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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
-------------
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 July 31, 1999, there were outstanding 492,955,248 shares of the
registrant'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
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..................................... 9
Part II -- Other Information
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Item 6. Exhibits and Reports on Form 8-K............................ 16
Signatures................................................................. 17
Exhibit 27 Financial Data Schedule (for SEC information only)
2
<PAGE>
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)
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Revenues $4,615.7 $4,186.1 $8,941.9 $8,128.1
------- ------- ------- -------
Costs and expenses
Cost of revenues 3,801.7 3,453.2 7,410.3 6,681.4
Selling, general and administrative 457.6 439.5 901.5 850.1
Restructuring and other charges -- 27.8 379.8 70.3
------- ------- ------- -------
Total costs and expenses 4,259.3 3,920.5 8,691.6 7,601.8
------- ------- ------- -------
Operating income 356.4 265.6 250.3 526.3
------- ------- ------- -------
Other income:
Gain on sale of stock of subsidiary -- 49.6 -- 49.6
Interest expense and other, net 19.6 3.7 93.4 30.7
------- ------- ------- -------
Total other income 19.6 53.3 93.4 80.3
------- ------- ------- -------
Income before income taxes 376.0 318.9 343.7 606.6
Provision for income taxes 135.4 97.0 123.7 200.5
------- ------- ------- -------
Net income $ 240.6 $ 221.9 $ 220.0 $ 406.1
======= ======= ======= =======
Earnings per share
Basic $0.49 $0.45 $0.45 $0.83
==== ==== ==== ====
Diluted $0.48 $0.45 $0.44 $0.82
==== ==== ==== ====
Cash dividends per share $0.15 $0.15 $0.30 $0.30
==== ==== ==== ====
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions except share and per share amounts)
June 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 573.5 $ 1,038.8
Marketable securities 196.5 272.9
Accounts receivable, net 4,547.7 3,835.0
Prepaids and other 569.4 486.6
-------- --------
Total current assets 5,887.1 5,633.3
-------- --------
Property and equipment, net 2,696.7 2,708.1
-------- --------
Operating and other assets
Investments and other assets 1,389.3 1,717.6
Software, goodwill, and other intangibles, net 2,790.1 1,467.1
-------- --------
Total operating and other assets 4,179.4 3,184.7
-------- --------
Total Assets $12,763.2 $11,526.1
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 371.4 $ 329.8
Accrued liabilities 2,934.0 2,511.1
Deferred revenue 635.0 593.3
Income taxes 107.3 174.9
Current portion of long-term debt 54.8 47.7
-------- --------
Total current liabilities 4,102.5 3,656.8
-------- --------
Deferred income taxes 269.6 362.6
Long-term debt, less current portion 2,136.8 1,184.3
Redeemable preferred stock of subsidiaries and minority
interests 429.7 405.9
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; 493,758,250 shares
issued at June 30, 1999, and 493,138,564
shares issued at December 31, 1998 4.9 4.9
Additional paid-in capital 961.1 958.3
Retained earnings 5,122.3 5,049.7
Accumulated other comprehensive income (229.6) (96.2)
Treasury stock, at cost, 620,836 shares at
June 30, 1999, and 7,160 shares at
December 31, 1998 (34.1) (0.2)
-------- --------
Total stockholders' equity 5,824.6 5,916.5
-------- --------
Total Liabilities and Stockholders' Equity $12,763.2 $11,526.1
======== ========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Six Months Ended
June 30,
--------
1999 1998
------ ------
<S> <C> <C>
Net cash provided by operating activities $ 686.0 $ 859.2
------- -------
Cash Flows from Investing Activities
Proceeds from sale of marketable securities 83.6 54.3
Proceeds from investments and other assets 346.2 211.1
Payments for purchases of property and equipment (358.1) (447.6)
Payments for investments and other assets (144.2) (206.6)
Payments related to acquisitions, net of cash acquired (1,658.7) (102.2)
Payments for purchases of software and other intangibles (53.5) (74.8)
Payments for purchases of marketable securities (25.1) (61.4)
Other 83.2 61.2
------- -------
Net cash used in investing activities (1,726.6) (566.0)
------- -------
Cash Flows from Financing Activities
Proceeds from long-term debt 5,143.5 4,168.6
Payments on long-term debt (4,228.2) (4,573.5)
Proceeds from sale of stock of subsidiaries -- 65.1
Purchase of treasury stock (174.7) (77.0)
Employee stock transactions and related tax benefits 48.4 43.5
Dividends paid (147.5) (147.6)
------- -------
Net cash provided by (used in) financing activities 641.5 (520.9)
------- -------
Effect of exchange rate changes on cash and cash equivalents (66.2) (2.7)
------- -------
Net decrease in cash and cash equivalents (465.3) (230.4)
Cash and cash equivalents at beginning of period 1,038.8 677.4
------- -------
Cash and cash equivalents at end of period $ 573.5 $ 447.0
======= =======
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, which are
of a normal recurring nature and 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 1998 Annual Report on Form 10-K.
