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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File No. 01-11779
[LOGO EDS]
ELECTRONIC DATA SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2548221
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5400 Legacy Drive, Plano, Texas 75024-3199
(Address of principal executive offices, including ZIP code)
Registrant's telephone number, including area code: (972) 604-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 Par Value New York Stock Exchange
London Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 28, 2001, the aggregate market value of the voting stock held by
non-affiliates of the registrant (based on the closing price on such date as
reported on the New York Stock Exchange Composite Transactions) was
approximately $29,796,760,000.
There were 467,631,000 shares of the registrant's common stock outstanding as of
February 28, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 22, 2001, are incorporated by reference in Part
III.
PART I
ITEM 1. BUSINESS
Electronic Data Systems Corporation ("EDS") was incorporated in Delaware in
1994 and, at the time of its split-off from General Motors Corporation ("GM") in
1996, became the successor to the business and operations of the Texas
corporation which had been incorporated under the same name in 1962. In 1984, GM
acquired all of the capital stock of the Texas corporation, which prior to that
time had been an independent publicly held corporation. As a result of the
split-off, EDS once again became an independent publicly held corporation with
its Common Stock listed for trading on the New York and London Stock Exchanges.
Unless the context requires otherwise, references in this Form 10-K to EDS
include its predecessor and subsidiaries.
EDS has been a leader in the global information technology (IT) services
industry for almost 40 years. We provide strategy, implementation, and hosting
services and solutions for clients managing the complexities of the digital
economy, bringing together the world's best technologies to address our clients'
critical business imperatives. Our end-to-end portfolio of services integrates
our four lines of business - Information Solutions, Business Process Management,
E.solutions and A.T. Kearney - to help clients solve complex business issues and
achieve results with technology. Our seven Global Industry Groups -
Communications, Energy, Financial, Government, Health Care, Manufacturing and
Retail, and Transportation - work with each of our lines of business and client
executive teams to most effectively position the company within our target
markets.
As of December 31, 2000, we employed approximately 122,000 persons. Our
principal executive offices are located at 5400 Legacy Drive, Plano, Texas
75024, telephone number: (972) 604-6000.
Information Solutions
Information Solutions, our largest line of business, encompasses our
traditional IT outsourcing business. Information Solutions includes network and
system operations, data management, applications development and field services,
as well as Internet hosting and Web site management. Our capabilities help
clients align IT and operations with business strategy while ensuring
predictable performance and costs. We have been a leader in the IT services
industry for almost 40 years.
Our Information Solutions services include:
. Centralized Systems Management. We offer data processing services for
stand-alone, midrange or high-end systems physically located in one or
more controlled environments. This includes management services for
traditional application processing environments, as well as specialized
services such as Web site hosting and data warehousing. These services
help clients reduce risk, facilitate cost-effective growth, improve
delivery, efficiency and quality, and enhance client-to-customer
relationships.
. Distributed Systems Management. We offer end-to-end services to plan,
deploy, operate and refresh an enterprise's total distributed processing
capability. These include traditional laptop and desktop environments, as
well as the emerging applications service provider model supported by
network-based applications (often referred to as apps on taps). Benefits
to clients for these services may include reduced cost of ownership,
increased return on investment, transformation of PCs into information
tools, increased speed to market and enhanced flexibility in business
operations.
. Communications Management. We define, develop and manage consistent
voice, video, data, multi-service and other global communications
services. These services facilitate electronic commerce, increase
competitiveness and market opportunities, and improve information sharing
through a client's supply and demand chain.
. Application Services. We offer applications development and management
services on an outsourced or out-tasked basis. These services range from
outsourcing of all application development and management to
implementation and management of EDS-owned or third party industry
applications. Benefits to clients for these services include reduced
costs, extended value of technology investments, information sharing and
enhanced ability to adapt to market changes.
Our Information Solutions line of business accounted for a substantial
majority of our revenues in 2000, and we expect it to continue to account for a
majority of our revenues in 2001.
2
Business Process Management
Business Process Management, or BPM, is the outsourcing of one or more
business processes or functions to an external provider. Our BPM line of
business focuses on clients' business goals to enhance their customers' total
satisfaction with delivery, performance, quality and cost.
Our BPM services include:
. Financial Process Management. We offer a full range of scalable services
that enable clients to bridge the gap between paper and electronic
payment processing environments. Offerings include credit card
processing, ATM and kiosk transaction processing, debit and gateway
authorization, check processing, remittance processing, mortgage and
consumer loan processing, relocation services, and a wide variety of
document management services. Services are aimed at several different
types of clients, including banks and other lending institutions, card
issuing institutions, merchants and merchant acquiring banks, as well as
medium-to-large-size billers from multiple industries.
. Administrative Process Management. With more than 30 years of experience,
EDS provides end-to-end services for city, state and federal programs
that operate in conjunction with a program's overall strategy to improve
and increase efficiency. We provide solutions to improve business
processes around Medicaid and Medicare claims administration, electronic
traffic enforcement, and alarm tracking and billing services. Additional
services provided to the public sector include decision support services,
fraud and abuse detection services, registry and tracking services for
vaccines and immunizations, and pharmacy benefit management services. In
the private sector, we provide improvement services to clients to enhance
and manage policyholder services for both life and property and casualty
insurance companies.
. Customer Relationship Management. EDS' expert management of customer
interactions enables clients to develop individual customer
relationships, build brand loyalty, and improve customer acquisition,
retention and lifetime value. We are a global leader in Customer
Relationship Management (CRM), supporting hundreds of clients with their
end-to-end capabilities across the areas of customer interaction centers,
customer intelligence, fulfillment and distribution services. Together
with our three other lines of business, we provide the full range of CRM
services - from management consulting and systems integration to ongoing
business process management and outsourcing.
E.solutions
Our E.solutions line of business provides consulting expertise, technology
and application knowledge, and delivery excellence that help clients navigate
the complexities of running their business in the digital economy. E.solutions
offerings encompass a complete continuum of solutions consulting services, from
enterprise strategy through application design, development and deployment; from
package selection through implementation and integration; and from
infrastructure assessment through design and deployment.
The E.solutions line of business is organized around four major practices
areas: Enterprise Consulting, bluesphere, Digital Value Chain and Digital
Platforms.
. Enterprise Consulting. Transforms enterprises through service offerings
including Industry Consulting, Business Integration Consulting and
Project Management Consulting. E.solutions also offers Web Universities
and Training, a complete range of services assembled for organizations
that intend to use learning as a strategic advantage in a fast-paced
global market.
. bluesphere. bluesphere is an interactive agency that specializes in
creative Internet and interactive application development. bluesphere's
offerings include Net Marketing, offering development and implementation
of strategic Web plans and management of digital branding; Net Design,
which helps clients develop custom Web-based solutions; Net Source, a
comprehensive management program that coordinates all of the services
required to deliver full Web capabilities; and Net Mobility, which
provides access to applications and customer assistance for devices such
as Web-ready cellular phones and personal digital assistants.
3
. Digital Value Chain. Optimizes relationships between clients and their
suppliers and customers through solutions consulting and technology,
fully integrating our clients' electronic business with traditional
systems. Digital Value Chain offerings include Supply Chain Services,
assisting clients in the creation of more-efficient extended supply
chains; Enterprise Resource Planning (ERP), offering planning,
implementation, optimization and hosting services for enterprise
application systems; CRM Services, a comprehensive suite of service
offerings to help clients plan, design, implement and operate their
customer care programs, including channel integration, marketing and
sales automation, customer care solutions, business intelligence,
knowledge management and full integration of front and back office
functions; Net Markets, an end-to-end solution that brings buyers and
suppliers together in an electronic community providing efficient
matching and value-added services; and Integration Services, enabling
clients to integrate their e-business environment with value-added
solutions, applications, systems and business processes across the global
extended enterprise.
. Digital Platforms. E.solutions offers e-infrastructure consulting that
allows clients to assess, design, plan and implement best-in-breed
infrastructure and Web-based security systems. Our Information Assurance
offerings help clients safely engage in all aspects of e-commerce with
confidentiality, integrity and availability. These services include
assessment, protection, verification and training solutions for data,
infrastructure and systems, and continuous security monitoring and
management that anticipate and react to all types of security threats.
Other Digital Platform offerings include Messaging Services, such as
migration/upgrade, systems integration/coexistence, hosted mailboxes,
messaging system enhancements, directory services, e-mail content
validation, administration optimization, collaborative solutions, and
Infrastructure Consulting, including platform, network and applications
consulting.
A.T. Kearney
A.T. Kearney, a leading global management consultancy, became a subsidiary
of EDS in 1995. The firm provides clients with high-value management consulting
services, including strategy, information technology and e-business services,
and organization and operations consulting, as well as executive search
services. A.T. Kearney addresses top management and CEO issues through delivery
of leading-edge solutions to complex problems.
A.T. Kearney serves clients through practice teams focused on major
industries, including automotive, consumer products, retail, financial
institutions, communications/high technology and energy, as well as aerospace
and defense, transportation, utilities, health care and pharmaceuticals.
