SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2002 Commission File Number 1-5397
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Automatic Data Processing, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-1467904
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One ADP Boulevard, Roseland, New Jersey 07068
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (973) 974-5000
------------------------
No change Former name, former address & former fiscal year, if changed since
last report.
Indicate by check mark whether the Registrant (1) has filed all annual,
quarterly and other reports required to be filed with the commission and (2) has
been subject to the filing requirements for at least the past 90 days.
X Yes No
- ------------------------------- -----------------------------
As of September 30, 2002 there were 598,872,287 common shares outstanding.
Form 10Q
Part I. Financial Information
STATEMENTS OF CONSOLIDATED EARNINGS
-----------------------------------
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
-----------------------------
September 30, September 30,
2002 2001
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Revenues, other than interest on funds
held for clients and PEO revenues $1,476,424 $1,433,476
Interest on funds held for clients 89,865 113,188
PEO revenues (A) 80,396 61,219
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Total revenues 1,646,685 1,607,883
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Operating expenses 708,468 676,352
General, administrative and
selling expenses 447,953 456,561
Systems development and
programming costs 119,898 115,829
Depreciation and amortization 67,684 69,463
Other income (37,718) (30,522)
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1,306,285 1,287,683
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EARNINGS BEFORE INCOME TAXES 340,400 320,200
Provision for income taxes 130,000 123,600
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NET EARNINGS $ 210,400 $ 196,600
========== ==========
BASIC EARNINGS PER SHARE $ 0.35 $ 0.32
========== ==========
DILUTED EARNINGS PER SHARE $ 0.34 $ 0.31
========== ==========
Dividends per share $ .1150 $ .1025
========== ==========
(A) Net of pass-through costs of $763,379 and $596,462, respectively.
See notes to the unaudited consolidated financial statements.
Form 10Q
CONSOLIDATED BALANCE SHEETS
---------------------------
(IN THOUSANDS)
(UNAUDITED)
September 30, June 30,
2002 2002
----------- -----------
Assets
- ------
Cash and cash equivalents $ 545,779 $ 798,810
Short-term marketable securities 623,988 677,005
Accounts receivable 971,373 1,045,170
Other current assets 360,643 296,272
----------- -----------
Total current assets 2,501,783 2,817,257
Long-term marketable securities 1,080,894 1,273,768
Long-term receivables 184,717 192,769
Land and buildings 459,763 458,478
Data processing equipment 714,953 696,829
Furniture, leaseholds and other 555,299 540,217
----------- -----------
1,730,015 1,695,524
Less accumulated depreciation (1,147,687) (1,099,073)
----------- -----------
Total property, plant and equipment 582,328 596,451
Other assets 338,853 293,808
Goodwill 1,411,449 1,375,654
Other Intangibles 509,061 501,544
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Total assets before funds held for clients 6,609,085 7,051,251
Funds held for clients 9,086,910 11,225,271
----------- -----------
Total assets $15,695,995 $18,276,522
=========== ===========
Liabilities and Shareholders' Equity
- ------------------------------------
Accounts payable $ 134,726 $ 148,694
Accrued expenses and other current
liabilities 1,024,407 1,035,389
Income taxes 217,422 227,019
----------- -----------
Total current liabilities 1,376,555 1,411,102
Long-term debt 83,780 90,648
Other liabilities 252,196 233,671
Deferred income taxes 332,647 237,633
Deferred revenue 137,666 138,893
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Total liabilities before client funds
obligations 2,182,844 2,111,947
Client funds obligations 8,764,225 11,050,370
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Total liabilities 10,947,069 13,162,317
Shareholders' equity:
Common stock 63,870 63,870
Capital in excess of par value 310,719 333,371
Retained earnings 6,118,356 5,977,318
Treasury stock (1,736,362) (1,142,041)
Accumulated other comprehensive loss (7,657) (118,313)
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Total shareholders' equity 4,748,926 5,114,205
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Total liabilities and shareholders' equity $15,695,995 $18,276,522
=========== ===========
See notes to the unaudited consolidated financial statements.
