<PAGE>
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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, 2000
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 No. 01-11779
ELECTRONIC DATA SYSTEMS CORPORATION
a Delaware corporation
IRS Employer Identification No. 75-2548221
5400 Legacy Drive, Plano, Texas 75024-3199
(972) 604-6000
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, 2000, there were outstanding 466,479,106 shares of the
registrant's Common Stock, $.01 par value per share.
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<PAGE>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I -- Financial Information (Unaudited)
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Income........................... 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................................................ 15
Signatures..................................................................................... 16
Exhibit 10(b) Amended and Restated 1996 Incentive Plan of Electronic Data Systems Corporation
Exhibit 27 Financial Data Schedule (for SEC information only)
</TABLE>
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $4,616.2 $4,615.7 $9,146.6 $8,941.9
-------- -------- -------- --------
Costs and expenses
Cost of revenues 3,754.9 3,801.7 7,491.2 7,410.3
Selling, general and administrative 424.3 457.6 844.1 901.5
Restructuring and other charges -- -- -- 379.8
-------- -------- -------- --------
Total costs and expenses 4,179.2 4,259.3 8,335.3 8,691.6
-------- -------- -------- --------
Operating income 437.0 356.4 811.3 250.3
-------- -------- -------- --------
Interest expense and other, net (39.6) 19.6 37.5 93.4
-------- -------- -------- --------
Income before income taxes 397.4 376.0 848.8 343.7
Provision for income taxes 143.1 135.4 305.6 123.7
-------- -------- -------- --------
Net income $ 254.3 $ 240.6 $ 543.2 $ 220.0
======== ======== ======== ========
Earnings per share
Basic $ 0.55 $ 0.49 $ 1.16 $ 0.45
======== ======== ======== ========
Diluted $ 0.53 $ 0.48 $ 1.13 $ 0.44
======== ======== ======== ========
Cash dividends per share $ 0.15 $ 0.15 $ 0.30 $ 0.30
======== ======== ======== ========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
<PAGE>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ---------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 455.2 $ 537.2
Marketable securities 397.0 191.5
Accounts receivable, net 4,309.8 4,423.4
Prepaids and other 754.7 725.6
--------- ---------
Total current assets 5,916.7 5,877.7
--------- ---------
Property and equipment, net 2,506.3 2,459.8
--------- ---------
Operating and other assets
Investments and other assets 1,353.9 1,483.6
Software, goodwill, and other intangibles, net 2,768.5 2,701.2
--------- ---------
Total operating and other assets 4,122.4 4,184.8
--------- ---------
Total assets $12,545.4 $12,522.3
========= =========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 370.0 $ 378.1
Accrued liabilities 3,065.4 3,312.6
Deferred revenue 558.4 718.3
Income taxes 39.2 93.4
Current portion of long-term debt 29.6 493.6
--------- ---------
Total current liabilities 4,062.6 4,996.0
--------- ---------
Deferred income taxes 245.4 268.2
Long-term debt, less current portion 2,814.0 2,215.7
Redeemable preferred stock of subsidiaries, minority
interests and other long-term liabilities 590.1 507.8
Shareholders' equity
Preferred stock, $.01 par value; authorized
200,000,000 shares, none issued -- --
Common stock, $.01 par value; 2,000,000,000 shares
authorized; 493,425,759 shares issued at June 30,
2000; 493,415,265 shares issued at December 31, 1999 4.9 4.9
Additional paid-in capital 949.8 971.9
Retained earnings 5,543.6 5,179.2
Accumulated other comprehensive income (67.1) (79.7)
Treasury stock, at cost, 27,140,736 shares at
June 30, 2000, and 27,222,631 shares
at December 31, 1999 (1,597.9) (1,541.7)
--------- ---------
Total shareholders' equity 4,833.3 4,534.6
--------- ---------
Total liabilities and shareholders' equity $12,545.4 $12,522.3
========= =========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
<PAGE>
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
2000 1999
--------- ---------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 517.3 $ 686.0
--------- ---------
Cash Flows from Investing Activities
Proceeds from sales of marketable securities 179.8 83.6
Proceeds from investments and other assets 48.9 346.2
Payments for purchases of property and equipment (338.7) (358.1)
