EXHIBIT 13
Financial Table of Contents
31. Selected Financial Data
32. Management's Discussion and Analysis of Financial Condition and Results of
Operations
50. Report of Management
51. Report of Independent Accountants
52. Consolidated Statements of Operations
53. Consolidated Balance Sheets
54. Consolidated Statements of Cash Flows
55. Consolidated Statements of Changes in Stockholders' Equity
56. Notes to Consolidated Financial Statements
NCR CORPORATION
Selected Financial Data
Dollars in millions, except per share amounts
Year Ended December 31
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1999 1 1998 2 1997 1996 1995
------ ------ ---- ---- ----
Results of Operations
Revenue 3 $ 6,196 $ 6,505 $ 6,589 $ 6,963 $ 8,162
Operating expenses 4
Cost of revenue 4,312 4,583 4,715 4,997 7,316
Selling, general and
administrative expenses 1,466 1,460 1,510 1,458 2,632
Research development
expenses 340 360 383 378 585
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Income (loss) from
operations 78 102 (19) 130 (2,371)
Interest expense 12 13 15 56 90
Other income, net (71) (68) (61) (36) (45)
Gain from significant
asset dispositions 5 (98) (55) - - -
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Income (loss) before
income taxes 235 212 27 110 (2,416)
Income tax (benefit)
expense (102) 90 20 219 (136)
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Net income (loss) $ 337 $ 122 $ 7 $ (109) $(2,280)
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Net income (loss) per
common share 6
Basic $ 3.45 $ 1.21 $ 0.07 $ (1.07) $(22.49)
Diluted $ 3.35 $ 1.20 $ 0.07 $ (1.07) $(22.49)
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Financial Position and
Other Data
Cash and short-term
investments $ 763 $ 514 $ 1,129 $ 1,203 $ 338
Accounts receivable, net 1,197 1,556 1,471 1,457 1,908
Inventories 299 384 489 439 621
Property, plant, equipment
and reworkable service
parts, net 1,002 1,104 1,106 1,207 1,215
Total assets 4,895 4,892 5,376 5,280 5,256
Debt 77 83 94 76 375
Stockholders' equity $ 1,596 $ 1,447 $ 1,353 $ 1,396 $ 358
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Cash dividends - - - - -
Number of employees and
contractors 32,800 33,100 38,300 38,600 41,100
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/1/ Income from operations is shown after deducting $125 million related to
restructuring and other related charges. (See Note 3 of Notes to Consolidated
Financial Statements.) 1999 net income includes pre-tax amounts of $125 million
of restructuring and other related charges, $98 million of gains from
significant asset dispositions and $232 million of favorable impact from a tax
valuation allowance release. (See footnote 5 below and Notes 3 and 4 of Notes
to Consolidated Financial Statements.) Excluding these items, the 1999 income
from operations, net income and net income per common share (diluted) would have
been $203 million, $162 million and $1.61, respectively.
/2/ Income from operations is shown after deducting $50 million related to a
non-recurring pension charge. (See Note 6 of Notes to Consolidated Financial
Statements.) 1998 net income includes the non-recurring charge and the benefit
of the non-recurring gain from asset disposition. (See footnote 5 below and
Note 6 of Notes to Consolidated Financial Statements.) Excluding these items,
the 1998 income from operations, net income and net income per common share
(diluted) would have been $152 million, $119 million and $1.17 million,
respectively.
/3/ The majority of the decrease in revenue for the year ended December 31, 1996
was due to our decision in September 1995 to discontinue selling personal
computers and entry-level server products through high-volume indirect channels.
The decline in revenue from 1996 to 1999 is primarily attributable to our
commodity hardware business.
/4/ Operating expenses include restructuring and other related charges of $125
million, $50 million, $(55) million and $1,649 million in 1999, 1998, 1996 and
1995, respectively. (See Notes 3 and 6 of Notes to Consolidated Financial
Statements.)
/5/ Represents gains from significant asset dispositions, including facilities,
in 1999 and TOP END(R) in 1998.
/6/ Net loss per share for the years ended December 31, 1996 and 1995 was
calculated by dividing the net loss by 101.4 million shares of common stock.
Effective December 31, 1996, AT&T Corp. distributed to its stockholders all of
its interest in NCR on the basis of one share of NCR common stock for each 16
shares of AT&T Corp. common stock (the Distribution). The Distribution resulted
in 101.4 million shares of NCR common stock outstanding as of December 31, 1996.
Such shares are assumed to be outstanding since January 1, 1995.
31
Management's Discussion and Analysis of Financial Condition and Results of
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Operations
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OVERVIEW
We provide solutions designed specifically to enable businesses to build, expand
and enhance their relationships with their customers by facilitating
transactions and transforming data from transactions into useful business
information.
Through our presence at customer interaction points, such as self service
(e.g., automated teller machines) or store automation (e.g., point-of-sale
workstations), our solutions are designed to help businesses process consumer
transactions. We also offer businesses the opportunity to centralize detailed
information in a data warehouse, analyze the complex relationships among all of
the different data elements and respond with programs designed to improve
consumer acquisition, retention and profitability. We offer specific solutions
for the retail and financial industries and also provide solutions for
industries including telecommunications, transportation, insurance, utilities
and electronic commerce as well as consumer goods manufacturers and government
entities. Our solutions are built on our foundation of long-established
industry knowledge and consulting expertise, value-adding software, global
customer support services, a complete line of consumable and media products and
a range of hardware technology.
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RESTRUCTURING
During the fourth quarter of 1999, our management approved a restructuring plan
designed to accelerate our transformation from a computer hardware and product
company to a technology solutions and services provider. A pre-tax charge of
$125 million was recorded in the fourth quarter of 1999 to provide for
restructuring and other related charges as a result of our plan. The plan will
lead to an alignment around three key solutions, an elimination of approximately
1,250 positions and an enhanced leverage of the investment in our Data
Warehousing offering. The three key solutions that we will focus on as a result
of our plan are Data Warehousing, Self Service and Store Automation. In
targeted countries, we will be exiting certain of our commodity hardware
businesses, such as entry-level and mid-range computer hardware, to the extent
that it is sold through our non-core solutions, primarily Channel Delivery and
Customer Interaction.
In total, the plan calls for approximately 1,250 employee separations,
including approximately 1,000 separations in locations outside of the United
States, and will include sales, infrastructure support and other positions. As
of December 31, 1999, approximately 8% of the employee separations were
completed.
The pre-tax charge of $125 million was comprised of restructuring and other
related liabilities of $83 million, $35 million of related asset impairments and
$7 million of related software and inventory write-downs. The following table
presents a roll-forward of the liabilities incurred in connection with the 1999
business restructuring, which were all reflected as current liabilities in our
consolidated balance sheet:
Balance Balance
In millions Jan. 01, 1999 Additions Utilizations Dec. 31, 1999
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Type of Cost
Employee separations $ - $ 76 $ (9) $ 67
Facility closures - 2 - 2
Contractual settlements and
other exit costs - 5 (1) 4
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Total $ - $ 83 $ (10) $ 73
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In connection with the restructuring plan, we performed a review of our
long-lived assets to identify potential impairments. As a result, we recorded a
$35 million charge resulting from the abandonment or write-down of certain
assets, including goodwill related to our networking products business.
Additionally, we recorded $7 million of charges for the write-off of software
licenses and inventory write-downs.
The total $125 million charge in the fourth quarter was recorded as $8
million cost of revenue and $117 million selling, general and administrative
expenses. In addition to the $125 million charge recorded in the fourth quarter
of 1999, we expect to incur approximately $55 million of additional costs
throughout 2000, primarily related to settling customer obligations that were
not complete as of December 31, 1999. These additional costs will be
appropriately recognized as incurred or as settlements are reached.
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In total, we expect the pre-tax charge of $125 million to result in cash outlays
of $83 million and non-cash write-offs of $42 million. The cash outlays are
primarily for employee separations, contract cancellations and settlement of
customer obligations. As of December 31, 1999, a total of $10 million of the
expected cash payments had been made with the balance expected to occur
throughout 2000. Beginning in 2000, we anticipate annual savings of
approximately $75 million as a result of our restructuring plan. The savings
will primarily come from the elimination of losses in our non-core solutions
that we are exiting as well as other cost savings related to employee
separations within our infrastructure support organizations. We anticipate 75%
of the total $75 million of savings to be recognized as a reduction in operating
expenses with the balance being recognized as a reduction in cost of revenue.
In addition, we anticipate an approximate $400 million revenue decline as a
result of our decision to exit specific non-core solutions in certain geographic
areas which will impact our ability to show overall revenue growth in the year
2000. Execution of our plan is anticipated to be substantially complete by the
third quarter of 2000 and will be funded through working capital and proceeds
from sales of facilities and non-core solutions.
REVENUE AND OPERATING MARGIN BY INDUSTRY SEGMENT
In 1999, we categorized our operations into four strategic operating segments:
Retail, Financial, Teradata Solutions Group (TSG) (formerly named National
Accounts Solutions Group) and Systemedia. The Retail, Financial and TSG
segments offer a variety of solutions to our customers that incorporate point-
of-sale workstations, automated teller machines (ATMs), scalable data
warehousing, Teradata(R) and applications software, a variety of other
information technologies, professional consulting and customer support services.
Customer support services complement the solutions we offer as they support high
availability technology environments such as those where our solutions are
utilized. Customer support services include maintenance services, staging and
implementation services, networking, multi-vendor integration services,
consulting services, industry-specific support services and outsourcing
solutions. Our ''All other segments'' accumulates the results of operations not
attributable to the above operating segments, plus unallocated corporate
expenses. (See Note 10 of Notes to Consolidated Financial Statements.) As a
result of the 1999 restructuring program, we will be changing our definition of
strategic operating segments and our associated reporting framework for 2000.
The new reporting segments in 2000 will be Store Automation, Self Service, Data
Warehousing, Systemedia and Other. All of these segments will include hardware,
software, professional consulting and customer support services.
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For the years ended December 31, the effects of restructuring and other
related charges have been excluded from the gross margin, operating expenses and
operating income amounts presented and discussed below. (See Notes 3 and 6 of
Notes to Consolidated Financial Statements.)
In millions 1999 1998 1997
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Consolidated revenue $6,196 $6,505 $6,589
Consolidated gross margin 1 1,892 1,922 1,874
Consolidated operating expenses:
Selling, general and administrative expenses 2 1,349 1,410 1,510
Research and development 340 360 383
Consolidated income (loss) from operations $ 203 $ 152 $ (19)
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/1/ Consolidated gross margin excludes the impact of $8 million of
restructuring and other related charges in 1999, which is the portion of the
total $125 million restructuring and other related charges that was recorded
in cost of revenue.
/2/ Consolidated operating expenses exclude the impact of $117 million of
restructuring and other related charges in 1999, which is the portion of the
total $125 million restructuring and other related charges that was recorded
in selling, general and administrative expenses, and excludes the impact of
a $50 million non-recurring pension charge in 1998.
Total revenue decreased 5% in 1999 compared to 1998. When adjusted for the
impacts of year-to-year changes in foreign currency exchange rates, the revenue
decrease remains at 5%. The decline in 1999 revenue reflects increased sales in
our Retail industry segment offset by declines in all of our other industry
segments. These declines are primarily due to declines in our non-core
solutions, which include commodity hardware. Across all segments, aggregate
revenues in 1999 decreased from the prior year 11% in Japan and 5% in each of
the Americas and Europe/Middle East/Africa regions. These declines over prior
year were partially offset by a 13% increase in the Asia/Pacific region. The
increase in income from operations in 1999 reflects continued improvement in
gross margin as a percentage of revenue primarily due to improvements in data
warehousing, professional consulting and customer support services margins and a
reduction in operating expenses.
Total revenue decreased 1% in 1998 compared to 1997. When adjusted for the
unfavorable impacts of year-to-year changes in foreign currency exchange rates,
revenue increased 1%. The decline in 1998 revenue reflected increased sales in
the Retail, Financial and Systemedia industry segments, which were more than
offset by declines in TSG and our "All other segments". The significant
increase in income from operations in 1998 was due to improved gross margin and
tighter expense controls.
The following chart presents our revenue by industry segment for the year
ended December 31, 1999:
[1999 REVENUE BY INDUSTRY GRAPHIC APPEARS HERE]
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Retail Industry Solutions
Our retail industry solutions are designed to improve customer service and
operating efficiency. These solutions bring together our industry expertise,
professional consulting services, software, hardware and strategic alliances to
build integrated solutions that improve retail customers' business results.
Offerings for the retail industry are grouped into two solution portfolios:
Store Automation and Retail Data Warehousing.
Store Automation solutions are designed to improve service levels and
operating efficiency for retailers. Solutions may include point-of-sale
terminals, barcode scanners, scanner-scales, electronic shelf labeling,
kiosks/Web kiosks, applications software and other hardware and software
utilized in merchandise checkout areas, along with professional consulting and
customer support services.