Form 10Q
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
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(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
-----------------------
September 30,
2002 2001
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Cash Flows From Operating Activities:
- -------------------------------------
Net earnings $ 210,400 $ 196,600
Expenses not requiring outlay of cash 118,258 95,634
Changes in operating net assets (91,870) 88,609
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Net cash flows provided by operating activities 236,788 380,843
---------- ----------
Cash Flows From Investing Activities:
- -------------------------------------
Purchase of marketable securities (706,635) (655,514)
Proceeds from sale of marketable securities 3,266,384 2,185,166
Net change in client funds obligations (2,286,144) (1,178,214)
Capital expenditures (27,208) (32,957)
Additions to intangibles (31,333) (22,913)
Acquisitions of businesses, net of cash acquired (29,026) (78,936)
Other 727 (2,861)
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Net cash flows provided by investing activities 186,765 213,771
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Cash Flows From Financing Activities:
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Net proceeds from short-term borrowings 399 86
Payments of debt (396) (563)
Proceeds from issuance of common stock 33,093 46,773
Repurchases of common stock (640,318) (437,188)
Dividends paid (69,362) (63,971)
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Net cash flows used in financing activities (676,584) (454,863)
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Net change in cash and cash equivalents (253,031) 139,751
Cash and cash equivalents, at beginning of
period 798,810 1,275,356
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Cash and cash equivalents, at end of
period $ 545,779 $1,415,107
========== ==========
See notes to the unaudited consolidated financial statements.
Form 10Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(UNAUDITED)
The information furnished herein reflects all adjustments, which are in the
opinion of management, necessary for a fair presentation of the results for the
interim periods. Adjustments are of a normal recurring nature. These statements
should be read in conjunction with the annual financial statements and related
notes of Automatic Data Processing, Inc. (ADP or the Company) for the year ended
June 30, 2002.
Note A - The results of operations for the three months ended September
30, 2002 may not be indicative of the results to be expected for the
year ending June 30, 2003.
Note B - The calculation of basic and diluted earnings per share (EPS) is
as follows:
(In thousands, except EPS)
For the three months ended September 30,
------------------------------------------------------
2002 2001
------------------------- ---------------------------
Income Shares EPS Income Shares EPS
-------- ------ --- --------- ------ ---
Basic $210,400 606,814 $0.35 $196,600 620,561 $0.32
Effect of zero coupon
subordinated notes 313 1,797 476 2,702
Effect of stock
options - 3,906 - 9,313
----------------- -----------------
Diluted $210,713 612,517 $0.34 $197,076 632,576 $0.31
========================= =========================
Note C - Other (income)/expense consists of the following:
(In thousands)
Three months ended September 30,
--------------------------------
2002 2001
---- ----
Interest income on corporate funds $(39,704) $(33,545)
Realized gains on investments (5,990) (3,994)
Interest expense 7,976 7,017
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Total other (income)/expense $(37,718) $(30,522)
======== ========
Form 10Q
Note D - Comprehensive income for the three months ended September 30, 2002
and 2001 follows:
Three months ended September 30,
--------------------------------
2002 2001
---- ----
Net income $210,400 $196,600
Other comprehensive income:
Foreign currency translation
adjustment 8,950 38,402
Unrealized gain on
securities 101,705 76,384
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Comprehensive income $321,055 $311,386
======== ========
Note E - Interim financial data by segment:
ADP evaluates performance of its business units based on recurring
operating results before interest on corporate funds, foreign currency
gains and losses and income taxes. Certain revenues and expenses are
charged to business units at a standard rate for management and
motivation reasons. Other costs are recorded based on management
responsibility. As a result, various income and expense items,
including certain non-recurring gains and losses, are recorded at the
corporate level and certain shared costs are not allocated. Goodwill
amortization is charged to business units to act as a surrogate for
the cost of capital for acquisitions, which is subsequently eliminated
in consolidation. Interest on invested funds held for clients is
recorded in Employer Services' revenues at a standard rate of 6%, with
the adjustment to actual revenues included in "other". The prior
year's business unit revenues and pre-tax earnings have been restated
to reflect fiscal 2003 budgeted foreign exchange rates.
Results of the Company's major business units, Employer Services,
Brokerage Services and Dealer Services are shown below.
