SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 30, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number 1-8729
UNISYS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 38-0387840
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Unisys Way
Blue Bell, Pennsylvania 19424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 986-4011
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 [ ]
Number of shares of Common Stock outstanding as of JuneSeptember 30, 1999:
282,988,882.309,905,309.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Millions)
JuneSeptember 30, December 31,
1999 1998
----------- ------------
Assets
- ------
Current assets
Cash and cash equivalents $ 438.8374.0 $ 604.3616.4
Accounts and notes receivable, net 1,201.4 1,232.01,262.0 1,239.0
Inventories
Parts and finished equipment 216.1 263.6227.9 264.1
Work in process and materials 167.7 199.7178.6 206.9
Deferred income taxes 459.8477.4 428.8
Other current assets 103.1 88.3
---------110.8 88.9
-------- --------
Total 2,586.9 2,816.7
---------2,630.7 2,844.1
-------- --------
Properties 1,662.9 1,720.51,723.7 1,734.6
Less-Accumulated depreciation 1,110.5 1,139.6
---------1,137.3 1,149.2
-------- --------
Properties, net 552.4 580.9
---------586.4 585.4
-------- --------
Investments at equity 193.4191.4 184.6
Software, net of accumulated amortization 237.9 246.6248.0 247.7
Prepaid pension cost 888.1917.6 833.8
Deferred income taxes 694.4721.4 694.4
Other assets 298.3 220.7
---------269.7 223.2
-------- --------
Total $5,451.4 $5,577.7
=========$5,565.2 $5,613.2
======== ========
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities
Notes payable $ 62.043.4 $ 50.652.2
Current maturities of long-term debt 24.2 4.026.3 4.1
Accounts payable 895.1 922.7993.4 928.5
Other accrued liabilities 1,119.8 1,301.91,098.5 1,308.2
Dividends payable 12.6 26.6
Estimated income taxes 314.3 276.7
---------345.1 277.0
-------- --------
Total 2,428.0 2,582.5
---------2,506.7 2,596.6
-------- --------
Long-term debt 1,088.8 1,105.2950.9 1,106.7
Other liabilities 344.6 373.0351.7 374.3
Stockholders' equity
Preferred stock 670.8 1,420.01,444.7
Common stock, issued: 1999, 284.8;311.8;
1998, 257.9 2.8259.4 3.1 2.6
Accumulated deficit (1,258.3) (1,456.3)(1,198.7) (1,532.2)
Other capital 2,749.9 2,082.33,547.6 2,152.1
Accumulated other comprehensive
loss (575.2)(596.1) (531.6)
----------------- --------
Stockholders' equity 1,590.0 1,517.0
---------1,755.9 1,535.6
-------- --------
Total $5,451.4 $5,577.7
=========$5,565.2 $5,613.2
======== ========
See notes to consolidated financial statements.
3
UNISYS CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(Millions, except per share data)
Three Months SixNine Months
Ended JuneSeptember 30 Ended JuneSeptember 30
----------------- ---------------------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenue $1,886.4 $1,728.5 $3,698.8 $3,378.2$1,865.4 $1,792.3 $5,584.7 $5,185.6
-------- -------- -------- --------
Cost and expenses
Cost of revenue 1,227.9 1,145.6 2,377.7 2,236.11,195.2 1,186.4 3,581.8 3,429.9
Selling, general and
administrative 341.5 328.6 672.5 658.8354.8 331.1 1,034.9 998.6
Research and development expenses 81.2 70.0 158.4 142.986.2 76.9 251.4 225.0
-------- -------- -------- --------
1,650.6 1,544.2 3,208.6 3,037.81,636.2 1,594.4 4,868.1 4,653.5
-------- -------- -------- --------
Operating income 235.8 184.3 490.2 340.4229.2 197.9 716.6 532.1
Interest expense 34.7 42.6 68.9 89.134.1 42.7 103.0 131.8
Other income (expense), net (16.9) (.9) (66.1) (12.5)1.0 (7.6) (65.3) (19.7)
-------- -------- -------- --------
Income before income taxes 184.2 140.8 355.2 238.8196.1 147.6 548.3 380.6
Estimated income taxes 64.5 50.7 124.3 86.045.6 53.8 169.9 139.9
-------- -------- -------- --------
Income before extraordinary item 150.5 93.8 378.4 240.7
Extraordinary item (12.1) (12.1)
-------- -------- -------- --------
Net income 119.7 90.1 230.9 152.8138.4 93.8 366.3 240.7
Dividends on preferred shares 12.01.9 26.6 34.8 53.336.7 79.9
-------- -------- -------- --------
Earnings on common shares $ 107.7136.5 $ 63.567.2 $ 196.1329.6 $ 99.5160.8
======== ======== ======== ========
Earnings per common share Basic- basic
Before extraordinary item $ .40.49 $ .25.26 $ .731.22 $ .40.64
Extraordinary item (.04) (.04)
-------- -------- -------- --------
Total $ .45 $ .26 $ 1.18 $ .64
======== ======== ======== ========
DilutedEarnings per common share - diluted
Before extraordinary item $ .38.47 $ .24.25 $ .701.17 $ .38.60
Extraordinary item (.04) (.04)
-------- -------- -------- --------
Total $ .43 $ .25 $ 1.13 $ .60
======== ======== ======== ========
See notes to consolidated financial statements.
