================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission File Number 001-00395
NCR CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 31-0387920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 South Patterson Blvd.
Dayton, Ohio 45479
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (937) 445-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Number of shares of common stock, $0.01 par value per share, outstanding as of
July 31, 2000 was 96,044,104.
TABLE OF CONTENTS
PART I. Financial Information
Description Page
----------- ----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
Three and Six Months Ended June 30, 2000 and 1999 3
Condensed Consolidated Balance Sheets
June 30, 2000 (Unaudited) and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. Other Information
Description Page
----------- ----
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
2
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
In millions, except per share amounts
Three Months Ended Six Months Ended
June 30 June 30
--------------------- -------------------
2000 1999 2000 1999
----- ----- ----- -----
Revenue
Products $ 771 $ 849 $ 1,400 $ 1,506
Services 677 723 1,303 1,399
-------- -------- -------- -------
Total Revenue 1,448 1,572 2,703 2,905
-------- -------- -------- -------
Operating Expenses
Cost of products 471 529 883 962
Cost of services 507 544 992 1,060
Selling, general and administrative expenses 328 353 634 665
Research and development expenses 99 85 169 165
-------- -------- -------- -------
Total Operating Expenses 1,405 1,511 2,678 2,852
-------- -------- -------- -------
Income from Operations 43 61 25 53
Interest expense (3) (2) (5) (5)
Other income, net 24 15 39 31
-------- -------- -------- -------
Income Before Income Taxes 64 74 59 79
Income tax expense 25 28 25 30
-------- -------- -------- -------
Net Income $ 39 $ 46 $ 34 $ 49
======== ======== ======== =======
Net Income per Common Share
Basic $ 0.41 $ 0.47 $ 0.36 $ 0.50
Diluted $ 0.39 $ 0.45 $ 0.35 $ 0.48
Weighted Average Common Shares Outstanding
Basic 95.4 98.3 94.6 98.7
Diluted 98.8 102.1 97.7 102.5
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
In millions, except per share amounts
June 30 December 31
2000 1999
----------- -----------
(Unaudited)
Assets
Current assets
Cash and short-term investments $ 561 $ 763
Accounts receivable, net 1,173 1,197
Inventories 299 299
Other current assets 298 282
----------- -----------
Total Current Assets 2,331 2,541
Reworkable service parts, net 218 209
Property, plant and equipment, net 754 793
Other assets 1,474 1,352
----------- -----------
Total Assets $ 4,777 $ 4,895
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings $ 37 $ 37
Accounts payable 335 378
Payroll and benefits liabilities 218 247
Customer deposits and deferred service revenue 422 365
Other current liabilities 502 635
----------- -----------
Total Current Liabilities 1,514 1,662
Long-term debt 38 40
Pension and indemnity liabilities 323 342
Postretirement and postemployment benefits liabilities 542 570
Other liabilities 611 623
Minority interests 47 49
----------- -----------
Total Liabilities 3,075 3,286
----------- -----------
Put Options 22 13
----------- -----------
Commitments and Contingencies
Stockholders' Equity
Preferred stock: par value $0.01 per share, 100.0 shares
authorized, no shares issued or outstanding at
June 30, 2000 and December 31, 1999, respectively - -
Common stock: par value $0.01 per share, 500.0 shares
authorized, 96.0 and 93.6 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively 1 1
Paid-in capital 1,173 1,081
Retained earnings 498 466
Accumulated other comprehensive income 8 48
----------- -----------
Total Stockholders' Equity 1,702 1,596
----------- -----------
Total Liabilities and Stockholders' Equity $ 4,777 $ 4,895
=========== ===========
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
In millions
Six Months Ended June 30
--------------------------------------
2000 1999
--------- ---------
Operating Activities
Net income $ 34 $ 49
Adjustments to reconcile net income to net cash provided
by/(used in) operating activities:
Depreciation and amortization 185 185
Net gain on sales of assets (21) (8)
Purchased research and development from acquisitions 24 -
Changes in operating assets and liabilities:
Receivables 37 202
Inventories - (11)
Current payables (106) (80)
Deferred revenue and customer deposits 57 49
Timing of disbursements for employee severance
and pension (144) (101)
Other operating assets and liabilities (83) (70)
--------- ---------
Net Cash (Used in)/Provided by Operating Activities (17) 215
--------- ---------
Investing Activities
Short-term investments, net 36 (109)
Expenditures for service parts and property, plant
and equipment (246) (170)
Proceeds from sales of facilities and other assets 133 40
Business acquisitions and investments (56) -
Other investing activities, net (36) (24)
--------- ---------
Net Cash Used in Investing Activities (169) (263)
--------- ---------
Financing Activities
Purchases of Company common stock (4) (62)
Short-term borrowings, net - 28
Long-term borrowings, net (3) -
Other financing activities, net 41 50
--------- ---------
Net Cash Provided by Financing Activities 34 16
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (13) (15)
--------- ---------
Decrease in Cash and Cash Equivalents (165) (47)
Cash and Cash Equivalents at Beginning of Period 571 488
--------- ---------
Cash and Cash Equivalents at End of Period $ 406 $ 441
========= =========
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
by NCR Corporation (NCR or the Company) without audit pursuant to the rules and
regulations of the Securities and Exchange Commission and, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the consolidated results of operations,
financial position, and cash flows for each period presented. The consolidated
results for interim periods are not necessarily indicative of results to be
expected for the full year. These financial statements should be read in
conjunction with NCR's 1999 Annual Report to Stockholders, Form 10-K for the
year ended December 31, 1999 and Form 10-Q for the quarter ended March 31, 2000.
Certain prior year amounts have been reclassified to conform to the 2000
presentation.
2. SUPPLEMENTAL FINANCIAL INFORMATION (in millions)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
Comprehensive Income/(Loss) 2000 1999 2000 1999
------- ------- ------ ------
Net income $ 39 $ 46 $ 34 $ 49
Other comprehensive income/(loss), net of tax:
Unrealized (loss)/gain on securities (24) (1) (32) 8
Additional minimum pension liability - - 6 -
Currency translation adjustments (4) (26) (14) (45)
---- ---- ---- ----
Total comprehensive income/(loss) $ 11 $ 19 $ (6) $ 12
==== ==== ==== ====
June 30 December 31
2000 1999
------- -----------
Cash and Short-Term Investments
Cash and cash equivalents $ 406 $ 571
Short-term investments 155 192
----- -----
Total cash and short-term investments $ 561 $ 763
===== =====
Inventories
Finished goods $ 237 $ 241
Work in process and raw materials 62 58
----- -----
Total inventories $ 299 $ 299
===== =====
3. SEGMENT INFORMATION
For 2000, NCR changed its definition of strategic operating segments and the
associated reporting framework. The Company's new reporting segments are Store
Automation, Self Service, Data Warehousing, Systemedia and All Other. All of
these segments include hardware, software, professional consulting and customer
support services. Customer support services include maintenance services,
staging and implementation services, networking, multi-vendor integration
services, consulting services, solution-specific support services and
outsourcing solutions.
6
The following tables present data for revenue and operating income/(loss) by
solution operating segments for the quarters ended June 30 (in millions):
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
Revenue
Store Automation $ 320 $ 366 $ 586 $ 685
Self Service 359 386 670 713
Data Warehousing 292 241 531 392
Systemedia 128 119 242 232
All other segments 349 460 674 883
------- ------- ------- -------
Consolidated revenue $ 1,448 $ 1,572 $ 2,703 $ 2,905
======= ======= ======= =======
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
2000 1999 2000 1999
------ ------- ------ ------
Operating Income/(Loss)
Store Automation $ (13) $ 16 $ (40) $ 14
Self Service 52 57 71 94
Data Warehousing 4 (23) (15) (92)
Systemedia 4 5 8 10
All other segments 24 6 43 27
Restructuring and other special
charges(1) (28) - (42) -
------ ------ ------ ------
Consolidated operating income $ 43 $ 61 $ 25 $ 53
====== ====== ====== ======
(1) Includes restructuring and other related charges and acquisition related
in-process research and development charges. (See Notes 7 and 9 of the Notes to
Condensed Consolidated Financial Statements).
