EXHIBIT 13
UNISYS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
During 2000, Unisys implemented a major transition of
its business to meet the new requirements of the
e-business marketplace. The company took actions during
the year to focus its resources on new high-growth
markets; de-emphasize non-strategic, low-growth and
low-margin businesses and products; and reduce its cost
structure in line with its new, more focused business
model. In particular, the company:
. Streamlined and repositioned its portfolio of
industry-specific repeatable solutions to focus
on high-growth market segments including
customer relationship management (CRM),
e-commerce, e-procurement and mobile commerce;
. Drove growth in its outsourcing business by
pursuing joint ventures and other new business
models;
. Focused its networking business on high value-
added services, such as managed network
outsourcing services, network consulting, and an
expanded network security management practice;
and
. Continued to focus its technology business on
high-end, enterprise-class servers and to de-
emphasize low-margin commodity products.
As a result of these actions, in the fourth
quarter of 2000, the company recorded a pretax
restructuring charge of $127.6 million, or $.29 per
diluted share, primarily for a work-force reduction.
See Note 5 of the Notes to Consolidated Financial
Statements.
In addition, the company has engaged an investment
banking firm to explore strategic alternatives for its
Federal government business, including a potential
sale. The company estimates that revenue in 2000
related to the Federal government business and the
businesses exited or de-emphasized as a result of the
actions taken above was approximately $1.3 billion.
Income related to this revenue was immaterial.
28
RESULTS OF OPERATIONS
The company's financial results for 2000 reflected the transition in its
business model. Net income in 2000 declined to $225.0 million, or $.71 per
diluted common share, from $510.7 million, or $1.59 per diluted common share, in
1999. The results for 2000 included the special charge of $127.6 million, or
$.29 per diluted common share, as well as an extraordinary charge of $19.8
million, or $.06 per diluted share, for the early extinguishment of debt.
Excluding these items, diluted earnings per share in 2000 was $1.06. The results
for 1999 included a one-time tax benefit of $22.0 million, or $.07 per diluted
common share, related to a U.S. Treasury income tax regulation, as well as an
extraordinary charge of $12.1 million, or $.04 per diluted share, for the early
extinguishment of debt. Excluding those items, diluted earnings per share in
1999 was $1.56.
THE FOLLOWING COMPARISONS OF INCOME STATEMENT CATEGORIES EXCLUDE THE
ONE-TIME ITEMS IN 2000 AND 1999.
Revenue for 2000 was $6.89 billion compared to $7.54 billion in 1999 and
$7.24 billion in 1998. Revenue in 2000 decreased 9% from the prior year, and
revenue in 1999 increased 4% from 1998. Excluding the negative impact of foreign
currency fluctuations, revenue in 2000 declined 5% and revenue in 1999 increased
7%. Revenue from international operations in 2000, 1999, and 1998 was $4.01
billion, $4.19 billion and $4.09 billion, respectively. Revenue from U.S.
operations was $2.88 billion in 2000, $3.35 billion in 1999, and $3.15 billion
in 1998.
Total gross profit percent was 31.2% in 2000, 35.6% in 1999, and 34.1% in
1998. The decrease in 2000 from 1999 was principally due to a lower mix of
higher-margin products and services and reduced utilization of services
personnel. The increase in 1999 from 1998 was largely due to productivity
improvements and cost reduction programs in the services segment.
Selling, general and administrative expenses were $1.28 billion in 2000
(18.5% of revenue), $1.38 billion in 1999 (18.4% of revenue), and $1.36 billion
in 1998 (18.8% of revenue).
Research and development expenses in 2000 were $315.4 million compared to
$339.4 million in 1999 and $308.3 million in 1998.
In 2000, the company reported operating income of $553.0 million (8.0% of
revenue) compared to $960.7 million (12.7% of revenue) in 1999 and $799.0
million (11.0% of revenue) in 1998.
29
Information by business segment for 2000, 1999, and 1998 is presented below:
=======================================================================================================
(Millions of dollars) Total Eliminations Services Technology
- ------------------------------------------------------------------------------------------------
2000
------------------------
Customer revenue $ 6,885.0 $ 4,741.6 $ 2,143.4
Intersegment $ (437.2) 46.6 390.6
----------------------------------------------------------------
Total revenue $ 6,885.0 $ (437.2) $ 4,788.2 $ 2,534.0
----------------------------------------------------------------
Gross profit percent 31.2% 21.6% 44.7%
Operating income percent 8.0% 1.7% 17.7%
1999
------------------------
Customer revenue $ 7,544.6 $ 5,287.0 $ 2,257.6
Intersegment $ (577.5) 65.6 511.9
----------------------------------------------------------------
Total revenue $ 7,544.6 $ (577.5) $ 5,352.6 $ 2,769.5
----------------------------------------------------------------
Gross profit percent 35.6% 25.6% 48.1%
Operating income percent 12.7% 7.9% 20.3%
1998
------------------------
Customer revenue $ 7,243.9 $ 4,944.8 $ 2,299.1
Intersegment $ (511.2) 73.7 437.5
----------------------------------------------------------------
Total revenue $ 7,243.9 $ (511.2) $ 5,018.5 $ 2,736.6
----------------------------------------------------------------
Gross profit percent 34.1% 24.4% 46.9%
Operating income percent 11.0% 6.6% 18.7%
------------------------------------------------------------------------------------------------
Gross profit percent and operating income percent are as a percent of total revenue.
=======================================================================================================
In the services segment, customer revenue was $4.74 billion in 2000, $5.29
billion in 1999, and $4.94 billion in 1998. Customer revenue in 2000 decreased
10% from 1999, as an increase in networking services revenue was more than
offset by declines in systems integration and solutions, and proprietary
maintenance. The decline in proprietary maintenance revenue, which continues to
decline industry wide, reflected customers' high rates of replacement of older
equipment in 1999 with newer systems that are under warranty and require less
maintenance. Customer revenue grew 7% in 1999 led by growth in outsourcing and
systems integration and solutions revenue which more than offset the continuing
decline in proprietary maintenance revenue. Services gross profit declined to
21.6% in 2000 from 25.6% in 1999, and 24.4% in 1998. Operating profit in the
services segment was 1.7% in 2000, 7.9% in 1999, and 6.6% in 1998. The decreases
in both gross profit and operating profit in 2000 were largely due to reduced
utilization of services personnel as well as a lower mix of higher-margin
systems integration and solutions, and proprietary maintenance revenue. The
increases in both gross profit and operating profit in 1999 were largely due to
productivity improvements and cost reduction programs.
30
In the technology segment, customer revenue was $2.14 billion in 2000,
$2.25 billion in 1999, and $2.30 billion in 1998. Customer revenue in 2000
declined 5% from 1999 as strong initial sales of the company's Cellular
MultiProcessing servers were more than offset by a decline in ClearPath
enterprise server revenue. In 1999, revenue for ClearPath enterprise servers was
up slightly compared to 1998. The gross profit percent was 44.7% in 2000, 48.1%
in 1999, and 46.9% in 1998. The gross profit decline in 2000 was due in large
part to a lower percentage of enterprise server sales. The increase in 1999 was
due in large part to a richer mix of enterprise servers and enterprise server
software sales. Operating profit in this segment was 17.7% in 2000, 20.3% in
1999, and 18.7% in 1998. The decrease in operating profit in 2000 was
principally due to the gross profit decline. The increase in 1999 in operating
profit, above the respective increase in gross profit, was largely due to cost
reduction programs as well as stringent controls over all discretionary
expenditures.
Interest expense declined to $79.8 million in 2000 from $127.8 million in
1999, and $171.7 million in 1998. The decline in 2000 from 1999 was principally
due to lower average interest rates as well as the effect of interest rate swaps
(discussed below). The decline in 1999 from 1998 was principally due to lower
average debt levels.
Other income (expense), net, which can vary from year to year, was income
of $33.4 million in 2000, and an expense of $62.6 million in 1999 and $33.1
million in 1998. The difference in 2000 compared to 1999 was principally due to
higher equity and interest income in 2000 and charges in 1999 related to legal
actions. The difference in 1999 compared to 1998 was principally due to higher
charges related to legal actions and lower interest income.
Income before income taxes in 2000 was $506.6 million compared to $770.3
million in 1999 and $594.2 million in 1998.
The provision for income taxes in 2000 was $172.3 million (34.0% effective
tax rate) compared to $269.5 million (35.0% effective tax rate) in 1999 and
$217.8 million (36.7% effective tax rate) in 1998. It is expected that the
effective tax rate will be 33.0% for 2001. The declines in the effective tax
rate are principally due to tax planning strategies.
In 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements." Its adoption
had no effect on the company's consolidated financial position, consolidated
results of operations, or liquidity.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement, which is
effective for the company for the year beginning January 1, 2001, establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133 requires a company to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Changes in the fair value of derivatives will
be reported currently in earnings or other comprehensive income depending on
their effectiveness pursuant to SFAS No. 133. Adoption of SFAS No. 133 will not
have a material effect on the company's consolidated financial position,
consolidated results of operations, or liquidity.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." This
statement revises the accounting standards for securitizations and other
transfers of financial assets and collateral and requires certain disclosures.
This statement is effective for transfers and servicing of financial assets
occurring after March 31, 2001. Management is evaluating what effect, if any,
this statement may have on the company's financial statements.
31
FINANCIAL CONDITION
Cash and cash equivalents at December 31, 2000 were $378.0 million compared to
$464.0 million at December 31, 1999.
During 2000, cash provided by operations was $419.9 million compared to
$517.6 million in 1999, principally reflecting a decline in profitability. The
improvement in the accounts receivable performance in 2000 reflected the sale of
approximately $230 million of receivables through a new U.S. securitization
facility. The new facility, which is renewable annually for up to three years,
allows for the sale of up to $275 million of U.S. receivables. Cash expenditures
related to both current and prior-year restructuring actions (which are included
in operating activities) in 2000, 1999, and 1998 were $26.3 million, $44.6
million, and $118.4 million, respectively, and are expected to be approximately
$70 million in 2001 and $10 million in total for all subsequent years,
principally for work-force reductions and facility costs. Personnel reductions
in 2000 related to restructuring actions were approximately 1,300 and are
expected to be approximately 700 in 2001.
Cash used for investing activities in 2000 was $270.9 million compared to
$328.4 million for 1999. During 2000, both proceeds from investments and
purchase of investments, which represent primarily foreign exchange hedging
contract activity, declined from the prior year as a result of extending the
duration of individual contracts to more closely match the timeframe of related
underlying exposures. This change in duration of foreign currency contracts did
not significantly impact net cash flows. In addition, 2000 reflects lower cash
usage for purchases of businesses and, as described below, $18.5 million net
proceeds from the termination of the euro and yen swaps.