4
UNISYS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Millions)
SixNine Months Ended
JuneSeptember 30
------------------
1999 1998
-------- --------
Cash flows from operating activities
Net incomeIncome before extraordinary item $ 230.9378.4 $ 152.8240.7
Add (deduct) items to reconcile net income before
extraordinary item to net cash provided by
operating activities:
Extraordinary item (12.1)
Depreciation 72.4 70.2105.3 108.3
Amortization:
Marketable software 58.0 52.883.6 85.0
Goodwill 8.0 3.410.2 7.2
(Increase)decrease in deferred income taxes, net (31.0) (2.8)(70.3) .6
(Increase)decrease in receivables, net (5.3) 36.9(47.1) 14.8
Decrease in inventories 79.5 7.664.4 18.4
(Decrease) in accounts payable and
other accrued liabilities (248.0) (126.2)(224.0) (106.5)
Increase in estimated income taxes 37.6 35.668.1 72.0
(Decrease)increase in other liabilities (10.7) 1.2(16.2) 17.0
(Increase) in other assets (74.6) (13.6)(94.4) ( 16.4)
Other 19.8 8.774.2 ( 8.9)
------- -------
Net cash provided by operating activities 136.6 226.6320.1 432.2
------- -------
Cash flows from investing activities
Proceeds from investments 638.9 913.8803.6 1,448.3
Purchases of investments (618.9) (906.7)(778.2) (1,444.8)
Proceeds from sales of properties 11.021.7 1.1
Investment in marketable software (49.2)(83.7) ( 58.5)79.1)
Capital additions of properties (77.8) ( 63.3)(139.0) (112.3)
Purchases of businesses (51.9)(53.9)
------- -------
Net cash used for investing activities (147.9) (114.7)(229.5) (186.8)
------- -------
Cash flows from financing activities
Redemption of preferred stock (181.9)(197.0)
Proceeds from issuance of long-term debt 29.530.3 195.2
Payments of long-term debt (2.4) (408.2)(161.5) (438.9)
Net proceeds(reduction in )proceeds from short-term
borrowings 11.5 23.4(9.1) 6.5
Dividends paid on preferred shares (47.0)(59.4) ( 53.3)79.9)
Proceeds from employee stock plans 46.0 52.674.4 61.5
------- -------
Net cash used for financing activities (144.3) (190.3)(322.3) (255.6)
------- -------
Effect of exchange rate changes on
cash and cash equivalents (9.9)(10.7) ( 12.9)18.1)
------- -------
(Decrease) in cash and cash equivalents (165.5)(242.4) ( 91.3)28.3)
Cash and cash equivalents, beginning of period 604.3 803.0616.4 824.2
-------- --------
Cash and cash equivalents, end of period $ 438.8374.0 $ 711.7795.9
======== ========
See notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the financial information furnished
herein reflects all adjustments necessary for a fair presentation of
the financial position, results of operations and cash flows for the
interim periods specified. These adjustments consist only of normal
recurring accruals. Because of seasonal and other factors, results
for interim periods are not necessarily indicative of the results to
be expected for the full year.
a. The shares used in the computations of earnings per share are as
follows (in thousands):
Three Months Ended SixNine Months Ended
JuneSeptember 30 JuneSeptember 30
------------------ -----------------
1999 1998 1999 1998
------- ------- ------- -------
Basic 272,558 251,134 266,850 249,704302,183 254,876 279,678 252,458
Diluted 282,941 266,473 278,934 264,497314,541 271,740 292,733 268,840
b. A summary of the company's operations by business segment for the
three and sixnine month periods ended JuneSeptember 30, 1999 and 1998 is presented
below(in millions of dollars):
Total Corporate Services Technology
Three Months Ended ----- --------- -------- ----------
JuneSeptember 30, 1999
------------------
Customer revenue $1,886.4 $1,370.0$1,865.4 $1,318.5 $ 516.4546.9
Intersegment $(154.8) 16.7 138.1$(151.7) 17.7 134.0
-------- -------- -------- --------
Total revenue $1,886.4 $(154.8) $1,386.7$1,865.4 $(151.7) $1,336.2 $ 654.5680.9
======== ======== ======== ========
Operating income(loss) $ 235.8229.2 $ (.2)(13.5) $ 115.9104.9 $ 120.1137.8
======== ======== ======== ========
Three Months Ended
JuneSeptember 30, 1998
------------------
Customer revenue $1,728.5 $1,226.3$1,792.3 $1,268.9 $ 502.2523.4
Intersegment $(123.3) 16.2 107.1$(118.4) 16.3 102.1
-------- -------- -------- --------
Total revenue $1,728.5 $(123.3) $1,242.5$1,792.3 $(118.4) $1,285.2 $ 609.3625.5
======== ======== ======== ========