Retail Data Warehousing solutions enable retailers to use information
gathered from customer transactions to analyze and manage every outlet, product
and consumer relationship, individually.
The following table presents our Retail industry revenue and total
operating margin for the years ended December 31:
In millions 1999 1998 1997
- ------------------------------------------------------------
Retail industry revenue $1,558 $1,447 $1,373
Retail industry operating margin $ 32 $ (25) $ (62)
- ------------------------------------------------------------
Retail industry revenues, including the solutions described above,
increased 8% in 1999 compared to 1998 primarily due to growth in Retail Data
Warehousing in the Americas and Japan and growth in Store Automation in all
regions. The substantial operating margin increase in 1999 was driven by sales
growth, significant improvement in gross margin, especially in maintenance and
professional consulting services, and continued focus on expense reduction in
both Retail Data Warehousing and Store Automation. In 1998, revenues increased
5% compared to 1997 due to growth in the Retail Data Warehousing and Store
Automation solutions in both the Americas and Europe/Middle East/Africa regions.
The operating margin improvement in 1998 was driven by sales growth, improvement
in gross margin, particularly in Store Automation products, and expense
reductions.
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Financial Industry Solutions
Our financial industry solutions are designed to help the financial services
industry process consumer transactions, with particular focus on retail banking.
These offerings include four solution portfolios: Self Service, Financial Data
Warehousing, Payment and Imaging and Channel Delivery.
The Self Service solutions offer a complete range of self service consumer
interaction points. These Self Service solutions are principally ATMs,
including specialized models that dispense customized information and non-cash
items such as tickets and coupons, along with professional consulting and
customer support services. We incorporate biometrics technology, such as iris-
scanning customer identification, in some offerings.
Financial Data Warehousing solutions enable financial services institutions
to transform data about consumer behavior into information that can be used to
change the way financial businesses interact with those consumers.
Payment and Imaging solutions include item-processing devices that read and
sort checks and other paper items, image-processing devices that convert checks
and other paper items into electronic images, outsourced management of item-
image processing facilities, professional consulting and customer support
services and products and services related to emerging methods of payment.
Channel Delivery solutions are designed to help banks reach customers
through new channels and include products and professional consulting and
customer support services related to bank branch automation, call centers, home
banking, switching and account processing.
The following table presents our Financial industry revenue and total
operating margin for the years ended December 31:
In millions 1999 1998 1997
- -------------------------------------------------------------
Financial industry revenue $2,568 $2,888 $2,845
Financial industry operating margin $ 100 $ 178 $ 151
- -------------------------------------------------------------
Financial industry revenues, including the solutions described above,
decreased 11% in 1999 compared to 1998 primarily due to declines in Channel
Delivery and Payment and Imaging solutions in all regions and declines in
Financial Data Warehousing in the Americas. The substantial operating margin
decrease in 1999 was driven by lower sales and gross margin primarily in our
Channel Delivery and Financial Data Warehousing solutions. In 1998, revenues
rose 2% compared to 1997 as increases in sales of Self Service solutions,
principally from off-premise automated teller machines in the Americas and
Europe/Middle East/Africa regions, offset sales declines in Japan and the
Asia/Pacific region, primarily in Korea and Australia. The operating margin
improvement in 1998 was driven by sales growth and improvement in gross margin
due to product mix partially offset by expense increases.
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Teradata Solutions
Our Teradata Solutions Group provides Data Warehousing and other solutions to
interface with customers through new channels. The customer base primarily
includes industries such as telecommunications, transportation, insurance,
utilities and electronic commerce as well as consumer goods manufacturers and
government entities. These solutions integrate software, hardware, professional
consulting services, customer support services and products from leading
technology firms that partner with us to meet customer needs. These solutions
are grouped primarily into two portfolios: National Accounts Data Warehousing
and Customer Interaction.
National Accounts Data Warehousing solutions help companies profitably
increase revenue by using data warehousing capabilities to gain insight into
consumers' activities and choices, asset use, operations and financial results.
Customer Interaction solutions are designed for all types of customer
interfaces, including call centers, Web interaction and kiosks.
The following table presents our TSG industry revenue and total operating
margin for the years ended December 31:
In millions 1999 1998 1997
- ---------------------------------------------------------
TSG industry revenue $1,485 $1,497 $1,562
TSG industry operating margin $ 46 $ (42) $ (113)
- ---------------------------------------------------------
TSG revenues, including the solutions described above, decreased 1% in 1999
1997 was driven by a revenue mix shift towards high-end products primarily in
the National Accounts Data Warehousing solutions and professional services, as
well as by operating expense reductions.
Systemedia
Systemedia develops, produces and markets a complete line of business
consumables to complement our solutions for the retail, financial and other
industries. These products include paper rolls, paper products and imaging
supplies for ink jet, laser, impact and thermal-transfer printers. In addition,
Systemedia develops Automatic Identification solutions that bring together
barcode labels, ribbons, software and printers to meet the product marketing and
distribution requirements of manufacturers and retailers.
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The following table presents Systemedia industry revenue and total
operating margin for the years ended December 31:
In millions 1999 1998 1997
- -----------------------------------------------------------
Systemedia industry revenue $ 506 $ 515 $ 510
Systemedia industry operating margin $ 25 $ 35 $ 43
- -----------------------------------------------------------
Systemedia industry revenues decreased 2% in 1999 compared to 1998
primarily due to our decision to exit sales in certain countries and specific
low-margin business within the indirect channel in the Europe/Middle East/Africa
region, partially offset by revenue increases in Japan. Operating margin
declined $10 million in 1999 primarily due to increases in operating expenses in
the Americas region and Japan. In 1998, revenue increased slightly, mainly in
the Americas and Europe/Middle East/Africa regions primarily due to increased
sales of custom printed paper rolls, laser supplies and ink jet cartridges.
Operating margin decreased by $8 million in 1998 due to continued declines in
paper pricing that were only partially offset by expense reductions.
GROSS MARGIN
Gross margin as a percentage of revenue increased 1.0 percentage point in 1999,
compared to an increase of 1.1 percentage points in 1998. The gross margin
increase in 1999 consisted of a 1.5 percentage point increase in product gross
margin and a 1.1 percentage point increase in services gross margin. Product
gross margin in 1999 reflected favorable sales mix which included increased
sales of higher-margin products within our Data Warehousing solutions and
decreased sales of lower-margin products within our non-core solutions. The
improvement in services gross margin was driven by strong margin improvements in
our professional consulting services and transactional support services. Gross
margin as a percentage of revenue increased 1.1 percentage points in 1998,
compared to a decrease of 0.9 percentage points in 1997. The gross margin
increase in 1998 consisted of a 2.8 percentage point increase in product gross
margin and a 1.0 percentage point decrease in services gross margin. During
1998, we implemented certain initiatives, such as the outsourcing of the
manufacture of our retail and computer products to Solectron Corporation
(Solectron), which contributed to gross margin percentage improvements in the
Store Automation and Data Warehousing solutions.
39
OPERATING EXPENSES
Selling, general and administrative expenses decreased $61 million or 4% in
1999, compared with a decrease of $100 million or 7% in 1998. The decreases in
both 1999 and 1998 were primarily due to our continued focus on expense
discipline; standardization of financial reporting, invoicing, logistics and
order processing; and employee reductions. As a percentage of revenue, selling,
general and administrative expenses were 21.8%, 21.7% and 22.9% in 1999, 1998
and 1997, respectively.
Research and development expenses decreased $20 million or 6% in 1999,
compared with a decrease of $23 million or 6% in 1998. This decrease was
primarily due to reductions in commodity hardware-related research and
development and a more synergistic focus on our core solution spending as we
transform into a solutions and services company.
INCOME BEFORE INCOME TAXES
We had operating income of $203 million in 1999, operating income of $152
million in 1998 and an operating loss of $19 million in 1997.
Interest expense was $12 million in 1999, $13 million in 1998 and $15
million in 1997. Other income, net, was $169 million in 1999, $123 million in
1998 and $61 million in 1997. Other income in 1999 includes $98 million in
licensing of certain technologies whereby we recognized $17 million of other
income in each of 1999 and 1998. Other income also includes interest income of
$26 million in 1999, $44 million in 1998 and $52 million in 1997. The trend
reflects lower average cash balances throughout the years due to the share
repurchase programs in 1999 and 1998.
INCOME TAX
Income tax (benefit)/expense was $(102) million in 1999, $90 million in 1998 and
$20 million in 1997. The 1999 income tax benefit was due primarily to the $232
million reduction in the Company's U.S. deferred tax valuation allowance as a
result of the U.S. operations achieving sustained profitability. Excluding the
impact of this item and the restructuring and other related charges, the
effective tax rate improved to 38% in 1999 from 42.5% in 1998 and 74.1% in 1997.
The change in effective tax rate is primarily due to improved profitability in
certain tax jurisdictions, principally the United States.
40
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short-term investments totaled $763 million at
December 31, 1999, compared with $514 million at December 31, 1998 and $1,129
million at December 31, 1997. The increase in 1999 was due to improved
operating results combined with our focus on reducing receivables, inventories
and capital deployed in the business. The $269 million expended for the stock
purchase program in 1999 was offset by proceeds from the sales of significant
facilities. The decrease in 1998 was primarily due to our acquisition of an
additional 27% ownership interest in our Japanese subsidiary at a cost of $274
million and $200 million expended for the stock repurchase program.
We generated cash from operations of $607 million in 1999, used cash in
operations of $79 million in 1998 and generated $287 million in 1997. The cash
generated in operations in 1999 was driven primarily by improved operating
results, asset management and the timing of disbursements for employee severance
and pension amounts. Receivable balances decreased $359 million in 1999
compared to an increase of $85 million in 1998. Inventory balances decreased
$85 million in 1999 compared to a decrease of $15 million in 1998. The use of
cash in 1998 reflected an increase in accounts receivable which was primarily
due to increased revenue during the fourth quarter of 1998 compared with the
fourth quarter of 1997. In addition, the use of cash in operations in 1998
included a decline in other operating liabilities due to the timing of increased
postemployment and postretirement benefit payments. In addition, 1998 operating
activities included a $55 million gain on the sale of TOP END. The 1997 cash
flow from operations included increases in accounts receivable and inventories
associated with normal business activities and cash utilized for payment of
restructuring activities of $82 million.
Net cash used in investing activities was $326 million, $186 million and
$563 million in 1999, 1998 and 1997, respectively. Investing activities
primarily represent purchases of short-term investments and capital
expenditures. Capital expenditures generally relate to expenditures for
information systems, reworkable parts used to service customer equipment,
equipment and facilities used in manufacturing and research and development and
facilities to support sales and marketing activities. In 1999, we purchased net
short-term investments of $165 million compared to a net investment reduction of
$217 million in 1998. The increase in 1999 reflects the improvement in operating
results and asset management as well as $168 million in proceeds from the sales
of significant facilities. In 1998, the cash used in investing reflects the
purchase of the minority interest in our Japanese subsidiary for $274 million.
This use of cash was partially offset by proceeds from the sale of TOP END and
the sale of our retail and computer products manufacturing operations to
Solectron. Capital expenditures, a historically significant component of
investing activities, were $355 million, $345 million and $348 million for the
years ended 1999, 1998 and 1997, respectively.
Net cash used in financing activities was $194 million in 1999 and $154
million in 1998. Net cash provided by financing activities was $62 million in
1997. In April and October 1999, we approved share repurchase programs which
resulted in the use of $269 million of cash in 1999. In 1998, a separate share
repurchase program resulted in the use of $200 million of cash.
41
In 1996, we entered into a five-year, unsecured revolving credit facility
with a syndicate of commercial banks and financial institutions. The credit
facility provides that we may borrow from time to time on a revolving credit
basis an aggregate principal amount of up to $600 million. We expect to be able
to use the available funds at any time for capital expenditure needs, repayment
of existing debt obligations, working capital and general corporate purposes.
The credit facility matures in 2001 and contains certain representations and
warranties, conditions, affirmative, negative and financial covenants and events
of default customary for such a facility. Interest rates charged on borrowings
outstanding under the credit facility are based on market rates. In addition, a
portion of the credit facility is available for the issuance of letters of
credit as we require. No amounts were outstanding under the facility as of
December 31, 1999, 1998 or 1997.
We believe that cash flows from operations, the credit facility and other
short- and long-term debt financings, if any, will be sufficient to satisfy our
future working capital, research and development, capital expenditures and other
financing requirements for the foreseeable future.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This annual report and other documents that we file with the Securities and
Exchange Commission, as well as other oral or written statements we may make,
contain information based on management's beliefs and include forward-looking
statements that involve a number of risks, uncertainties and assumptions. These
forward-looking statements are not guarantees of future performance, and there
are a number of factors, including those listed below, which could cause actual
outcomes and results to differ materially from the results contemplated by such
forward-looking statements.