(In millions)
Three months ended September 30,
-------------------------------------------------------------
Employer Brokerage Dealer
Services Services Services Other Total
---------- ---------- ---------- --------- --------------
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ---- ----- -----
Revenues $1,009 $971 $354 $360 $189 $175 $95 $102 $1,647 $1,608
Pretax
Earnings $ 240 $215 $ 56 $ 67 $ 29 $ 27 $15 $ 11 $ 340 $ 320
Form 10Q
Note F. Intangible Assets
Components of intangible assets are as follows:
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(In thousands)
September June
2002 2002
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Goodwill $ 1,411,449 $ 1,375,654
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Intangibles
Software licenses 486,242 462,474
Customer lists 367,547 360,268
Other 414,731 398,495
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Total intangibles 1,268,520 1,221,237
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Total goodwill and intangibles 2,679,969 2,596,891
Less accumulated amortization (759,459) (719,693)
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$ 1,920,510 $ 1,877,198
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Other intangibles consist primarily of purchased rights, covenants, and
patents (acquired directly or through acquisitions) amortized over periods from
3 to 25 years. Amortization of intangibles totaled $27 million and $26 million
for the three months ended September 30, 2002 and 2001, respectively.
Changes in goodwill for the quarter ended September 30, 2002 are as follows:
(In thousands)
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Employer Brokerage Dealer
Services Services Services Other Total
-------- --------- -------- ----- -----
Balance as of
June 30, 2002 $751,451 $348,960 $182,642 $92,601 $1,375,654
Additions 3,405 4,692 22,169 - 30,266
Cumulative
translation
adjustments 4,413 (310) 93 1,333 5,529
----------------------------------------------------
Balance as of
September 30, 2002 $759,269 $353,342 $204,904 $93,934 $1,411,449
====================================================
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No impairment losses were recognized during the quarter.
Form 10Q
Note G - In October 2002, the Company entered into a new $4.0 billion
unsecured revolving credit agreement with certain financial
institutions, replacing an existing $4.0 billion credit agreement. The
interest rate applicable to the borrowings is tied to LIBOR or prime
rate depending on the notification provided to the syndicated
financial institutions prior to borrowing. The Company is also
required to pay a facility fee on the credit agreement. The primary
uses of the credit facility are to provide liquidity to the unsecured
commercial paper program and to fund normal business operations, if
necessary. The Company has had no borrowings to date under the credit
agreement, which expires in October 2003.
Note H - In April 2002, the Company authorized a short-term commercial
paper program providing for the issuance of up to $4.0 billion in
aggregate maturity value of commercial paper at any given time. The
Company's commercial paper program is rated A-1+ by Standard and
Poor's and Prime 1 by Moody's. These ratings denote the highest
quality investment grade securities. Maturities of commercial paper
can range from overnight to 270 days. At September 30, 2002 there was
no commercial paper outstanding. For the three months ended September
30, 2002, the Company had average borrowings of $1.3 billion at an
effective weighted average interest rate of 1.8%. The Company uses the
commercial paper issuances as a primary instrument to meet short-term
funding requirements related to client funds obligations.
MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------
OPERATING RESULTS
Revenues and earnings again reached record levels during the quarter ended
September 30, 2002.
Revenues and revenue growth by ADP's major business units for the three months
ended September 30, 2002 and 2001 are shown below:
Revenues Revenue Growth
September 30, September 30,
------------------- ------------------
2002 2001 2002 2001
------ ------ ----- ------
($ In millions)
Employer Services $1,009 $ 971 4% 9%
Brokerage Services 354 360 (2) -
Dealer Services 189 175 8 6
Other 95 102 (17) (20)
------ ------ ----- ----
$1,647 $1,608 2% 4%
====== ====== ===== ====
Form 10Q
Pre-tax earnings and pre-tax earnings by ADP's major business units for the
three months ended September 30, 2002 and 2001 are shown below:
Pre-tax Earnings Pre-tax Earnings Growth
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
------ ------ ----- ------
($ In millions)
Employer Services $ 240 $ 215 11% 22%
Brokerage Services 56 67 (16) 6
Dealer Services 29 27 9 29
Other 15 11 39 (61)
------ ------ ----- ----
$ 340 $ 320 6% 11%
====== ====== ===== =====
Consolidated revenues for the quarter of approximately $1.6 billion were up 2%
from last year. Revenue growth in Employer Services grew 4%, while new business
sales grew 4% and client retention improved slightly in the quarter. The number
of employees on our clients' payrolls declined 2% in the quarter, a slightly
lower decline than the full fiscal 2002 average.
