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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No.: 1-4850
COMPUTER SCIENCES CORPORATION
(Exact name of Registrant as specified in its charter)
[LOGO APPEARS HERE]
Nevada 95-2043126
(State of incorporation or organization) (I.R.S. Employer Identification No.)
2100 East Grand Avenue
El Segundo, California 90245
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (310) 615-0311
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class: registered
- -------------------------------------- ----------------------------------------
Common Stock, $1.00 par value per
share New York Stock Exchange
Preferred Stock Purchase Rights Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of June 2, 2000, the aggregate market value of stock held by non-
affiliates of the Registrant was approximately $15,289,000,000. A total of
167,987,084 shares of common stock was outstanding as of such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2000 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days after March 31, 2000, are incorporated by reference
into Part III hereof.
TABLE OF CONTENTS
Item Page
---- ----
Part I
1. Business........................................................... 1
2. Properties......................................................... 6
3. Legal Proceedings.................................................. 6
4. Submission of Matters to a Vote of Security Holders................ 6
Part II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters............................................................ 9
6. Selected Financial Data............................................ 9
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 11
7A. Quantitative and Qualitative Disclosures About Market Risk......... 17
8. Financial Statements and Supplementary Data........................ 18
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 44
Part III
10. Directors and Executive Officers of the Registrant................. 44
11. Executive Compensation............................................. 44
12. Security Ownership of Certain Beneficial Owners and Management..... 44
13. Certain Relationships and Related Transactions..................... 44
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 45
PART I
Item 1. Business
INTRODUCTION AND HISTORY
General
Computer Sciences Corporation ("CSC" or the "Company") is one of the world
leaders in the information technology ("I/T") services industry. Since it was
founded in 1959, the Company has helped clients use I/T more efficiently in
order to improve their operations and profitability and to achieve business
results.
CSC offers a broad array of professional services to clients in the global
commercial and government markets and specializes in the application of
advanced and complex I/T to achieve its customers' strategic objectives. Its
service offerings include outsourcing, systems integration, and I/T and
management consulting and other professional services, including e-business
solutions.
Outsourcing involves operating all or a portion of a customer's technology
infrastructure, including systems analysis, applications development, network
operations, desktop computing and data center management. CSC also provides
business process outsourcing, which is the management of a client's non-core
business functions, such as claims processing, credit checking, or customer
call centers.
Systems integration encompasses designing, developing, implementing and
integrating complete information systems.
I/T and management consulting services include advising clients on the
strategic acquisition and utilization of I/T and on business strategy,
operations, change management and business process reengineering.
The Company also licenses sophisticated software systems for select vertical
markets.
In addition, CSC provides a broad array of end-to-end e-business solutions
that meet the needs of large commercial and government clients and new e-
commerce entrants. The company focuses on delivering business results by
linking business innovation skills with seasoned delivery expertise to provide
flexible and scalable solutions. To do so, CSC draws on its vast experience in
designing, building and maintaining large, complex, mission-critical systems
and applies this knowledge to today's e-business challenges. The Company has
significant experience in creating Internet-based business-to-business
solutions in Net Markets operations for established global companies, mid-
sized companies and new entrants to the marketplace.
In addition, CSC does not have exclusive agreements with hardware or
software providers and believes that this "vendor neutrality" enables it to
better identify and manage solutions specifically tailored to each client's
needs.
Major Markets
CSC provides its services primarily to clients in global commercial
industries and to the U.S. federal government.
CSC has provided I/T services to the U.S. federal government for nearly
forty years. In fiscal 1986, when U.S. federal contracts represented 70% of
the Company's revenues, CSC decided to devote substantial resources to further
develop global commercial business in order to accelerate its growth and take
advantage of the competencies gained as a leader in the federal sector.
Because of this strategy, CSC has increased its penetration of the global
commercial market and has diversified its business.
In the global commercial area, the Company's service offerings are marketed
to clients in a wide array of industries including aerospace; automotive;
chemical and energy; consumer goods; financial services; healthcare;
manufacturing; media; public sector; retail/distribution; telecommunications;
traffic and transportation; travel and hospitality; and utilities.
Geographically, CSC has operations throughout North America, Europe and
Asia-Pacific.
During the last three fiscal years, the Company's revenue mix by major
markets was as follows:
2000 1999 1998
---- ---- ----
U.S. Commercial.......................................... 39% 40% 41%
Europe................................................... 27 28 25
Other International...................................... 10 6 6
--- --- ---
Global Commercial.......................................... 76 74 72
U.S. Federal Government.................................... 24 26 28
--- --- ---
Total Revenues............................................. 100% 100% 100%
=== === ===
Fiscal Year 2000 Performance Overview
During fiscal 2000, CSC announced awards valued at more than $11.3 billion,
a record in the Company's history. In comparison, during fiscal 1999, CSC
announced awards valued at more than $5 billion, excluding the value of the
Internal Revenue Service ("IRS") contract. Although the value of the IRS
contract has not been quantified, it has the potential to become the Company's
largest contract.
Continuing with its strategy of growth through acquisitions, CSC also
acquired an additional five I/T services providers during fiscal 2000.
Global Commercial Market: Highlights
Within the global commercial market, there were several significant awards
to CSC.
United States:
In the first quarter of fiscal 2000, CSC was awarded an 11-year, $1.1
billion business process outsourcing contract by Enron Energy Services,
representing the Company's further expansion into the dynamic energy market.
CSC assumed responsibility for Enron's back office administrative functions
and is applying e-business technology solutions to functions such as meter
reading, collection and related customer inquiries.
CSC signed a master outsourcing agreement with United Technologies
Corporation ("UTC"), a Fortune 50 diversified manufacturer, valued at $2.6
billion over 10 years. Under the contract, CSC will manage the I/T
infrastructure for UTC's business units which include Pratt & Whitney, Otis
Elevator, Carrier Corp., Sikorsky Aircraft, Hamilton Sundstrand and Pratt &
Whitney Canada.
