SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number 1-8729
UNISYS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 38-0387840
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Unisys Way
Blue Bell, Pennsylvania 19424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 986-4011
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
Number of shares of Common Stock outstanding as of June 30, 2004:
334,846,823.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
UNISYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Millions)
June 30,
2004 December 31,
(Unaudited) 2003
----------- ------------
Assets
- ------
Current assets
Cash and cash equivalents $ 643.4 $ 635.9
Accounts and notes receivable, net 885.2 1,027.8
Inventories
Parts and finished equipment 112.7 121.7
Work in process and materials 120.0 116.9
Deferred income taxes 272.4 270.0
Other current assets 106.4 85.7
-------- --------
Total 2,140.1 2,258.0
-------- --------
Properties 1,347.4 1,352.7
Less-Accumulated depreciation
and amortization 924.8 928.5
-------- --------
Properties, net 422.6 424.2
-------- --------
Outsourcing assets, net 529.9 477.5
Marketable software, net 329.8 332.2
Investments at equity 183.3 153.3
Prepaid pension cost 49.6 55.5
Deferred income taxes 1,385.7 1,384.6
Goodwill 186.6 177.5
Other long-term assets 189.3 211.8
-------- --------
Total $5,416.9 $5,474.6
======== ========
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities
Notes payable $ 10.4 $ 17.7
Current maturities of long-term debt 150.7 2.2
Accounts payable 429.8 513.8
Other accrued liabilities 1,240.0 1,305.7
Income taxes payable 192.2 214.1
-------- --------
Total 2,023.1 2,053.5
-------- --------
Long-term debt 901.8 1,048.3
Accrued pension liabilities 460.1 433.6
Other long-term liabilities 539.1 544.0
Stockholders' equity
Common stock, shares issued: 2004, 336.8;
2003, 333.8 3.4 3.3
Accumulated deficit ( 366.4) ( 414.8)
Other capital 3,856.9 3,818.6
Accumulated other comprehensive loss (2,001.1) (2,011.9)
-------- --------
Stockholders' equity 1,492.8 1,395.2
-------- --------
Total $5,416.9 $5,474.6
======== ========
See notes to consolidated financial statements.
3
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Millions, except per share data)
Three Months Six Months
Ended June 30 Ended June 30
----------------- ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenue
Services $1,158.8 $1,163.4 $2,323.8 $2,270.4
Technology 229.3 261.6 527.2 553.5
-------- -------- -------- --------
1,388.1 1,425.0 2,851.0 2,823.9
Costs and expenses
Cost of revenue:
Services 930.2 906.8 1,855.9 1,789.3
Technology 90.8 126.1 236.5 255.4
-------- -------- -------- --------
1,021.0 1,032.9 2,092.4 2,044.7
Selling, general and
administrative expenses 272.9 242.4 534.1 486.1
Research and development expenses 71.3 63.7 142.8 130.5
-------- -------- -------- --------
1,365.2 1,339.0 2,769.3 2,661.3
-------- -------- -------- --------
Operating income 22.9 86.0 81.7 162.6
Interest expense 18.2 18.4 35.2 34.1
Other income (expense), net 24.0 10.6 24.6 7.2
-------- -------- -------- --------
Income before income taxes 28.7 78.2 71.1 135.7
Provision for income taxes 9.3 25.7 22.8 44.7
-------- -------- -------- --------
Net income $ 19.4 $ 52.5 $ 48.3 $ 91.0
======== ======== ======== ========
Earnings per share
Basic $ .06 $ .16 $ .14 $ .28
======== ======== ======== ========
Diluted $ .06 $ .16 $ .14 $ .28
======== ======== ======== ========
See notes to consolidated financial statements.
4
UNISYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Millions)
Six Months Ended
June 30
-----------------
2004 2003
-------- -------
Cash flows from operating activities
Net income $ 48.3 $ 91.0
Add(deduct) items to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of properties and
outsourcing assets 123.1 105.4
Amortization of marketable software 62.9 59.9
(Increase) in deferred income taxes, net ( 2.4) ( 1.5)
Decrease (increase) in receivables, net 185.3 ( 6.6)
Decrease in inventories 6.4 19.5
(Decrease) in accounts payable and other
accrued liabilities (172.2) (177.5)
(Decrease) increase in income taxes payable ( 21.9) 17.5
Increase (decrease) in other liabilities 3.5 ( 14.8)
(Increase) in other assets ( 27.8) ( 39.1)
Other 8.8 ( 5.6)
------- ------
Net cash provided by operating activities 214.0 48.2
------- ------
Cash flows from investing activities
Proceeds from investments 2,878.8 2,387.5
Purchases of investments (2,879.0) (2,421.7)
Investment in marketable software ( 60.5) ( 76.9)
Capital additions of properties and
outsourcing assets (143.5) (112.0)
Purchases of businesses ( 12.6) ( 2.0)
------- ------
Net cash used for investing activities (216.8) (225.1)
------- ------
Cash flows from financing activities
Net reduction in short-term borrowings (10.6) ( 59.6)
Proceeds from employee stock plans 24.0 13.9
Payments of long-term debt ( 1.7) ( 3.0)
Proceeds from issuance of long-term debt 293.3
------- ------
Net cash provided by financing activities 11.7 244.6
------- ------
Effect of exchange rate changes on
cash and cash equivalents ( 1.4) 12.3
------- ------
Increase in cash and cash equivalents 7.5 80.0
Cash and cash equivalents, beginning of period 635.9 301.8
------- -------
Cash and cash equivalents, end of period $ 643.4 $ 381.8
======= =======
See notes to consolidated financial statements.
5
UNISYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
In the opinion of management, the financial information furnished
herein reflects all adjustments necessary for a fair presentation of
the financial position, results of operations and cash flows for the
interim periods specified. These adjustments consist only of normal
recurring accruals. Because of seasonal and other factors, results
for interim periods are not necessarily indicative of the results to
be expected for the full year.
a. The following table shows how earnings per share were computed for the
three and six months ended June 30, 2004 and 2003 (dollars in millions,
shares in thousands):
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Basic Earnings Per Share
Net income $ 19.4 $ 52.5 $ 48.3 $ 91.0
======= ======= ======= =======
Weighted average shares 334,411 328,783 333,567 327,996
======= ======= ======= =======
Basic earnings per share $ .06 $ .16 $ .14 $ .28
======= ======= ======= =======
Diluted Earnings Per Share
Net income $ 19.4 $ 52.5 $ 48.3 $ 91.0
======= ======= ======= =======
Weighted average shares 334,411 328,783 333,567 327,996
Plus incremental shares
from assumed exercises
under employee stock plans 4,356 2,366 4,840 1,991
------- ------- ------- -------
Adjusted weighted average
shares 338,767 331,149 338,407 329,987
======= ======= ======= =======
Diluted earnings per share $ .06 $ .16 $ .14 $ .28
======= ======= ======= =======
At June 30, 2004, 25.8 million shares related to employee stock plans were
not included in the computation of diluted earnings per share because the
option prices are above the average market price of the company's common
stock.
b. The company has two business segments: Services and Technology. Revenue
classifications by segment are as follows: Services - consulting and
systems integration, outsourcing, infrastructure services and core
maintenance; Technology - enterprise-class servers and specialized
technologies. The accounting policies of each business segment are the same
as those followed by the company as a whole. Intersegment sales and
transfers are priced as if the sales or transfers were to third parties.
Accordingly, the Technology segment recognizes intersegment revenue and
manufacturing profit on hardware and software shipments to customers under
Services contracts. The Services segment, in turn, recognizes customer
revenue and marketing profits on such shipments of company hardware and
software to customers. The Services segment also includes the sale of
hardware and software products sourced from third parties that are sold to
customers through the company's Services channels. In the company's
consolidated statements of income, the manufacturing costs of products
sourced from the Technology segment and sold to Services customers are
reported in cost of revenue for Services.
Also included in the Technology segment's sales and operating profit are
sales of hardware and software sold to the Services segment for internal use
in Services engagements. The amount of such profit included in operating
income of the Technology segment for the three and six months ended June 30,
2004 and 2003 was $1.3 million and $11.5 million, and $2.6 million and $14.6
million, respectively. The profit on these transactions is eliminated in
Corporate.
6
The company evaluates business segment performance on operating income
exclusive of restructuring charges and unusual and nonrecurring items, which
are included in Corporate. All other corporate and centrally incurred costs
are allocated to the business segments based principally on revenue,
employees, square footage or usage.