Operating income(loss) $ 184.3197.9 $( 9.2)1.5) $ 90.392.3 $ 103.2
======== =======107.1
======== ======== Six======== ========
Nine Months Ended
JuneSeptember 30, 1999
----------------------------------
Customer revenue $3,698.8 $2,562.3 $1,136.5$5,584.7 $3,901.3 $1,683.4
Intersegment $(263.9) 31.3 232.6$(415.6) 49.0 366.6
-------- -------- -------- --------
Total revenue $3,698.8 $(263.9) $2,593.6 $1,369.1$5,584.7 $(415.6) $3,950.3 $2,050.0
======== ======== ======== ========
Operating income(loss) $ 490.2716.6 $ (8.2)(21.6) $ 186.7288.7 $ 311.7449.5
======== ======== ======== ========
SixNine Months Ended
JuneSeptember 30, 1998
------------------
Customer revenue $3,378.2 $2,277.5 $1,100.7$5,185.6 $3,561.5 $1,624.1
Intersegment $(248.4) 31.0 217.4$(366.8) 47.3 319.5
-------- -------- -------- --------
Total revenue $3,378.2 $(248.4) $2,308.5 $1,318.1$5,185.6 $(366.8) $3,608.8 $1,943.6
======== ======== ======== ========
Operating income(loss) $ 340.4532.1 $( 27.1)28.6) $ 138.5224.6 $ 229.0336.1
======== =============== ======== ========
6
Presented below is a reconciliation of total business segment operating
income to consolidated income before taxes (in millions of dollars):
Three Months SixNine Months
Ended JuneSept 30 Ended JuneSept 30
--------------- -------------
1999 1998 1999 1998
---- ---- ------ ------
Total segment operating income $236.0 $193.5 $498.4 $367.5$242.7 $199.4 $738.2 $560.7
Interest expense (34.7) (42.6) (68.9) (89.1)( 34.1) ( 42.7) (103.0) (131.8)
Other income (expense), net (16.9)1.0 ( .9) (66.1) (12.5)7.6) ( 65.3) ( 19.7)
Corporate and eliminations ( .2)13.5) ( 9.2)1.5) ( 8.2) (27.1)21.6) ( 28.6)
------ ------ ------ ------
Total income before income taxes $184.2 $140.8 $355.2 $238.8$196.1 $147.6 $548.3 $380.6
====== ====== ====== ======
c. Comprehensive income for the three and sixnine months ended JuneSeptember 30,
1999 and 1998 includes the following components (in millions of dollars):
Three Months SixNine Months
Ended JuneSept 30 Ended JuneSept 30
--------------- -------------
1999 1998 1999 1998
------ ------ ------ ------
Net income $119.7$138.4 $ 90.1 $230.9 $152.893.8 $366.3 $240.7
Other comprehensive
income (loss)
Foreign currency
translation adjustment 15.8 (25.4) (43.1) (54.7)(19.9) (35.6) (63.0) (90.3)
Related tax expense
(benefit) .71.0 ( 1.7) .5.1) 1.5 ( 2.2)2.3)
------ ----------- ------ ------
Total other comprehensive
income (loss) 15.1 (23.7) (43.6) (52.5)(20.9) (35.5) (64.5) (88.0)
------ ----------- ------ ------
Comprehensive income (loss) $134.8$117.5 $ 66.4 $187.3 $100.358.3 $301.8 $152.7
====== ====== ====== ======
Accumulated other comprehensive income (loss), (all of which
relates to foreign currency translation adjustments) as of
June 30,1999September 30, 1999 and December 31, 1998 is as follows (in millions of
dollars):
JuneSeptember 30, December 31,
1999 1998
---------------- ------------------------- - ------------
Balance at beginning of period $(531.6) $(448.1)
Translation adjustments ( 43.6)64.5) ( 83.5)
------- -------
Balance at end of period $(575.2)$(596.1) $(531.6)
======= =======
d. In August of 1999, the company acquired PulsePoint Communications, Tech
Hackers, Inc. and Publishing Partners International, Inc. Approximately
2.9 million shares of the company's common stock were exchanged for all of
the outstanding shares of these companies. The transactions were accounted
for as poolings of interests; therefore, all prior periods presented were
restated.
7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
- ---------------------
For the three months ended JuneSeptember 30, 1999, the company reported net income
of $119.7$138.4 million, or $.43 per diluted common share, compared to $90.1$93.8 million,
or $.25 per share, for the three months ended JuneSeptember 30, 1998. After paymentIncome in the
current quarter includes a one-time tax benefit of preferred dividends, the company earned $.38$22.0 million, or $.07 per
diluted common share, onrelated to a recently issued U.S. Treasury income tax
regulation, as well as an extraordinary charge of $12.1 million, or $.04 per
diluted basisshare, for the early extinguishment of debt. Excluding these items,
third quarter earnings per share rose 60% to $.40 per share compared to $.24 a year ago.$.25 per
share in the year-ago quarter.