Payments for investments and other assets (259.4) (144.2)
Payments related to acquisitions, net of cash acquired -- (1,658.7)
Payments for purchases of software and other intangibles (167.0) (53.5)
Payments for purchases of marketable securities (68.5) (25.1)
Other 9.0 83.2
--------- ---------
Net cash used in investing activities (595.9) (1,726.6)
--------- ---------
Cash Flows from Financing Activities
Proceeds from long-term debt 10,259.5 5,143.5
Payments on long-term debt (9,939.3) (4,228.2)
Purchase of treasury stock (210.0) (174.7)
Employee stock transactions and related tax benefits 71.8 48.4
Dividends paid (139.9) (147.5)
--------- ---------
Net cash provided by financing activities 42.1 641.5
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (45.5) (66.2)
--------- ---------
Net decrease in cash and cash equivalents (82.0) (465.3)
Cash and cash equivalents at beginning of period 537.2 1,038.8
--------- ---------
Cash and cash equivalents at end of period $ 455.2 $ 573.5
========= =========
</TABLE>
See accompanying Notes to Unaudited 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, 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 that 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 1999 Annual Report on Form 10-K.
Certain reclassifications have been made to the 1999 unaudited condensed
consolidated financial statements to conform to the 2000 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):
2000 1999
----- -----
For the three months ended June 30:
Basic earnings per share 465.9 492.4
Diluted earnings per share 476.7 504.1
For the six months ended June 30:
Basic earnings per share 466.3 492.3
Diluted earnings per share 478.9 503.0
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 9.9 million and 0.5 million shares, respectively, for the three and
six months ended June 30, 2000, and 867,412 shares for the three and six months
ended June 30, 1999, and 109,657 restricted stock units for the three months
ended June 30, 2000.
Note 3. Depreciation and Amortization
Property and equipment is stated net of accumulated depreciation of $4.3 billion
and $4.2 billion, respectively, at June 30, 2000 and December 31, 1999.
Additionally, software, goodwill, and other intangibles are stated net of
accumulated amortization of $1.5 billion and $1.4 billion, respectively, at June
30, 2000 and December 31, 1999. Depreciation and amortization expense for the
three and six months ended June 30, 2000 was $364.1 million and $718.7 million,
respectively. Depreciation and amortization expense for the three and six
months ended June 30, 1999 was $372.2 million and $684.2 million, respectively.
Note 4. Restructuring Activities and Other Charges
In the first quarter of 1999, the Company began the implementation of
initiatives designed to reduce costs, streamline its organizational structure,
and exit certain operating activities. As a result of these initiatives, the
Company recorded restructuring charges and related asset writedowns totaling
$1,067.7 million for the year ended December 31, 1999, including $379.8 million
in the first quarter of 1999. In the fourth quarter
6
<PAGE>
of 1999, the Company reversed residual accruals of $29.4 million related to
previously recorded restructuring charges resulting in a net charge of $1,038.3
million for the year ended December 31, 1999. Amounts recorded for restructuring
activities during 1999 provide for planned workforce reductions of approximately
15,300 employees, consisting of approximately 3,200 employees who accepted the
Company's early retirement offer and the involuntary termination of
approximately 12,100 individuals employed throughout the Company in managerial,
professional, clerical, consulting and technical positions. Total involuntary
termination and early retirement offer charges amounted to $866.5 million,
$146.2 million of which pertains to the expense associated with special
termination benefits related to the early retirement offer (net of a curtailment
gain), including amounts under our defined benefit pension plan, and $51.3
million of which pertains to changes in the vesting conditions for unvested
restricted stock units and options. In addition, these initiatives resulted in
the exit of certain business activities, the consolidation of facilities, and
the writedown of certain assets to net realizable value. Charges associated with
these actions include $93.9 million related to business exit and facilities
consolidation costs, and asset writedowns of $107.3 million.