A summary of the company's operations by business segment for the three and
six month periods ended June 30, 2004 and 2003 is presented below (in
millions of dollars):
Total Corporate Services Technology
Three Months Ended ----- --------- -------- ----------
June 30, 2004
------------------
Customer revenue $1,388.1 $1,158.8 $ 229.3
Intersegment $( 57.3) 4.5 52.8
-------- ------- -------- --------
Total revenue $1,388.1 $( 57.3) $1,163.3 $ 282.1
======== ======= ======== ========
Operating income (loss) $ 22.9 $( .4) $ 8.2 $ 15.1
======== ======= ======== ========
Three Months Ended
June 30, 2003
------------------
Customer revenue $1,425.0 $1,163.4 $ 261.6
Intersegment $( 89.2) 6.3 82.9
-------- ------- -------- --------
Total revenue $1,425.0 $( 89.2) $1,169.7 $ 344.5
======== ======= ======== ========
Operating income (loss) $ 86.0 $( 4.9) $ 64.1 $ 26.8
======== ======= ======== ========
Six Months Ended
June 30, 2004
----------------
Customer revenue $2,851.0 $2,323.8 $ 527.2
Intersegment $(103.0) 9.3 93.7
-------- ------- -------- --------
Total revenue $2,851.0 $(103.0) $2,333.1 $ 620.9
======== ======= ======== ========
Operating income (loss) $ 81.7 $ - $ 37.4 $ 44.3
======== ======= ======== ========
Six Months Ended
June 30, 2003
------------------
Customer revenue $2,823.9 $2,270.4 $ 553.5
Intersegment $(159.2) 11.9 147.3
-------- ------- -------- --------
Total revenue $2,823.9 $(159.2) $2,282.3 $ 700.8
======== ======= ======== ========
Operating income (loss) $ 162.6 $( 2.3) $ 98.5 $ 66.4
======== ======= ======== ========
Presented below is a reconciliation of total business segment operating
income to consolidated income before taxes (in millions of dollars):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Total segment operating income $ 23.3 $ 90.9 $ 81.7 $164.9
Interest expense (18.2) (18.4) (35.2) (34.1)
Other income (expense), net 24.0 10.6 24.6 7.2
Corporate and eliminations ( .4) ( 4.9) - ( 2.3)
------ ------ ------ ------
Total income before income taxes $ 28.7 $ 78.2 $ 71.1 $135.7
====== ====== ====== ======
7
Customer revenue by classes of similar products or services, by segment, is
presented below:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
---- ---- ---- ----
Services
Consulting and systems
integration $ 413.9 $ 386.0 $ 791.0 $ 742.4
Outsourcing 419.4 421.8 862.4 831.1
Infrastructure services 180.0 211.8 379.5 412.6
Core maintenance 145.5 143.8 290.9 284.3
-------- -------- -------- -------
1,158.8 1,163.4 2,323.8 2,270.4
Technology
Enterprise-class servers 185.5 193.8 387.3 411.6
Specialized technologies 43.8 67.8 139.9 141.9
-------- -------- -------- --------
229.3 261.6 527.2 553.5
-------- -------- -------- --------
Total $1,388.1 $1,425.0 $2,851.0 $2,823.9
======== ======== ======== ========
c. Comprehensive income for the three and six months ended June 30, 2004 and
2003 includes the following components (in millions of dollars):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Net income $ 19.4 $ 52.5 $ 48.3 $ 91.0
Other comprehensive income (loss)
Cash flow hedges
Income (loss), net of tax of
$1.4, $(2.6), $.4, and $(2.6) 2.5 (4.7) .9 (4.8)
Reclassification adjustments,
net of tax of $(.1), $1.0 ,$1.6,
and $2.0 (.2) 1.7 2.9 3.8
Foreign currency translation
adjustments (13.2) 38.6 7.0 30.9
------ ------ ------ ------
Total other comprehensive
income (loss) (10.9) 35.6 10.8 29.9
------ ------ ------ ------
Comprehensive income $ 8.5 $ 88.1 $ 59.1 $120.9
====== ====== ====== ======
Accumulated other comprehensive income (loss) as of December 31, 2003 and
June 30, 2004 is as follows (in millions of dollars):
Cash Minimum
Translation Flow Pension
Total Adjustments Hedges Liability
----- ----------- ------ ---------
Balance at December 31, 2002 $(2,236.9) $(745.0) $( 1.5) $(1,490.4)
Change during period 225.0 65.3 ( 5.1) 164.8
--------- ------- ------ ---------
Balance at December 31, 2003 (2,011.9) (679.7) ( 6.6) (1,325.6)
Change during period 10.8 7.0 3.8
--------- ------- ------ ---------
Balance at June 30, 2004 $(2,001.1) $(672.7) $ (2.8) $(1,325.6)
========= ======= ====== =========
d. The amount credited to stockholders' equity for the income tax benefit
related to the company's stock plans for the six months ended June 30,
2004 and 2003 was $2.9 million and $1.8 million, respectively. The company
expects to realize these tax benefits on future Federal income tax returns.
8
e. For equipment manufactured by the company, the company warrants that it will
substantially conform to relevant published specifications for 12 months
after shipment to the customer. The company will repair or replace, at its
option and expense, items of equipment that do not meet this warranty. For
company software, the company warrants that it will conform substantially to
then-current published functional specifications for 90 days from customer's
receipt. The company will provide a workaround or correction for material
errors in its software that prevents its use in a production environment.
The company estimates the costs that may be incurred under its warranties
and records a liability in the amount of such costs at the time revenue is
recognized. Factors that affect the company's warranty liability include
the number of units sold, historical and anticipated rates of warranty
claims and cost per claim. The company quarterly assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
Presented below is a reconciliation of the aggregate product warranty
liability (in millions of dollars):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Balance at beginning
of period $17.9 $19.3 $20.8 $19.2
Accruals for warranties issued
during the period 2.1 6.8 7.1 11.7
Settlements made during the
period (4.2) (4.4) (8.9) (9.1)
Changes in liability for
pre-existing warranties during
the period, including expirations (.8) (.6) (4.0) (.7)
----- ----- ----- -----
Balance at June 30 $15.0 $21.1 $15.0 $21.1
===== ===== ===== =====
f. The company applies the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based employee compensation
plans. For stock options, no compensation expense is reflected in net
income as all stock options granted had an exercise price equal to or
greater than the market value of the underlying common stock on the date
of grant. In addition, no compensation expense is recognized for common
stock purchases under the Employee Stock Purchase Plan. Pro forma
information regarding net income and earnings per share is required by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," and has been determined as if the company
had accounted for its stock plans under the fair value method of SFAS No.
123. For purposes of the pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
following table illustrates the effect on net income and earnings per share
if the company had applied the fair value recognition provisions of SFAS No.
123 (in millions of dollars):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Net income as reported $ 19.4 $ 52.5 $ 48.3 $ 91.0
Deduct total stock-based employee
compensation expense determined
under fair value method for all
awards, net of tax ( 7.7) (10.3) (17.7) (24.8)
------ ------ ------ ------
Pro forma net income $ 11.7 $ 42.2 $ 30.6 $ 66.2
====== ====== ====== ======
Earnings per share
Basic - as reported $ .06 $ .16 $ .14 $ .28
Basic - pro forma $ .03 $ .13 $ .09 $ .20
Diluted - as reported $ .06 $ .16 $ .14 $ .28
Diluted - pro forma $ .03 $ .13 $ .09 $ .20
9
g. Net periodic pension expense (income) for the three and six months ended
June 30, 2004 and 2003 is presented below (in millions of dollars):
Three Months Three Months
Ended June 30, 2004 Ended June 30, 2003
---------------------- ----------------------
U.S. Int'l. U.S. Int'l.
Total Plans Plans Total Plans Plans
----- ----- ----- ----- ----- -----
Service cost $ 28.6 $ 16.5 $ 12.1 $ 23.5 $ 13.5 $ 10.0
Interest cost 90.7 66.7 24.0 86.7 66.6 20.1
Expected return on
plan assets (123.3) (94.7) (28.6) (125.7) (101.0) (24.7)
Amortization of prior
service (benefit) cost (1.6) (1.9) .3 (2.5) (3.0) 0.5
Recognized net actuarial
loss 30.4 24.3 6.1 8.9 4.9 4.0
Settlement/curtailment
loss 1.2 1.2
----- ----- ------ ------ ------ -----
Net periodic pension
expense (income) $24.8 $ 10.9 $ 13.9 $ (7.9) $ (19.0)$ 11.1
===== ====== ====== ======= ====== =====
Six Months Six Months
Ended June 30, 2004 Ended June 30, 2003
---------------------- ----------------------
U.S. Int'l. U.S. Int'l.
Total Plans Plans Total Plans Plans
----- ----- ----- ----- ----- -----
Service cost $ 57.9 $ 33.6 $ 24.3 $ 48.7 $ 29.4 $ 19.3
Interest cost 180.2 132.3 47.9 173.4 133.6 39.8
Expected return on
plan assets (246.8) (189.5) (57.3) (251.1) (201.8) (49.3)
Amortization of prior
service (benefit) cost (3.0) (3.8) .8 (5.3) (6.0) 0.7
Recognized net actuarial
loss 58.7 46.5 12.2 17.8 10.4 7.4
Settlement/curtailment
loss 2.2 2.2
----- ----- ------ ------ ------ -----
Net periodic pension
expense (income) $47.0 $19.1 $ 27.9 $(14.3) $(34.4) $ 20.1
===== ===== ====== ======= ====== =====
The company currently expects to make cash contributions of approximately
$70 million to its worldwide defined benefit pension plans in 2004 compared
with $62.5 million in 2003. For the six months ended June 30, 2004 and
2003, $27.5 million and $22.7 million, respectively of cash contributions
have been made. In accordance with regulations governing contributions to
U.S. defined benefit pension plans, the company is not required to fund its
U.S. qualified defined benefit pension plan in 2004.
Net periodic postretirement benefit expense for the three and six months
ended June 30, 2004 and 2003 is presented below (in millions of dollars):
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Interest cost $ 3.5 $ 3.6 $ 7.0 $ 7.2
Amortization of prior service benefit (.5) (.5) (1.0) (1.0)
Recognized net actuarial loss 1.0 .7 2.0 1.4
----- ----- ----- -----
Net periodic postretirement benefit
expense $ 4.0 $ 3.8 $ 8.0 $ 7.6
===== ===== ===== =====
The company expects to make cash contributions of approximately $25 million
to its postretirement benefit plan in 2004. For the six months ended
June 30, 2004, $14 million of cash contributions have been made.
10
h. Substantially all of the company's investments at equity consist of Nihon
Unisys, Ltd., a publicly traded Japanese company ("NUL"). NUL is the
exclusive supplier of the company's hardware and software products in Japan.
The company owns approximately 28% of NUL's outstanding common stock. Prior
to January 1, 2004, the company's share of NUL's earnings or losses were
recorded semiannually in the second quarter and fourth quarter on a quarter-
lag basis since NUL's quarterly financial results were not available. Due
to recent regulatory changes in Japan, NUL is required to publish its
earnings quarterly. Accordingly, effective January 1, 2004, the company has
begun to record its equity earnings in NUL quarterly on a quarter-lag basis,
and recorded equity income of $9.1 million and $14.4 million for the three
and six months ended June 30, 2004, respectively.
i. Cash paid during the six months ended June 30, 2004 and 2003 for income
taxes was $35.7 million and $42.2 million, respectively.
Cash paid during the six months ended June 30, 2004 and 2003 for interest
was $42.7 million and $33.8 million, respectively.
j. In November 2003, the company purchased KPMG's Belgian consulting business
for approximately $3.3 million of cash plus assumed liabilities. The
preliminary purchase price allocation was completed in December 2003 and
assumed that the excess of the purchase price over the assets acquired and
liabilities assumed was allocated to goodwill. An outside appraisal company
completed its appraisal during the March 2004 quarter. Approximately $1.5
million of amortizable intangibles (principally customer relationships) were
identified and recorded. The intangible assets have a weighted average life
of approximately 5.5 years. The goodwill from this acquisition has been
assigned to the Services segment.