4. CONTINGENCIES
In the normal course of business, NCR is subject to various regulations,
proceedings, lawsuits, claims and other matters, including actions under laws
and regulations related to the environment and health and safety, among others.
NCR believes the amounts provided in its consolidated financial statements, as
prescribed by generally accepted accounting principles, are adequate in light of
the probable and estimable liabilities. However, there can be no assurances that
the actual amounts required to discharge alleged liabilities from various
lawsuits, claims, legal proceedings and other matters, including the Fox River
matter discussed below, and to comply with applicable laws and regulations, will
not exceed the amounts reflected in NCR's consolidated financial statements or
will not have a material adverse effect on its consolidated results of
operations, financial condition or cash flows. Any amounts of costs that may be
incurred in excess of those amounts provided as of June 30, 2000 cannot
currently be determined.
Environmental Matters
NCR's facilities and operations are subject to a wide range of environmental
protection laws and has investigatory and remedial activities underway at a
number of facilities that it currently owns or operates, or formerly owned or
operated, to comply, or to determine compliance, with such laws. Also, NCR has
been identified, either by a government agency or by a private party seeking
contribution to site cleanup costs, as a potentially responsible party (PRP) at
a number of sites pursuant to various state and federal laws, including the
Federal Water Pollution Control Act (FWPCA) and comparable state statutes, and
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended (CERCLA), and comparable state statutes.
Various federal agencies, Native American tribes and the State of Wisconsin
(Claimants) consider NCR to be a PRP under the FWPCA and CERCLA for alleged
natural resource damages (NRD) and remediation liability with respect to the Fox
River and related Green Bay environment (Fox River System) due to, among other
things, sediment contamination in the Fox River System allegedly resulting in
part from NCR's former carbonless paper manufacturing in Wisconsin. Claimants
have also notified a number of other paper manufacturing companies of their
status as PRPs resulting from their ongoing or former paper manufacturing
operations in the Fox River Valley, and Claimants have entered into a Memorandum
of
7
Agreement among themselves to coordinate their actions, including the assertion
of claims against the PRPs. Additionally, the federal NRD Claimants have
notified NCR and the other PRPs of their intent to commence a NRD lawsuit, but
have not as yet instituted litigation. In addition, one of the Claimants, the
United States Environmental Protection Agency (USEPA), has formally proposed the
Fox River for inclusion on the CERCLA National Priorities List. In February
1999, the State of Wisconsin made available for public review a draft remedial
investigation and feasibility study (RI/FS), which outlines a variety of
alternatives for addressing the Fox River sediments. While the draft RI/FS did
not advocate any specific alternative or combination of alternatives, the
estimated total costs provided in the draft RI/FS ranged from $0 for no action
(which appears to be an unlikely choice) to between $143 million and $721
million depending on the alternative selected. In addition, one of the federal
NRD claimants has released an interim estimate of alleged losses from lost
recreational fishing opportunities of between $106 million and $147 million.
NCR, in conjunction with the other PRPs, has developed a substantial body of
evidence which it believes should demonstrate that selection of alternatives
involving river-wide restoration/remediation, particularly massive dredging,
would be inappropriate and unnecessary. However, because there is ongoing debate
within the scientific, regulatory, legal, public policy and legislative
communities over how to properly manage large areas of contaminated sediments,
NCR believes there is a high degree of uncertainty about the appropriate scope
of alternatives that may ultimately be required by the Claimants. An accurate
estimate of NCR's ultimate share of restoration/remediation and damages
liability cannot be made at this time due to uncertainties with respect to: the
scope and cost of the potential alternatives; the outcome of further federal and
state NRD assessments; the amount of NCR's share of such restoration/remediation
expenses; the timing of any restoration/remediation; the evolving nature of
restoration/remediation technologies and governmental policies; the
contributions from other parties; and the recoveries from insurance carriers and
other indemnitors. NCR believes the other currently named PRPs would be required
and able to pay substantial shares toward restoration and remediation, and that
there are additional parties, some of which have substantial resources, that may
also be liable. Further, in 1978 NCR sold the business to which the claims
apply, and NCR and the buyer have reached an interim settlement agreement under
which the parties are sharing both defense and liability costs.
It is difficult to estimate the future financial impact of environmental laws,
including potential liabilities. NCR accrues environmental provisions when it is
probable that a liability has been incurred and the amount or range of the
liability is reasonably estimable. Provisions for estimated losses from
environmental restoration and remediation are, depending on the site, based
primarily on internal and third-party environmental studies, estimates as to the
number and participation level of any other PRPs, the extent of the
contamination, and the nature of required remedial and restoration actions.
Accruals are adjusted as further information develops or circumstances change.
Management expects that the amounts accrued from time to time will be paid out
over the period of investigation, negotiation, remediation and restoration for
the applicable sites, which may as to the Fox River site be 10 to 20 years or
more. The amounts provided for environmental matters in NCR's consolidated
financial statements are the estimated gross undiscounted amount of such
liabilities, without deductions for insurance or third-party indemnity claims.
Except for the sharing arrangement described above with respect to the Fox
River, in those cases where insurance carriers or third-party indemnitors have
agreed to pay any amounts and management believes that collectibility of such
amounts is probable, the amounts are reflected as receivables in the
consolidated financial statements.
Legal Proceedings
NCR was named as one of the defendants in a purported class-action suit filed in
November 1996 in Florida alleging liability based on state antitrust and common-
law claims of unlawful restraints of trade, monopolization, and unfair business
practices related to a purported agreement between Siemens Nixdorf Printing
Systems, L.P. and NCR. In January 1999, NCR agreed to settle this suit with
plaintiffs for an undisclosed and non-material amount. The settlement was
approved by the court in early 2000 and is being implemented.
5. STOCK REPURCHASE PROGRAM
In 1999, the Board of Directors authorized two share repurchase programs valued
at a total of $500 million. The first program was authorized on April 15, 1999
for $250 million and was completed in the fourth quarter of 1999. The second
program was authorized on October 21, 1999 for $250 million. As of June 30,
2000, the Company has committed $35 million of the $250 million authorized in
October. In the first six months of 2000, approximately 102,000 shares were
repurchased on the open market at an average price of $34.97 per share.
Following the end of the second quarter, approximately 252,000 shares were
repurchased on the open market at an average price of $34.60 per share.
8
6. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted
average number of shares outstanding during the reported period. The calculation
of diluted earnings per share is similar to basic, except that the weighted
average number of shares outstanding include the additional dilution from
potential common stock such as stock options and restricted stock awards, when
appropriate.
7. RESTRUCTURING
During the fourth quarter of 1999, NCR approved a restructuring plan designed to
accelerate the Company's transformation from a computer hardware and product
company to a technology solutions and services provider. The plan led to an
alignment around four key solutions, an expected elimination of approximately
1,250 positions and an enhanced leverage of the investment in NCR's Data
Warehousing offering. A pre-tax charge of $125 million was recorded in the
fourth quarter of 1999 to provide for restructuring and other related charges as
a result of the plan. There was $73 million of restructuring and other related
liabilities incurred in connection with the 1999 business restructuring, which
were all reflected as current liabilities in NCR's balance sheet.
In addition to the pre-tax charge of $125 million recorded in the fourth quarter
of 1999, during the first six months of 2000, the Company recorded $18 million
of settlement costs relating to the settlement of customer obligations that were
not complete as of December 31, 1999. Included in this $18 million was $17
million recorded in cost of revenue and $1 million recorded in selling, general
and administrative expense. The Company is actively working to complete
substantially all of the remaining customer settlements by the third quarter of
2000 as cost effectively as possible.