Certain reclassifications have been made to the 1998 unaudited condensed
consolidated financial statements to conform to the 1999 presentation.
Note 2. Earnings per Share
The weighted-average number of shares outstanding used to compute basic and
diluted earnings per share are as follows (in millions):
1999 1998
---- ----
For the three months ended June 30:
Basic earnings per share 492.4 491.9
Diluted earnings per share 504.1 494.1
For the six months ended June 30:
Basic earnings per share 492.3 491.7
Diluted earnings per share 503.0 495.3
Securities which were outstanding but were not included in the computation of
diluted earnings per share because their effect was antidilutive include options
to purchase 867,412 shares for the three and six months ended June 30, 1999, and
11,631,409 shares and 5,632,017 shares, respectively, for the three and six
months ended June 30, 1998, and restricted stock units of 1,035,336 shares and
457,953 shares, respectively, for the three and six months ended June 30, 1998.
Note 3. Depreciation and Amortization
Property and equipment is stated net of accumulated depreciation of $4.20
billion and $4.23 billion at June 30, 1999 and December 31, 1998, respectively.
Additionally, software, goodwill, and other intangibles are stated net of
accumulated amortization of $1.34 billion and $1.32 billion at June 30, 1999 and
December 31, 1998, respectively. Depreciation and amortization expense for the
three and six months ended June 30, 1999 was $372.2 million and $684.2 million,
respectively. Depreciation and amortization expense for the three and six months
ended June 30, 1998 was $358.4 million and $679.7 million, respectively.
6
<PAGE>
Note 4. Restructuring Activities and Other Charges
In the first quarter of 1999, the Company began implementation of an initiative
to reduce its costs, streamline its organizational structure, and exit certain
operating activities. As a result of this initiative, the Company recorded
restructuring charges and related asset writedowns totaling $379.8 million in
the quarter ended March 31, 1999. This initiative involves the involuntary
termination of approximately 5,200 individuals employed throughout the Company
in managerial, professional, clerical, consulting and technical positions, the
exit of certain business activities and the consolidation of facilities, and the
writedown of certain assets to net realizable value. Charges associated with
this action include $285.0 million relating to severance costs associated with
involuntary terminations, $52.0 million relating to business exit and facilities
consolidation costs, and asset writedowns of $42.8 million. The accrual for
business exit activities and consolidation of operations includes estimated
costs of $14.1 million to terminate a software license agreement, $11.9 million
to terminate certain leases, $13.6 million to terminate certain customer
contracts, and $12.4 million for other costs. These costs are associated with
the exit of several lines of business, primarily within systems and technology
services. Asset writedowns related to the restructuring activities consist of
$23.7 million to write-off software, goodwill, and other intangibles, $17.4
million for computer-related equipment, and other writedowns of $1.7 million.
Such asset writedowns, which predominantly related to businesses that the
Company has decided to exit in the consulting, business process management, and
systems and technology lines of business, were primarily determined based on the
present value of anticipated future cash flows.
As of June 30, 1999, approximately 3,850 employees have left the Company and
termination benefits of $163.3 million have been charged to the accrual. In
addition, approximately $1.2 million has been paid in connection with the exit
activities described above. The Company expects that cash expenditures relating
to this charge will be incurred primarily in the remainder of 1999.
As of June 30, 1999, restructuring activities in 1996 and 1997 have resulted in
approximately 4,750 employees involuntarily terminated and approximately 1,750
employees accepting early retirement offers. The restructuring activities have
resulted in cash expenditures of $275.5 million since the second quarter of
1996. The restructuring actions contemplated under the 1996 and 1997 plans are
essentially complete as of June 30, 1999. The remaining restructuring reserve of
$16.5 million is primarily comprised of severance-related payments to terminated
employees, lease payments for exited facilities, and accruals for other
restructuring activities.
