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: March 31, 1998
----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ______________________
Commission file number 01-11779
Electronic Data Systems Corporation
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(Exact name of registrant as specified in its charter)
Delaware 75-2548221
----------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5400 Legacy Drive, Plano, Texas 75024-3199
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(Address of principal executive offices)
(Zip Code)
(972) 604-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
As of April 30, 1998, there were outstanding 491,689,889 shares of
the registrant's Common Stock, $.01 par value per share.
<PAGE>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
--------
Part I -- Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Operations.......... 3
Unaudited Condensed Consolidated Balance Sheets.................... 4
Unaudited Condensed Consolidated Statements of Cash Flows.......... 5
Notes to Unaudited Condensed Consolidated Financial Statements..... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 7
Part II -- Other Information
Item 1. Legal Proceedings............................................ 13
Item 6. Exhibits and Reports on Form 8-K............................. 13
Signatures.................................................................. 14
Exhibit 27 Financial Data Schedule (for SEC information only)
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Systems and other contracts revenues $3,942.0 $3,591.6
-------- --------
Costs and expenses
Cost of revenues 3,228.2 2,893.6
Selling, general and administrative 410.6 370.7
Acquired in-process research and development 42.5 --
-------- --------
Total costs and expenses 3,681.3 3,264.3
-------- --------
Operating income 260.7 327.3
Interest and other income (expense), net 27.0 (24.0)
-------- --------
Income before income taxes 287.7 303.3
Provision for income taxes 103.5 109.2
-------- --------
Net income $ 184.2 $ 194.1
========= ========
Earnings per share
Basic $0.37 $0.40
===== =====
Diluted $0.37 $0.39
===== =====
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</TABLE>
3
<PAGE>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 769.0 $ 677.4
Marketable securities 252.3 347.5
Accounts receivable, net 3,674.1 3,736.8
Inventories 91.6 100.9
Prepaids and other 331.6 306.8
---------- ---------
Total current assets 5,118.6 5,169.4
---------- ---------
Property and equipment, net 2,846.4 2,868.4
---------- ---------
Operating and other assets
Land held for development, at cost 88.5 87.2
Investments and other assets 1,676.2 1,501.2
Software, goodwill, and other intangibles, net 1,629.6 1,547.9
---------- ----------
Total operating and other assets 3,394.3 3,136.3
---------- ----------
Total Assets $ 11,359.3 $ 11,174.1
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 401.2 $ 372.4
Accrued liabilities 2,104.8 2,207.3
Deferred revenue 523.8 430.8
Income taxes 224.1 137.6
Current portion of long-term debt 95.0 109.5
---------- ----------
Total current liabilities 3,348.9 3,257.6
---------- ----------
Deferred income taxes 501.5 474.8
Long-term debt, less current portion 1,659.8 1,790.9
Redeemable preferred stock of subsidiaries and
minority interests 402.9 341.4
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; 491,919,070 issued at
March 31, 1998, and 491,567,240 issued and
outstanding at December 31, 1997 4.9 4.9
Additional paid-in capital 850.4 855.7
Retained earnings 4,712.1 4,601.6
Accumulated other comprehensive income (110.9) (152.8)
Treasury stock, at cost,
234,032 shares at March 31, 1998 (10.3) --
---------- ----------
Total stockholders' equity 5,446.2 5,309.4
---------- ----------
Total Liabilities and Stockholders' Equity $ 11,359.3 $ 11,174.1
========== ==========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</TABLE>
4
<PAGE>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
------- ------
<S> <C> <C>
Net cash provided by operating activities $623.6 $546.1
------ ------
Cash Flows from Investing Activities
Proceeds from sale of marketable securities 39.6 27.2
Proceeds from investments and other assets 140.6 44.8
Payments for purchases of property and equipment (189.9) (197.7)
Payments for investments and other assets (110.1) (89.8)
Payments related to acquisitions, net of cash acquire (89.7) (6.4)
Payments for purchase of software and other intangibl (37.2) (1.1)
Payments for purchase of marketable securities (37.1) (14.9)
Other 22.1 16.9
-------- -------
Net cash used in investing activities (261.7) (221.0)
-------- -------
Cash Flows from Financing Activities
Proceeds from long-term debt 1,277.4 2,000.6
Payments on long-term debt (1,424.3) (2,597.0)
Proceeds from sale of stock of subsidiaries 1.4 339.0
Purchase of treasury stock (77.0) --
Employee stock transactions and related tax benefit 29.2 32.5
Dividends paid (73.8) (73.1)
------- -------
Net cash used in financing activities (267.1) (298.0)
------- -------
Effect of exchange rate changes on cash and cash equivalents (3.2) (10.2)
------- -------
Net increase in cash and cash equivalents 91.6 16.9
Cash and cash equivalents at beginning of period 677.4 879.9
------- -------
Cash and cash equivalents at end of period $769.0 $896.8
======= =======
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</TABLE>
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
which 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 diluted effect on earnings per share. The weighted-average