In total, the Company expects the pre-tax charge of $125 million to result in
cash outlays of $83 million of which $76 million relates to employee separations
that were accrued under the Company's postemployment benefits plan as well as
non-cash write-offs of $42 million. The cash outlays are primarily for employee
separations, contract cancellations and settlement of customer obligations. As
of June 30, 2000, substantially all cash outlays for other than employee
separations had been made. The balance of the cash outlays is expected to occur
over the remainder of the current year. No adjustments have been made to the
restructuring and other related liabilities recorded in the fourth quarter of
1999.
In total, the plan calls for approximately 1,250 employee separations. As of the
end of the second quarter 2000, approximately 51% of the planned employee
separations were complete and as of June 30, 2000, the Company has incurred
cash outlays for employee separations of $30 million.
8. PUT OPTIONS
In a series of private placements, NCR sold put options that entitle the holder
of each option to sell to the Company, by physical delivery, shares of common
stock at a specified price. The options sold in the fourth quarter of 1999 and
the first quarter of 2000 all expired, unexercised. NCR sold additional options
in the second quarter of 2000 totaling 1,000,000 shares of which 400,000
expired, unexercised in the quarter. At the end of the second quarter of 2000,
the total amount related to the Company's remaining potential repurchase
obligation of 600,000 shares of common stock was $22 million. The put option
obligations had no significant effect on diluted earnings per share for the
period presented, and the net proceeds from the sale of the put options are
shown as an increase to paid-in capital.
From the end of the second quarter through August 11, 2000, NCR sold additional
options for 400,000 shares and repurchased 400,000 of the 600,000 shares subject
to then outstanding options from the end of the second quarter. The remaining
potential repurchase obligation of 600,000 shares of common stock is $21
million.
9
The activity is summarized as follows:
Put Options Outstanding
Cumulative ------------------------
Net Premium Number of Potential
In millions Received Options Obligation
- --------------------------------------------------------------------
December 31, 1998 $ - - $ -
Sales 1.1 0.4 13.1
Exercises - - -
Expirations - - -
- --------------------------------------------------------------------
December 31, 1999 $1.1 0.4 $ 13.1
Sales 1.0 0.4 14.8
Exercises - - -
Expirations - (0.4) (13.1)
- --------------------------------------------------------------------
March 31, 2000 $2.1 0.4 $ 14.8
Sales 2.8 1.0 36.8
Exercises - - -
Expirations - (0.8) (29.6)
- --------------------------------------------------------------------
June 30, 2000 $4.9 0.6 $ 22.0
====================================================================
9. ACQUISITIONS
In the second quarter of 2000, the Company announced the acquisition of Ceres
Integrated Solutions, LLC (Ceres) and Research Computer Services, Inc. (RCS).
Ceres is a leading provider of customer relationship management solutions and a
leader in retail targeted marketing applications. This acquisition is expected
to drive sales of new data warehouses and expansion of existing data warehouses.
The in-process research and development charge associated with the acquisition
of Ceres was $19 million. RCS is a leading provider of point-of-sale software
for general merchandise retailers. This acquisition is expected to enable NCR to
drive revenue and market growth for our point-of-sale solutions in domestic and
international markets. The in-process research and development charge associated
with the acquisition of RCS was $5 million.
The total amount of stock issued as part of the acquisitions completed by the
Company in the current year is $64 million. The pro forma results of operations
through the end of the second quarter of 1999, assuming that all 1999 and 2000
acquisitions occurred on January 1, 1999, do not differ materially from amounts
reported.
10. SUBSEQUENT EVENTS
On July 14, 2000, the Company announced the acquisition of the remaining 50
percent interest in Stirling Douglas Group (SDG), a leading demand chain
management application software firm. As a result of this purchase, SDG is now a
wholly-owned subsidiary of NCR. The acquisition enhances NCR's ability to offer
business-to-business e-commerce solutions between retailers and suppliers
through real-time inventory management while reducing overhead costs.
On August 3, 2000, the Company announced that it had entered into a definitive
agreement to acquire 4Front Technologies, Inc. in a merger transaction for an
aggregate consideration of approximately $250 million. 4Front Technologies is a
leading provider and integrator of information technology services, consisting
of specialized computer services and web-based solutions. The company is
headquartered in London and has a strong pan-European market presence in the
United Kingdom, France, Italy, Germany, Belgium, the Netherlands, Spain and
Sweden. 4Front Technologies employs approximately 1,900 people. This acquisition
further strengthens NCR's position in providing high availability service
solutions and should enable the Company to better service the complex needs of
its global customers. This merger is expected to be completed before the end of
the current year and is subject to a number of conditions, including the receipt
of the approval of the 4Front Technologies stockholders as well as the receipt
of required regulatory approvals.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Restructuring
During the fourth quarter of 1999, our management approved a restructuring plan
designed to accelerate our transformation from a computer hardware and product
company, to a technology solutions and services provider. The plan led to an
alignment around four key solutions, an expected elimination of approximately
1,250 positions and an enhanced leverage of the investment in our Data
Warehousing offering. A pre-tax charge of $125 million was recorded in the
fourth quarter of 1999 to provide for restructuring and other related charges as
a result of our plan. There was $73 million of restructuring and other related
liabilities incurred in connection with the 1999 business restructuring, which
were all reflected as current liabilities in NCR's balance sheet.
In addition to the pre-tax charge of $125 million recorded in the fourth quarter
of 1999, during the first six months of 2000 we recorded $18 million of
settlement costs relating to the settlement of customer obligations that were
not complete as of December 31, 1999. Included in this $18 million was $17
million recorded in cost of revenue and $1 million recorded in selling, general
and administrative expenses. We are actively working to complete substantially
all of the remaining customer settlements by the third quarter of 2000 as cost
effectively as possible.
In total, we expect the pre-tax charge of $125 million to result in cash outlays
of $83 million of which $76 million relates to employee separations that were
accrued under our postemployment benefits plan as well as non-cash write-offs of
$42 million. The cash outlays are primarily for employee separations, contract
cancellations and settlement of customer obligations. As of June 30, 2000,
substantially all cash outlays for other than employee separations had been
made. The balance of the cash outlays is expected to occur over the remainder of
the current year. No adjustments have been made to the restructuring and other
related liabilities recorded in the fourth quarter of 1999.
We anticipate annual savings of approximately $75 million as a result of our
restructuring plan and estimate that we generated $29 million of the anticipated
savings in the first six months of 2000. The savings primarily come from the
elimination of losses in our non-core solutions that we exited as well as other
cost savings related to employee separations within our infrastructure support
organizations. We estimate that 75% of these savings were recognized as a
reduction in operating expenses with the balance being recognized as a reduction
in cost of revenue.
In total, the plan calls for approximately 1,250 employee separations. As of the
end of the second quarter 2000, approximately 51% of the planned employee
separations were complete and as of June 30, 2000, the Company has incurred cash
outlays for employee separations of $30 million.
Results of Operations
For 2000, we have changed our definition of strategic operating segments and our
associated reporting framework. Our new reporting segments are Store Automation,
Self Service, Data Warehousing, Systemedia and All Other. All of these segments
include hardware, software, professional consulting and customer support
services. Customer support services include maintenance services, staging and
implementation services, networking, multi-vendor integration services,
consulting services, solution-specific support services and outsourcing
solutions.
11
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
- -----------------------------------------------------------------------------
For the quarters ended June 30, the effects of significant special items, which
include restructuring and other related charges of $4 million in connection with
the action announced in October 1999 and acquisition related in-process research
and development charges of $24 million, have been excluded from the gross
margin, operating expenses and operating income amounts presented and discussed
below. (See Notes 7 and 9 of the Notes to Condensed Consolidated Financial
Statements and the discussion of acquisitions below).