Through June 30, 2000, approximately 9,900 employees have left the Company
through involuntary termination as a result of the 1999 initiatives, and
approximately $407.9 million of termination benefits have been charged to the
accrual. In addition, approximately $54.7 million has been paid in connection
with the exit activities described above. The Company expects that remaining
cash expenditures relating to this charge will be incurred primarily in 2000.
The following table depicts activity in the 1999 restructuring accrual for the
six months ended June 30, 2000 (in millions):
Involuntary
Termination Exit
Costs Costs Total
------- ------ -----
Balance at December 31, 1999 $ 399.3 $ 51.3 $ 450.6
Payments (149.0) (19.7) (168.7)
------- ------ -------
Balance at June 30, 2000 $ 250.3 $ 31.6 $ 281.9
======= ====== =======
Note 5. Comprehensive Income
Comprehensive income for the three and six months ended June 30, 2000 was $215.4
million and $516.9 million, respectively. Comprehensive income for the three
and six months ended June 30, 1999 was $197.0 million and $86.6 million,
respectively. The primary difference between comprehensive income and net
income for the three and six months ended June 30, 2000 was related to foreign
currency translation adjustments, partially offset by net unrealized holding
gains on certain of the Company's investments. 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.
Note 6. Segment Information
Effective January 1, 2000, the Company reorganized its business on a global
basis along the following four lines of business: Information Solutions,
Business Process Management, E.solutions, and A.T. Kearney. The Company's
segment information is stated in accordance with the new organizational
structure. Revenue and operating income (loss) from E.solutions and A.T.
Kearney have been combined to produce the "Consulting" segment. During the
second quarter of 2000, we continued refining the alignment of contracts along
our four lines of business. As a result, certain reclassifications have been
made to current and prior year financial information to conform to the current
alignment.
7
<PAGE>
Prior to the reorganization, the Company disclosed segment information by
aggregating its client contracts along the following three lines of business:
Systems and Technology Services, Business Process Management, and Management
Consulting Services. Prior period segment data has been restated to reflect the
new reporting structure.
The following is a summary of certain financial information by reportable
segment (in millions):
<TABLE>
<CAPTION>
For the Three
Months Ended June 30, 2000 1999
--------------------- ----------------------------- ----------------------------
Operating Operating
Revenue Income (Loss) Revenue Income (Loss)
------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Information Solutions $3,513.5 $ 611.0 $3,509.9 $ 545.7
Business Process Management 655.7 98.5 634.3 62.2
Consulting 543.5 46.0 455.0 42.6
All other (96.5) (318.5) 16.5 (294.1)
-------- ------- -------- -------
Totals $4,616.2 $ 437.0 $4,615.7 $ 356.4
======== ======= ======== =======
For the Six
Months Ended June 30, 2000 1999
--------------------- ----------------------------- ----------------------------
Operating Operating
Revenue Income (Loss) Revenue Income (Loss)
------- ------------ -------- ------------
Information Solutions $6,906.3 $1,146.0 $6,744.6 $1,040.1
Business Process Management 1,289.6 198.2 1,249.1 125.6
Consulting 1,066.9 80.6 869.0 48.6
All other (116.2) (613.5) 79.2 (584.2)
-------- -------- -------- --------
9,146.6 811.3 8,941.9 630.1
Restructuring and other charges -- -- -- (379.8)
-------- -------- -------- --------
Totals $9,146.6 $ 811.3 $8,941.9 $ 250.3
======== ======== ======== ========
</TABLE>
The Company currently uses operating income or loss, which consists of segment
revenues less segment costs and expenses (before restructuring and other
charges), to measure segment profit or loss. The Company had previously
measured segment performance using gross profit, which consists of segment
revenues less segment cost of revenues. Revenue and operating income of non-
U.S. operations are measured using fixed currency exchange rates with
differences between fixed and actual exchange rates being included in the "all
other" category. In addition, the "all other" category includes the results of
the Company's Unigraphics Solutions Inc., EDS CoNext, Inc., and eBreviate, Inc.
businesses. Certain historical financial information is not readily available
under the new reporting structure, accordingly, certain group overhead cost
allocations have been made to present 1999 operating income (loss) under the new
reporting structure.