number of shares outstanding used to compute basic and diluted earnings per
share for the three-months ended March 31, 1998 was 491.5 million and 496.2
million, respectively. The weighted-average number of shares outstanding used to
compute basic and diluted earnings per share for the three-months ended March
31, 1997 was 487.9 million and 493.3 million, respectively. The Company has
restated its March 31, 1997 earnings per share calculation 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
$4,009.6 million and $4,032.8 million at March 31, 1998 and December 31, 1997,
respectively. Additionally, software, goodwill, and other intangibles are stated
net of accumulated amortization of $1,271.4 million and $1,246.5 million at
March 31, 1998 and December 31, 1997, respectively. Depreciation and
amortization expense for the three months ended March 31, 1998 and 1997 was
$321.3 million and $279.7 million, respectively.
Note 4. Restructuring Activities
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. As
a result of this initiative, the Company recorded restructuring charges and
asset writedowns totaling $329.6 million. Such amount consisted of restructuring
charges 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
6
<PAGE>
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 will consolidate and certain product lines and related
services provided to certain industries. Asset writedowns relating to these
products lines include investments; software, goodwill, and other intangibles;
and buildings and computer equipment. In addition, the Company recorded a $104.6
million writedown relating to operating assets that it is in the process of
selling, thereby reducing such assets to their estimated net realizable value.
As of March 31, 1998, approximately 1,860 employees have been involuntarily
terminated, and approximately $66.4 million has been paid in termination
benefits and other accruals. The remaining $58.9 million is expected to be paid
in 1998.
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 months ended March 31, 1998 and
1997 was $226.1 million and $123.0 million, respectively. The primary difference
between comprehensive income and net income for the three months ended March 31,
1998 was related to net unrealized holding gains on certain of the Company's
investments. The primary difference between comprehensive income and net income
for the three months ended March 31, 1997 was related to foreign currency
translation adjustments.
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.
On June 7, 1996, General Motors Corporation ("GM") split-off (the
"Split-Off") EDS to the holders of GM's Class E common stock in a transaction
that was tax-free for U.S. federal income tax purposes, and EDS became a
publicly held company. Under the terms of the Split-Off, one share of EDS common
stock was exchanged for each share of GM Class E common stock. In connection
with the Split-Off, GM and EDS entered into a Master Services Agreement (the
"MSA") with respect to information technology (IT) services to be provided after
the Split-Off. The MSA and certain related sector agreements (collectively, the
"IT Services Agreements") provide that EDS will continue to serve as GM's
principal supplier of IT services for a term ending in June 2006, which may be
extended by agreement of the parties.
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 GM and other
7
<PAGE>
clients, the Company's ability to achieve cost reductions, future selling,
general and administrative expenses, future interest expense, and the
recognition of unrealized gains on certain of the Company's assets. 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 market acceptance of new
product or service offerings that offer higher margins than traditional product
or service offerings and costs associated with the development and marketing of
such offerings; the financial performance of current and future customer
contracts, including the financial performance of EDS' contracts with GM and
EDS' ability to effect cost reductions for services provided under such
contracts; 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 estimates; the degree to which EDS can improve
productivity; general economic conditions; the degree to which business entities
continue to outsource information technology and business processes; the cost of
attracting and retaining highly skilled personnel; and, with respect to EDS'
Year 2000 exposure and opportunity, EDS' ability to capitalize on new business
opportunities and the interpretation of information technology contracts it 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 and Other Related Charges
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. As
a result of this initiative, the Company recorded restructuring charges and
asset writedowns totaling $329.6 million. Such amount consisted of restructuring
charges 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 products lines include investments; software,
goodwill, and other intangibles; and buildings and computer equipment. In
addition, the Company recorded a $104.6 million writedown relating to operating
assets that it is in the process of selling, thereby reducing such assets to
their estimated net realizable value. As of March 31, 1998, approximately 1,860
employees have been involuntarily terminated and approximately $66.4 million has
been paid in termination benefits and other accruals. The remaining $58.9
million is expected to be paid in 1998.