CSC led a consortium of companies, called the Pennant Alliance, to win a
project from the County of San Diego (California) to provide citizens with
greater, more efficient access to the County's services. Under the seven-year,
$644 million contract, CSC and its alliance partners will upgrade the County's
networks, and establish online multilingual kiosks providing information about
county services, as well as forms, applications, and job listings via the
Internet.
Saturn Corporation, a unit of General Motors, selected CSC and a team of
other I/T leaders to design and build an integrated, open, real-time, Web-
based automotive retail management system that will make car buying simpler
and more flexible and improve customer service and support for consumers.
About 15,000 Saturn retail team members located in over 400 retail facilities
in the U.S will use the Next Generation Saturn Retail System. The contract is
valued at $190 million over seven years.
2
The Company signed a $390 million, seven-year outsourcing pact with a
consortium of oil firms representing the largest gasoline retail and refinery
operation in the U.S. CSC is supporting the I/T operations of Equilon
Enterprises LLC, Motiva Enterprises LLC, Equiva Trading Company and Equiva
Services, which are joint venture companies of Shell Oil, Texaco and Saudi
Aramco. CSC will streamline the widespread I/T operations and manage over
15,000 desktops, in addition to a host of other support functions.
Three other commercial contracts awarded to the Company demonstrated the
strength of CSC's client relationships. First, CSC and Fidelity & Guaranty
Life Insurance Co. extended the original 1995 contract by five years and
expanded the business process outsourcing relationship. The contract extension
is valued at $425 million.
The Company also successfully recompeted for the New York State Department
of Health program to support the State's Medicaid program. The new agreement
is valued at $351 million over six years.
Finally, with the signing of an agreement with Computing Devices Canada
("CDC"), CSC further strengthened its relationship with CDC's parent company,
General Dynamics. The $68 million, 10-year contract is the 11th agreement CSC
has with global business units of General Dynamics and calls for the Company
to manage the I/T infrastructure, including applications, desktops and network
operations of CDC.
Additionally, CSC continued to expand in the U.S. commercial area during
fiscal 2000 through strategic acquisitions. With the acquisition of TRW Data
Services, a developer of customized software and systems solutions for high-
volume payment processors, CSC expanded its capabilities in the financial
services market. The Company also acquired ECS Integrated Technology Solutions
LLC, a Portland, Oregon-based I/T consulting services company specializing in
Oracle applications, e-business, customer relationship management, data
warehousing, supply chain management and infrastructure resource planning.
Also in the U.S. financial services arena, the Company provides consumer
credit reports to thousands of credit grantors nationwide. Through an
agreement with Equifax Inc., a major consumer credit repository, the Company
offers credit grantors the benefits of a national file of consumer credit
histories. The national file enables customers to obtain credit information
from a single source, instead of dealing with multiple reporting services.
International:
The Company's international operations provide a wide range of information
technology services to commercial and public sector clients. CSC has major
offices in the United Kingdom, France, Germany, Belgium, the Netherlands,
Denmark, Italy, Australia, Singapore, Malaysia and Hong Kong, and provides
substantially the same services to its international customers that it
provides to its U.S. customers.
During fiscal 2000, there were several significant international awards.
Old Mutual plc, an international financial services group, signed an I/T
outsourcing agreement with CSC. The Company will help Old Mutual meet the
market challenges and the increasingly complex and sophisticated I/T
requirements in the global financial services industry by managing the
client's I/T infrastructure in South Africa under a $300 million, seven-year
contract. This agreement makes CSC an I/T leader in South Africa and will
clearly strengthen and support the Company's presence and future expansion
plans in the region.
CSC signed a ten-year, $300 million agreement with General Electric Company
("GE") to manage GE's and GE Capital's data processing operations, help desk
and disaster recovery services in the United Kingdom and other European
countries. The agreement has been designed to allow additional GE companies to
join at any time.
Strengthening the Company's presence in the world chemicals market, CSC
signed a multi-year global outsourcing agreement with Avecia, one of Europe's
leading specialty chemical companies. CSC will support Avecia's data centers
in Wilmington, Delaware, the United Kingdom and the Netherlands.
3
Acquisitions also helped increase CSC's presence in the international
markets. The Company acquired a majority interest in Servo Data, an Austrian
I/T consulting firm based in Vienna. This acquisition significantly
strengthened CSC's capabilities in Austria and provides a strategic doorway to
expand services in Eastern Europe.
Additionally, as part of its outsourcing agreement with GE, CSC acquired the
Australian operations of GE Capital Information Technology Solutions, a
leading I/T supplier to commercial and government organizations worldwide.
With this acquisition, CSC will provide GE outsourcing services in Australia
and has greatly enhanced its presence in the growing Australian market.
U.S. Federal Government Market: Highlights
The Company provides a broad array of services to the U.S. federal
government, ranging from traditional systems integration and outsourcing to
advanced technical undertakings and complex project management. CSC has
extensive experience in the development of software for mission-critical
systems for defense and civil agency applications, and also provides systems
engineering and technical assistance in network management, satellite
communications, intelligence, aerospace, logistics, and related high-
technology fields.
There were several significant awards to CSC during fiscal 2000 from within
the U.S federal government.
CSC was awarded a $680 million, 10-year contract by the U.S. Army Wholesale
Logistics Modernization Program, commonly known as LOGMOD, to provide I/T
services required to reengineer and modernize the Army's wholesale logistics
business processes. As part of this outsourcing contract, CSC offered
employment to all government employees affected by the award. The LOGMOD
contract continues a trend by federal agencies to turn to the private sector
to obtain best commercial practices for services. In fiscal 1999, CSC was
awarded the first significant U.S. federal government outsourcing contract
involving the voluntary transition of federal I/T employees to the private
sector under the BREAKTHROUGH Program of the National Security Agency.
CSC was among a select group of vendors chosen by the Health Care Financing
Administration ("HCFA") to provide safeguard services in support of the
Medicare Integrity Program. The overall HFCA contract is valued at $500
million over five years.