The following is a summary of total assets by reportable segment (in millions):
June 30, December 31,
2000 1999
---- -----
Information Solutions $ 7,774.5 $ 7,374.9
Business Process Management 1,746.5 1,708.2
Consulting 1,795.1 1,653.1
All other 1,229.3 1,786.1
--------- ---------
Total $12,545.4 $12,522.3
========= =========
Total assets in the "all other" category include unallocated assets, primarily
corporate cash, fixed assets and investments, and foreign exchange rate
differences.
8
<PAGE>
Note 7. Commerce One Stock
In April 1999, EDS acquired 2,150,043 shares of Commerce One stock as part of
the Company's acquisition of MCI Systemhouse from MCI WorldCom. In January
2000, EDS entered into a five-year forward sale of the stock that monetized the
Company's position and established the difference between the Company's basis in
the stock and the sales price on the date of the forward sale transaction as the
minimum amount of appreciation that will be realized upon sale. The Company has
the ability to realize further financial benefits if the market price of the
stock appreciates above a certain level at the end of the five-year period.
The Company received $309.5 million in net proceeds as a result of entering into
the forward sale, and recognized this amount as debt. Interest expense will be
recognized over the five-year period using the effective interest rate implicit
in the transaction. On an ongoing basis, EDS recognizes the change in the
market values of Commerce One stock and the debt as components of other
comprehensive income. There will be no further impact on cash flow from
retiring the debt as it is redeemed by the delivery of Commerce One stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Electronic Data Systems Corporation, or EDS, is a professional services firm
that offers its clients a portfolio of related services worldwide within the
broad categories of information technology outsourcing, business process
management and consulting. This discussion refers to EDS and its consolidated
subsidiaries and should be read in conjunction with the discussion included in
our 1999 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 future revenue growth, expenses and operating margins, as
well as 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, short-
and long-term revenue and earnings growth, the impact of the renegotiation of
certain sector agreements with GM, backlog, the value of new contract signings,
business pipeline, 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, including contracts with GM; 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 and
revenue estimates; the impact of acquisitions and divestitures and our ability
to improve productivity and achieve synergies from acquired businesses; the
degree to which third parties continue to outsource information technology and
business processes; and the cost of attracting and retaining highly skilled
personnel. We are not obligated to update or revise any forward-looking
statements whether as a result of new information, future events or otherwise.
9
<PAGE>
Results of Operations
Revenues. Total revenues of $4.6 billion for the quarter ended June 30, 2000,
remained flat, when compared to the corresponding period in 1999, as a result of
an increase in revenues from non-GM clients offset by a decrease in revenues
from GM. Revenues from non-GM clients for the quarter ended June 30, 2000, rose
$72.4 million, or 2%, to $3.8 billion from $3.7 billion for the same period in
1999. The increase in non-GM revenues was primarily the result of new contracts
signed in 1999 and 2000, and from revenues associated with the acquisition of
Systemhouse in April 1999. This increase was partially offset by decreases
resulting from the divestiture of certain business units and the discontinuation
of certain contracts during 1999 in order to align service offerings with our
four global lines of business to capture synergies and further leverage our
delivery platforms. As a result of these strategic divestitures, we expect non-
GM revenue growth, when compared to the corresponding periods in 1999, to be
stronger in the second half of 2000 than in the first half of the year.
Revenues from GM decreased $71.9 million, or 8%, to $814.2 million during the
three months ended June 30, 2000, compared with $886.1 million for the
corresponding period in 1999. The decrease in revenues from GM is primarily
attributable to the previously announced renegotiation of certain sector
agreements, including the agreements covering GM's North American operations and
GMAC, that became effective January 1, 2000. Revenues from both GM and non-GM
clients were negatively impacted by foreign currency fluctuations during the
three months ended June 30, 2000.