The following table depicts restructuring accrual activity for the six months
ended June 30, 1999 (in millions):
Balance at December 31, 1998 $ 33.8
Accrual for employee severance 285.0
Accrual for business exit activities and
consolidation of operations 52.0
Payments (172.5)
-----
Balance at June 30, 1999 $198.4
=====
Note 5. Comprehensive Income
Comprehensive income for the three and six months ended June 30, 1999 was $197.0
million and $86.6 million, respectively. Comprehensive income for the three and
six months ended June 30, 1998 was $215.4 million and $441.5 million,
respectively. The primary difference between comprehensive income and net income
for the three and six months ended June 30, 1999 was related to foreign currency
translation adjustments. The primary differences between comprehensive income
and net income for the three and six months ended June 30, 1998 were related to
foreign currency translation adjustments and net unrealized holding gains on
certain of the Company's investments.
7
<PAGE>
Note 6. Segment Information
The following is a summary of certain financial information by reportable
segment (in millions):
<TABLE>
<CAPTION>
For the Three Months Ended June 30, 1999 1998
----------------------------------- ---- ----
Gross Gross
Revenue Profit Revenue Profit
------- ------ ------- ------
<S> <C> <C> <C> <C>
Systems and technology services $3,460.4 $ 656.3 $3,066.0 $ 592.5
Business process management 792.7 125.8 772.2 132.0
Management consulting 273.7 51.5 257.4 39.8
All other 88.9 (19.6) 90.5 (31.4)
------- -------- ------- -------
Total $4,615.7 $ 814.0 $4,186.1 $ 732.9
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999 1998
----------------------------------- ---- ----
Gross Gross
Revenue Profit Revenue Profit
------- ------ ------- ------
<S> <C> <C> <C> <C>
Systems and technology services $6,595.7 $1,243.0 $5,880.5 $1,110.0
Business process management 1,563.1 247.8 1,508.0 245.5
Management consulting 536.4 72.7 495.1 84.9
All other 246.7 (31.9) 244.5 6.3
------- ------- ------- -------
Total $8,941.9 $1,531.6 $8,128.1 $1,446.7
======= ======= ======= =======
</TABLE>
For the three and six months ended June 30, 1999, the results of operations of
Systemhouse from the date of acquisition (see Note 7 "Purchase of MCI
Systemhouse") are included in "systems and technology services" pending
potential allocation to other applicable service lines. At June 30, 1999, total
assets for "systems and technology services", including the total assets of
Systemhouse, were $7.0 billion. At June 30, 1999, total assets for "business
process management", "management consulting", and "all other" were $1.8 billion,
$0.9 billion, and $3.1 billion, respectively.
The following reconciles segment gross profit to the Company's consolidated
operating income (in millions):
For the Three Months Ended June 30, 1999 1998
----------------------------------- ---- ----
Total gross profit for reportable
segments $814.0 $732.9
Selling, general, and administrative 457.6 439.5
Restructuring and other charges -- 27.8
----- -----
Consolidated operating income $356.4 $265.6
===== =====
For the Six Months Ended June 30, 1999 1998
--------------------------------- ---- ----
Total gross profit for reportable
segments $1,531.6 $1,446.7
Selling, general, and administrative 901.5 850.1
Restructuring and other charges 379.8 70.3
------- --------
Consolidated operating income $ 250.3 $ 526.3
======= ========
Note 7. Purchase of MCI Systemhouse
On April 22, 1999, the Company acquired MCI WorldCom's information technology
services unit, MCI Systemhouse ("Systemhouse"), for $1.65 billion, subject to
final adjustments, in a transaction accounted for as a purchase. The excess
purchase price over the fair values of net tangible assets acquired, pending
final determination of certain acquired balances, was $1.4 billion and is being
amortized to expense over periods ranging from 5 to 25 years.
8
<PAGE>
The accompanying consolidated financial statements include the operations of
Systemhouse since the date of acquisition. The following table is prepared on a
pro forma basis as though Systemhouse had been acquired as of January 1, 1998,
after including the estimated impact of adjustments such as amortization of
goodwill and other intangible assets, interest expense, elimination of certain
MCI WorldCom intercompany charges and related tax effects (in millions, except
per share amounts):
For the Six Months Ended June 30, 1999 1998
--------------------------------- ---- ----
Revenues $9,300 $8,800
Net income 170 360
Earnings per share - basic 0.35 0.72
Earnings per share - diluted 0.34 0.72
The pro forma results are not necessarily indicative of what would have occurred
if the acquisition had been in effect for the periods presented. In addition,
they are not intended to be a projection of future results and do not reflect
any synergies that might be achieved from combining the operations.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Electronic Data Systems Corporation is a professional services firm which
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. In the second quarter of 1999, EDS
commenced the formation of E.Solutions, a unit which will combine electronic
business operations and capabilities from across EDS.