Competition
Our ability to compete effectively within the technology industry is critical to
our future success.
We compete in the intensely competitive information technology industry. This
industry is characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions, price and cost reductions, and
increasingly greater commoditization of products, making differentiation
difficult. In addition, this intense competition increases pressure on gross
margins which could impact our business and operating results. Our competitors
include other large, successful companies in the technology industry such as:
International Business Machines (IBM), Wincor Nixdorf Gmbh & Co., Unisys
Corporation, Diebold, Inc., and Oracle Corporation, some of which have
widespread penetration of their platforms. If we are unable to compete
successfully, the demand for our solutions, including products and services,
would decrease. Any reduction in demand could lead to fewer customer orders, a
decrease in the prices of our products and services, reduced revenues, reduced
margins, operating inefficiencies, reduced levels of profitability, and loss of
market share. These competitive pressures could impact our business and
operating results.
42
Our future competitive performance depends on a number of factors,
including our ability to: rapidly and continually design, develop and market, or
otherwise obtain and introduce solutions and related products and services for
our customers that are competitive in the marketplace; offer a wide range of
solutions from small electronic shelf labels to very large enterprise data
warehouses; offer solutions to customers that operate effectively within a
computing environment which includes the integration of hardware and software
from multiple vendors; offer products that are reliable and that ensure the
security of data and information; offer high-quality, high availability
services; market and sell all of our solutions effectively, including the
successful execution of our new marketing campaign.
New Solutions Introductions
The solutions we sell are very complex, and we need to rapidly and successfully
develop and introduce new solutions.
We operate in a very competitive, rapidly changing environment, and our future
success depends on our ability to develop and introduce new solutions that our
customers choose to buy. If we are unable to develop new solutions, our
business and operating results would be impacted. This includes our efforts to
rapidly develop and introduce data warehousing software applications. The
development process for our complex solutions, including our software
application development programs, requires high levels of innovation from both
our developers and our suppliers of the components embedded in our solutions.
In addition, the development process can be lengthy and costly. It requires us
to commit a significant amount of resources to bring our business solutions to
market. If we are unable to anticipate our customers' needs and technological
trends accurately, or are otherwise unable to complete development efficiently,
we would be unable to introduce new solutions into the market on a timely basis,
if at all, and our business and operating results would be impacted. In
addition, if we were unable to successfully market and sell both existing and
newly developed solutions, our operating results would be impacted.
Our solutions which contain both hardware and software products may contain
known as well as undetected errors which may be found after the products'
introduction and shipment. While we attempt to fix errors that we believe would
be considered critical by our customers prior to shipment, we may not be able to
detect or fix all such errors, and this could result in lost revenues, delays in
customer acceptance, and incremental costs which would all impact our operating
results.
43
Reliance on Third Parties
Third party suppliers provide important elements to our solutions.
We rely on many suppliers for necessary parts and components to complete our
solutions. In most cases, there are a number of vendors producing the parts and
components that we utilize. However, there are some components that are
purchased from single sources due to price, quality, technology or other
reasons. For example, we depend on chips and microprocessors from Intel
Corporation and operating systems from UNIX(R) and Microsoft Windows NT(R).
Certain parts and components used in the manufacture of our ATMs and the
delivery of some of our Store Automation solutions are also supplied by single
sources. If we were unable to purchase the necessary parts and components from
a particular vendor and we had to find an alternative supplier for such parts
and components, our new and existing product shipments and solutions deliveries
could be delayed, impacting our business and operating results.
We have, from time to time, formed alliances with third parties (such as
the outsourcing arrangements with Solectron to manufacture hardware) that have
complementary products, services and skills. These alliances introduce risks
that we can not control such as non-performance by third parties and
difficulties with or delays in integrating elements provided by third parties
into our solutions. The failure of third parties to provide high quality
products or services that conform to the required specifications could impair
the delivery of our solutions on a timely basis and impact our business and
operating results.
Acquisitions and Alliances
Our ability to successfully integrate acquisitions or effectively manage
alliance activities will help drive future growth.
As part of our overall solutions strategy, we intend to continue to make
investments in companies, products, services and technologies, either through
acquisitions, joint ventures or strategic alliances. Acquisitions and alliance
activities inherently involve risks. The risks we may encounter include those
associated with assimilating and integrating different business operations,
corporate cultures, personnel, infrastructures and technologies or products
acquired or licensed, retaining key employees, and the potential for unknown
liabilities within the acquired or combined business. The investment or
alliance may also disrupt our ongoing business or we may not be able to
successfully incorporate acquired products, services or technologies into our
solutions and maintain quality. Business acquisitions typically result in
intangible assets being recorded and amortized in future years. Future
operating results could be impacted if our acquisitions do not generate
profitable results in excess of the related amortization expense.
44
Operating Result Fluctuations
We expect our quarterly revenues and operating results to fluctuate for a number
of reasons.
Future operating results will continue to be subject to quarterly fluctuations
based on a variety of factors, including:
Seasonality. Our sales are historically seasonal, with revenue higher in
the fourth quarter of each year. During the three quarters ending in March, June
and September, we have historically experienced less favorable results than in
the quarter ending in December. Such seasonality also causes our working capital
cash flow requirements to vary from quarter to quarter depending on the
variability in the volume, timing and mix of product sales. In addition, revenue
in the third month of each quarter is typically higher than in the first and
second months. These factors, among other things, make forecasting more
difficult and may adversely affect our ability to predict financial results
accurately.
Acquisitions and Alliances. As part of our solutions strategy, we intend to
continue to acquire technologies, products and businesses as well as form
strategic alliances and joint ventures. As these activities take place and we
begin to include the financial results related to these investments, our
operating results will fluctuate. For example, the acquisition of Gasper
Corporation will result in incremental revenue, margin and operating expenses
for our Self Service solution.
Multi-National Operations
Continuing to generate substantial revenues from our multi-national operations
helps to balance our risks and meet our strategic goals.
Currently, approximately 57% of our revenues come from our international
operations. We believe that our geographic diversity may help to mitigate some
risks associated with geographic concentrations of operations (e.g., adverse
changes in foreign currency exchange rates or business disruptions due to
economic or political uncertainties). However, our ability to sell our
solutions internationally is subject to the following risks, among others:
general economic and political conditions in each country which could adversely
affect demand for our solutions in these markets, as recently occurred in
certain Asian markets; currency exchange rate fluctuations which could result in
lower demand for our products as well as generate currency translation losses;
currency changes such as the "Euro" introduction which could affect cross border
competition, pricing, and require modifications to our offerings to accommodate
the changeover; changes to and compliance with a variety of local laws and
regulations which may increase our cost of doing business in these markets or
otherwise prevent us from effectively competing in these markets.
45
Restructuring
Successfully completing our restructuring activities is important as it is
designed to improve our focus and overall profitability.
As we have discussed above, we plan to grow revenue and earnings through the
realignment of our businesses into three key solutions: Self Service, Store
Automation and Data Warehousing. Our success with these restructuring
activities depends on a number of factors including our ability to: execute
strategies in various markets, including electronic commerce and other new
industries beyond our traditional focus; exit certain businesses as planned;
profitably replace the lost revenues; and manage issues that may arise in
connection with the restructuring such as gaps in short-term performance,
diversion of management focus and employee morale and retention. In particular,
our business plan includes leveraging the Teradata technology in electronic
commerce and other industries. If we are not successful in managing the
required changes to achieve this realignment, our business and operating results
could be impacted.
Employees
Hiring and retaining highly qualified employees helps us to achieve our business
objectives.
Our employees are vital to our success, and our ability to attract and retain
highly skilled technical, sales, consulting and other key personnel is critical
as these key employees are difficult to replace. The expansion of high
technology companies has increased demand and competition for qualified
personnel. If we are not able to attract or retain highly qualified employees
in the future, our business and operating results could be impacted.
Intellectual Property
As a technology company, our intellectual property portfolio is key to our
future success.
Our intellectual property portfolio is a key component of our ability to be a
leading technology and services solutions provider. To that end, we
aggressively protect and work to enhance our proprietary rights in our
intellectual property through patent, copyright, trademark and trade secret laws
and if our efforts fail, our business could be impacted. In addition, many of
our offerings rely on technologies developed by others and if we were not able
to continue to obtain licenses for such technologies, our business would be
impacted. Moreover, from time to time, we receive notices from third parties
regarding patent and other intellectual property claims. Whether such claims
are with or without merit, they may require significant resources to defend and,
if an infringement claim is successful, in the event we are unable to license
the infringed technology or to substitute similar non-infringing technology, our
business could be adversely affected.
46
Environmental
Our historical and ongoing manufacturing activities subject us to environmental
exposures.
We have been identified as a potentially responsible party in connection with
the Fox River matter as further described in "Environmental Matters" under Note
11 of the Notes to Consolidated Financial Statements on page 78 of this annual
report and we incorporate such discussion in this Management's Discussion and
Analysis of Financial Condition and Results of Operations by reference and make
it a part of this risk factor.
Contingencies
Like other technology companies, we face uncertainties with regard to
regulations, lawsuits and other related matters.
We are subject to regulations, proceedings, lawsuits, claims and other matters,
including those that relate to the environment, health and safety and
intellectual property. Such matters are subject to the resolution of many
uncertainties; thus, outcomes are not predictable with assurance. While we
believe that amounts provided in our financial statements are currently adequate
in light of the probable and estimable liabilities, there can be no assurances
that the amounts required to discharge alleged liabilities from lawsuits, claims
and other legal proceedings and environmental matters, and to comply with
applicable environmental laws will not impact future operating results.
Year 2000
Our readiness and the readiness of our customers and business partners to be
able to handle Year 2000 dates is critical to maintaining a stable business
environment.
Please note that the following is a Year 2000 Readiness Disclosure, as that term
is defined in the Year 2000 Information and Readiness Disclosure Act (105
P.L.271).
We completed our Year 2000 preparations as planned, and monitored the year-end
rollover both with respect to our internal infrastructure and from a customer
support perspective. There were no significant issues identified during the
Year 2000 rollover; while a small number of minor issues did arise with
customers, these were quickly addressed. Moreover, the majority of these issues
did not involve an inability to recognize or process date data in the Year 2000,
but rather other matters that coincided with the rollover. There were no
reports of widespread product failures or shutdowns or of degraded performance.
With respect to internal infrastructure systems, there were no interruptions to
our operations, and planned testing of our critical applications following the
rollover were completed without any significant issues. In addition, no
supplier problems due to Year 2000 concerns have been identified.
The costs that we have incurred in addressing Year 2000 matters continue to
be difficult to measure with precision due to, among other things, the large
number of our employees and contractors who spent at least a portion of their
time on Year 2000 issues, the concurrent remediation of both Year 2000 and non-
Year 2000 issues in internal systems, upgrades that would have occurred in any
event, and the risks listed below. In light of these factors, we estimate that
our total Year 2000 costs, including those incurred from 1997 through 1999, were
nearly $200 million.
47
The risks associated with Year 2000 issues can be difficult to identify or
predict for a number of reasons. These include, among others: the complexity of
testing inter-connected products, operating environments, networks and
applications, including those developed and/or sold by third parties; the
difficulty of simulating and testing for all possible variables and outcomes
associated with critical dates in 1999 and 2000; the reliability of test results
obtained in a laboratory environment against actual occurrences in a live
production environment; and the possibility that problems or insidious data loss
may not occur or be evident until a number of points in the future, such as the
ends of future months, quarters and years. In addition, as a vendor of
technology products and services, we could face other uncertainties such as the
risk that our products, including those of companies we have recently acquired,
may contain undetected errors or defects, or we may have been unable to identify
and notify all affected customers. No legal claims pertaining to Year 2000
issues have been asserted against us, although we are aware that claims are
pending against other technology vendors. Moreover, for the reasons discussed
above, among others, we are unable to determine whether claims are likely to be
filed against us in the future.
DERIVATIVE FINANCIAL INSTRUMENTS AND MARKET RISK
We are exposed to market risk, including changes in foreign currency exchange
rates and interest rates. We use a variety of measures to monitor and manage
these risks, including derivative financial instruments. Since a substantial
portion of our operations and revenue occur outside the United States, our
results can be significantly impacted by changes in foreign currency exchange
rates. To manage our exposures to changes in currency exchange rates, we enter
into various derivative financial instruments such as forward contracts and
options. These instruments generally mature within twelve months. At
inception, the derivative instruments are designated as hedges of inventory
purchases and sales and of certain financing transactions which are firmly
committed or forecasted. Gains and losses on qualifying hedged transactions are
deferred and recognized in the determination of income when the underlying
transactions are realized, canceled or otherwise terminated. When hedging
certain foreign currency transactions of a long-term investment nature, gains
and losses are recorded in the currency translation adjustment component of
stockholders' equity. Gains and losses on other foreign exchange contracts are
generally recognized currently in other income or expense as exchange rates
change.