Total revenue for the quarter ended JuneSeptember 30, 1999 was $1.89$1.87 billion, up 9%4%
from revenue of $1.73$1.79 billion for the quarter ended JuneSeptember 30, 1998.
Excluding the negative impact of foreign currency fluctuations, revenue in the
quarter rose 12%7%. Total gross profit percent increased to 34.9%35.9% in the secondthird
quarter of 1999 from 33.7%33.8% in the year-ago period.
For the three months ended JuneSeptember 30, 1999, selling, general and
administrative expenses were $341.5$354.8 million (18.1%(19.0% of revenue) compared to
$328.6$331.1 million (19.0%(18.5% of revenue) for the three months ended JuneSeptember 30, 1998. The decrease in
these costs as a percent of revenue was largely due to the company's ongoing
cost reduction programs, as well as stringent controls over discretionary
expenditures.
Research and development expenses were $81.2$86.2 million compared to $70.0$76.9 million a
year earlier.
For the secondthird quarter of 1999, the company reported an operating income percent
of 12.5%12.3% compared to 10.7%11.0% for the secondthird quarter of 1998.
Information by business segment is presented below (in millions):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Three Months Ended
JuneSeptember 30, 1999
- ------------------
Customer revenue $1,886.4 $1,370.0 $516.4$1,865.4 $1,318.5 $546.9
Intersegment $(154.8) 16.7 138.1$(151.7) 17.7 134.0
-------- ------- -------- ------
Total revenue $1,886.4 $(154.8) $1,386.7 $654.5$1,865.4 $(151.7) $1,336.2 $680.9
======== ======= ======== ======
Gross profit percent 34.9% 24.9% 46.8%35.9% 25.8% 48.5%
======== ======== ======
Operating income percent 12.5% 8.4% 18.4%12.3% 7.8% 20.2%
======== ======== ======
Three Months Ended
JuneSeptember 30, 1998
- ------------------
Customer revenue $1,728.5 $1,226.3 $502.2$1,792.3 $1,268.9 $523.4
Intersegment $(123.3) 16.2 107.1$(118.4) 16.3 102.1
-------- ------- -------- ------
Total revenue $1,728.5 $(123.3) $1,242.5 $609.3$1,792.3 $(118.4) $1,285.2 $625.5
======== ======= ======== ======
Gross profit percent 33.7% 24.4% 46.3%33.8% 24.5% 47.4%
======== ======== ======
Operating income percent 10.7% 7.3% 16.9%11.0% 7.2% 17.1%
======== ======== ======
8
In the Services segment, customer revenue increased by 12%4% to $1.37$1.32 billion in
the secondthird quarter of 1999 from $1.23$1.27 billion in the secondthird quarter of 1998.1998 due
principally to growth in outsourcing revenue. Excluding proprietary maintenance
revenue, which continues to decline industry-
wide,industry-wide, revenue increased 15%6% in the
quarter. The increase was led byServices revenue growth in outsourcingthe quarter was constrained by weakness in
network services, particularly in the Federal government business, due to
intense competitive pricing pressures and delays in the expected rollout of some
large networking projects; however, this is not materially impacting
profitability because of the lower-margin nature of this business. Revenue from
enterprise Windows NT services business was also lower than expected as wellthe
market for these services is developing more slowly than anticipated in the
short term as repeatable solutions and systems integration revenue.companies evaluate the NT operating environment for mission-
critical performance.
In the secondthird quarter of 1999, services gross profit increased to 24.9%25.8% from
24.4%24.5% in 1998, and operating profit was 8.4%7.8% compared to 7.3%7.2% in 1998. The
increase in services operating profit was largely due to ongoing cost reduction
programs as well as stringent cost controls over discretionary expenditures.
8
In the Technology segment, customer revenue increased 3%4% to $516$547 million in the
secondthird quarter of 1999 from $502$523 million in the prior-year period primarily due
to continued strong demandas some
customers shifted technology spending from the fourth quarter into the third
quarter as they prepare for ClearPath enterprise servers and software whichthe year 2000 transition. This shift more than
offset the expected declines in personal computer revenue. The shift of
technology revenue from the fourth quarter to the third quarter is expected to
result in a decline in technology revenue in the fourth quarter of 1999 when
compared to the prior year quarter. The gross profit percent was 46.8%48.5% in 1999,
compared to 46.3%47.4% in 1998. Operating profit in this segment was 18.4%20.2% in 1999
compared to 16.9%17.1% in 1998. The increase in operating profit, above the increase
in gross profit, was largely due to the ongoing cost reduction efforts.
The company expects that the issues in its network and NT services businesses,
the impact of foreign currency exchange rates, the year 2000 transition, and
organizational changes to be made in the fourth quarter will have a negative
impact on its revenue for the next two quarters.
Interest expense for the three months ended JuneSeptember 30, 1999 declined to $34.7$34.1
million from $42.6$42.7 million for the three months ended JuneSeptember 30, 1998. The
decline was principally due to the company's debt reduction program.
