemable preferred stock of subsidiaries
and minority interest 493.3 39.9 -- -- --
Stockholders' equity 4,783.1 4,978.5 4,232.5 3,617.4 3,063.4
</TABLE>
================================================================================
STOCK PRICE RANGE
The Company's common stock is listed on the New York Stock Exchange (NYSE) under
the symbol "EDS." As a result of the Split-Off of the Company from GM on June 7,
1996, each share of Class E common stock of GM was converted into one share of
common stock of the Company. The GM Class E common stock had been listed and
traded on the NYSE under the symbol "GME" through June 7, 1996 (the date of
consummation of the Split-Off). This table shows the range of reported per share
sales prices on the NYSE Composite Tape for the Class E common stock (through
June 7, 1996) and the common stock (beginning June 10, 1996) for the periods
indicated.
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
High Low High Low
<S> <C> <C> <C> <C>
First quarter $58.00 $50.00 $41.38 $36.88
Second quarter 58.63 52.25 45.25 38.38
Third quarter 61.38 46.00 47.50 41.50
Fourth quarter 63.38 40.75 52.63 43.88
</TABLE>
EDS 1996 Annual Report 53
<PAGE>
Exhibit 21
----------
A.T. Kearney GmbH, a Germany corporation
A.T. Kearney International, Inc., a Delaware corporation
A.T. Kearney, Inc., a Delaware corporation
American Network Leasing Corporation, a Nevada corporation
(does business under assumed/fictitious names of American Network Leasing
Corporation of Nevada, ANLC Corporation, and Premier Collection Services)
Appex, Inc., a Delaware corporation
E.D.S. de Mexico, Sociedad Anonima de Capital Variable, a Mexico corporation
E.D.S. International Corporation, a Texas corporation
E.D.S. of Canada, Ltd., an Ontario corporation
E.D.S. World Corporation (Far East), a Nevada corporation
E.D.S. World Corporation (Netherlands), a Texas corporation
EDS (Australia) Pty Limited, an Australia corporation
EDS (Electronic Data Systems) Limited, an England corporation
EDS (Europe) S.A., a Switzerland corporation
EDS Antares, Inc., a Nevada corporation
(does business under assumed/fictitious name of Antares Alliance Group)
EDS Electronic Data Systems Italia S.p.A., an Italy corporation
EDS Electronic Financial Services, Inc., a Delaware corporation
EDS Finance plc, an England corporation
EDS Holding GmbH, a Germany corporation
EDS International (France) S.A.S., a France corporation
EDS New Zealand Limited, a New Zealand corporation
EDS Personal Communications Corporation, a Delaware corporation
EDS Technical Products Corporation, a Delaware corporation
EDS-Electronic Data Systems do Brasil Ltda, a Brazil corporation
Electronic Data Systems (EDS) International B.V., a Netherlands corporation
Electronic Data Systems (EDS) Sweden AB, a Sweden corporation
Electronic Data Systems Belgium N.V., a Belgium corporation
Electronic Data Systems de Venezuela "EDS" C.A., a Venezuela corporation
Electronic Data Systems Espana S.A., a Spain corporation
Electronic Data Systems Limited, an England corporation
Electronic Data Systems, Ltd., a Japan corporation
Japan Systems Company Limited, a Japan corporation
LG-EDS Systems, Inc., a Korea corporation
National Heritage Insurance Company, a Texas insurance corporation
OAN Services, Inc., a Texas corporation
(does business under assumed/fictitious name of EDS OAN Services, Inc.)
Power Investment Corporation, a Nevada corporation
SD-Scicon Ltd, an England corporation
Subarban Limited-Liability Company, a Nevada corporation
Telecommunications International, Inc., a California corporation
(does business under assumed/fictitious name of TIIC)
<PAGE>
Varitel, Inc., a California corporation
Electronic Data Systems Corporation does business under various
assumed/fictitious names, as follows: Encore Auto Financing, Inc. - in Missouri
and Oklahoma; Energy Management Associates - in California, Georgia and Guam;
Maryland Health Information Network - in Delaware, Illinois, Maryland, Michigan,
New York, Virginia and West Virginia.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Electronic Data Systems Corporation:
We consent to incorporation by reference in the following registration
statements of Electronic Data Systems Corporation of our reports dated January
31, 1997, relating to the consolidated balance sheets of Electronic Data Systems
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statement of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996, and the related
schedule, which reports appear in or are incorporated by reference in the 1996
annual report on Form 10-K of Electronic Data Systems Corporation.
Registration
Form Statement No. Description
- ---- ------------- -----------
S-3 333-10145 Electronic Data Systems Corporation Debt
Securities
S-8 2-94690 1984 Electronic Data Systems Corporation
(Post Effective Stock Purchase Plan
Amendment No. 2)
S-8 2-94691 1984 Electronic Data Systems Corporation
(Post Effective Stock Incentive Plan
Amendment No. 2)
S-8 33-64681 EDS Deferred Compensation Plan
(Post Effective
Amendment No. 1)
S-8 33-36443 EDS Deferred Compensation Plan
(Post Effective
Amendment No. 1)
S-8 33-54833 EDS Puerto Rico Savings Plan
(Post Effective
Amendment No. 1)
S-8 (filed on PerformanceShare, 1997 Nonqualified Stock
February 20, 1997) Option Plan of Electronic Data Systems
Corporation
/s/ KPMG Peat Marwick LLP
----------------------------------------
KPMG Peat Marwick LLP
Dallas, Texas
March 5, 1997
<PAGE>
Exhibit 24
POWER OF ATTORNEY
I, the undersigned director of Electronic Data Systems Corporation, a Delaware
corporation ("EDS"), hereby constitute and appoint Lester M. Alberthal, Jr.,
Joseph M. Grant, and D. Gilbert Friedlander, and each of them, my true and
lawful attorneys-in-fact and agents, with full power to them and each of them to
sign for me, and in my name and the capacity indicated below, EDS' Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, and any and all
amendments thereto, with power to file said Form 10-K and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may lawfully do or cause to be done by virtue
hereof.