Among the services provided by A.T. Kearney are:
. Strategy Consulting. Includes a broad spectrum of services from
corporate/business unit and competitive strategy to e-business strategy,
product/market/channel strategy and restructuring and privatization.
. E-Business Consulting. Focuses on developing and delivering the e-
business priorities within our client CEO's digital economy agenda.
Working in collaboration with the E.solutions line of business, A.T.
Kearney provides global clients end-to-end e-business capabilities from
insight through implementation.
. Strategic Information Technology Consulting. Provides services such as
technology strategy, IT alignment, and business intelligence and
technology-enabled business transformation. It assists clients in
achieving business results by improving their ability to leverage and use
IT or formulating results-oriented business strategies in which IT plays
a central role.
. Organization and Transformation Consulting. Focuses on change management,
organization strategy, organization transformation and design, and post-
merger integration.
. Sales and Marketing Consulting. Includes services such as e-CRM, sales
force effectiveness, customer service strategy, and pricing, terms and
condition design.
. Finance and Economics Consulting. Provides clients with services such as
integrated strategic measurement, activity-based management,
economic/financial analysis, litigation support and transfer pricing.
4
. Operations Consulting. Involves all phases of operations, including
strategic sourcing, manufacturing, supply chain management and
negotiations. Specialties include Asset Productivity, Digital Operations
Excellence and Network Market Management Operations.
Revenues
Our fees are generally paid pursuant to contracts with our clients. These
contracts may provide for both fixed- and variable-fee arrangements. The terms
of our client contracts generally range from less than one year in the high-
value consulting business to up to ten years in our IT outsourcing business.
Other than GM, no one client accounted for more than 10% of our total revenues
in any of the past three years. Approximately 42% of our 2000 revenues were
generated outside the United States.
Acquisitions, Strategic Alliances and Investments
From time to time, EDS has made acquisitions and entered into strategic
alliances in an effort to obtain a competitive advantage or a new or expanded
presence in targeted geographic or service markets. In January 2000, we
announced the creation of a venture fund to facilitate strategic investments in
the Internet, e-commerce and the emerging business-to-business (B2B)
marketplace. We believe that acquisitions, strategic alliances and investments
will continue to be important to our ability to compete effectively.
Competition
The IT services market remains fragmented and highly competitive. We
experience competition in all four of our lines of business. Our Information
Solutions line of business faces competition principally from other companies
providing IT systems and services. The principal competitors in our Information
Solutions line of business are Cap Gemini Ernst & Young, Computer Sciences
Corporation (CSC), International Business Machines Corporation (IBM) Global
Services and Perot Systems Corporation. The principal competitors in our
Business Process Management line of business are First Data Corp., Automatic
Data Processing, Inc., Fiserv Inc., and Convergys Corporation. Our E.solutions
line of business competes with IBM Global Services, Cap Gemini Ernst & Young,
Accenture, PricewaterhouseCoopers and Deloitte & Touche, as well as a number of
other emerging technology companies. The Internet services and solutions
consulting markets are converging as companies move toward the formation of
collaborative enterprises and Internet services providers increasingly enter the
solutions consulting space, providing Web enablement and enterprise systems
integration. Principal competitors of A.T. Kearney include McKinsey & Company,
Bain & Company, Booz Allen & Hamilton, Boston Consulting Group and Accenture. In
addition, all four of our lines of business experience competition from
numerous smaller, niche-oriented consulting and other firms, such as Viant
Corporation, Razorfish, Inc., Sapient Corp., Proxicom, Inc., Exodus
Communications, Inc., Digex, Incorporated, Deluxe Corp., Consultec, Inc., Harte-
Hanks, Inc., and UPS Logistics Group.
Technology and its application within the business enterprise are in a
rapid and continuing state of change as new technologies continue to be
developed, introduced and implemented. We believe that to continue to compete
effectively we must be able to develop and market offerings that meet changing
user needs and respond to technological changes on a timely and cost-effective
basis.
Employees
As of December 31, 2000, we employed approximately 122,000 persons in the
United States and around the world. None of our U.S. employees are currently
employed under an agreement with a collective bargaining unit, and we believe
that our relations with employees are good. To maintain our technical expertise
and responsiveness to evolving client needs, we provide our employees with
extensive continuing education and training, as well as leadership and
professional development programs.
Patents, Proprietary Rights and Licenses
We hold a number of patents and pending patent applications in the United
States and other countries. Our policy generally is to pursue patent protection
that we consider necessary or advisable for the patentable inventions and
technological improvements of our business. We also significantly rely on trade
secrets, copyrights, technical expertise and know-how, continuing technological
innovations, and other means, such as confidentiality agreements with employees,
consultants and clients, to protect and enhance our competitive position.
5
Some of our business areas are highly patent-intensive. Many of our
competitors have obtained, and may obtain in the future, patents that cover or
affect services or products directly or indirectly related to those that we
offer. We routinely receive communications from third parties asserting patent
or other rights covering our products and services. We may not be aware of all
patents containing claims that may pose a risk of infringement by our products
and services. In general, if one or more of our products or services infringe
patents held by others, we would be required to cease developing or marketing
such products or services, obtain licenses from the holders of the patents, or
redesign our products or services to avoid infringing the patent claims. There
is no assurance that we would be able to take any of such remedial actions or,
if we are able to do so, that the costs incurred would not be significant.
We are not aware of any pending patent or proprietary right disputes that
would have a material adverse effect on our consolidated financial position or
results of operations.
Regulation
Various aspects of our business are subject to governmental regulation in
the United States and other countries in which we operate. Failure to comply
with such regulation may, depending upon the nature of the noncompliance, result
in the suspension or revocation of any license or registration at issue, the
termination or loss of any contract at issue, or the imposition of contractual
damages, civil fines or criminal penalties. We have experienced no material
difficulties in complying with the various laws and regulations affecting our
business.
Services for General Motors
Approximately 18% of our total revenues in 2000 were attributable to GM and
its affiliates. We are the primary provider of data processing and other
information technology services for GM and certain of its affiliates worldwide,
including integrated information systems for payroll, health and benefits,
office automation, and plant automation functions. The loss of GM as an ongoing
major customer would have a material adverse effect on EDS.
Immediately prior to our split-off from GM in 1996, we entered into a new
Master Service Agreement (MSA) with GM that serves as a framework for the
negotiation and operation of service agreements for certain "in-scope" IT
services (as defined in the MSA) we provide to GM on a worldwide basis. These
in-scope services accounted for approximately $2.9 billion of the $3.4 billion
of GM revenues in 2000. The remainder was attributable to goods and services
provided outside the scope of the MSA.
The term of the MSA will continue until 2006 and may be extended by mutual
agreement of the parties. In addition, the MSA may be terminated by GM if there
occurs a "change of control" of EDS and certain other conditions are met
(including a determination by GM's Board of Directors that there is substantial
uncertainty about EDS' ability to perform its obligations under the MSA or any
other significant threat to the business relationship between the parties).
Reference is made to the MSA, a copy of which has been filed with the SEC, for a
description of the other terms and conditions of that agreement, including
certain market testing procedures to test the competitiveness of the services we
provide thereunder.
ITEM 2. PROPERTIES
At December 31, 2000, we operated in approximately 340 locations in 41
states and 201 cities in the United States and approximately 453 locations in
218 cities in 40 countries outside the United States. At such date, we owned
approximately 7 million square feet of space and leased from third parties
approximately 20.8 million square feet of space. Our global headquarters campus
in Plano, Texas, contains approximately 3.2 million square feet of office and
data center space. Other than the 1.6-million-square-foot EDS Centre building,
which we lease for an initial term expiring in 2022 (which lease has certain
fixed price purchase options we may exercise during and at the end of such
initial term), we own all buildings and real estate comprising the Plano campus.
We operate large scale Service Management Centers (SMCs) in locations
throughout the United States and in Australia, Brazil, Canada, France, Germany,
the Netherlands, Spain and the United Kingdom. In addition, we operate Service
Delivery Centers (SDCs) at client-owned sites or EDS-owned or leased facilities
throughout the world. SDCs usually support a single or small number of clients
with more specialized requirements than those supported at the large scale,
multiple client SMCs. Our leased properties consist primarily of office,
warehouse, SDC and non-U.S. SMC facilities. Lease terms are generally five years
or, for leases related to a specific client contract, have a term concurrent
with that contract. We do not anticipate any difficulty in obtaining renewals or
alternative space upon expiration of our existing leases. In addition to our
owned and leased properties, we occupy office space at client locations
throughout the world. Such space is generally occupied pursuant to the terms of
the relevant client contract.
6
We believe that our facilities are suitable and adequate for our business.
We periodically review our space requirements and consolidate and dispose of or
sublet facilities which we no longer require for our business and acquire new
space to meet the needs of our business.
ITEM 3. LEGAL PROCEEDINGS
From time to time we are involved in various litigation matters arising in
the ordinary course of our business. We do not believe that disposition of any
current matter will have a material adverse effect on our consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None submitted.
