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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
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Commission File No. 01-11779
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ELECTRONIC DATA SYSTEMS CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 75-2548221
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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5400 Legacy Drive, Plano, Texas 75024-3199
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(Address of principal executive offices)
(Zip Code)
(972) 604-6000
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(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_].
As of October 30, 1998, there were outstanding 492,755,842 shares of the regis-
trant's Common Stock, $.01 par value per share.
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<PAGE>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I -- Financial Information (Unaudited)
Item 1. Financial Statements
Condensed Consolidated Statements of Operations.............. 3
Condensed Balance Sheets..................................... 4
Condensed Consolidated Statements of Cash Flows.............. 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 8
Part II -- Other Information
Item 6. Exhibits and Reports on Form 8-K......................... 16
Signatures.............................................................. 17
Exhibit 10(m) Agreement dated August 8, 1998 between Electronic Data Systems
Corporation and Lester M. Alberthal, Jr.
Exhibit 27 Financial Data Schedule (for SEC information only)
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Revenues $4,352.7 $3,733.7 $12,480.8 $11,007.4
------- ------- -------- --------
Costs and expenses
Cost of revenues 3,555.2 2,945.1 10,236.6 8,824.9
Selling, general and administrative 475.1 358.2 1,325.2 1,108.1
Restructuring charge -- -- -- 125.3
Acquired in-process research and development -- -- 42.5 --
Asset write-downs -- 25.9 27.8 165.6
------- ------- -------- --------
Total costs and expenses 4,030.3 3,329.2 11,632.1 10,223.9
------- ------- -------- --------
Operating income 322.4 404.5 848.7 783.5
------- ------- -------- --------
Other income (expense):
Gain on sale of stock of subsidiary -- -- 49.6 --
Interest expense and other, net (17.5) (44.8) 13.2 (84.8)
------- ------- -------- --------
Total other income (expense) (17.5) (44.8) 62.8 (84.8)
------- ------- -------- --------
Income before income taxes 304.9 359.7 911.5 698.7
Provision for income taxes 109.8 129.5 310.3 251.5
------- ------- -------- --------
Net income $ 195.1 $ 230.2 $ 601.2 $ 447.2
======= ======= ======== ========
Earnings per share
Basic $ 0.40 $ 0.47 $ 1.22 $ 0.91
======= ======= ======== ========
Diluted $ 0.39 $ 0.47 $ 1.22 $ 0.91
======= ======= ======== ========
Cash dividends per share $ 0.15 $ 0.15 $ 0.45 $ 0.45
======= ======= ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
3
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<TABLE>
<CAPTION>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions except share and per share amounts)
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 762.1 $ 677.4
Marketable securities 280.0 347.5
Accounts receivable, net 3,837.0 3,736.8
Inventories 61.0 100.9
Prepaids and other 468.2 306.8
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Total current assets 5,408.3 5,169.4
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Property and equipment, net 2,789.9 2,868.4
-------- --------
Operating and other assets
Land held for development, at cost 87.4 87.2
Investments and other assets 1,658.7 1,501.2
Software, goodwill, and other intangibles, net 1,510.7 1,547.9
-------- --------
Total operating and other assets 3,256.8 3,136.3
-------- --------
Total Assets $11,455.0 $11,174.1
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 294.4 $ 372.4
Accrued liabilities 2,471.9 2,207.3
Deferred revenue 498.9 430.8
Income taxes 113.1 137.6
Current portion of long-term debt 41.9 109.5
-------- --------
Total current liabilities 3,420.2 3,257.6
-------- --------
Deferred income taxes 436.9 474.8
Long-term debt, less current portion 1,386.5 1,790.9
Redeemable preferred stock of subsidiaries and
minority interests 392.8 341.4
Stockholders' equity
Preferred stock, $.01 par value; authorized
200,000,000 shares, none issued -- --
Common stock, $.01 par value; 2,000,000,000
shares authorized; 492,567,293 shares
issued at September 30, 1998, and
491,567,240 shares issued and outstanding
at December 31, 1997 4.9 4.9
Additional paid-in capital 929.1 855.7
Retained earnings 4,981.4 4,601.6
Accumulated other comprehensive income (96.3) (152.8)
Treasury stock, at cost,
15,083 shares at September 30, 1998 (0.5) --
-------- --------
Total stockholders' equity 5,818.6 5,309.4
-------- --------
Total Liabilities and Stockholders' Equity $11,455.0 $11,174.1
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
4
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<TABLE>
<CAPTION>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Nine Months Ended
September 30,
------------
1998 1997
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 1,221.9 $ 1,464.4
-------- --------
Cash Flows from Investing Activities
Proceeds from sale of marketable
securities 71.1 66.7
Proceeds from investments and other assets 263.7 160.7
Proceeds from divestiture 371.5 24.6
Payments for purchases of property and
equipment (613.8) (621.7)
Payments for investments and other assets (347.9) (246.6)
Payments related to acquisitions, net of
cash acquired (108.1) (143.1)
Payments for purchases of software and
other intangibles (75.1) (100.6)
Payments for purchases of marketable
securities (91.7) (45.2)
Other 52.7 69.4
-------- --------
Net cash used in investing activities (477.6) (835.8)
-------- --------
Cash Flows from Financing Activities
Proceeds from long-term debt 6,861.7 5,466.1
Payments on long-term debt (7,332.8) (5,848.9)
Proceeds from sale of stock of subsidiaries 66.5 553.3
Redemption of preferred stock -- (653.3)
Purchase of treasury stock (93.3) --
Employee stock transactions and related
tax benefits 53.8 61.9
Dividends paid (221.4) (220.1)
-------- --------
Net cash used in financing activities (665.5) (641.0)
-------- --------
Effect of exchange rate changes on cash and
cash equivalents 5.9 (7.1)
-------- --------
Net increase (decrease) in cash and cash
equivalents 84.7 (19.5)
Cash and cash equivalents at beginning of
period 677.4 879.9
-------- --------
Cash and cash equivalents at end of period $ 762.1 $ 860.4
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Electronic Data Systems Corporation ("EDS" or the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments (consisting
of only normal recurring items) which are necessary for a fair presentation have
been included. The results for interim periods are not necessarily indicative of
results which may be expected for any other interim period or for the full year.
For further information, refer to the consolidated financial statements and
notes thereto included in the Company's 1997 Annual Report on Form 10-K.
Certain reclassifications have been made to the 1997 unaudited condensed
consolidated financial statements to conform to the 1998 presentation.
Note 2. Earnings per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share, in the fourth quarter of 1997. It
requires companies to present both basic and diluted earnings per share. Basic
earnings per share of common stock is computed by dividing net income by the
weighted-average number of EDS common shares outstanding during the period.
Diluted earnings per share is calculated in the same manner as basic earnings
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding assuming the exercise
of all employee stock options and the vesting of restricted stock units that
would have had a dilutive effect on earnings per share. The weighted-average
number of shares outstanding used to compute basic and diluted earnings per
share for the three and nine months ended September 30, 1998 and 1997 are as
follows (in millions):
1998 1997
---- ----
For the three months ended September 30:
Basic earnings per share 492.4 490.4
Diluted earnings per share 494.1 494.2
For the nine months ended September 30:
Basic earnings per share 491.9 489.4
Diluted earnings per share 494.6 493.8
Securities which were outstanding but were not included in the computa-
tion of diluted earnings per share because their effect was antidilutive include
restricted stock units of 446,536 shares and 163,866 shares for the three months
ended September 30, 1998 and 1997, respectively, and 527,644 shares and 37,530
shares for the nine months ended September 30, 1998 and 1997, respectively,
and options to purchase 1,844,105 shares and 752,699 shares for the three months
ended September 30, 1998 and 1997, respectively, and 905,422 shares and 574,042
shares for the nine months ended September 30, 1998 and 1997, respectively.
The Company has restated its earnings per share calculation for the
three and nine months ended September 30, 1997 to reflect the adoption of SFAS
No. 128. For further information, refer to the consolidated financial statements
and notes thereto included in the Company's 1997 Annual Report on Form 10-K.
Note 3. Depreciation and Amortization
Property and equipment is stated net of accumulated depreciation of
$4,234.7 million and $4,032.8 million at September 30, 1998 and December 31,
1997, respectively. Additionally, software, goodwill, and other intangibles are
stated net of accumulated amortization of $1,254.1 million and $1,246.5 million
at September 30,
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1998 and December 31, 1997, respectively. Depreciation and amortization expense
for the nine months ended September 30, 1998 and 1997 was $1,005.8 million and
$879.8 million, respectively.
Note 4. Restructuring Activities and Other Charges
The Company recorded restructuring charges and asset writedowns totaling
$329.6 million in 1997 and $27.8 million in the second quarter of 1998. During
the second quarter of 1997, the Company began implementation of an
enterprise-wide business transformation initiative to reduce its costs,
streamline its organizational structure, and align its strategy, services, and
delivery with market opportunities. This initiative involves the elimination of
approximately 8,500 positions through reassignment of personnel, elimination of
open personnel requisitions, normal attrition, and termination of employees.
Restructuring charges and asset writedowns consisted of $111.3 million relating
to the severance costs associated with the planned involuntary termination of
approximately 2,600 employees, asset writedowns of $99.7 million, and related
accruals of $14.0 million relating to operations that the Company plans to
discontinue. These operations primarily consist of several processing centers
which the Company is consolidating and certain product lines and related
services provided to certain industries. Asset writedowns relating to these
product lines include investments; software, goodwill, and other intangibles;
and buildings and computer equipment. In addition, the Company recorded asset
writedowns of $104.6 million in 1997 and $27.8 million in the second quarter of
1998 primarily relating to operating assets initially identified for sale in the
second quarter of 1997. As of June 30, 1998, all such assets had been sold. As
of September 30, 1998, approximately 2,230 employees have been involuntarily
terminated and approximately $100.9 million has been paid in termination
benefits and other accruals. The majority of the remaining accrual of $24.4
million is expected to be paid in 1998.