A joint venture managed by CSC was re-awarded the U.S. Air Force Range
Technical Services contract at the Eastern Range. This award marked the third
straight win on this contract. CSC is the only company to win a services
recompete award at Cape Canaveral in the last seven years.
The National Aeronautics and Space Administration ("NASA") deepened its
relationship with CSC with the award of a $325 million, seven-year contract to
support the operations of NASA's John C. Stennis Space Center. As the managing
partner of a joint venture known as Mississippi Space Services, CSC is
utilizing business process reengineering including Web-based applications and
related new technology to improve productivity and reduce costs.
CSC was named as one of 12 companies to provide services to the General
Services Administration ("GSA") under the 10-year, $25 billion Millennia
contract. CSC will provide the GSA with a broad array of I/T services and
support.
In fiscal 2000, CSC also enhanced its offerings to the U.S. federal
government market with the acquisition of Nichols Research Corporation
("Nichols"), a leading I/T services provider to the federal government.
Headquartered in Huntsville, Alabama, Nichols provides the U.S. Army, Air
Force, Navy and intelligence agencies with extensive systems engineering,
information technology and technical assistance for aviation, missile and
space defense systems. Nichols is also a leading provider of defense
technology services for the Huntsville-based Redstone Arsenal, which is home
to several major U.S. Army organizations and has an aggregate annual budget
authorization exceeding $15 billion, one of the largest in the U.S.
government. The
4
combination of the two firms provides a large pool of highly qualified
individuals with high-level security clearances. Nichols also supports the I/T
services needs of commercial clients including the health insurance and
healthcare provider markets.
COMPETITION
The I/T market in which CSC competes is not dominated by a single company or
a small number of companies. A substantial number of companies offer services
that overlap and are competitive with those offered by CSC. Some of these are
large industrial firms, including computer manufacturers and major aerospace
firms that have greater financial resources than CSC and, in some cases, may
have greater capacity to perform services similar to those provided by CSC.
The Company's ability to obtain business is dependent upon its ability to
offer better strategic concepts and technical solutions, better value, a
quicker response, or a combination of these factors. In the opinion of the
Company's management, CSC is positioned to compete effectively in the global
commercial and U.S. federal government markets based on its technology and
systems expertise and large project management skills. It is also management's
opinion that CSC's competitive position is enhanced by its recognized position
as a leader in management consulting and the full spectrum of services that it
provides.
EMPLOYEES
The Company has more than 700 offices worldwide, and as of March 31, 2000
employed approximately 58,000 persons, including more than 48,000
professionals. The services provided by CSC require proficiency in many
fields, such as computer sciences, programming, mathematics, physics,
engineering, astronomy, geology, operations, research, economics, statistics
and business administration.
5
Item 2. Properties
Owned properties as of Approximate
March 31, 2000 Square Footage General Usage
- ---------------------- -------------- -------------
Copenhagen, Denmark...... 423,000 Computer and General Office Facility
Falls Church, Virginia... 417,000 General Office
El Segundo, California... 206,000 General Office
Newark, Delaware......... 183,000 Computer and General Office Facility
San Diego, California.... 175,500 Computer and General Office Facility
Wilmington, Delaware..... 175,000 Computer and General Office Facility
Norwich, Connecticut..... 147,000 Computer and General Office Facility
Meriden, Connecticut..... 119,000 Computer and General Office Facility
Moorestown, New Jersey... 99,000 General Office
Herndon, Virginia........ 87,000 General Office
Maidstone, United
Kingdom................. 79,000 Computer and General Office Facility
Shatin, Hong Kong........ 72,000 General Office
Singapore................ 61,000 General Office
Sterling, Virginia....... 45,000 General Office
Various other U.S. and
foreign locations....... 99,000 Primarily General Offices
Leased properties as of
March 31, 2000
- -----------------------
Washington, D.C. area.... 1,284,000 Computer and General Office Facility
Texas.................... 809,000 Computer and General Office Facility
Germany.................. 599,000 General Office
Australia and other
Pacific Rim locations... 528,000 Computer and General Office Facility
United Kingdom........... 520,000 General Office
New Jersey............... 508,000 General Office
France................... 331,000 General Office
Connecticut.............. 318,000 General Office
Alabama.................. 258,000 General Office
Massachusetts............ 255,000 General Office
Ohio..................... 243,000 General Office
New York................. 234,000 General Office
Denmark.................. 139,000 General Office
Michigan................. 119,000 General Office
California............... 116,000 General Office
Illinois................. 106,000 General Office
Various other U.S. and
foreign locations....... 1,089,000 Computer and General Office Facilities
Upon expiration of its leases, the Company does not anticipate any
difficulty in obtaining renewals or alternative space. Lease expiration dates
range from fiscal 2001 through 2018.
Item 3. Legal Proceedings
The Company is currently party to a number of disputes which involve or may
involve litigation. After consultation with counsel, it is the opinion of
Company management that the ultimate liability, if any, with respect to these
disputes will not be material to the Company's results of operations or
financial position.
Item 4. Submission of Matters to a Vote of Security Holders
None.
6
Executive Officers of the Registrant
Year First
Elected as Term as Family
Name Age an Officer Officer Position Held with the Registrant Relationship
- ---- --- ---------- ---------- --------------------------------- ------------
Van B. Honeycutt* 55 1987 Indefinite Chairman, President and Chief Executive None
Officer
Leon J. Level* 59 1989 Indefinite Vice President and Chief Financial Officer None
Harvey N. Bernstein 53 1988 Indefinite Vice President None
Edward P. Boykin 61 1995 Indefinite Vice President None
Bryan Brady 53 2000 Indefinite Vice President and Controller None
Milton E. Cooper 61 1992 Indefinite Vice President None
Hayward D. Fisk 57 1989 Indefinite Vice President, General Counsel and None
Secretary
Ronald W. Mackintosh 51 1993 Indefinite Vice President None
Paul T. Tucker 52 1997 Indefinite Vice President None
- --------
* Director of the Company
Business Experience of Officers
Van B. Honeycutt was elected Chairman of the Board of Directors effective
March 29, 1997. He was appointed Chief Executive Officer of the Company
effective April 1, 1995. He joined the Company in 1975 and was elected
President and Chief Operating Officer during 1993. Prior to his election he
was a Vice President of CSC and President of the Industry Services Group. He
was formerly President of CSC Credit Services, Inc. He has also held a variety
of other positions with the Company.