Cash used for financing activities during 2000 was $217.3 million compared
to cash usage of $328.4 million in 1999. Included in 2000 were net proceeds from
short-term borrowings of $179.6 million, principally borrowings used to repay
long-term debt of $448.0 million, as described below. Included in 1999 were
payments of $197.0 million for redemptions of preferred stock, $164.4 million
related to repayment of long-term debt, and $59.4 million for preferred stock
dividends.
At December 31, 2000, total debt was $762.6 million, a decrease of $237.4
million from December 31, 1999. At December 31, 2000, the debt-to-capital ratio
was 25.9% compared to 33.9% at December 31, 1999.
The company has a $400 million credit agreement which expires June 2001. As
of December 31, 2000, there were no borrowings outstanding under this agreement
and the entire $400 million was available for borrowings.
In April 2000, the company redeemed all of its $399.5 million outstanding
12% senior notes due 2003 at the stated redemption price of 106% of principal.
As a result, the company recorded an extraordinary after-tax charge of $19.8
million, or $.06 per diluted share, for the call premium and unamortized debt
expense. The redemption was funded through a combination of cash and short-term
borrowings. In March 2000, the company entered into an additional $150 million
credit agreement expiring April 2001 for the purpose of funding this redemption.
As of December 31, 2000, $127.5 million was borrowed under this agreement at a
rate of 7.56%.
32
The company may, from time to time, redeem, tender for, or repurchase its
debt securities in the open market or in privately negotiated transactions
depending upon availability, market conditions, and other factors.
During 1999, all shares of the company's Series A cumulative convertible
preferred stock were either converted into the company's common stock or
redeemed for cash in response to various calls by the company. These actions
eliminated all $1.4 billion of Series A preferred stock (28.4 million shares)
and $106.5 million of annual dividend payments. Overall in 1999, of the 28.4
million shares of Series A preferred stock that were outstanding at the
beginning of the year, 24.5 million shares were converted into 40.8 million
shares of common stock and 3.9 million shares were redeemed for $197.0 million
in cash.
In 2000, the company terminated its interest rate swaps and currency swaps
for euro and Japanese yen which were established in 1999. The currency swaps
were designated as hedges of the foreign currency exposure on the company's net
investments in foreign subsidiaries and equity investments. As a result of these
terminations, the company received net cash of $18.5 million and recognized a
pretax loss of $2.7 million. The interest expense benefit related to these swaps
amounted to approximately $16 million in 2000.
The company has on file with the Securities and Exchange Commission an
effective registration statement covering $700 million of debt or equity
securities, which enables the company to be prepared for future market
opportunities.
At December 31, 2000, the company had deferred tax assets in excess of
deferred tax liabilities of $1,299 million. For the reasons cited below,
management determined that it is more likely than not that $990 million of such
assets will be realized, therefore resulting in a valuation allowance of $309
million.
The company evaluates quarterly the realizability of its deferred tax
assets and adjusts the amount of the related valuation allowance, if necessary.
The factors used to assess the likelihood of realization are the company's
forecast of future taxable income, and available tax planning strategies that
could be implemented to realize deferred tax assets. Approximately $3.0 billion
of future taxable income (predominantly U.S.) is needed to realize all of the
net deferred tax assets. Failure to achieve forecasted taxable income might
affect the ultimate realization of the net deferred tax assets. See "Factors
that might affect future results" below.
Stockholders' equity increased $232.8 million during 2000, principally
reflecting net income of $225.0 million, $69.4 million for issuance of stock
under stock option and other plans and $11.3 million of tax benefits related to
employee stock plans, offset in part by currency translation of $73.3 million.
33
MARKET RISK
The company has exposure to interest rate risk from its short-term and long-term
debt. In general, the company's long-term debt is fixed rate and the short-term
debt is variable rate. See Note 10 of the Notes to Consolidated Financial
Statements for components of the company's long-term debt. The company believes
that the market risk from changes in interest rates would not be material to the
fair value of these financial instruments, or the related cash flows, or future
results of operations.
The company is also exposed to foreign currency exchange rate risks. The
company uses derivative financial instruments to reduce its exposure to market
risks from changes in foreign currency exchange rates. The derivative
instruments used are foreign exchange forward contracts and foreign exchange
options. The company does not hold or issue derivatives for speculative trading
purposes. See Note 13 of the Notes to Consolidated Financial Statements for
additional information on the company's derivative financial instruments.
The company has performed a sensitivity analysis assuming a hypothetical
10% adverse movement in foreign currency exchange rates applied to these
derivative financial instruments described above. As of December 31, 2000 and
1999, the analysis indicated that such market movements would have reduced the
estimated fair value of these derivative financial instruments by approximately
$10 million and $70 million, respectively. Based on changes in the timing and
amount of interest rate and foreign currency exchange rate movements and the
company's actual exposures and hedges, actual gains and losses in the future may
differ from the above analysis.
CONVERSION TO THE EURO CURRENCY
On January 1, 1999, certain member countries of the European Union established
fixed conversion rates between their existing currencies and the European
Union's common currency (the "euro"). The transition period for the introduction
of the euro began on January 1, 1999. The company is addressing the issues
involved with the introduction of the euro. The more important issues facing the
company include converting information technology systems, reassessing currency
risk, and negotiating and amending agreements.
Based on progress to date, the company believes that the use of the euro
will not have a significant impact on the manner in which it conducts its
business. Accordingly, conversion to the euro is not expected to have a material
effect on the company's consolidated financial position, consolidated results of
operations, or liquidity.
34
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, the company provides information containing "forward-looking"
statements, as defined in the Private Securities Litigation Reform Act of 1995.
All forward-looking statements rely on assumptions and are subject to risks,
uncertainties, and other factors that could cause the company's actual results
to differ materially from expectations. In addition to changes in general
economic and business conditions and natural disasters, these include, but are
not limited to, the factors discussed below.
The company operates in an industry characterized by aggressive
competition, rapid technological change, evolving technology standards, and
short product life cycles.
Future operating results will depend on the company's ability to design,
develop, introduce, deliver, or obtain new products and services on a timely and
cost-effective basis; the success of the actions taken to focus on higher
growth, higher-margin e-business opportunities; on its ability to effectively
manage the shift in its technology business into higher growth, standards-based
server products; on its ability to mitigate the effects of competitive pressures
and volatility in the information technology and services industry on revenues,
pricing, and margins; and on its ability to successfully attract and retain
highly skilled people. In addition, future operating results could be impacted
by market demand for and acceptance of the company's service and product
offerings.
Certain of the company's systems integration contracts are fixed-price
contracts under which the company assumes the risk for delivery of the
contracted services at an agreed-upon price. Future results will depend on the
company's ability to profitably perform these services contracts and bid and
obtain new contracts.
The company frequently forms alliances with third parties that have
complementary products, services, or skills. Future results will depend in part
on the continuing relationships with, and on the performance and capabilities
of, these third parties. Future results will also depend upon the ability of
external suppliers to deliver components at reasonable prices and in a timely
manner and on the financial condition of, and the company's relationship with,
distributors and other indirect channel partners.
Approximately 58% of the company's total revenue derives from international
operations. The risks of doing business internationally include foreign currency
exchange rate fluctuations, changes in political or economic conditions, trade
protections measures, and import or export licensing requirements.
35
UNISYS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Income
Year Ended December 31 (Millions, except per share data) 2000 1999 1998
=========================================================================================================
Revenue $6,885.0 $7,544.6 $7,243.9
--------------------------------
Costs and expenses
Cost of revenue 4,795.9 4,859.9 4,775.9
Selling, general and administrative expenses 1,328.7 1,384.6 1,360.7
Research and development expenses 333.6 339.4 308.3
--------------------------------
6,458.2 6,583.9 6,444.9
--------------------------------
Operating income 426.8 960.7 799.0
Interest expense 79.8 127.8 171.7
Other income (expense), net 32.0 (62.6) (33.1)
--------------------------------
Income before income taxes 379.0 770.3 594.2
Provision for income taxes 134.2 247.5 217.8
--------------------------------
Income before extraordinary items 244.8 522.8 376.4
Extraordinary items (19.8) (12.1)
--------------------------------
Net income 225.0 510.7 376.4
Dividends on preferred shares 36.7 106.5
--------------------------------
Earnings on common shares $ 225.0 $ 474.0 $ 269.9
--------------------------------
Earnings (loss) per common share - basic
Before extraordinary items $ .78 $ 1.69 $ 1.07
Extraordinary items (.06) (.04)
--------------------------------
Total $ .72 $ 1.65 $ 1.07
--------------------------------
Earnings (loss) per common share - diluted
Before extraordinary items $ .77 $ 1.63 $ 1.01
Extraordinary items (.06) (.04)
--------------------------------
Total $ .71 $ 1.59 $ 1.01
=========================================================================================================
See notes to consolidated financial statements.
36
UNISYS CORPORATION
Consolidated Balance Sheet
December 31 (Millions) 2000 1999
============================================================================================
Assets
Current assets
Cash and cash equivalents $ 378.0 $ 464.0
Accounts and notes receivable, net 1,247.4 1,430.5
Inventories
Parts and finished equipment 249.4 236.8
Work in process and materials 176.1 136.1
Deferred income taxes 460.6 472.7
Other current assets 75.5 105.6
-----------------------
Total 2,587.0 2,845.7
-----------------------
Properties 1,584.1 1,723.0
Less - Accumulated depreciation 963.9 1,102.2
-----------------------
Properties, net 620.2 620.8
-----------------------
Investments at equity 225.8 225.5
-----------------------
Software, net of accumulated amortization 296.7 259.8
-----------------------
Prepaid pension cost 1,063.0 975.9
-----------------------
Deferred income taxes 583.6 655.6
-----------------------
Other assets 341.4 306.4
-----------------------
Total $ 5,717.7 $ 5,889.7
===========================================================================================
Liabilities and stockholders' equity
Current liabilities
Notes payable $ 209.5 $ 26.9
Current maturities of long-term debt 16.8 22.9
Accounts payable 847.7 833.2
Other accrued liabilities 1,323.5 1,386.6
Income taxes payable 288.3 348.9
-----------------------
Total 2,685.8 2,618.5
-----------------------
Long-term debt 536.3 950.2
-----------------------
Other liabilities 309.5 367.7
-----------------------
Stockholders' equity
Common stock, shares issued: 2000 - 317.3; 1999 - 312.5 3.2 3.1
Accumulated deficit (829.4) (1,054.4)
Other capital 3,656.0 3,575.0
Accumulated other comprehensive loss (643.7) (570.4)
-----------------------
Stockholders' equity 2,186.1 1,953.3
-----------------------
Total $ 5,717.7 $ 5,889.7
===========================================================================================
See notes to consolidated financial statements.