During the third quarter of 1998, the Company recorded a charge of $36.7
million related to the announced retirement of Chairman and Chief Executive
Officer Les Alberthal. The charge resulted from the alteration of vesting
conditions for his unvested restricted stock units and the grant of additional
supplemental executive retirement and other cash benefits.
Note 5. Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components. The statement also requires
the accumulated balance of other comprehensive income to be displayed separately
from retained earnings and additional paid-in capital in the equity section of
the statement of financial position.
Comprehensive income for the three and nine months ended September 30,
1998 was $216.2 million and $657.7 million, respectively. Comprehensive income
for the three and nine months ended September 30, 1997 was $208.0 million and
$365.8 million, respectively. The primary difference between comprehensive
income and net income for the three and nine months ended September 30, 1998 was
related to unrealized holding gains on certain of the Company's investments. The
primary differences between comprehensive income and net income for the three
and nine months ended September 30, 1997 were related to foreign currency
translation adjustments and prior period losses of Neodata Corporation. Prior to
acquiring all the remaining outstanding equity of Neodata Corporation in the
third quarter of 1997, EDS accounted for its investment under the cost method of
accounting.
Note 6. Sale of Stock of Subsidiary
On June 23, 1998, Unigraphics Solutions Inc., a wholly-owned subsidiary
of the Company, sold five million shares of its Class A common stock
representing 13.8% of its total outstanding common stock in an initial public
offering. Net proceeds from the offering were $65.1 million. As a result of the
offering, the Company recognized a gain on the sale of stock of this subsidiary
of $49.6 million. Income taxes have not been provided for this gain as the
Company believes that it will recover its basis in this subsidiary in a tax-free
manner.
7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
EDS offers its clients a portfolio of related services worldwide within
the broad categories of systems and technology services, business process
management, management consulting, and electronic business. Services include the
management of computers, networks, information systems, information- processing
facilities, business operations, and related personnel.
Forward Looking Statements
All statements other than historical statements contained in this
report on Form 10-Q constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Without limitation,
these forward-looking statements include statements regarding the Company's Year
2000 exposure and opportunity, future revenues and operating margins from
contracts with General Motors Corporation ("GM") and other clients, the
Company's ability to achieve cost reductions, and future selling, general and
administrative expenses. 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 which constitute forward-looking statements have been
made or may be made in the future by EDS, including statements regarding future
operating performance, short- and long-term revenue and earnings growth, backlog
and the value of new contract signings, 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: competition in the information technology
industry and the impact of such competition on pricing, revenues, and margins;
the financial performance of current and future customer contracts, including
the financial performance of EDS' contracts with GM; the ability of EDS to
retain a significant portion of the operating income from business subject to
the competitive bidding provisions of its agreement with GM and to reach
mutually acceptable agreements with GM for new or replacement services
thereunder; the impact of exchange rate fluctuations in non-US areas where EDS
has significant operations; with respect to client contracts accounted for under
the percentage-of-completion method of accounting, the performance of such
contracts in accordance with EDS' cost and revenue estimates; the degree to
which EDS can improve productivity; the degree to which business entities
continue to outsource information technology and business processes; the cost of
attracting and retaining highly skilled personnel; and, with respect to EDS'
Year 2000 exposure and opportunity, EDS' ability to retain key personnel in the
Year 2000 remediation effort, a significant increase in the cost of labor for
such personnel, the identification of additional projects which would require
remediation as a result of a change in business needs, acquisitions or
otherwise, EDS' ability to remediate client systems on a timely basis where it
is obligated to do so, and the interpretation of information technology
contracts EDS has with its clients.
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.
Restructuring Activities, Asset Writedowns, and Other Related Charges
The Company recorded restructuring charges and asset writedowns
totaling $329.6 million in 1997 and $27.8 million in the second quarter of 1998.
During the second quarter of 1997, the Company began implementation of an
enterprise-wide business transformation initiative to reduce its costs,
streamline its organizational structure, and align its strategy, services, and
delivery with market opportunities. This initiative involves the elimination of
approximately 8,500 positions through reassignment of personnel, elimination of
open personnel requisitions, normal attrition, and termination of employees.
Restructuring charges and asset writedowns consisted of $111.3 million relating
to the severance costs associated with the planned involuntary termination of
approximately 2,600 employees, asset writedowns of $99.7 million, and related
accruals of $14.0 million relating to operations that the Company plans to
discontinue. These operations primarily consist of several processing centers
which the Company is consolidating and certain product lines and related
services provided to certain industries. Asset writedowns relating to these
product lines include investments; software, goodwill, and other intangibles;
and
8
<PAGE>
buildings and computer equipment. In addition, the Company recorded asset
writedowns of $104.6 million in 1997 and $27.8 million in the second quarter of
1998 primarily relating to operating assets initially identified for sale in the
second quarter of 1997. As of June 30, 1998, all such assets had been sold. As
of September 30, 1998, approximately 2,230 employees have been involuntarily
terminated and approximately $100.9 million has been paid in termination
benefits and other accruals. The majority of the remaining accrual of $24.4
million is expected to be paid in 1998.
New Accounting Standards
In June 1998, Statement of Financial Accounting Standards (SFAS) No.
133, Accounting for Derivative Instruments and Hedging Activities, was issued.
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The provisions of SFAS No. 133 are
effective for financial statements beginning after June 15, 1999, although early
adoption is allowed. The Company has not determined the financial impact of
adopting this SFAS and has not determined if it will adopt its provisions prior
to its effective date.
In March 1998, Statement of Position (SOP) 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use, was issued.
This SOP requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software. The provisions of SOP 98-1 are effective for financial
statements issued for fiscal years beginning after December 15, 1998, although
early adoption is allowed. Initial application of SOP 98-1 is not expected to
have a material impact on the Company's financial statements. The Company will
adopt the provisions of this SOP on January 1, 1999.
In April 1998, SOP 98-5, Reporting on the Costs of Start-up Activities,
was issued. This SOP provides guidance on the financial reporting of start-up
and organization costs and requires that these costs be expensed as incurred.
The provisions of SOP 98-5 are effective for financial statements for fiscal
years beginning after December 15, 1998, although early adoption is allowed.
Adoption of SOP 98-5 is not expected to have a material impact on the Company's
financial statements. The Company will adopt the provisions of this SOP on
January 1, 1999.
In June 1997, SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, was issued. This statement establishes standards for
reporting information about operating segments in annual and interim financial
statements, although this statement need not be applied to interim financial
statements in the initial year of its application. This statement is effective
for fiscal years beginning after December 15, 1997.
Year 2000
General. For EDS, the Year 2000 ("Y2K") issue encompasses the cost
required to make its internal systems and, where it is obligated to do so, its
clients' systems Y2K compliant, as well as a revenue opportunity. EDS has
developed processes, assembled tools, and created a business organization to
provide Y2K services to its clients and to assist in addressing EDS' internal
needs. EDS has a Corporate Program Office responsible for monitoring the Y2K
assessment and remediation status of the Company's internal systems and
reporting such status to the Company's management and Board of Directors.
Status of Remediation. With respect to its internal systems, EDS has
identified projects which it deems to be mission critical on both a corporate
and a business unit level. These projects have been classified based on the
relationships of the systems involved and the impact of these systems on EDS'
business. Some projects involve more than one system. EDS deems a project to be
mission critical if the failure to timely complete the Y2K remediation for that
project would cause substantial disruption in, or cessation of, EDS' business.
Corporate mission critical projects include, for example, systems for payroll,
accounts receivable, accounts payable, tax administration, corporate
administration and telecommunications. Unit mission critical projects include,
for example, systems for unit payroll, unit invoice generation, country-specific
tax administration and localized networks. EDS has identified additional
projects which it deems to be non-mission critical, such as projects covering
certain non-IT systems, systems relating to employee training and other systems
which may enhance efficiency or productivity but the failure of which would not
materially impact EDS' business. EDS continues to actively evaluate and
categorize new inventory of Y2K projects.
9
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For its internal and external reporting purposes, EDS has divided the
Y2K remediation process into the following four stages: assessment and planning;
renovation; testing; and implementation.
As of October 31, 1998, EDS had identified approximately 35 corporate
mission critical projects. Through September 30, 1998, EDS had completed
assessment of approximately 89% of such projects, renovation of approximately
57% of such projects, testing of approximately 11% of such projects and
implementation of approximately 11% of such projects. EDS expects to complete
the Y2K remediation for such projects by the end of the second quarter of 1999.
As of October 31, 1998, EDS had identified approximately 30 unit
mission critical projects. Through September 30, 1998, EDS had completed
assessment of approximately 33% of such projects, renovation of approximately
17% of such projects, testing of approximately 7% of such projects and
implementation of approximately 7% of such projects. EDS expects to complete the
Y2K remediation for such projects by the end of the second quarter of 1999.
The foregoing percentages are based on the percentage of the total
number of identified corporate or unit projects, as the case may be, for which
the applicable stage has been completed at September 30, 1998, and may not be
indicative of the percentage of the total labor or expense remaining with
respect to the mission critical projects as a whole.
EDS has also identified over 325 projects, on both a corporate and unit
basis, which it deems to be non-mission critical. These projects include non-IT
systems such as those which may be used in the operation of elevators, machinery
and equipment and HVAC, lighting and building security systems, as well as IT
systems the general function of which is to enhance efficiency or productivity
but the failure of which would not materially impact EDS' business. EDS has
determined that many of the non-mission critical projects identified to date
will not be remediated for Y2K compliance for one or more reasons, including the
retirement of the system, redundancy with other systems, the ability to leverage
common systems and because the expense of remediation may be greater than the
benefits obtained from the system. Of those non-mission critical projects which
EDS had identified for remediation as of October 31, 1998, approximately 71% and
46% of the corporate and unit projects, respectively, had completed the
assessment stage, approximately 54% and 32% had completed the renovation stage,
approximately 22% and 25% had completed the testing stage and approximately 20%
and 20% had completed the implementation stage as of September 30, 1998. The
remediation process for all non-mission critical projects identified for
remediation is scheduled to be substantially completed by the end of the third
quarter of 1999, although the remediation of certain non-mission critical
projects may extend into the fourth quarter of 1999.