Leon J. Level joined the Company in 1989 as Vice President and Chief
Financial Officer and as a member of CSC's Board of Directors. Former
positions include Vice President and Treasurer of Unisys Corporation and
Chairman of Unisys Finance Corporation; Assistant Corporate Controller and
Executive Director of The Bendix Corporation; and Principal with the public
accounting firm of Deloitte & Touche LLP. He is a Certified Public Accountant.
Harvey N. Bernstein joined the Company as Assistant General Counsel in 1983.
He became Deputy General Counsel and was elected a Vice President in 1988.
Prior to joining the Company, he specialized in government procurement law at
the firm of Fried, Frank, Harris, Shriver & Jacobson in Washington, D.C.
Edward P. Boykin joined the Company in 1966 and has held numerous positions
with several divisions of the Company. He was elected a Vice President in
1995. Since May, 1999, he has been President of the Financial Services Group.
From 1998 to 1999, he was responsible for leveraging the capabilities that
exist within the J.P. Morgan & Co. Incorporated ("J.P. Morgan") and E.I.
duPont de Nemours and Company accounts. Previously, he was President of The
Pinnacle Alliance, a CSC-managed organization providing information technology
outsourcing and other services to J.P. Morgan, from 1996 to 1998, and
President of the Technology Management Group from 1993 to 1996.
Bryan Brady joined the Company in 1997 and served as Vice President, Finance
of European Business Development and then Vice President, Finance and
Administration of the United Kingdom Division. In February 2000 he was elected
Vice President and Controller. Prior to joining the Company, he worked for
International Computers Ltd. from 1985-1997 and held various executive-level
finance positions. Additionally, he also spent seven years in South Africa and
Saudi Arabia as general manager of a joint ventures division.
Milton E. Cooper joined the Company in 1984 as Group Vice President of
program development. He was named President of the Federal Sector, formerly
known as the Systems Group, in December 1991 and became a Corporate Vice
President in January 1992. A veteran of 36 years in the information industry,
he has held senior
7
sales and marketing positions with IBM Corporation and Telex Corporation. He
is a graduate of the United States Military Academy at West Point.
Hayward D. Fisk joined the Company in 1989 as Vice President, General
Counsel and Secretary. Prior to joining the Company, he was associated for 21
years with Sprint Corporation (formerly United Telecommunications, Inc.), in
various legal and executive officer positions, most recently as Vice President
and Associate General Counsel.
Ronald W. Mackintosh joined the Company in 1988 as a result of the Index
acquisition, where he was Managing Director of its London office. Previously
he was a partner in the London office of Nolan, Norton & Company. In 1991, he
was named Chief Executive Officer of the Company's U.K. Operations and,
subsequently, President of the European Group. In 1993 he was elected a Vice
President of the Company.
Paul T. Tucker joined the Company in 1996 as a Corporate Development
executive, and in August, 1997 was elected Vice President of Corporate
Development. From 1990 to 1995 he was President and Chief Executive Officer of
Knight-Ridder Financial, an electronic real-time financial market information
company. Previously, he founded and served as President and Chief Technologist
of HAL Communications Corp., a communications hardware and software company
and was an Associate Professor and Senior Research Engineer at the University
of Illinois.
8
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Common stock of Computer Sciences Corporation is listed and traded on the
New York Stock Exchange and Pacific Exchange under the ticker symbol "CSC."
As of June 13, 2000, the number of registered shareholders of Computer
Sciences Corporation's common stock was 9,630. The table shows the high and
low intra-day prices of the Company's common stock as reported on the
composite tape of the New York Stock Exchange for each quarter during the last
two calendar years and through June 13, 2000.
2000 1999 1998
--------------- --------------- -----------------
Calendar Quarter High Low High Low High Low
---------------- -------- ------ ------ -------- -------- --------
1st..................... 94 15/16 72 74 3/8 54 15/16 56 3/4 39 31/32
2nd..................... 99 7/8* 72 1/8* 69 7/8 52 3/8 65 49 1/8
3rd..................... 74 61 7/8 74 7/8 51 1/2
4th..................... 94 5/8 57 15/16 70 15/16 46 1/4
- --------
* Through June 13, 2000
Item 6. Selected Financial Data
COMPUTER SCIENCES CORPORATION
Five-Year Review
------------------------------------------------------
March 31, April 2, April 3, March 28, March 29,
In thousands except per-share 2000 1999 1998 1997 1996
amounts ---------- ---------- ---------- ---------- ----------
Total assets................. $5,874,124 $5,260,353 $4,274,131 $3,706,719 $3,101,340
Debt:
Long-term.................. 652,367 399,672 739,002 634,867 431,418
Short-term................. 238,138 436,421 12,110 30,811 71,422
Current maturities......... 11,089 167,518 22,808 10,383 7,681
---------- ---------- ---------- ---------- ----------
Total.................... 901,594 1,003,611 773,920 676,061 510,521
Stockholders' equity......... 3,043,974 2,588,521 2,171,022 1,820,028 1,535,165
Working capital.............. 782,369 661,489 845,804 602,676 505,171
Property and equipment:
At cost.................... 2,744,240 2,368,764 1,992,245 1,707,277 1,280,192
Accumulated depreciation
and amortization.......... 1,469,321 1,256,557 1,012,617 799,937 584,644
---------- ---------- ---------- ---------- ----------
Property and equipment,
net....................... 1,274,919 1,112,207 979,628 907,340 695,548
Current assets to current
liabilities................. 1.4:1 1.3:1 1.7:1 1.6:1 1.5:1
Debt to total capitalization. 22.9% 27.9% 26.3% 27.1% 25.0%
Book value per share......... $18.17 $15.67 $13.33 $11.43 $9.87
Stock price range (high)..... 94.94 74.88 56.75 43.25 40.38
(low)................ 52.38 46.25 28.94 30.81 23.25