In millions 2000 1999
- --------------------------------------------------------------------
Consolidated revenue $1,448 $1,572
Consolidated gross margin 474 499
Consolidated operating expenses:
Selling, general and administrative expenses 328 353
Research and development expenses 75 85
- --------------------------------------------------------------------
Consolidated income from operations $ 71 $ 61
====================================================================
Revenue: Revenue for the three months ended June 30, 2000 was $1,448 million, a
decrease of 8% from the second quarter of 1999. When adjusted for the impact of
changes in currency exchange rates, revenue decreased 7%.
The revenue decline in the second quarter of 2000 compared to the prior year
reflects the exit of our non-core solutions, the termination of service
associated with equipment retired as a result of Year 2000 replacement, product
availability issues for our Store Automation solutions and declines in the sales
of our Self Service solutions in the Americas region. On an aggregate basis,
revenue in our core solutions overall were down 2% compared with the prior year
due to the product availability issues for Store Automation. By solution, our
revenue in the second quarter of 2000 reflects increased sales of our Data
Warehousing solutions of 21% and Systemedia products of 8%. Offsetting the
revenue growth in Data Warehousing and Systemedia were declines in sales of our
Store Automation solutions of 13%, Self Service solutions of 7%, and our all
other segments of 24% which includes declines in our non-core solutions of 33%.
Revenue in the second quarter of 2000 compared with the second quarter of 1999
decreased 13% in the Americas region and 16% in the Europe/Middle East/Africa
region. The declines in both of these regions were primarily due to the exit of
our non-core solutions and product availability issues for our Store Automation
solutions. Revenue in the Asia Pacific region, excluding Japan, increased 28%
over the prior year while Japan increased 5%. The revenue growth in the Asia
Pacific region, excluding Japan, reflects strong growth in sales of our Data
Warehousing, Self Service and Payment and Imaging solutions partially offset by
declines in our non-core solutions. When adjusted for the impact of changes in
foreign currency exchange rates, revenue increased 32% in the Asia Pacific
region, excluding Japan, and decreased 13% in the Americas region, 9% in the
Europe/Middle East/Africa region and 9% in Japan. The Americas region comprised
52% of our total revenue in the second quarter of 2000, the Europe/Middle
East/Africa region comprised 28%, Japan comprised 10% and the Asia Pacific
region, excluding Japan, comprised 10%.
Gross Margin and Operating Expenses: Gross margin as a percentage of revenue
increased 1.0 percentage points to 32.7% in the second quarter of 2000 from
31.7% in the second quarter of 1999. Products gross margin increased 1.2
percentage points to 38.9% in the second quarter of 2000. This increase is
primarily attributable to product margin rate improvement in the Data
Warehousing solution as a result of increased volume. Services gross margin
increased 0.9 percentage points to 25.7% in the second quarter of 2000 from
24.8% in the second quarter of 1999. This increase is attributable to margin
rate improvements in our consulting business primarily due to improved
utilization of our consultants.
Selling, general and administrative expenses decreased $25 million, or 7%, in
the second quarter of 2000 from the second quarter of 1999 reflecting the exit
of our non-core solutions and our focus on expense containment initiatives. As a
percentage of revenue, selling, general and administrative expenses were 22.7%
in the second quarter of 2000 and 22.5% in the second quarter of 1999. Research
and development expenses decreased $10 million to $75 million in the second
quarter of 2000. As a percentage of revenue, research and development expenses
were 5.2% in the second quarter of 2000 compared to 5.4% in the second quarter
of 1999. The second quarter research and development expenses reflect increased
investments in our strategic operating segments which were more than offset by
spending reductions in our non-core/exited operating segments.
12
Gross margins and operating expenses were favorably impacted in the second
quarter of 2000 and 1999 from our pension benefits plan with an additional $17
million of income being recognized in the second quarter of 2000. Gross margins
and operating expenses were unfavorably impacted in the second quarter of 2000
and 1999 from our post-employment and post-retirement benefit plans and
associated investments with $7 million more expense in the second quarter of
2000. Thus, the net impact on operating results from our combined pension, post-
retirement and post-employment plans was $10 million additional income in the
second quarter of 2000 as compared to the second quarter of 1999.
Income Before Income Taxes: Operating income was $71 million in the second
quarter of 2000 compared to $61 million in the second quarter of 1999.
Other income, net of expenses, was $21 million in the second quarter of 2000
compared to $13 million in the second quarter of 1999. Other income in 2000
includes approximately $27 million of gains on sales of facilities.
Provision for Income Taxes: Income tax provisions for interim periods are based
on estimated annual income tax rates calculated without the effect of
extraordinary charges. The provision for income taxes in the second quarter of
2000 was $25 million compared to $28 million in the second quarter of 1999.
Excluding the tax effect of special items, the second quarter 2000 income tax
provision was $32 million which compared to the 1999 period reflects a return to
more normalized tax rate levels. The normalization of tax rates is due to
continued profitability in certain tax jurisdictions, primarily the United
States.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
- -------------------------------------------------------------------------
For the six months ended June 30, the effects of significant special items,
which include restructuring and other related charges of $18 million in
connection with the action announced in October 1999 and acquisition related in-
process research and development charges of $24 million, have been excluded from
the gross margin, operating expenses and operating income amounts presented and
discussed below. (See Notes 7 and 9 of the Notes to Condensed Consolidated
Financial Statements and the discussion of acquisitions below).
In millions 2000 1999
- ---------------------------------------------------------------------
Consolidated revenue $2,703 $2,905
Consolidated gross margin 845 883
Consolidated operating expenses:
Selling, general and administrative expenses 633 665
Research and development expenses 145 165
- ---------------------------------------------------------------------
Consolidated income from operations $ 67 $ 53
=====================================================================
Revenue: Revenue for the six months ended June 30, 2000 was $2,703 million, a
decrease of 7% from the first six months of 1999. When adjusted for the impact
of changes in currency exchange rates, revenue decreased 6%.
The revenue decline in the second quarter of 2000 compared to the prior year
reflects the exit of our non-core solutions, the termination of service
associated with equipment retired as a result of Year 2000 replacement, product
availability issues for our Store Automation solutions and declines in the sales
of our Self Service solutions in the Americas region. On an aggregate basis,
revenue in our core solutions overall declined 1% compared with the prior year
due to the product availability issues for Store Automation. By solution, our
revenue for the first six months of 2000 reflects increased sales of our Data
Warehousing solutions of 35% and Systemedia products of 4%. Offsetting the
revenue growth in Data Warehousing and Systemedia were declines in sales of our
Store Automation solutions of 14%, Self Service solutions of 6%, and our all
other segments of 24% which includes declines in our non-core solutions of 33%.
Revenue in the first six months of 2000 compared with the first six months of
1999 decreased 8% in the Americas region, 18% in Europe/Middle East/Africa
region. The declines in both of these regions were primarily due to the exit of
our non-core solutions and product availability issues for Store Automation.
Revenue in the Asia Pacific region, excluding Japan, increased 29% over the
prior year while Japan increased 1%. When adjusted for the impact of changes in
foreign currency exchange rates, revenue on a local currency basis increased 32%
in the Asia Pacific region, excluding Japan, and decreased 8% in the Americas
region, 10% in the Europe/Middle East/Africa region, and 11% in Japan. The
Americas region comprised 52% of NCR's total revenue in the first six months of
2000, the Europe/Middle East/Africa region comprised 28%, Japan comprised 10%
and the Asia Pacific region, excluding Japan, comprised 10%.