Although EDS currently anticipates that the remedial actions described
above will be completed on a timely basis, the failure to do so could have a
material adverse effect on EDS' business, results of operations or financial
condition.
Third Party Compliance. In 1997, EDS commenced mailing questionnaires
to substantially all of its vendors and suppliers requesting information
regarding the Y2K compliance of their products and services. As a result of this
and other inquiries, EDS has compiled a database listing thousands of
information technology related products, including hardware, software, network
operating systems and physical plant equipment, from a wide range of suppliers
and indicating which assets are Y2K compliant and which need to be replaced or
upgraded. This database, which had been initially prepared for use by EDS'
business units, has recently been made available to the public through EDS'
website.
In addition to these formal inquiries, EDS has been working closely
with those third parties with whom EDS has a material relationship regarding the
Y2K compliance of their products and services. These third parties include, in
particular, leading telecommunications providers. EDS' business is substantially
dependent on its ability to transmit its data and that of its clients and its
clients' customers on a worldwide basis through data, voice and video networks.
These networks include EDSNET(R), the Company's proprietary network which
integrates multiple third party network owners with EDS controlled and managed
components, as well as the "extended" networks (i.e., networks outside of
EDSNET(R)) of third party international, national and local telecommunications
providers. Unlike EDSNET(R), these "extended" networks are also used to transmit
data by thousands of other organizations around the world.
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The Y2K remediation of EDSNET(R) is a corporate mission critical
project and is expected to be completed by the second quarter of 1999. Although
EDS expects the remediation of EDSNET(R) to be successfully completed on a
timely basis, the Company believes that there is a significant likelihood that
non-EDS related Y2K problems will cause interruptions of the "extended" networks
utilized by EDS and other third parties. EDS believes the interruptions on these
third party networks will result from the Y2K related failure of some of these
non-EDS networks, as well as the increased volume on the remaining networks due
to the rejection of data transmitted by third parties containing Y2K related
errors.
EDS is preparing contingency plans for such potential network failures.
EDS personnel at all relevant data centers and client locations will closely
monitor the "traffic" on networks utilized by EDS and will be prepared to shut
down segments of networks and use alternative networks where necessary and
possible. EDS is also seeking to increase network capacity where cost efficient
to prepare for this possibility.
As do most other organizations, EDS relies on the continued performance
of public utilities for the operation of its business. Due to the reliance of
EDS' data centers around the world on a continuous source of electric power, EDS
already has in place at substantially all EDS owned data centers extensive
contingency plans in the event of the disruption of electric service. These
contingency plans include the availability of backup generators to supply power
for a period of time following the power disruption and the ability to transfer
operations to an alternative center. Data centers operated at client locations
are dependent on the contingency plans put in place by those clients. EDS
believes that its existing contingency plans are adequate for any reasonably
likely Y2K related disruption of electric or other utility services to EDS owned
data centers. However, a lengthy disruption in utility services or lack of Y2K
readiness by financial institutions, governmental agencies and other providers
of general infrastructure could materially adversely impact EDS' ability to
conduct its normal business in the areas so affected.
Estimated Costs. Of the approximately $80 million of estimated expendi-
tures for Year 2000 remediation projects, approximately $20 million has been
incurred through September 30, 1998 and substantially all of the remainder is
expected to be incurred by the end of the third quarter of 1999. This estimate
in part reflects an estimate of the remediation costs for systems which have not
yet been identified or assessed. Because EDS' hardware and software has been
refreshed in recent years in accordance with its normal business practices, the
substantial majority of these estimated Y2K remediation costs is attributed to
labor expense. The remediation effort is generally being performed by EDS
business units which also provide Y2K remediation services to EDS clients. The
foregoing estimate of remediation costs does not include an estimated
approximately $15 million of costs attributable to the operation of the
Company's Y2K Program Office, the majority of which costs will be incurred and
expensed ratably during 1998 and 1999.
Client Obligations. EDS has completed an assessment of its obligations
to make client systems Y2K compliant and to remediate certain EDS-owned systems
which are directly used to support client obligations. This assessment, which is
monitored on a monthly basis, includes an estimate of the cost and revenues to
EDS for performing such work. Based on such assessment, EDS does not believe
that its client obligations with respect to the Y2K issue will have a material
adverse impact on EDS. In addition, EDS and its largest customer, GM, have
agreed that GM will pay EDS $75 million by March 31, 2000 if the systems
remediated by EDS under its Master Services Agreement ("MSA") with GM are
capable of continued operation before, on and after January 1, 2000 without
causing a significant business disruption that results in a material financial
loss to GM due to the millennium change. Such payment is in addition to amounts
paid, or to be paid, by GM to EDS for the ongoing maintenance and support of the
MSA systems in accordance with the MSA and applicable service agreements,
statements of work and other agreements entered into under the MSA.
The estimated cost of the Y2K remediation of the foregoing client
systems and client-related systems (including the GM systems referred to above)
has generally been treated as a contract cost and is included in the estimate of
total contract costs for the related contract under the Company's revenue
recognition policy.
Revenue Opportunities. Aside from the cost to EDS discussed above, the
Y2K issue presents opportunities for revenue growth for the next several years
for EDS' CIO Services unit, which provides a full range of Y2K services to new
and existing clients.
11
<PAGE>
Forward Looking Statements. Readers are cautioned that forward-looking
statements contained in this Y2K discussion should be read in conjunction with
the risk factors identified as being applicable to this discussion under the
heading "Forward Looking Statements" on page 8 of this Form 10-Q.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the
European Union are scheduled to adopt the euro as their common legal currency
and to establish fixed conversion rates between their existing sovereign
currencies and the euro. The euro will then trade on currency exchanges and be
available for non-cash transactions. The existing sovereign currencies will
remain legal tender in the participating countries during a transition period
ending on January 1, 2002. Beginning on that date, the participating countries
will issue new euro-denominated currency for use in cash transactions and the
existing sovereign currencies will no longer be legal tender.
Although during the transition period commencing on January 1, 1999
EDS' internal business systems can continue to process information based on
currently existing sovereign currencies, EDS expects its European systems to be
updated by January 1, 1999 to provide the capability to trade with customers and
suppliers in the euro currency. In addition, by the fourth quarter of 1999, EDS
expects its European systems to have the capability to provide for dual
reporting in the euro currency and the applicable sovereign currency and to
allow migration from the existing currencies to the euro over the remainder of
the transition period. EDS does not expect to incur any material incremental
cost to incorporate this functionality into its systems.
EDS does not believe that the adoption of the euro will negatively
impact the enforceability of its client contracts or result in any material cost
to EDS in respect of client contracts for which it is not compensated. In
addition, EDS does not believe the conversion will have a material impact on its
competitiveness in Europe. The Company's revenues are generally derived from
sales of services rather than products. Because the nature of these services
varies from client to client and the fees for these services are based in large
part on EDS' costs in the area in which the services are provided, there is no
significant price transparency which would be highlighted by the adoption of the
euro.
Results of Operations
Revenues. Total revenues for the quarter ended September 30, 1998, rose
$619.0 million, or 17%, over the corresponding quarter in 1997 to $4,352.7
million. Revenues from non-GM clients for the quarter ended September 30, 1998,
rose $642.1 million, or 24%, to $3,323.2 million from $2,681.1 million for the
same period in 1997. This increase in non-GM revenues was primarily the result
of new contracts signed in 1997 and earlier in 1998, acquisitions that occurred
in the second half of 1997, and the recognition of approximately $69.0 million
in revenues related to the sale of a portion of the Company's leasing portfolio
that was sold during the quarter ended September 30, 1998. Revenues from GM
decreased $23.1 million, or 2%, to $1,029.5 million during the three months
ended September 30, 1998 compared with $1,052.6 million for the corresponding
period in 1997. The decline in revenues from GM resulted primarily from reduced
discretionary spending by GM for information technology services during the
third quarter of 1998 and certain billing rate and price reductions for existing
services that have been in place during all of 1998.
Revenues from non-GM clients for the nine months ended September 30,
1998 rose $1,621.4 million, or 21%, to $9,423.6 million from $7,802.2 million in
the corresponding period of 1997 primarily due to the reasons discussed above.
Revenues from GM for the nine months ended September 30, 1998 declined $148.0
million, or 5%, to $3,057.2 million from $3,205.2 million in the comparable
period in 1997 due to the reasons discussed above. The decline in revenues from
GM is expected to continue. See "Master Services Agreement with GM" below.
Revenues from non-GM clients comprised 76% and 72% of total revenues
for the three months ended September 30, 1998 and 1997, and 76% and 71% of total
revenues for the nine months ended September 30, 1998 and 1997, respectively.
The Company expects this trend to continue as revenues from non-GM clients are
anticipated to increase while revenues from GM are anticipated to decline.
Costs and Expenses. The gross margin [(revenues less cost of
revenues)/revenues] declined to 18% for both the three and nine month periods
ended September 30, 1998, compared with 21% and 20%, respectively, for each of
the corresponding periods in 1997. This decrease was due primarily to a decrease
in the gross margin on
12
<PAGE>
contracts with GM. During the three and nine months ended September 30, 1998,
the Company incurred incremental costs deemed necessary for the successful
long-term support of its contracts with GM, including costs associated with the
Company's Future by Design initiative which is intended to streamline the
Company's processes, identify and implement other productivity improvements, and
position the Company for future growth. In addition, billing rates for certain
services provided to GM decreased during the three and nine month periods ended
September 30, 1998 while commensurate cost reductions related to these services
were not realized during these periods. Although the decline in revenues related
to these existing services was partially offset by new contracts with GM for
additional products and services, the gross margins on these new contracts were
lower than historical levels. The Company expects the gross margin related to
revenues from GM to stabilize at approximately the current level for the
remainder of 1998. The gross margin related to revenues from non-GM clients was
relatively stable during the three month period ended September 30, 1998 when
compared with the corresponding period in 1997. The gross margin related to
revenues from non-GM clients was higher during the nine months ended September
30, 1998 when compared with the corresponding period in 1997.