EXECUTIVE OFFICERS OF EDS
The following sets forth certain information with respect to the executive
officers of EDS as of February 28, 2001:
Richard H. Brown, 53, has been Chairman and Chief Executive Officer of EDS
since January 1999. He was Chief Executive Officer of Cable & Wireless plc from
July 1996 to December 1998 and President and Chief Executive Officer of H&R
Block, Inc., and Chairman of its CompuServe subsidiary, from May 1995 to July
1996. Mr. Brown was Vice Chairman of Ameritech Corporation from January 1993 to
May 1995 and President of its Illinois Bell subsidiary from 1990 to 1993. He
held various executive positions with United Telecommunications, Inc., from 1981
to 1990, most recently as Executive Vice President, and was with Ohio Bell from
1969 to 1981.
Jeffrey M. Heller, 61, has been Vice Chairman of EDS since November 2000
and a director of EDS since 1983. Mr. Heller oversees operation of EDS' six
Global Industry Groups and its corporate support functions. He had served as
President and Chief Operating Officer of EDS from June 1996 to November 2000,
Senior Vice President of EDS from 1984 until June 1996, and Chairman of EDS'
Unigraphics Solutions Inc. subsidiary from January 1999 to February 2001. Mr.
Heller joined EDS in 1968 and has served in numerous technical and management
capacities.
Paul J. Chiapparone, 61, has been Executive Vice President - Operations of
EDS since November 2000 and prior to that time had served as an Executive Vice
President since June 1996 and a Senior Vice President since April 1986. Mr.
Chiapparone has oversight responsibility for our Information Solutions and
Business Process Management lines of business and CIO and CTO organizations as
well as for our GM client on a global basis. He also serves as Chairman of our
Unigraphics Solutions Inc. subsidiary. Mr. Chiapparone joined EDS in 1966 and
has served in numerous management capacities.
James E. Daley, 59, has been Executive Vice President and Chief Financial
Officer of EDS since March 1999. Before joining EDS, he had been with Price
Waterhouse, L.L.P. from 1963 to 1998, serving as its Co-Chairman - Operations
from 1988 to 1995, Vice Chairman International from 1995 to 1996, Global ABS
Leader of Financial Services Industry Practices from 1997 to 1998, and as a
member of its Policy Board from 1984 to 1995, Management Committee from 1986 to
1996, World Board from 1988 to 1996 and World Firm Management Committee from
1988 to 1995.
Douglas L. Frederick, 51, has been President of EDS' Information Solutions
line of business since July 1999. Prior to joining EDS, he had served as
Executive Vice President, Baan Customer Initiatives, of the Baan Company, a
provider of enterprise business solutions, and Chairman and outside director of
the Bain Company, a software technology company, from April 1997 to July 1999.
Mr. Frederick was employed by The Boeing Company from 1979 to March 1997,
holding senior executive IT positions commencing in 1990.
John McCain, 41, has been President of EDS' E.solutions line of business
since August 1999. He served as President of the E.solutions consulting group
from May 1999 to July 1999. From December 1996 through April 1999, Mr. McCain
was head of EDS' CIO Services strategic business line, which unit delivered
technology based solutions, including Y2K services, around the world. He served
as Vice President of EDS' Consumer Products business unit from August 1994
through November 1996. Mr. McCain joined EDS in 1986 in its marketing
development program.
7
Kim McMann, 43, has been President of EDS' Business Process Management line
of business since October 1999. Prior to that time, she served as President of
EDS' State Business unit from July 1999 to September 1999, President of EDS'
State Health Care strategic business unit from September 1995 to July 1999, and
President of EDS' Commercial Services strategic business unit, which focused on
the U.S. retail industry, from July 1993 to September 1995. Ms. McMann began her
career with EDS in 1979.
Dietmar Ostermann, 39, has been Chief Executive Officer of A.T. Kearney,
our high-value management consultancy subsidiary, since December 2000. He had
been Managing Director of A.T. Kearney's operations in Europe from May 2000 to
December 2000, Unit Head for Central Europe from January 1999 to May 2000,
Managing Director for Germany from July 1997 to January 1999, and Managing
Director of the firm's North American automotive practice from 1996 to July
1997. Mr. Ostermann joined A.T. Kearney in 1989. He is a citizen of Germany.
Troy W. Todd, 72, has been Executive Vice President - Leadership and Change
Management of EDS since April 1999, with responsibility for EDS' corporate
communications, employee administration, executive compensation, and
professional and technical development functions. Prior to joining EDS, he
served in several senior management positions in the utilities and
telecommunications industries, including CEO of Cable & Wireless Panama
Telephone Company from June 1997 to March 1999, General Manager of the Orlando
Utilities Commission from 1992 to 1995 and President and CEO of United Telephone
Company of Florida from 1982 to 1992.
Executive officers serve at the discretion of our Board of Directors.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the symbol "EDS." The table below shows the range of reported per share
sales prices on the NYSE Composite Tape for the Common Stock for the periods
indicated.
Calendar Year High Low
-------------------------------------------------------------
1999
First Quarter............................ $53.94 $44.13
Second Quarter........................... 59.94 46.88
Third Quarter............................ 67.38 52.38
Fourth Quarter........................... 70.00 47.88
2000
First Quarter............................ $76.00 $58.38
Second Quarter........................... 73.25 38.67
Third Quarter............................ 51.88 38.94
Fourth Quarter........................... 60.00 39.44
The last reported sale price of the Common Stock on the NYSE on February
28, 2001, was $63.83 per share. As of that date, there were approximately
164,083 record holders of Common Stock.
EDS declared quarterly dividends on the Common Stock at the rate of $0.15
per share for each quarter of 1999 and 2000.
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ITEM 6. SELECTED FINANCIAL DATA
(in millions, except per share amounts)
As of and for the Years Ended December 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------
Operating results
Revenues........................ $19,226.8 $18,731.3 $17,242.9 $15,370.1 $14,494.7
Cost of revenues................ 15,630.6 15,367.7 14,290.1 12,298.6 11,505.8
Selling, general and
administrative................. 1,775.5 1,852.6 1,837.9 1,528.3 1,403.3
Restructuring and other
charges........................ 2.5 1,038.3 48.1 329.6 789.5
One-time split-off costs........ - - - - 45.5
Other income (expense).......... (18.2) 185.0 66.9 (72.0) (76.5)
Provision for income
taxes.......................... 656.7 236.8 390.3 411.0 242.6
-------------------------------------------------------------
Net income..................... $ 1,143.3 $ 420.9 $ 743.4 $ 730.6 $ 431.5
=============================================================
Per share data
Basic earnings per share
of common stock................ $ 2.45 $ 0.87 $ 1.51 $ 1.49 $ 0.89
Diluted earnings per
share of common stock.......... 2.40 0.85 1.50 1.48 0.88
Cash dividends per share
of common stock................ 0.60 0.60 0.60 0.60 0.60
Financial position
Current assets.................. $ 6,166.7 $ 5,877.7 $ 5,633.3 $ 5,169.4 $ 4,945.2
Property and equipment,
net............................ 2,474.1 2,459.8 2,708.1 2,868.4 3,097.0
Operating and other
assets......................... 4,059.5 4,184.8 3,184.7 3,136.3 3,150.7
Total assets.................... 12,700.3 12,522.3 11,526.1 11,174.1 11,192.9
Current liabilities............. 4,318.3 4,996.0 3,656.8 3,257.6 3,162.8
Long-term debt, less
current portion................ 2,585.6 2,215.7 1,184.3 1,790.9 2,324.3
Redeemable preferred
stock of subsidiaries,
minority interests and
other long-term
liabilities................... 528.7 507.8 405.9 341.4 493.3
Shareholders' equity.............. 5,138.7 4,534.6 5,916.5 5,309.4 4,783.1
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 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. This discussion refers to
EDS and its consolidated subsidiaries.
Forward-Looking Statements
The statements in this discussion that 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 estimated revenues, operating margins, capital expenditures
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, short-
and long-term revenue and earnings growth, cost savings, backlog and the value
of contract signings, 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; 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, except as may be required by law.
Results of Operations
Revenues. The following table displays revenues from contracts with our
base (non-GM) clients and revenues from contracts with GM (dollars in
millions):
2000 1999 1998
-------------------------------------------------
Revenues:
Base............... $15,856.4 82% $15,150.8 81% $13,632.9 79%
GM................. 3,370.4 18% 3,580.5 19% 3,610.0 21%
-------------------------------------------------
Total............. $19,226.8 100% $18,731.3 100% $17,242.9 100%
=================================================
Total revenues increased 3% in 2000 to $19.2 billion, up from $18.7 billion
in 1999, which represented a 9% increase over 1998 total revenues of $17.2
billion. Base revenues grew 5% in 2000 to $15.9 billion, compared with an 11%
increase to $15.2 billion in 1999. The increase in base revenues in 2000
resulted primarily from new contract signings, as well as from full-year
revenues attributable to Systemhouse, which was acquired in April 1999.
Approximately one-half of the increase in base revenues in 1999 resulted from
new contract signings, while the other half of the increase was attributable to
Systemhouse. These increases in base revenues in 2000 and 1999 were partially
offset by decreases resulting from the divestiture during 1999 of certain
business units and the discontinuation of certain contracts to align service
offerings with our four global lines of business to capture synergies and
further leverage our delivery platforms. See "Restructuring and other charges"
below. Base revenues in 1998 included a negative adjustment of $200.0 million
primarily as a result of a legal dispute with a client. The negative impact of
this adjustment was partially offset by a gain of $69.0 million recorded as
revenue resulting from the sale of a portion of our leasing portfolio. Revenues
from GM declined 6% in 2000 to $3.4 billion, compared with a 1% decline in 1999.