Dated: February 6, 1997 By: /s/ JAMES A. BAKER, III
----------------------------
James A. Baker, III
Director
POWER OF ATTORNEY
I, the undersigned director of Electronic Data Systems Corporation, a Delaware
corporation ("EDS"), hereby constitute and appoint Lester M. Alberthal, Jr.,
Joseph M. Grant, and D. Gilbert Friedlander, and each of them, my true and
lawful attorneys-in-fact and agents, with full power to them and each of them to
sign for me, and in my name and the capacity indicated below, EDS' Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, and any and all
amendments thereto, with power to file said Form 10-K and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may lawfully do or cause to be done by virtue
hereof.
Dated: February 6, 1997 By: /s/ RICHARD B. CHENEY
----------------------------
Richard B. Cheney
Director
<PAGE>
POWER OF ATTORNEY
I, the undersigned director of Electronic Data Systems Corporation, a Delaware
corporation ("EDS"), hereby constitute and appoint Lester M. Alberthal, Jr.,
Joseph M. Grant, and D. Gilbert Friedlander, and each of them, my true and
lawful attorneys-in-fact and agents, with full power to them and each of them to
sign for me, and in my name and the capacity indicated below, EDS' Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, and any and all
amendments thereto, with power to file said Form 10-K and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may lawfully do or cause to be done by virtue
hereof.
Dated: February 6, 1997 By: /s/ WILLIAM H. GRAY, III
----------------------------
William H. Gray, III
Director
POWER OF ATTORNEY
I, the undersigned director of Electronic Data Systems Corporation, a Delaware
corporation ("EDS"), hereby constitute and appoint Lester M. Alberthal, Jr.,
Joseph M. Grant, and D. Gilbert Friedlander, and each of them, my true and
lawful attorneys-in-fact and agents, with full power to them and each of them to
sign for me, and in my name and the capacity indicated below, EDS' Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, and any and all
amendments thereto, with power to file said Form 10-K and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may lawfully do or cause to be done by virtue
hereof.
Dated: February 6, 1997 By: /s/ RAY J. GROVES
-----------------------------
Ray J. Groves
Director
<PAGE>
POWER OF ATTORNEY
I, the undersigned director of Electronic Data Systems Corporation, a Delaware
corporation ("EDS"), hereby constitute and appoint Lester M. Alberthal, Jr.,
Joseph M. Grant, and D. Gilbert Friedlander, and each of them, my true and
lawful attorneys-in-fact and agents, with full power to them and each of them to
sign for me, and in my name and the capacity indicated below, EDS' Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, and any and all
amendments thereto, with power to file said Form 10-K and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may lawfully do or cause to be done by virtue
hereof.
Dated: February 6, 1997 By: /s/ RAY L. HUNT
-----------------------------
Ray L. Hunt
Director
POWER OF ATTORNEY
I, the undersigned director of Electronic Data Systems Corporation, a Delaware
corporation ("EDS"), hereby constitute and appoint Lester M. Alberthal, Jr.,
Joseph M. Grant, and D. Gilbert Friedlander, and each of them, my true and
lawful attorneys-in-fact and agents, with full power to them and each of them to
sign for me, and in my name and the capacity indicated below, EDS' Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, and any and all
amendments thereto, with power to file said Form 10-K and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may lawfully do or cause to be done by virtue
hereof.
Dated: February 6, 1997 By: /s/ C. ROBERT KIDDER
-----------------------------
C. Robert Kidder
Director
<PAGE>
POWER OF ATTORNEY
I, the undersigned director of Electronic Data Systems Corporation, a Delaware
corporation ("EDS"), hereby constitute and appoint Lester M. Alberthal, Jr.,
Joseph M. Grant, and D. Gilbert Friedlander, and each of them, my true and
lawful attorneys-in-fact and agents, with full power to them and each of them to
sign for me, and in my name and the capacity indicated below, EDS' Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, and any and all
amendments thereto, with power to file said Form 10-K and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may lawfully do or cause to be done by virtue
hereof.
Dated: February 6, 1997 By: /s/ JUDITH RODIN
-----------------------------
Judith Rodin
Director
POWER OF ATTORNEY
I, the undersigned director of Electronic Data Systems Corporation, a Delaware
corporation ("EDS"), hereby constitute and appoint Lester M. Alberthal, Jr.,
Joseph M. Grant, and D. Gilbert Friedlander, and each of them, my true and
lawful attorneys-in-fact and agents, with full power to them and each of them to
sign for me, and in my name and the capacity indicated below, EDS' Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, and any and all
amendments thereto, with power to file said Form 10-K and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may lawfully do or cause to be done by virtue
hereof.
Dated: February 6, 1997 By: /s/ ENRIQUE J. SOSA
-----------------------------
Enrique J. Sosa
Director
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<PAGE>
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