Selling, general and administrative (SG&A) expenses as a percentage of
revenues increased to approximately 11% for both the three and nine month
periods ended September 30, 1998 compared with 11% and 10%, respectively, for
the corresponding periods in 1997. The increase in 1998 is due in part to the
recognition of a $36.7 million charge during the third quarter of 1998
associated with the announced retirement of the Company's Chairman and Chief
Executive Officer, Les Alberthal. The Company expects to continue to incur
incremental SG&A costs during the remainder of 1998 and during 1999 primarily
for the remediation of the Company's internal systems to make them Year 2000
compliant, the continued implementation of the SAP enterprise resource process
system, increased spending on employee development, and a management retention
plan implemented in the fourth quarter of 1998. This incremental spending is
expected to cause SG&A as a percentage of revenues to remain at approximately
11% for the twelve months ending December 31, 1998.
Costs and expenses for the nine months ended September 30, 1998 include
asset writedowns of $27.8 million as discussed above, and a pre-tax charge of
$42.5 million related to amounts allocated to acquired in-process research and
development activities associated with the acquisition of Intergraph
Corporation's Mechanical CAD/CAM business by EDS' Unigraphics Solutions Inc.
(USI) subsidiary, which was completed in the first quarter of 1998. Costs and
expenses for the nine months ended September 30, 1997 include asset writedowns
of $165.6 million. See "Restructuring Activities and Other Related Activities"
above.
Other Income (Expense). Other income (expense) increased $27.3 million
in the third quarter of 1998 to $(17.5) million, compared with $(44.8) million
in the corresponding period in 1997. This increase was due primarily to the
write-off in the third quarter of 1997 of $38.7 million of certain of the
Company's equity investments that were deemed unrecoverable. In addition,
interest expense declined $10.8 million in the third quarter of 1998 to $31.8
million compared with $42.6 million in the corresponding period of 1997 as a
result of a decreased level of debt. These increases in other income (expense)
were partially offset by a decrease of $16.0 million from gains related to
limited partnership investment sales during the third quarter of 1998 compared
with the same period in 1997.
For the nine months ended September 30, 1998, other income (expense)
increased $147.6 million to $62.8 million compared with $(84.8) million in the
corresponding period in the previous year. This increase was due to the factors
discussed above as well as the recognition of a gain of $49.6 million in the
second quarter of 1998 resulting from the sale of stock by USI, previously a
wholly-owned subsidiary of EDS, the realization of approximately $40.0 million
in gains resulting from sales of certain of the Company's assets in the first
quarter of 1998, and a $20.1 million decline in interest expense for the nine
months ended September 30, 1998 to $106.9 million compared with $127.0 million
in the corresponding period in 1997 resulting from a decreased level of debt.
The Company anticipates recording future gains on sales of Company assets, the
timing of which may be driven by then existing market conditions.
Net Income. For the three month period ended September 30, 1998, the
Company's net income decreased $35.1 million to $195.1 million compared with
$230.2 million during the corresponding period of the prior year. For the nine
months ended September 30, 1998, net income increased $154.0 million to $601.2
million from $447.2 million in the corresponding period in 1997. Basic and
diluted earnings per share of common stock were $0.40 and $0.39, respectively,
for the three months ended September 30, 1998 compared with $0.47 for both basic
and diluted earnings per share of common stock in the comparable period of 1997.
For the nine months ended September 30,
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<PAGE>
1998, both basic and diluted earnings per share of common stock were $1.22
compared with $0.91 in the corresponding period of 1997.
Excluding the charges related to the restructuring activities, asset
writedowns, acquired in-process research and development, and retirement of the
CEO discussed above, net income for the three months ended September 30, 1998
and 1997 would have been $218.6 million and $246.8 million, respectively. Net
income for the nine months ended September 30, 1998 and 1997 would have been
$669.7 million and $633.3 million, respectively. Both basic and diluted earnings
per share for the three months ended September 30, 1998 and 1997 would have been
$0.44 and $0.50, respectively. Basic and diluted earnings per share for the nine
months ended September 30, 1998 would have been $1.36 and $1.35, respectively.
Basic and diluted earnings per share for the nine months ended September 30,
1997 would have been $1.29 and $1.28, respectively.
Excluding these charges as well as the gain on the sale of stock of
subsidiary and the revenues associated with the sale of a portion of the
Company's leasing portfolio discussed above, net income for the three and nine
months ended September 30, 1998 would have been $174.5 million and $575.9
million, respectively. Both basic and diluted earnings per share for the three
months ended September 30, 1998 would have been $0.35. Basic and diluted
earnings per share for the nine months ended September 30, 1998 would have been
$1.17 and $1.16, respectively.
Net asset efficiency [revenues/(average net operating assets, adjusted
for non-recurring charges discussed above)] for the twelve-month period ended
September 30, 1998 improved, increasing to 1.9 from 1.7 for the comparable
period ended September 30, 1997. This increase was due primarily to a decrease
in capital requirements related to new contracts and the divestiture of
non-performing assets. Return on stockholders' equity was 16.3% for the
twelve-month period ended September 30, 1998, compared to 15.0% for the
comparable period ended September 30, 1997. This increase was due primarily to
an increase in net income for the twelve months ended September 30, 1998.
The Company's effective tax rate remained constant at 36% for the three
months ended September 30, 1998, and 1997. The effective tax rate for the nine
months ended September 30, 1998 decreased to 34%, compared to 36% in the
corresponding period of 1997, due to the effect of the sale of stock of USI
during the second quarter of 1998 for which no taxes were provided, as the
Company believes that it will recover its basis in the subsidiary in a tax-free
manner. The Company expects the effective tax rate to be 36% for the remaining
three months of the year.
Master Services Agreement with GM. The MSA with GM entered into at the
time of EDS' split-off from GM and certain related sector agreements
(collectively, the "IT Service Agreements") provided for certain significant
changes to the pricing and terms under which EDS provides information technology
("IT") services to GM. Among other things, the IT Services Agreements reduced
the rates charged by EDS to GM for certain information processing activities and
communications services. GM has 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, the MSA established specified structural
cost reduction targets of $100 million for each of the years from 1996 through
1998 and $50 million for 1999. These targets are not performance guarantees but
represent firm good faith business commitments on the part of GM and EDS. These
targets were achieved in 1996 and 1997, and EDS anticipates that they will be
achieved in 1998.
The terms of the MSA and the related IT Services Agreements have had an
adverse effect on the Company's revenues and operating margins attributable to
GM. During the nine months ended September 30, 1998, the Company has incurred
additional costs related to its efforts to effect future reductions in costs
related to services provided to GM. Although the Company expects these efforts
to enable it to achieve stability in the operating margins attributable to GM
for the remainder of 1998, the Company expects revenues from GM to continue to
decline. EDS anticipates that this decline in revenues will be offset by
additional revenues from non-GM clients in 1998. The extent to which the MSA and
related IT Services Agreements continue to impact the Company's future financial
performance will be dependent on the Company's ability to retain a significant
portion of the operating income from 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.
14
<PAGE>
Seasonality and Inflation. The Company's revenues and net income vary
over the calendar year, with the fourth quarter generally reflecting the highest
revenues and net income for the year due to certain services that are purchased
more heavily in the fourth quarter as a result of the spending patterns of
several clients. Due to the factors identified above, the Company expects that
the fourth quarter of 1998 will be the strongest quarter of the year. The
Company believes that inflation generally had little effect on its results of
operations for the periods presented.
Liquidity and Capital Resources
At September 30, 1998, the Company held cash and cash equivalents of
$762.1 million, had working capital of $1,988.1 million, and a current ratio of
1.6-to-1. This compares to cash equivalents of $677.4 million, $1,911.8 million
in working capital and a current ratio of 1.6-to-1 at December 31, 1997.
The Company's capitalization at September 30, 1998, consisted of
$1,386.5 million in long-term debt, less current portion, and $5,818.6 million
in stockholders' equity. Total debt (which includes redeemable preferred stock
of subsidiaries) was $1,603.4 million at September 30, 1998, compared with total
debt of $2,075.3 million at December 31, 1997. The total debt-to-capital ratio
(which includes current portion of long-term debt and redeemable preferred stock
of subsidiaries as components of debt and capital) was 22% at September 30,
1998, and 28% at December 31, 1997. The ratio of long-term debt to capital was
21% at September 30, 1998 and 26% at December 31, 1997. At both September 30,
1998, and December 31, 1997, the Company had committed lines of credit of
approximately $2,500.0 million, all unused, which serves as a backup facility
for commercial paper borrowings. The balance of commercial paper borrowings at
September 30, 1998 was approximately $215.0 million.
Cash flows provided by operating activities decreased $242.5 million
during the nine months ended September 30, 1998 to $1,221.9 million from
$1,464.4 million in the comparable period in the prior year. This decrease was
primarily due to an increase in accounts receivable and prepaids and other,
partially offset by an increase in deferred revenue. Cash used in investing
activities during the nine months ended September 30, 1998 decreased $358.2
million to $477.6 million compared to $835.8 million in the comparable period in
the prior year, primarily due to proceeds from divestitures. Cash flows used in
financing activities increased $24.5 million to $665.5 million during the nine
months ended September 30, 1998 as compared to $641.0 million during the same
period of 1997. For the nine month periods ended September 30, 1998 and 1997,
the Company paid cash dividends totaling $221.4 million and $220.1 million,
respectively.