Approximately two-thirds of the decrease in revenues from contracts with GM in
2000 was due to the renegotiation of our sector agreements with GM covering its
North American operations and GMAC, which became effective January 1, 2000. The
remainder of the decline was
10
due primarily to foreign currency fluctuations. The decline in revenues from GM
in 1999, when compared to 1998, was primarily the result of billing rate
reductions for certain existing services provided to GM, partially offset by new
contracts with GM for additional products and services. We anticipate that
revenues from contracts with GM in 2001 will remain at approximately the 2000
level. Revenues from both base and GM clients were negatively impacted in 2000
by foreign currency fluctuations, due primarily to the relative decline of both
the euro and the British pound against the U.S. dollar. On a constant foreign
currency basis, total revenues for 2000 increased 6% over 1999, resulting from
an increase of 8% in revenues from base clients and a decline of 4% in revenues
from GM.
Other than GM, no one client accounted for more than 10% of our total
revenues in 2000, 1999 or 1998.
Effective January 1, 2000, we reorganized our business on a global basis
along the following four lines of business: Information Solutions, Business
Process Management, E.solutions and A.T. Kearney. Information Solutions
encompasses traditional IT outsourcing including network and system operations,
data management, applications development and field services, as well as
Internet hosting and Web site management. Business Process Management is the
outsourcing of one or more business processes or functions to improve overall
business performance. E.solutions offers electronic business strategy, solutions
consulting and systems integration. A.T. Kearney provides high-value management
consulting services including strategy, e-business services, strategic
information technology, organization and operations consulting, as well as
executive search services. Our E.solutions and A.T. Kearney lines of business
constitute our "Consulting" reportable segment.
Prior to the reorganization, we disclosed segment information by
aggregating client contracts along the following three lines of business:
Systems and Technology Services, Business Process Management and Management
Consulting. In the following discussion, segment revenues for prior periods
have been restated to reflect the new reporting structure. Because certain
financial information for 1998 is not readily available under the new reporting
structure, amounts for revenues by reportable segments for 1998 have been
estimated based on the information reported for 1999.
The following table displays the percentage of revenues by reportable
segments for the years ended December 31, 2000, 1999 and 1998. Revenues 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 revenues from
our Unigraphics Solutions Inc. subsidiary. Revenues from contracts with GM are
reported in each of our reportable segments, predominantly in Information
Solutions.
Percentage of Revenues
----------------------
2000 1999 1998
----------------------
Reportable Segments:
Information Solutions..................... 77% 75% 75%
Business Process Management............... 14 14 14
Consulting................................ 12 10 10
All other................................. (3) 1 1
----------------------
Total.................................... 100% 100% 100%
======================
The following table displays the percentage of revenues by geographies:
Percentage of Revenues
----------------------
2000 1999 1998
----------------------
Geographies:
United States............................. 58% 59% 62%
United Kingdom............................ 12 11 10
All other, none greater than 10%.......... 30 30 28
----------------------
Total.................................... 100% 100% 100%
======================
11
Costs and expenses. Our gross margin percentage [(revenues less cost of
revenues)/revenues] increased to 19% in 2000, compared with 18% in 1999 and 17%
in 1998. The increase in our gross margin percentage in 2000 is primarily the
result of the cost saving initiatives we implemented during 1999. See
"Restructuring and other charges" below. The increase in total gross margin in
2000 resulting from these initiatives was partially offset by a decrease in the
gross margin on contracts with GM resulting primarily from the renegotiation of
our sector agreements with GM covering its North American operations and GMAC,
which became effective January 1, 2000. The increase in gross margin during
1999, as compared with 1998, was due to the cost savings initiatives implemented
in 1999, as well as to negative adjustments recorded to revenues in 1998. See
"Revenues" above.
As a percentage of revenues, selling, general and administrative (SG&A)
expenses in 2000, 1999 and 1998 were 9%, 10% and 11%, respectively. The decrease
in SG&A expenses as a percentage of revenues in 2000 is primarily the result of
the initiatives we implemented in 1999 designed to improve operating margins.
Cost savings realized from these initiatives were partially offset by increased
spending for marketing and branding, Web-enabled employee training and
development, improvements to certain of our internal systems, and other areas of
strategic importance. SG&A expenses in 1998 included the recognition of $49.4
million related to the retirements of the former chairman and vice chairman. In
addition, we incurred incremental SG&A expenses during 1998 related to the
improvement of certain of our internal systems, the implementation of the SAP
enterprise resource process system, increased spending on employee development
and a management retention plan.
Restructuring and other charges. The following table summarizes
restructuring and other charges for the years ended December 31, 2000, 1999 and
1998 (in millions):
2000 1999 1998
---------------------------
Restructuring activity.................... $ 123.9 $1,067.7 $ -
Reversal of prior restructuring accruals.. (145.6) (29.4) (22.2)
In-process research and development....... 24.2 - 42.5
Other charges............................. - - 27.8
---------------------------
Total restructuring and other charges.... $ 2.5 $1,038.3 $ 48.1
===========================
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 write-downs totaling $1,067.7 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 offers (net of a
curtailment gain), including amounts under the company's defined benefit pension
plan, and $51.3 million from changes to 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
write-down of certain assets to fair value. Charges associated with these
actions include $93.9 million related to business exit and facilities
consolidation costs, and asset write-downs of $107.3 million. The accrual for
business exit activities and consolidation of facilities includes estimated
costs of $15.5 million to terminate software license agreements, $39.6 million
to terminate certain leases, $16.8 million to terminate certain client contracts
and $22.0 million for other costs. These costs are associated with the exit of
certain operations, primarily within our Information Solutions line of business.
Asset write-downs related to the restructuring activities consist of $57.8
million to write off software, goodwill and other intangibles, and $49.5 million
for write-downs of computer-related equipment and other assets. Such asset
write-downs predominantly related to businesses we have decided to exit in each
of our lines of business and were primarily determined based on the present
value of anticipated future cash flows. During the year ended December 31, 1999,
we reversed restructuring accruals totaling $29.4 million, $14.7 million of
which was attributable to the initiatives begun in the first quarter of 1999,
and the remainder of which was attributable to the 1996 and 1997 restructuring
initiatives as discussed below.
As a result of our ongoing evaluation of the results to date of the
initiatives begun in 1999, we amended some of the original 1999 restructuring
initiatives in the fourth quarter of 2000 due to actual attrition rates for job
categories and/or geographies differing from original expectations. These
amendments consist primarily of plans to involuntarily terminate employees
different from those originally planned. Due to the specific requirements to
detail both the type of position and location of the workplace
12
when recording a restructuring charge, these amendments resulted in the reversal
of a portion of the charge associated with the original plan, representing
approximately 1,500 of the original positions, and the recognition of a charge
associated with the new plan. As a result of the new plan, we recorded
restructuring charges and asset write-downs totaling $123.9 million in the
fourth quarter of 2000. The financial impact of the new plan was more than
offset by the reversal of accruals of $145.6 million related to restructuring
charges previously recorded in 1999, resulting in a net reversal of
restructuring charges of $21.7 million for 2000.
Amounts recorded for restructuring activities in the fourth quarter of 2000
provide for workforce reductions of approximately 2,250 employees, consisting
of individuals employed throughout the company in managerial, professional,
clerical, consulting and technical positions. Total involuntary termination
charges amounted to $88.5 million, $9.5 million of which pertains to changes in
the vesting conditions for unvested restricted stock units and options. These
initiatives also resulted in charges of $16.6 million resulting from the exit of
certain business activities and the consolidation of facilities, and asset
write-downs of $18.8 million. The accrual for business exit activities and
consolidation of facilities includes estimated costs of $12.6 million to exit
certain leases, $3.1 million to terminate certain client contracts and $0.9
million for other costs. These costs are associated primarily with our Business
Process Management line of business. Asset write-downs related to the
restructuring activities consist primarily of write-downs of computer-related
equipment and other assets. Such asset write-downs, which predominantly related
to businesses that we have decided to exit in the Information Solutions line of
business, were primarily determined based on the present value of anticipated
future cash flows.
Through December 31, 2000, approximately 11,150 employees had left the
company through involuntary termination as a result of the 1999 and 2000
initiatives, and approximately $485.7 million of termination benefits have been
charged to the accrual. In addition, approximately $71.7 million has been paid
in connection with the exit activities described above. We expect that remaining
cash expenditures relating to these charges will be incurred primarily in 2001.
Restructuring actions contemplated under the 1996 and 1997 restructuring
plans are essentially complete as of December 31, 2000, with remaining reserves
of $8.0 million comprised primarily of future severance-related payments to
terminated employees, future lease payments for exited facilities and accruals
for other restructuring activities. Through December 31, 2000, these
restructuring activities 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 $278.6 million since the second quarter of 1996. During the
years ended December 31, 1999 and 1998, we reversed restructuring accruals
related to these initiatives of $14.7 million and $22.2 million, respectively.