New Accounting Standards
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 has
not determined if it will adopt the provisions of this SOP prior to its
effective date.
8
<PAGE>
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 has not determined if it will adopt the
provisions of this SOP prior to its effective date.
In June 1997, Statement of Financial Accounting Standards (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 Issue
For EDS, the Year 2000 issue encompasses not only the cost of making
EDS' internal systems Year 2000 compliant but also the cost to EDS of making its
clients' systems Year 2000 compliant where it is obligated to do so. EDS has
developed processes, assembled tools, and created a business organization to
provide Year 2000 services to its customers and to assist in addressing EDS'
internal needs.
With respect to its centralized internal systems, EDS has completed the
assessment and planning stages and has commenced the renovation process. EDS
anticipates that this process and the subsequent testing and implementation of
the modified code will be completed in stages, from mid-1998 through mid-1999.
With respect to noncentralized internal systems, which are generally confined to
a particular location or business unit, EDS is inventorying and assessing such
systems and expects to be completed with the assessment and planning stages for
the systems which EDS deems to be significant by the middle of 1998. The total
cost to EDS of making all of its internal systems Year 2000 compliant is
estimated at approximately $60.0 million, almost all of which will be incurred
during 1998 and 1999.
EDS has completed an assessment of its obligations to make clients'
systems Year 2000 compliant, including an estimate of the cost and revenues to
EDS for performing such work, and monitors this assessment on an ongoing basis.
Based on such assessment, EDS does not believe that its client obligations with
respect to the Year 2000 issue will have a material adverse impact on EDS. The
estimated cost associated with making clients' systems Year 2000 compliant where
EDS is obligated to do so has been treated as a contract cost and is included in
the estimate of total contract costs for the respective contract under the
Company's revenue recognition policy.
Although the failure to complete the Year 2000 conversion process for
EDS' internal systems on a timely basis would have a material adverse impact on
the Company, EDS believes that this process will be completed in accordance with
the current schedule and that the Year 2000 issue will not have a material
adverse effect on the Company's business or results of operations. Aside from
the cost to EDS discussed above, the Year 2000 issue presents opportunities for
revenue growth for the next several years for EDS' CIO Services unit, which
provides a full range of Year 2000 services.
Results of Operations
Revenues. Total systems and other contracts revenues for the quarter
ended March 31, 1998, rose $350.4 million, or 10%, over the corresponding
quarter in 1997 to $3,942.0 million. Revenues from non-GM clients for the
quarter ended March 31, 1998, rose 15% to $2,946.7 million compared to $2,572.6
million for the same period in 1997. Revenues from GM decreased $23.7 million,
or 2%, to $995.3 million compared with $1,019.0 million for the corresponding
period in 1997. The decline in revenues from GM resulted primarily from certain
billing rate reductions for existing services covered by the provisions of the
MSA. This decline was partially offset by revenues from new contracts for
products and services, although
9
<PAGE>
the billings for such products and services were at rates lower than historical
levels. The decline in revenues from GM is anticipated to accelerate during the
remainder of 1998 when compared with 1997. Revenues from non-GM clients
comprised 75% and 72% of total revenues for the three months ended March 31,
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. See "Master Services Agreement with GM" below.
Costs and Expenses. Cost of revenues as a percentage of systems and
other contracts revenues increased to 82% for the three months ended March 31,
1998, compared with 81% for the corresponding period in 1997. This increase was
due primarily to an increase in expenses and a decrease in revenues on contracts
with GM. During the three months ended March 31, 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, under the provisions of the MSA with GM, billing
rates for certain services provided to GM decreased during the three months
ended March 31, 1998. Commensurate cost reductions related to these services
were not realized during the three months ended March 31, 1998. Although the
Company anticipates that cost reductions on contracts with GM will be achieved
during 1998, there can be no assurance that the decrease in expenses will be
proportionate with the decrease in revenues. Cost of revenues for non-GM clients
grew slower than non-GM revenues during the three months ended March 31, 1998.