For the six months ended June 30, 2000, revenues rose $204.7 million, or 2%, to
$9.1 billion when compared to $8.9 billion in the corresponding period in 1999.
Revenues from non-GM clients for the six months ended June 30, 2000, rose $312.3
million, or 4%, to $7.5 billion from $7.2 billion in the corresponding period of
1999 primarily due to the reasons discussed above. Revenues from GM for the six
months ended June 30, 2000, decreased $107.6 million, or 6%, to $1.7 billion
from $1.8 billion in the comparable period in 1999 due primarily to the reasons
discussed above. Revenues from both GM and non-GM clients were negatively
impacted by foreign currency fluctuations during the six months ended June 30,
2000.
Effective January 1, 2000, the Company reorganized its operations on a global
basis along the following four lines of business: Information Solutions,
Business Process Management, E.solutions, and A.T. Kearney. The Company's
segment information displayed below is in accordance with the new organizational
structure. Revenue and operating income (loss) from E.solutions and A.T.
Kearney have been combined to produce the "Consulting" segment. During the
second quarter of 2000, we continued refining the alignment of contracts along
our four lines of business. As a result, certain reclassifications have been
made to current and prior year financial information to conform to the current
alignment.
Prior to the reorganization, the Company disclosed segment information by
aggregating its client contracts along the following three lines of business:
Systems and Technology Services, Business Process Management, and Management
Consulting Services.
We evaluate our operating segment revenue growth on a constant foreign currency
basis. On this basis, operating segment revenues from non-GM clients increased
5% and 7%, respectively, for the three and six months ended June 30, 2000, when
compared to the corresponding periods in 1999. The following table displays
revenue growth by segment on a constant foreign currency basis for the three and
six months ended June 30, 2000, as compared to the corresponding period in 1999:
Three months ended Six months ended
June 30, 2000 June 30, 2000
------------- -------------
Information Solutions -- % 2 %
Business Process Management 3 % 3 %
Consulting 19 % 23 %
E.solutions 37 % 45 %
A.T. Kearney 9 % 11 %
10
<PAGE>
Revenue growth for the three and six months periods ended June 30, 2000 as
compared to the corresponding periods in the prior year, is attributable
primarily to new contract signings and to revenues associated with the
acquisition of Systemhouse in April 1999. The divestiture of certain business
units in 1999 had the largest impact on revenue growth in the Business Process
Management segment. Revenue growth for the six months ended June 30, 2000
reflects certain reclassifications as discussed above.
The following table displays the percentage of total revenue by segment:
For the Three Months Ended June 30, 2000 1999
----------------------------------- ---- ----
Information Solutions 76% 76%
Business Process Management 14 14
Consulting 12 10
All other (2) --
---- ----
Total 100% 100%
==== ====
For the Six Months Ended June 30, 2000 1999
--------------------------------- ---- ----
Information Solutions 76% 75%
Business Process Management 14 14
Consulting 12 10
All other (2) 1
---- ----
Total 100% 100%
==== ====
Revenues from non-GM clients comprised 82% and 81%, respectively, of total
revenues for the three months ended June 30, 2000 and 1999, and 82% and 80%,
respectively, for the six months ended June 30, 2000 and 1999.
Costs and expenses. Our gross margin percentage [(revenues less cost of
revenues)/revenues] increased to 18.7% for the three months ended June 30, 2000,
compared with 17.6% for the corresponding period in 1999. For the six months
ended June 30, 2000, the gross margin increased to 18.1%, compared with 17.1%
for the comparable period in 1999. The increase in gross margin for the three
and six months ended June 30, 2000, was due primarily to company-wide
productivity and repositioning initiatives implemented in 1999, and was
partially offset by a decline in the gross margin on our GM business resulting
from the renegotiation of certain sector agreements. See "Revenues" above. In
addition, we incurred incremental expenses during the three and six months ended
June 30, 2000, when compared to the corresponding periods in the prior year,
related to start-up activities for various e-business activities. We expect to
continue to incur expenses related to these activities in future periods.