9
Five-Year Review (continued)
Fiscal Year
-------------------------------------------------------
In thousands except per- 2000 1999 1998 1997 1996
share amounts........... ---------- ---------- ---------- ---------- ----------
Revenues................ $9,370,694 $8,111,405 $7,027,881 $6,014,190 $4,997,365
---------- ---------- ---------- ---------- ----------
Costs of services....... 7,352,544 6,349,471 5,500,478 4,760,673 3,908,588
Selling, general and
administrative......... 779,367 735,756 640,624 509,407 491,469
Depreciation and
amortization........... 545,723 456,897 397,805 339,333 276,742
Interest, net........... 40,523 34,408 41,387 31,690 31,728
Special charges......... 41,065 233,219 57,429 76,053
---------- ---------- ---------- ---------- ----------
Total costs and
expenses............... 8,759,222 7,576,532 6,813,513 5,698,532 4,784,580
---------- ---------- ---------- ---------- ----------
Income before taxes..... 611,472 534,873 214,368 315,658 212,785
Taxes on income......... 208,600 179,371 (60,199) 118,546 93,291
---------- ---------- ---------- ---------- ----------
Net income.............. $ 402,872 $ 355,502 $ 274,567 $ 197,112 $ 119,494
========== ========== ========== ========== ==========
Basic earnings per
common share........... $ 2.42 $ 2.17 $ 1.71 $ 1.26 $ 0.78
========== ========== ========== ========== ==========
Diluted earnings per
common share........... $ 2.37 $ 2.12 $ 1.67 $ 1.22 $ 0.76
========== ========== ========== ========== ==========
Average common shares
outstanding............ 166,311 164,124 160,881 157,009 153,133
Average common shares
outstanding assuming
dilution............... 169,749 167,986 164,501 161,771 157,588
Notes:
A discussion of "Income Before Taxes" and "Net Income and Earnings per
Share" before and after special items is included in Management's Discussion
and Analysis of Financial Condition and Results of Operations ("MD&A"). A
discussion of "Special Items" for fiscal years ended 2000 and 1998 is also
included in MD&A. The Fiscal 1997 special charge of $57,429 (24 cents per
share after tax) relates to costs and expenses associated with the acquisition
of the Continuum Company, Inc. ("Continuum") and to a write-off of acquired
research and development related to an acquisition by a company subsequently
acquired by CSC and accounted for as a pooling of interests. The fiscal 1996
special charge of $76,053 (40 cents per share after tax) relates to two
acquisitions by Continuum which was subsequently acquired by CSC and accounted
for as a pooling of interests.
The selected financial data have been restated for fiscal 1996 through 1999
to include the results of business combinations accounted for as poolings of
interests.
No dividends were paid by CSC during the five years presented.
10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Revenues
Revenues for the Global Commercial and U.S. Federal Sector segments for
fiscal years 2000, 1999 and 1998 are as follows:
Fiscal 2000 Fiscal 1999 Fiscal 1998
---------------- ---------------- -----------
Percent Percent
Amount Change Amount Change Amount
Dollars in millions -------- ------- -------- ------- -----------
U. S. Commercial................ $3,560.6 12% $3,181.2 12% $2,846.9
Europe.......................... 2,526.0 12 2,250.1 27 1,771.0
Other International............. 902.8 81 499.4 24 403.3
-------- -------- --------
Global Commercial................. 6,989.4 18 5,930.7 18 5,021.2
U. S. Federal Sector.............. 2,378.1 9 2,180.2 9 2,006.6
Corporate ........................ 3.2 .5 .1
-------- -------- --------
Total............................. $9,370.7 16 $8,111.4 15 $7,027.9
======== ======== ========
The Company's 16% overall revenue growth for fiscal 2000 over 1999 resulted
principally from the successful expansion of its broad range of end-to-end I/T
services reflecting its geographic span and the markets served.
Effective November 16, 1999, the Company acquired Nichols Research
Corporation ("Nichols"), in a transaction accounted for as a pooling of
interests. Accordingly, CSC's consolidated financial statements for periods
prior to November 16, 1999 have been restated to include the financial
position and results of operations for Nichols. The restatement combines
results from Nichols' fiscal 1999 and 1998, which ended August 31, with
results from CSC's fiscal 1999 and 1998, which ended April 2 and April 3,
respectively. Therefore, the restated twelve month results for fiscal 1999 and
1998 reflect Nichols' twelve months ended August 31. The restated fiscal 2000
data include Nichols' results based on CSC's fiscal year. Due to the alignment
of fiscal periods, Nichols' results of operations for the same five months of
April to August 1999 are reported in both CSC's fiscal 2000 and 1999.
Global commercial revenue grew 18%, or $1,058.7 million, during fiscal 2000.
In constant currency, global commercial revenue grew 20%. Over 60% of the
global commercial growth was provided by international operations. The Company
announced over $6.9 billion in new global commercial business awards during
fiscal 2000 compared with the $2.2 billion announced during fiscal 1999.
For fiscal 2000, U.S. commercial revenue grew 12%, or $379.4 million. Nearly
two-thirds of the growth was generated by increases in outsourcing activities.
Fiscal 2000 outsourcing revenue growth was fueled by major new contracts
including United Technologies Corporation and Enron Energy Services. The
remainder of the U.S. Commercial growth was provided principally by consulting
and systems integration services and increases from the Company's financial
services and healthcare vertical markets. For fiscal 1999, U.S. commercial
revenue grew 12%, or 16% when excluding fiscal 1998 revenue from activities in
the Company's collections and telecommunications operations, which were
subsequently sold or phased out. More than two-thirds of the U.S. commercial
growth was generated by information technology outsourcing contracts. The
remainder of the growth resulted from demand for consulting and systems
integration activities and further expansion in the Company's financial
services and healthcare vertical markets.