Other income (expense), net, which can vary from quarter to quarter, was an
expenseincome
of $16.9$1.0 million in the current quarter compared to an expense of $.9$7.6 million in
the year-ago quarter. The change was mainly due to equitylower foreign exchange
losses and lessgains on the sale of certain investments in the current quarter
offset in part by lower interest income.
Income before income taxes was $184.2$196.1 million in the secondthird quarter of 1999
compared to $140.8$147.6 million last year. The provision for income taxes was $64.5$45.6
million in the current period compared to $50.7$53.8 million in the year-ago period.
The tax provision in the current period includes a one-time benefit of $22.0
million related to a recently issued U.S. Treasury income tax regulation
pertaining to the use of net operating loss carryforwards of acquired companies.
For the sixnine months ended JuneSeptember 30, 1999, net income increased to $230.9was $366.3 million, or
$.70$1.13 per diluted common share, fromcompared to net income of $152.8$240.7 million, or
$.38$.60 per diluted common share, last year. The current period income includes
the tax benefit of $22.0 million, or $.07 per diluted common share, discussed
above and an extraordinary item for the early extinguishment of debt of $12.1
million, or $.04 million per diluted common share. Excluding these items,
diluted earnings per share was $1.10 for the nine months ended September 30,
1999 compared to $.60 in the year-ago period. Revenue was $3.70$5.58 billion
compared to $3.38$5.19 billion for the first sixnine months of 1998. 9
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement,
which is effective for the year beginning January 1, 2001, establishes
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS No. 133 requires a company to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Management is evaluating the impact this
statement may have on the company's financial statements.
Financial Condition
- -------------------
Cash and cash equivalents at JuneSeptember 30, 1999 were $438.8$374.0 million compared to
$604.3$616.4 million at December 31, 1998. During the sixnine months ended JuneSeptember 30,
1999, cash provided by operations was $136.6$320.1 million compared to $226.6$432.2 million
a year ago principally reflecting an increasea decrease in working capital. The company's
days of sales outstanding increased, primarily reflecting late quarter-end
technology sales that were not able to be collected in September.
Cash used for investing activities during the first sixnine months of 1999 was
$147.9$229.5 million compared to $114.7$186.8 million during the first halfnine months of 1998.
The increase was principally due to the purchase of 88% of Datamec, a Brazilian
application outsourcing company, in June of 1999.
Cash used for financing activities during the first halfnine months of 1999 was
$144.3$322.3 million compared to $190.3$255.6 million in the year-ago period. Included in
the current period were payments of $181.9$197.0 million for redemptions of preferred
stock.stock and $161.5 million related to the early redemption of long-term debt. In
the year-ago period $408.2$438.9 million of payments on long-term debt were offset by
proceeds of $195.2 million for issuances of long-term debt.
At JuneSeptember 30, 1999, total debt was $1.2$1.0 billion, an increasea decrease of $15.2$142.4 million
from December 31, 1998. The increasedecrease was principally due to additional borrowings
related to the purchaseearly
extinguishment, by means of Datamec, offsetopen market purchases in large part bythe current quarter, of
$115.8 million principal amount of the company's 11 3/4% senior notes due 2004,
and $25.5 million of 12% senior notes due 2003. The decrease also reflects the
March 15, 1999 conversion into common stock of the remaining $27 million of the company's
8 1/4% convertible subordinated notes due 2006, which were called during the
first quarter. Approximately 3.9 million common shares were issued for this
conversion.the
conversion of the 8 1/4% notes.
During the sixnine months ended JuneSeptember 30, 1999, approximately 15.0 millionall shares of the company's
Series A cumulative convertible preferred stock were either converted into the
company's common stock or redeemed for cash in response to threevarious calls by the
company. Of the 15.0 million preferred shares, 11.4 million
were converted into 19.0 million shares of common stock and 3.6 million
preferred shares were redeemed for $181.9 million in cash. On June 30, 1999,
9
the company called the remaining 13.4 million shares of preferred stock for
redemption on August 2, 1999. As a result of the call, approximately 13.1
million of such preferred shares were converted into 21.8 million shares of
common stock and .3 million were redeemed for $15.1 million in cash. As of
August 2, 1999, the company hasThese actions have eliminated all $1.4 billion of Series A preferred
stock (28.4 million shares) and $106.5 million of annual dividend payments.
Overall in 1999, of the 28.4 million shares of Series A preferred stock that
were outstanding at the beginning of the year, 24.5 million shares were
converted into 40.8 million shares of common stock increasing the number of
common shares outstanding to approximately 306 million, and 3.9 million shares were
redeemed for $197.0 million in cash.
As part of the company's ongoing program to reduce interest expense, in the
third quarter of 1999, the company entered into interest rate and currency swaps
for Japanese yen and euro. In these arrangements, the company receives payments
based on a U.S. fixed rate of interest and pays interest based on a foreign
currency denominated floating rate. The company is obligated to deliver, on
April 1, 2008, 23.2 billion yen in exchange for $200 million and is obligated
to deliver, on October 15, 2004, 194.4 million euro in exchange for $200
million. These currency swaps have been designated as hedges of the company's
net investments in entities measured in these currencies.