37
UNISYS CORPORATION
Consolidated Statement of Cash Flows
Year Ended December 31 (Millions) 2000 1999 1998
==========================================================================================================================
Cash flows from operating activities
Income before extraordinary items $ 244.8 $ 522.8 $ 376.4
Add (deduct) items to reconcile income before extraordinary
items to net cash provided by operating activities:
Extraordinary items (19.8) (12.1)
Depreciation 143.0 141.8 149.2
Amortization:
Marketable software 115.5 110.9 112.3
Goodwill 12.5 12.5 8.9
Decrease (increase) in deferred income taxes, net 85.6 (9.9) (26.7)
Decrease (increase) in receivables, net 158.2 (244.5) (277.3)
(Increase) decrease in inventories (52.5) 98.0 94.4
(Decrease) increase in accounts payable and other accrued liabilities (136.1) (81.8) 103.1
(Decrease) increase in income taxes payable (62.8) 78.2 148.0
(Decrease) increase in other liabilities (6.4) (2.2) 13.2
(Increase) in other assets (69.2) (159.2) (57.6)
Other 7.1 63.1 (1.7)
------------------------------------------
Net cash provided by operating activities 419.9 517.6 642.2
------------------------------------------
Cash flows from investing activities
Proceeds from investments 790.4 1,033.8 1,991.0
Purchases of investments (716.7) (1,013.8) (2,006.5)
Proceeds from sales of properties 20.0 47.9 51.1
Investment in marketable software (152.4) (122.8) (100.3)
Capital additions of properties (198.3) (219.6) (209.1)
Purchases of businesses (13.9) (53.9) (3.9)
------------------------------------------
Net cash (used for) investing activities (270.9) (328.4) (277.7)
------------------------------------------
Cash flows from financing activities
Payments of long-term debt (448.0) (164.4) (749.2)
Net proceeds from (reduction in) short-term borrowings 179.6 (25.6) 9.6
Proceeds from employee stock plans 51.1 87.7 79.5
Dividends paid on preferred shares (59.4) (106.5)
Redemption of preferred stock (197.0)
Proceeds from issuance of long-term debt 30.3 197.3
------------------------------------------
Net cash (used for) financing activities (217.3) (328.4) (569.3)
------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (17.7) (13.2) (3.0)
------------------------------------------
Decrease in cash and cash equivalents (86.0) (152.4) (207.8)
Cash and cash equivalents, beginning of year 464.0 616.4 824.2
------------------------------------------
Cash and cash equivalents, end of year $ 378.0 $ 464.0 $ 616.4
==========================================================================================================================
See notes to consolidated financial statements.
38
UNISYS CORPORATION
Consolidated Statement of Stockholders' Equity
Other, Accumulated
Principally Other Comprehensive
Preferred Common Accumulated Treasury Paid-In Comprehensive Income
(Millions) Stock Stock Deficit Stock Capital Income (Loss)* (Loss)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 1,438.2 $ 2.5 $ (1,802.1) $ (12.2) $ 2,049.6 $ (448.1)
Conversions to common stock (.1) .5
Conversion of shareholder notes 6.6
Issuance of stock under stock
option and other plans .1 (11.4) 90.2
Net income 376.4 $ 376.4
Other comprehensive income -
translation adjustments (83.5) (83.5)
---------
Comprehensive income $ 292.9
---------
Dividends (106.5)
Unearned compensation 4.8
Tax benefit related to stock plans 30.6
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 1,444.7 2.6 (1,532.2) (23.6) 2,175.7 (531.6)
Conversions to common stock (1,245.3) .4 1,271.2
Redemption of preferred stock (197.0)
Issuance of stock under stock
option and other plans .1 (17.8) 103.4
Net income 510.7 $ 510.7
Other comprehensive income -
translation adjustments (38.8) (38.8)
---------
Comprehensive income $ 471.9
---------
Dividends (32.9)
Tax benefit related to stock plans 66.1
Other (2.4)
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 - 3.1 (1,054.4) (41.4) 3,616.4 (570.4)
Issuance of stock under stock
option and other plans .1 (.7) 70.0
Net income 225.0 $ 225.0
Other comprehensive income -
translation adjustments (73.3) (73.3)
---------
Comprehensive income $ 151.7
---------
Unearned compensation .4
Tax benefit related to stock plans 11.3
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ - $ 3.2 $ (829.4) $ (42.1) $ 3,698.1 $ (643.7)
- -------------------------------------------------------------------------------------------------------------------------------
*Entire amount relates to foreign translation adjustments.
See notes to consolidated financial statements.
39
Unisys Corporation
Notes to Consolidated Financial Statements
1 Summary of significant accounting policies
Principles of consolidation. The consolidated financial statements include
the accounts of all majority-owned subsidiaries. Investments in companies
representing ownership interests of 20% to 50% are accounted for by the
equity method.
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 amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
Cash equivalents. All short-term investments purchased with a maturity of
three months or less are classified as cash equivalents.
Inventories. Inventories are valued at the lower of cost or market. Cost
is determined principally on the first-in, first-out method.
Properties and depreciation. Properties are carried at cost and are
depreciated over the estimated lives of such assets using the straight-
line method. Out-sourcing equipment is depreciated over the shorter of the
asset life or the term of the contract. For other classifications of
properties, the principal rates used are summarized below:
Rate per Year (%)
-----------------
Buildings 2-5
Machinery and office equipment 5-25
Rental equipment 25
Advertising costs. The company expenses all advertising costs as they are
incurred. The amount charged to expense during 2000, 1999, and 1998 was
$38.2, $48.6, and $48.2 million, respectively.
Revenue recognition. The company generally recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the
fee is fixed or determinable, and collectibility is probable.
Revenue from hardware sales is recognized upon shipment and the passage
of title. Outside of the United States, the company recognizes revenue
even if it retains a form of title to products delivered to customers,
provided the sole purpose is to enable the company to recover the products
in the event of customer payment default, and the arrangement does not
prohibit the customers' use of the product in the ordinary course of
business.
Revenue from software licenses is recognized at the inception of the
initial license term and upon execution of an extension to the license
term. Revenue for post-contract software support arrangements, which are
marketed separately, is recorded on a straight-line basis over the support
period for multi-year contracts and at the inception of contracts of one
year or less.
Revenue from equipment and software maintenance is recognized on a
straight-line basis as earned over the lives of the respective contracts.
For equipment leased to a customer under an operating lease or a
sales-type lease, revenue recognition commences when the equipment has
been shipped, installed and is ready for use. Revenue for operating leases
is recognized on a monthly basis over the term of the lease and for
sales-type leases at the inception of the lease term.
40
Revenue under systems integration and services contracts is recognized
on the percentage of completion method of accounting using the cost-to-
cost method or when services have been performed and accepted, depending
on the nature of the project.
Accounting for large multi-year, fixed-price systems integration
contracts involves considerable use of estimates in determining revenue,
costs, and profits. Revisions in profit estimates are reflected in the
period in which the facts that give rise to the revision become known.
When estimates indicate a loss under a contract, cost of revenue is
charged with a provision for such loss.
Income taxes. Income taxes are provided on taxable income at the
statutory rates applicable to such income. Deferred taxes have not been
provided on the cumulative undistributed earnings of foreign subsidiaries
because such amounts are expected to be reinvested indefinitely.
Marketable software. The cost of development of computer software to be
sold or leased, incurred subsequent to establishment of technological
feasibility, is capitalized and amortized to cost of sales over the
estimated revenue-producing lives of the products, but not in excess of
three years following product release.
Goodwill. Goodwill represents the excess of cost over fair value of net
assets acquired, which is being amortized on the straight-line method.
Accumulated amortization at December 31, 2000 and 1999 was $26.0 and $14.4
million, respectively.
The carrying value of goodwill is reviewed for impairment whenever
events or changes in circumstances indicate that it may not be
recoverable. If such an event occurred, the company would prepare
projections of future cash flows for the applicable business. If such
projections indicated that goodwill would not be recoverable, the
company's carrying value of such asset would be reduced by the estimated
excess of such value over projected discounted cash flow.
Translation of foreign currency. The local currency is the functional
currency for most of the company's international subsidiaries and, as
such, assets and liabilities are translated into U.S. dollars at year-end
exchange rates. Income and expense items are translated at average
exchange rates during the year. Translation adjustments resulting from
changes in exchange rates are reported in other comprehensive income.
Exchange gains and losses on intercompany balances of a long-term
investment nature are reported in other comprehensive income.
For those international subsidiaries operating in hyper-inflationary
economies, the U.S. dollar is the functional currency and, as such, non-
monetary assets and liabilities are translated at historical exchange
rates and monetary assets and liabilities are translated at current
exchange rates. Exchange gains and losses arising from translation are
included in other income (expense), net.
41
Derivative financial instruments. The derivative financial instruments
currently used by the company are foreign exchange forward contracts and
options. The company does not hold or issue derivatives for speculative
trading purposes.
A change in the underlying exchange rate would have no impact on
financial position or results of operations relating to these financial
instruments. All of the company's foreign currency contracts and options
have been designated as and are effective as hedges against specific
exposures and have been accounted for as such. Therefore, a change in the
derivative's value would be offset by an opposite change in the hedged
exposure.
The company monitors its risks in derivative transactions by
periodically assessing the cost of replacing, at market rates, those
contracts in the event of default by the counterparty. The company
believes such risk to be remote. In addition, before entering into
derivative contracts, and periodically during the life of the contract,
the company reviews the counterparties' financial condition.
Gains or losses on foreign exchange forward contracts and the cost of
foreign currency options are deferred in current liabilities and other
current assets, respectively. The cost of options is reported in income
ratably over the option term, and any gains thereon as well as any gains
or losses on foreign exchange contracts are recognized in income (either
in revenue or cost of revenue) when the transactions being hedged are
recognized. Cash flows on such instruments are reported in investing
activities as proceeds or purchases of investments.
If the criteria for hedge accounting discussed above were not met,
gains or losses on these instruments would be included in income currently
and would not be deferred. If a derivative financial instrument is
terminated before the transaction date of the hedged transaction, any
deferred gain or loss would continue to be deferred until the transaction
date. If an expected transaction is no longer likely to occur, any
deferred gains or losses on financial instruments that hedge such a
transaction would be reported in income immediately.