The Company's European operations generated revenue growth of 12%, or $275.9
million, for fiscal 2000 compared to 1999. The growth was principally due to
(a) expansion of outsourcing services provided in the United Kingdom, (b) the
acquisition of two major Italian providers of information technology services
and a partial year's benefit associated with the fiscal 1999 acquisition of
Paris-based KPMG Peat Marwick SA ("KPMG"), a management consulting and
information technology services firm, and (c) increased demand in
11
Germany for consulting and systems integration activities and enterprise
resource planning ("ERP") services. For fiscal 1999 compared to fiscal 1998,
CSC's European operations accounted for revenue growth of 27%, or $479
million. Three factors generated the Company's growth in Europe: (a)
outsourcing services provided to British Aerospace plc, E. I. du Pont de
Nemours and Company and Hartmann & Braun, (b) the acquisition of Paris-based
KPMG, and (c) continued strong demand throughout Europe for consulting and
systems integration activities and ERP services.
Other international operations provided revenue growth of 81%, or $403.4
million, during fiscal 2000. The growth was primarily attributable to the
acquisition of G.E. Capital ITS based in Australia, expansion of other
business in Australia, and a partial year's benefit associated with the fiscal
1999 acquisition of Singapore-based CSA Holdings, Ltd. ("CSA"). During fiscal
1999, other international revenue increased 24% or $96.1 million. The growth
was primarily attributable to the acquisition of CSA, expansion of the
financial services sector and additional outsourcing activities in Australia.
The Company's U.S. federal sector revenues were derived from the following
sources:
Fiscal 2000 Fiscal 1999 Fiscal 1998
---------------- --------------- -----------
Percent Amount Change
Amount Change Percent Amount Amount
Dollars in millions -------- ------- -------- ------ -----------
Department of Defense.............. $1,474.1 4% $1,421.6 2% $1,387.7
Civil agencies..................... 799.5 17 683.8 18 578.6
Other.............................. 104.5 40 74.8 86 40.3
-------- -------- --------
Total U. S. Federal................ $2,378.1 9 $2,180.2 9 $2,006.6
======== ======== ========
Revenue from the U.S. federal sector increased 9% during fiscal 2000 versus
1999. The increase was principally related to activity with the Internal
Revenue Service ("IRS") contract, the National Aeronautics and Space
Administration ("NASA") Stennis Facilities Operations contract, and additional
task orders on various Civil agency and Department of Defense ("DOD")
contracts. Revenue for fiscal 1999 compared to 1998 increased 9%. The increase
is attributable to additional task orders with the General Services
Administration, increased ordering of a management information system for the
DOD and the acquisition of the DOD Ballistic Missile Defense Organization
support contract. Revenue gains during fiscal 1999 were partially offset by
reductions in work performed for NASA and the winding down of several
contracts.
During fiscal 2000, CSC announced federal contract awards with a total value
of $4.4 billion, compared with the $2.9 billion and $1 billion announced
during fiscal 1999 and 1998, respectively. In addition, during December 1998,
the IRS selected the CSC PRIME Alliance to enter into a strategic partnership
with the IRS to modernize the U.S. tax system. This award, the value of which
is not quantified, has the potential to become the Company's largest contract
to date.
Costs and Expenses
The Company's costs and expenses before special charges were as follows:
Percentage of
Dollar Amount Revenue
-------------------------- ----------------
2000 1999 1998 2000 1999 1998
Dollars in millions -------- -------- -------- ---- ---- ----
Costs of services................. $7,352.5 $6,349.5 $5,500.5 78.5% 78.3% 78.3%
Selling, general and
administrative................... 779.4 735.7 640.6 8.3 9.1 9.1
Depreciation and amortization..... 545.7 456.9 397.8 5.8 5.6 5.6
Interest expense, net............. 40.5 34.4 41.4 .4 .4 .6
-------- -------- -------- ---- ---- ----
Total........................... $8,718.1 $7,576.5 $6,580.3 93.0% 93.4% 93.6%
======== ======== ======== ==== ==== ====
12
Costs of Services
For fiscal 2000, the Company's costs of services as a percent of revenue
increased slightly to 78.5% from 78.3%. The change was driven principally by
the Company's revenue mix including the expansion of operations in Asia which
has a higher rate of cost of services and is less capital intensive in
comparison with the rest of the Company's operations. For fiscal 1999, the
Company's costs of services as a percent of revenue was unchanged versus
fiscal 1998.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses as a percentage of
revenue decreased to 8.3% from 9.1% for fiscal 2000 versus 1999. The decrease
was due to a number of performance improvements and management's increased
focus regarding discretionary costs owing to the uncertainty of the
marketplace in large part caused by the transition to the Year 2000.
For fiscal 1999, SG&A as a percent of revenue was unchanged compared to
fiscal 1998.
Special Items
Special items of $41.1 million ($29.8 million after tax), or 18 cents per
share, were recorded during fiscal 2000. The Company recorded a special item
of $39.1 million ($28.5 million after tax) representing merger-related charges
and other transaction costs associated with the November 16, 1999 acquisition
of Nichols. Also during fiscal 2000, the Company recorded a special item of $2
million ($1.3 million after tax) for legal and other costs, net of recoveries,
associated with the final resolution of the remaining issues relating to the
Company's fiscal 1998 response to a failed take-over attempt.
There were no special items during fiscal 1999.
The fiscal 1998 special items represent costs, expenses and benefits
associated with developments at CSC Enterprises, the Company's response to a
failed take-over attempt and merger-related charges associated with several
acquisitions made by Nichols. The Company recorded a first quarter net special
credit of $1.7 million, or 1 cent per share, at CSC Enterprises, a general
partnership which then operated certain of the Company's credit services
operations and carried out other business strategies through acquisition and
investment. The net credit resulted from a tax benefit of $135 million and an
after-tax charge of $133.3 million ($208.4 million before tax). During the
first quarter, several partners withdrew from CSC Enterprises. These
withdrawals caused CSC Enterprises to take actions which caused CSC to
recognize an increase in the tax basis of certain assets. As required by
Statement of Financial Accounting Standards ("SFAS") No. 109, this tax basis
increase from the previous tax basis resulted in a deferred tax asset of $135
million and a corresponding reduction in the Company's provision for taxes.