During 1998, we recorded asset write-downs of $27.8 million primarily relating
to operating assets initially identified for sale in 1997. As of December 31,
1998, all such assets had been sold.
Acquisition of Engineering Animation, Inc. On October 23, 2000, one of our
subsidiaries, Unigraphics Solutions Inc., or UGS, acquired all of the
outstanding stock of Engineering Animation, Inc., or EAI, for a purchase price
of $178.1 million, net of cash acquired, in a transaction accounted for as a
purchase. EAI is a leader in Internet-enabled visual process management,
collaboration, analysis and communication solutions for extended manufacturing
enterprises. The cost of EAI was allocated to tangible and identifiable
intangible assets acquired and liabilities assumed based on estimated fair
values. Costs allocated to in-process research and development (R&D) in the
amount of $24.2 million, were expensed upon acquisition. The excess of the
purchase price, including fees and expenses related to the acquisition, over the
fair value of net tangible assets acquired and in-process R&D was $125.6 million
and is being amortized over periods of three to seven years.
In-process R&D relates to the value of technology under development at the
time of acquisition. The value assigned to in-process R&D was determined based
on our estimates of the percentage of completion of the underlying development
efforts, resulting net cash flows and the discounting of such cash flows to
their present value using average risk adjusted rates and a percent complete
factor. The in-process R&D will have no alternative future use if the products
under development are not feasible. Efforts to complete development products
continue, and there are no known delays to company-forecasted plans.
Acquisition of Solid Edge. On March 2, 1998, UGS completed the acquisition
of Intergraph Corporation's mechanical CAD/CAM business for a purchase price of
$105.0 million, excluding $2.0 million of acquisition costs. In connection with
the allocation of the purchase price to identifiable intangible assets, UGS
allocated $42.5 million to in-process R&D that was expensed upon acquisition.
The in-process R&D related to the modification of Solid Edge Version 4.0
software to include UGS' Parasolid solid modeling kernel software. The value
assigned to in-process R&D was determined based on estimates of the resulting
net cash flows from Solid Edge 5.0 and the discounting of such cash flows to
present value using average risk adjusted rates and a percent complete factor.
Management continues to believe that the original net cash flow projections for
Solid Edge 5.0 are reasonable.
13
Other income (expense). The components of other income (expense) are
presented below for the years ended December 31, 2000, 1999 and 1998 (in
millions):
2000 1999 1998
---------------------------
Interest and other income.................. $ 191.3 $ 335.0 $ 148.6
Interest expense........................... (209.5) (150.0) (131.3)
Gain on sale of stock of subsidiary........ - - 49.6
---------------------------
Total..................................... $ (18.2) $ 185.0 $ 66.9
===========================
Interest and other income decreased $143.7 million in 2000 to $191.3
million due primarily to the recognition of incremental gains in 1999 resulting
from the disposition of certain investments. In 2000 and 1999 we recorded pre-
tax gains of $97.6 million and $199.5 million, respectively, on the disposition
of certain investments. Interest expense increased $59.5 million in 2000 to
$209.5 million, compared with $150.0 million in 1999 and $131.3 million in 1998,
due to additional borrowings during 1999 used primarily to finance the
repurchase of our common stock and to partially fund the acquisition of
Systemhouse. See "Liquidity and Capital Resources" below. Also included in other
income (expense) during 1998 was the recognition of a non-taxable gain of $49.6
million resulting from the sale of stock in connection with UGS' initial public
offering. No taxes were provided for this gain, as we believe we will recover
our basis in the shares sold in a tax-free manner.
Income taxes. The effective income tax rates in 2000, 1999 and 1998 were
36.5%, 36.0%, and 34.4%, respectively. The increase in 2000 was due to a charge
of $24.2 million for the write-off of acquired in-process R&D, which is not
deductible for tax purposes, and the decrease in 1998 was due to a non-taxable
gain of $49.6 million from the sale of stock as discussed above.
Net income. Net income (including all charges, gains and adjustments
discussed above) increased to $1,143.3 million in 2000, compared with $420.9
million in 1999 and $743.4 million in 1998. Basic earnings per share increased
to $2.45 per share in 2000, compared with $0.87 in 1999 and $1.51 in 1998.
Diluted earnings per share increased to $2.40 per share in 2000, compared with
$0.85 in 1999 and $1.50 in 1998.
As discussed above, during 2000 we recorded a charge of $24.2 million
related to acquired in-process R&D, a net reversal of $21.7 million associated
with restructuring activities and gains of $97.6 million resulting from the
disposition of certain investments. Excluding these charges and gains, net
income for 2000 would have been $1,091.1 million and basic and diluted earnings
per share would have been $2.34 and $2.29, respectively.
During 1999 we recorded restructuring and other charges, net of the
reversal of certain previously recorded accruals, of $1,038.3 million and
recorded gains of $199.5 million resulting from the disposition of certain
investments. Excluding these charges and gains, net income for 1999 would have
been $957.8 million and basic and diluted earnings per share would have been
$1.97 and $1.92, respectively.
During 1998 we recorded certain charges and adjustments, including $49.4
million related to senior executive retirements, $42.5 million for a write-off
associated with acquired in-process R&D, $27.8 million for asset write-downs and
$200.0 million for revenue adjustments resulting primarily from a legal dispute
with a client. The negative impact of these items was partially offset by a gain
of $49.6 million associated with the sale of stock of UGS, a gain of $69.0
million related to the sale of a portion of our leasing portfolio and positive
adjustments of $22.2 million to reverse accruals related to previously recorded
restructuring charges. Excluding these charges, gains and adjustments, net
income would have been $840.1 million, and basic and diluted earnings per share
would have been $1.71 and $1.70, respectively.
14
The following table summarizes the adjustments discussed in the three
preceding paragraphs (dollars in millions, except per share amounts):
2000 1999 1998
---------------------------------
Revenues - as reported................................. $19,226.8 $18,731.3 $17,242.9
Adjusting items:
Contract revenue adjustments........................ - - 200.0
Sale of portion of leasing portfolio................ - - (69.0)
---------------------------------
Revenues - pro forma................................... 19,226.8 18,731.3 17,373.9
---------------------------------
Costs and expenses - as reported....................... 17,408.6 18,258.6 16,176.1
Adjusting items:
Restructuring activities/related asset write-downs.. 21.7 (1,038.3) 22.2
Senior executive retirements........................ - - (49.4)
Write-off of acquired in-process R&D................ (24.2) - (42.5)
Certain other asset write-downs..................... - - (27.8)
---------------------------------
Costs and expenses - pro forma......................... 17,406.1 17,220.3 16,078.6
---------------------------------
Operating income - pro forma........................... 1,820.7 1,511.0 1,295.3
---------------------------------
Other income - as reported............................. (18.2) 185.0 66.9
Adjusting items:
Disposition of certain investments.................. (97.6) (199.5) -
Gain on sale of stock of subsidiary................. - - (49.6)
---------------------------------
Other income - pro forma............................... (115.8) (14.5) 17.3
---------------------------------
Income before income taxes - pro forma................. 1,704.9 1,496.5 1,312.6
Provision for income taxes - pro forma................. 613.8 538.7 472.5
---------------------------------
Net income - pro forma................................. $ 1,091.1 $ 957.8 $ 840.1
---------------------------------
Earnings per share - pro forma
Basic $ 2.34 $ 1.97 $ 1.71
=================================
Diluted $ 2.29 $ 1.92 $ 1.70
=================================
Percentage-of-completion. Our estimates of total revenues and expenses on
client contracts change periodically in the normal course of business,
occasionally due to modifications of our contractual arrangements. In addition,
cost saving initiatives and productivity improvements generally result in the
reduction of estimated total contract expenses on affected client contracts. For
client contracts accounted for under the percentage-of-completion method, such
changes are reflected in results of operations as a change in accounting
estimate in the period the revisions are determined.
Seasonality and inflation. Our 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 that quarter as a result of the spending patterns of several clients.
In addition, revenues generally increase from quarter to quarter as a result of
new business added throughout the year. Inflation generally had little effect on
our results of operations during the past three years.
Financial Position
Assets. Total assets increased to $12.7 billion at December 31, 2000, up
from $12.5 billion at December 31, 1999. At December 31, 2000, we held cash and
cash equivalents of $392.5 million, had working capital of $1.8 billion and a
current ratio of 1.4-to-1. This compares with cash and cash equivalents of
$506.4 million, $881.7 million in working capital, and a current ratio of 1.2-
to-1 at December 31, 1999.
15
Liabilities and shareholders' equity. Total debt decreased slightly to $2.8
billion at December 31, 2000, from $2.9 billion at December 31, 1999. Total debt
consists of notes payable, commercial paper and redeemable preferred stock of
subsidiaries. Total debt increased $1.5 billion, to $2.9 billion at December 31,
1999, when compared with $1.4 billion at December 31, 1998, due to additional
borrowings used primarily to finance the repurchase of our common stock and to
partially fund the acquisition of Systemhouse. During 1999, we repurchased
approximately 27 million shares of our common stock at a cost of approximately
$1.5 billion. This repurchase is intended to serve as a hedge against our long-
term exposure to earnings per share dilution with respect to outstanding options
and restricted stock units. The total debt-to-capital ratio (which includes
total debt and minority interests as components of capital) was 34.5% and 37.8%
at December 31, 2000 and 1999. At both December 31, 2000 and 1999, we had
committed lines of credit of approximately $1.3 billion, all unused, which serve
as a backup facility for commercial paper borrowings.