This discussion refers to Electronic Data Systems Corporation and its
consolidated subsidiaries and should be read in conjunction with the discussion
incorporated by reference in our 1998 Annual Report on Form 10-K.
Forward-Looking Statements
The statements in this discussion which are not historical statements are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include
statements regarding Year 2000 exposure, total contract values for new business,
future revenues and gross margins, and other forward-looking financial
information. In addition, we have made in the past and may make in the future
other written or oral forward-looking statements, including statements regarding
future operating performance, the Company's views regarding market earnings per
share expectations, short- and long-term revenue and earnings growth, the value
of new contract signings, future cost savings and industry growth rates and our
performance relative thereto. Any forward-looking statement may rely on a number
of assumptions concerning future events and be subject to a number of
uncertainties and other factors, many of which are outside our control, that
could cause actual results to differ materially from such statements. These
include, but are not limited to: competition in the industries in which we
conduct business and the impact of competition on pricing, revenues, and
margins; the financial performance of current and future client contracts; with
respect to client contracts accounted for under the percentage-of-completion
method of accounting, the performance of such contracts in accordance with our
cost estimates; our ability to improve productivity and achieve synergies
9
<PAGE>
from acquired businesses; the degree to which third parties continue to
outsource information technology and business processes; the cost of attracting
and retaining highly skilled personnel; and, with respect to Year 2000 exposure,
the successful remediation of our internal systems and the interpretation of
information technology contracts with clients. We are not obligated to update or
revise any forward-looking statements whether as a result of new information,
future events, or otherwise.
New Accounting Standards
In June 1999, Statement of Financial Accounting Standards No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 was issued. Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The provisions of this statement are now
effective for financial statements for fiscal years beginning after June 15,
2000, although early adoption is allowed. We have not determined the financial
impact of adopting this statement nor whether we will adopt the provisions of
this statement prior to its effective date.
Year 2000
For EDS, the Year 2000, or Y2K, issue encompasses the cost required to
make our internal systems and, where we are obligated to do so, our clients'
systems Y2K compliant, as well as a revenue opportunity.
Status of Remediation. For internal and external reporting purposes, we
have divided the Y2K remediation process into the following four stages:
assessment and planning; renovation; testing; and implementation.
As of June 30, 1999, we had identified 33 and 32 corporate and unit mission
critical projects, respectively, and had completed the planned assessment,
renovation, testing and implementation of all of such projects.
We have also identified over 450 projects, on both a corporate and unit
basis, which we deem 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 our business. We have
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 the non-mission critical projects
identified for remediation at June 30, 1999, approximately 71% and 52% of the
corporate and unit projects, respectively, had completed the assessment,
renovation, testing and implementation stages as of such date. 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.
The foregoing analysis of the remediation status of our internal systems as
of June 30, 1999 does not reflect the remediation of the internal systems of
Systemhouse, which was acquired by EDS on April 22, 1999. We expect the
remediation of Systemhouse's mission critical projects to be completed by
October 31, 1999.
Third Party Compliance. Our business is substantially dependent on the
ability to transmit our data and the data of our clients and their customers on
a worldwide basis through data, voice and video networks. These networks include
EDSNET(R), our proprietary network which integrates multiple third party network
owners with EDS controlled and managed components, as well as the "extended"
networks
10
<PAGE>
(i.e., networks outside of EDSNET(R)) of third party international, national and
local telecommunications providers which are used to transmit data by EDS as
well as thousands of other organizations. As previously disclosed, we have
agreed to sell EDSNET(R) and certain related network assets to MCI WorldCom in
connection with the outsourcing of our network to MCI WorldCom.
Although the Y2K remediation of EDSNET(R), which is a corporate mission
critical project, has been completed, 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. The interruptions on these third party
networks may 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. We
have prepared contingency plans for such potential network failures. Personnel
at all relevant data centers and client locations will closely monitor the
"traffic" on networks we utilize and will be prepared to shut down segments of
networks and use alternative networks where necessary and possible. In addition,
we have put in place contingency plans for all other corporate and unit mission
critical systems, which plans will be reviewed and revised as necessary.