The tax basis increase is temporary and will be realized over time through an
increase in depreciation and amortization expense for income tax purposes. In
connection with the partner withdrawals and related developments, CSC
Enterprises reviewed its operations, its market opportunities and the carrying
value of its assets. Based on this review, plans were initiated to eliminate
certain offerings and write down assets, primarily within its
telecommunications operations. As a result of these plans, a pre-tax special
charge of $208.4 million ($133.3 million after tax) was recognized. The charge
is comprised of goodwill write-offs of $56.3 million ($35 million after tax),
contract termination costs of $54.3 million ($33.8 million after tax),
deferred contract costs and other assets of $33.1 million ($20.5 million after
tax), telecommunications software and accruals of $35.8 million ($22.3 million
after tax), telecommunications property, equipment and intangible assets of
$18.9 million ($11.7 million after tax), and other non-deductible costs of $10
million.
During the fourth quarter of fiscal 1998, the Company recorded a before-tax
special charge of $20.7 million, or equivalent to 8 cents per share after tax,
for costs relating to the Company's response to a failed take-over attempt.
The charge is comprised of $14.4 million for investment banking expenses and
$6.3 million for other expenses such as legal costs, public relations and
shareholder communications.
13
Also, during fiscal 1998, special charges of $4.1 million, or 2 cents per
share after tax, were recorded by Nichols. The charges were comprised of $2.2
million for purchased in-process research and development activities and other
merger-related expenses in connection with several acquisitions made during
the year and $1.9 million related to impairment of assets.
Income Before Taxes
The Company's income before taxes and margin for the most recent three
fiscal years is as follows:
Dollar Amount Margin
-------------------- ----------------
2000 1999 1998 2000 1999 1998
Dollars in millions ------ ------ ------ ---- ---- ----
Before special charges..................... $652.5 $534.9 $447.6 7.0% 6.6% 6.4%
Income before taxes........................ 611.5 534.9 214.4 6.5 6.6 3.1
Income before special charges and taxes improved during fiscal 2000 as a
percentage of revenue. The .4% margin improvement to 7% principally relates to
lower SG&A expenses as a percent of revenue in the Company's U.S. Federal
sector and U.S. commercial operations.
During fiscal 1999, income before taxes as a percentage of revenue improved
primarily due to lower net interest expense.
Taxes
The provision for (benefit from) income taxes as a percentage of pre-tax
earnings was 34.1%, 33.5% and (28.1)% for the three years ended March 31,
2000. The fiscal 1998 rate includes the tax benefit associated with the
partnership withdrawals at CSC Enterprises during that year. Before special
items, the tax rate was 33.7% and 35.4% for fiscal 2000 and 1998,
respectively. The decrease in the fiscal 1999 tax rate from 35.4% to 33.5% is
principally the result of utilization of foreign operating losses not
previously recognized and research tax credits.
Net Income and Earnings per Share
The Company's net income and diluted earnings per share for fiscal years
2000, 1999 and 1998 is as follows:
Dollar Amount Margin
-------------------- ----------------
2000 1999 1998 2000 1999 1998
Dollars in millions, except EPS ------ ------ ------ ---- ---- ----
Net income:
Before special items................... $432.7 $355.5 $289.3 4.6% 4.4% 4.1%
As reported............................ 402.9 355.5 274.6 4.3 4.4 3.9
Diluted earnings per share:
Before special items................... 2.55 2.12 1.76
As reported............................ 2.37 2.12 1.67
During fiscal 2000, the Company's net income margin decreased to 4.3% from
4.4%. The decrease is related to the special items incurred during fiscal 2000
which reduced net income by $29.8 million or .3% of revenue. For fiscal 1999,
the Company's net income margin increased to 4.4% from 3.9%, primarily related
to lower net interest, a lower tax rate and no special items recorded.
14
Before special items, the net earnings margin was 4.6% for fiscal 2000, 4.4%
for fiscal 1999 and 4.1% for 1998. The improvement for fiscal 2000 was
attributable to lower SG&A as a percent of revenue.
Cash Flows
Fiscal 2000 Fiscal 1999 Fiscal 1998
------------------ ---------------- -----------
Percent Percent
Amount Change Amount Change Amount
Dollars in millions --------- ------- ------- ------- -----------
Net cash from operations....... $ 946.3 12% $ 847.3 43% $ 593.4
Net cash used in investing..... (1,176.6) 58 (742.8) 24 (599.1)
Net cash (used) provided by
financing..................... (111.4) 227.7 41 161.9
Effect of exchange rate changes
on cash and cash equivalents.. (3.7) (.3) (4.9)
--------- ------- -------
Net (decrease) increase in cash
and cash equivalents.......... (345.4) 331.9 151.3
Cash at beginning of year...... 617.9 286.0 134.7
Effect of pooling restatement.. (12.1)
--------- ------- -------
Cash at end of year.......... $ 260.4 $ 617.9 $ 286.0
========= ======= =======
Historically, the majority of the Company's cash has been provided from
operating activities. The increases in cash from operations during fiscal 2000
and 1999 are principally the result of higher earnings and non-cash charges
(depreciation and amortization) partially offset by increased working capital
requirements.
The Company's investments principally relate to purchases of computer
equipment and software that support the Company's expanding global commercial
operations. Investments include computer equipment purchased at the inception
of outsourcing contracts as well as subsequent upgrades, expansion or
replacement of these client-supporting assets. The Company's investments also
include several acquisitions accounted for under the purchase method of
accounting during fiscal 1998 through 2000.
As described above, a majority of the Company's capital investments have
been funded by cash from operations. During fiscal 1999 the Company, issued
$200 million of 6.25% notes due in 2009. Proceeds were used for general
corporate purposes and to repay $150 million of 6.80% notes due April 1999.
Liquidity and Capital Resources
The balance of cash and cash equivalents was $260.4 million at March 31,
2000, $617.9 million at April 2, 1999 and $286 million at April 3, 1998.