Reclassifications. Certain prior-year amounts have been reclassified to
conform with the 2000 presentation.
42
2 Earnings per share
The following table shows how earnings per share were computed for the three
years ended December 31, 2000.
=============================================================================================================================
Year ended December 31
(Millions, except per share data) 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------
Basic earnings per share computation
Income before extraordinary items $ 244.8 $ 522.8 $ 376.4
Less dividends on preferred shares (36.7) (106.5)
---------------------------------------
Income available to common stockholders before extraordinary items 244.8 486.1 269.9
Extraordinary items (19.8) (12.1)
---------------------------------------
Net income available to common stockholders $ 225.0 $ 474.0 $ 269.9
---------------------------------------
Weighted average shares (thousands) 313,115 287,290 253,335
---------------------------------------
Basic earnings per share
Before extraordinary items $ .78 $ 1.69 $ 1.07
Extraordinary items (.06) (.04)
---------------------------------------
Total $ .72 $ 1.65 $ 1.07
---------------------------------------
Diluted earnings per share computation
Income available to common stockholders before extraordinary items $ 244.8 $ 486.1 $ 269.9
Plus interest expense on assumed conversion of 8 1/4% Convertible Notes,
net of tax .3 1.5
---------------------------------------
Income available to common stockholders
plus assumed conversions before extraordinary items 244.8 486.4 271.4
Extraordinary items (19.8) (12.1)
---------------------------------------
Net income available to common stockholders $ 225.0 $ 474.3 $ 271.4
---------------------------------------
Weighted average shares (thousands) 313,115 287,290 253,335
Plus incremental shares from assumed conversions:
Preferred stock 877 1,350
Employee stock plans 3,536 9,835 11,164
8 1/4% Convertible Notes 818 3,994
---------------------------------------
Adjusted weighted average shares 316,651 298,820 269,843
---------------------------------------
Diluted earnings per share
Before extraordinary items $ .77 $ 1.63 $ 1.01
Extraordinary items (.06) (.04)
---------------------------------------
Total $ .71 $ 1.59 $ 1.01
---------------------------------------
The shares listed below were not included in the computation of diluted earnings per share because to do so would have been
antidilutive for the periods presented.
Year ended December 31 (thousands) 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------
Employee stock plans 16,073 6,680 101
Preferred stock 47,448
-------------------------------------------------------------------------------------------------------------------------
==============================================================================================================================
43
3 Acquisitions
During 2000, the company acquired the following companies: Network Plus Limited,
a London-based desktop and network services consulting company; VeriCom, a
Norwegian information technology consulting company; and QCOM, an Australian
information technology services provider. These companies were acquired for an
aggregate cash purchase price of approximately $20 million and were accounted
for under the purchase method of accounting.
In addition during 2000, the company formed a new company with BankWest, a
full-service bank with its headquarters in Perth, Western Australia. The new
company, called Unisys West, will provide e-business services to businesses and
governments. Unisys also formed a new company called Intelligent Processing
Solutions Limited ("iPSL"), a UK-based company, which will provide high-volume
payment processing. The company's partners in iPSL are Barclays Bank and Lloyds
TSB Bank, both UK-based financial institutions. Both of the above new companies
are 51% owned by the company and are fully consolidated in the company's
financial statements. The minority owners' interests are represented in other
liabilities and other income (expense), net in the financial statements.
During 1999, the company acquired three companies for an aggregate cash
purchase price of approximately $60 million. These acquisitions were accounted
for under the purchase method of accounting. During 1999, the company also
acquired three companies in exchange for approximately 2.9 million shares of the
company's common stock. These acquisitions were accounted for under the pooling
of interests method of accounting, and all prior periods were restated.
4 Accounting changes
In 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements." Its adoption had no
effect on the company's consolidated financial position, consolidated results of
operations, or liquidity.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement, which is
effective for the company for the year beginning January 1, 2001, establishes
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS No. 133 requires a company to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Changes in the fair value of derivatives will
be reported currently in earnings or in other comprehensive income depending on
their effectiveness pursuant to SFAS No. 133. Adoption of SFAS No. 133 will not
have a material effect on the company's consolidated financial position,
consolidated results of operations, or liquidity.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." This
statement revises the accounting standards for securitizations and other
transfers of financial assets and collateral and requires certain disclosures.
This statement is effective for transfers and servicing of financial assets
occurring after March 31, 2001. Management is evaluating what effect, if any,
this statement may have on the company's financial statements.
44
5 One-time charges
2000 restructuring. As a result of a comprehensive business review of the
company's operations, the company has decided to focus its resources on
value-added, e-business opportunities, de-emphasize or eliminate low-return
businesses, and lower its cost base in line with its new business model. As a
result, in the fourth quarter of 2000, the company recorded a pretax
restructuring charge of $127.6 million, or $.29 per diluted share, primarily for
a work-force reduction of approximately 2,000 people (1,400 in the United States
and 600 outside the United States). Of the total, approximately 1,300 people
were terminated in 2000 with the remaining 700 to leave in 2001. In 2000, 742
people, included above, accepted an early retirement program in the United
States. For those employees, funding will be provided through the company's
pension plan. Cash expenditures related to the involuntary reductions in 2000
were $8.7 million. A further breakdown of the individual components of these
costs follows:
=========================================================================
Work-Force Reductions(1)
(Millions) Total U. S. Int'l Other (2)
- --------------------------------------------------------
Work-force
reductions (1)
Early retirement $ 57.8 $ 57.8
Involuntary
reductions 60.9 13.3 $47.6
--------------------------
Subtotal 118.7 71.1 47.6
Other (2) 8.9 $ 8.9
--------------------------------------
Total charge 127.6 71.1 47.6 8.9
Utilized (71.9) (58.7) (7.8) (5.4)
--------------------------------------
Balance at
Dec. 31, 2000 $ 55.7 $ 12.4 $39.8 $ 3.5
--------------------------------------
Expected future
utilization:
2001 $ 51.9 $ 12.2 $36.8 $ 2.9
2002 and
thereafter 3.8 .2 3.0 .6
- ---------------------------------------------------------
(1) Includes severance, notice pay, medical, and other benefits.
(2) Includes facilities costs, and product and program discontinuances.
=========================================================================
The 2000 restructuring charge was recorded in the following statement of income
classifications: cost of revenue, $56.1 million; selling, general and
administrative expenses, $51.9 million; research and development expenses, $18.2
million; and other income (expense), net, $1.4 million.
Prior year restructurings. In 1997 and 1995, the company recorded total pretax
restructuring charges of $113.6 million and $717.6 million, respectively, for a
total of $831.2 million. The charges were related to strategic realignments, the
discontinuance of the manufacturing and assembly of personal computers and low-
end servers, and the disposal of a small, non-strategic technology product. The
charges included (a) $501.5 million for work-force reductions of approximately
8,900 people, (b) $221.1 million for consolidation of facilities and
manufacturing capacity, and (c) $108.6 million for product and program
discontinuances.
Activity related to these restructuring actions during the years ended
December 31, 2000, 1999, and 1998, was as follows:
================================================================================
Work-Force
(Millions) Total Reductions(1) Facilities(2) Products
- -------------------------------------------------------------------------------
Balance at
Dec. 31, 1997 $ 253.6 $130.5 $103.2 $ 19.9
Utilized (127.3) (80.0) (36.0) (11.3)
Other(3) (18.8) (7.5) (10.8) (.5)
---------------------------------------------------
Balance at
Dec. 31, 1998 107.5 43.0 56.4 8.1
Utilized (48.8) (23.1) (22.3) (3.4)
Other(3) (1.5) 2.6 (3.4) (.7)
---------------------------------------------------
Balance at
Dec. 31, 1999 57.2 22.5 30.7 4.0
Utilized (20.8) (6.8) (13.2) (.8)
Other(3) (9.3) (2.1) (5.4) (1.8)
---------------------------------------------------
Balance at
Dec. 31, 2000 $ 27.1 $ 13.6 $ 12.1 $ 1.4
---------------------------------------------------
Expected future
utilization:
2001 $ 21.5 $ 13.6 $ 6.5 $ 1.4
2002 and
thereafter 5.6 5.6
- -------------------------------------------------------------------
(1) Includes severance, notice pay, medical, and other benefits.
(2) Includes consolidation of office facilities and manufacturing capacity.
(3) Includes changes in estimates, reversals of excess reserves, translation
adjustments, and additional provisions.
================================================================================
45
In 1998, there was a reduction in accrued work-force provisions, principally for
the reversal of unneeded reserves due to approximately 150 voluntary
terminations, and the favorable results of negotiations on termination
indemnities relating principally to PC manufacturing personnel. In addition, as
a result of the sale of the non-strategic technology product operations in 1998
on more favorable terms than originally anticipated, the company reversed $6.0
million of unneeded accruals, principally for termination indemnities for
approximately 130 people.
As a result of the prior year restructuring actions, cash expenditures in
2000, 1999 and 1998 were $17.6, $44.6, and $118.4 million, respectively, and
employee levels were reduced in 2000, 1999, and 1998 by 21, 284, and 900 people,
respectively. The $13.6 million balance of the reserve at December 31, 2000 for
work-force reductions represents the remaining balance of extended payment
severance packages for terminated employees. The $12.1 million December 31, 2000
balance for facility consolidations represents contractual obligations (reduced
by sub-lease income) existing under long-term leases of vacated facilities.
6 Accounts receivable
In December 2000, the company entered into an agreement, renewable annually
for up to three years, to sell through Unisys Funding Corporation I, a wholly
owned subsidiary, interests in eligible U.S. trade accounts receivable for up to
$275 million. Unisys Funding Corporation I has been structured to isolate its
assets from creditors of Unisys. The company received proceeds of $232 million
from the initial sale of accounts receivable interests under the program, which
has been included in cash flows from operating activities in the accompanying
consolidated statement of cash flows. The company retained subordinated
interests of $223 million in the associated receivables, which have been
included in accounts and notes receivable, net in the accompanying consolidated
balance sheet. As collections reduce previously sold interests, interests in new
eligible receivables can be sold, subject to meeting certain conditions.
The selling price of the receivables interests reflects a discount based on
the A-1 rated commercial paper borrowing rates of the purchasers (6.7% at
December 31, 2000). The company remains responsible for servicing the underlying
accounts receivable, for which it will receive a fee of 0.5% of the outstanding
balance, which it believes represents adequate compensation. The company
estimates the fair value of its retained interests by considering two key
assumptions: the payment rate, which is derived from the average life of the
accounts receivable which is less than 60 days, and the rate of expected credit
losses. Based on the company's favorable collection experience and very short-
term nature of the receivables, both assumptions are considered to be highly
predictable. Therefore, the company's estimated fair value of its retained
interests in the pool of eligible receivables is approximately equal to the
previous cost, less the associated allowance for doubtful accounts. As a result,
the loss on the initial sale was not material.