Selling, general and administrative, or SG&A, expenses as a percentage of
revenues decreased to 9.2% for the three months ended June 30, 2000, compared to
9.9% in the corresponding period in 1999. For the six months ended June 30,
2000, SG&A decreased to 9.2%, compared with 10.1% for the comparable period in
1999. This decrease resulted primarily from the cost-saving initiatives
implemented in 1999. Savings from these initiatives were partially offset by
increased spending for sales, corporate systems, training and other areas of
strategic importance.
In the first quarter of 1999, we began the implementation of initiatives
designed to reduce costs, streamline our organizational structure, and exit
certain operating activities. As a result of these initiatives, we recorded
restructuring charges and related asset writedowns totaling $1,067.7 million for
the year ended December 31, 1999, including $379.8 million in the first quarter
of 1999. In the fourth quarter of 1999, the Company reversed residual accruals
of $29.4 million related to previously recorded restructuring charges resulting
in a net charge of $1,038.3 million for the year ended December 31, 1999.
Amounts recorded for restructuring activities during 1999 provide for planned
workforce reductions of approximately 15,300 employees, consisting of
approximately 3,200 employees who accepted our early retirement offer and the
involuntary termination of approximately 12,100 individuals employed throughout
the Company in
11
<PAGE>
managerial, professional, clerical, consulting and technical positions. Total
involuntary termination and early retirement offer charges amounted to $866.5
million, $146.2 million of which pertains to the expense associated with special
termination benefits related to the early retirement offer (net of a curtailment
gain), including amounts under our defined benefit pension plan, and $51.3
million of which pertains to changes in the vesting conditions for unvested
restricted stock units and options. In addition, these initiatives resulted in
the exit of certain business activities, the consolidation of facilities, and
the writedown of certain assets to net realizable value. Charges associated with
these actions include $93.9 million related to business exit and facilities
consolidation costs, and asset writedowns of $107.3 million.
Through June 30, 2000, approximately 9,900 employees have left the Company
through involuntary termination as a result of the 1999 initiatives, and
approximately $407.9 million of termination benefits have been charged to the
accrual. In addition, approximately $54.7 million has been paid in connection
with the exit activities described above. We expect that remaining cash
expenditures relating to this charge will be incurred primarily in 2000.
The following table depicts activity in the 1999 restructuring accrual for the
six months ended June 30, 2000 (in millions):
Involuntary
Termination Exit
Costs Costs Total
----- ----- -----
Balance at December 31, 1999 $ 399.3 $ 51.3 $ 450.6
Payments (149.0) (19.7) (168.7)
------- ------ -------
Balance at June 30, 2000 $ 250.3 $ 31.6 $ 281.9
======= ====== =======
Interest expense and other, net. The components of interest expense and other,
net are presented below (in millions):
For the three months ended June 30, 2000 1999
---------------------------------- ------ ------
Interest and other income $ 13.5 $ 59.0
Interest expense 53.1 39.4
------ ------
Total $(39.6) $ 19.6
====== ======
For the six months ended June 30, 2000 1999
--------------------------------- ------ ------
Interest and other income $143.5 $154.6
Interest expense 106.0 61.2
------ ------
Total $ 37.5 $ 93.4
====== ======
Interest expense and other, net decreased $59.2 million during the three months
ended June 30, 2000, to ($39.6) million, compared with $19.6 million in the
corresponding period in 1999. Interest and other income decreased $45.5
million, to $13.5 million from $59.0 million, due primarily to a pre-tax gain of
$26.5 million recognized in 1999 resulting from the sale of limited partnership
investments. Interest expense increased $13.7 million, to $53.1 million from
$39.4 million, due primarily to an increased level of debt.
Interest expense and other, net decreased $55.9 million during the six months
ended June 30, 2000, to $37.5 million, compared with $93.4 million in the
corresponding period in 1999. Interest and other income decreased $11.1
million, to $143.5 million, compared with $154.6 million. Interest and other
income for the six months ended June 30, 2000, includes a pre-tax gain of $97.6
million recorded in the first quarter of 2000 resulting primarily from the sale
of our Kinetra subsidiary, an e-business venture started in 1998. Interest and
other income for the six months ended June 30, 1999, includes a pre-tax gain of
$90.0 million resulting from the sale of limited partnership investments.