48
For purposes of potential risk analysis, we use sensitivity analysis to
determine the impacts that market risk exposures may have on the fair values of
our hedge portfolio related to anticipated transactions. The foreign currency
exchange risk is computed based on the market value of future cash flows as
impacted by the changes in the rates attributable to the market risk being
measured. The sensitivity analysis represents the hypothetical changes in value
of the hedge position and does not reflect the opposite gain or loss on the
forecasted underlying transaction. The results of the foreign currency exchange
rate sensitivity analysis at December 31, 1999 and 1998 were: a 10% movement in
the levels of foreign currency exchange rates against the U.S. dollar with all
other variables held constant would result in a decrease in the fair values of
our financial instruments by $2 million and $13 million, respectively, or an
increase in fair values of our financial instruments by $22 million and $26
million, respectively.
The interest rate risk associated with our borrowing and investing
activities at December 31, 1999 is not material in relation to our consolidated
financial position, results of operations or cash flows. We do not generally use
derivative financial instruments to alter the interest rate characteristics of
our investment holdings or debt instruments.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities" which delayed the effective date of Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities" for one year. SFAS 133 provides guidance
for the recognition and measurement of derivatives and hedging activities. It
requires an entity to record, at fair value, all derivatives as either assets or
liabilities in the balance sheet, and it establishes specific accounting rules
for certain types of hedges. SFAS 133 is now effective for fiscal years
beginning after June 15, 2000. We will adopt this standard when required, if
not earlier. The impact, if any, of adopting SFAS 133 on our consolidated
financial position, results of operations and cash flows, has not been
finalized.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), "Revenue Recognition in Financial
Statements", which provides guidance on applying generally accepted accounting
principles for recognizing revenue. SAB 101 is effective for fiscal years
beginning after December 15, 1999. The impact, if any, of adopting SAB 101 in
the first quarter of 2000 on our consolidated financial position, results of
operations and cash flows, has not been determined.
49
Report of Management
We are responsible for the preparation, integrity and objectivity of our
consolidated financial statements and other financial information presented in
our Annual Report. The accompanying consolidated financial statements were
prepared in accordance with generally accepted accounting principles and include
certain amounts based on currently available information and our judgment of
current conditions and circumstances.
We maintain an internal control structure designed to provide reasonable
assurance, at reasonable cost, that our assets are safeguarded, and that
transactions are properly authorized, executed, recorded and reported. This
structure is supported by the selection and training of qualified personnel, by
the proper delegation of authority and division of responsibility, and through
dissemination of written policies and procedures. An ongoing program of
internal audits and operational reviews assists us in monitoring the
effectiveness of these controls, policies and procedures. The accounting
systems and related other controls are modified and improved in response to
changes in business conditions and operations, and recommendations made by our
independent accountants and internal auditors.
PricewaterhouseCoopers LLP, independent accountants, are engaged to perform
audits of our consolidated financial statements. These audits are performed in
accordance with generally accepted auditing standards, which include the
consideration of our internal control structure.
The Audit and Finance Committee of the Board of Directors, consisting
entirely of independent directors who are not employees of NCR, monitors our
accounting, reporting and internal control structure. Our independent
accountants, internal auditors and management have complete and free access to
the Audit and Finance Committee, which periodically meets directly with each
group to ensure that their respective duties are being properly discharged.
LOGO
Lars Nyberg
Chairman of the Board and
Chief Executive Officer
LOGO
David Bearman
Senior Vice President and
Chief Financial Officer
50
Report of Independent Accountants
To the Board of Directors and
Stockholders of NCR Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
NCR Corporation and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of NCR Corporation's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
LOGO
Dayton, Ohio
February 8, 2000
51
NCR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
In millions, except per share amounts
Year Ended December 31
-----------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------
Revenue
Products $3,289 $3,641 $3,709
Services 2,907 2,864 2,880
- ----------------------------------------------------------------------------------------
Total Revenue 6,196 6,505 6,589
- ----------------------------------------------------------------------------------------
Operating Expenses
Cost of products 2,109 2,380 2,528
Cost of services 2,203 2,203 2,187
Selling, general and administrative expenses 1,466 1,460 1,510
Research and development expenses 340 360 383
- ----------------------------------------------------------------------------------------
Total Operating Expenses 6,118 6,403 6,608
- ----------------------------------------------------------------------------------------
Income (Loss) from Operations 78 102 (19)
- ----------------------------------------------------------------------------------------
Interest expense 12 13 15
Other income, net (169) (123) (61)
- ----------------------------------------------------------------------------------------
Income Before Income Taxes 235 212 27
- ----------------------------------------------------------------------------------------
Income tax (benefit)/expense (102) 90 20
- ----------------------------------------------------------------------------------------
Net Income $ 337 $ 122 $ 7
- ----------------------------------------------------------------------------------------
Net Income per Common Share
- ---------------------------
Basic $ 3.45 $ 1.21 $ 0.07
Diluted $ 3.35 $ 1.20 $ 0.07
Weighted Average Common Shares Outstanding
- ------------------------------------------
Basic 97.6 101.0 102.0
Diluted 100.6 102.1 102.0
The Notes on pages 56 through 81 are an integral part of the consolidated
financial statements.
52
NCR CORPORATION
CONSOLIDATED BALANCE SHEETS
In millions, except per share amounts
At December 31
--------------
1999 1998
- -----------------------------------------------------------------------------
Assets
Current assets
Cash, cash equivalents and short-term investments $ 763 $ 514
Accounts receivable, net 1,197 1,556
Inventories 299 384
Other current assets 282 178
- -----------------------------------------------------------------------------
Total Current Assets 2,541 2,632
- -----------------------------------------------------------------------------
Reworkable service parts, net 209 232
Property, plant and equipment, net 793 872
Other assets 1,352 1,156
- -----------------------------------------------------------------------------
Total Assets $4,895 $4,892
- -----------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings $ 37 $ 50
Accounts payable 378 376
Payroll and benefits liabilities 247 303
Customer deposits and deferred service revenue 365 352
Other current liabilities 635 619
- -----------------------------------------------------------------------------
Total Current Liabilities 1,662 1,700
- -----------------------------------------------------------------------------
Long-term debt 40 33
Pension and indemnity liabilities 342 420
Postretirement and postemployment benefits liabilities 570 655
Other liabilities 623 593
Minority interests 49 44
- -----------------------------------------------------------------------------
Total Liabilities 3,286 3,445
- -----------------------------------------------------------------------------
Put Options 13 -
- -----------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock: par value $0.01 per share, 100.0 shares
authorized, no shares issued and outstanding at
December 31, 1999 and 1998 - -
Common stock: par value $0.01 per share, 500.0
shares authorized, 93.6 and 98.7 shares issued and
outstanding at December 31, 1999 and 1998, respectively 1 1
Paid-in capital 1,081 1,295
Retained earnings 466 129
Accumulated other comprehensive income 48 22
- -----------------------------------------------------------------------------
Total Stockholders' Equity 1,596 1,447
- -----------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $4,895 $4,892
- -----------------------------------------------------------------------------
The Notes on pages 56 through 81 are an integral part of the consolidated
financial statements.
53
NCR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
In millions
Year Ended December 31
-----------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 337 $ 122 $ 7
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 358 364 383
Deferred income taxes (187) 54 13
Net (gain) loss on sales of assets (107) (47) 4
Changes in operating assets and liabilities:
Receivables 359 (85) (14)
Inventories 85 15 (50)
Current payables (41) (53) 49
Deferred revenue and customer deposits 13 4 -
Timing of disbursements for employee severance and pension (148) (268) (62)
Other assets and liabilities (62) (185) (43)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 607 (79) 287
- ----------------------------------------------------------------------------------------------------------------
Investing Activities
Purchases of short-term investments (354) (356) (685)
Proceeds from sales of short-term investments 189 573 482
Expenditures for reworkable service parts (168) (140) (154)
Expenditures for property, plant and equipment (187) (205) (194)
Acquisition of minority interest in subsidiary - (274) -
Proceeds from sales of facilities and other assets 304 310 99
Other investing activities, net (110) (94) (111)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (326) (186) (563)
- ----------------------------------------------------------------------------------------------------------------
Financing Activities
Purchases of Company common stock (269) (200) -
Short-term borrowings, net (13) (9) 31
Long-term borrowings, net 7 (2) (13)
Other financing activities, net 81 57 44
- ----------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (194) (154) 62
- ----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (4) 21 (63)
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 83 (398) (277)
Cash and cash equivalents at beginning of year 488 886 1,163
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 571 $ 488 $ 886
- ----------------------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash investing activities:
In 1999, the Company sold its TeraCube(R) software rights
and related assets to MicroStrategy Incorporated in exchange
for $14 million of MicroStrategy Incorporated common stock.
A pre-tax realized gain of $11 million was recognized in NCR's
consolidated financial statements.
The Notes on pages 56 through 81 are an integral part of the consolidated
financial statements.
54
NCR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
In millions
Accumulated
Common Stock Other
----------------- Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income Total
------- ------ ------- -------- ------ -----
December 31, 1996 101 $1 $1,394 $ - $ 1 $1,396
Employee stock purchase
and stock compensation plans 2 - 44 - - 44
- -----------------------------------------------------------------------------------------------------------------
Subtotal 103 1 1,438 - 1 1,440
- -----------------------------------------------------------------------------------------------------------------
Net income - - - 7 - 7
Other comprehensive income, net of tax:
Currency translation adjustments - - - - (79) (79)
Unrealized gains on securities:
Unrealized holding gains arising
during the period - - - - 6 6
Less: reclassification adjustment for
gains included in net income - - - - (9) (9)
Additional minimum pension liability - - - - (12) (12)
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) - - - 7 (94) (87)
- -----------------------------------------------------------------------------------------------------------------
December 31, 1997 103 1 1,438 7 (93) 1,353
Employee stock purchase
and stock compensation plans 2 - 57 - - 57
Purchase of Company common stock (6) - (200) - - (200)
- -----------------------------------------------------------------------------------------------------------------
Subtotal 99 1 1,295 7 (93) 1,210
- -----------------------------------------------------------------------------------------------------------------
Net income - - - 122 - 122
Other comprehensive income, net of tax:
Currency translation adjustments - - - - 95 95
Unrealized gains on securities:
Unrealized holding gains arising
during the period - - - - 9 9
Less: reclassification adjustment for
gains included in net income - - - - (4) (4)
Additional minimum pension liability - - - - 15 15
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income - - - 122 115 237
- -----------------------------------------------------------------------------------------------------------------
December 31, 1998 99 1 1,295 129 22 1,447
Employee stock purchase
and stock compensation plans 3 - 80 - - 80
Proceeds from sale of put options - - 1 - - 1
Reclassification of put option obligation - - (13) - - (13)
Purchase of Company common stock (8) - (282) - - (282)
- -----------------------------------------------------------------------------------------------------------------
Subtotal 94 1 1,081 129 22 1,233
- -----------------------------------------------------------------------------------------------------------------
Net income - - - 337 - 337
Other comprehensive income, net of tax:
Currency translation adjustments - - - - (13) (13)
Unrealized gains on securities:
Unrealized holding gains arising
during the period - - - - 54 54
Less: reclassification adjustment for
gains included in net income - - - - (14) (14)
Additional minimum pension liability - - - - (1) (1)
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income - - - 337 26 363
- -----------------------------------------------------------------------------------------------------------------
December 31, 1999 94 $1 $1,081 $466 $ 48 $1,596
- -----------------------------------------------------------------------------------------------------------------
The Notes on pages 56 through 81 are an integral part of the consolidated
financial statements.
55
NCR Corporation
- ---------------
Notes to Consolidated Financial Statements
Note 1.
Description of Business and Significant Accounting Policies
Description of Business
NCR Corporation and its subsidiaries (NCR or the Company) provide solutions
worldwide that are designed specifically to enable businesses to build, expand
and enhance their relationships with their customers by facilitating
transactions and transforming data from transactions into useful business
information.
Through its presence at customer interaction points, such as self service
(e.g., automated teller machines) or store automation (e.g., point-of-sale
workstations), NCR's solutions are designed to help businesses process consumer
transactions. They also offer businesses the opportunity to centralize detailed
information in a data warehouse, analyze the complex relationships among all of
the different data elements, and respond with programs designed to improve
consumer acquisition, retention and profitability. NCR offers specific
solutions for the retail and financial industries and also provides solutions
for industries including telecommunications, transportation, insurance,
utilities and electronic commerce as well as consumer goods manufacturers and
government entities. These solutions are built on NCR's foundation of long-
established industry knowledge and consulting expertise, value-adding software,
global customer support services, a complete line of consumable and media
products and a range of hardware technology.