13
Gross Margin and Operating Expenses: Gross margin as a percentage of revenue
increased 0.9 percentage points to 31.3% in the first six months of 2000 from
30.4% in the same period of 1999. Products gross margin increased 1.1 points to
37.2% in the first six months of 2000. This increase is primarily attributable
to product margin rate improvement in the Data Warehousing solution. Services
gross margin increased 0.7 points to 24.9% in the first six months of 2000 due
primarily to improvements in our consulting business.
Selling, general and administrative expenses decreased $32 million, or 5% in the
first six months of 2000 from the first six months of 1999 reflecting the exit
of our non-core solutions and our focus on expense containment initiatives. As a
percentage of revenue, selling, general and administrative expenses were 23.4%
in the first six months of 2000 and 22.9% in the first six months of 1999.
Research and development expenses in the first six months of 2000 reflect
increased investments in our strategic operating segments which were more than
offset by spending reductions in our non-core/exited operating segments. As a
result of this, research and development expenses decreased $20 million to $145
million in the first six months of 2000. As a percentage of revenue, research
and development expenses were 5.4% in the first six months of 2000 compared to
5.7% in the first six months of 1999.
Gross margins and operating expenses were favorably impacted in the first six
months of 2000 compared to the same period of 1999 from our pension benefits
plan with an additional $34 million of income being recognized through June of
2000. Gross margins and operating expenses were unfavorably impacted in the
first six months of 2000 compared to 1999 from our post-employment and post-
retirement benefit plans and associated investments with $20 million more
expense during the first six months of 2000. Thus, the net impact on operating
results from our combined pension, post-retirement and post-employment plans was
$14 million additional income in the first six months of 2000 as compared to the
same period of 1999.
Income Before Income Taxes: Operating income was $67 million in the first six
months of 2000 compared to $53 million in the same period of 1999.
Other income, net of expenses, was $34 million in the first six months of 2000
compared to $26 million in the first six months of 1999. Other income includes
gains on sales of facilities of approximately $30 million in 2000 compared to
$11 million in 1999.
Provision for Income Taxes: Income tax provisions for interim periods are based
on estimated annual income tax rates calculated without the effect of
extraordinary charges. The provision for income taxes was $25 million in the
first six months of 2000 compared to $30 million in the first six months of
1999. Excluding the tax effect of special items, the income tax provision for
the first six months of 2000 was $35 million which compared to the 1999 period
reflects a return to more normalized tax rate levels. The normalization of tax
rates is due to continued profitability in certain tax jurisdictions, primarily
the United States.
Financial Condition, Liquidity, and Capital Resources
Our cash, cash equivalents, and short-term investments totaled $561 million at
June 30, 2000, compared to $763 million at December 31, 1999.
Operating Activities: We used cash flows from operations of $17 million in the
first six months of 2000 while generating net cash flows from operations of $215
million in the first six months of 1999. Receivable balances decreased $37
million in the first six months of 2000 and $202 million in the same period in
1999. The significant decrease in our receivable balances in the first six
months of 1999 reflected our strong focus on collections that we have been able
to maintain with incremental improvements in the first six months of 2000. We
used $144 million of cash in the first six months of 2000 related to the timing
of disbursements for employee severance and pension compared to a $101 million
use of cash in the same period of 1999. The increased use of cash in the first
six months of 2000 relates primarily to cash payments of benefits under un-
funded pension plans in some of our international locations and severance
related cash payments.
Investing Activities: Net cash flows used in investing activities were $169
million in the first six months of 2000 and $263 million in the same period of
1999. In 2000, we decreased our short-term investments by $36 million as we
increased the liquidity of our overall portfolio due to expected acquisition
activity; this compared to a $109 million increase in our short-term investments
in 1999. Capital expenditures were $246 million for the first six months of 2000
and $170 million in the same period of 1999. The increase in capital
expenditures primarily relates to expenditures for information technology,
reworkable parts used to service customer equipment including purchases to
support our high availability networking service
14
offerings, and expenditures for facilities to support sales and marketing
activities. Proceeds from the sales of facilities and other assets for the first
six months of 2000 was $133 million compared to $40 million in the same period
of 1999. The increase in proceeds is driven by our ongoing asset management
initiative to sell less productive assets such as real estate. Business
acquisitions and investments utilized $56 million of cash in the first six
months of 2000 and is the result of our strategy to invest in our core solutions
and related technologies. Other investing activities used $36 million of cash in
the first six months of 2000 and $24 million in the comparable period for 1999.
The increase is primarily related to capitalized software.
Financing Activities: Net cash provided by financing activities was $34 million
in the in the first six months of 2000 and $16 million in the same period of
1999. As of June 30, 2000, $4 million of cash was used in the repurchase of
Company stock pursuant to the stock repurchase program included in Note 5 of the
Notes to Consolidated Financial Statements; $62 million of cash was used in the
same period of 1999 to repurchase Company stock. In the first six months of
2000, we reported cash flows of $41 million from other financing activities
compared to $50 million in the same period of 1999. Other financing cash flows
primarily relate to share activity under our stock option and employee stock
purchase plans.
We believe that cash flows from operations, existing credit facilities, and
other short- and long-term financing, if any, will be sufficient to satisfy our
future working capital, research and development, capital expenditure and other
financing requirements for the foreseeable future.
Acquisitions: In the second quarter of 2000, we announced the acquisition of
Ceres Integrated Solutions, LLC (Ceres) and Research Computer Services, Inc.
(RCS). Ceres is a leading provider of customer relationship management solutions
and a leader in retail targeted marketing applications. This acquisition is
expected to drive sales of new data warehouses and expansion of existing data
warehouses. The in-process research and development charge associated with the
acquisition of Ceres was $19 million. RCS is a leading provider of point-of-sale
software for general merchandise retailers. This acquisition is expected to
enable us to drive revenue and market growth for our point-of-sale solutions in
domestic and international markets. The in-process research and development
charge associated with the acquisition of RCS was $5 million.
On July 14, 2000, we announced the acquisition of the remaining 50 percent
interest in Stirling Douglas Group (SDG), a leading demand chain management
application software firm. As a result of our purchase, SDG is now a wholly-
owned subsidiary of NCR. The acquisition enhances our ability to offer business-
to-business e-commerce solutions between retailers and suppliers through real-
time inventory management while reducing overhead costs.
On August 3, 2000, we announced that we had entered into a definitive agreement
to acquire 4Front Technologies, Inc. in a merger transaction for an aggregate
consideration of approximately $250 million. 4Front Technologies is a leading
provider and integrator of information technology services, consisting of
specialized computer services and web-based solutions. The company is
headquartered in London and has a strong pan-European market presence in the
United Kingdom, France, Italy, Germany, Belgium, the Netherlands, Spain and
Sweden. 4Front Technologies employs approximately 1,900 people. This acquisition
further strengthens our position in providing high availability service
solutions and should enable us to better service the complex needs of our global
customers. This merger is expected to be completed before the end of the current
year and is subject to a number of conditions, including the receipt of approval
of the 4Front Technologies stockholders as well as the receipt of required
regulatory approvals.
The total amount of stock issued as part of the acquisitions we completed in the
current year is $64 million. The pro forma results of operations through the end
of the second quarter of 1999, assuming that all 1999 and 2000 acquisitions
occurred on January 1, 1999, do not differ materially from amounts reported.
Factors That May Affect Future Results
This quarterly report, other documents that we file with the Securities and
Exchange Commission, as well as other oral or written statements we may make,
contain information based on management's beliefs and include forward-looking
statements that involve a number of risks, uncertainties and assumptions. These
forward-looking statements are not guarantees of future performance, and there
are a number of factors, including those listed below, which could cause actual
outcomes and results to differ materially from the results contemplated by such
forward-looking statements.
15
Competition
Our ability to compete effectively within the technology industry is critical to
our future success.