Interest expense increased $44.8 million during
12
<PAGE>
the six months ended June 30, 2000, to $106.0 million from $61.2 million, due
primarily to an increased level of debt.
Income taxes. The effective tax rate remained constant at 36.0% for the three
and six months ended June 30, 2000 and 1999.
Net income. For the three months ended June 30, 2000, net income increased
$13.7 million, to $254.3 million, compared with $240.6 million during the
corresponding period of the prior year. Basic and diluted earnings per share
were $0.55 and $0.53, respectively, for the three months ended June 30, 2000,
and $0.49 and $0.48, respectively, for the comparable period in the prior year.
For the six months ended June 30, 2000, net income increased $323.2 million, to
$543.2 million, compared with $220.0 million during the corresponding period of
the prior year. Basic and diluted earnings per share were $1.16 and $1.13,
respectively, for the six months ended June 30, 2000, and $0.45 and $0.44,
respectively, for the comparable period in the prior year.
As discussed above, we recorded a pre-tax gain of $97.6 million in the first
quarter of 2000 from the sale of investments. Excluding this gain, net income
for the six months ended June 30, 2000 would have been $480.8 million, and basic
and diluted earnings per share would have been $1.03 and $1.00, respectively.
During 1999, we recorded pre-tax gains of $26.5 million and $90.0 million,
respectively, during the three and six months ended June 30, 1999 related to the
sale of limited partnership investments. We also recorded pre-tax charges of
$379.8 million related to restructuring and other charges during the first
quarter of 1999. Excluding these items, 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
earnings per share would have been $0.82 and $0.80, respectively.
The following table summarizes the adjustments discussed in the preceding
paragraph for the three and six months ended June 30, 2000 and 1999 (dollars in
millions, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues - as reported $4,616.2 $4,615.7 $9,146.6 $8,941.9
-------- -------- -------- --------
Costs and expenses - as reported 4,179.2 4,259.3 8,335.3 8,691.6
Adjusting item:
Restructuring and other charges -- -- -- (379.8)
-------- -------- -------- --------
Costs and expenses - pro forma 4,179.2 4,259.3 8,335.3 8,311.8
-------- -------- -------- --------
Operating income - pro forma 437.0 356.4 811.3 630.1
-------- -------- -------- --------
Interest expense and other, net - as reported (39.6) 19.6 37.5 93.4
Adjusting item:
Gain on disposition of certain investments -- (26.5) (97.6) (90.0)
-------- -------- -------- --------
Interest expense and other, net - pro forma (39.6) (6.9) (60.1) 3.4
-------- -------- -------- --------
Income before income taxes - pro forma 397.4 349.5 751.2 633.5
Provision for income taxes - pro forma 143.1 125.8 270.4 228.0
-------- -------- -------- --------
Net income - pro forma $ 254.3 $ 223.7 $ 480.8 $ 405.5
======== ======== ======== ========
Earnings per share - pro forma
Basic $ 0.55 $ 0.45 $ 1.03 $ 0.82
======== ======== ======== ========
Diluted $ 0.53 $ 0.44 $ 1.00 $ 0.80
======== ======== ======== ========
</TABLE>
13
<PAGE>
Liquidity and Capital Resources
At June 30, 2000, we held cash and cash equivalents of $455.2 million, had
working capital of $1.9 billion, and had a current ratio of 1.5-to-1. This
compares to cash and cash equivalents of $537.2 million, $881.7 million in
working capital, and a current ratio of 1.2-to-1 at December 31, 1999.
Total debt increased to $3.0 billion at June 30, 2000, from $2.9 billion at
December 31, 1999. Total debt consists of notes payable, commercial paper and
redeemable preferred stock of subsidiaries. The total debt-to-capital ratio
(which includes total debt and minority interests as a component of capital) was
38% at June 30, 2000, and at December 31, 1999. At both June 30, 2000, and
December 31, 1999, we had committed lines of credit of approximately $1.3
billion, all unused, which serve as a backup facility for commercial paper
borrowings.