In April 2004, the company purchased the document services business unit of
Interpay Nederlands B.V. ("Interpay") for $5.2 million. This business unit
processes approximately 110 million paper-related payments a year for Dutch
banks. The purchase price was allocated to assets acquired and liabilities
assumed based on their estimated fair values, and resulted in goodwill of
$3.4 million. The acquisition provides for the company to make contingent
payments to Interpay based on the achievement of certain future revenue
levels. The contingent consideration will be recorded as additional
goodwill when the contingencies are resolved and consideration is issued or
becomes issuable. The goodwill from this acquisition has been assigned to
the Services segment.
In June 2004, the company purchased the security services and identity and
access management solutions business of ePresence, Inc., whose consultants
design and implement enterprise directory and security solutions that enable
identity management within and across organizations. The purchase price of
$10.6 million will be allocated to assets acquired and liabilities assumed
based on their estimated fair values. The preliminary allocation of the
purchase price assumes that the excess of the purchase price over the assets
acquired and liabilities assumed of $8.2 million will be allocated to
goodwill. There can be no assurance that this preliminary allocation will
represent the final purchase price allocation. The purchase price
allocation will be completed within the next few months after finalization
of appraisals. The goodwill from this acquisition has been assigned to the
Services segment.
k. In January 2003, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities, an interpretation of ARB 51." The primary objectives of this
interpretation are to provide guidance on the identification of entities for
which control is achieved through means other than through voting rights
("variable interest entities") and how to determine when and which business
enterprise (the "primary beneficiary") should consolidate the variable
interest entity. This new model for consolidation applies to an entity in
which either (i) the equity investors (if any) do not have a controlling
financial interest, or (ii) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN 46 requires that the
primary beneficiary, as well as all other enterprises with a significant
variable interest in a variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were effective for
financial statements issued after January 31, 2003. In December 2003, the
FASB issued FIN 46 (revised December 2003), "Consolidation of Variable
Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation
issues.
11
The provisions of FIN 46 were applicable for variable interests in entities
obtained after January 31, 2003. The adoption of the provisions applicable
to special purpose entities ("SPE") and all other variable interests
obtained after January 31, 2003 did not have a material impact on the
company's consolidated financial position, consolidated results of
operations, or liquidity.
Effective March 31, 2004, the company adopted the provisions of FIN 46-R
applicable to Non-SPEs created prior to February 1, 2003. Adoption of
FIN 46-R had no impact on the company's consolidated financial position,
consolidated results of operations, or liquidity.
On May 19, 2004, the FASB issued Staff Position No. FAS 106-2, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003", ("FSP No. 106-2"). The above
Act introduces a prescription drug benefit under Medicare as well as a
federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part
D. FSP No. 106-2 is effective for the first interim period beginning after
June 15, 2004 and provides that an employer shall measure the accumulated
plan benefit obligation ("APBO") and net periodic postretirement benefit
cost taking into account any subsidy received under the Act. As of June 30,
2004, the company's measurements of both the APBO and the net postretirement
benefit cost do not reflect any amounts associated with the subsidy because
the company has not yet been able to conclude whether the benefits provided
by its postretirement medical plan are actuarially equivalent to Medicare
Part D under the Act.
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
- ---------------------
The company experienced a slowdown in certain areas of its business,
particularly in infrastructure services and in enterprise servers in the second
quarter of 2004. This resulted in deferrals and delays of some technology
contracts and services projects late in the quarter, leading to lower-than-
anticipated results for the period.
For the three months ended June 30, 2004, the company reported net income of
$19.4 million, or $.06 per share, compared with $52.5 million, or $.16 per
share, for the three months ended June 30, 2003.
Total revenue for the quarter ended June 30, 2004 was $1.39 billion, down 3%
from revenue of $1.43 billion for the quarter ended June 30, 2003. Foreign
currency translations had a 4% positive impact on revenue in the quarter when
compared with the year-ago period. In the current quarter, Services revenue
was flat and Technology revenue decreased 12% from the prior year.
U.S. revenue decreased 5% in the current quarter compared with the year-ago
period and revenue in international markets was flat as an increase in Europe
was offset by declines in other international regions. On a constant currency
basis, international revenue declined 8% in the quarter.
Pension expense for the three months ended June 30, 2004 was $24.8 million
compared with $7.9 million of pension income for the three months ended
June 30, 2003. The change was due to the following: (1) a decline in the
discount rate used for the U.S. pension plan to 6.25% at December 31, 2003
from 6.75% at December 31, 2002, (2) an increase in amortization of net
unrecognized losses, (3) lower expected returns on plan assets due to
amortization of the difference between the calculated value of plan assets and
the fair value of plan assets, and (4) for international plans, declines in
discount rates and currency translation. The company records pension income
or expense, as well as other employee-related costs such as FICA and medical
insurance costs, in operating income in the following income statement
categories: cost of sales; selling, general and administrative expenses; and
research and development expenses. The amount allocated to each income
statement line is based on where the salaries of the active employees are
charged. The company currently expects to report pension expense of
approximately $90 - $95 million in 2004 compared with pension income of $22.6
million in 2003.
Total gross profit margin was 26.4% in the second quarter of 2004 compared with
27.5% in the year-ago period, the change principally reflected pension expense
of $17.8 million in the current quarter compared with pension income of $1.5
million in the year-ago quarter.
For the three months ended June 30, 2004, selling, general and administrative
expenses were $272.9 million (19.7% of revenue) compared with $242.4 million
(17.0% of revenue) for the three months ended June 30, 2003. The increase
principally reflected pension expense of $4.8 million in the current year
compared with $2.4 million of pension income in the year-ago period as well as
the impact of foreign currency exchange rates.
Research and development ("R&D") expense was $71.3 million compared with $63.7
million a year ago. The company continues to invest in high-end Cellular
MultiProcessing server technology and in key programs within its industry
practices. R&D in the current period includes $2.2 million of pension expense
compared with pension income of $4.0 million in the year-ago period.
For the second quarter of 2004, the company reported an operating income
percent of 1.6% compared with 6.0% for the second quarter of 2003. The change
principally reflected pension expense of $24.8 million in the current quarter
compared with pension income of $7.9 million in the year-ago period as well as
lower revenue and higher selling, general and administrative expenses.
Interest expense for the three months ended June 30, 2004 was $18.2 million
compared with $18.4 million for the three months ended June 30, 2003.
13
Other income (expense), net was income of $24.0 million in the current quarter
compared with income of $10.6 million in the year-ago quarter. The increase
in income was principally due to foreign currency exchange gains of $1.5
million in the current quarter compared with exchange losses of $6.9 million
in the year-ago quarter.
Income before income taxes was $28.7 million in the second quarter of 2004
compared with $78.2 million last year. The provision for income taxes was
$9.3 million in the current period compared with $25.7 million in the year-ago
period. The effective tax rate was 32% in 2004 and 33% in 2003.
For the six months ended June 30, 2004, the company reported net income of
$48.3 million, or $.14 per share, compared with $91.0 million, or $.28 per
share, for the six months ended June 30, 2003.
Total revenue for the six months ended June 30, 2004 was $2.85 billion, up 1%
from revenue of $2.82 billion for the six months ended June 30, 2003. Foreign
currency translations had a 5% positive impact on revenue in the six months
when compared with the year-ago period. In the current six-month period,
Services revenue increased 2% and Technology revenue decreased 5%.
U.S. revenue decreased 1% in the current six-month period compared with the
year-ago period and revenue in international markets increased 3% driven by an
increase in Europe which was partially offset by declines in other
international regions. On a constant currency basis, international revenue
declined 7% in the six months ended June 30, 2004.
Pension expense for the six months ended June 30, 2004 was $47.0 million
compared with $14.3 million of pension income for the six months ended June 30,
2003.
Total gross profit margin was 26.6% in the six months ended June 30, 2004
compared with 27.6% in the year-ago period. The change principally reflected
pension expense of $33.3 million in the current period compared with pension
income of $2.7 million in the year-ago period.
For the six months ended June 30, 2004, selling, general and administrative
expenses were $534.1 million (18.7% of revenue) compared with $486.1 million
(17.2% of revenue) for the six months ended June 30, 2003.
R&D expense for the six months ended June 30, 2004 was $142.8 million compared
with $130.5 million a year ago. R&D in the current period includes $4.0
million of pension expense compared with pension income of $7.2 million in the
year-ago period.
For the six months ended June 30, 2004, the company reported an operating
income percent of 2.9% compared with 5.8% for the six months ended June 30,
2003. The change principally reflected pension expense of $47.0 million in the
current period compared with pension income of $14.3 million in the year-ago
period.
Interest expense for the six months ended June 30, 2004 was $35.2 million
compared with $34.1 million for the six months ended June 30, 2003. The
increase in interest expense was due to higher borrowing levels in 2004.
Other income (expense), net was income of $24.6 million in the current six-
month period compared with income of $7.2 million in the year-ago period. The
increase in income was principally due to foreign exchange losses of
$.7 million in the current year compared with losses of $11.3 million in the
prior-year period as well as Nihon Unisys Ltd. ("NUL") equity income of $14.4
million in the current period compared with $10.2 million in the prior-year
period.
Income before income taxes was $71.1 million in the six months ended June 30,
2004 compared with $135.7 million last year. The provision for income taxes
was $22.8 million in the current period compared with $44.7 million in the year-
ago period. The effective tax rate was 32% in 2004 and 33% in 2003.
14
Segment results
- ---------------
The company has two business segments: Services and Technology. Revenue
classifications are as follows: Services - consulting and systems integration,
outsourcing, infrastructure services, and core maintenance; Technology -
enterprise-class servers and specialized technologies. The accounting policies
of each business segment are the same as those followed by the company as a
whole. Intersegment sales and transfers are priced as if the sales or
transfers were to third parties. Accordingly, the Technology segment recognizes
intersegment revenue and manufacturing profit on hardware and software
shipments to customers under Services contracts. The Services segment, in
turn, recognizes customer revenue and marketing profit on such shipments of
company hardware and software to customers. The Services segment also includes
the sale of hardware and software products sourced from third parties that are
sold to customers through the company's Services channels. In the company's
consolidated statements of income, the manufacturing costs of products sourced
from the Technology segment and sold to Services customers are reported in cost
of revenue for Services.