From September 1, 1999 through March 31, 2000, we will operate Millennium
Management Centers (MMCs) globally to facilitate the collection and distribution
of Y2K information. Acting as an information clearing house and issues
management center, the corporate MMC located at our headquarters in Plano,
Texas, will coordinate the prioritization and/or escalation of enterprise-wide
issues, collect and disseminate statistics and trending to auxiliary MMCs and
ensure timely content for consistent communications to internal and external
constituencies.
As do most other organizations, we rely on the continued performance of
public utilities for the operation of our business. Due to the reliance of our
data centers around the world on a continuous source of electric power, we
already have 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. We believe
that our 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 our ability to
conduct normal business in the areas so affected.
Estimated Costs. We currently estimate that we will incur a total of
approximately $95.0 million in costs related to the remediation of our internal
systems, of which approximately $15.0 million is attributable to the operation
of our Y2K Program Office. Of the approximately $80.0 million estimated cost for
remediation projects, approximately $57.1 million has been incurred through June
30, 1999 and substantially all of the remainder should be incurred by the end of
1999. Included in this estimate are costs for the accelerated replacement of
non-compliant equipment and software. Approximately $12.0 million of expense
related to this replacement equipment and software will be recognized as
depreciation, amortization, or lease expense after January 1, 2000. Because our
hardware and software is generally refreshed on an ongoing basis in accordance
with normal business practices, the substantial majority of the total estimated
remediation costs represents labor expense. As of June 30, 1999, approximately
$11.3 million had been incurred for the operation of the Y2K Program Office. The
majority of the remaining costs will be incurred and expensed ratably during
1999. The foregoing estimates do not include costs for the remediation of
Systemhouse's internal systems, which are estimated at a total of $20 million,
of which approximately $10 million had been incurred as of June 30, 1999.
Forward-Looking Statements. The forward-looking statements contained in
this Y2K discussion should be read in conjunction with the applicable risk
factors identified under the heading "Forward-Looking Statements" above.
11
<PAGE>
Results of Operations
Revenues. Total revenues for the quarter ended June 30, 1999, rose $429.6
million, or 10.3%, over the corresponding quarter in 1998 to $4.62 billion. On
May 28, 1999, Delphi Automotive Systems Corporation ("Delphi"), previously a
wholly owned subsidiary of GM, was spun off from GM. For comparative purposes in
the following discussion, revenues from contracts with Delphi in both the
current and historical periods have been classified as revenues from non-GM
clients. Revenues from non-GM clients for the quarter ended June 30, 1999, rose
$442.7 million, or 13.5%, to $3.73 billion from $3.29 billion for the same
period in 1998. The increase in non-GM revenues was primarily attributable to
revenues of approximately $160.0 million for Systemhouse from the April 22, 1999
acquisition date, and new contracts signed in 1999 and 1998. Revenues from GM
decreased 1.5%, to $886.1 million, during the three months ended June 30, 1999
compared with $899.2 million for the corresponding period in 1998.
Revenues from non-GM clients for the six months ended June 30, 1999 rose
$796.1 million, or 12.5%, to $7.16 billion from $6.37 billion in the
corresponding period of 1998 primarily due to the reasons discussed above.
Revenues from GM for the six months ended June 30, 1999 increased $17.7 million,
or 1%, to $1.78 billion from $1.76 billion in the comparable period in 1998. We
estimate that revenues from GM for calendar year 1999 will be lower than in
1998.
The following table displays the percentage of total revenue by segment:
For the Three Months Ended June 30, 1999 1998
----------------------------------- ---- ----
Systems and technology services 75% 73%
Business process management 17 19
Management consulting 6 6
All other 2 2
--- ---
Total 100% 100%
=== ===
For the Six Months Ended June 30, 1999 1998
--------------------------------- ---- ----
Systems and technology services 74% 72%
Business process management 17 19
Management consulting 6 6
All other 3 3
--- ---
Total 100% 100%
=== ===
Revenues from non-GM clients comprised 81% and 79% of total revenues for
the three months ended June 30, 1999 and 1998, and 80% and 78% for the six
months ended June 30, 1999 and 1998, respectively. We expect 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] remained relatively constant at 17.6% for the three months
ended June 30, 1999, compared with 17.5% for the corresponding period in 1998.