Market Risks
We are exposed to market risk from changes in interest rates, equity prices
and foreign currency exchange rates. We enter into various hedging transactions
to manage this risk. We do not hold or issue derivative financial instruments
for trading purposes. A discussion of our accounting policies for financial
instruments, and further disclosure relating to financial instruments, are
included in the notes to the financial statements.
Interest rate risk. Our earnings are affected by changes in short-term
interest rates as a result of the issuance of short-term commercial paper and
variable-rate notes. However, the effects of interest rate changes are reduced
by our management of our debt portfolio between fixed- and variable-rate
instruments as well as the utilization of interest rate swaps. Risk can be
estimated by measuring the impact of a near-term adverse movement of 10% in
short-term market interest rates. If these rates average 10% more in 2001 than
in 2000, there would be no material adverse impact on our results of operations
or financial position. During 2000, had short-term market interest rates
averaged 10% more than in 1999, there would have been no material adverse impact
on our results of operations or financial position.
Publicly traded equity price sensitivity. Our financial position is
affected by changes in publicly traded equity prices as a result of certain
investments. Risk can be estimated by measuring the impact of a near-term
adverse movement of 10% in the value of our publicly traded equity security
investments. If the market price of our investments in publicly traded equity
securities in 2001 were to fall by 10% below the level at the end of 2000, there
would be no material adverse impact on our results of operations or financial
position. During 2000, had the market price of our investments in publicly
traded equity securities fallen by 10% below the level at the end of 1999, there
would have been no material adverse impact on our results of operations or
financial position.
Foreign exchange risk. We conduct business in the United States and around
the world. Our most significant foreign currency transaction exposures relate
to Canada, the United Kingdom, those Western European countries who use the euro
as a common currency, Australia and New Zealand. The primary purpose of our
foreign currency hedging activities is to protect against foreign currency
exchange risk from intercompany financing and trading transactions. We enter
into foreign currency forward contracts with durations of generally less than
12 months to hedge such transactions. We have not entered into foreign currency
forward contracts for speculative or trading purposes.
All foreign currency forward contracts are marked-to-market, with gains and
losses recognized in earnings, on a current basis. In addition, since we enter
into forward contracts only as a hedge, any change in currency rates would not
result in any material gain or loss, as any gain or loss on the underlying
foreign denominated balance would be offset by the loss or gain on the forward
contract. Risk can be estimated by measuring the impact of a near-term adverse
movement of 10% in foreign currency rates against the U.S. dollar. If these
rates averaged 10% more in 2001 than in 2000, there would be no material adverse
impact on our results of operations or financial position. During 2000, had
foreign currency rates averaged 10% more than in 1999, there would have been no
material adverse impact on our results of operations or financial position.
Liquidity and Capital Resources
For the year ended December 31, 2000, net cash provided by operating
activities decreased to $1.6 billion, as compared with $1.9 billion and $2.1
billion in 1999 and 1998, respectively. The decrease in 2000 as compared with
1999 was due primarily to changes in working capital items, partially offset by
an increase in net income. The decrease in 1999 as compared with 1998 was due
primarily to a decrease in net income, partially offset by changes in working
capital items.
16
For the year ended December 31, 2000, net cash used in investing activities
decreased $492.9 million, to $1.2 billion, when compared to 1999. This decrease
was due primarily to payments of approximately $1.6 billion in 1999 related to
the acquisition of Systemhouse. This decrease was partially offset by reduced
proceeds from investments and other assets and increases in payments for
purchases of software and other intangibles in 2000. For the year ended December
31, 1999, net cash used in investing activities increased $1.0 billion from
1998, to $1.7 billion, due primarily to payments related to the acquisition of
Systemhouse.
For the year ended December 31, 2000, net cash used in financing activities
decreased $223.9 million, to $352.3 million, compared with $576.2 million in
1999, due primarily to a decrease in the purchase of treasury stock partially
offset by a reduction in net proceeds from commercial paper and long-term debt.
For the year ended December 31, 1999, net cash used in financing activities
decreased $377.5 million, to $576.2 million, compared with $953.7 million in
1998, due primarily to an increase in net proceeds from commercial paper and
long-term debt partially offset by an increase in the purchase of treasury
stock. We paid cash dividends totaling $280.1 million, $291.4 million and $295.3
million, respectively, in 2000, 1999 and 1998.
We expect that the principal use of funds for the foreseeable future will
be for capital expenditures and working capital. Capital expenditures may
consist of purchases of computer and telecommunications equipment, buildings and
facilities, land and software, as well as acquisitions and joint ventures. We
estimate that projected gross capital expenditures during 2001, excluding
acquisition and joint venture activities as well as proceeds from divestitures,
will be approximately $2 billion. Total capital expenditures for 2001 will
depend to a significant extent on the level of additional acquisition and joint
venture activities by EDS, capital requirements for new business and proceeds
from divestitures. We anticipate that cash reserves, cash flows from operations
and unused borrowing capacity under the existing lines of credit will provide
sufficient funds to meet our needs for at least the next year.
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, require that an entity recognize
all derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative. The adoption of this standard on January 1, 2001, will result in
a one-time increase in net income of $173.2 million, and a decrease in
accumulated other comprehensive income of $205.1 million, primarily related to
the reclassification of certain available-for-sale equity securities into the
trading portfolio.
In the fourth quarter of 2000, the FASB announced, in connection with
finalizing the new accounting standard for business combinations, its tentative
conclusion that goodwill arising from business combinations, including prior
business combinations, would no longer be required to be amortized. Goodwill
would instead be reviewed for impairment, and the value would be written down
only in periods in which the value of goodwill is more than fair value. The
final standard on business combinations is expected to be issued by the FASB in
the third quarter of 2001, but the FASB's tentative conclusion is subject to
change, and there can be no assurance when or if a final standard will be
issued.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedule Page
Independent Auditors' Report................................................................ 19
Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998...... 20
Consolidated Balance Sheets as of December 31, 2000 and 1999................................ 21
Consolidated Statements of Shareholders' Equity and Comprehensive Income as of and
for the years ended December 31, 2000, 1999 and 1998....................................... 22
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.. 23
Notes to Consolidated Financial Statements.................................................. 24
Financial Statement Schedule II - Valuation and Qualifying Accounts......................... 50
18
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Electronic Data Systems Corporation:
We have audited the accompanying consolidated balance sheets of Electronic
Data Systems Corporation and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of income, shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2000. In connection with our audits of the
consolidated financial statements, we have also audited the related financial
statement schedule. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Electronic
Data Systems Corporation and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
KPMG LLP
Dallas, Texas
February 1, 2001
19
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
Years Ended December 31,
--------------------------------
2000 1999 1998
--------------------------------
Revenues.................................... $19,226.8 $18,731.3 $17,242.9
--------------------------------
Costs and expenses
Cost of revenues.......................... 15,630.6 15,367.7 14,290.1
Selling, general and administrative....... 1,775.5 1,852.6 1,837.9
Restructuring and other charges........... 2.5 1,038.3 48.1
--------------------------------
Total costs and expenses................ 17,408.6 18,258.6 16,176.1
--------------------------------
Operating income........................ 1,818.2 472.7 1,066.8
Other income (expense)...................... (18.2) 185.0 66.9
--------------------------------
Income before income taxes.............. 1,800.0 657.7 1,133.7
Provision for income taxes.................. 656.7 236.8 390.3
--------------------------------
Net income.............................. $ 1,143.3 $ 420.9 $ 743.4
================================
Basic earnings per share of common stock.... $ 2.45 $ 0.87 $ 1.51
================================
Diluted earnings per share of common stock.. $ 2.40 $ 0.85 $ 1.50
================================
See accompanying notes to consolidated financial statements.