We compete in the intensely competitive information technology industry. This
industry is characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions, price and cost reductions, and
increasingly greater commoditization of products, making differentiation
difficult. In addition, this intense competition increases pressure on gross
margins that could impact our business and operating results. Our competitors
include other large, successful companies in the technology industry such as:
International Business Machines (IBM), Wincor Nixdorf Gmbh & Co., Unisys
Corporation, Diebold, Inc., and Oracle Corporation, some of which have
widespread penetration of their platforms. If we are unable to compete
successfully, the demand for our solutions, including products and services,
would decrease. Any reduction in demand could lead to fewer customer orders, a
decrease in the prices of our products and services, reduced revenues, reduced
margins, operating inefficiencies, reduced levels of profitability, and loss of
market share. These competitive pressures could impact our business and
operating results.
Our future competitive performance depends on a number of factors, including our
ability to: rapidly and continually design, develop and market, or otherwise
obtain and introduce solutions and related products and services for our
customers that are competitive in the marketplace; offer a wide range of
solutions from small electronic shelf labels to very large enterprise data
warehouses; offer solutions to customers that operate effectively within a
computing environment which includes the integration of hardware and software
from multiple vendors; offer products that are reliable and that ensure the
security of data and information; offer high-quality, high availability
services; market and sell all of our solutions effectively, including the
successful execution of our new marketing campaign.
New Solutions Introductions
The solutions we sell are very complex, and we need to rapidly and successfully
develop and introduce new solutions.
We operate in a very competitive, rapidly changing environment, and our future
success depends on our ability to develop and introduce new solutions that our
customers choose to buy. If we are unable to develop new solutions, our business
and operating results would be impacted. This includes our efforts to rapidly
develop and introduce data warehousing software applications. The development
process for our complex solutions, including our software application
development programs, requires high levels of innovation from both our
developers and our suppliers of the components embedded in our solutions. In
addition, the development process can be lengthy and costly. It requires us to
commit a significant amount of resources to bring our business solutions to
market. If we are unable to anticipate our customers' needs and technological
trends accurately, or are otherwise unable to complete development efficiently,
we would be unable to introduce new solutions into the market on a timely basis,
if at all, and our business and operating results would be impacted. In
addition, if we were unable to successfully market and sell both existing and
newly developed solutions, our operating results would be impacted.
Our solutions which contain both hardware and software products may contain
known as well as undetected errors which may be found after the products'
introduction and shipment. While we attempt to fix errors that we believe would
be considered critical by our customers prior to shipment, we may not be able to
detect or fix all such errors, and this could result in lost revenues, delays in
customer acceptance, and incremental costs which would all impact our operating
results.
Reliance on Third Parties
Third party suppliers provide important elements to our solutions.
We rely on many suppliers for necessary parts and components to complete our
solutions. In most cases, there are a number of vendors producing the parts and
components that we utilize. However, there are some components that are
purchased from single sources due to price, quality, technology or other
reasons. For example, we depend on chips and microprocessors from Intel
Corporation and operating systems from UNIX(R) and Microsoft Windows NT(R).
Certain parts and components used in the manufacture of our ATMs and the
delivery of some of our Store Automation solutions are also supplied by single
sources. If we were unable to purchase the necessary parts and components from a
particular vendor and we had to find an alternative supplier for such parts and
components, our new and existing product shipments and solutions deliveries
could be delayed, impacting our business and operating results.
We have, from time to time, formed alliances with third parties (such as the
outsourcing arrangements with Solectron to manufacture hardware) that have
complementary products, services and skills. These alliances introduce risks
that we can not
16
control such as non-performance by third parties and difficulties with or delays
in integrating elements provided by third parties into our solutions. The
failure of third parties to provide high quality products or services that
conform to the required specifications could impair the delivery of our
solutions on a timely basis and impact our business and operating results.
Acquisitions and Alliances
Our ability to successfully integrate acquisitions or effectively manage
alliance activities will help drive future growth.
As part of our overall solutions strategy, we intend to continue to make
investments in companies, products, services and technologies, either through
acquisitions, joint ventures or strategic alliances. Acquisitions and alliance
activities inherently involve risks. The risks we may encounter include those
associated with assimilating and integrating different business operations,
corporate cultures, personnel, infrastructures and technologies or products
acquired or licensed, retaining key employees, and the potential for unknown
liabilities within the acquired or combined business. The investment or
alliance may also disrupt our ongoing business or we may not be able to
successfully incorporate acquired products, services or technologies into our
solutions and maintain quality. Business acquisitions typically result in
intangible assets being recorded and amortized in future years. Future
operating results could be impacted if our acquisitions do not generate
profitable results in excess of the related amortization expense.
Operating Result Fluctuations
We expect our quarterly revenues and operating results to fluctuate for a number
of reasons.
Future operating results will continue to be subject to quarterly fluctuations
based on a variety of factors, including:
Seasonality. Our sales are historically seasonal, with revenue higher in the
fourth quarter of each year. During the three quarters ending in March, June
and September, we have historically experienced less favorable results than in
the quarter ending in December. Such seasonality also causes our working
capital cash flow requirements to vary from quarter to quarter depending on the
variability in the volume, timing and mix of product sales. In addition,
revenue in the third month of each quarter is typically higher than in the first
and second months. These factors, among other things, make forecasting more
difficult and may adversely affect our ability to predict financial results
accurately.
Acquisitions and Alliances. As part of our solutions strategy, we intend to
continue to acquire technologies, products, and businesses as well as form
strategic alliances and joint ventures. As these activities take place and we
begin to include the financial results related to these investments, our
operating results will fluctuate. For example, the acquisition of Ceres
Integrated Solutions will result in incremental revenue, margin and operating
expenses for our Data Warehousing solution.
Multi-National Operations
Continuing to generate substantial revenues from our multi-national operations
helps to balance our risks and meet our strategic goals.
Currently, approximately 59% of our revenues come from our international
operations. We believe that our geographic diversity may help to mitigate some
risks associated with geographic concentrations of operations (e.g., adverse
changes in foreign currency exchange rates or business disruptions due to
economic or political uncertainties). However, our ability to sell our
solutions internationally is subject to the following risks, among others:
general economic and political conditions in each country which could adversely
affect demand for our solutions in these markets, as recently occurred in
certain Asian markets; currency exchange rate fluctuations which could result in
lower demand for our products as well as generate currency translation losses;
currency changes such as the "Euro" introduction which could affect cross border
competition, pricing, and require modifications to our offerings to accommodate
the changeover; changes to and compliance with a variety of local laws and
regulations which may increase our cost of doing business in these markets or
otherwise prevent us from effectively competing in these markets.
Restructuring
Successfully completing our restructuring activities is important as it is
designed to improve our focus and overall profitability.
As we have discussed, we plan to grow revenue and earnings through the
realignment of our businesses into our key solutions: Self Service, Store
Automation and Data Warehousing. Our success with these restructuring activities
depends on a number of factors including our ability to: execute strategies in
various markets, including electronic commerce and other new industries beyond
our traditional focus; exit certain businesses as planned; profitably replace
the lost revenues; and manage issues that may
17
arise in connection with the restructuring such as gaps in short-term
performance, diversion of management focus and employee morale and retention. In
particular, our business plan includes leveraging the Teradata(R) technology in
electronic commerce and other industries. If we are not successful in managing
the required changes to achieve this realignment, our business and operating
results could be impacted.
Employees
Hiring and retaining highly qualified employees helps us to achieve our business
objectives.
Our employees are vital to our success, and our ability to attract and retain
highly skilled technical, sales, consulting, and other key personnel is critical
as these key employees are difficult to replace. The expansion of high
technology companies has increased demand and competition for qualified
personnel. If we are not able to attract or retain highly qualified employees
in the future, this could impact our business and operating results.
Intellectual Property
As a technology company, our intellectual property portfolio is key to our
future success.