The company has a $400 million credit agreement which expires June 2001. As of
JuneSeptember 30, 1999, there were no borrowings under the agreement.
The company may, from time to time, redeem, tender for, or repurchase its debt
securities in the open market or in privately negotiated transactions depending
upon availability, market conditions, and other factors. 10
The company has on file with the Securities and Exchange Commission an effective
registration statement covering $700 million of debt or equity securities, which
enables the company to be prepared for future market opportunities.
On July 2, 1999, Moody's Investors Service increased its rating on the company's
senior long-term debt to Ba1Bal from Ba3,Ba3; on August 2, 1999, Standard & Poor's
Corporation increased its rating on the company's senior long-term debt to BB+
from BB-,; and on August 10, 1999, Duff & Phelps Credit Rating Co. increased its
rating on the company's senior long-term debt to BBB- from BB+.
At JuneSeptember 30, 1999, the company had deferred tax assets in excess of deferred
tax liabilities of $1,404$1,457 million. For the reasons cited below, management
determined that it is more likely than not that $1,093$1,136 million of such assets
will be realized, therefore resulting in a valuation allowance of $311$321 million.
The company evaluates quarterly the realizability of its net deferred tax assets
by assessing its valuation allowance and by adjusting the amount of such
allowance, if necessary. The factors used to assess the likelihood of
realization are the company's forecast of future taxable income, which is
adjusted by applying probability factors, and available tax planning strategies
that could be implemented to realize deferred tax assets.
Failure to achieve forecasted taxable income might affect the ultimate
realization of the net deferred tax assets. See "Factors that may affect future
results" below. The combination of these factors is expected to be sufficient
to realize the entire amount of net deferred tax assets. Approximately $3.3$3.4
billion of future taxable income (predominantly U.S.) is needed to realize all
of the net deferred tax assets.
Stockholders' equity increased $73.0$220.3 million during the sixnine months ended
JuneSeptember 30, 1999, principally reflecting net income of $230.9$366.3 million,
issuance of stock under stock option and other plans of $39.8$87.2 million, $33.8$53.8
million of tax benefits related to employee stock plans, and $26.4 million from
conversion of the remaining 8 1/4% convertible notes, offset in part by the
redemption of $181.9$197.0 million of preferred stock, translation adjustments of
$43.6$64.5 million, and preferred stock dividends declared of $32.9$32.8 million.
On June 14,In August of 1999, the company signed an agreement to acquireacquired PulsePoint Communications, a leading developer of carrier-class enhanced services solutions
for the communications industry, in a tax-free, stock-for-stock merger. The
Company expects to issue approximately 2.4Tech Hackers,
Inc. and Publishing Partners International, Inc. Approximately 2.9 million
shares of itsthe company's common stock inwere exchanged for all of the merger.outstanding
shares of these companies. The acquisition which will betransactions were accounted for as a poolingpoolings of
interest is expected to close in the third quarter of 1999. The transaction is
subject to approval by PulsePoint common and preferred shareholders, each class
voting separately, and customary closing conditions.interests; therefore, all prior periods presented were restated.
Year 2000 Readiness Disclosure
- ------------------------------
Many computer systems and embedded technology may experience problems handling
dates beyond the year 1999 and therefore may need to be modified prior to the
year 2000. 10
As part of its development efforts, the company's current product offerings have
been designed or are being redesigned to be year 2000 ready, as defined by the
company. However, certain of the company's hardware and software products
currently used by customers will require upgrades or other remediation to become
year 2000 ready. Some of these products are used in critical applications where
the impact of non-performance to these customers and other parties could be
significant. The company has taken steps to notify customers of the year 2000
issue, provide information and resources on the company's year 2000 web site,
emphasize the importance of customer testing of their own systems in their own
unique business environments and offer consulting services to assist customers
in assessing their year 2000 risk. 11
The company continues to assess the year 2000 readiness of its key suppliers.
The company's reliance on suppliers, and therefore, on the proper functioning of
their products, information systems, and software, means that their failure to
address year 2000 issues could affect the company's business. The potential
impact and related costs are not known at this time. The company has inquired
about the year 2000 readiness of its key suppliers and, whenever possible, has
obtained year 2000 readiness warranties or statements as to their readiness.
The company expects to identify alternate sources or strategies where necessary
if significant exposure is identified.
The company's year 2000 internal systems effort involves three stages:
inventory and assessment of its hardware, software and embedded systems,
remediation or replacement of those that are not year 2000 ready, and testing
the systems. In 1997, the company completed an inventory and year 2000
assessment of its internal information technology ("IT") systems, and developed
a work plan to remediate non-compliant systems or replace or consolidate these
systems as part of the company's efforts to reduce and simplify, on a worldwide
basis, its IT systems.