20
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
December 31,
---------------------
2000 1999
---------------------
ASSETS
Current assets
Cash and cash equivalents..................................................................... $ 392.5 $ 506.4
Marketable securities......................................................................... 300.1 219.7
Accounts receivable, net...................................................................... 4,837.1 4,454.2
Prepaids and other............................................................................ 637.0 697.4
---------------------
Total current assets........................................................................ 6,166.7 5,877.7
Property and equipment, net..................................................................... 2,474.1 2,459.8
Investments and other assets.................................................................... 1,028.4 1,304.2
Software, goodwill and other intangibles, net................................................... 3,031.1 2,880.6
---------------------
Total assets............................................................................ $12,700.3 $12,522.3
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities...................................................... $ 3,640.8 $ 3,690.7
Deferred revenue.............................................................................. 552.4 718.3
Income taxes.................................................................................. 112.2 93.4
Current portion of long-term debt............................................................. 12.9 493.6
---------------------
Total current liabilities................................................................... 4,318.3 4,996.0
---------------------
Deferred income taxes........................................................................... 129.0 268.2
---------------------
Long-term debt, less current portion............................................................ 2,585.6 2,215.7
---------------------
Redeemable preferred stock of subsidiaries, minority interests and other long-term liabilities.. 528.7 507.8
---------------------
Commitments and contingencies
Shareholders' equity
Preferred stock, $.01 par value; authorized 200,000,000 shares; none issued................... - -
Common stock, $.01 par value; authorized 2,000,000,000 shares;
493,435,404 shares issued at December 31, 2000; 493,415,265 shares
issued at December 31, 1999................................................................. 4.9 4.9
Additional paid-in capital.................................................................... 948.5 971.9
Retained earnings............................................................................. 6,042.4 5,179.2
Accumulated other comprehensive income........................................................ (237.7) (79.7)
Treasury stock, at cost, 28,136,801 and 27,222,631 shares at
December 31, 2000 and 1999, respectively.................................................... (1,619.4) (1,541.7)
---------------------
Total shareholders' equity................................................................ 5,138.7 4,534.6
---------------------
Total liabilities and shareholders' equity.............................................. $12,700.3 $12,522.3
=====================
See accompanying notes to consolidated financial statements.
21
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(in millions)
Accumulated
Common Stock Other Treasury Stock
------------------- Additional Compre- ----------------
Shares Paid-in Retained hensive Shares Shareholders'
Outstanding Amount Capital Earnings Income Held Amount Equity
-----------------------------------------------------------------------------------------
Balance at December 31, 1997......... 491.6 $4.9 $855.7 $4,601.6 $(152.8) - $ - $ 5,309.4
Comprehensive income:
Net income........................ - - - 743.4 - - - 743.4
Currency translation adjustment... - - - - 5.3 - - 5.3
Unrealized gains on securities,
net of tax effect of $34.3 and
reclassification adjustment...... - - - - 51.3 - - 51.3
---------
Total comprehensive income........ 800.0
---------
Dividends declared.................. - - - (295.3) - - - (295.3)
Stock award transactions............ 1.5 - 102.6 - - (2.2) 93.1 195.7
Purchase of treasury shares......... - - - - - 2.2 (93.3) (93.3)
-----------------------------------------------------------------------------------------
Balance at December 31, 1998......... 493.1 4.9 958.3 5,049.7 (96.2) - (0.2) 5,916.5
Comprehensive income:
Net income........................ - - - 420.9 - - - 420.9
Currency translation adjustment... - - - - (163.1) - - (163.1)
Unrealized gains on securities,
net of tax effect of $146.5 and
reclassification adjustment...... - - - - 186.7 - - 186.7
Minimum pension liability,
net of tax effect of $4.0........ - - - - (7.1) - - (7.1)
---------
Total comprehensive income........ 437.4
---------
Dividends declared.................. - - - (291.4) - - - (291.4)
Stock award transactions............ 0.3 - 13.6 - - (7.4) 294.2 307.8
Purchase of treasury shares......... - - - - - 34.6 (1,835.7) (1,835.7)
-----------------------------------------------------------------------------------------
Balance at December 31, 1999......... 493.4 4.9 971.9 5,179.2 (79.7) 27.2 (1,541.7) 4,534.6
Comprehensive income:
Net income........................ - - - 1,143.3 - - - 1,143.3
Currency translation adjustment... - - - - (96.3) - - (96.3)
Unrealized losses on securities,
net of tax effect of $13.6 and
reclassification adjustment...... - - - - (24.1) - - (24.1)
Minimum pension liability,
net of tax effect of $21.1....... - - - - (37.6) - - (37.6)
---------
Total comprehensive income........ 985.3
---------
Dividends declared.................. - - - (280.1) - - - (280.1)
Stock award transactions............ - - (23.4) - - (4.5) 254.6 231.2
Purchase of treasury shares......... - - - - - 5.4 (332.3) (332.3)
-----------------------------------------------------------------------------------------
Balance at December 31, 2000......... 493.4 $4.9 $948.5 $6,042.4 $(237.7) 28.1 $(1,619.4) $ 5,138.7
=========================================================================================
See accompanying notes to consolidated financial statements.
22
ELECTRONIC DATA SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended December 31,
-----------------------------------
2000 1999 1998
-----------------------------------
Cash Flows from Operating Activities
Net income................................................... $ 1,143.3 $ 420.9 $ 743.4
-----------------------------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 1,431.2 1,435.8 1,393.7
Deferred compensation...................................... 101.1 112.9 156.2
Asset write-downs.......................................... 43.0 129.2 70.3
Gain on sale of stock of subsidiary........................ - - (49.6)
Other...................................................... (188.4) (228.8) (133.3)
Changes in operating assets and liabilities, net of
effects of acquired companies:
Accounts receivable...................................... (410.8) (184.6) (146.4)
Prepaids and other....................................... (61.8) 89.9 (155.9)
Accounts payable and accrued liabilities................. (305.4) 367.7 181.2
Deferred revenue......................................... (156.1) 162.1 133.7
Income taxes payable..................................... (37.6) (369.1) (110.5)
-----------------------------------
Total adjustments..................................... 415.2 1,515.1 1,339.4
-----------------------------------
Net cash provided by operating activities.................... 1,558.5 1,936.0 2,082.8
-----------------------------------
Cash Flows from Investing Activities
Proceeds from sales of marketable securities................. 241.3 278.5 134.1
Proceeds from investments and other assets................... 79.1 545.6 271.4
Proceeds from divestitures................................... 11.5 66.5 408.4
Payments for purchases of property and equipment............. (768.0) (684.9) (870.3)
Payments for investments and other assets.................... (73.8) (76.1) (306.9)
Payments related to acquisitions, net of cash acquired....... (201.7) (1,722.1) (108.1)
Payments for purchases of software and other intangibles..... (600.6) (260.4) (243.7)
Payments for purchases of marketable securities.............. (68.0) (47.2) (120.8)
Other........................................................ 133.2 160.2 57.1
-----------------------------------
Net cash used in investing activities........................ (1,247.0) (1,739.9) (778.8)
-----------------------------------
Cash Flows from Financing Activities
Proceeds from commercial paper and long-term debt............ 44,510.8 30,366.2 7,254.8
Payments on commercial paper and long-term debt.............. (44,349.6) (28,955.8) (7,911.7)
Purchase of treasury stock................................... (332.3) (1,835.7) (93.3)
Employee stock transactions.................................. 96.6 140.5 26.7
Dividends paid............................................... (280.1) (291.4) (295.3)
Other........................................................ 2.3 - 65.1
-----------------------------------
Net cash used in financing activities........................ (352.3) (576.2) (953.7)
-----------------------------------
Effect of exchange rate changes on cash and cash equivalents..... (73.1) (135.2) (6.0)
-----------------------------------
Net increase (decrease) in cash and cash equivalents............. (113.9) (515.3) 344.3
Cash and cash equivalents at beginning of year................... 506.4 1,021.7 677.4
-----------------------------------
Cash and cash equivalents at end of year......................... $ 392.5 $ 506.4 $ 1,021.7
===================================
See accompanying notes to consolidated financial statements.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Electronic Data Systems Corporation is a professional services firm that
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. As used herein, the terms "EDS" and
the "Company" refer to Electronic Data Systems Corporation and its consolidated
subsidiaries.
Principles of Consolidation
The consolidated financial statements include the accounts of EDS and its
controlled subsidiaries. All significant intercompany accounts and transactions
have been eliminated. The Company's investments in companies which it does not
control but has the ability to exercise significant influence over operating and
financial policies are accounted for under the equity method.
Earnings Per Share
Basic earnings per share of common stock is computed using the weighted-
average number of common shares outstanding during the period. Diluted earnings
per share amounts reflect the incremental increase in common shares outstanding
assuming the exercise of all employee stock options and restricted stock units
that would have had a dilutive effect on earnings per share. A reconciliation of
the number of shares used in the calculation of basic and diluted earnings per
share is as follows for the years ended December 31, 2000, 1999 and 1998 (in
millions):
Years Ended December 31,
-------------------------
2000 1999 1998
-------------------------
Basic earnings per share of common stock:
Weighted-average common shares outstanding.................................... 466.2 486.2 492.2
Effect of dilutive securities (Note 10):
Restricted stock units........................................................ 4.9 6.0 2.7
Stock options................................................................. 5.3 5.8 0.6
-------------------------
Diluted earnings per share:
Weighted-average common and common equivalent shares outstanding.............. 476.4 498.0 495.5
=========================
Securities that were outstanding but were not included in the computation
of diluted earnings per share because their effect was antidilutive include
restricted stock units of 0.4 million shares for the years ended December 31,
2000 and 1998, and options to purchase 11.3 million, 1.6 million and 9.6 million
shares of common stock for the years ended December 31, 2000, 1999 and 1998,
respectively.