Also included in the Technology segment's sales and operating profit are sales
of hardware and software sold to the Services segment for internal use in
Services engagements. The amount of such profit included in operating income
of the Technology segment for the three months ended June 30, 2004 and 2003,
was $1.3 million and $11.5 million, respectively. The profit on these
transactions is eliminated in Corporate.
The company evaluates business segment performance on operating income
exclusive of restructuring charges and unusual and nonrecurring items, which
are included in Corporate. All other corporate and centrally incurred costs
are allocated to the business segments based principally on revenue, employees,
square footage or usage.
Information by business segment is presented below (in millions of dollars):
Elimi-
Total nations Services Technology
------- ------- -------- ----------
Three Months Ended
June 30, 2004
- ------------------
Customer revenue $1,388.1 $1,158.8 $229.3
Intersegment $( 57.3) 4.5 52.8
-------- ------- -------- ------
Total revenue $1,388.1 $( 57.3) $1,163.3 $282.1
======== ======= ======== ======
Gross profit percent 26.4% 18.5% 53.3%
======== ======== ======
Operating income
percent 1.6% .7% 5.4%
======== ======== ======
Three Months Ended
June 30, 2003
- ------------------
Customer revenue $1,425.0 $1,163.4 $261.6
Intersegment $( 89.2) 6.3 82.9
-------- ------- -------- ------
Total revenue $1,425.0 $( 89.2) $1,169.7 $344.5
======== ======= ======== ======
Gross profit percent 27.5% 20.0% 46.6%
======== ======== ======
Operating income
percent 6.0% 5.5% 7.8%
======== ======== ======
Gross profit percent and operating income percent are as a percent of total
revenue.
15
In the Services segment, customer revenue was $1.16 billion for the three
months ended June 30, 2004, compared with $1.16 billion for the three months
ended June 30, 2003. Foreign currency translations had about a 4% positive
impact on Services revenue in the quarter when compared with the year-ago
period. In Services revenue there was a 7% increase in consulting and systems
integration ($414 million in 2004 compared with $386 million in 2003) and a 1%
increase in core maintenance revenue ($146 million in 2004 compared with $143
million in 2003). Offsetting these increases was a decline of 15% in
infrastructure services revenue ($180 million in 2004 compared with $212
million in 2003). Outsourcing revenue was flat ($419 million in 2004 compared
with $422 million in 2003). The decline in infrastructure services revenue was
principally due to less project-based work in the current quarter compared with
the year-ago quarter. Services gross profit was 18.5% for the three months
ended June 30, 2004 compared with 20.0% in the year-ago period. This change
was principally due to the impact of pension expense of $17.4 million in the
current quarter compared with pension income of $.7 million in the year-ago
period. Services operating income percent was .7% for the three months ended
June 30, 2004 compared with 5.5% last year. This change was principally due
to the impact of pension expense of $21.1 million in the current quarter
compared with pension income of $3.2 million in the prior year as well as
higher selling, and general and administrative expenses in the current quarter.
In the Technology segment, customer revenue was $229 million for the three
months ended June 30, 2004, down 12% compared with $262 million for the three
months ended June 30, 2003. Foreign currency translations had about a 2%
positive impact on Technology revenue in the quarter when compared with the
year-ago period. The decrease in revenue was due to a 35% decrease in sales of
specialized technology products ($44 million in 2004 compared with $68 million
in 2003) and a 4% decline in sales of enterprise-class servers ($185 million in
2004 compared with $194 million in 2003). The decrease in specialized
technology revenue was caused by lower sales of semiconductor test systems and
payment systems. Sales of these systems can vary significantly from quarter to
quarter depending on customer needs. Technology gross profit was 53.3% for the
three months ended June 30, 2004 compared with 46.6% in the year-ago period,
and Technology operating income percent was 5.4% for the three months ended
June 30, 2004 compared with 7.8% last year. The gross profit increase
primarily reflected a higher proportion of high-end, higher-margin products
within the ClearPath product line. The decline in operating income percent was
principally due to pension expense of $3.7 million in the current period
compared with pension income of $4.7 million in the prior-year period.
New Accounting Pronouncements
- -----------------------------
In January 2003, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities,
an interpretation of ARB 51." The primary objectives of this interpretation
are to provide guidance on the identification of entities for which control is
achieved through means other than through voting rights ("variable interest
entities") and how to determine when and which business enterprise (the
"primary beneficiary") should consolidate the variable interest entity. This
new model for consolidation applies to an entity in which either (i) the equity
investors (if any) do not have a controlling financial interest, or (ii) the
equity investment at risk is insufficient to finance that entity's activities
without receiving additional subordinated financial support from other parties.
In addition, FIN 46 requires that the primary beneficiary, as well as all other
enterprises with a significant variable interest in a variable interest entity,
make additional disclosures. Certain disclosure requirements of FIN 46 were
effective for financial statements issued after January 31, 2003. In December
2003, the FASB issued FIN 46 (revised December 2003), "Consolidation of Variable
Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation issues.
The provisions of FIN 46 were applicable for variable interests in entities
obtained after January 31, 2003. The adoption of the provisions applicable to
special purpose entities ("SPE") and all other variable interests obtained after
January 31, 2003 did not have a material impact on the company's consolidated
financial position, consolidated results of operations, or liquidity.
16
Effective March 31, 2004, the company adopted the provisions of FIN 46-R
applicable to Non-SPEs created prior to February 1, 2003. Adoption of FIN 46-R
had no impact on the company's consolidated financial position, consolidated
results of operations, or liquidity.
Financial Condition
- -------------------
Cash and cash equivalents at June 30, 2004 were $643.4 million compared with
$635.9 million at December 31, 2003.
During the six months ended June 30, 2004, cash provided by operations was
$214.0 million compared with $48.2 million for the six months ended June 30,
2003. Operating cash flow increased principally due to higher receivable
collections and lower restructuring expenditures. Cash expenditures in the six
months ended June 30, 2004 related to prior-year restructuring charges (which
are included in operating activities) were approximately $7 million compared
with $45 million for the prior-year period, and are expected to be approximately
$6 million for the remainder of 2004 and $10 million in total for all subsequent
years, principally for work-force reductions and idle lease costs.
Cash used for investing activities for the six months ended June 30, 2004 was
$216.8 million compared with $225.1 million during the six months ended June 30,
2003. The decrease in cash used was principally due to net purchases of
investments of $.2 million in the current period compared with net purchases of
$34.2 million in the prior-year period. In addition, the current period
investment in marketable software was $60.5 million compared with $76.9 million
in the prior-year. Capital additions were $143.5 million for the six months
ended June 30, 2004 compared with $112.0 million in the prior-year period. The
increase in current year capital expenditures was principally due to additions
of revenue-generating assets, particularly in the company's outsourcing
business, as well as expenditures related to the move of the company's Federal
headquarters into a new facility. Cash expenditures for purchases of
businesses was $12.6 million for the six months ended June 30, 2004 compared
with $2.0 million in the prior year.
Cash provided by financing activities during the six months ended June 30, 2004
was $11.7 million compared with $244.6 million in the prior year. The prior
period includes net proceeds from issuance of long-term debt of $293.3 million
in connection with the company's issuance in March 2003 of $300 million of
6 7/8% senior notes due 2010.
At June 30, 2004 and December 31, 2003, total debt was $1.1 billion.
The company has a $500 million credit agreement that expires in May 2006. As
of June 30, 2004, there were no borrowings under this facility, and the entire
$500 million was available for borrowings. Borrowings under the agreement
bear interest based on the then-current LIBOR or prime rates and the company's
credit rating. The credit agreement contains financial and other covenants,
including maintenance of certain financial ratios, a minimum level of net worth
and limitations on certain types of transactions, which could reduce the amount
the company is able to borrow. Events of default under the credit agreement
include failure to perform covenants, material adverse change, change of
control and default under other debt aggregating at least $25 million. If an
event of default were to occur under the credit agreement, the lenders would be
entitled to declare all amounts borrowed under it immediately due and payable.
The occurrence of an event of default under the credit agreement could also
cause the acceleration of obligations under certain other agreements and the
termination of the company's U.S. trade accounts receivable facility, described
below.
In addition, the company and certain international subsidiaries have access to
certain uncommitted lines of credit from various banks. Other sources of short-
term funding are operational cash flows, including customer prepayments, and
the company's U.S. trade accounts receivable facility. Using this facility,
the company sells, on an on-going basis, up to $225 million of its eligible
U.S. trade accounts receivable through a wholly owned subsidiary, Unisys
Funding Corporation I. The facility is renewable annually at the purchasers'
option and expires in December 2006. At June 30, 2004, the company had sold
$217 million of eligible receivables compared with $225 million at December 31,
2003.
17
At June 30, 2004, the company has met all covenants and conditions under its
various lending and funding agreements. Since the company believes that it
will continue to meet these covenants and conditions, the company believes that
it has adequate sources and availability of short-term funding to meet its
expected cash requirements.
The company may, from time to time, redeem, tender for, or repurchase its
securities in the open market or in privately negotiated transactions depending
upon availability, market conditions and other factors.
The company has on file with the Securities and Exchange Commission a
registration statement covering $1.2 billion of debt or equity securities,
which enables the company to be prepared for future market opportunities.
At June 30, 2004, the company had deferred tax assets in excess of deferred tax
liabilities of $2,032 million. For the reasons cited below, management
determined that it is more likely than not that $1,586 million of such assets
will be realized, therefore resulting in a valuation allowance of $446 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 $4.8 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 May
Affect Future Results" below.
Stockholders' equity increased $97.6 million during the six months ended June
30, 2004, principally reflecting net income of $48.3 million, $35.4 million for
issuance of stock under stock option and other plans, $2.9 million of tax
benefits related to employee stock plans and currency translation of $7.0
million.