The company initially focused on the IT systems that are critical to running its
business. As of JuneSeptember 30, 1999, the company has completed the remediation,
integrated testing and most of the replacementsreplacement of its major mission critical IT
applications. The company expects to complete the implementation of theeliminate any remaining mission critical replacements/consolidations during the third quarter
or early fourth quarter of 1999. Remediation and testing of othernon-compliant,
non-critical IT systems to be used afterby December 31, 1999 are expected to be completed
in the second half of1, 1999.
The company has completed an inventory and assessment of its key non-IT systems,
such as data and voice communications, building management, and manufacturing
systems. The company has completed remediation of those systems that were not
year 2000 ready, with the exception of some telecommunications equipment and
voice mail systems in a few locations, which are expected to be completed in the
second halflast quarter of 1999.
The company estimates that, as of JuneSeptember 30, 1999, the cost of
remediatingremediating/replacing its internal systems has been approximately $14.5 million, and it expects$26
million. Any remaining expenditures in 1999 are expected to spend
approximately $.5 million for the remainder of 1999.be minimal. The
company is fundinghas funded this effort through normal working capital. This estimate
does not include the cost of replacing or consolidating IT systems in
connection with the company's worldwide IT simplification project, which was
undertaken for reasons unrelated to year 2000 issues, potential costs related to
any customer or other claims, the costs associated with making the company's
product offerings year 2000 ready, and the costs of any disruptions caused by
suppliers not being year 2000 ready. This estimate is based on a current
assessment of the year 2000 projects and is subject to change as the projects
progress.
Although the company does not believe that it will incur material costs or
experience material disruptions in its business associated with the year 2000,
there can be no assurance that the company will not experience serious
unanticipated negative consequences and/or material costs. The company may see
increased customer satisfaction costs related to year 2000 over the next few
years. In addition some commentators have stated that a significant amount of
11
litigation may arise out of year 2000 compliance issues, and the company is
aware of a growing number of lawsuits against information technology and
solutions providers. Although the company believes it has taken adequate
measures to address year 2000 issues, because of the unprecedented nature of
such litigation, it is uncertain to what extent the company may be affected by
it. It is also unknown
whether customerCustomer spending patterns have also been, and may continue to be, impacted
by the year 2000 issue.issue, although the company is unable to quantify the impact.
Efforts by customers to address year 2000 issues may absorb a substantial part
of their IT budgets in the near term, and customers may either accelerate or
delay the purchase of new applications and systems. While this behavior may
increase demand for certain of the company's products and services, including
year 2000 offerings, it could
also soften demand. These events could affectIn the company's revenues or change itsthree months ended September 30, 1999, the company
has experienced such a shift in revenue patterns.patterns as some customers have shifted
technology spending from the fourth quarter of 1999 into the third quarter as
they prepare for the year 2000 transition. In addition, there can be no
assurance that the company's current product offerings do not contain undetected
errors or defects associated with year 2000 date functions that may result in
increased costs to the company. 12
With respect to its internal systems, the worst case scenarios might include
corruption of data contained in the company's internal IT systems, hardware
failures, the failure of the company's significant suppliers, and the failure of
infrastructure services provided by utilities and other third parties such as
electricity, phone service, water transport and internet services.
The company continues to assess and refine the contingency plans it is
developing in the event it does not complete all phases of its year 2000 program
and to respond to year 2000 related events outside its control.
Conversion to the Euro Currency
- -------------------------------
On January 1, 1999, certain member countries of the European Union established
fixed conversion rates between their existing currencies and the European
Union's common currency, (the "euro").the euro. The transition period for the
introduction of the euro began on January 1, 1999. Beginning January 1, 2002,
the participating countries will issue new euro-denominated bills and coins for
use in cash transactions. No later than July 1, 2002, the participating
countries will withdraw all bills and coins denominated in the legacy
currencies, so that the legacy currencies no longer will be legal tender for any
transactions, making the conversion to the euro complete.
The company is addressing the issues involved with the introduction of the euro.
The more important issues facing the company include converting information
technology systems, reassessing currency risk, and negotiating and amending
agreements. Based on progress to date, the company believes that the use of the
euro will not have a significant impact on the manner in which it conducts its
business. Accordingly, conversion to the euro is not expected to have a
material effect on the company's consolidated financial position, consolidated
results of operations, or liquidity.
Factors that May Affect Future Results
- --------------------------------------
From time to time, the company provides information containing "forward-looking"
statements, as defined in the Private Securities Litigation Reform Act of 1995.
All forward-looking statements rely on assumptions and are subject to risks,
uncertainties, and other factors that could cause the company's actual results
to differ materially from expectations. In addition to changes in general
economic and business conditions and natural disasters, these include, but are
not limited to, the factors discussed below.
The company operates in an industry characterized by aggressive competition,
rapid technological change, evolving technology standards, and short product
life-cycles.
12Future operating results will depend on the company's ability to design,
develop, introduce, deliver, or obtain new products and services on a timely and
cost-effective basis; on its ability to successfully implement its fourth
quarter organizational realignments; on its ability to mitigate the effects of
competitive pressures and volatility in the information services and technology
industry on revenues, pricing and margins; on its ability to effectively manage
the shift of its business mix away from traditional high-margin product and
services offerings; and on its ability to successfully attract and retain highly
skilled people. In addition, future operating results could be impacted by
market demand for and acceptance of the company's service and product offerings.