The Company expects that its principal uses of funds for the next 12
months will be for capital expenditures and working capital. Capital
expenditures are expected to consist of purchases of computer and
telecommunications equipment, buildings and facilities, land, and software, as
well as acquisitions. Gross capital expenditures for 1998 are expected to be
approximately $1,000.0 million to $1,200.0 million. Net capital expenditures for
1998, after approximately $400.0 million in proceeds from divestitures, are
expected to be approximately $600.0 million to $800.0 million. However, actual
capital expenditures are somewhat dependent on acquisition and joint venture
activities, as well as capital requirements for new business. The Company
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.
15
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -------------------------------------------------------
10(m) Agreement dated as of August 6, 1998 between the Registrant
and Lester M. Alberthal, Jr.
27 Financial Data Schedule (for SEC information only)
(b) Reports on Form 8-K
During the quarter ended September 30, 1998, EDS filed the following
Current Reports on Form 8-K:
(i) Current Report on Form 8-K dated August 7, 1998 reporting press
releases under Item 5 - Other Events and Item 7 - Exhibits.
(ii) Current Report on Form 8-K dated August 10, 1998 reporting under
Item 5 - Other Events and Item 7 - Exhibits the Purchase Agree-
ment dated August 10, 1998 among the Registrant, the General
Motors Hourly Rate Employees Pension Plan (the "Pension Plan"),
Bear, Stearns & Co., Inc. and Morgan Stanley & Co. Incorporated
in connection with the offering by the Pension Plan of 11,500,000
shares of the Registrant's Common Stock.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ELECTRONIC DATA SYSTEMS CORPORATION
(Registrant)
Date: November 13, 1998 By: /s/ H. Paulett Eberhart
----------------------------------
H. Paulett Eberhart, Senior Vice
President - Finance
17
<PAGE>
Exhibit10(m)
AGREEMENT BETWEEN
ELECTRONIC DATA SYSTEMS CORPORATION
AND
LESTER M. ALBERTHAL, JR.
This Agreement between the Company (hereinafter defined) and Lester M.
Alberthal, Jr. ("Executive") is entered into on August 6, 1998 (the "Effective
Date").
I. RECITALS
1. Executive was employed by the Company in 1968, became an officer in 1974,
president in 1986, chief executive officer in 1987 and chairman of the board in
1988. During this period the Company has overcome the departure of Mr. Perot and
has grown to approximately $17 billion in revenue with operations in forty four
countries and completed its separation from General Motors. From the date of
this Agreement until the election of a new chief executive officer of the
Company, the Company desires that Executive undertake unique duties critical to
the Company and its future in addition to his current duties. After election of
a new chief executive officer, Executive will remain with the Company as an
employee or consultant, as applicable, until March 31, 2004.
2. It is the desire of both parties that the remainder of Executive's employment
at the Company, and his subsequent retirement from the Company, be conducted in
an amicable manner and without undue prejudice to either party.
3. During his tenure at the Company, Executive has been entrusted with,
acquired, or developed substantial knowledge and expertise of a special nature
relating to the business, financial and functional areas of the Company, as well
as other information and knowledge concerning the Company and its internal
business affairs. As an executive of the Company and in such capacity Executive
has obtained trade secrets, and highly confidential business, technological,
customer, and strategic information, as well as business and other information
relating to internal affairs of the Company.
4. As set forth below, the Company is providing the Executive benefits of
substantial value under this Agreement, and Executive agrees to be strictly
bound by the terms hereof.
THEREFORE, in order to set forth the terms, conditions and covenants upon
which the parties have agreed, the Company and Executive agree as follows:
<PAGE>
II. CERTAIN DEFINITIONS
1. "Company" shall mean Electronic Data Systems Corporation, a Delaware
corporation, and all of its direct and indirect subsidiaries and affiliated
entities and successors and assigns thereof.
2. "Company Information" shall mean all business information, financial
information, technological information, intellectual property, trade secrets,
customer and other information belonging to the Company or relating to the
Company's internal affairs, or information relating to its business, technology
and customers which is not readily available to the general public.
3. "Participate" shall mean lending one's name to, acting as a consultant or
advisor to, being retained or employed by, or acquiring any direct or indirect
interest in any business or enterprise, whether as a stockholder, partner,
officer, director, employee or otherwise (other than by ownership of less than
five percent of the stock of a publicly-held corporation).
III. TERMS
1. Change of Status and Subsequent Termination of Employment. From the date of
this Agreement until the election of a new chief executive officer by the
Company, Executive shall at the request of the Board of Directors of the Company
remain Chairman and Chief Executive Officer of the Company. Upon the election of
a new chief executive officer of the Company, Executive shall resign from all
positions held by him at the Company as an officer or director and his level of
responsibility as an employee at the Company will be significantly reduced. He
will remain as an employee until March 31, 1999, or when a new chief executive
officer is elected, whichever is later. After terminating his employment on such
date Executive shall, until March 31, 2004, provide consulting services to the
Company as an independent contractor. The consulting services shall be advice,
information, guidance, and assistance as reasonably requested. On March 31,
2004, Executive shall resign as a consultant to the Company.
2. Non-Competition and Other Conduct. Executive acknowledges and agrees that
under the terms and the provisions of this Agreement, and in consideration for
compliance with the terms, conditions and covenants hereunder, he will receive
cash and stock benefits from the Company, and that such benefits are substantial
and material and that he is not otherwise entitled to such stock and cash
benefits. Executive further acknowledges and agrees that in the course of his
employment with the Company he has been entrusted with, and been privy to,
sensitive, privileged and confidential Company Information, and as an executive
of the Company has participated in the legal affairs, management, strategic
planning and development of the business and services of the Company, the
analysis of the needs and requirements of the Company's customers, and other
similar matters that, if discussed, communicated, or disclosed to third parties
or used in competition with the Company, would be highly detrimental to the
Company. In addition, Executive has been entrusted with, and has obtained, other
Company Information. Accordingly, Executive agrees to the following provisions
and covenants:
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<PAGE>
2.1 Non-Competition and Other Restrictions. For the period of time that
Executive is receiving salary, compensation or retirement benefits pursuant to
Subsection 3 hereof, but not more than 20 years, Executive will not (without the
Company's express written waiver), directly or indirectly, engage in the
following conduct:
a. Participate in any activity as or for a competitor of the
Company, which is the same or similar to the activities in
which Executive was involved in at the Company whether as an
employee or a consultant;
b. Hire, attempt to hire or to assist any other person or entity
in hiring or attempting to hire an employee of the Company, or
any person who was a Company employee within the six-month
period prior to the hire, attempted hire or assistance in
hiring or attempting to hire (This Subsection 2.1b shall not
prohibit Executive from retaining the services of a former
administrative assistant at the Company, to perform
administrative duties for him personally);
c. Solicit, in competition with the Company, the business of any
Company customer or any entity whose business the Company was
actively soliciting during the prior six month period;
d. Consult with or accept employment with any existing or
prospective customer, contractor or venture partner of the
Company with respect to any matters or transactions in which
the Company has an economic or financial interest (for
purposes of this Subsection 2.1d., prospective customer,
contractor or venture partner means any person or entity to or
with which the Company is proposing or negotiating any
business relationship);
e. Participate voluntarily with any person or entity that is
involved in a potential or existing business or legal dispute
with the Company, including but not limited to litigation,
except as may be required by law or if mandated by subpoena or
a court to do so.
2.2 Other Conduct. Executive will not discuss, disclose, communicate, or
use for any purpose with any one not an employee, agent or attorney of the
Company, any Company Information, except as may be required by law or if
mandated by subpoena or a court to do so. (By way of example and not by way of
limitation, absent written approval from the Company, Executive shall not
publish any books or articles related to his employment at the Company and shall
not grant interviews and/or make public appearances regarding his employment at
the Company). Executive also agrees that absent written approval by the Company,
he shall make no public statements nor publish in any form any information
related to his separation and/or pending separation from the Company. Executive
further agrees he will not commit any act or make any statement that is, or
could reasonably be interpreted as, detrimental to the business, reputation, or
good will of the Company, including disparaging or embarrassing the Company or
its officers, directors, agents,
3 of 13
<PAGE>
attorneys and other personnel, or discussing the internal or private business
affairs of the Company with any third parties. However, this Subsection 2.2
shall not prohibit Executive from communicating to third parties general
information about his duties and responsibilities while employed by the Company,
general information about the Company that is readily available to the general
public, the positions he held while employed by the Company and the time period
he was employed by the Company. Nothing in this Agreement shall preclude
Executive from providing information if required by law or if mandated by
subpoena or a court to do so.
2.3 Remedies. If the scope of any provision contained in Subsection 2 of
Section III of this Agreement is too broad to permit enforcement of such
provision to its full extent, then such provision shall be reformed and/or
modified to exclude the unenforceable language, and enforced as reformed or
modified to the maximum extent permitted by law, in any proceedings brought to
enforce such provision. Subject to the provisions of the foregoing sentence,
whenever possible, each provision of Subsection 2 of Section III of this
Agreement will be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of the Agreement is held to be
prohibited by or invalid under applicable law, such provision, to the extent of
such prohibition or invalidity, shall be deemed not to be a part of this
Agreement, and shall not invalidate the remainder of such provision or the
remaining provisions of this Agreement. Executive understands and agrees that
the Company would be irreparably damaged in the event that the provisions of
Subsection 2 of Section III of this Agreement are violated, and agrees that the
Company shall be entitled (in addition to any other remedy to which it may be
entitled, at law or in equity) to an injunction or injunctions to redress
breaches of this Agreement and to specifically enforce the terms and provisions
hereof.