At December 31 of each year, accounting rules require a company to recognize a
liability on its balance sheet for each defined benefit pension plan if the
fair value of the assets of that pension plan is less than the present value of
the pension obligation (the accumulated benefit obligation, or "ABO"). This
liability is called a "minimum pension liability." Concurrently, any existing
prepaid pension asset for the pension plan must be removed. These adjustments
are recorded as a charge in "accumulated other comprehensive income (loss)" in
stockholders' equity. If at any future year-end, the fair value of the pension
plan assets exceeds the ABO, the charge to stockholders' equity would be
reversed for such plan. Alternatively, if the fair market value of pension
plan assets experiences further declines or the discount rate is reduced,
additional charges to accumulated other comprehensive income (loss) may be
required at a future year-end.
At December 31, 2002, for all of the company's defined benefit pension plans,
the ABO exceeded the fair value of pension plan assets. At December 31, 2003,
the difference between the ABO and the fair value of pension plan assets
decreased. As a result, at December 31, 2003, the company adjusted its minimum
pension liability as follows: decreased its pension plan liabilities by
approximately $300 million, increased its investments at equity by approximately
$6 million relating to the company's share of the change in NUL's minimum
pension liability, decreased prepaid pension asset by $56 million, and offset
these changes by a credit to other comprehensive income of approximately $250
million, or $165 million net of tax.
This accounting has no effect on the company's net income, liquidity or cash
flows. Financial ratios and net worth covenants in the company's credit
agreements and debt securities are unaffected by charges or credits to
stockholders' equity caused by adjusting a minimum pension liability.
In accordance with regulations governing contributions to U.S. defined benefit
pension plans, the company is not required to fund its U.S. qualified defined
benefit plan in 2004. The company expects to make cash contributions of
approximately $70 million to its other defined benefit pension plans during
2004.
18
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. Forward-looking statements provide current expectations of future
events and include any statement that does not directly relate to any
historical or current fact. Words such as "anticipates," "believes," "expects,"
"intends," "plans," "projects" and similar expressions may identify such
forward-looking statements. 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. These other
factors include, but are not limited to, those discussed below. Any forward-
looking statement speaks only as of the date on which that statement is made.
The company assumes no obligation to update any forward-looking statement to
reflect events or circumstances that occur after the date on which the
statement is made.
The company's business is affected by changes in general economic and business
conditions. The company continues to face a highly competitive business
environment and economic weakness in certain geographic regions. In this
environment, many organizations are delaying planned purchases of information
technology products and services. If the level of demand for the company's
products and services declines in the future, the company's business could be
adversely affected. The company's business could also be affected by acts of
war, terrorism or natural disasters. Current world tensions could escalate and
this could have unpredictable consequences on the world economy and on our
business.
The information services and technology markets in which the company operates
include a large number of companies vying for customers and market share both
domestically and internationally. The company's competitors include consulting
and other professional services firms, systems integrators, outsourcing
providers, infrastructure services providers, computer hardware manufacturers
and software providers. Some of the company's competitors may develop competing
products and services that offer better price performance or that reach the
market in advance of the company's offerings. Some competitors also have or may
develop greater financial and other resources than the company, with enhanced
ability to compete for market share, in some instances through significant
economic incentives to secure contracts. Some also may be better able to
compete for skilled professionals. Any of these factors could have an adverse
effect on the company's business. Future results will depend on the company's
ability to mitigate the effects of aggressive competition on revenues, pricing
and margins and on the company's ability to attract and retain talented people.
The company operates in a highly volatile industry characterized by rapid
technological change, evolving technology standards, short product life cycles
and continually changing customer demand patterns. Future success will depend
in part on the company's ability to anticipate and respond to these market
trends and to design, develop, introduce, deliver or obtain new and innovative
products and services on a timely and cost-effective basis. The company may not
be successful in anticipating or responding to changes in technology, industry
standards or customer preferences, and the market may not demand or accept its
services and product offerings. In addition, products and services developed by
competitors may make the company's offerings less competitive.
The company's future results will depend in part on its ability to grow
outsourcing and infrastructure services. The company's outsourcing contracts
are multiyear engagements under which the company takes over management of a
client's technology operations, business processes or networks. The company
will need to maintain a strong financial position in order to grow its
outsourcing business. In a number of these arrangements, the company hires
certain of its clients' employees and may become responsible for the related
employee obligations, such as pension and severance commitments.
In addition, system development activity on outsourcing contracts may require
the company to make significant upfront investments. As long-term relationships,
these outsourcing contracts provide a base of recurring revenue. However, in
the early phases of these contracts, gross margins may be lower than in later
years when the work force and facilities have been rationalized for efficient
operations, and an integrated systems solution has been implemented. Future
results will depend on the company's ability to effectively complete the
rationalizations and solution implementations.
19
Future results will also depend in part on the company's ability to drive
profitable growth in consulting and systems integration. The company's ability
to grow profitably in this business will depend in part on an improvement in
economic conditions and a pick-up in demand for systems integration projects.
It will also depend on the success of the actions the company has taken to
enhance the skills base and management team in this business and to refocus the
business on integrating best-of-breed, standards-based solutions to solve
client needs. In addition, profit margins in this business are largely a
function of the rates the company is able to charge for services and the
chargeability of its professionals. If the company is unable to maintain the
rates it charges or appropriate chargeability for its professionals, profit
margins will suffer. The rates the company is able to charge for services are
affected by a number of factors, including clients' perception of the company's
ability to add value through its services; introduction of new services or
products by the company or its competitors; pricing policies of competitors;
and general economic conditions. Chargeability is also affected by a number of
factors, including the company's ability to transition employees from completed
projects to new engagements, and its ability to forecast demand for services
and thereby maintain an appropriate head count.
Future results will also depend, in part, on market acceptance of the company's
high-end enterprise servers. In its technology business, the company is
focusing its resources on high-end enterprise servers based on its Cellular
MultiProcessing (CMP) architecture. The company's CMP servers are designed to
provide mainframe-class capabilities with compelling price-performance by
making use of standards-based technologies such as Intel chips and Microsoft
operating system software. The company has transitioned both its legacy
ClearPath servers and its Intel-based ES7000s to the CMP platform, creating a
common platform for all the company's high-end server lines. Future results
will depend, in part, on customer acceptance of the new CMP-based ClearPath
Plus systems and the company's ability to maintain its installed base for
ClearPath and to develop next-generation ClearPath products that are purchased
by the installed base. In addition, future results will depend, in part, on
the company's ability to generate new customers and increase sales of the Intel-
based ES7000 line. The company believes there is significant growth potential
in the developing market for high-end, Intel-based servers running Microsoft
operating system software. However, competition in this new market is likely to
intensify in coming years, and the company's ability to succeed will depend on
its ability to compete effectively against enterprise server competitors with
more substantial resources and its ability to achieve market acceptance of the
ES7000 technology by clients, systems integrators, and independent software
vendors.
A number of the company's long-term contracts for infrastructure services,
outsourcing, help desk and similar services do not provide for minimum
transaction volumes. As a result, revenue levels are not guaranteed. In
addition, some of these contracts may permit termination or may impose other
penalties if the company does not meet the performance levels specified in the
contracts.
Some of the company's systems integration contracts are fixed-priced contracts
under which the company assumes the risk for delivery of the contracted
services and products at an agreed-upon fixed price. At times the company has
experienced problems in performing some of these fixed-price contracts on a
profitable basis and has provided periodically for adjustments to the estimated
cost to complete them. Future results will depend on the company's ability to
perform these services contracts profitably.
The company frequently enters into contracts with governmental entities. Risks
and uncertainties associated with these government contracts include the
availability of appropriated funds and contractual provisions that allow
governmental entities to terminate agreements at their discretion before the
end of their terms.
The success of the company's business is dependent on strong, long-term client
relationships and on its reputation for responsiveness and quality. As a
result, if a client is not satisfied with the company's services or products,
its reputation could be damaged and its business adversely affected. In
addition, if the company fails to meet its contractual obligations, it could be
subject to legal liability, which could adversely affect its business,
operating results and financial condition.
20
The company has commercial relationships with suppliers, channel partners and
other parties that have complementary products, services or skills. Future
results will depend, in part, on the performance and capabilities of these
third parties, on 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 54% 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 protection measures, import or export licensing requirements,
multiple and possibly overlapping and conflicting tax laws, and weaker
intellectual property protections in some jurisdictions.
The company cannot be sure that its services and products do not infringe on
the intellectual property rights of third parties, and it may have infringement
claims asserted against it or against its clients. These claims could cost the
company money, prevent it from offering some services or products, or damage
its reputation.
Item 4. Controls and Procedures
- ---------------------------------
The company's management, with the participation of the company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the company's disclosure controls and procedures as of June 30, 2004. Based
on this evaluation, the company's Chief Executive Officer and Chief Financial
Officer concluded that the company's disclosure controls and procedures are
effective for gathering, analyzing and disclosing the information the company
is required to disclose in the reports it files under the Securities Exchange
Act of 1934, within the time periods specified in the SEC's rules and forms.
Such evaluation did not identify any change in the company's internal control
over financial reporting that occurred during the quarter ended June 30, 2004
that has materially affected, or is reasonably likely to materially affect, the
company's internal control over financial reporting.
21
Part II - OTHER INFORMATION
- ------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
(a) The company's 2004 Annual Meeting of Stockholders (the "Annual Meeting")
was held on April 22, 2004 in Philadelphia, Pennsylvania.
(c) The following matter was voted upon at the Annual Meeting and received
the following votes:
Election of Directors as follows:
Henry C. Duques - 293,986,489 votes for; 10,001,384 votes withheld
Clayton M. Jones - 293,943,825 votes for; 10,044,048 votes withheld
Theodore E. Martin - 290,945,808 votes for; 13,042,065 votes withheld
Lawrence A. Weinbach - 295,253,437 votes for; 8,734,436 votes withheld
Item 5 Other Information
- ---------------------------
On July 22, 2004, the company's Board of Directors elected Matthew J. Espe,
chairman and chief executive officer of IKON Office Solutions, Inc., as a
director of Unisys. Mr. Espe has been named to the Finance Committee of the
Board.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
As previously disclosed in the company's Quarterly Report on From
10-Q for the quarterly period ended March 31, 2004, on April 6, 2004, the
company filed a Current Report on Form 8-K dated April 6, 2004, to report under
Items 5 and 7 of that form.