The gross margin decreased to 17.1% for the six months ended June 30, 1999,
compared to 17.8% in the comparable period in 1998, due to a decrease in the
gross margin during the first quarter of 1999 when compared with the first
quarter in 1998. This decrease reflected a decrease in the gross margin on
revenues generated by the Company's management consulting subsidiary, A. T.
Kearney, the divestiture during the third quarter of 1998 of leasing operations
reflected in revenues during the first half of 1998, and a decrease in the gross
margin on the Company's GM business. These decreases in gross margin were offset
in the second quarter by the implementation of initiatives designed to improve
operating margins. See "Restructuring and Other Charges" below.
12
<PAGE>
Selling, general and administrative expenses ("SG&A") as a percentage of
revenues decreased to 9.9% for the three months ended June 30, 1999 compared to
10.5% in the corresponding period in 1998. This decrease is primarily due to the
implementation during the first quarter of 1999 of plans designed to improve
operating margins. Although we anticipate these plans will continue to reduce
SG&A expenses, some of these savings are expected to be offset by incremental
spending for marketing and advertising. SG&A as a percentage of revenues
decreased to 10.1% for the six months ended June 30, 1999 compared with 10.5% in
the corresponding period in 1998 due to the reasons discussed above.
Restructuring and Other Charges
In the first quarter of 1999, we began implementation of an initiative to
reduce our costs, streamline our organizational structure, and exit certain
operating activities. As a result of this initiative, we recorded restructuring
charges and related asset writedowns totaling $379.8 million in the quarter
ended March 31, 1999. This initiative involves the involuntary termination of
approximately 5,200 individuals employed throughout the Company in managerial,
professional, clerical, consulting and technical positions, the exit of certain
business activities and the consolidation of facilities, and the writedown of
certain assets to net realizable value. Charges associated with this action
include $285.0 million relating to severance costs associated with involuntary
terminations, $52.0 million relating to business exit and facilities
consolidation costs, and asset writedowns of $42.8 million. The accrual for
business exit activities and consolidation of operations includes estimated
costs of $14.1 million to terminate a software license agreement, $11.9 million
to terminate certain leases, $13.6 million to terminate certain customer
contracts, and $12.4 million for other costs. These costs are associated with
the exit of several lines of business, primarily within systems and technology
services. Asset writedowns related to the restructuring activities consist of
$23.7 million to write-off software, goodwill, and other intangibles, $17.4
million for computer-related equipment, and other writedowns of $1.7 million.
Such asset writedowns, which predominantly related to businesses that we have
decided to exit in the consulting, business process management, and systems and
technology lines of business, were primarily determined based on the present
value of anticipated future cash flows.
As of June 30, 1999, approximately 3,850 employees have left EDS and
termination benefits of $163.3 million have been charged to the accrual. In
addition, approximately $1.2 million has been paid in connection with the exit
activities described above. The Company expects that cash expenditures relating
to this charge will be incurred primarily in the remainder of 1999.
As of June 30, 1999, restructuring activities in 1996 and 1997 have
resulted in approximately 4,750 employees involuntarily terminated and
approximately 1,750 employees accepting early retirement offers. The
restructuring activities have resulted in cash expenditures of $275.5 million
since the second quarter of 1996. The restructuring actions contemplated under
the 1996 and 1997 plans are essentially complete as of June 30, 1999. The
remaining restructuring reserve of $16.5 million is primarily comprised of
severance-related payments to terminated employees, lease payments for exited
facilities, and accruals for other restructuring activities.
The following table depicts restructuring accrual activity for the six
months ended June 30, 1999 (in millions):
Balance at December 31, 1998 $ 33.8
Accrual for employee severance 285.0
Accrual for business exit activities
and consolidation of operations 52.0
Payments (172.5)
-----
Balance at June 30, 1999 $198.4
=====
During July 1999, we announced a voluntary early retirement program
available to employees meeting certain eligibility requirements. This program
will result in a charge in the third quarter of 1999,
13
<PAGE>
with the amount of the charge dependant upon employee participation. As we
continue to explore opportunities for organizational improvements and cost
reductions, we expect to take further actions that will result in additional
restructuring and other charges in 1999.