Revenue recognized in excess of billings on services contracts, or unbilled
accounts receivable, was $171.3 and $217.8 million at December 31, 2000 and
1999, respectively. Such amounts are included in accounts and notes receivables,
net.
46
7 Income taxes
======================================================================
Year ended December 31 (Millions) 2000 1999 1998
------------------------------------------------------------------
Income before income taxes
United States $ 389.0 $ 485.4 $ 397.8
Foreign (10.0) 284.9 196.4
---------------------------
Total income before
income taxes $ 379.0 $ 770.3 $ 594.2
------------------------------------------------------------------
Provision for income taxes
Current
United States $ 10.1 $ 55.3 $ 55.8
Foreign 63.6 79.1 22.7
State and local 4.9 10.5 23.3
---------------------------
Total 78.6 144.9 101.8
---------------------------
Deferred
United States 72.8 75.7 115.2
Foreign (17.2) 24.4 .7
State and local 2.5 .1
---------------------------
Total 55.6 102.6 116.0
---------------------------
Total provision for income taxes $ 134.2 $ 247.5 $ 217.8
------------------------------------------------------------------
======================================================================
Following is a reconciliation of the provision for income taxes at the United
States statutory tax rate to the provision for income taxes as reported:
====================================================================
Year ended December 31 (Percent) 2000 1999 1998
----------------------------------------------------------------
United States statutory income
tax 35.0% 35.0% 35.0%
Difference in estimated income
taxes on foreign earnings, losses,
and remittances 9.6 .5 (7.7)
State taxes .8 1.2 2.5
Tax refund claims, audit issues,
and other matters (10.4) (2.3) 5.3
Amortization of goodwill .5 .3 .3
U.S. tax law change (2.9)
Other (.1) .3 1.2
-------------------------
Provision for income taxes 35.4% 32.1% 36.6%
----------------------------------------------------------------
====================================================================
The tax effects of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets and liabilities at December 31, 2000
and 1999, were as follows:
===============================================================
December 31 (Millions) 2000 1999
-----------------------------------------------------------
Deferred tax assets
Capitalized research and
development $ 592.7 $ 596.1
Tax loss carryforwards 280.0 254.2
Foreign tax credit carryforwards 159.1 114.4
Other tax credit carryforwards 232.2 243.3
Prepayments 101.7 138.5
Postretirement benefits 80.1 82.4
Employee benefits 83.8 88.5
Depreciation 61.0 46.3
Restructuring 67.1 38.2
Other 242.6 281.7
---------------------
1,900.3 1,883.6
Valuation allowance (309.2) (308.7)
---------------------
Total deferred tax assets $1,591.1 $1,574.9
---------------------
Deferred tax liabilities
Pensions $ 451.9 $ 383.4
Sales-type leases 85.2 77.4
Other 64.2 38.6
---------------------
Total deferred tax liabilities $ 601.3 $ 499.4
---------------------
Net deferred tax assets $ 989.8 $1,075.5
-----------------------------------------------------------
===============================================================
SFAS No. 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax asset will not be realized. The valuation allowance at December 31, 2000,
applies to certain state and local and foreign tax loss carryforwards and
temporary differences that, in management's opinion, are more likely than not to
expire unused.
Cumulative undistributed earnings of foreign subsidiaries, for which no U.S.
income or foreign withholding taxes have been recorded, approximated $740.0
million at December 31, 2000. Such earnings are expected to be reinvested
indefinitely. Determination of the amount of unrecognized deferred tax liability
with respect to such earnings is not practicable. The additional taxes payable
on the earnings of foreign subsidiaries, if remitted, would be substantially
offset by U.S. tax credits for foreign taxes already paid. While there are no
specific
47
plans to distribute the undistributed earnings in the immediate future, where
economically appropriate to do so, such earnings may be remitted.
Cash paid during 2000, 1999, and 1998 for income taxes was $110.0, $96.6, and
$92.7 million, respectively.
In 1999, the company recognized a one-time tax benefit of $22.0 million, or
$.07 per diluted common share, related to a U.S. Treasury income tax regulation
pertaining to the use of net operating loss carryforwards of acquired companies.
At December 31, 2000, the company has U.S. federal and state and local tax
loss carryforwards and foreign tax loss carryforwards for certain foreign
subsidiaries, the tax effect of which is approximately $280.0 million. These
carryforwards will expire as follows (in millions): 2001, $5.9; 2002, $9.5;
2003, $12.7; 2004, $19.2; 2005, $15.1; and $217.6 thereafter. The company also
has available tax credit carryforwards of approximately $391.3 million, which
will expire as follows (in millions): 2001, $87.7; 2002, $56.7; 2003, $10.9;
2004, $7.7; 2005, $24.6; and $203.7 thereafter.
The company's net deferred tax assets include substantial amounts of
capitalized research and development, and tax credit carryforwards. Failure to
achieve forecasted taxable income might affect the ultimate realization of the
net deferred tax assets. There can be no assurance that in the future there
would not be increased competition or other factors that may result in a decline
in sales or margins, loss of market share, delays in product availability, or
technological obsolescence.
The company is currently contesting issues before the Internal Revenue
Service in connection with Sperry Corporation for the years ended March 31,
1985, through September 16, 1986. In management's opinion, adequate provisions
for income taxes have been made for all years.
8 Properties
Properties comprise the following:
===========================================================
December 31 (Millions) 2000 1999
-------------------------------------------------------
Land $ 8.3 $ 8.4
Buildings 148.0 164.4
Machinery and office equipment 1,207.7 1,323.0
Rental and outsourcing
equipment 220.1 227.2
----------------------
Total properties $ 1,584.1 $ 1,723.0
-------------------------------------------------------
===========================================================
9 Investments at equity
Substantially all of the company's investments at equity consist of Nihon
Unisys, Ltd., a Japanese company ("NUL"). At December 31, 2000, the company
owned approximately 28% of NUL's common stock that has a fair market value of
approximately $320 million. The company has approximately $174 million of
retained earnings that represents undistributed earnings of NUL.
10 Debt
Long-term debt comprises the following:
========================================================
December 31 (Millions) 2000 1999
--------------------------------------------------
11 3/4% senior notes due 2004 $ 334.2 $ 334.2
7 7/8% senior notes due 2008 200.0 200.0
12% senior notes 399.5
Other, net of unamortized
discounts 18.9 39.4
----------------
Total 553.1 973.1
Less - Current maturities 16.8 22.9
----------------
Total long-term debt $ 536.3 $ 950.2
--------------------------------------------------
========================================================
48
Total long-term debt maturities in 2001, 2002, 2003, 2004, and 2005 are
$16.8, $1.7, $.2, $334.4, and $.2 million, respectively.
Cash paid during 2000, 1999, and 1998 for interest was $90.5, $141.5, and
$185.6 million, respectively.
On April 15, 2000, the company redeemed all of its $399.5 million outstanding
12% senior notes due 2003 at the stated redemption price of 106% of principal.
As a result, the company recorded an extraordinary charge of $19.8 million, net
of $10.7 million of income tax benefits, or $.06 per diluted share, for the call
premium and unamortized debt expense. The redemption was funded through a
combination of cash and short-term borrowings under the company's two credit
agreements discussed below.
During 1999, the company repurchased $115.8 million principal amount of its
11 3/4% senior notes due 2004 and $25.5 million principal amount of its 12%
senior notes due 2003 at a cost of $157.4 million. As a result, the company
recorded an extraordinary charge of $12.1 million, net of $6.5 million of income
tax benefits, or $.04 per diluted common share.
In March 2000, the company entered into a $150 million credit agreement
expiring April 2001 for the purpose of funding the redemption of its 12% senior
notes. As of December 31, 2000, $127.5 million was borrowed under this agreement
at a rate of 7.56%. The company also has a $400 million credit agreement
expiring June 2001. As of December 31, 2000, there were no borrowings
outstanding under the facility and the entire $400 million was available for
borrowings. The company pays commitment fees on the total amount of the
facility. In addition, the company has access to certain uncommitted lines of
credit from U.S. banks and international subsidiaries maintain short-term credit
arrangements with banks in accordance with local customary practice.
11 Other accrued liabilities
Other accrued liabilities (current) comprise the following:
================================================================================
December 31 (Millions) 2000 1999
--------------------------------------------------------------------------
Payrolls and commissions $ 314.7 $ 360.9
Customers' deposits and
prepayments 545.0 522.0
Taxes other than income taxes 120.2 113.5
Restructuring* 73.4 36.2
Other 270.2 354.0
-----------------------------
Total other accrued liabilities $ 1,323.5 $ 1,386.6
--------------------------------------------------------------------------
*At December 31, 2000 and 1999, an additional $9.4 million and $21.0
million, respectively, was reported in other liabilities (long term) on
the consolidated balance sheet.
================================================================================
12 Leases
Rental expense, less income from subleases, for 2000, 1999, and 1998 was
$126.6, $120.8, and $118.8 million, respectively.
Minimum net rental commitments under noncancelable operating leases
outstanding at December 31, 2000, substantially all of which relate to real
properties, were as follows: 2001, $126.5; 2002, $107.1; 2003, $84.6; 2004,
$64.6; 2005, $42.3; and $271.5 million thereafter. Such rental commitments
have been reduced by minimum sublease rentals of $73.0 million due in the
future under noncancelable subleases.
49
13 Financial instruments
The company uses derivative financial instruments to manage its exposure to
market risks from changes in foreign currency exchange rates. The derivative
instruments used are foreign exchange forward contracts and foreign exchange
options.
Due to its foreign operations, the company is exposed to the effects of
foreign currency exchange rate fluctuations on the U.S. dollar. Foreign
exchange forward contracts and options generally have maturities of three
months except for foreign exchange forward contracts for Japanese yen which
generally have maturities of one year. These instruments are entered into for
the sole purpose of hedging certain royalty income and cost exposures.
The cost of foreign currency options is recorded in other current assets in
the consolidated balance sheet. At December 31, 2000, such amount was $.5
million. When the U.S. dollar strengthens against foreign currencies, the
decline in value of the underlying exposures is partially offset by gains in
the value of purchased currency options designated as hedges. When the U.S.
dollar weakens, the increase in the value of the underlying exposures is
reduced only by the premium paid to purchase the options. The cost of options
is reported in income ratably over the option term, and any gains thereon are
reported in income when the related transactions being hedged (generally
within six months) are recognized.