Brokerage Services revenues declined by 2% due to a number of factors including
lost business from industry consolidations, reduced discretionary spending in
the financial services industry, compressions of institutional trades and
pricing pressure in our back office trade processing business, as well as lower
postage revenue and lower growth in the number of equity positions in our
investor communications business. Pre-tax earnings in our Brokerage group
declined 16% due primarily to declines in our back office trade processing
business.
Dealer Services revenue growth was 8% supported by acquisitions and increased
sales in the traditional core business primarily from our new products, which
include Application Service Provider (ASP) managed services and our Customer
Relationship Management(CRM)system. Claims Services growth was 3% in the
quarter.
The primary components of "Other" revenues are Claims Services, foreign exchange
differences, and miscellaneous processing services. For the three months ended
September 30, 2002 and 2001, Claims Services revenues were $86 million and $84
million, respectively. In addition, "Other" revenues have been adjusted for the
difference between actual interest income earned on invested funds held for
clients and interest credited to Employer Services at a standard rate of 6%.
This adjustment to "Other" revenues resulted in a decrease of $26.8 million and
$1.7 million for the three-month period ended September 30, 2002 and 2001,
respectively. The prior year's business unit revenues and pre-tax earnings have
been restated to reflect fiscal 2003 budgeted foreign exchange rates.
Systems development and programming increased in the quarter due to accelerated
automation, migration to new computing technologies and the continued
development of new and improved products. We believe that sustained investment
in systems development and programming is critical to attaining our strategic
objectives.
Pre-tax earnings for the quarter increased 6% to $340 million from $320 million
in the prior year. Consolidated pre-tax margins increased over the previous year
as continued automation and operating efficiencies enabled the Company to offset
accelerated investments in new products. This increase in pre-tax earnings was
offset by lower interest income resulting from the acquisition of ADP common
stock for treasury.
Form 10Q
The effective income tax rate was 38.2% of pre-tax earnings in the current
quarter compared to 38.6% in the prior year quarter. The decrease in the
effective income tax rate was due to several factors primarily the mix of income
between domestic and foreign operations and additional tax credits.
Net earnings for the quarter, increased 7% to $210 million from $197 million in
the prior year quarter.
Diluted earnings per share, on fewer shares outstanding, increased to $0.34 from
$0.31.
In fiscal 2003, ADP is forecasting another record year of both revenue and
earnings per share growth in the mid single-digits over fiscal 2002 full year
results.
FINANCIAL CONDITION
The Company's financial condition and balance sheet remain exceptionally strong.
At September 30, 2002, the Company had cash and marketable securities of $2.3
billion. Shareholders' equity was $4.7 billion and the ratio of long-term debt
to equity was 2%.
Capital expenditures for fiscal 2003 are expected to approximate $160 million,
compared to $146 million in fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows generated from operations were $236.8 million for the three months
ended September 30, 2002 compared to $380.8 million for the three months ended
September 30, 2001. The decrease in cash provided from operations was primarily
attributable to the pre-funding of employee benefit plans, which impacted the
changes in net assets.
Cash flows provided by investing activities totaled $186.8 million primarily as
a result of proceeds from the sales of marketable securities in our investment
portfolio, partially offset by the net change in client funds obligations,
acquisitions of businesses, and capital expenditures in the quarter.
Cash flows used in financing activities totaled $676.6 million. In the first
three months of fiscal 2003, the Company purchased approximately 18.4 million
shares of common stock at an average price per share of approximately $35. As of
September 30, 2002, the Company has remaining Board of Directors authorization
to purchase up to 17.5 million additional shares.