In the first quarter of 1998, we recorded a pre-tax charge of $42.5 million
for amounts allocated to acquired in-process research and development activities
associated with the acquisition of Intergraph Corporation's Mechanical CAD/CAM
business by our Unigraphics Solutions Inc. subsidiary. In the second quarter of
1998, we recorded asset writedowns of $27.8 million primarily relating to
operating assets initially identified for sale in 1997.
Other Income. Other income decreased $33.7 million in the second quarter of
1999 to $19.6 million, compared with $53.3 million in the corresponding period
in 1998. Interest expense and other, net increased $15.9 million in the second
quarter of 1999, to $19.6 million, from $3.7 million in the comparable period in
1998. Interest and other income increased $17.8 million in the second quarter of
1999, to $59.0 million from $41.2 million in the comparable period in 1998, due
primarily to a pre-tax gain of $26.5 million resulting from the sale of limited
partnership investments. Interest expense remained relatively constant at $39.4
million in the second quarter of 1999 compared with $37.5 million in the
corresponding period of 1998.
For the six months ended June 30, 1999, other income increased $13.1
million to $93.4 million compared with $80.3 million in the comparable period in
1998. For the six months ended June 30, 1999, interest expense and other, net
increased $62.7 million, to $93.4 million from $30.7 million in the
corresponding period of 1998. For the six months ended June 30, 1999, interest
and other income increased $48.8 million, to $154.6 million from $105.8 million
in the corresponding period of 1998, due primarily to incremental gains
resulting from the sale of our limited partnership portfolio. For the six months
ended June 30, 1999, interest expense decreased $13.9 million, to $61.2 million
from $75.1 million in the corresponding period in 1998, due to a decreased level
of debt in the first quarter of 1999 compared to the first quarter of 1998.
Also included in other income during the three and six months ended June
30, 1998 was the recognition of a non-taxable gain of $49.6 million resulting
from the sale of a minority interest in Unigraphics Solutions Inc., previously a
wholly owned subsidiary of EDS, in connection with an initial public offering.
Income Taxes. The effective tax rate remained constant at 36% for the three
and six months ended June 30, 1999. The effective tax rate was 30% and 33%,
respectively, for the three and six months ended June 30, 1998, and was reduced
from historical levels by the tax-free gain on the sale of stock by Unigraphics
Solutions Inc.
discussed above.
Net Income. For the three-month period ended June 30, 1999, net income
increased $18.7 million to $240.6 million compared to net income of $221.9
million during the corresponding period of the prior year. For the six months
ended June 30, 1999, net income decreased $186.1 million to $220.0 million from
$406.1 million in the comparable period in 1998. For the three months ended June
30, 1999 basic and diluted earnings per share increased to $0.49 and $0.48,
respectively, compared with $0.45 and $0.45, respectively, in the corresponding
period of 1998. For the six months ended June 30, 1999, basic and diluted
earnings per share decreased to $0.45 and $0.44, respectively, compared with
$0.83 and $0.82, respectively, in the comparable period in 1998.
During the three and six months ended June 30, 1999, we recorded
non-operating pre-tax gains of $26.5 million and $90.0 million, respectively,
resulting from the sale of limited partnership investments, and pre-tax
restructuring charges of $379.8 million during the three months ended March 31,
1999. Excluding these gains and charges, net income for the three months ended
June 30, 1999 would have been $223.7 million, and basic and diluted earnings per
share would have been $0.45 and $0.44, respectively. Net income for the six
months ended June 30, 1999 would have been $405.5 million, and basic and diluted
14
<PAGE>
earnings per share would have been $0.82 and $0.80, respectively. During 1998 we
recorded a pre-tax charge of $42.5 million for amounts allocated to acquired
in-process research and development during the first quarter, a pre-tax charge
of $27.8 million for asset writedowns during the second quarter, and recognized
a non-taxable gain of $49.6 million related to the sale of stock of Unigraphics
Solutions Inc. during the second quarter. Excluding these charges and gains, net
income for the three months ended June 30, 1998 would have been $190.1 million,
and both basic and diluted earnings per share would have been $0.39. Net income
for the six months ended June 30, 1998 would have been and $401.4 million, and
both basic and diluted earnings per share would have been $0.82.
Return on stockholders' equity was 9.6% for the twelve-month period ended
June 30, 1999, compared to 17.5% for the comparable period ended June 30, 1998.
This decrease was due primarily to a decrease in net income for the twelve
months ended June 30, 1999 as a result of restructuring and other charges.