Cash flows provided by operating activities decreased $168.7 million during the
six months ended June 30, 2000, to $517.3 million from $686.0 million in the
corresponding period in the prior year. This decrease was primarily due to
changes in working capital items, partially offset by an increase in net income.
Cash used in investing activities during the six months ended June 30, 2000
decreased $1.1 billion, to $595.9 million. Cash used in investing activities
during the corresponding period in the prior year was $1.7 billion and included
the acquisition of Systemhouse for approximately $1.6 billion. Cash flows
provided by financing activities decreased $599.4 million to $42.1 million
during the six months ended June 30, 2000, compared to $641.5 million during the
corresponding period of 1999, due primarily to a decrease in net proceeds on
long-term debt. For the six months ended June 30, 2000 and 1999, EDS paid cash
dividends totaling $139.9 million and $147.5 million, respectively.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 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, as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of Effective Date of
SFAS No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments
and Certain Hedging Activities, an amendment of SFAS No. 133, are effective for
financial statements for fiscal years beginning after June 15, 2000. We do not
expect our adoption of the provisions of this statement on January 1, 2001, to
have a material effect on our results of operations or financial position.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation: an Interpretation of APB
Opinion No. 25. This interpretation clarifies the application of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and is effective July 1, 2000.
We do not expect our adoption of this interpretation to have a material effect
on our results of operations or financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
This bulletin summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB No. 101B that delayed the implementation date
of SAB No. 101 until the fourth fiscal quarter of fiscal years beginning after
December 15, 1999, although early adoption is allowed. We do not expect our
adoption of the provisions of this statement effective October 1, 2000, to have
a material effect on our results of operations or financial position.
14
<PAGE>
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
EDS' 2000 Annual Meeting of Shareholders was held on May 23, 2000 in Plano,
Texas. A total of 395,875,551 shares (approximately 84.6% 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:
(i) Election of four Class I directors for a term expiring at the 2003
Annual Meeting of Shareholders: William H. Gray, III - 389,827,352 shares cast
for election and 6,048,199 shares withheld; Ray J. Groves - 390,164,697 shares
cast for election and 5,710,854 shares withheld; Jeffrey M. Heller - 390,187,148
shares cast for election and 5,688,403 shares withheld; and Ray L. Hunt -
390,321,145 shares cast for election and 5,554,406 shares withheld. The terms
of the following directors continued after the meeting: James A. Baker, III,
Richard H. Brown, Richard B. Cheney, Roger A. Enrico, C. Robert Kidder, and
Judith Rodin. Mr. Cheney resigned as a director of EDS effective August 1,
2000.
(ii) Ratification of the appointment of KPMG LLP as auditors to audit
the accounts for EDS for 2000: 393,650,710 shares cast for the ratification,
1,025,474 shares cast against the ratification and 1,199,351 shares abstained.
(iii) Stockholder proposal regarding poison pills: 217,034,724 shares
cast for the proposal, 136,805,563 shares cast against the proposal and
2,884,495 shares abstained. There were 39,150,769 broker non-votes.
(iv) Stockholder proposal regarding super-majority vote: 213,594,554
shares cast for the proposal, 139,640,689 shares cast against the proposal and
3,489,536 shares abstained. There were 39,150,772 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
-------------------------------------------------------------------------
10(b) Amended and Restated 1996 Incentive Plan of Electronic Data
Systems Corporation
27 Financial Data Schedule (for SEC information only)
(b) Reports on Form 8-K
During the quarter ended June 30, 2000, EDS filed no Current Reports on
Form 8-K.
15
<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 11, 2000 By: /s/ James E. Daley
--------------------------------
James E. Daley
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: August 11, 2000 By: /s/ John Adams
--------------------------------
John Adams
Vice President and Controller
(Principal Accounting Officer)
16