Approximately twenty percent of the Company's overall investment portfolio is
invested in cash and cash equivalents, which are therefore impacted immediately
by changes in interest rates. The other eighty percent of the Company's
investment portfolio is invested in fixed-income securities, with varying
maturities up to ten years, which are also subject to interest rate risk,
including reinvestment risk. The Company has historically had the ability to
hold these investments until maturity, and therefore this has not had an adverse
impact on income or cash flows.
The earnings impact of future interest rate changes is based on many factors,
which influence the return on the Company's portfolio. These factors include,
among others, the overall portfolio mix between short-term and long-term
investments. This mix varies during the year and is impacted by daily interest
rate changes. A hypothetical change in interest rates of
Form 10Q
25 basis points applied to the average projected investment balances for fiscal
2003 would result in approximately a $9 million pre-tax earnings impact over the
twelve-month period.
In October 2002, the Company entered into a new $4.0 billion unsecured revolving
credit agreement with certain financial institutions, replacing an existing $4.0
billion credit agreement. The interest rate applicable to the borrowings is tied
to LIBOR or prime rate depending on the notification provided to the syndicated
financial institutions prior to borrowing. The Company is also required to pay a
facility fee on the credit agreement. The primary uses of the credit facility
are to provide liquidity to the unsecured commercial paper program and to fund
normal business operations, if necessary. The Company has had no borrowings to
date under the credit agreement, which expires in October 2003.
In April 2002, the Company authorized a short-term commercial paper program
providing for the issuance of up to $4.0 billion in aggregate maturity value of
commercial paper at any given time. The Company's commercial paper program is
rated A-1+ by Standard and Poor's and Prime 1 by Moody's. These ratings denote
the highest quality investment grade securities. Maturities of commercial paper
can range from overnight to 270 days. At September 30, 2002 there was no
commercial paper outstanding. For the three months ended September 30, 2002, the
Company had average borrowings of $1.3 billion at an effective weighted average
interest rate of 1.8%. The Company uses the commercial paper issuances as a
primary instrument to meet short-term funding requirements related to client
funds obligations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" (FAS
146), which nullifies Emerging Issues Task Force Issue No. 94-3 (Issue 94-3),
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." FAS
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost as defined in Issue 94-3 was recognized at the date
of an entity's commitment to an exit plan. The provisions of FAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002.
OTHER MATTERS
This report contains "forward-looking statements" based on management's
expectations and assumptions and are subject to risks and uncertainties that may
cause actual results to differ from those expressed. Factors that could cause
differences include, but are not limited to: ADP's success in obtaining,
retaining and selling additional services to clients; the pricing of products
and services; changes in laws regulating payroll taxes and employee benefits;
overall economic trends, including interest rate and foreign currency trends;
stock market activity; auto sales and related industry changes; employment
levels; changes in technology; availability of skilled technical associates and
the impact of new acquisitions. ADP disclaims any obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Form 10Q
PART II. OTHER INFORMATION
Except as noted below, all other items are either inapplicable or would result
in negative responses and, therefore, have been omitted.
Item 4. Controls and Procedures
ADP management, including the Chief Executive Officer and Principal
Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based on that evaluation, the Chief Executive Officer and
Principal Financial Officer concluded that the disclosure controls and
procedures are effective in ensuring that all material information
required to be filed in this quarterly report has been made known to
them in a timely fashion. There have been no significant changes in
internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer
and Principal Financial Officer completed their evaluation.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Exhibit
------ -------
99.1 Certification by Arthur F. Weinbach pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification by Karen E. Dykstra pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
In a Report on Form 8-K dated and filed on September 16, 2002, the
Company reported, under Item 9. "Regulation FD Disclosure", the filing
with the Securities and Exchange Commission of its Principal Executive
Officer's and Principal Financial Officer's Statements Under Oath
Regarding Facts and Circumstances Relating to Exchange Act Filings.
Form 10Q
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.
AUTOMATIC DATA PROCESSING, INC.
-------------------------------
(Registrant)
Date: October 31, 2002 /s/ Karen E. Dykstra
-----------------------
Karen E. Dykstra
Vice President Finance
(Principal Financial Officer)
-----------------------------
(Title)