Selling, general and administrative expenses as a percentage of systems
and other contracts revenues remained at approximately 10% for the three months
ended March 31, 1998 when compared with the corresponding period in 1997. During
the three months ended March 31, 1998, selling, general and administrative
expenses increased related to the Company's Customer Solutions and Unigraphics
Solutions Inc. business units. These areas have been targeted for aggressive
growth by the Company. This increase was partially offset by reductions in
selling, general and administrative expenses in other areas such as Asia
Pacific. The Company expects to continue making incremental selling, general and
administrative investments in certain targeted areas during the remainder of
1998.
Costs and expenses for the three months ended March 31, 1998 also
include a pre-tax charge of $42.5 million related to acquired in-process
research and development cost resulting from the acquisition of Intergraph
Corporation's Mechanical CAD/CAM business by EDS' Unigraphics Solutions Inc.
subsidiary, which was completed in the first quarter.
Interest and Other Income (Expense), net. Interest and other income,
net increased $51.0 million in the first quarter of 1998 to $27.0 million,
compared with interest and other expense, net of $(24.0) million during the
corresponding period in 1997. The primary reason for the increase was
attributable to an increase in other income of approximately $40 million
resulting from the realization of gains on certain of the Company's assets,
primarily investments in limited partnerships that were sold as a result of
market conditions, during the three months ended March 31, 1998. In addition,
interest expense for the three months ended March 31, 1998 decreased $7.9
million to $34.4 million compared with $42.3 million in the corresponding period
of 1997 due to the decreased level of debt. As a result of this decreased level
of debt, the Company anticipates that annual interest expense for 1998 will
decrease from 1997.
The Company expects to realize additional gains during the remainder of
1998 from the sale of certain of the Company's assets, including gains in
connection with an initial public offering by its Unigraphics Solutions Inc.
subsidiary which, subject to market conditions, is expected to be completed by
the end of the second quarter of 1998. As a result of these factors, the Company
anticipates that annual interest and other income will exceed interest expense
in 1998.
Net Income. For the three month period ended March 31, 1998, the
Company's net income decreased 5% to $184.2 million from $194.1 million for the
corresponding period of the prior year. Basic
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earnings per share of common stock declined to $.37 from $.40 for the first
quarter of 1998 compared to the first quarter of 1997. Diluted earnings per
share of common stock declined to $.37 from $.39 for the first quarter of 1998
compared to the first quarter of 1997. Excluding the negative impact on net
income resulting from pre-tax charge of $42.5 million related to the write-off
of the acquired in-process research and development cost, net income was $211.3
million, and basic and diluted earnings per share were $0.43 for the first
quarter of 1998. See "Costs and Expenses" above.
Return on assets was 6.5% (8.7% excluding the impact on net income and
assets of both the write-off associated with the acquired in-process research
and development cost in the first quarter of 1998, and the restructuring and
other related charges in 1997 discussed above) for the twelve-month period ended
March 31, 1998, compared with 3.7% (9.2% excluding the impact on net income and
assets for the restructuring and other related charges recorded in the second
quarter of 1996) for the corresponding period ended March 31, 1997. Return on
stockholders' equity was 13.9% (18.1% excluding the impact on net income and
equity of both the write-off associated with the acquired in-process research
and development cost, and the restructuring and other related charges in 1997
discussed above) for the twelve-month period ended March 31, 1998, compared to
8.1% (18.4% excluding the impact on net income and equity for the restructuring
and other related charges recorded in the second quarter of 1996) for the
comparable period ended March 31, 1997. The Company's effective tax rate
remained constant at 36% for the three months ended March 31, 1998 and 1997.
The Company and its clients may, from time to time, modify their
contractual arrangements. For client contracts accounted for under the
percentage of completion method, such changes would be reflected in results of
operations as a cumulative change in accounting estimate in the period the
revisions are determined.