On April 15, 2004 the company furnished a Current Report on Form 8-K
to provide, under Items 7 and 12, the company's earnings release reporting its
financial results for the quarter ended March 31, 2004. Such information shall
not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act
of 1934.
22
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
UNISYS CORPORATION
Date: July 22, 2004 By: /s/ Janet M. Brutschea Haugen
-----------------------------
Janet M. Brutschea Haugen
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Carol S. Sabochick
----------------------
Carol S. Sabochick
Vice President and
Corporate Controller
(Chief Accounting Officer)
23
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Restated Certificate of Incorporation of Unisys Corporation
(incorporated by reference to Exhibit 3.1 to the registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999)
3.2 Bylaws of Unisys Corporation, as amended through April 22, 2004
(incorporated by reference to Exhibit 3 to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004)
10.1 Agreement, dated April 6, 2004, between Lawrence A. Weinbach and
Unisys Corporation (incorporated by reference to Exhibit 10 to the
registrant's current Report on Form 8-K dated April 6, 2004)
10.2 Deferred Compensation Plan for Directors of Unisys Corporation,
as amended and restated effective April 22, 2004
12 Statement of Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of Lawrence A. Weinbach required by Rule 13a-14(a) or
Rule 15d-14(a)
31.2 Certification of Janet Brutschea Haugen required by Rule 13a-14(a) or
Rule 15d-14(a)
32.1 Certification of Lawrence A. Weinbach required by Rule 13a-14(b) or
Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350
32.2 Certification of Janet Brutschea Haugen required by Rule 13a-14(b) or
Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
DEFERRED COMPENSATION
PLAN FOR DIRECTORS OF UNISYS CORPORATION
ARTICLE I
PURPOSE & AUTHORITY
1.1 PURPOSE. The purpose of the Plan is to offer members of the
Board of Directors who are not employees of the Corporation the opportunity to
defer receipt of a portion of their Compensation, under terms advantageous to
both the Director and the Corporation.
1.2 EFFECTIVE DATE. The Board originally approved the Plan on
November 20, 1981, and the Plan was subsequently amended, effective January 1,
1994. This document reflects the Plan as amended and restated effective April
22, 2004. The terms of this amended and restated Plan shall apply to all
Account Balances and elections made pursuant to the Plan prior to its
amendment.
1.3 AUTHORITY. Any decision made or action taken by the
Corporation and any of its officers or employees involved in the
administration of this Plan, or any member of the Board or the Committee
arising out of or in connection with the construction, administration,
interpretation and effect of the Plan shall be within the absolute discretion
of all and each of them, as the case may be, and will be conclusive and
binding on all parties. No member of the Board and no employee of the
Corporation shall be liable for any act or action hereunder, whether of
omission or commission, by any other member or employee or by any agent to
whom duties in connection with the administration of the Plan have been
delegated or, except in circumstances involving the member's or employee's bad
faith, for anything done or omitted to be done by himself or herself.
ARTICLE II
DEFINITIONS
2.1 "Account" means, for any Participant, each memorandum
account established for the Participant under Section 4.1. "Stock Units
Account" means that portion of a Participant's Account attributable to
Elective and Non-Elective Stock Units. Effective April 22, 2004, each
Participant's Account maintained under the Unisys Corporation Director Stock
Unit Plan will be transferred to this Plan and become part of the
Participant's Stock Unit Account.
2.2 "Account Balance" means, for any Participant as of any date,
the aggregate amount reflected in his or her Account.
2.3 "Beneficiary" means the person or persons designated from
time to time in writing by a Participant to receive payments under the Plan
after the death of such Participant or, in the absence of such designation or
in the event that such designated person or persons predeceases the
Participant, the Participant's estate.
2.4 "Board" means the Board of Directors of the Corporation.
2.5 "Change in Control" shall have the same meaning as is
ascribed to that term under the Unisys Corporation 2003 Long-Term Incentive
and Equity Compensation Plan, or any successor stock option plan.
2.6 "Committee" means the Compensation Committee of the Board,
or such other committee as may be appointed by the Board to administer the
Plan.
2.7 "Compensation" means amounts payable by the Corporation,
absent deferral, with respect to services provided by a Participant to the
Corporation as a Director, including retainer and meeting fees, but shall not
include Non-Elective Stock Unit amounts credited to a Participant's Account
hereunder.
2.8 "Corporation" means Unisys Corporation.
2.9 "Deferral Election" means an election by an Eligible
Director to defer a portion of his or her Compensation under the Plan, as
described in Section 3.1.
2.10 "Eligible Director" means a member of the Board who is not
an employee of the Corporation.
2.11 "Executives' Plan" means the Unisys Corporation Deferred
Compensation Plan.
2.12 "Fair Market Value" means, on any date, the sales
price of a share of Unisys Common Stock as of the official close of the New
York Stock Exchange at 4:00 p.m. U.S. Eastern Standard Time on such date.
2.13 "Investment Measurement Option" means any of the
hypothetical investment alternatives available for determining the additional
amounts to be credited to a Participant's Account under Section 4.2. The
Investment Measurement Options available are all of the investment options
available to eligible participants under the USP other than the Unisys Common
Stock Fund.
2.14 "Option for Stock Units" means an option, created pursuant
to a Director's election in accordance with Section 6 that, if exercised by
the Director, will result in the crediting of Stock Units to the Director's
Account.
2.15 "Participant" means an Eligible Director or former Eligible
Director who has made a Deferral Election and who has not received a
distribution of his or her entire Account Balance.
2.16 "Plan" means the Deferred Compensation Plan for Directors of
Unisys Corporation, as set forth herein and as amended from time to time.
2.17 "Revised Election" means an election made by a Participant,
in accordance with Section 5.2, to change the date as of which payment of his
or her Account Balance is to commence and/or the form in which such payment is
to be made.
2.18 "Stock Units" means Unisys common stock-equivalent units,
which are awarded pursuant to the Unisys Corporation 2003 Long-Term Incentive
and Equity Compensation Plan as Elective or Non-Elective Stock Units.
Elective Stock Units are Stock Units awarded as a result of a Participant's
election to defer the receipt of Compensation in accordance with Section
4.2(b) of the Plan or the Participant's election to convert an option for
stock to an Option for Stock Units in accordance with Section 3.2 of the Plan.
Non-Elective Stock Units are Stock Units awarded to the Participant by the
Corporation without regard to a deferral election.
2.19 "USP" means the Unisys Savings Plan.
2.20 "Valuation Date" means any business day as of which the
interest of a Participant in each of the Participant's Accounts is valued
pursuant to the terms of the Plan.
ARTICLE III
DEFERRAL OF COMPENSATION
3.1 DEFERRAL ELECTION.
(a) Prior to or during any calendar year, each Eligible Director
may elect to defer all or a portion of his or her Compensation that, absent
deferral, would be paid to him or her for services rendered during the
following calendar year or the remainder of the current calendar year, as
applicable, by properly completing a Deferral Election form.
(b) To be effective, a Deferral Election must be made in writing
by the Eligible Director on a form furnished by the Secretary of the
Corporation on or before the date that is (I) no later than the December 31
prior to the calendar year to which the Deferral Election applies or (II) at
least three months and one day before the date on which the amounts to be
deferred, absent deferral, would be paid to the Eligible Director, provided,
however, that an individual who becomes an Eligible Director after January 1
of a calendar year may make a Deferral Election with respect to Compensation
that, absent deferral, would be paid to him or her during the remainder of the
calendar year in which he or she has become an Eligible Director, by filing
the required written election on or before the date that is 30 days after the
date on which he or she becomes an Eligible Director.
(c) Once made, a Deferral Election shall become effective upon
receipt by the Secretary of the Corporation and is thereafter irrevocable,
except to the extent otherwise provided in Section 5.2.
(d) An Eligible Director's Deferral Election must specify either
a percentage or a certain dollar amount of his or her Compensation to be
deferred under the Plan. In addition, the Deferral Election must specify the
date on which payment of the amount deferred and payment in respect of any
Non-Elective Stock Units that may be credited to the Participant's Account is
to commence and the manner in which such payment is to be made, as set forth
below:
(1) Subject to Section 5.1(b) hereof, the Deferral
Election must specify that such payment is to commence as of:
(A) his or her termination of service as a member of
the Board (including as a result of disability); or
(B) a specific date (which may be determined by
reference to the Eligible Director's termination of service) that is at least
two years after the date on which the initial amounts to be deferred, absent
deferral, would be paid to the Eligible Director.
(2) The Eligible Director must specify whether payment of
his or her Account Balance, including any payment in respect of any Non-
Elective Stock Units that may be credited to the Participant's Account, is to
be made in a single sum or in annual installments.
(3) Notwithstanding the foregoing, an Eligible Director
may not elect a time of benefit commencement and/or a form of payment to the
extent that such an election would cause any payments to be made after the
March 31 first following the date that is 20 years after the date of the
Eligible Director's termination of service.
(e) Deferrals of an Eligible Director's Compensation shall be
credited to the Plan at the time at which the Compensation, absent deferral,
would be payable to the Participant.
(f) Unless the Deferral Election form specifically provides
otherwise, a Deferral Election shall expire as of the last day of the calendar
year that includes the first day on which any amount, absent deferral, would
be paid to the Eligible Director.
3.2 OPTIONS FOR STOCK UNITS. A Director who holds an option for
Corporation common stock that was awarded to him or her under any plan
maintained by the Corporation may elect, to the extent permitted under that
plan or otherwise by the Committee, to convert all or part of that option to
an Option for Stock Units in accordance with the provisions of this Section
3.2.
(a) ELECTION TO CONVERT OPTION. A Director can elect to convert
all or a portion of an outstanding option to an Option for Stock Units by
providing written notice to the Corporation, which must be received by the
Corporate Executive Compensation Department, at least six months before the
expiration date of the option. The election must specify the number of shares
of Corporation common stock subject to the option that are to become subject
to the Option for Stock Units. The election must also specify the date on
which the Stock Units to be credited to the Director's Account upon the
exercise of the Option for Stock Units are to be paid to the Director; such
date may be (1) the Director's termination of service or (2) a specific date
(which may be determined by reference to the Director's termination of service
or by reference to the date of the Director's exercise of the Option for Stock
Units).