56
Basis of Consolidation
The consolidated financial statements include the accounts of NCR and its
majority-owned subsidiaries in which NCR exercises significant influence and
control. Long-term investments in affiliated companies in which NCR exercises
significant influence, but which it does not control, are accounted for under
the equity method. Investments in which NCR does not exercise significant
influence (generally when NCR has no representative on the company's Board of
Directors) are accounted for under the cost method. All significant
intercompany transactions and accounts have been eliminated.
Use of Estimates
The preparation of 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, the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the period reported. Actual results could differ
from those estimates. Estimates are made when accounting for uncollectible
accounts receivable, excess and obsolete inventory, product warranty,
depreciation and amortization, employee benefit plans, income taxes,
restructuring and other related charges and environmental and other
contingencies, among others.
Foreign Currency
For most NCR international operations, the local currency is designated as the
functional currency. Accordingly, assets and liabilities are translated into
U.S. dollars at year-end exchange rates, and revenues and expenses are
translated at average exchange rates prevailing during the year. Currency
translation adjustments resulting from fluctuations in exchange rates are
recorded in other comprehensive income.
In the normal course of business, NCR enters into various financial
instruments, including derivative financial instruments. The use of foreign
exchange forward contracts and options allows NCR to reduce its exposure to
changes in currency exchange rates. Derivatives used as a part of NCR's risk
management strategy must be designated at inception as hedges and measured for
effectiveness both at inception and on an ongoing basis. NCR primarily uses
forward contracts and options to hedge its foreign currency exposures relating
largely to inventory purchases by marketing units and inventory sales by
manufacturing units. For foreign exchange contracts that hedge firm
commitments, and foreign exchange options contracts that hedge anticipated
transactions, the gains and losses are deferred and recognized as adjustments of
carrying amounts when the underlying hedged transaction is realized, canceled or
otherwise terminated. For other foreign exchange contracts that hedge
anticipated transactions, gains and losses are recognized currently in other
income and expense as exchange rates change. When hedging certain foreign
currency transactions of a long-term investment nature, gains and losses are
recorded in the currency translation adjustment component of stockholders'
equity. Cash payments are primarily based on net gains and losses related to
foreign exchange derivatives and are included in cash flows from operating
activities in the consolidated statements of cash flows. At December 31, 1999,
deferred net gains on foreign exchange options which hedged anticipated
transactions were $3 million, and the unamortized foreign exchange option
premiums were $15 million. The applicable amounts at December 31, 1998 were $6
million and $9 million, respectively.
57
Revenue Recognition
Revenue from product and software license sales is generally recognized upon
performance of contractual obligations, such as shipment, installation or
customer acceptance. To the extent that significant obligations remain or
significant uncertainties exist about customer acceptance of such products or
licenses at the time of sale, revenue is not recognized until the obligations
are satisfied or the uncertainties are resolved. Services and maintenance
revenue is recognized proportionately over the contract period or as services
are performed.
Warranty, Sales Returns and Post Sales Support
Provisions for product warranties, sales returns and allowances and post sales
support are recorded in the period in which the related revenue is recognized.
Capitalized Software
Costs incurred for the development of computer software that will be sold,
leased or otherwise marketed are capitalized when technological feasibility has
been established. In 1999, NCR implemented the Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". As a result, costs incurred for the design, coding, installation
and testing of internal-use software were capitalized beginning in 1999. Both
of these types of costs are recorded as capitalized software and generally
amortized over three years. Capitalized software is subject to an ongoing
assessment of recoverability based upon anticipated future revenues and
identified changes in hardware and software technologies. Costs capitalized
include direct labor and related overhead costs. Amortization of capitalized
software development costs was $63 million in 1999, $65 million in 1998 and $66
million in 1997. Accumulated amortization for software development costs was
$102 million and $105 million at December 31, 1999 and 1998, respectively.
Income Taxes
Income tax expense is provided based on income before income taxes. Deferred
income taxes reflect the impact of temporary differences between assets and
liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes. These deferred taxes are measured by applying
currently enacted tax laws. NCR records valuation allowances related to its
deferred income tax assets when, in the opinion of management, it is more likely
than not that some portion or all of the deferred income tax assets will not be
realized.
58
Net Income Per Common Share
Basic earnings per share is calculated by dividing net income by the weighted
average number of shares outstanding during the reported period. The
calculation of diluted earnings per share is similar to basic, except that the
weighted average number of shares outstanding includes the additional dilution
from potential common stock such as stock options and restricted stock awards.
For the year ended December 31, 1999, the weighted average number of common
shares outstanding used to compute diluted earnings per share included 0.6
million of restricted stock awards and 2.4 million of stock options. For the
year ended December 31, 1998, the weighted average number of common shares
outstanding used to compute diluted earnings per share included 0.5 million of
restricted stock awards and 0.6 million of stock options. For the year ended
December 31, 1997, the dilutive effect of potential common stock had no impact
on reported net income per common share.
Cash, Cash Equivalents and Short-Term Investments
All short-term, highly liquid investments having maturities of three months or
less at the date of acquisition are considered to be cash equivalents. Short-
term investments include certificates of deposit, commercial paper and other
investments having maturities greater than three months at the date of
acquisition. Such investments are stated at cost which approximates fair value
at December 31, 1999 and 1998.
Inventories
Inventories are stated at the lower of average cost or market.
Investments in Marketable Securities
All marketable securities, which are included in other assets, are deemed by
management to be available for sale and are reported at fair value with net
unrealized gains or losses reported, net of tax, within stockholders' equity.
Realized gains and losses are recorded based on the specific identification
method and average cost method, as appropriate, based upon the investment type.
The fair value of the Company's investments in marketable securities in
aggregate was $118 million and $77 million at December 31, 1999 and 1998,
respectively.
Long-Lived Assets and Goodwill
Property, plant, equipment and reworkable service parts are stated at cost less
accumulated depreciation. Reworkable service parts are those parts that can be
reconditioned and used in installation and ongoing maintenance services and
integrated service solutions for NCR's customers. Depreciation is computed over
the estimated useful lives of the related assets primarily on the straight-line
basis. Buildings are depreciated over 25 to 45 years, machinery and equipment
over three to ten years and reworkable service parts over three to five years.
Goodwill is included in other assets and is carried at cost less accumulated
amortization. Amortization is computed on a straight-line basis over useful
lives ranging from 5 to 20 years. Accumulated amortization was $20 million and
$29 million at December 31, 1999 and 1998, respectively.
NCR reviews the carrying value of long-lived assets and goodwill for
impairment when events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. An impairment loss would be
recognized when estimated future undiscounted cash flows expected to result from
the use of the asset and its eventual disposition are less than its carrying
amount.
59
Acquisitions and Divestitures
During 1999, 1998 and 1997, NCR acquired several companies that were not
significant to its financial position, results of operations or cash flows. All
of these acquisitions were accounted for under the purchase method. Acquisition
costs were allocated to the acquired tangible and identifiable intangible assets
and liabilities based on fair market values, with residual amounts recorded as
goodwill. In-process research and development write-offs have not been
significant. In 1999 and 1998, NCR sold assets related to portions of its
businesses to third parties. Unaudited pro forma financial information has not
been presented because the effects of these acquisitions and divestitures were
not material on either an individual or aggregated basis.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1999
presentation.
Recently Issued Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities" which delayed the effective date of Statement of
Financial Accounting Standards No. 133 (SFAS 133), ''Accounting for Derivative
Instruments and Hedging Activities" for one year. SFAS 133 provides guidance
for the recognition and measurement of derivatives and hedging activities. It
requires an entity to record, at fair value, all derivatives as either assets or
liabilities in the balance sheet, and it establishes specific accounting rules
for certain types of hedges. SFAS 133 is now effective for fiscal years
beginning after June 15, 2000 and will be adopted by the Company when required,
if not earlier. The impact, if any, of adopting SFAS 133 on NCR's consolidated
financial position, results of operations and cash flows, has not been
finalized.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), "Revenue Recognition in Financial
Statements", which provides guidance on applying generally accepted accounting
principles for recognizing revenue. SAB 101 is effective for fiscal years
beginning after December 15, 1999. The impact, if any, of adopting SAB 101 on
NCR's consolidated financial position, results of operations and cash flows, has
not been determined.
60
Note 2.
Supplementary Financial Information
Year Ended December 31
------------------------
In millions 1999 1998 1997
- -----------------------------------------------------------------------------
Other Income
Interest income $ 26 $ 44 $ 52
Gain (loss) on sales of assets 107 47 (4)
Other, net 36 32 13
- -----------------------------------------------------------------------------
Total other income, net $169 $ 123 $ 61
- -----------------------------------------------------------------------------
At December 31
-----------------
In millions 1999 1998
- -----------------------------------------------------------------------------
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents $ 571 $ 488
Short-term investments 192 26
- -----------------------------------------------------------------------------
Total cash and short-term investments $ 763 $ 514
- -----------------------------------------------------------------------------
Accounts Receivable
Trade $ 1,047 $ 1,423
Other 181 180
- -----------------------------------------------------------------------------
1,228 1,603
- -----------------------------------------------------------------------------
Less: allowance for doubtful accounts (31) (47)
- -----------------------------------------------------------------------------
Total accounts receivable, net $ 1,197 $ 1,556
- -----------------------------------------------------------------------------
Inventories
Finished goods, net $ 241 $ 324
Work in process and raw materials, net 58 60
- -----------------------------------------------------------------------------
Total inventories $ 299 $ 384
- -----------------------------------------------------------------------------
Other Current Assets
Current deferred tax assets $ 167 $ 67
Other 115 111
- -----------------------------------------------------------------------------
Total other current assets $ 282 $ 178
- -----------------------------------------------------------------------------
Reworkable Service Parts
Reworkable service parts $ 516 $ 555
Less: accumulated depreciation (307) (323)
- -----------------------------------------------------------------------------
Total reworkable service parts, net $ 209 $ 232
- -----------------------------------------------------------------------------
Property, Plant and Equipment
Land and improvements $ 140 $ 155
Buildings and improvements 701 747
Machinery and other equipment 1,170 1,313
- -----------------------------------------------------------------------------
2,011 2,215
- -----------------------------------------------------------------------------
Less: accumulated depreciation (1,218) (1,343)
- -----------------------------------------------------------------------------
Total property, plant and equipment, net $ 793 $ 872
- -----------------------------------------------------------------------------
Other Assets
Prepaid pension cost $ 811 $ 723
Capitalized software, net 116 104
Other 425 329
- -----------------------------------------------------------------------------
Total other assets $ 1,352 $ 1,156
- -----------------------------------------------------------------------------
Accumulated Other Comprehensive Income
Currency translation adjustments $ 30 $ 43
Unrealized gains (losses) on securities 39 (1)
Additional minimum pension liability and other (21) (20)
- -----------------------------------------------------------------------------
Total accumulated other comprehensive income $ 48 $ 22
- -----------------------------------------------------------------------------
61
Note 3.
Business Restructuring
During the fourth quarter of 1999, management approved a restructuring plan
designed to accelerate the Company's transformation from a computer hardware and
product company, to a technology solutions and services provider. A pre-tax
charge of $125 million was recorded in the fourth quarter of 1999 to provide for
restructuring and other related charges as a result of this plan. The plan will
lead to an alignment around three key solutions, an elimination of approximately
1,250 positions and an enhanced leverage of the investment in the Company's Data
Warehousing offering. The three key solutions that the Company will focus on as
a result of the plan are Data Warehousing, Self Service and Store Automation.
In targeted countries, the Company will be exiting certain commodity hardware
businesses, such as entry-level and mid-range computer hardware, to the extent
that it is sold through its non-core solutions, primarily Channel Delivery and
Customer Interaction.
In total, the plan calls for approximately 1,250 employee separations,
including approximately 1,000 separations in locations outside of the United
States, and will include sales, infrastructure support and other positions. As
of December 31, 1999, approximately 8% of the employee separations were
completed.
The pre-tax charge of $125 million was comprised of restructuring and other
related liabilities of $83 million, $35 million of related asset impairments and
$7 million of related software and inventory write-downs. The following table
presents a roll-forward of the liabilities incurred in connection with the 1999
business restructuring, which were all reflected as current liabilities in NCR's
consolidated balance sheet:
Balance Balance
In millions Jan. 01, 1999 Additions Utilizations Dec. 31, 1999
- --------------------------------------------------------------------------------
Type of Cost
Employee separations $ - $76 $ (9) $67
Facility closures - 2 - 2
Contractual settlements and
other exit costs - 5 (1) 4
- --------------------------------------------------------------------------------
Total $ - $83 $(10) $73
- --------------------------------------------------------------------------------
In connection with the restructuring plan, the Company performed a review of
its long-lived assets to identify potential impairments. As a result, NCR
recorded a $35 million charge resulting from the abandonment or write-down of
certain assets, including goodwill related to NCR's networking products
business. Additionally, NCR recorded $7 million of charges for the write-off of
software licenses and inventory write-downs.