Our intellectual property portfolio is a key component of our ability to be a
leading technology and services solutions provider. To that end, we
aggressively protect and work to enhance our proprietary rights in our
intellectual property through patent, copyright, trademark and trade secret laws
and if our efforts fail, our business could be impacted. In addition, many of
our offerings rely on technologies developed by others and if we were not able
to continue to obtain licenses for such technologies, our business would be
impacted. Moreover, from time to time, we receive notices from third parties
regarding patent and other intellectual property claims. Whether such claims
are with or without merit, they may require significant resources to defend and,
if an infringement claim is successful, in the event we are unable to license
the infringed technology or to substitute similar non-infringing technology, our
business could be adversely affected.
Environmental
Our historical and ongoing manufacturing activities subject us to environmental
exposures.
We have been identified as a potentially responsible party in connection with
the Fox River matter as further described in "Environmental Matters" under Note
4 of the Notes to Condensed Consolidated Financial Statements on page 7 of this
quarterly report and we incorporate such discussion in this Management's
Discussion and Analysis of Financial Condition and Results of Operations by
reference and make it a part of this risk factor.
Contingencies
Like other technology companies, we face uncertainties with regard to
regulations, lawsuits and other related matters.
We are subject to regulations, proceedings, lawsuits, claims and other matters,
including those that relate to the environment, health and safety and
intellectual property. Such matters are subject to the resolution of many
uncertainties, thus, outcomes are not predictable with assurance. While we
believe that amounts provided in our financial statements are currently adequate
in light of the probable and estimable liabilities, there can be no assurances
that the amounts required to discharge alleged liabilities from lawsuits, claims
and other legal proceedings and environmental matters, and to comply with
applicable environmental laws will not impact future operating results.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, including changes in foreign currency exchange
rates and interest rates. We use a variety of measures to monitor and manage
these risks, including derivative financial instruments. Since a substantial
portion of our operations and revenue occur outside the United States, our
results can be significantly impacted by changes in foreign currency exchange
rates. To manage our exposures to changes in currency exchange rates, we enter
into various derivative financial instruments such as forward contracts and
options. These instruments generally mature within twelve months. At
inception, the derivative instruments are designated as hedges of inventory
purchases and sales and of certain financing transactions which are firmly
committed or forecasted. Gains and losses on qualifying hedged transactions are
deferred and recognized in the determination of income when the underlying
transactions are realized, canceled or otherwise terminated. When hedging
certain foreign currency transactions of a long-term investment nature, gains
and losses are recorded in the currency translation adjustment component of
stockholders' equity. Gains and losses on other foreign exchange contracts are
generally recognized currently in other income or expense as exchange rates
change.
18
For purposes of potential risk analysis, we use sensitivity analysis to
determine the impacts that market risk exposures may have on the fair values of
our hedge portfolio related to anticipated transactions. The foreign currency
exchange risk is computed based on the market value of future cash flows as
impacted by the changes in the rates attributable to the market risk being
measured. The sensitivity analysis represents the hypothetical changes in value
of the hedge position and does not reflect the opposite gain or loss on the
forecasted underlying transaction. The results of the foreign currency exchange
rate sensitivity analysis at June 30, 2000 and 1999 were: a 10% movement in the
levels of foreign currency exchange rates against the U.S. dollar with all other
variables held constant would result in an increase in the fair values of our
financial instruments by $13 million and an increase of $8 million,
respectively, or an increase in fair values of our financial instruments by $1
million and $16 million, respectively.
The interest rate risk associated with our borrowing and investing activities at
June 30, 2000 is not material in relation to our consolidated financial
position, results of operations or cash flows. We do not generally use
derivative financial instruments to alter the interest rate characteristics of
our investment holdings or debt instruments.
19
Part II. Other Information
Item 1. LEGAL PROCEEDINGS
The information required by this item is included in the material under Note 4
of the Notes to Condensed Consolidated Financial Statements on page 7 of this
quarterly report and is incorporated in this Item 1 as by reference and made a
part hereof.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Amendment and Restatement of NCR Corporation as amended May 14, 1999 (incorporated by
reference to Exhibit 3.1 from the NCR Corporation Form 10-Q for the period ended June 30, 1999) and
Articles Supplementary of NCR Corporation (incorporated by reference to Exhibit 3.1 from the NCR
Corporation Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 NCR Annual
Report")).
3.2 Bylaws of NCR Corporation, as amended and restated on February 3, 2000 (incorporated by reference to
Exhibit 3.2 from the NCR Corporation Annual Report on Form 10-K for the year ended December 31, 1999).
4.1 Common Stock Certificate of NCR Corporation (incorporated by reference to Exhibit 4.1 from the NCR
Corporation Annual Report on Form 10-K for the year ended December 31, 1999).
4.2 Preferred Share Purchase Rights Plan of NCR Corporation, dated as of December 31, 1996, by and between
NCR Corporation and The First National Bank of Boston (incorporated by reference to Exhibit 4.2 from the
1996 NCR Annual Report).
10.1 Letter agreement dated June 20, 2000.
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports filed on Form 8-K for the quarter ended June 30, 2000.
UNIX is a registered trademark in the United States and other countries,
exclusively licensed through X/OPEN Company Limited.
Windows NT is a registered trademark of Microsoft Corporation.
Teradata is either a registered trademark or trademark of NCR International,
Inc. in the United States and/or other countries.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NCR CORPORATION
Date: August 11, 2000 By: /s/ David Bearman
-----------------------------------
David Bearman, Senior Vice President
and Chief Financial Officer
21
EXHIBIT 10.1
[NCR LOGO]
- --------------------------------------------------------------------------------
Lars Nyberg 1700 South Patterson Boulevard
Chairman and CEO Dayton, Ohio 45479
June 20, 2000
Mr. William Amelio
1696 Palos Verdes Estates
Palos Verdes, California 90274
Dear Bill:
I am delighted to extend to you an offer of employment with NCR Corporation as
Executive Vice President and Chief Operating Officer. This position will have
all operating responsibilities for NCR's self service, retail, Systemedia, and
services businesses, which generate the majority of revenues and profits. As you
know, this offer is contingent on the approval of NCR Board of Directors. In
this position, you will report directly to me, as Chairman & CEO. We'll need to
discuss a mutually agreeable start date. Other details of your offer are as
follows.
Annual Base Salary - Your base salary will be $700,000, commencing as of
your effective start date. You will be paid on a bi-weekly pay schedule,
one week in arrears. Your paycheck will be automatically deposited in the
bank of your choice via our convenient Easipay plan.
Sign-On Bonus - You will be extended a $200,000 gross sign-on bonus within
thirty days of your effective start date. All applicable taxes will be
withheld from this award. Your sign-on bonus will not be treated as
compensation for purposes of determining employee pensions and benefits.
Incentive Award - You will be eligible to participate in the Management
Incentive Plan for Executive Officers (MIP), which provides year-end
incentive awards based on the success of NCR in meeting annual performance
objectives. For your position, the targeted incentive opportunity is 80% of
your salary ($560,000) and the maximum award is 160% ($1,120,000) of your
salary. Given the fact that you will forfeit your 2000 bonus at your
current company, NCR will guarantee your proposed target incentive award
($560,000) for 2000. This will be paid within thirty days of your effective
start date. If the actual 2000 incentive payout is greater than target, you
will receive an incremental bonus in March, 2001 (up to $560,000).
For 2001, compensation objectives are yet to be established, but will
probably include revenue growth, profit and asset management measure.