3. Compensation, Benefits and Other Consideration to be Received by Executive.
Following the Effective Date of this Agreement, the Company shall provide and
Executive shall be entitled to the following compensation, benefits and other
consideration pursuant to the terms, conditions and covenants in this Agreement:
a. A salary of $850,000 per annum, to be paid semi-monthly and to
be continued through December 31, 1998.
b. Cash payments of $1,700,000 per annum, beginning January 1,
1999, to be paid semi-monthly and to be continued through
March 31, 2004.
c. Payment of the residual bonus under the Executive Bonus
Program in January 1999, in the total amount of $250,000.
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<PAGE>
d. The shares of the Company common stock awarded to Executive
under the provisions of the Company Stock Incentive Plan
(SIP), (741,000 shares in the aggregate), shall vest, without
any restrictions or conditions under the SIP or otherwise, as
follows:
---------------------------- -------------------------
Date of Vesting Number of shares
---------------------------- -------------------------
January 1, 1999 306,000
---------------------------- -------------------------
January 1, 1999 72,500
---------------------------- -------------------------
January 1, 2000 72,500
---------------------------- -------------------------
January 1, 2001 72,500
---------------------------- -------------------------
January 1, 2002 72,500
---------------------------- -------------------------
January 1, 2003 72,500
---------------------------- -------------------------
March 31, 2004 72,500
---------------------------- -------------------------
If Executive dies before March 31, 2004, all unvested common
stock shall vest upon his death.
Restrictions on sale of shares after vesting under the SIP or
otherwise, including the restrictions on 25,500 shares already
vested under the SIP, shall be void and of no further effect,
allowing Executive to sell all the shares at any time after
vesting without any contractual restrictions with the Company.
e. The Nonqualified Stock Option Agreement dated as of December
17, 1996, providing Executive with the right to acquire
950,000 shares of Common Stock of the Company at a price of
$45.06 per share, is hereby amended to provide that (i) the
option shall be fully vested and exercisable as to all or a
portion of the shares immediately upon execution of this
Agreement and shall be exercisable until 5:00 P.M. Plano,
Texas time on March 31, 2004 and (ii) Executive's death or
termination of employment with the Company, whether voluntary
or involuntary, shall not terminate the option.
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f. The Company shall pay annually to Executive as a retirement
benefit $1,000,000 beginning on Executive's sixtieth birthday,
in equal monthly amounts, until his death, and upon his death
the Company shall pay to Executive's wife $500,000 annually,
in equal monthly installments, until her death (the
"Retirement Benefit"). Within 30 days after executing this
Agreement the Company shall deposit in the trust created under
its Supplemental Executive Retirement Plan (the "Plan"), or a
comparable trust, for the benefit of Executive such amount of
cash as will be required to fund the Retirement Benefit under
the actuarial assumptions utilized by the Plan.
g. Executive and Executive's family shall receive through March
March 31, 2004, all benefits under welfare benefit plans,
practices, policies and programs provided by the Company
except disability benefits but including, without limitation,
medical, prescription, dental, vision, group life and supple-
mental group life, accidental death and travel accident insur-
ance plans and programs, to the extent applicable generally to
other executives of the Company and its affiliated companies,
but in no event shall plans, practices, policies and programs
provide Executive with benefits that are less favorable, in
the aggregate, than the most favorable such plans, practices,
policies and programs of the Company. If Executive is not eli-
gible at any time during this period to receive benefits under
the Company's plans, policies and programs, the Company shall
pay to Executive annually an amount equal to his costs in se-
curing equivalent benefits from other providers through March
31, 2004.
h. The services of one secretary/administrative assistant and
financial and tax planning services through March 31, 2004.
The foregoing compensation, benefits and other consideration to be received by
Executive under this Agreement and the additional possible payments provided for
in Sections 4, 6 and 13 constitute his sole and exclusive rights to any payments
or benefits from the Company, and Executive shall receive no consideration or
benefits other than those expressly granted herein except for benefits to which
he is entitled under any Company plan qualified under Section 401(a) of the
Internal Revenue Code, including the Retirement Plan and the Deferred
Compensation Plan of the Company.
4. Change in Control and Additional Payments.
a. In the event the Company experiences a change in control (as
defined in Appendix "A") at anytime prior to August 1, 2008,
sixty (60) days thereafter, Executive shall be provided with
immediate vesting and exercisability of, and termination of
any restrictions on sale or transfer (other than any such
restriction arising by operation of law) with respect to
each and every common stock award under the SIP referred to
in Subsection 3 of Section III of this Agreement.
b. Anything in this Agreement to the contrary notwithstanding,
in the event it shall be determined that any payment or
distribution to or for the benefit of the Executive (whether
paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined
without regard to any additional payments required under
this Subsection 4 of Section III of this Agreement) (a
"Payment") would be subject to the excise tax imposed by
Section 4999 of the Code or any
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interest or penalties are incurred by the Executive with
respect to such excise tax (such excise tax, together with
any such interest and penalties, hereinafter collectively
referred to as the "Excise Tax"), then the Executive shall
be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Execu-
tive of all taxes (including any interest or penalties
imposed with respect to such taxes), including, without lim-
itation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the
Payments.
c. Subject to the provisions of Subsection 4d of Section III of
this Agreement, all determinations required to be made under
this Subsection 4 of Section III of this Agreement,
including whether and when Gross-Up Payment is required and
the amount of such Gross-Up Payment and the assumptions to
be utilized in arriving at such determination, shall be made
by KPMG Peat Marwick LLP (the "Accounting Firm"); provided,
however, that the Accounting Firm shall not determine that
no Excise Tax is payable by the Executive unless it delivers
to the Executive a written opinion (the "Accounting
Opinion") that failure to report the Excise Tax on the
Executive's applicable federal income tax return would not
result in the imposition of a negligence or similar penalty.
In the event that KPMG Peat Marwick LLP has served, at any
time during the two years immediately preceding a Change in
Control (as defined in Appendix "A"), as accountant or
auditor for the individual, entity or group that is involved
in effecting or has any material interest in the Change in
Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations and
perform the other functions specified in this Subsection 4
of Section III of this Agreement (which accounting firm
shall then be referred to as the Accounting Firm hereunder).
All fees and expenses of the Accounting Firm shall be borne
solely by the Company. Within 15 business days of the
receipt of notice from the Executive that there has been a
Payment, or such earlier time as is requested by the
Company, the Accounting Firm shall make all determinations
required under this Subsection 4 of Section III of this
Agreement, shall provide to the Company and the Executive a
written report setting forth such determinations, together
with detailed supporting calculations, and, if the
Accounting Firm determines that no Excise Tax is payable,
shall deliver the Accounting Opinion to the Executive. Any
Gross-up Payment, as determined pursuant to this Subsection
4 of Section III of this Agreement, shall be paid by the
Company to the Executive within five days of the receipt of
the Accounting Firm's determination. Subject to the
remainder of this Subsection 4 of Section III of this
Agreement, any determination by the Accounting Firm shall be
binding upon the Company and the Executive. As a result of
the uncertainty in the application of Section 4999 of the
Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should
have been made ("Underpayment"), consistent with the
calculations required
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to be made hereunder. In the event that it is ultimately
determined in accordance with the procedures set forth in
Subsection 4d of Section III of this Agreement that the Exe-
cutive is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Under-
payment that has occurred and any such Underpayment shall
be promptly paid by the Company to or for the benefit of the
Executive.
d. The Executive shall notify the Company in writing of any
claims by the Internal Revenue Service that, if successful,
would require the payment by the Company of the Gross-Up
Payment. Such notification shall be given as soon as
practicable but no later than 30 days after the Executive
actually receives notice in writing of such claim and shall
apprise the Company of the nature of such claim and the date
on which such claim is requested to be paid; provided,
however, that the failure of the Executive to notify the
Company of such claim (or to provide any required
information with respect thereto) shall not affect any
rights granted to the Executive under this Subsection 4 of
Section III of this Agreement except to the extent that the
Company is materially prejudiced in the defense of such
claim as a direct result of such failure. The Executive
shall not pay such claim prior to the expiration of the
30-day period following the date on which he gives such
notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is
due). If the Company notifies the Executive in writing prior
to the expiration of such period that it desires to contest
such claim, the Executive shall:
(i) give the Company any information reasonably requested
by the Company relating to such claim;
(ii) take such action in connection with contesting such
claim as the Company shall reasonably request in
writing from time to time, including, without
limitation, accepting legal representation with respect
to such claim by an attorney selected by the Company
and reasonably acceptable to the Executive;
(iii) cooperate with the Company in good faith in order
effectively to contest such claim; and
(iv) if the Company elects not to assume and control the
defense of such claim, permit the Company to
participate in any proceedings relating to such claim;
provided, however, that the Company shall bear and pay
directly all costs and expenses (including additional interest
and penalties) incurred in connection with such contest and
shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including
interest and penalties with respect thereto) imposed as a
result of such representation and payment of costs and
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expenses. Without limitation on the foregoing provisions of
this Subsection 4d of Section III of this Agreement, the
Company shall have the right, at its sole option, to assume
the defense of and control all proceedings in connection with
such contest, in which case it may pursue or forego any and
all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim
and may either direct the Executive to pay the tax claimed and
sue for a refund or contest the claim in any permissible
manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts,
as the Company shall determine; provided, however, that if the
Company directs the Executive to pay such claim and sue for a
refund, the Company shall advance the amount of such payment
to the Executive, on an interest-free basis, and shall
indemnify and hold the Executive harmless, on an after-tax
basis, from any Excise Tax or income tax (including interest
or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with
respect to such advance; and further provided that any
extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to
which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company's
right to assume the defense of and control the contest shall
be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Executive shall be entitled
to settle or contest, as the case may be, any other issue
raised by the Internal Revenue Service or any other taxing
authority.
e. If, after the receipt by the Executive of an amount advanced
by the Company pursuant to Subsection 4d of Section III of
this Agreement, the Executive becomes entitled to receive
any refund with respect to such claim, the Executive shall
(subject to the Company's complying with the requirements of
Subsection 4d of Section III of this Agreement) promptly pay
to the Company the amount of such refund (together with any
interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Subsection 4d of
Section III of this Agreement, a determination is made that
the Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify the
Executive in writing of its intent to contest such denial of
refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall
not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
5. Confidentiality. This Agreement and its provisions shall be kept strictly
confidential. This Agreement and its provisions shall not be disclosed by the
Company to anyone other than its Board of Directors, its legal counsel and its
accountants, without prior written approval by Executive or as otherwise
required by law. Executive may disclose such information to his spouse, to
individuals
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retained by him to provide advice/guidance on personal financial
and/or legal matters, to individuals retained by him to provide administrative
assistance, or as may be required by a financial institution for business
reasons. The Company, absent written approval by Executive, shall make no public
statements nor publish in any form any information related to his separation
and/or pending separation from the Company. The Company further agrees it will
not commit any act or make any statement that is, or could reasonably be
interpreted as, detrimental to the reputation or good will of Executive,
including disparaging or embarrassing Executive.