62
The total $125 million charge in the fourth quarter was recorded as $8 million
cost of revenue and $117 million selling, general and administrative expenses.
In addition to the $125 million charge recorded in the fourth quarter of 1999,
the Company expects to incur approximately $55 million of additional costs
throughout 2000, primarily related to settling customer obligations that were
not complete as of December 31, 1999. These additional costs will be
appropriately recognized as incurred or as settlements are reached.
In total, the Company expects the pre-tax charge of $125 million to result in
cash outlays of $83 million and non-cash write-offs of $42 million. The cash
outlays are primarily for employee separations, contract cancellations and
settlement of customer obligations. As of December 31, 1999, a total of $10
million of the expected cash payments had been made with the balance expected to
occur throughout 2000. Execution of the plan is anticipated to be substantially
complete by the third quarter of 2000.
Note 4.
Income Taxes
Income before income taxes consists of the following (in millions):
Year Ended December 31
-------------------------
1999 1998 1997
- --------------------------------------------------------------
Income (Loss) Before Income Taxes
U.S. $ 264 $ 272 $(121)
Foreign (29) (60) 148
- --------------------------------------------------------------
Total income before income taxes $ 235 $ 212 $ 27
- --------------------------------------------------------------
Income tax expense (benefit) consists of the following (in millions):
Year Ended December 31
-------------------------
1999 1998 1997
- --------------------------------------------------------------
Income Tax Expense (Benefit)
Current
Federal $ 24 $ 21 $ (17)
State and local 2 (8) (17)
Foreign 59 23 41
Deferred
Federal (218) - -
State and local (14) - -
Foreign 45 54 13
- --------------------------------------------------------------
Total income tax (benefit) expense $(102) $ 90 $ 20
- --------------------------------------------------------------
63
The following table presents the principal components (in millions) of the
difference between the effective tax rate and the U.S. federal statutory income
tax rate:
Year Ended December 31
-------------------------
1999 1998 1997
- --------------------------------------------------------------
Income tax expense at the
U.S. federal tax rate of 35% $ 82 $ 74 $ 10
Foreign income tax differential 74 98 2
U.S. tax losses and valuation
allowance (260) (91) 42
Other, net 2 9 (34)
- --------------------------------------------------------------
Total income tax (benefit) expense $(102) $ 90 $ 20
- --------------------------------------------------------------
NCR's tax provisions include a provision for income taxes in those tax
jurisdictions where its subsidiaries are profitable, but reflect no or only a
portion of the tax benefits related to certain foreign subsidiaries' tax losses
due to the uncertainty of the ultimate realization of future benefits from these
losses. In 1999, U.S. tax losses and valuation allowance includes the effect of
the recognition of the Company's federal and a portion of its state deferred
income taxes that were previously subject to a valuation allowance.
NCR paid income taxes of $61 million, $60 million and $108 million for the
years ended December 31, 1999, 1998 and 1997, respectively.
Deferred income tax assets and liabilities included in the balance sheets at
December 31 were as follows (in millions):
1999 1998
- -------------------------------------------------------------------------
Deferred Income Tax Assets
Employee pensions and other benefits $ 165 $ 242
Other balance sheet reserves and allowances 198 261
Tax loss and credit carryforwards 353 252
Property, plant and equipment 24 31
Other 76 91
- -------------------------------------------------------------------------
Total deferred income tax assets 816 877
Valuation allowance (285) (498)
- -------------------------------------------------------------------------
Net deferred income tax assets 531 379
- -------------------------------------------------------------------------
Deferred Income Tax Liabilities
Property, plant and equipment 93 77
Employee pensions and other benefits 135 122
Taxes on undistributed earnings of foreign subsidiaries 75 126
Other 79 89
- -------------------------------------------------------------------------
Total deferred income tax liabilities 382 414
- -------------------------------------------------------------------------
Total net deferred income tax assets (liabilities) $ 149 $ (35)
- -------------------------------------------------------------------------
64
NCR has recorded valuation allowances related to its deferred income tax
assets due to the uncertainty of the ultimate realization of future benefits
from certain assets. The 1999 net change in the valuation allowance is
primarily attributable to the $232 million reduction in the Company's U.S.
deferred tax valuation allowance as a result of the U.S. operations achieving
sustained profitability partially offset by incremental foreign deferred tax
valuation allowances. As of December 31, 1999, NCR has U.S. federal and foreign
tax loss carryforwards of approximately $560 million. The tax loss
carryforwards subject to expiration expire in years 2001 through 2019.
NCR has not provided for U.S. federal income taxes or foreign withholding
taxes on approximately $612 million and $399 million of undistributed earnings
of a foreign subsidiary as of December 31, 1999 and 1998, respectively, because
such earnings are intended to be reinvested indefinitely.
The income tax effect relating to comprehensive income for 1999 was $5
million; in 1998 and 1997 the tax effects were not significant as a result of
the Company's tax position in those years.
Note 5.
Debt Obligations
NCR has debt with scheduled maturities within one year of $37 million and $50
million as of December 31, 1999 and 1998, respectively. The weighted average
interest rate for such debt was 7.7% at December 31, 1999 and 7.3% at December
31, 1998. NCR has long-term debt and notes totaling $40 million and $33 million
at December 31, 1999 and 1998, respectively. These obligations have U.S. dollar
equivalent interest rates ranging from 7.64% to 9.49% with scheduled maturity
dates from 2001 to 2020. The scheduled maturities of the outstanding long-term
debt and notes during the next five years are: $28 million in 2001, $5 million
in 2003 and the remainder after 2005. Interest paid was approximately $16
million, $13 million and $19 million in 1999, 1998 and 1997, respectively.
In 1996, NCR entered into a five-year, unsecured revolving credit facility
with a syndicate of commercial banks and financial institutions. The credit
facility provides that NCR may borrow on a revolving credit basis an aggregate
principal amount of up to $600 million. The credit facility matures in 2001 and
contains certain representations and warranties, conditions, affirmative,
negative and financial covenants and events of default customary for such
facilities. Interest rates charged on borrowings outstanding under the credit
facility are based on prevailing market rates. No amounts were outstanding
under the facility as of December 31, 1999 or 1998.
65
Note 6.
Employee Benefit Plans
Pension and Postretirement Plans
NCR sponsors defined benefit plans for substantially all U.S. employees and the
majority of international employees. For salaried employees, the defined
benefit plans are based primarily upon compensation and years of service. For
certain hourly employees in the U.S., the benefits are based on a fixed dollar
amount per year of service. NCR's funding policy is generally to contribute
annually not less than the minimum required by applicable laws and regulations.
Assets of NCR's defined benefit plans are primarily invested in publicly-traded
common stocks, corporate and government debt securities, real estate investments
and cash or cash equivalents.
Prior to September 1998, substantially all U.S. employees who reached
retirement age while working for NCR were eligible to participate in a
postretirement benefit plan. The plan provides medical care and life insurance
benefits to retirees and their eligible dependents. In September 1998, the plan
was amended whereby participants who had not reached a certain age and years of
service with NCR were no longer eligible for such benefits. In 1998, NCR
recognized a $19 million pre-tax gain on the curtailment of these benefits and
expects that this and other plan changes will favorably impact future
postretirement net benefit costs. Non-U.S. employees are typically covered
under government sponsored programs, and NCR generally does not provide
postretirement benefits other than pensions to non-U.S. retirees. NCR generally
funds these benefits on a pay-as-you-go basis from operations.
Reconciliations of the beginning and ending balances of the benefit
obligations for NCR's pension and postretirement benefit plans were (in
millions):
Pension Benefits Postretirement Benefits
------------------ -----------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at January 1 $3,422 $3,084 $ 316 $ 394
Gross service cost 83 78 1 4
Interest cost 225 222 23 27
Amendments 16 7 - (90)
Actuarial (gain) loss (31) 328 20 36
Benefits paid (204) (204) (34) (36)
Curtailment (1) - - (19)
Settlement (1) (145) - -
Currency translation adjustments (47) 52 - -
- --------------------------------------------------------------------------------
Benefit Obligation at December 31 $3,462 $3,422 $ 326 $ 316
- --------------------------------------------------------------------------------
66
A reconciliation of the beginning and ending balances of the fair value of the
plan assets of NCR's pension plans follows (in millions):
Pension Benefits
------------------
1999 1998
- --------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at
January 1 $4,000 $3,662
Actual return on plan assets 924 573
Company contributions 67 72
Plan participant contributions 5 6
Benefits paid (204) (204)
Settlement (1) (145)
Currency translation adjustments (84) 36
- --------------------------------------------------------
Fair Value of Plan Assets at
December 31 $4,707 $4,000
- --------------------------------------------------------
Accrued pension and/or postretirement benefit assets (liabilities) included in
NCR's consolidated balance sheet at December 31 were (in millions):
Pension Benefits Postretirement Benefits
------------------ -----------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Reconciliation to Balance Sheet
Funded status $1,245 $ 578 $(326) $(316)
Unrecognized net gain (779) (205) (15) (35)
Unrecognized prior service cost 38 40 (46) (58)
Unrecognized transition asset (47) (69) - -
- --------------------------------------------------------------------------------
Net Amount Recognized $ 457 $ 344 $(387) $(409)
- --------------------------------------------------------------------------------
Total Recognized Amounts Consist of:
Prepaid benefit cost $ 811 $ 723 $ - $ -
Accrued benefit liability (380) (401) (387) (409)
Intangible asset 5 2 - -
Accumulated other comprehensive income 21 20 - -
- --------------------------------------------------------------------------------
Net Amount Recognized $ 457 $ 344 $(387) $(409)
- --------------------------------------------------------------------------------
The weighted average rates and assumptions utilized in accounting for these
plans for the years ended December 31 were:
Pension Benefits Postretirement Benefits
------------------ -----------------------
1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------
Discount rate 7.0% 6.8% 7.3% 7.5% 7.0% 7.5%
Expected return on plan assets 10.0% 10.0% 9.6% - - -
Rate of compensation increase 4.1% 4.3% 4.3% 4.3% 4.3% 4.3%
67
For postretirement benefit measurement purposes, NCR assumed growth in the per
capita cost of covered health care benefits (the health care cost trend rate)
would gradually decline from 9.5% and 7.0%, pre-65 and post-65, respectively, in
1999 to 5.0% by the year 2006. In addition, a one percentage point change in
assumed health care cost trend rates would have the following effect on the
postretirement benefit costs and obligation (in millions):
1% Increase 1% Decrease
- ---------------------------------------------------------------------------
1999 service cost and interest cost $ 2 $ (2)
Postretirement benefit obligation at
December 31, 1999 $ 22 $ (20)
The net periodic benefit cost for the plans for the years ended December 31,
follows (in millions):
Pension Benefits Postretirement Benefits
------------------ -----------------------
1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------
Net service cost $ 78 $ 75 $ 69 $ 1 $ 4 $ 5
Interest cost 225 222 204 23 27 28
Expected return on plan assets (360) (349) (314) - - -
Settlement - 46 - - - -
Curtailment - - - - (19) -
Amortization of:
Transition asset (22) (22) (21) - - -
Prior service cost 16 17 17 (12) (3) 2
Actuarial losses (gains) 3 4 (2) - (1) (3)
- ------------------------------------------------------------------------------
Net Benefit Cost $ (60) $ (7) $ (47) $ 12 $ 8 $ 32
- ------------------------------------------------------------------------------
In 1998, NCR recognized a $50 million pre-tax non-recurring pension charge
relating to its Japanese subsidiary.
For pension plans with accumulated benefit obligations in excess of plan
assets, the projected benefit obligation, accumulated benefit obligation and
fair value were $504 million, $401 million and $31 million, respectively, at
December 31, 1999 and $460 million, $386 million and $10 million, respectively,
at December 31, 1998.
While NCR was owned by AT&T Corp. (AT&T), the assets of NCR's U.S. pension
plans were held as part of a master trust managed by AT&T. The valuation of the
December 31, 1996 assets attributable to the AT&T, Lucent and NCR pension plans
were finalized resulting in an additional $230 million in assets to NCR and a
corresponding decrease of $23 million in NCR's 1997 pension expense.
68
In 1996, NCR entered into an agreement with the Pension Benefit Guaranty
Corporation (PBGC) concerning the provision by NCR of additional support for its
domestic defined benefit pension plans. Under this agreement, among other terms
and conditions, NCR agreed to provide security interests in support of such
plans in collateral with an aggregate value (calculated by applying specified
discounts to market value) of $84 million. This collateral is comprised of
certain domestic real estate. NCR does not believe that its agreement with the
PBGC will have a material effect on its financial condition, results of
operations or cash flows.