The company also enters into foreign exchange forward contracts. Gains and
losses on such contracts are deferred and included in current liabilities
until the corresponding transaction is recognized. At December 31, 2000, the
company had a total of $217.0 million (of notional value) of foreign exchange
forward contracts, $168.3 million to sell foreign currencies, and $48.7
million to buy foreign currencies. At December 31, 1999, the company had a
total of $264.7 million (of notional value) of such contracts, $237.0 million
to sell foreign currencies, and $27.7 million to buy foreign currencies. At
December 31, 2000, a realized net gain on such contracts of approximately
$2.5 million was deferred and included in current liabilities. Gains or
losses on foreign exchange forward contracts are reported in income when the
related transactions being hedged (generally within three months except for
yen contracts) are recognized.
In 1999, the company entered into interest rate swaps and currency swaps
for euros and Japanese yen. The currency swaps were designated as hedges of
the foreign currency exposure on the company's net investments in foreign
subsidiaries and equity investments. The currency effects of these hedges are
reflected in accumulated other comprehensive income (loss) thereby offsetting
a portion of the foreign currency translation of net assets. The difference
between receipts of a U.S. fixed rate of interest and payments of a foreign
currency denominated floating rate is reflected in interest expense. In 2000,
the company terminated these swaps, and as a result received net cash of
$18.5 million and recognized a pretax loss of $2.7 million. Under the swaps,
the company recognized an interest expense benefit of approximately $16
million and $7 million in 2000 and 1999, respectively.
50
Financial instruments comprise the following:
================================================================================
December 31 (Millions) 2000 1999
--------------------------------------------------------------------------
Outstanding:
Long-term debt $ 553.1 $ 973.1
Foreign exchange forward contracts* 217.0 264.7
Foreign exchange options* 63.9 288.2
Interest rate swaps* - 400.0
Foreign currency swaps* - 400.0
--------------------------
Estimated fair value:
Long-term debt $ 557.0 $ 1,021.2
Foreign exchange forward contracts 3.0 (1.9)
Foreign exchange options .2 8.4
Interest rate swaps - 3.4
Foreign currency swaps - (27.2)
--------------------------------------------------------------------------
*notional value
================================================================================
Financial instruments also include temporary cash investments and customer
accounts receivable. Temporary investments are placed with creditworthy
financial institutions, primarily in over-securitized treasury repurchase
agreements, euro-time deposits, or commercial paper of major corporations. At
December 31, 2000, the company's cash equivalents principally have maturities
of less than one month. Due to the short maturities of these instruments,
they are carried on the balance sheet at cost plus accrued interest, which
approximates market value. Realized gains or losses during 2000 and 1999, as
well as unrealized gains or losses at December 31, 2000, were immaterial.
Receivables are due from a large number of customers that are dispersed
worldwide across many industries. At December 31, 2000 and 1999, the company
had no significant concentrations of credit risk.
The carrying amount of cash and cash equivalents, and notes payable
approximates fair value because of the short maturity of these instruments.
The fair value of the company's long-term debt is based on the quoted market
prices for publicly traded issues. For debt that is not publicly traded, the
fair value is estimated, after considering any conversion terms, based on
current yields to maturity for the company's publicly traded debt with
similar maturities. In estimating the fair value of its derivative positions,
the company utilizes quoted market prices, if available, or quotes obtained
from outside sources.
14 Litigation
There are various lawsuits, claims, and proceedings that have been brought or
asserted against the company. Although the ultimate results of these
lawsuits, claims, and proceedings are not currently determinable, management
does not expect that these matters will have a material adverse effect on the
company's consolidated financial position, consolidated results of
operations, or liquidity.
51
15 Segment information
The company has two business segments: Services and Technology. The products
and services of each segment are marketed throughout the world to commercial
businesses and governments. The major service and product lines by segment
are as follows: Services - systems integration and solutions, outsourcing,
network services, and multivendor maintenance; Technology -enterprise-class
servers and specialized technologies.
The accounting policies of each business segment are the same as those
described in the summary of significant accounting policies. Intersegment
sales and transfers are priced as if the sales or transfers were to third
parties. The company evaluates business segment performance on operating
income exclusive of restructuring charges and unusual and nonrecurring items.
All corporate and centrally incurred costs are allocated to the business
segments based principally on assets, revenue, employees, square footage, or
usage.
Corporate assets are principally cash and cash equivalents, prepaid pension
assets, and deferred income taxes. The expense or income related to corporate
assets are allocated to the business segments. In addition, corporate assets
include an offset for accounts receivable that have been recorded as sales in
accordance with SFAS No. 125 because such receivables are included in the
assets of the business segments.
No single customer accounts for more than 10% of revenue. Revenue from
various agencies of the U.S. Government, which is reported in both business
segments, approximated $689, $865, and $917 million in 2000, 1999, and 1998,
respectively.
A summary of the company's operations by business segment for 2000, 1999,
and 1998 is presented below:
=============================================================================
(Millions of dollars) Total Corporate Services Technology
------------------------------------------------------------------------
2000
----
Customer revenue $6,885.0 $4,741.6 $2,143.4
Intersegment $ (437.2) 46.6 390.6
---------------------------------------------
Total revenue $6,885.0 $ (437.2) $4,788.2 $2,534.0
---------------------------------------------
Operating income
(loss) $ 426.8 $ (103.3) $ 81.4 $ 448.7
Depreciation and
amortization 271.0 116.7 154.3
Total assets 5,717.7 2,438.8 1,989.0 1,289.9
Investments at
equity 225.8 1.7 224.1
Capital expenditures
for properties 198.3 21.4 111.9 65.0
1999
----
Customer revenue $7,544.6 $5,287.0 $2,257.6
Intersegment $ (577.5) 65.6 511.9
---------------------------------------------
Total revenue $7,544.6 $ (577.5) $5,352.6 $2,769.5
---------------------------------------------
Operating income
(loss) $ 960.7 $ (23.6) $ 421.0 $ 563.3
Depreciation and
amortization 265.2 115.1 150.1
Total assets 5,889.7 2,754.9 1,991.8 1,143.0
Investments at
equity 225.5 1.8 223.7
Capital expenditures
for properties 219.6 59.9 97.8 61.9
1998
----
Customer revenue $7,243.9 $4,944.8 $2,299.1
Intersegment $ (511.2) 73.7 437.5
---------------------------------------------
Total revenue $7,243.9 $ (511.2) $5,018.5 $2,736.6
---------------------------------------------
Operating income
(loss) $ 799.0 $ (45.3) $ 332.3 $ 512.0
Depreciation and
amortization 270.4 88.1 182.3
Total assets 5,613.2 2,717.8 1,837.6 1,057.8
Investments at
equity 184.6 2.1 182.5
Capital expenditures
for properties 209.1 44.2 86.5 78.4
------------------------------------------------------------------------
==============================================================================
52
Presented below is a reconciliation of total business segment operating
income to consolidated income before income taxes:
===============================================================
Year ended December 31
(Millions) 2000 1999 1998
-----------------------------------------------------------
Total segment operating
income $ 530.1 $ 984.3 $ 844.3
Interest expense (79.8) (127.8) (171.7)
Other income (expense), net 32.0 (62.6) (33.1)
Corporate and eliminations 22.9 (23.6) (45.3)
Other special charges (126.2)
-----------------------------
Total income before
income taxes $ 379.0 $ 770.3 $ 594.2
-----------------------------------------------------------
===============================================================
Presented below is a reconciliation of total business segment assets to
consolidated assets:
======================================================================
December 31 (Millions) 2000 1999 1998
---------------------------------------------------------------
Total segment assets $ 3,278.9 $ 3,134.8 $ 2,895.4
Cash and cash equivalents 378.0 464.0 616.4
Prepaid pension assets 1,063.0 975.9 833.8
Deferred income taxes 1,044.2 1,128.3 1,123.2
Elimination for sale of
receivables (279.1) (30.7) (28.4)
Other corporate assets 232.7 217.4 172.8
----------------------------------
Total assets $ 5,717.7 $ 5,889.7 $ 5,613.2
---------------------------------------------------------------
======================================================================
Geographic information about the company's revenue, which is principally
based on location of the selling organization, and properties, is presented
below:
=============================================================
(Millions) 2000 1999 1998
---------------------------------------------------------
Revenue
United States $ 2,875.5 $ 3,357.9 $ 3,154.3
United Kingdom 762.9 806.5 735.8
Other foreign 3,246.6 3,380.2 3,353.8
---------------------------------
Total $ 6,885.0 $ 7,544.6 $ 7,243.9
---------------------------------
Properties, net
United States $ 389.2 $ 367.2 $ 322.3
United Kingdom 52.6 64.2 56.2
Brazil 37.2 38.8 61.9
Other foreign 141.2 150.6 145.0
---------------------------------
Total $ 620.2 $ 620.8 $ 585.4
---------------------------------------------------------
=============================================================
16 Employee plans
Stock plans. Under plans approved by the stockholders, stock options,
stock appreciation rights, restricted stock, and restricted stock
units may be granted to officers and other key employees.
Options have been granted to purchase the company's common stock
at 100% of the fair market value at the date of grant. Options have
a maximum duration of ten years and generally become exercisable in
annual installments over a four-year period following date of grant.
Restricted stock and restricted stock units have been granted and
are subject to forfeiture until the expiration of a specified period
of service commencing on the date of grant. Compensation expense
resulting from the awards is charged to income ratably from the date
of grant until the date the restrictions lapse and is based on fair
market value at the date of grant. During the years ended December
31, 2000, 1999, and 1998, $1.0, $2.5, and $6.0 million was charged
to income, respectively.
Effective July 1, 1998, the company implemented a world-wide
Employee Stock Purchase Plan ("ESPP"), which enables substantially
all regular employees to purchase shares of the company's common
stock through payroll deductions of up to 10% of eligible pay. The
price the employee pays is 85% of the market price at the beginning
or end of a calendar quarter, whichever is lower. During the years
ended December 31, 2000, 1999, and 1998, employees purchased shares,
all of which were newly issued shares, for which $37.3, $35.1 and
$5.6 million was paid to the company, respectively.
U.S. employees are eligible to participate in an employee savings
plan. Under this plan, a percentage of the employee's pay may be
contributed to various investment alternatives. Effective July 1,
1998, a company match for up to 1% of pay was reinstituted.
Effective January 1, 2000 such company match was increased to 2%.
The match consists of the company contributing newly issued shares
of its common stock to the plan. The charge to income, related to
such company match, for the years ended December 31, 2000, 1999, and
1998 was $19.1, $8.2, and $4.1 million, respectively.