6. Indemnification of Executive. In accordance with the laws of the State of
Delaware, and in compliance with and pursuant to the express terms of Paragraph
6.1 of Article VI of the Amended and Restated Bylaws of the Company, the Company
agrees to indemnify Executive and to advance expenses incurred by him.
7. Effect of Executive's Death. In the event of Executive's death, his estate
shall receive, if not already delivered, the compensation, benefits, stock and
other consideration set forth in Subsection 3 of Section III of this Agreement
at the same times and in the same amounts as if Executive were alive, except (i)
as provided in Subsection 3d of Section III of this Agreement, any unvested
shares under the SIP shall vest upon Executive's death, (ii) the Retirement
Benefit payable to Executive's wife shall be paid beginning on the Executive's
sixtieth birthday or Executive's death, whichever is later, and (iii) the
amounts payable under Subsection 3b of Section III of this Agreement shall
terminate upon the death of Executive's wife.
8. Complete Release. It is understood and agreed by the parties that except as
specifically set forth in this Agreement, the Company shall not be required to
pay any amount or provide any benefit to Executive. As of the Effective Date of
this Agreement, Executive hereby releases the Company, and the employees,
agents, attorneys, officers and directors of the Company, from all claims or
demands Executive may have based on Executive's employment with the Company or
the termination of that employment. As of the Effective Date of this Agreement,
Executive also releases the Company, and the employees, agents, attorneys,
officers and directors of the Company, from all other claims, contracts or
causes of action of any nature whatsoever, that he has or may have, whether
accrued or contingent, and whether known or unknown. Such release includes, but
is not limited to, a release of any rights or claims Executive may have under
the Change of Control Employment Agreement dated June 25, 1995; the Age
Discrimination in Employment Act, which prohibits age discrimination in
employment; Title VII of the Civil Rights Act of 1964, as amended by the Civil
Rights Act of 1991, which prohibits discrimination in employment based on race,
color, national origin, religion or sex; the Equal Pay Act, which prohibits
paying men and women unequal pay for equal work; the Americans with Disabilities
Act of 1990, which prohibits discrimination against disabled persons; or any
other federal, state or local laws or regulations prohibiting employment
discrimination. This also includes a release by Executive of any claims for
wrongful discharge or workplace torts.
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This release agreement does not include a release of (i) any rights or claims
that Executive may have under the Age Discrimination in Employment Act which
arise after the date Executive signs this Agreement, or (ii) any rights or
claims Executive may have pursuant to the terms of this Agreement.
9. Amendments. The Agreement may not be modified or amended, and there shall be
no waiver of its provisions, except by a written instrument executed by
Executive and a corporate officer of the Company.
10. Entire Agreement. This Agreement constitutes the entire agreement of the
parties, and supersedes and prevails over all other prior agreements,
understandings or representations by or between the parties, whether oral or
written, including, but not limited to, the Change of Control Employment
Agreement (which Executive acknowledges is terminated and of no further force
and/or effect), with respect to Executive's employment with the Company and the
subject matters herein.
11. Termination. The Company can sue in law or in equity for injunctions,
specific performance or damages for any breach of this Agreement but Executive
cannot be terminated by the Company under this Agreement nor can any of the
Company's obligations under this Agreement, including the compensation, benefits
and other consideration provided in Subsection 3 of Section III of this
Agreement, be terminated or released unless Executive shall have committed:
a. intentional embezzlement or theft in connection with his duties or
in the course of his employment with the Company; or
b. intentional wrongful disclosure of confidential information of the
Company which is harmful to the Company; or
c. intentional wrongful engagement in any activity competitive with the
Company which is harmful to the Company.
12. Governing Law. Except as otherwise expressly provided herein, this Agreement
and its enforceability shall be governed by and construed in accordance with the
substantive law of the State of Texas. Any dispute or conflict arising out of or
relating to the Agreement must be brought in a court of competent jurisdiction
located in Collin County, Texas.
13. Attorney Fees. All reasonable legal fees and costs incurred by the Executive
in connection with the resolution of any dispute or controversy under or in
connection with this Agreement shall be reimbursed immediately by the Company to
the Executive as bills for such services are presented by the Executive to the
Company. Upon resolution of any dispute or controversy, the Executive shall pay
to the Company the amount of such reimbursements only if Executive fails to
succeed, in whole or in part, in the prosecution or defense, as the case may be,
of such dispute or controversy.
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14. Period for Review and Consideration of Agreement. Executive understands he
has been given a period of 21 days to review and consider the Agreement before
signing it. Executive further understands he may use as much of the 21 day
period as he wishes prior to signing.
15. Encouragement to Consult with Attorney. Executive acknowledges he was
encouraged to and did consult with an attorney before signing the Agreement.
16. Employee's Right to Revoke Agreement. Executive may revoke the Agreement
within seven days of signing it. Revocation can be made by delivering a written
notice of revocation to the Company. For the revocation to be effective, written
notice must be received by the Company no later than the close of business on
the seventh day after Executive signs the Agreement. If Executive revokes the
Agreement, it shall not be effective or enforceable and Executive will not
receive the benefits described in Subsection 3 of Section III or any other
payments or benefits from the Company, except those to which he otherwise is
entitled by law.
17. Notices. All notices and other communications hereunder shall be in writing
and shall be given by telecopy or facsimile transmission at the
telecommunications number set forth below, by hand delivery to the other party
or by registered or certified mail, return receipt requested, postage prepaid,
addressed as follows and shall be effective upon receipt:
If to the Executive: Lester M. Alberthal, Jr.
[address on file with the Company]
If to the Company: Electronic Data Systems Corporation
5400 Legacy Drive
Suite 8W-50
Plano, Texas 75024
Attn: John R. Castle, Jr. 972-605-6803 (Fax)
Executive Vice President
With a copy to: James R. Raborn 713-229-1522 (Fax)
Baker & Botts
3000 One Shell Plaza
910 Louisiana
Houston, Texas 77002
EXECUTIVE ACKNOWLEDGES THAT HE HAS READ THE AGREEMENT, UNDERSTANDS IT AND
IS VOLUNTARILY ENTERING INTO IT.
PLEASE READ THE AGREEMENT CAREFULLY. IT CONTAINS A RELEASE OF ALL KNOWN
AND UNKNOWN CLAIMS.
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IN WITNESS WHEREOF, the parties have executed this Agreement to be
binding and enforceable on the Effective Date.
EXECUTIVE: ELECTRONIC DATA SYSTEMS CORPORATION
/s/ Lester M. Alberthal, Jr. /s/ John R. Castle, Jr.
- -------------------------------- ---------------------------------------
Lester M. Alberthal, Jr. John R. Castle, Jr.
Executive Vice President
Dated: August 6, 1998
Dated: August 6, 1998
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Appendix A
Change of Control
(a) As used in this Appendix "A", the terms set forth below shall
have the following respective meanings:
"Affiliate" shall have the meaning ascribed to such term in Rule
12b-2 of the General Rules and Regulations under the Exchange Act, as in effect
on June 18, 1996.
"Associate" shall mean, with reference to any Person, (i) any
corporation, firm, partnership, association, unincorporated organization or
other entity (other than EDS) of which such Person is an officer or general
partner (or officer or general partner of a general partner) or is, directly or
indirectly, the Beneficial Owner of 10% or more of any class of equity
securities, (ii) any trust or other estate in which such Person has a
substantial beneficial interest or as to which such Person serves as trustee or
in a similar fiduciary capacity and (iii) any relative or spouse of such Person,
or any relative of such spouse, who has the same home as such Person.
"Beneficial Owner" shall mean, with reference to any securities,
any Person if:
(i) such Person or any of such Person's Affiliates and Associates,
directly or indirectly, is the "beneficial owner" of (as determined
pursuant to Rule 13d-3 of the General Rules and Regulations under the
Exchange Act, as in effect on June 18, 1996) such securities or
otherwise has the right to vote or dispose of such securities,
including pursuant to any agreement, arrangement or understanding
(whether or not in writing); provided, however, that a Person shall not
be deemed the "Beneficial Owner" of, or to "beneficially own," any
security under this subsection (i) as a result of an agreement,
arrangement or understanding to vote such security if such agreement,
arrangement or understanding: (x) arises solely from a revocable proxy
or consent given in response to a public (i.e., not including a
solicitation exempted by Rule 14a-2(b)(2) of the General Rules and
Regulations under the Exchange Act) proxy or consent solicitation made
pursuant to, and in accordance with, the applicable provisions of the
General Rules and Regulations under the Exchange Act and (y) is not
then reportable by such Person on Schedule 13D under the Exchange Act
(or any comparable or successor report);
(ii) such Person or any of such Person's Affiliates and
Associates, directly or indirectly, has the right or obligation to
acquire such securities (whether such right or obligation is
exercisable or effective immediately or only after the passage of time
or the occurrence of an event) pursuant to any agreement, arrangement
or understanding (whether or not in writing) or upon the exercise of
conversion rights, exchange rights, other rights, warrants or options,
or otherwise; provided, however, that a Person shall not be deemed the
Beneficial Owner of, or to "beneficially own," (A) securities tendered
pursuant to a tender or exchange offer made by such Person or any of
such Person's
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Affiliates or Associates until such tendered securities are accepted
for purchase or exchange or (B) securities issuable upon exercise of
Exempt Rights; or
(iii) such Person or any of such Person's Affiliates or Associates
(A) has any agreement, arrangement or understanding (whether or not in
writing) with any other Person (or any Affiliate or Associate thereof)
that beneficially owns such securities for the purpose of acquiring,
holding, voting (except as set forth in the proviso to subsection (i)
of this definition) or disposing of such securities or (B) is a member
of a group (as that term is used in Rule 13d-5(b) of the General Rules
and Regulations under the Exchange Act) that includes any other Person
that beneficially owns such securities;
provided, however, that nothing in this definition shall cause a Person engaged
in business as an underwriter of securities to be the Beneficial Owner of, or to
"beneficially own," any securities acquired through such Person's participation
in good faith in a firm commitment underwriting until the expiration of forty
days after the date of such acquisition. For purposes hereof, "voting" a
security shall include voting, granting a proxy, consenting or making a request
or demand relating to corporate action (including, without limitation, a demand
for a stockholder list, to call a stockholder meeting or to inspect corporate
books and records) or otherwise giving an authorization (within the meaning of
Section 14(a) of the Exchange Act) in respect of such security.