Savings Plans
All U.S. employees and many international employees participate in defined
contribution savings plans. These plans generally provide either a specified
percent of pay or a matching contribution on participating employees' voluntary
elections. NCR's matching contributions typically are subject to a maximum
percentage or level of compensation. Employee contributions can be made pre-
tax, after-tax or a combination thereof. The expense under these plans was
approximately $28 million, $24 million and $30 million for 1999, 1998 and 1997,
respectively.
Other Postemployment Benefits
NCR offers various postemployment benefits to involuntarily terminated and
certain inactive employees after employment but before retirement. These
benefits are paid in accordance with NCR's established postemployment benefit
practices and policies. Postemployment benefits may include disability
benefits, supplemental unemployment benefits, severance, workers' compensation
benefits and continuations of health care benefits and life insurance coverage.
The accrued postemployment liability at December 31, 1999 and 1998 was $275
million and $271 million, respectively.
Note 7.
Acquisition of Minority Interest in Subsidiary
During 1998, NCR acquired an additional 27% ownership interest in its Japanese
subsidiary, NCR Japan, Ltd. at a cost of $274 million, increasing NCR's
ownership of the subsidiary to over 97%. As a result of the acquisition, which
is being accounted for as a purchase, goodwill of approximately $65 million was
recorded by NCR and is being amortized on a straight-line basis over 20 years.
On a pro forma basis, the impact of the transaction on NCR's consolidated net
income and net income per share for the years ended December 31, 1998 and 1997
was not material.
69
Note 8.
Stock Compensation Plans, Purchases of Company Common Stock and Put Options
Stock Compensation Plans
The NCR Management Stock Plan provides for the grant of several different forms
of stock-based benefits, including stock options, stock appreciation rights,
restricted stock awards, performance awards, other stock unit awards and other
rights, interests or options relating to shares of NCR common stock to employees
and non-employee directors. Stock options are generally granted at the fair
market value of the common stock at the date of grant, generally have a ten-year
term and vest within three years of the grant date. Grants that were issued
before 1998 generally had a four-year vesting period. Options to purchase
common stock may be granted under the authority of the Board of Directors.
Option terms as determined by the Compensation Committee of the Board will not
exceed ten years, as consistent with the Internal Revenue Code. The number of
shares of common stock authorized and available for grant under this plan were
approximately 17 million and 5 million, respectively, at December 31, 1999.
NCR adopted the WorldShares Plan effective as of December 31, 1996, the date
AT&T distributed to its stockholders all of its interest in NCR on the basis of
one share of NCR common stock for each 16 shares of AT&T common stock (the
Distribution). The plan provides for the grant of nonstatutory stock options to
substantially all NCR employees. NCR provided each participant with an option to
purchase shares of NCR common stock with an aggregate market value of $3,000 as
of the Distribution date. Such options have an exercise price of $33.44, equal
to the market value of NCR common stock on January 2, 1997, and have a five-year
expiration period. Subject to certain conditions, participants became fully
vested and able to exercise their options January 2, 1998. The number of shares
authorized and available for grant under this plan were approximately 7 million
and 4 million, respectively, at December 31, 1999.
A summary of stock option activity under the NCR Management Stock Plan and the
WorldShares Plan follows (shares in thousands):
1999 1998 1997
----------------- ----------------- ------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
- --------------------------------------------------------------------------------------------
Outstanding at beginning of year 12,906 $33.13 12,521 $33.26 6,871 $32.34
Granted 3,967 40.64 2,904 31.87 6,491 33.24
Exercised (1,631) 31.36 (703) 27.13 (425) 20.43
Canceled (504) 36.47 (1,552) 33.95 (349) 34.91
Forfeited (161) 33.27 (264) 36.06 (67) 34.53
- --------------------------------------------------------------------------------------------
Outstanding at end of year 14,577 $35.22 12,906 $33.13 12,521 $33.26
- --------------------------------------------------------------------------------------------
70
The following table summarizes information about stock options outstanding at
December 31, 1999 (shares in thousands):
Stock Options Outstanding Stock Options Exercisable
------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
- -----------------------------------------------------------------------------
$5.92 to $14.51 68 1.21 years $12.35 68 $12.35
$15.28 to $29.72 870 3.04 years 23.87 755 23.47
$30.31 to $51.63 13,639 6.50 years 36.06 7,340 34.52
- -----------------------------------------------------------------------------
Total 14,577 $35.22 8,163 $33.31
- -----------------------------------------------------------------------------
NCR accounts for its stock-based compensation plans using the intrinsic value-
based method, which requires compensation expense for options to be recognized
when the market price of the underlying stock exceeds the exercise price on the
date of grant. Compensation cost charged against income for NCR's stock-based
plans was not material in 1999, 1998 and 1997. Had NCR recognized stock-based
compensation expense based on the fair value of granted options at the grant
date, net income (loss) and net income (loss) per diluted share for the years
ended December 31 would have been as follows (in millions, except per share
amounts):
1999 1998 1997
- -------------------------------------------------------------------------
Net income (loss) As reported $ 337 $ 122 $ 7
Pro forma 309 81 (58)
Net income (loss) per diluted share As reported $3.35 $ 1.20 $0.07
Pro forma 3.07 0.80 (0.57)
The pro forma amounts in 1997 contain a charge for the January 2, 1997 grant
of options to substantially all NCR employees under the WorldShares Plan of $32
million. The pro forma amounts shown above are not necessarily indicative of
the effects on net income (loss) and net income (loss) per diluted share in
future years.
The above pro forma net income (loss) and net income (loss) per diluted share
for all periods presented were computed using the fair value of options as
calculated using the Black-Scholes option-pricing method. The following
weighted average assumptions were used for the years ended December 31:
1999 1998 1997
------ ------ ------
Dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 4.97% 5.35% 6.35%
Expected volatility 40.00% 40.00% 40.00%
Expected holding period (years) 5.00 5.00 4.06
71
The weighted average fair value of NCR stock options calculated using the
Black-Scholes option-pricing model for options granted during the years ended
December 31, 1999, 1998 and 1997 was $17.39, $13.85 and $13.14 per share,
respectively.
The NCR Employee Stock Purchase Plan enables eligible employees to purchase
NCR's common stock at 85% of the average market price at the end of the last
trading day of each month. Employees may authorize payroll deductions of up to
10% of eligible compensation for common stock purchases. During 1999, 1998 and
1997, employees purchased approximately 900 thousand, one million and one
million shares, respectively, of NCR common stock for approximately $30 million,
$28 million and $28 million, respectively. The number of shares authorized for
future issuance and available for grant under this plan at December 31, 1999
were approximately 8 million and 5 million, respectively.
Purchase of Company Common Stock
As of December 31, 1999, the Company committed $282 million of the total $500
million authorized by the Board of Directors on April 15, 1999 and October 21,
1999 for share repurchase programs. A portion of the funds was used to cash out
fractional interests in NCR stock resulting from a 1-for-10 reverse stock split,
followed immediately by a 10-for-1 forward split of NCR's common stock, on May
14, 1999. This program effectively cashed out registered stockholders who held
fewer than 10 shares of NCR common stock in a record account as of May 14, 1999.
As a result of the reverse/forward stock split initiative, approximately 2.4
million shares were repurchased at a cost of $42.38 per share. Additionally, in
the second, third and fourth quarters of 1999, 5.1 million shares were
repurchased on the open market, at an average cost of $35.25 per share.
On April 16, 1998, NCR's Board of Directors approved a share repurchase
program authorizing the purchase of shares of Company common stock valued up to
$200 million. In the third quarter of 1998, NCR completed its 1998 stock
buyback program, purchasing a total of 6.3 million shares at a cost of $200
million.
Put Options
In a single private placement in 1999, the Company sold put options that entitle
the holder of each option to sell to the Company, by physical delivery, 400,000
shares of common stock at a specified price. In 1999, the activity is
summarized as follows:
Put Options Outstanding
Cumulative -----------------------
Net Premium Number of Potential
In millions Received Options Obligation
- ---------------------------------------------------------
December 31, 1998 $ - - $ -
Sales 1.1 0.4 13.1
Exercises - - -
Expirations - - -
- ---------------------------------------------------------
December 31, 1999 $ 1.1 0.4 $13.1
- ---------------------------------------------------------
The amount related to the Company's $13 million potential repurchase
obligation has been reclassified from stockholders' equity to put options. Each
option is exercisable only at expiration, and all options expire on March 1,
2000. The options have an exercise price of $32.64 per share. These put option
obligations had no significant effect on diluted earnings per share for the
periods presented.
72
Note 9.
Financial Instruments
In the normal course of business, NCR enters into various financial instruments,
including derivative financial instruments. These instruments primarily consist
of foreign exchange forward contracts and options which are used to reduce NCR's
exposure to changes in currency exchange rates. At inception, foreign exchange
contracts are designated as hedges of firmly committed or forecasted
transactions. These transactions are generally expected to occur in less than
one year. The forward contracts and options generally mature within twelve
months. The majority of NCR's foreign exchange forward contracts were to
exchange British pounds, Canadian dollars and German marks.
Letters of Credit
Letters of credit are purchased guarantees that ensure NCR's performance or
payment to third parties in accordance with specified terms and conditions.
Letters of credit may expire without being drawn upon. Therefore, the total
notional or contract amounts do not necessarily represent future cash flows.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, short-term investments, accounts
receivable, accounts payable and other current liabilities approximate fair
value due to the short maturity of these instruments. The fair values of long-
term debt and foreign exchange contracts are based on market quotes of similar
instruments. The fair value of letters of credit are based on fees charged for
similar agreements. The table below presents the fair value, carrying value and
notional amount of foreign exchange contracts, debt and letters of credit at
December 31, 1999 and 1998. The notional amounts represent agreed-upon amounts
on which calculations of dollars to be exchanged are based, and are an
indication of the extent of NCR's involvement in such instruments. They do not
represent amounts exchanged by the parties and, therefore, are not a measure of
the instruments.
Contract Carrying Amount Fair Value
Notional ------------------- ----------------
In millions Amount Asset Liability Asset Liability
- -------------------------------------------------------------------------------------
1999
Foreign exchange forward contracts $467 $19 $24 $19 $30
Foreign currency options 403 19 2 19 2
Debt - - 77 - 77
Letters of credit 44 - - - -
1998
Foreign exchange forward contracts $902 $37 $37 $57 $39
Foreign currency options 309 16 1 12 2
Debt - - 83 - 85
Letters of credit 47 - - - -
Fair values of financial instruments represent estimates of possible value
that may not be realized in the future.
73
Concentration of Credit Risk
Financial instruments that potentially subject NCR to concentrations of credit
risk consist primarily of cash and cash equivalents, short-term investments,
accounts receivables and hedging instruments. By their nature, all such
financial instruments involve risk, including the credit risk of nonperformance
by counterparties, and the maximum potential loss may exceed the amount
recognized in the balance sheet. At December 31, 1999 and 1998, in management's
opinion, there was no significant risk of loss in the event of nonperformance of
the counterparties to these financial instruments. Exposure to credit risk is
managed through credit approvals, credit limits, selecting major international
financial institutions (as counterparties to hedging transactions) and
monitoring procedures, and management believes that the reserves for losses are
adequate. NCR had no significant exposure to any individual customer or
counterparty at December 31, 1999 or 1998, nor does NCR have any major
concentration of credit risk related to any financial instrument.
Note 10.
Segment Information and Concentrations
NCR operates in the information technology industry, which includes designing,
developing and marketing technology and business solutions worldwide.
Operating Segment Information
NCR assesses performance and allocates resources based principally on the
customers served and the industries in which such customers operate.
Accordingly, NCR categorizes its operations into four strategic segments:
Retail, Financial, Teradata Solutions Group (TSG) and Systemedia. The Retail
and Financial industry segments serve customers that operate in the respective
industries. TSG provides solutions, products and services to customers in the
telecommunications, transportation, insurance, utilities, electronic commerce
industries, consumer goods manufacturers and government entities. The
Systemedia segment develops, produces and markets consumable media products
principally for customers in industries served by NCR's other operating
segments.
74
Through its Retail industry segment, NCR provides a full line of solutions to
improve customer service and operating efficiency for customers in the retail
industry. Offerings for the retail industry are grouped into two solutions
portfolios: Store Automation and Retail Data Warehousing. NCR's Financial
industry segment provides a full line of solutions to customers in the financial
services industry with particular focus on retail banking. These offerings are
included in four solution portfolios: Self Service, Financial Data Warehousing,
Payment and Imaging and Channel Delivery. The Company's TSG segment provides
solutions to integrate software, hardware, professional consulting services,
customer support services and products from leading technology firms that
partner with NCR to meet customer needs. TSG offerings are grouped primarily
into two solutions portfolios: National Accounts Data Warehousing and Customer
Interaction. Professional consulting and customer support services are also
offered through NCR's Retail, Financial and TSG segments. In addition, third-
party applications and technologies are incorporated into the solutions and
systems NCR provides through its operating segments. NCR's "All other segments"
accumulates the revenue and operating income not attributable to the above
operating segments as well as unallocated corporate expenses.