(b) EXERCISE OF OPTIONS FOR STOCK UNITS. A Director may not
exercise an Option for Stock Units until the expiration of the six-month
period beginning on the date on which the Director's option is converted to an
Option for Stock Units. Thereafter, but only until the expiration of the
period during which the option that the Director converted to an Option for
Stock Units could, in accordance with its original terms be exercised, a
Director may exercise Options for Stock Units by providing written notice of
exercise to the place designated by the Committee. At the time of the
exercise of an Option for Stock Units, the Director must certify to the
Corporation or its designee that he or she currently owns shares of
Corporation common stock sufficient to pay the aggregate option price and, if
the shares were acquired for services to the Corporation that he or she has
held those shares for at least six months.
(c) EFFECT OF EXERCISE.
(1) As soon as practicable following receipt of a
Director's notice of exercise under Section 3.2(b), Stock Units will be
credited to the Director's Account. The number of Stock Units to be so
credited will be equal to (A) the difference between (i) the aggregate fair
market value on the date of exercise of the shares of Corporation common
stock relating to the portion of the Option for Stock Units that the Director
has elected to exercise and (ii) the sum of (a) the aggregate exercise price
and (b) any Social Security, Medicare or state or local income tax required
to be withheld with respect to the exercise, divided by (B) the fair market
value of a share of Corporation common stock on the date of exercise. For
purposes of this Section 3.2(c)(1), "fair market value" means, on any date,
the average of the high and the low sales price of a share of Unisys common
stock as reported on the New York Stock Exchange for that day, but not later
than the earlier of the official close of the New York Stock Exchange or 4:00
p.m. US Eastern Standard Time or Eastern Daylight Time, as the case may be
(2) Notwithstanding a Director's election of a payment
date under Section 3.2(a), if the Director exercises an Option for Stock
Units later than two years before the payment date elected, payment in
respect of the Stock Units credited to his or her Account as a result of the
exercise will be made as soon as practicable after the second anniversary of
the date of exercise.
(d) EFFECT OF TERMINATION OF SERVICE. If a Director
terminates service before exercising an Option for Stock Units, the Option for
Stock Units will remain exercisable to the extent that the option that the
Director converted to the Option for Stock Units would have remained
exercisable absent conversion. If, however, the Director (or his or her
Beneficiary) subsequently exercises the Option for Stock Units after his or
her Account Balance has been paid or has begun to be paid as a result of his
or her termination of service, payment in respect of the Stock Units acquired
upon such exercise will be made immediately. If the Director (or his or her
Beneficiary) fails to exercise the Option for Stock Units before the date on
which the option that the Director converted to an Option for Stock Units
would have expired or terminated, then the Director's (or Beneficiary's) right
to exercise the Option for Stock Units will likewise terminate.
ARTICLE IV
TREATMENT OF DEFERRED AMOUNTS
4.1 MEMORANDUM ACCOUNT. (a) The Corporation shall establish on
its books a separate Account for each Participant for each calendar year in
which the Participant elects to defer Compensation. Amounts deferred by a
participant pursuant to a Deferral Election shall be credited to the
Participant's Account on the date on which the deferred amounts, absent
deferral, would have been paid to the Participant. Non-Elective Stock Units
awarded to the Participant shall be credited to the Participant's Account on
such dates as are prescribed in the applicable award documents. In addition,
as of each Valuation Date, incremental amounts determined in accordance with
Section 4.2 will be credited or debited to each Participant's Account. Any
payments made to or on behalf of the Participant and for his or her
Beneficiary shall be debited from the Account. No assets shall be segregated
or earmarked in respect to any Account and no Participant or Beneficiary shall
have any right to assign, transfer, pledge or hypothecate his or her interest
or any portion thereof in his or her Account. The Plan and the crediting of
Accounts hereunder shall not constitute a trust or a funded arrangement of any
sort and shall be merely for the purpose of recording an unsecured contractual
obligation of the Corporation.
(b) If the Corporation shall issue a stock dividend on the common
stock, stock dividend equivalents shall be credited to the Participant's Stock
Unit Account, as of the dividend payment date, as Stock Units in the same
amount as the stock dividends to which the Participant would have been
entitled if the Stock Units were shares of common stock. Cash dividends, if
any, shall be credited to the Stock Units Account, as of the dividend payment
date, in the form of Stock Units based on the Fair Market Value of the Common
Stock on the dividend payment date. The Stock Units Account shall be
appropriately adjusted to reflect splits, reverse splits, or comparable
changes to the Corporation's common stock.
4.2 INVESTMENT MEASUREMENT OPTIONS.
(a) Subject to the provisions of this Section 4.2, a
Participant's Account, excluding his/her Stock Units Account, shall be
credited or debited with amounts equal to the amounts that would be earned or
lost with respect to the Participant's Account Balance if amounts equal to
that Account Balance were actually invested in the Investment Measurement
Options in the manner specified by the Participant.
(b) Each Eligible Director may elect, at the same time as a
Deferral Election is made, to have one or more of the Investment Measurement
Options applied to current deferrals, or to have the current deferrals
credited to his/her Stock Units Account in the form of Elective Stock Units.
Such election with respect to current deferrals may be changed at any time
upon appropriate notice to the Corporate Executive Compensation Department;
provided, however, that an election to have current deferrals credited as
Elective Stock Units may not be changed at any time during the effective
period of the Deferral Election. If a Participant elects to have current
deferrals credited as Elective Stock Units, the number of Stock Units to be
credited to the Participant's Stock Unit Account under this Section 4.2(c)
shall be the quotient of (i) divided by (ii) where (i) equals the amount of
the current deferral to be credited as Stock Units and (ii) equals the Fair
Market Value on the date on which the amounts are credited to the
Participant's Stock Unit Account.
(c) Subject to the restrictions described in Subsection (d), a
Participant may elect to change the manner in which Investment Measurement
Options apply to existing Account Balances (excluding the Participant's Stock
Units Account). In addition, a Participant may elect to have all or any
portion of his/her existing Account Balances (other than the Stock Units
Account) credited to his/her Stock Units Account as Elective Stock Units.
(i) The number of Stock Units to be credited to the
Participant's Stock Unit Account under this Section 4.2(b) shall
be the quotient of (x) divided by (y) where (x) equals the amount
of the current deferral to be credited as Stock Units and (y)
equals the Fair Market Value on the effective date on which the
amounts are credited to the Participant's Stock Unit Account.
Any election described in this subsection (c) will be effective upon receipt
of the appropriate notice to the Corporate Executive Compensation Department.
(d) The following rules apply to Investment Measurement Options.
(1) The percentage of a Participant's current deferrals
and/or Account Balance to which a specified Investment Measurement Option is
to be applied must be a multiple of one percent (1%). The Participant may
change the specified Investment Measurement Options that will apply to his or
her Account(s) on any business day as of which the Plan's recordkeeper is open
for business. Changes in a specified Investment Measurement Option with
respect to a Participant's Account will be effective as soon as
administratively practicable following receipt of the Participant's election.
(2) To the extent that a Participant has not specified an
Investment Measurement Option to apply to all or a portion of his or her
current deferrals and/or Account Balance, the Insurance Contract Fund or such
other fund as is designated by the Committee shall be deemed to be the
applicable Investment Measurement Option.
(3) The chosen Investment Measurement Option or Options
shall apply to deferred amounts on the date on which such deferred amounts,
absent deferral, would have been paid to the Participant.
(e) The Committee shall have the authority to modify the rules
and restrictions relating to Investment Measurement Options (including the
authority to change such Investment Measurement Options prospectively) as it,
in its discretion, deems necessary and in accord with the investment practices
in place under the USP.
ARTICLE V
PAYMENT OF DEFERRED AMOUNTS
5.1 FORM AND TIME OF PAYMENT. The benefits to which a
Participant or a Beneficiary may be entitled under the Plan shall be paid in
accordance with this Section 5.1.
(a) Payments of a Participant's Account Balances (other than the
Participant's Stock Units Account) shall be made in cash. Payments of the
Participant's Stock Units Account shall be made in shares of Unisys common
stock and the number of shares of Unisys common stock delivered to the
Participant shall equal the number of Stock Units held in the Participant's
Stock Units Account.
(b) Except as otherwise provided in Sections 5.3 and 5.4,
payment of a Participant's Account Balance shall commence as of the Valuation
Date next following the date or dates specified in the Participant's Deferral
Election or Elections or (where applicable) the Participant's Revised Election
or Elections; provided, however, that where the Participant's Deferral
Election or Elections or (where applicable) the Participant's Revised Election
or Elections specify that payments with respect to a Participant's Account
Balance are to commence as of a specified date or specified dates not
determined by reference to the Participant's retirement or other termination
of service and the Participant terminates service with the Corporation prior
to such date or dates, payment of the portion of the Participant's Account
Balance that was deferred to such date or dates shall commence as of the
Valuation Date next following the Participant's termination of service, but in
the same manner specified in the Participant's Deferral Election or Elections
or (where applicable) the Participant's Revised Election or Elections.
(c) All payments shall be made in the manner specified in the
Participant's Deferral Election or Elections or (where applicable) the
Participant's Revised Election or Elections.
(d) To the extent a Participant has not specified the manner or
time of payment of all or a part of his or her Account Balance, payment of the
amounts not specified will be made in a single sum as soon as administratively
practicable, but no later than 90 days, after the first Valuation Date
following the Participant's termination of service as a Director.
(e) Where a Participant has elected payment in the form of
annual installments, each installment payment after the initial installment
payment shall be made on or about March 31 of each year following the year in
which the first installment was paid. With respect to each Deferral Election
made by a Participant, the amount of each annual installment payment to be
made to a Participant under such Deferral Election shall be determined by
dividing the portion of the Participant's Account Balance covered by such
Deferral Election as of the latest Valuation Date preceding the date of
payment by the number of installments remaining to be paid under such Deferral
Election.
(f) Notwithstanding any Deferral Election made by the
Participant:
(1) If a Participant terminates service as a Director
after beginning to receive any portion of an Account Balance that was to be
paid to the Participant as of a specific date, the remaining Account Balance
shall be distributed in accordance with the distribution election in effect at
the time of the Participant's termination of service as a Director.