The terms "beneficially own" and "beneficially owning" shall have
meanings that are correlative to this definition of the term "Beneficial Owner."
"Change of Control" shall mean any of the following occurring on
or after June 18, 1996:
(i) Any Person (other than an Exempt Person) shall become the
Beneficial Owner of 15% or more of the shares of Common Stock then
outstanding or 15% or more of the combined voting power of the Voting
Stock of EDS then outstanding; provided, however, that no Change of
Control shall be deemed to occur for purposes of this subsection (i) if
such Person shall become a Beneficial Owner of 15% or more of the
shares of Common Stock or 15% or more of the combined voting power of
the Voting Stock of EDS solely as a result of (x) an Exempt Transaction
or (y) an acquisition by a Person pursuant to a reorganization, merger
or consolidation, if, following such reorganization, merger or
consolidation, the conditions described in clauses (x), (y) and (z) of
subsection (iii) of this definition are satisfied;
(ii) Individuals who, as of June 18, 1996, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming
a director subsequent to June 18, 1996 whose election, or nomination
for election by EDS' shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent
Board; provided, further, that there shall be excluded, for this
purpose, any such individual whose initial assumption of
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office occurs as a result of any actual or threatened election contest
that is subject to the provisions of Rule 14a-11 under the Exchange
Act;
(iii) Approval by the shareholders of EDS of a reorganization,
merger or consolidation, in each case, unless, following such
reorganization, merger or consolidation, (x) more than 85% of the then
outstanding shares of common stock of the corporation resulting from
such reorganization, merger or consolidation and the combined voting
power of the then outstanding Voting Stock of such corporation
beneficially owned, directly or indirectly, by all or substantially all
of the Persons who were the Beneficial Owners of the outstanding Common
Stock immediately prior to such reorganization, merger or consolidation
in substantially the same proportions as their ownership, immediately
prior to such reorganization, merger or consolidation, of the
outstanding Common Stock, (y) no Person (excluding any Exempt Person or
any Person beneficially owning, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, 15% or
more of the Common Stock then outstanding or 15% or more of the
combined voting power of the Voting Stock of EDS then outstanding)
beneficially owns, directly or indirectly, 15% or more of the then
outstanding shares of common stock of the corporation resulting from
such reorganization, merger or consolidation or the combined voting
power of the then outstanding Voting Stock of such corporation and (z)
at least a majority of the members of the board of directors of the
corporation resulting from such reorganization, merger or consolidation
were members of the Incumbent Board at the time of the execution of the
initial agreement or initial action by the Board providing for such
reorganization, merger or consolidation; or
(iv) Approval by the shareholders of EDS of (x) a complete
liquidation or dissolution of EDS, unless such liquidation or
dissolution is approved as part of a plan of liquidation and
dissolution involving a sale or disposition of all or substantially all
of the assets of EDS to a corporation with respect to which, following
such sale or other disposition, all of the requirements of clauses
(y)(A), (B) and (C) of this subsection (iv) are satisfied, or (y) the
sale or other disposition of all or substantially all of the assets of
EDS, other than to a corporation, with respect to which, following such
sale or other disposition, (A) more than 85% of the then outstanding
shares of common stock of such corporation and the combined voting
power of the Voting Stock of such corporation is then beneficially
owned, directly or indirectly, by all or substantially all of the
Persons who were the Beneficial Owners of the outstanding Common Stock
immediately prior to such sale or other disposition in substantially
the same proportion as their ownership, immediately prior to such sale
or other disposition, of the outstanding Common Stock, (B) no Person
(excluding any Exempt Person and any Person beneficially owning,
immediately prior to such sale or other disposition, directly or
indirectly, 15% or more of the Common Stock then outstanding or 15% or
more of the combined voting power of the Voting Stock of EDS then
outstanding) beneficially owns, directly or indirectly, 15% or more of
the then outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding Voting Stock of such
corporation and (C) at least a majority of the members of the board of
directors of such corporation
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were members of the Incumbent Board at the time of the execution of the
initial agreement or initial action of the Board providing for such
sale or other disposition of assets of EDS.
"Common Stock" shall mean the common stock, par value $.01 per
share, of the Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exempt Person" shall mean any of the following:
(i) EDS, any subsidiary of EDS, any employee benefit plan of EDS
or any subsidiary of EDS, and any Person organized, appointed or
established by EDS for or pursuant to the terms of any such plan; or
(ii) the General Motors Hourly-Rate Employees Pension Plan for its
Hourly Employees, or any trustee of or fiduciary with respect to such
plan (when acting in such capacity) (the "Hourly Plan"), unless and
until, at any time when the Hourly Plan, together with all Affiliates
thereof, is the Beneficial Owner of 15% or more of the shares of Common
Stock then outstanding or 15% or more of the combined voting power of
the Voting Stock of EDS then outstanding, (A) the Hourly Plan shall
purchase or otherwise become the Beneficial Owner of any additional
shares of Common Stock constituting 1% or more of the then outstanding
shares of Common Stock or shares of Voting Stock of EDS representing 1%
or more of the combined voting power of the then outstanding shares of
Voting Stock or (B) any other Person or Persons who is or are the
Beneficial Owner of any shares of Common Stock constituting 1% or more
of the then outstanding shares of Common Stock or shares of Voting
Stock of EDS representing 1% or more of the combined voting power of
the then outstanding shares of Voting Stock of EDS shall become an
Affiliate of such Person.
"Exempt Rights" shall mean any rights to purchase shares of Common
Stock or other Voting Securities of the Company if at the time of the issuance
thereof such rights are not separable from such Common Stock or other Voting
Securities (i.e., are not transferable otherwise than in connection with a
transfer of the underlying Common Stock or other Voting Securities) except upon
the occurrence of a contingency, whether such rights exist as of the Agreement
Effective Date or are thereafter issued by EDS as a dividend on shares of Common
Stock or other Voting Securities or otherwise; provided, however, that from and
after the date (the "Separation Date") as of which such rights become separable
from the underlying shares of Common Stock or other Voting Securities, such
rights shall only constitute "Exempt Rights" pursuant to this definition to the
extent that they are beneficially owned by a Person that acquired such rights
prior to the Separation Date.
"Exempt Transaction" shall mean an increase in the percentage of
the outstanding shares of Common Stock or the percentage of the combined voting
power of the outstanding Voting Stock of EDS beneficially owned by any Person
solely as a result of a reduction in the number of shares of Common Stock then
outstanding due to the repurchase of Common Stock by
A-4
<PAGE>
EDS, unless and until such time as (A) such Person or any Affiliate or Associate
of such Person shall purchase or otherwise become the Beneficial Owner of
additional shares of Common Stock constituting 1% or more of the then
outstanding shares of Common Stock or additional Voting Stock representing 1% or
more of the combined voting power of the then outstanding Voting Stock or (B)
any other Person (or Persons) who is (or collectively are) the Beneficial Owner
of shares of Common Stock constituting 1% or more of the then outstanding shares
of Common Stock or Voting Stock representing 1% or more of the combined voting
power of the then outstanding Voting Stock shall become an Affiliate or
Associate of such Person.
"Person" shall mean any individual, firm, corporation, partner-
ship, association, trust, unincorporated organization or other entity.
"Voting Stock" shall mean, with respect to a corporation, all
securities of such corporation of any class or series that are entitled to vote
generally in the election of directors of such corporation (excluding any class
or series that would be entitled so to vote by reason of the occurrence of any
contingency, so long as such contingency has not occurred).
A-5
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 762
<SECURITIES> 280
<RECEIVABLES> 3,971
<ALLOWANCES> 134
<INVENTORY> 61
<CURRENT-ASSETS> 5,408
<PP&E> 7,070
<DEPRECIATION> 4,235
<TOTAL-ASSETS> 11,455
<CURRENT-LIABILITIES> 3,420
<BONDS> 1,562
0
0
<COMMON> 5
<OTHER-SE> 5,814
<TOTAL-LIABILITY-AND-EQUITY> 11,455
<SALES> 12,481
<TOTAL-REVENUES> 12,481
<CGS> 0
<TOTAL-COSTS> 10,237
<OTHER-EXPENSES> 1,396
<LOSS-PROVISION> 39
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> 912
<INCOME-TAX> 310
<INCOME-CONTINUING> 601
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 601
<EPS-PRIMARY> 1.22 <F1>
<EPS-DILUTED> 1.22 <F2>
<FN>
<F1>
EPS - Basic
<F2>
EPS - Diluted
</FN>
</TABLE>