Equity Awards -
Stock Options/One Time Grant - In lieu of your current
compensation and equity situation, you will receive a one-time stock option
grant, as of your first date of employment, for that number of whole shares
of NCR common stock determined by dividing $12,300,000 by the fair market
value of one share of the Company's common stock on your first date of
employment. These options will be subject to terms and conditions
determined by the NCR Board of Directors. Future grants are discretionary
and set annually by the Board of Directors. These stock options include a
non-competition provision and vest as follows:
23
Initial Vesting Date - 1-year anniversary of start date - 1/3 of the
grant
Next Vesting Date - 2-year anniversary of start date - 1/3 of the
grant
Final Vesting Date - 3-year anniversary of start date - 1/3 of the
grant
Stock Options/2001 Advance Management Stock Grant - On your first date of
employment, you will receive a stock option grant, for that number of whole
shares of NCR common stock determined by dividing $4,100,000 by the fair market
value of one share of the Company's common stock on your first date of
employment. These options will be subject to terms and conditions determined by
the NCR Board of Directors. Future grants are discretionary and set annually by
the Board of Directors. These stock options include a non-competition provision
and vest as follows:
Initial Vesting Date - 1-year anniversary of start date - 1/3 of the
grant
Next Vesting Date - 2-year anniversary of start date - 1/3 of the
grant
Final Vesting Date - 3-year anniversary of start date - 1/3 of the
grant
Given the grant above, you will not receive a management stock option grant in
Q1 2001 when NCR management is awarded their 2001 stock option grants. However,
you will be eligible for future management stock option grants, beginning in
2002. Although we cannot make a commitment about future stock option awards,
given past awards for this position and current expectations, we would
anticipate that the award of stock options would have an approximate face value
of $4.1 million or more. Again, as I know you appreciate, any actual award will
be as finally determined by NCR's Compensation Committee of the Board of
Directors.
Restricted Stock - In lieu of your current compensation and equity
situation, you will receive a special restricted stock grant, as of your first
date of employment, of that number of whole shares of NCR common stock
determined by dividing $4,100,000 by the fair market value of one share of the
Company's common stock on your first date of employment. These shares will be
set up in a record account in your name with NCR's Transfer Agent and Stock
Registrar (American Stock Transfer), and will vest (become transferable) over
three years as follows:
Initial Vesting Date - 1-year anniversary of start date - 1/3 of the
grant
Next Vesting Date - 2-year anniversary of start date - 1/3 of the
grant
Final Vesting Date - 3-year anniversary of start date - 1/3 of the
grant
In addition, the restricted stock will vest in full in the event of a Company
initiated termination other than for "cause" (defined in the same manner as in
the NCR Change-in-Control Severance Plan for Executive Officers). The restricted
stock will be subject to other terms and conditions determined by the NCR Board
of Directors, including a non-competition provision.
In the event of a voluntary termination from NCR, the number of shares
representing a value of $1,500,000 (increased during each year starting on your
start date based on a 10% imputed interest rate) will be immediately vested.
However, whatever value has previously vested will be counted towards the
$1,500,000. For example, assume the NCR stock price is $41 and 100,000 shares
have been awarded on your first day of employment. Assume you voluntarily leave
NCR 18 months after your start date and you have vested shares of 33,333 on your
termination date. Assuming the stock price is still $41 with a value of
$1,366,653 (33,333 x $41), another 8,923 shares will immediately vest to get
your total vested value up to $1.73M. If in this example, the NCR share price
was $52 at termination, no additional shares would vest.
Incentives in General - For an officer in your position, short- and long-term
incentives at NCR currently take the form of the MIP and stock options. Since
these incentives are designed to address the conditions of an ever-changing
marketplace, NCR cannot make any definitive representations concerning the
continuation of either program or the size of the individual awards.
Vacation - In recognition of your prior work experience, you will be eligible
for four weeks of paid vacation.
Special Severance - In the event of a Company initiated termination other than
for "cause" (defined in the same manner as in the NCR Change-in-Control
Severance Plan for Executive Officers), you will receive a cash payment of one
times your annual base salary and immediate vesting of your NCR restricted
stock.
24
NCR Benefits - On your first day of employment with NCR, the company
provides you and your eligible dependents with the following core benefit
coverage:
NCR Health Care Coverage
NCR Dental Care Coverage
Short-Term and Long-Term Disability Coverages
Life Insurance Coverage
Accidental Death and Dismemberment Insurance Coverage
As a new employee of NCR, you have the opportunity to design your own
personalized benefit program through Personal Choice, the company's
flexible benefits program. After your employment commences, you will
receive the NCR Benefits Information Package, and a Benefit representative
will meet with you to guide you through any questions you may have.
Additionally, you will be eligible to participate in the NCR Pension Plan,
the NCR Savings Plan (401k), and the NCR Stock Purchase Plan. The attached
Benefits Overview provides more information about NCR benefits.
Retirement - In addition to your participation in the NCR Pension Plan
(qualified plan), you will also participate in the following nonqualified
pension plans:
The Retirement Plan for Officers of NCR Corporation (SERP II) - The plan,
which is described in more detail in the attached summary, provides a
career average pension of 2.5% of the total of your base salary and MIP
award, times your years of service as an Officer and less pension accrued
as an Officer in other NCR sponsored plans. Also attached is a model to
help quantify your award given certain pay assumptions. While this plan
currently vests after ten years of officer service, NCR plans to recommend
to the Compensation Committee of the Board of Directors that the vesting
take place after five years, which is more in line with competitive analogs
and mirrors the qualified pension plan vesting pertaining to all employees.
However, there can be no assurance that this proposed change will be
adopted.
The NCR Mid-Career Hire Supplemental Pension Plan - This plan, described in
more detail in the attached summary (also modeled as part of the SERP II
estimate), provides a pension supplement to make up for lost pension that
could result from not having a "full career" with one company. This pension
supplement is in addition to the SERP II benefit.
Financial Counseling - You will be eligible to participate in a financial
counseling program provided through one of three consulting firms
designated by the Company. The Company will pay up to $8,000 annually for
financial planning, estate planning and tax preparation plus a gross-up for
the tax impact of this service. Further information on this program will be
provided separately.
Relocation/Temporary Housing - You will be eligible for relocation benefits
under NCR's Relocation Policy under Tier II Benefits. A copy of the NCR
Relocation Policy is enclosed. It is expected that you will move to Dayton,
Ohio within a maximum of 18 months of your start date. In the interim, NCR
will arrange temporary housing/accommodations for you in Dayton.
Change in Control - You will participate in NCR's current Change in Control
Severance Plan for Executive Officers. In the event of a qualified Change-
In-Control (as defined in this Plan), you will receive three times your
base salary and targeted bonus plus immediate vesting of your NCR stock
options and restricted stock.
This letter reflects the entire agreement regarding the terms and conditions of
your employment. Accordingly, it supersedes and completely replaces any prior
oral or written communication on this subject. This letter is not an employment
contract and should not be construed or interpreted as containing any guarantee
of continued employment. The employment relationship at NCR is by mutual consent
("Employment-At-Will"). This means that managers have the right to terminate
their employment at any time and for any reason. Likewise, the Company reserves
the right to discontinue your employment with or without cause at any time and
for any reason. Also, this offer is contingent upon completion of full reference
checks.
25
Bill, we are enthusiastic about the contributions, experience and vision you can
bring to NCR. The company is positioned well in our market to be exceedingly
successful and I personally would like to extend this opportunity for you to be
a part of my senior management team.
If you have any questions concerning the details of the appointment, please feel
free to contact Wilbert Buiter or me.
Sincerely,
/s/ Lars Nyberg
Lars Nyberg
/s/ William Amelio June 21, 2000
- -------------------------------- -------------
Agreed and Accepted Date
William Amelio
pc: W. Buiter
Attachments: Benefits Overview
Summary of SERP II
Summary of Mid-Career Hire Plan
NCR Relocation Policy
26
5
1,000,000
3-MOS
DEC-31-2000
APR-01-2000
JUN-30-2000
406
155
1,200
27
299
2,331
1,966
1,212
4,777
1,514
38
0
0
1
1,679
4,777
771
1,448
471
978
427
(1)
3
64
25
64
0
0
0
39
0.41
0.39