(2) If the balance in all of a Participant's Accounts is
less than a minimum amount established by the Committee at the time of a
Participant's termination of service as a Director, the balance in all the
Participant's Accounts shall be paid to the Participant in a single sum.
(3) Any portion of a Participant's Account Balance that
has not been paid to the Participant as of the date of his or her death shall
be paid to the Participant's Beneficiary in a single sum as soon as
administratively practicable after the Valuation Date following the date on
which the Corporation receives notification of the Participant's death.
5.2 REVISED ELECTION.
(a) Pursuant to a Revised Election, a Participant may specify:
(1) a date for the commencement of the payment of the
Participant's Account Balance that is either the date of the Participant's
termination of service as a Director or a date at least one year after the
date specified in the Participant's applicable Deferral Election; and/or
(2) a manner of payment that calls for a greater number of
annual installment payments than that specified in the Participant's
applicable Deferral Election, or a number of annual installment payments where
the Participant specified a single sum payment in his or her applicable
Deferral Election.
(3) Notwithstanding the foregoing, a Participant may not
elect a time of benefit commencement and/or a form of payment to the extent
that such an election would cause any payments to be made after the March 31
first following the date that is 20 years after the date of the Eligible
Executive's termination of service as a Director.
(b) A Participant may only make three Revised Elections with
respect to each of the Participant's Accounts.
(c) To be effective, a Revised Election must be:
(1) made in writing by the Participant on a form furnished
for such purpose by the Corporate Executive Compensation Department;
(2) submitted to the Corporate Executive Compensation
Department on or before the date that is three months and one day before the
date on which the portion of the Participant's Account Balance that is the
subject of the Revised Election would, absent the Revised Election, first
become payable; and
(3) approved by the Corporate Executive Compensation
Department. A Revised Election will be deemed to have been approved by the
Corporate Executive Compensation Department if it is not disapproved by the
Corporate Executive Compensation Department within ten days of the date on
which it is received.
5.3 SPECIAL PAYMENT.
(a) Notwithstanding any other provision of the Plan to the
Contrary, a Participant may receive payment of all or a portion of his or her
Account Balance as soon as administratively practicable following the receipt
by the Secretary of the Corporation of the Participant's written request for
such payment; provided, however, that a Participant will not be permitted to
receive any portion of his/her Non-Elective Stock Units under this Section
5.3(a) prior to termination of service as a Director.
(b) As a condition of receiving any payment made pursuant to
Subsection 5.3(a), a Participant will be subject to, as a penalty, payment to
the Company of an amount equal to eight percent of the amount of the payment
made pursuant to Subsection 5.3(a). The payment to the Company shall
generally be deducted from the amount otherwise payable to the Participant
under Subsection 5.3(a).
(c) If a Participant receives a payment of less than his or her
entire Account Balance pursuant to Subsection 5.3(a), the portion of the
Participant's Account Balance to which each Investment Measurement Option is
applied shall be reduced proportionately so that the Investment Measurement
Options apply to the Participant's Account Balance in the same percentage
immediately before and immediately after the payment.
(d) Notwithstanding any provision of the Plan to the contrary,
in the event the Committee determines that any portion of a Participant's
Account Balance is the subject of a determination by the Internal Revenue
Service that such portion is includible in the Participant's taxable income,
the Participant's Account Balance shall be distributed to the extent it is so
includible. Payments made in respect of the Participant's Stock Units Account
will be made in shares of Unisys common stock. All income taxes and related
interest and penalties associated with credits to or distributions from a
Participant's Account shall be borne by the Participant.
5.4 ACCELERATION OF PAYMENT. Notwithstanding any other
provision of this Plan to the contrary, the Committee in its sole discretion
may accelerate the payment of Account Balances to all or any group of
similarly situated Participants or Beneficiaries, whether before or after the
Participant's termination of service, in response to changes in the tax laws
or accounting principles.
5.5 SEC RULE 16b. If deemed necessary to comply with Rule 16b-3
under the Securities and Exchange Act of 1934, as amended, the Corporation may
delay payment of Stock Units until six months following the date on which the
Stock Units were credited to the Participant's Account.
ARTICLE VI
MISCELLANEOUS
6.1 AMENDMENT. The Board may modify or amend, in whole or in
part, any of or all the provisions of the Plan, or suspend or terminate it
entirely; provided, however, that any such modification, amendment, suspension
or termination may not, without the Participant's consent, adversely affect
any deferred amount credited to him or her for any period prior to the
effective date of such modification, amendment, suspension or termination.
The Plan shall remain in effect until terminated pursuant to this provision.
6.2 ADMINISTRATION. The Committee shall have the sole authority
to interpret the Plan and in its discretion to establish and modify
administrative rules for the Plan. All expenses and costs in connection with
the operation of this Plan shall be borne by the Corporation. The Corporation
shall have the right to deduct from any payment to be made pursuant to this
Plan any federal, state or local taxes required by law to be withheld, and any
associated interest and/or penalties.
6.3 GOVERNING LAW. The Plan shall be construed and its
provisions enforced and administered in accordance with the laws of the
Commonwealth of Pennsylvania except as such laws may be superseded by the
federal law.
ARTICLE VII
TRANSFER OF ACCOUNT BALANCE
7.1 TRANSFER OF EXECUTIVES' PLAN ACCOUNTS. Notwithstanding any
other provision of the Plan to the contrary, a Director who is a former
employee of Unisys Corporation and who is a participant in the Executives'
Plan may elect to transfer any or all of his/her account balance in the
Executives' Plan into this Plan. Upon transfer, such amounts shall be subject
to the terms and conditions of this Plan, provided that all elections
previously made under the Executives' Plan with respect to such amounts shall
continue in effect until otherwise modified hereunder. Notwithstanding the
payment election provision described in Article V hereof, in no event may a
Director elect a form of payment with respect to amounts transferred from the
Executives' Plan that is any more rapid than the form of payment in effect
under the Executives' Plan at the time of such transfer.
ARTICLE VIII
CHANGE IN CONTROL
8.1 WITHDRAWAL ELECTION.
(a) Notwithstanding any other provision of the Plan to the
contrary, in the event of a Change in Control, each Participant may elect to
receive a single sum payment of all or any portion of his/her account balance.
Such election shall only be effective if delivered to the Secretary of the
Corporation within the ninety-day period immediately following the date of the
occurrence of the Change in Control.
(b) If an election is timely made, the Participant (or
Beneficiary) will be entitled to receive, as soon as practicable after the
expiration of the ninety-day period, an amount equal to (1) the full value or
any portion thereof of the Account Balance minus (2) an early withdrawal
penalty equal to 8% of the total value of (1). The Committee, upon advice of
counsel, may modify the early withdrawal penalty described above in any way it
deems appropriate and consistent with the purposes of the Plan.
8.2 LITIGATION EXPENSES. If litigation is brought by a
Participant or Beneficiary after a Change in Control to enforce or interpret
any provision of the Plan, the Corporation to the extent permitted by
applicable law shall reimburse the Participant (or Beneficiary) for the
reasonable fees and disbursements of counsel incurred in such litigation.
Exhibit 12
UNISYS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED)
($ in millions)
Six
Months
Ended Years Ended December 31
June 30, ----------------------------------
2004 2003 2002 2001 2000 1999
-------- ---- ---- ---- ---- ----
Fixed charges
Interest expense $ 35.2 $ 69.6 $ 66.5 $ 70.0 $ 79.8 $127.8
Interest capitalized during
the period 8.5 14.5 13.9 11.8 11.4 3.6
Amortization of debt issuance
expenses 1.7 3.8 2.6 2.7 3.2 4.1
Portion of rental expense
representative of interest 27.6 55.2 53.0 53.9 42.2 46.3
------ ------ ------ ------ ------ -----
Total Fixed Charges 73.0 143.1 136.0 138.4 136.6 181.8
------ ------ ------ ------ ------ -----
Earnings
Income (loss) from continuing
operations before income taxes 71.1 380.5 332.8 (73.0) 348.5 751.7
Add (deduct) the following:
Share of loss (income) of
associated companies (13.2) (16.2) 14.2 (8.6) (20.5) 8.9
Amortization of capitalized
interest 5.6 10.2 8.8 5.4 2.2 -
------ ------ ------ ------ ------ -----
Subtotal 63.5 374.5 355.8 (76.2) 330.2 760.6
------ ------ ------ ------ ------ -----
Fixed charges per above 73.0 143.1 136.0 138.4 136.6 181.8
Less interest capitalized during
the period ( 8.5) (14.5) (13.9) (11.8) (11.4) (3.6)
------ ------ ------ ------ ------ ------
Total earnings $128.0 $503.1 $477.9 $ 50.4 $455.4 $938.8
====== ====== ====== ====== ====== ======
Ratio of earnings to fixed
charges 1.75 3.52 3.51 * 3.33 5.16
====== ====== ====== ====== ====== =====
* Earnings for the year ended December 31, 2001 were inadequate to cover fixed
charges by approximately $88 million.
Exhibit 31.1
CERTIFICATION
I, Lawrence A. Weinbach, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Unisys Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation;
c. Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: July 22, 2004 /s/ Lawrence A. Weinbach
-------------------------
Name: Lawrence A. Weinbach
Title: Chairman of the Board and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Janet Brutschea Haugen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Unisys Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation;
c. Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: July 22, 2004 /s/ Janet Brutschea Haugen
-------------------------
Name: Janet Brutschea Haugen
Title: Senior Vice President and
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF PERIODIC REPORT
I, Lawrence A. Weinbach, Chairman of the Board and Chief Executive
Officer of Unisys Corporation (the "Company"), certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350,
that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarterly
period ended June 30, 2004 (the "Report") fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934
(15 U.S.C. 78m); and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: July 22, 2004
/s/ Lawrence A. Weinbach
- ------------------------
Lawrence A. Weinbach
Chairman of the Board and
Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION OF PERIODIC REPORT
I, Janet Brutschea Haugen, Senior Vice President and Chief Financial
Officer of Unisys Corporation (the "Company"), certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350,
that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarterly
period ended June 30, 2004 (the "Report") fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934
(15 U.S.C. 78m); and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Dated: July 22, 2004
/s/ Janet Brutschea Haugen
- --------------------------
Janet Brutschea Haugen
Senior Vice President and
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.