Master Services Agreement with GM. The IT Services Agreements provided
for certain significant changes to the pricing and terms under which EDS
provides 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
and may continue to have an adverse effect on the Company's revenues and
operating margins unless, among other things, EDS is able to effect
cost-reduction measures in the services provided to GM, retain a significant
portion of the operating income from business subject to the competitive bidding
provisions of the IT Services Agreements, and reach mutually acceptable
agreements with GM with respect to new or replacement services thereunder. Due
to these factors, EDS expects its revenues and operating income generated from
its contracts with GM and its affiliates to decline in 1998 compared to 1997.
EDS anticipates that this decline in revenues will be offset by additional
revenues from non-GM clients in 1998. However, there can be no assurance that
the operating income attributable to any such additional non-GM revenues will be
equivalent to the operating income attributable to the revenues from GM.
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. In addition, revenues and net income have generally increased
from quarter to quarter as a result of new business added throughout the year.
Consistent with this pattern, the Company expects the latter half of 1998 to be
stronger than the first half of the year. The Company believes that inflation
generally had little effect on its results of operations for the periods
presented.
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Liquidity and Capital Resources
At March 31, 1998, the Company held cash and cash equivalents of $769.0
million, had working capital of $1,769.7 million, and a current ratio of
1.5-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 March 31, 1998, consisted of $1,659.8
million in long-term debt, less current portion, and $5,446.1 million in
stockholders' equity. Total debt (which includes redeemable preferred stock of
subsidiaries) was $1,929.8 million at March 31, 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 26% at March 31, 1998, and
28% at December 31, 1997. The ratio of long-term debt to capital was 25% at
March 31, 1998 and 27% at December 31, 1997. At March 31, 1998, the Company had
unused, uncommitted short-term lines of credit totaling $609.4 million and
unused committed lines of credit of $2,500.0 million. The unused committed lines
of credit of $2,500.0 million serve as a backup facility for commercial paper
borrowings. The balance of commercial paper borrowings at March 31, 1998 was
approximately $578.0 million. At March 31, 1998 and December 31, 1997, the
Company had total committed lines of credit of $2,515.5 million and $2,521.3
million, respectively.
Cash flows from operations increased $77.5 million during the first
quarter of 1998 to $623.6 million compared with the first quarter of 1997 due
primarily to an increase in income prior to non-cash charges for depreciation
and amortization as well as the write-off of acquired in-process research and
development cost, an increase in deferred revenue, and an increase in accounts
payable and accrued liabilities, partially offset by an increase in accounts
receivable. Cash used in investing activities during the first quarter of 1998
was $261.7 million compared with $221.0 million in the corresponding period of
1997. Net cash used in financing activities was $267.1 million in the first
quarter of 1998 compared with $298.0 million used in the corresponding period of
last year.
The Company paid cash dividends totaling $73.8 million for the first
three months of 1998, and $73.1 million for the same period in 1997.
The IT services agreements existing between GM and EDS prior to the
Split-Off provided for GM to pay EDS on the 15th day of the month in which
services are provided with respect to a substantial portion of services. Under
the IT services agreements signed at the time of the Split-Off, there will be a
transition over a two-year period, which began in 1997, to payment on the 20th
day of the month following service for all agreements that do not already have
payment terms at least that favorable to GM. These revised payment terms are
expected to result in an increase in EDS' working capital requirements. EDS will
obtain the funds for this working capital impact through borrowings under its
existing commercial paper or bank credit facilities.
The Company expects that its principal uses of funds for the
next 12 months will be for capital expenditures, debt repayment, 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. Capital expenditures for 1998 are expected to be
approximately $1,200.0 million to $1,700.0 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.
12
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
Reference is made to EDS' Annual Report on Form 10-K for the year ended
December 31, 1997 for information regarding certain litigation in connection
with the split-off of EDS from GM.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------------------------------------------------
27 Financial Data Schedule (for SEC information only)
(b) Reports on Form 8-K
None
13
<PAGE>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ELECTRONIC DATA SYSTEMS CORPORATION
-----------------------------------
(Registrant)
By /s/ Gary J. Fernandes
------------------------------------
(Gary J. Fernandes, Vice Chairman)
Date: May 11, 1998
By /s/ H. Paulett Eberhart
------------------------------------
(H. Paulett Eberhart, Vice President
and Controller)
Date: May 11, 1998
14
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