Marketable Securities
Marketable securities at December 31, 2000 and 1999 consist of government
and agency obligations, corporate debt, and corporate equity securities. The
Company classifies all of its debt and marketable equity securities as trading
or available-for-sale. All such investments are recorded at fair value. Changes
in net unrealized holding gains (losses) on trading securities are recognized in
income, whereas changes in net unrealized holding gains (losses) on available-
for-sale securities are reported as a component of accumulated other
comprehensive income in shareholders' equity until realized. Any decline in the
fair value of an available-for-sale security below its cost deemed other than
temporary is charged to earnings, resulting in the establishment of a new cost
basis for the security.
24
Property and Equipment
Property and equipment are carried at cost. Depreciation of property and
equipment is calculated using the straight-line method over the shorter of the
asset's estimated useful life or the term of the lease in the case of leasehold
improvements. The ranges of estimated useful lives are as follows:
Years
-----
Buildings.................................................... 20-40
Facilities................................................... 5-20
Computer equipment........................................... 3-8
Other equipment and furniture................................ 3-15
Software, Goodwill and Other Intangibles
Purchased software or licensed software not subject to a subscription
agreement and utilized in designing, installing and operating business
information and communications systems is capitalized and amortized on a
straight-line basis over a two- to five-year period. Costs of developing and
maintaining software systems incurred primarily in connection with client
contracts are considered contract costs. Software development costs for computer
software sold, leased or otherwise marketed as a separate product or as part of
a product or process are capitalized. Effective January 1, 1999, software
development costs incurred to meet the Company's internal needs are capitalized
and amortized on a straight-line basis over three years. Software under
subscription arrangements, whereby the software provider makes available current
software products as well as products developed or acquired during the term of
the arrangement, are expensed in the period the software is provided. Under the
terms of a five-year subscription agreement with a software provider, the
Company has committed to contractually specified subscription minimums over the
term of the agreement. The remaining contractual minimums under this arrangement
as of December 31, 2000, are approximately $425.0 million.
The cost of acquired companies is allocated first to their identifiable
assets based on estimated fair values. Costs allocated to identifiable
intangible assets are amortized on a straight-line basis over the remaining
estimated useful lives of the assets, as determined by underlying contract terms
or independent appraisals. Such lives range from two to ten years. The excess of
the purchase price over the fair value of identifiable assets acquired, net of
liabilities assumed, is recorded as goodwill and amortized on a straight-line
basis over the estimated useful life. Useful life is determined based on the
individual characteristics of the acquired entity and ranges from five to forty
years.
The Company periodically evaluates the carrying amounts of goodwill, as
well as the related amortization periods, to determine whether adjustments to
these amounts or useful lives are required based on current events and
circumstances. The evaluation is based on the Company's projection of the
undiscounted future operating cash flows of the acquired operation over the
remaining useful lives of the related goodwill. To the extent such projections
indicate that future undiscounted cash flows are not sufficient to recover the
carrying amounts of related goodwill, the underlying assets are written down by
charges to expense so that the carrying amount is equal to future undiscounted
cash flows. The assessment of the recoverability of goodwill will be affected if
estimated future operating cash flows are not achieved.
Revenue Recognition
The Company provides services under level-of-effort and fixed-price
contracts, which generally extend up to ten years. Under level-of-effort
contracts, revenue is recognized as services are provided to the client in
accordance with contractual billing schedules. For certain fixed-price
contracts, revenue is recognized on the percentage-of-completion method, based
on the percentage which incurred contract costs to date bear to total estimated
contract costs after giving effect to the most recent estimates of total cost.
The effect of changes to total estimated contract costs is recognized in the
period such changes are determined. Provisions for estimated losses are made in
the period in which the loss first becomes apparent. Revenue under non-
refundable fixed-price contracts for software licenses is recognized after the
software has been delivered and all significant uncertainties regarding customer
acceptance have expired. The portion of the fixed-fee revenue related to
maintenance is deferred and recognized ratably over the contract period.
25
Deferred revenues of $552.4 million and $718.3 million at December 31, 2000
and 1999, respectively, represent billings in excess of amounts earned on
certain contracts. Included in accounts receivable are unbilled receivables of
$1,030.9 million and $999.5 million at December 31, 2000 and 1999, respectively.
Unbilled receivables represent costs and related profits in excess of billings
on certain fixed-price contracts. Unbilled receivables were not billable at the
balance sheet date but are recoverable over the remaining life of the contract
through billings made in accordance with contractual agreements. Of the unbilled
receivables at December 31, 2000, billings to such clients totaling $33.2
million are expected to be collected in 2002 and thereafter. However, a specific
client's unbilled receivable balance may not be directly decreased for such
future years' billings because additional costs may also be incurred in the
future in accordance with the contractual agreements.
Currency Translation
Assets and liabilities of non-U.S. subsidiaries whose functional currency
is not the U.S. dollar are translated at current exchange rates. Revenue and
expense accounts are translated using an average rate for the period.
Translation gains and losses are not included in determining net income, but are
reflected as a component of shareholders' equity. Cumulative currency
translation adjustment losses included in shareholders' equity were $430.4
million, $334.1 million and $171.0 million at December 31, 2000, 1999 and 1998,
respectively. Non-functional currency transaction gains (losses), net of income
taxes, are included in determining net income and were $(14.2) million, $1.0
million and $(8.5) million, respectively, for the years ended December 31, 2000,
1999 and 1998.
Derivative Financial Instruments
Net payments or receipts under the Company's interest rate swap agreements
are recorded as adjustments to interest expense. Foreign currency forward
contracts are marked to market with gains and losses recognized in earnings on a
current basis.
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, require that an entity recognize
all derivative instruments as either assets or liabilities measured at fair
value. The accounting for changes in the fair value of a derivative depends on
the use of the derivative instrument. The adoption of this standard on January
1, 2001, will result in a one-time increase in net income of $173.2 million, and
a decrease in accumulated other comprehensive income of $205.1 million,
primarily related to the reclassification of certain "available-for-sale" equity
securities into the "trading" securities classification.
Comprehensive Income
Comprehensive income includes all changes in equity during a period, except
those resulting from investments by and distributions to owners. For the years
ended December 31, 2000, 1999 and 1998, the reclassification from comprehensive
income to net income of gains (losses) realized on security transactions were
$(0.4) million, $73.7 million and $9.6 million, respectively, net of the related
tax expense (benefit) of $(0.1) million, $41.5 million and $5.4 million,
respectively.
Income Taxes
The Company provides for deferred taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be reversed. The deferral method is used to account
for investment tax credits.
Statements of Cash Flows
The Company considers the following asset classes with original maturities
of three months or less to be cash equivalents: certificates of deposit,
commercial paper, repurchase agreements and money market funds.
26
Financial Instruments
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 2000 and 1999 (in millions):
December 31,
------------------------------------------
2000 1999
------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------
Current marketable securities (Note 2)....................... $ 300.1 $ 300.1 $ 219.7 $ 219.7
Investments in securities, joint ventures and partnerships,
excluding equity method investments (Note 4)................ 176.3 175.0 476.2 485.2
Long-term debt (Note 7)...................................... 2,598.5 2,682.4 2,709.3 2,806.4
Redeemable preferred stock of subsidiaries (Note 8).......... 175.0 175.0 175.0 175.0
Foreign currency forward contracts, net liability (Note 12).. 42.6 42.6 12.5 12.5
Current marketable securities are carried at their estimated fair value
based on current market quotes. The fair values of certain long-term investments
are estimated based on quoted market prices for these or similar investments.
For other investments, various methods are used to estimate fair value,
including external valuations and discounted cash flows. The fair value of long-
term debt and redeemable preferred stock of subsidiaries, including related
interest rate swap agreements, is estimated based on the quoted market prices
for the same or similar issues or based on the current rates offered to the
Company for instruments with similar terms, degree of risk and remaining
maturities. The fair value of foreign currency forward contracts is based on the
estimated amount to settle the contracts using current market exchange rates.
The carrying value of other financial instruments, such as cash equivalents,
accounts and notes receivable, and accounts payable, approximates their fair
value.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those estimates.
Concentration of Credit Risk
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of clients forming the Company's client base and
their dispersion across different industry and geographic areas. Accounts
receivable are shown net of allowances of $133.4 million and $95.2 million at
December 31, 2000 and 1999, respectively.
The Company is exposed to credit risk in the event of non-performance by
counterparties to derivative contracts. However, because the Company deals only
with major commercial banks with high-quality credit ratings, the Company does
not anticipate non-performance by any of these counterparties.
Stock-Based Compensation
The Company recognizes compensation cost over the vesting period for the
difference between the quoted market price of an award at the date of grant and
the purchase or exercise price of the share.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amounts may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by
27
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value, less costs to sell.
Reclassifications
Certain reclassifications have been made to the 1999 and 1998 consolidated
financial statements to conform to the 2000 presentation.
NOTE 2: MARKETABLE SECURITIES
Trading securities at December 31, 2000 and 1999 had carrying amounts of
$62.2 million and $28.2 million, respectively. Changes in net unrealized holding
gains (losses) on trading securities included in earnings were not material.
The following is a summary of current available-for-sale marketable
securities at December 31, 2000 and 1999 (in millions):
December 31, 2000
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------------------------------------------
Government and agency obligations............. $112.7 $0.6 $ (0.6) $112.7
Other debt securities......................... 60.3 - (0.6) 59.7
----------------------------------------------
Total deb