Certain of the company's systems integration contracts are fixed-price contracts
under which the company assumes the risk for delivery of the contracted services
at an agreed-upon price. Future results will depend on the company's ability to
profitably perform these services contracts and bid and obtain new contracts.
Approximately 56%55% of the company's total revenue derives from international
operations. The risk of doing business internationally include foreign currency
exchange rate fluctuations, changes in political or economic conditions, trade
protection measures, and import or export licensing requirements. 13
In the course of providing complex, integrated solutions to customers, the
company frequently forms alliances with third parties that have complementary
products, services, or skills. Future results will depend in part on the
performance and capabilities of these third parties, including their ability to
deal effectively with the year 2000 issue. Future results will also depend upon
the ability of external suppliers to deliver components at reasonable prices and
in a timely manner and on the financial condition of, and the company's
relationship with, distributors and other indirect channel partners.
Future results may also be adversely affected by a delay in, or increased costs
associated with, the implementation of the year 2000 actions discussed above, or
by the company's inability to implement them.
1314
Part II - OTHER INFORMATION
- ------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders1. Legal Proceedings
- ------- ---------------------------------------------------
(a)-----------------
A number of purported class actions seeking unspecified compensatory damages
have been filed against Unisys and two current and one former officer in the
U.S. District Court for the Eastern District of Pennsylvania by persons who
purchased Unisys common stock during the period May 4, 1999 through October
14, 1999. The Company's 1999 Annual Meeting of Stockholders (the "Annual Meeting")
was held on April 29, 1999plaintiffs in Philadelphia, Pennsylvania.
(b) The following matters were voted upon at the Annual Meeting and received
the following votes:
1. Election of Directors as follows:
J. P. Bolduc - 234,277,442 votes for; 2,858,530 votes withheld
James J. Duderstadt - 234,339,107 votes for; 2,796,865 votes
withheld
Kenneth A. Macke - 234,212,882 votes for; 2,923,090 votes
withheld
2. A proposal to ratify the selectionthese actions allege violations of the Company's independent
auditors - 235,947,649 votes for; 1,188,322 votes against; 681,936
abstentionsFederal
securities laws in connection with statements made by the Company concerning
certain of its services contracts. These actions, which are in the early
stages, include the following: Frances W. Smith, et al v. Unisys Corporation,
Larry Weinbach, Jack McHale and Gerald Gagliaradi (filed on October 28,
1999); Sam Wietschner, et al v. Unisys Corporation, et al (filed on November
1, 1999); Larry Morrison, et al v. Unisys Corporation, et al (filed on
November 4, 1999) and Alex Igdalski and Michael Sayegh, et al v. Unisys
Corporation, et al (filed on November 9, 1999). The Company believes it has
meritorious defenses to these actions and intends to defend them vigorously.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
During the quarter ended JuneSeptember 30, 1999, the Company filed twoone
Current ReportsReport on Form 8-K dated April 1, 1999 and JuneJuly 15, 1999 respectively, to report under ItemItems 5 and 7
of such Form.
15
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
UNISYS CORPORATION
Date: August 10,November 12, 1999 By: /s/ Robert H. Brust
----------------------------
Robert H. Brust
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/Janet M. Brutschea Haugen
---------------------------------------------------------
Janet M. Brutschea Haugen
Vice President and Controller
(Chief Accounting Officer)
16
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.13.1 Restated Certificate of Incorporation of Unisys Corporation
Executive Life Insurance Program
10.210.1 Amendment, effective April 28,September 24, 1999, to the 1990Director Stock
Unit Plan
10.2 Amendments, effective September 24, 1999, to the Deferred
Compensation Plan for Executives of Unisys Long-Term
IncentiveCorporation
10.3 Amendment, effective September 24, 1999, to the Deferred
Compensation Plan for Directors of Unisys Corporation
11.1 Statement of Computation of Earnings Per Share for the sixnine
months ended JuneSeptember 30, 1999 and 1998
11.2 Statement of Computation of Earnings Per Share for the three
months ended JuneSeptember 30, 1999 and 1998
12 Statement of Computation of Ratio of Earnings to Fixed Charges
2727.1 Financial Data Schedule for the period ended September 30, 1999
27.2 Restated Financial Data Schedule for the year ended December 31, 1996
27.3 Restated Financial Data Schedule for the year ended December 31, 1997
27.4 Restated Financial Data Schedule for the period ended March 31, 1998
27.5 Restated Financial Data Schedule for the period ended June 30, 1998
27.6 Restated Financial Data Schedule for the period ended September 30,
1998
27.7 Restated Financial Data Schedule for the year ended December 31, 1998
27.8 Restated Financial Data Schedule for the period ended March 31, 1999
27.9 Restated Financial Data Schedule for the period ended June 30, 1999