Liquidity and Capital Resources
At June 30, 1999, we held cash and cash equivalents of $573.5 million, had
working capital of $1.78 billion, and had a current ratio of 1.4-to-1. This
compares to cash and cash equivalents of $1.04 billion, $1.98 billion in working
capital, and a current ratio of 1.5-to-1 at December 31, 1998.
Our capitalization at June 30, 1999, consisted of $2.14 billion in
long-term debt, less current portion, and $5.82 billion in stockholders' equity.
Total debt (which includes redeemable preferred stock of subsidiaries) was $2.38
billion at June 30, 1999, compared with total debt of $1.41 billion at December
31, 1998. 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 29.0% at June 30, 1999, and 19.3% at December 31, 1998.
The ratio of long-term debt to capital was 28.6% at June 30, 1999 and 18.7% at
December 31, 1998. At both June 30, 1999, and December 31, 1998, we had
committed lines of credit of approximately $2.5 billion, all unused, which serve
as a backup facility for commercial paper borrowings. The purchase of
Systemhouse for $1.65 billion was financed approximately 50% with cash and 50%
with commercial paper borrowings.
Cash flows provided by operating activities decreased $173.2 million during
the six months ended June 30, 1999 to $686.0 million from $859.2 million in the
comparable period in the prior year. This decrease was primarily due to the
decrease in earnings resulting from the restructuring and other charges. Cash
used in investing activities during the six months ended June 30, 1999 increased
$1.16 billion to $1.73 billion, from $566.0 million in the corresponding period
in the prior year, primarily due to payments related to the acquisition of
Systemhouse, partially offset by incremental proceeds from the sale of
marketable securities, investments and other assets. Cash flows provided by
financing activities increased $1.16 billion to $641.5 million during the three
months ended June 30, 1999, compared to a use of $520.9 million during the same
period of 1998, due primarily to proceeds from long term debt to partially
finance the acquisition of Systemhouse. For the six-month periods ended June 30,
1999 and 1998, we paid cash dividends totaling $147.5 million and $147.6
million, respectively.
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
EDS' 1999 Annual Meeting of Shareholders was held on May 25, 1999 in
Plano, Texas. A total of 417,880,564 shares (approximately 84.95% of all shares
entitled to vote at the meeting) were represented by proxy or ballot at the
meeting. The matters voted upon at the meeting, and the votes cast with respect
to each, were:
15
<PAGE>
(i) Election of three Class III directors for a term expiring
at the 2002 Annual Meeting of Shareholders: Richard H. Brown - 413,191,219
shares cast for election and 4,689,345 shares withheld; James A. Baker, III -
411,112,734 shares cast for election and 6,767,830 shares withheld; and Judith
Rodin - 413,112,024 shares cast for election and 4,768,540 shares withheld. The
terms of the following directors continued after the meeting: Richard B. Cheney,
William H. Gray, III, Ray J. Groves, C. Robert Kidder, Jeffrey M. Heller, Ray L.
Hunt and Enrique J. Sosa.
(ii) Ratification of the appointment of KPMG LLP as auditors to audit
the accounts for EDS for 1999: 415,910,079 shares cast for the ratification,
1,237,767 shares cast against the ratification and 732,718 shares abstained.
(iii) Stockholder proposal regarding declassification of the Board of
Directors: 144,740,414 shares cast for the proposal, 233,509,620 shares cast
against the proposal and 4,373,323 shares abstained. There were 35,257,207
broker non-votes.
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
During the quarter ended June 30, 1999, EDS filed the following Current
Reports on Form 8-K:
(i) Current Report on Form 8-K dated April 29, 1999 reporting a
press release under Item 5-Other Events and Item 7-Exhibits.
(ii) Current Report on Form 8-K dated May 6, 1999 reporting under
Item 5-Other Events and Item 7-Exhibits the Purchase Agreement
dated May 6, 1999 among the Registrant, the General Motors
Hourly Rate Employees Pension Plan (the "Pension Plan"), Morgan
Stanley & Co. Incorporated, Goldman, Sachs & Co. and Merrill,
Lynch, Pierce, Fenner & Smith Incorporated in connection with
the offering by the Pension Plan of 17,250,000 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)
Dated: August __, 1999 By: /s/ James E. Daley
---------------------------------
James E. Daley
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: August __, 1999 By: /s/ H. Paulett Eberhart
---------------------------------
H. Paulett Eberhart
Senior Vice President
(Principal Accounting Officer)
17
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