As a result of the 1999 restructuring program, NCR will be changing its
definition of strategic operating segments and its associated reporting
framework for 2000. The new reporting segments in 2000 will be Store Automation,
Self Service, Data Warehousing, Systemedia and Other. All of these segments will
include hardware, software, professional consulting and customer support
services.
The following tables present data for revenue and operating income by industry
operating segments for the years ended December 31 (in millions):
1999 1998 1997
- -----------------------------------------------------------------------------
Revenue
Retail $1,558 $1,447 $1,373
Financial 2,568 2,888 2,845
Teradata Solutions Group 1,485 1,497 1,562
Systemedia 506 515 510
All other segments 79 158 299
- -----------------------------------------------------------------------------
Consolidated revenue $6,196 $6,505 $6,589
- -----------------------------------------------------------------------------
Operating Income (Loss)
Retail $ 32 $ (25) $ (62)
Financial 100 178 151
Teradata Solutions Group 46 (42) (113)
Systemedia 25 35 43
Unallocated corporate expenses and other segments - 6 (38)
Restructuring and other special charges (125) (50) -
- -----------------------------------------------------------------------------
Consolidated operating income (loss) $ 78 $ 102 $ (19)
- -----------------------------------------------------------------------------
75
The assets attributable to NCR's industry operating segments consist primarily
of accounts receivable, inventories and manufacturing assets dedicated to a
specific segment. Operating segment assets at December 31 were (in millions):
1999 1998 1997
- ---------------------------------------------------------------
Operating Segment Assets
Retail $ 384 $ 464 $ 444
Financial 699 969 874
Teradata Solutions Group 469 578 683
Systemedia 185 192 200
- ---------------------------------------------------------------
Operating segment assets 1,737 2,203 2,201
Assets not attributable to segments 3,158 2,689 3,175
- ---------------------------------------------------------------
Consolidated assets $4,895 $4,892 $ 5,376
- ---------------------------------------------------------------
Assets not attributable to segments consist primarily of fixed assets not
dedicated to a specific segment, prepaid pension costs, cash equivalents and
short-term investments.
The following tables present revenue by product and service line and
geographic area for NCR for the years ended December 31, 1999, 1998 and 1997.
Revenues are attributed to geographic areas/countries based principally upon the
geographic area/country to which the product is delivered or in which the
service is provided.
Revenue by Product and Service Line
In millions 1999 1998 1997
- --------------------------------------------------------------------------------
Store Automation $ 955 $ 841 $ 828
Self Service 1,097 1,116 1,031
Data Warehousing 735 695 684
Customer Service Maintenance 1,777 1,912 1,759
Systemedia 506 515 510
Other 1,126 1,426 1,777
- --------------------------------------------------------------------------------
Consolidated revenue $6,196 $6,505 $6,589
- --------------------------------------------------------------------------------
Revenue by Geographic Area
In millions 1999 1998 1997
- --------------------------------------------------------------------------------
United States $2,655 $2,846 $2,735
Americas (excluding United States) 533 523 476
Europe/Middle East/Africa 1,941 2,046 1,976
Japan 612 687 859
Asia/Pacific (excluding Japan) 455 403 543
- --------------------------------------------------------------------------------
Consolidated revenue $6,196 $6,505 $6,589
- --------------------------------------------------------------------------------
76
The following tables present certain long-lived assets by country at December
31:
Property, Plant and Equipment, Net
In millions 1999 1998 1997
- --------------------------------------------------------------------------------
United States $ 341 $ 366 $ 411
Japan 189 210 130
All other countries 263 296 317
- --------------------------------------------------------------------------------
Consolidated property, plant and equipment, net $ 793 $ 872 $ 858
- --------------------------------------------------------------------------------
Reworkable Service Parts, Net
In millions 1999 1998 1997
- --------------------------------------------------------------------------------
United States $ 95 $ 117 $ 137
Japan 16 18 18
All other countries 98 97 93
- --------------------------------------------------------------------------------
Consolidated reworkable service parts, net $ 209 $ 232 $ 248
- --------------------------------------------------------------------------------
Concentrations
No single customer accounts for more than 10% of NCR's consolidated revenue. As
of December 31, 1999, NCR is not aware of any significant concentration of
business transacted with a particular customer that could, if suddenly
eliminated, have a material adverse impact on NCR's operations. NCR also does
not have a concentration of available sources of labor, services, licenses or
other rights that could, if suddenly eliminated, have a material adverse impact
on its operations.
A number of NCR's products, systems and solutions rely primarily on specific
suppliers for microprocessors and other component products, operating systems,
commercial databases and other central components. There can be no assurances
that any sudden impact to the availability or cost of these technologies would
not have a material adverse impact on NCR's operations.
Inventories are routinely subject to changes in value, resulting from rapid
technological change, intense price competition and changes in customer demand
patterns. While NCR has provided for estimated declines in the market value of
inventories, no estimate can be made of a range of amounts of loss that are
reasonably possible under various competitive conditions.
77
Note 11.
Contingencies
In the normal course of business, NCR is subject to various regulations,
proceedings, lawsuits, claims and other matters, including actions under laws
and regulations related to the environment and health and safety, among others.
NCR believes the amounts provided in its consolidated financial statements, as
prescribed by generally accepted accounting principles, are adequate in light of
the probable and estimable liabilities. However, there can be no assurances
that the actual amounts required to discharge alleged liabilities from various
lawsuits, claims, legal proceedings and other matters, including the Fox River
matter discussed below, and to comply with applicable laws and regulations, will
not exceed the amounts reflected in NCR's consolidated financial statements or
will not have a material adverse effect on its consolidated results of
operations, financial condition or cash flows. Any amounts of costs that may be
incurred in excess of those amounts provided as of December 31, 1999 cannot
currently be determined.
Environmental Matters
NCR's facilities and operations are subject to a wide range of environmental
protection laws and has investigatory and remedial activities underway at a
number of facilities that it currently owns or operates, or formerly owned or
operated, to comply, or to determine compliance, with such laws. Also, NCR has
been identified, either by a government agency or by a private party seeking
contribution to site cleanup costs, as a potentially responsible party (PRP) at
a number of sites pursuant to various state and federal laws, including the
Federal Water Pollution Control Act (FWPCA) and comparable state statutes, and
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended (CERCLA), and comparable state statutes.
Various federal agencies, Native American tribes and the State of Wisconsin
(Claimants) consider NCR to be a PRP under the FWPCA and CERCLA for alleged
natural resource damages (NRD) and remediation liability with respect to the Fox
River and related Green Bay environment (Fox River System) due to, among other
things, sediment contamination in the Fox River System allegedly resulting in
part from NCR's former carbonless paper manufacturing in Wisconsin. Claimants
have also notified a number of other paper manufacturing
78
companies of their status as PRPs resulting from their ongoing or former paper
manufacturing operations in the Fox River Valley, and Claimants have entered
into a Memorandum of Agreement among themselves to coordinate their actions,
including the assertion of claims against the PRPs. Additionally, the federal
NRD Claimants have notified NCR and the other PRPs of their intent to commence a
NRD lawsuit, but have not as yet instituted litigation. In addition, one of the
Claimants, the United States Environmental Protection Agency (USEPA), has
formally proposed the Fox River for inclusion on the CERCLA National Priorities
List. In February 1999, the State of Wisconsin made available for public review
a draft remedial investigation and feasibility study (RI/FS), which outlines a
variety of alternatives for addressing the Fox River sediments. While the draft
RI/FS did not advocate any specific alternative or combination of alternatives,
the estimated total costs provided in the draft RI/FS ranged from $0 for no
action (which appears to be an unlikely choice) to between $143 million and $721
million depending on the alternative selected. In addition, one of the federal
NRD claimants has released an interim estimate of alleged losses from lost
recreational fishing opportunities of between $106 million and $147 million.
NCR, in conjunction with the other PRPs, has developed a substantial body of
evidence which it believes should demonstrate that selection of alternatives
involving river-wide restoration/remediation, particularly massive dredging,
would be inappropriate and unnecessary. However, because there is ongoing debate
within the scientific, regulatory, legal, public policy and legislative
communities over how to properly manage large areas of contaminated sediments,
NCR believes there is a high degree of uncertainty about the appropriate scope
of alternatives that may ultimately be required by the Claimants. An accurate
estimate of NCR's ultimate share of restoration/remediation and damages
liability cannot be made at this time due to uncertainties with respect to: the
scope and cost of the potential alternatives; the outcome of further federal and
state NRD assessments; the amount of NCR's share of such restoration/remediation
expenses; the timing of any restoration/remediation; the evolving nature of
restoration/remediation technologies and governmental policies; the
contributions from other parties; and the recoveries from insurance carriers and
other indemnitors. NCR believes the other currently named PRPs would be required
and able to pay substantial shares toward restoration and remediation, and that
there are additional parties, some of which have substantial resources, that may
also be liable. Further, in 1978 NCR sold the business to which the claims
apply, and NCR and the buyer have reached an interim settlement agreement under
which the parties are sharing both defense and liability costs.
79
It is difficult to estimate the future financial impact of environmental laws,
including potential liabilities. NCR accrues environmental provisions when it
is probable that a liability has been incurred and the amount or range of the
liability is reasonably estimable. Provisions for estimated losses from
environmental restoration and remediation are, depending on the site, based
primarily on internal and third-party environmental studies, estimates as to the
number and participation level of any other PRPs, the extent of the
contamination, and the nature of required remedial and restoration actions.
Accruals are adjusted as further information develops or circumstances change.
Management expects that the amounts accrued from time to time will be paid out
over the period of investigation, negotiation, remediation and restoration for
the applicable sites, which may as to the Fox River site be 10 to 20 years or
more. The amounts provided for environmental matters in NCR's consolidated
financial statements are the estimated gross undiscounted amount of such
liabilities, without deductions for insurance or third-party indemnity claims.
Except for the sharing arrangement described above with respect to the Fox
River, in those cases where insurance carriers or third-party indemnitors have
agreed to pay any amounts and management believes that collectibility of such
amounts is probable, the amounts are reflected as receivables in the
consolidated financial statements.
Legal Proceedings
NCR was named as one of the defendants in a purported class-action suit filed in
November 1996 in Florida alleging liability based on state antitrust and common-
law claims of unlawful restraints of trade, monopolization, and unfair business
practices related to a purported agreement between Siemens Nixdorf Printing
Systems, L.P. and NCR. In January 1999, NCR agreed to settle this suit with
plaintiffs for an undisclosed and non-material amount. Preliminary approval of
this settlement has been granted by the court, but final approval by the parties
to the litigation and the court is still pending.
80
Note 12.
Leases
NCR conducts certain of its sales and manufacturing operations using leased
facilities, the initial lease terms of which vary in length. Many of the leases
contain renewal options and escalation clauses. Future minimum lease payments
under noncancelable leases as of December 31, 1999 were:
Later
In millions 2000 2001 2002 2003 2004 Years Total
- ---------------------------------------------------------------------
Operating leases $ 53 $ 39 $ 28 $ 21 $ 12 $37 $ 190
Total rental expense for operating leases was $99 million, $76 million and $81
million in 1999, 1998 and 1997, respectively.
Note 13.
Quarterly Information (Unaudited)
In millions, except
per share amounts First Second 1 Third 2 Fourth 3,4 Total
- ----------------------------------------------------------------------
1999
Total revenues $1,333 $1,572 $1,530 $1,761 $6,196
Gross margin 383 497 463 541 1,884
Net income 3 46 53 235 337
Net income per share:
Basic $ 0.03 $ 0.47 $ 0.54 $ 2.47 $ 3.45
Diluted 0.03 0.45 0.53 2.44 3.35
1998
Total revenues $1,309 $1,574 $1,555 $2,067 $6,505
Gross margin 354 472 461 635 1,922
Net income - 48 25 49 122
Net income per share:
Basic $ 0.0 $ 0.47 $ 0.25 $ 0.50 $ 1.21
Diluted 0.0 0.46 0.25 0.49 1.20
1 In the second quarter of 1998, NCR recognized a $55 million pre-tax gain
on the sale of its TOP END(R) middleware technology and products family.
2 In the third quarter of 1999, net income includes a pre-tax gain of $21
million from the sale of real estate in Madrid, Spain.
3 In the fourth quarter of 1999, NCR recognized $125 million pre-tax expense
related to restructuring and other related charges as more fully explained
in Note 3. Also, in the fourth quarter of 1999, NCR released U.S. deferred
tax valuation allowances of $232 million as more fully explained in Note 4.
In addition, net income includes a pre-tax gain of $77 million from the
sale of real estate in Akasaka, Japan.
4 In the fourth quarter of 1998, NCR recognized a $50 million pre-tax loss on
the settlement of pension benefit obligations relating to a reduction in
workforce of the Company's Japanese subsidiary.
81