53
The company applies APB Opinion 25 for its stock plans and the
disclosure-only option under SFAS No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation expense is recognized for stock
options granted and for common stock purchases under the ESPP.
Pro forma information regarding net income and earnings per share is required
by SFAS No. 123, and has been determined as if the company had accounted for its
stock plans under the fair value method of SFAS No. 123. The fair value of stock
options is estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for 2000, 1999, and 1998,
respectively: risk-free interest rates of 6.84%, 5.14%, and 5.67%, volatility
factors of the expected market price of the company's common stock of 55%, a
weighted average expected life of the options of five years, and no dividends.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The company's
pro forma net income for the years ended December 2000, 1999, and 1998,
respectively, follows: 2000, $182.5 million, or $.58 per diluted share; 1999,
$472.2 million, or $1.46 per diluted share; and 1998, $361.6 million, or $.95
per diluted share.
A summary of the status of stock option activity follows:
=============================================================================================================================
Year ended December 31
(Shares in thousands) 2000 1999 1998
------------------------------------------------------------- -------------------------- ----------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------------------------- -------------------------- ----------------------------
Outstanding at
beginning of year 19,158 $ 19.74 18,252 $ 13.28 20,439 $ 9.90
Granted 7,667 33.36 6,981 30.54 5,492 23.14
Exercised (1,455) 9.58 (4,649) 11.28 (6,842) 10.76
Forfeited and expired (3,285) 24.41 (1,426) 17.05 (837) 14.05
-------------------------- -------------------------- ----------------------------
Outstanding at end of year 22,085 24.44 19,158 19.74 18,252 13.28
-------------------------- -------------------------- ----------------------------
Exercisable at end of year 7,946 15.72 6,138 11.39 7,547 10.50
-------------------------- -------------------------- ----------------------------
Shares available for granting
options at end of year 4,008 2,601 4,592
-------------------------- -------------------------- ----------------------------
Weighted average fair value
of options granted during
the year $ 18.76 $ 15.95 $ 12.79
December 31, 2000
(Shares in thousands) Outstanding Exercisable
----------------------------------------------------------------------------- ------------------------------
Exercise Average Average Average
Price Range Shares Life * Exercise Price Shares Exercise Price
----------------------------------------------------------------------------- ------------------------------
$ 4-11 3,864 5.26 $ 7.02 3,209 $ 7.16
$ 11-30 5,898 6.78 19.01 3,285 17.43
$ 30-52 12,323 8.78 32.50 1,452 30.74
----------------------------------------- -------------------------------
Total 22,085 7.63 24.44 7,946 15.72
----------------------------------------------------------------------------- ------------------------------
* Average contractual remaining life in years.
=============================================================================================================================
54
Retirement benefits
Retirement plans funded status and amounts recognized in the company's
consolidated balance sheet at December 31, 2000 and 1999, follows:
=======================================================================================================================
U.S. Plans International Plans
-------------------------- ---------------------
December 31 (Millions) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 3,491.1 $ 3,684.1 $ 844.2 $ 811.7
Service cost 37.4 39.3 18.7 18.0
Interest cost 263.5 251.3 49.9 51.5
Plan participants' contributions 9.4 10.2
Plan amendments 59.0 1.1
Actuarial (gain) loss (29.2) (234.5) (7.4) 16.3
Benefits paid (262.8) (249.1) (34.7) (35.9)
Effect of settlements/curtailments 1.4 1.1
Foreign currency translation adjustments (121.7) (66.9)
Other (3.8) 38.2
-------------------------- ---------------------
Benefit obligation at end of year $ 3,559.0 $ 3,491.1 $ 757.1 $ 844.2
-----------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 5,045.5 $ 4,459.1 $ 959.3 $ 877.9
Actual return on plan assets 163.5 831.0 40.4 113.8
Employer contribution 5.1 4.5 10.1 15.3
Plan participants' contributions 9.4 10.2
Benefits paid (262.8) (249.1) (34.7) (35.9)
Foreign currency translation adjustments (136.6) (73.2)
Other 51.2
-------------------------- ---------------------
Fair value of plan assets at end of year $ 4,951.3 $ 5,045.5 $ 847.9 $ 959.3
-----------------------------------------------------------------------------------------------------------------
Funded status $ 1,392.3 $ 1,554.4 $ 90.8 $ 115.1
Unrecognized net actuarial (gain) loss (413.6) (660.0) (13.7) (34.4)
Unrecognized prior service (benefit) cost (12.8) (20.0) 6.9 7.6
Unrecognized net obligation at date of adoption .8 .3 .7
-------------------------- ---------------------
Prepaid pension cost $ 965.9 $ 875.2 $ 84.3 $ 89.0
-----------------------------------------------------------------------------------------------------------------
Amounts recognized in the statement of financial
position consist of:
Prepaid pension cost $ 965.9 $ 875.2 $ 97.1 $ 100.7
Other liabilities (12.8) (11.7)
-------------------------- ---------------------
$ 965.9 $ 875.2 $ 84.3 $ 89.0
-----------------------------------------------------------------------------------------------------------------
=======================================================================================================================
The projected benefit obligations, accumulated benefit obligations and fair
value of plan assets for plans with accumulated benefit obligations in excess of
plan assets was as follows (in millions of dollars): $168.7, $161.4, and $91.2
million at December 31, 2000; and $187.2, $178.1, and $108.2 million at December
31, 1999.
55
Net periodic pension costs for 2000, 1999, and 1998 includes the following
components:
===================================================================================================================================
U.S. Plans International Plans
Year ended December 31 (Millions) 2000 1999 1998 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
Service cost $ 37.4 $ 39.3 $ 35.7 $ 18.7 $ 18.0 $ 15.3
Interest cost 263.5 251.3 248.3 49.9 51.5 45.8
Expected return on plan assets (440.3) (395.4) (356.5) (67.3) (67.4) (56.8)
Amortization of prior service (benefit) cost (5.9) (6.3) (6.6) .9 1.0 .8
Amortization of asset or liability at adoption .8 .7 .7 .3 .1
Recognized net actuarial loss (gain) 1.1 1.4 23.7 .5 2.8 (.1)
Settlement/curtailment (gain) loss (.4) 1.4 1.1
---------------------------------------------------------------
Net periodic pension (income) cost $ (143.4) $(109.0) $ (55.1) $ 4.4 $ 7.1 $ 5.0
-------------------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions as of December 31
were as follows:
Discount rate 8.00% 7.75% 7.00% 6.57% 6.35% 6.36%
Rate of compensation increase 5.40% 5.40% 5.40% 3.77% 3.81% 4.07%
Expected long-term rate of return on assets 10.00% 10.00% 10.00% 8.51% 8.44% 8.23%
-------------------------------------------------------------------------------------------------------------------------------
===================================================================================================================================
Other postretirement benefits
A reconciliation of the benefit obligation, fair value of the plan assets, and
the funded status of the postretirement medical plan at December 31, 2000 and
1999, follows:
=====================================================================
December 31 (Millions) 2000 1999
-----------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of
year $ 217.4 $ 225.8
Interest cost 14.9 14.9
Plan participants' contributions 24.1 23.8
Actuarial loss (gain) 7.2 1.5
Benefits paid (44.3) (43.1)
Effect of settlement/curtailment (.2) (5.5)
--------------------
Benefit obligation at end of year $ 219.1 $ 217.4
--------------------
Change in plan assets
Fair value of plan assets at
beginning of year $ 13.4 $ 13.3
Actual return on plan assets 1.4 (.1)
Employer contributions 18.7 19.5
Plan participants' contributions 24.1 23.8
Benefits paid (44.3) (43.1)
--------------------
Fair value of plan assets at end of year $ 13.3 $ 13.4
--------------------
Funded status $ (205.8) $ (204.0)
Unrecognized net actuarial loss 17.5 12.1
Unrecognized prior service benefit (11.8) (13.6)
--------------------
Accrued benefit cost $ (200.1) $ (205.5)
-----------------------------------------------------------------
=====================================================================
Net periodic postretirement benefit cost for 2000, 1999, and 1998 follows:
========================================================================
Year ended December 31 (Millions) 2000 1999 1998
-------------------------------------------------------------------
Interest cost $ 14.9 $ 14.9 $ 15.5
Expected return on plan assets (.4) (1.1)
Amortization of prior
service benefit (2.0) (2.2) (2.7)
Recognized net actuarial loss .4 .6 .6
Settlement/curtailment gain (6.5)
---------------------------
Net periodic benefit cost $ 13.3 $ 6.4 $ 12.3
---------------------------
Weighted-average assumptions as
of December 31 were as follows:
Discount rate 7.70% 7.50% 7.20%
Expected return on plan assets 8.00% 8.00% 8.00%
-------------------------------------------------------------------
========================================================================
56
The assumed health care cost trend rate used in measuring the
expected cost of benefits covered by the plan was 10.2% for 2000,
gradually declining to 5.5% in 2006 and thereafter. A one-percentage
point increase (decrease) in the assumed health care cost trend rate
would increase (decrease) the accumulated postretirement benefit
obligation at December 31, 2000, by $8.6 and $(7.9) million,
respectively, and increase (decrease) the interest cost component of
net periodic postretirement benefit cost for 2000 by $.6 and $(.6)
million, respectively.
17 Stockholders' equity
The company has 720.0 million authorized shares of common stock, par
value $.01 per share, and 40.0 million shares of authorized
preferred stock, par value $1 per share, issuable in series.
During the year ended December 31, 1999, the company made several
calls of its Series A Cumulative Convertible Preferred Stock
("Series A Preferred Stock") for redemption. As a result, of the
28.4 million shares of Series A Preferred Stock outstanding at
December 31, 1998, 24.5 million were converted into 40.8 million
shares of the company's common stock and 3.9 million shares of
Series A Preferred Stock were redeemed for $197.0 million in cash.
In 1999, the remaining balance of $27 million of 8 1/4% convertible
subordinated notes due 2006 were converted into 3.9 million shares
of the company's common stock.
Each outstanding share of common stock has attached to it one
preferred share purchase right. The rights become exercisable only
if a person or group acquires 20% or more of the company's common
stock, or announces a tender or exchange offer for 30% or more of
the common stock. Until the rights become exercisable, they have no
dilutive effect on net income per common share.
At December 31, 2000, 28.3 million shares of unissued common stock
of the company were reserved for stock options and for stock
purchase and savings plans.
Changes in issued shares during the three years ended December 31,
2000, were as follows:
=========================================================================
Preferred Common Treasury
(Thousands) Stock Stock Stock
---------------------------------------------------------------------
Balance at December 31, 1997 28,800 251,764 (739)
Conversions to common stock (2) 110
Issuance of stock under stock
option and other plans 143 7,573 (553)
------------------------------
Balance at December 31, 1998 28,941 259,447 (1,292)
Conversions to common stock (24,952) 46,090
Redemptions (3,941)
Issuance of stock under stock
option and other plans 6,916 (578)
Other (48)
------------------------------
Balance at December 31, 1999 - 312,453 (1,870)
Issuance of stock under stock
option and other plans 4,882 (26)
------------------------------
Balance at December 31, 2000 - 317,335 (1,896)
---------------------------------------------------------------------
=========================================================================
Comprehensive income for the three years ended December 31, 2000, includes
the following components:
=======================================================================
Year ended
December 31 (Millions) 2000 1999 1998
-------------------------------------------------------------------
Net income $ 225.0 $ 510.7 $ 376.4
------------------------------
Other comprehensive
income (loss)
Foreign currency translation
adjustments (54.3) (41.6) (89.6)
Related tax (benefit) 19.0 (2.8) (6.1)
expense
------------------------------
Total other comprehensive
income (loss) (73.3) (38.8) (83.5)
------------------------------
Comprehensive income $ 151.7 $ 471.9 $ 292.9
-------------------------------------------------------------------
=======================================================================
57
Report of Management
The management of the company is responsible for the integrity of its financial
statements. These statements have been prepared in conformity with accounting
principles generally accepted in the United States and include amounts based on
the best estimates and judgments of management. Financial information included
elsewhere in this report is consistent with that in the financial statements.
The company maintains a system of internal accounting controls designed to
provide reasonable assurance at a reasonable cost that assets are safeguarded
against loss or unauthorized use, and that transactions are executed in
accordance with management's authorization and recorded and summarized properly.
This system is augmented by written policies and procedures, an internal audit
program, and the selection and training of qualified personnel.
Ernst & Young LLP, independent auditors, have audited the company's financial
statements. Their accompanying report is based on audits conducted in accordance
with auditing standards generally accepted in the United States, which require a
review of the system of internal accounting controls and tests of accounting
procedures and records to the extent necessary for the purpose of their audits.
The Board of Directors, through its Audit Committee, which is composed
entirely of outside directors, oversees management's responsibilities in the
preparation of the financial statements and selects the independent auditors,
subject to stockholder ratification. The Audit Committee meets regularly with
the independent auditors, representatives of management, and the internal
auditors to review the activities of each and to assure that each is properly
discharging its responsibilities. To ensure complete independence, the internal
auditors and representatives of Ernst & Young LLP have full access to meet with
the Audit Committee, with or without management representatives present, to
discuss the results of their examinations and their opinions on the adequacy of
internal controls and the quality of financial reporting.
/s/ Lawrence A. Weinbach /s/ Janet Brutschea Haugen
Lawrence A. Weinbach Janet Brutschea Haugen
Chairman, President, Senior Vice President
and Chief Executive Officer and Chief Financial Officer
Report of Independent Auditors
To the Board of Directors of Unisys Corporation
We have audited the accompanying consolidated balance sheets of Unisys
Corporation at December 31, 2000 and 1999, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 2000. These financial statements are the
responsibility of Unisys Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Unisys Corporation
at December 31, 2000 and 1999, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 18, 2001
58
Unisys Corporation
Supplemental Financial Data (Unaudited)
Quarterly financial information
First Second Third Fourth
(Millions, except per share data) Quarter Quarter Quarter Quarter Year
===================================================================================================================
2000
- ---------------------------------
Revenue $ 1,668.7 $ 1,597.1 $ 1,690.9 $ 1,928.3 $ 6,885.0
Gross profit 539.3 480.8 474.7 594.3 2,089.1
Income before income taxes 161.4 85.3 65.0 67.3 379.0
Income before extraordinary item 106.5 56.3 42.9 39.1 244.8
Net income 106.5 36.5 42.9 39.1 225.0
Earnings per common share - basic
Before extraordinary item .34 .18 .14 .12 .78
Extraordinary item (.06) (.06)
----------------------------------------------------------------
Total .34 .12 .14 .12 .72
----------------------------------------------------------------
Earnings per common share - diluted
Before extraordinary item .34 .18 .14 .12 .77
Extraordinary item (.06) (.06)
----------------------------------------------------------------
Total .34 .12 .14 .12 .71
----------------------------------------------------------------
Market price per common share - high 36.06 28.19 15.31 16.38 36.06
- low 24.25 14.25 9.13 9.25 9.13
===================================================================================================================
1999
- ---------------------------------
Revenue $ 1,822.8 $ 1,896.5 $ 1,865.4 $ 1,959.9 $ 7,544.6
Gross profit 668.6 664.1 670.2 681.8 2,684.7
Income before income taxes 169.7 182.5 196.1 222.0 770.3
Income before extraordinary item 109.9 118.0 150.5 144.4 522.8
Net income 109.9 118.0 138.4 144.4 510.7
Dividends on preferred shares 22.8 12.0 1.9 36.7
Earnings on common shares 87.1 106.0 136.5 144.4 474.0
Earnings per common share - basic
Before extraordinary item .33 .39 .49 .47 1.69
Extraordinary item (.04) (.04)
----------------------------------------------------------------
Total .33 .39 .45 .47 1.65
----------------------------------------------------------------
Earnings per common share - diluted
Before extraordinary item .31 .37 .47 .46 1.63
Extraordinary item (.04) (.04)
----------------------------------------------------------------
Total .31 .37 .43 .46 1.59
----------------------------------------------------------------
Market price per common share - high 36.50 39.94 49.69 47.44 49.69
- low 27.63 27.38 37.06 20.94 20.94
===================================================================================================================
In the fourth quarter of 2000, the company recognized a pretax restructuring
charge of $127.6 million, or $.29 per diluted common share. Excluding this item,
diluted earnings per share for the year before the extraordinary item was $1.06.
See Note 5 of the Notes to Consolidated Financial Statements.
In the third quarter of 1999, the company completed three acquisitions that were
accounted for as poolings of interests and all prior periods were restated. See
Note 3 of the Notes to Consolidated Financial Statements.
Included in the third quarter of 1999, the company recognized a one-time tax
benefit of $22.0 million, or $.07 per diluted common share. Excluding this item,
diluted earnings per share for the year before the extraordinary item was $1.56.
See Note 7 of the Notes to Consolidated Financial Statements.
The individual quarterly per-common share amounts may not total to the
per-common share amount for the full year because of accounting rules governing
the computation of earnings per common share.
Market prices per common share are as quoted on the New York Stock Exchange
composite listing.
59
Ten-Year summary of selected financial data
(Millions, except
per share data) 2000(1) 1999 1998 1997(1) 1996 1995(1) 1994(1) 1993 1992 1991(1)
==================================================================================================================================
Results of operations
Revenue $6,885.0 $7,544.6 $7,243.9 $6,662.9 $6,397.9 $6,370.3 $6,130.6 $6,133.0 $6,750.9 $ 6,943.0
Operating income (loss) 426.8 960.7 799.0 (408.4) 313.1 (568.4) 273.8 692.7 690.2 (612.7)
Income (loss) from
continuing operations
before income taxes 379.0 770.3 594.2 (748.1) 80.2 (786.0) 17.4 365.2 304.6 (1,422.2)
Income (loss) from
continuing operations
before extraordinary
items and changes in
accounting principles 244.8 522.8 376.4 (852.9) 50.7 (632.2) 14.8 280.6 168.6 (1,517.8)
Net income (loss) 225.0 510.7 376.4 (852.9) 38.6 (629.5) 103.2 559.7 363.5 (1,390.9)
Dividends on preferred
shares 36.7 106.5 111.1 120.8 120.3 120.1 121.6 122.1 121.2
Earnings (loss) on common
shares 225.0 474.0 269.9 (964.0) (82.2) (749.8) (16.9) 438.1 241.4 (1,512.1)
Earnings (loss) from
continuing operations
per common share
Basic .78 1.69 1.07 (5.25) (.40) (4.36) (.61) .97 .28 (10.05)
Diluted .77 1.63 1.01 (5.25) (.40) (4.36) (.61) .88 .28 (10.05)
Financial position
Working capital
(deficit) $ (98.8) $ 227.2 $ 247.5 $ 321.9 $ 684.5 $ 93.5 $1,044.2 $ 700.9 $ 537.7 $ 406.7
Total assets 5,717.7 5,889.7 5,613.2 5,631.6 7,002.3 7,153.3 7,238.1 7,386.3 7,365.1 8,256.5
Long-term debt 536.3 950.2 1,106.7 1,438.4 2,271.5 1,533.3 1,864.1 2,025.0 2,172.8 2,694.6
Common stockholders'
equity(2) 2,186.1 1,953.3 90.9 (210.3) 188.8 303.7 1,052.0 1,072.0 561.8 359.2
Common stockholders'
equity per share 6.93 6.29 .35 (.84) 1.07 1.76 6.10 6.24 3.44 2.20
Other data
Research and
development $ 333.6 $ 339.4 $ 308.3 $ 314.8 $ 352.0 $ 411.7 $ 464.8 $ 496.9 $ 513.3 $ 617.3
Capital additions
of properties 198.3 219.6 209.1 184.0 164.3 196.0 209.4 174.0 228.4 224.1
Investment in
marketable software 152.4 122.8 100.3 133.5 116.6 123.0 121.3 118.7 110.2 167.7
Depreciation 143.0 141.8 149.2 159.1 184.4 205.5 228.7 254.0 313.4 413.9
Amortization
Marketable software 115.5 110.9 112.3 97.2 101.7 151.7 150.5 144.6 131.8 241.0
Goodwill 12.5 12.5 8.9 963.9 46.1 40.9 36.9 36.7 36.8 246.6
Common shares
outstanding (millions) 315.4 310.6 258.2 251.0 176.4 172.9 172.5 171.9 163.4 163.1
Stockholders of record
(thousands) 29.7 32.8 28.6 37.3 39.2 41.5 45.3 47.8 51.7 54.6
Employees (thousands) 36.9 35.8 33.5 32.9 33.2 37.6 38.0 38.4 42.0 46.7
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(1) Includes special pretax charges of $127.6 million, $1,039.2 million,
$846.6 million, $186.2 million, and $1,200.0 million for the years ended
December 31, 2000, 1997, 1995, 1994, and 1991, respectively.
(2) After deduction of cumulative preferred dividends in arrears in 1991,
1992, and 1993.
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