During this period, the Company's earnings have added substantially to equity.
At the end of fiscal 2000, CSC's ratio of debt to total capitalization was
22.9%.
2000 1999 1998
Dollars in millions -------- -------- --------
Debt........................................... $ 901.6 $1,003.6 $ 773.9
Equity......................................... 3,044.0 2,588.5 2,171.0
-------- -------- --------
Total capitalization........................... $3,945.6 $3,592.1 $2,944.9
======== ======== ========
Debt to total capitalization................... 22.9% 27.9% 26.3%
During fiscal 2000, the Company replaced its expiring credit agreement with
a new credit facility. The new credit facility replaced the $490 million
credit agreement with a $250 million short term credit agreement and a $250
million long term credit agreement that expires in August 2004. At the end of
fiscal 2000, approximately $84 million was available for borrowing under this
program as compared to $115 million at the end of fiscal 1999. In addition,
the Company had uncommitted lines of credit of $185 million available with a
domestic bank and several foreign banks.
15
In the opinion of management, CSC will be able to meet its liquidity and
cash needs for the foreseeable future through the combination of cash flows
from operating activities, cash balances, unused borrowing capacity and other
financing activities. If these resources need to be augmented, major
additional cash requirements would likely be financed by the issuance of debt
and/or equity securities and/or the exercise of the put option (as described
in Note 11 to the Company's consolidated financial statements).
Dividends and Redemption
It has been the Company's policy to invest earnings in the growth of the
Company rather than distribute earnings as dividends. This policy, under which
dividends have not been paid since fiscal 1969, is expected to continue, but
is subject to regular review by the Board of Directors.
On February 27, 1998, the Board of Directors redeemed the stock purchase
rights, which had been issued under the 1988 stockholder rights plan, for one
sixth of one cent per right. The redemption was paid on April 13, 1998.
Year 2000
As previously reported in the Company's fiscal 2000 third quarter 10-Q, the
Company did not experience any significant problems caused by year 2000 issues
related to the Company's internal systems, contractual obligations to
customers or non-performance of suppliers. Based on currently available
information, the Company does not expect any future year 2000 issues.
Euro Introduction
On January 1, 1999 the euro currency was introduced in 11 of the 15 member
countries in the European Union. Although euro notes and coins will not be
available until the latter part of the transition period in 2002, the euro is
traded on the currency exchanges and is available for non-cash transactions.
The Company established a European steering group during 1997 to determine
the Company's approach to the euro and to develop plans to ensure that
customer expectations and statutory requirements are met. The Company was
ready by January 1, 1999 to deal with any customer or supplier who wished to
transact in euros and all European intercompany transactions since January 1,
1999 have been invoiced and settled in euros in the participating countries.
The Company's European operations has completed the development of the
infrastructure that provides all the internal systems functionality required
to deal with the euro during the transition period and thereafter. The
transition period lasts until July 2002 when the national currencies will no
longer be legal tender. The incremental system cost to CSC of introducing the
euro will not be material.
As of March 31, 2000, the transition to the euro has not resulted in any
material adverse impact on CSC's financial position or results of operations.
Furthermore, CSC will continue to review the impact of the euro conversion
during the remaining transition period, but does not expect it to have a
material impact on its overall financial position or results of operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires all derivatives to be recorded on the balance sheet at fair
value and establishes accounting standards for hedging activities. In June
1999, the FASB issued SFAS No. 137, which amended SFAS No. 133 by deferring
its effective date by one year to fiscal years beginning after June 15, 2000.
The Company is currently assessing the impact this statement will have and,
based on preliminary estimates, does not expect the adoption to have a
material impact on its consolidated financial position or results of
operations.
16
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement requires the
capitalization of internal use computer software costs provided that certain
criteria are met. These capitalized software costs will be amortized on a
straight-line basis over the useful life of the software. The adoption of this
statement effective April 3, 1999 had no material impact on the company's
consolidated financial position, results of operations or cash flows.
Forward-Looking Statements
All statements contained in this annual report, or in any document filed by
the Company with the Securities and Exchange Commission, or in any press
release or other written or oral communication by or on behalf of the Company,
that do not directly and exclusively relate to historical facts constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements represent the Company's
expectations and beliefs, and no assurance can be given that the results
described in such statements will be achieved.
These statements are subject to risks, uncertainties and other factors, many
of which are outside of the Company's control, that could cause actual results
to differ materially from the results described in such statements. These
factors include, without limitation, the following: (i) competitive pressures;
(ii) the Company's ability to consummate strategic acquisitions and alliances;
(iii) the Company's ability to attract and retain key personnel; (iv) changes
in the demand for information technology outsourcing and business process
outsourcing; (v) changes in U.S. federal government spending levels for
information technology services; (vi) the Company's ability to continue to
develop and expand its service offerings to address emerging business demands
and technological trends; (vii) changes in the financial condition of the
Company's commercial customers; (viii) the future profitability of the
Company's customer contracts, and (ix) general economic conditions and
fluctuations in currency exchange rates in countries in which we do business.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rates
The Company has fixed-rate long-term debt obligations, short-term commercial
paper and other borrowings subject to market risk from changes in interest
rates. Sensitivity analysis is one technique used to measure the impact of
changes in interest rates on the value of market-risk sensitive financial
instruments. A hypothetical 10% movement in interest rates would not have a
material impact on the Company's future earnings or cash flows.
Foreign Currency
During the ordinary course of business, the Company enters into certain
contracts denominated in foreign currency. Potential foreign currency
exposures arising from these contracts are analyzed during the contract
bidding process. The Company generally manages these transactions by ensuring
costs to service contracts are incurred in the same currency in which revenue
is received. Short-term contract financing requirements are met by borrowing
in the same currency. By matching revenues, costs and borrowings to the same
currency, the Company has been able to substantially mitigate foreign currency
risk to earnings. If necessary, the Company may also use foreign currency
forward contracts or options to hedge exposures arising from these
transactions. The Company does not foresee changing its foreign currency
exposure management strategy.
During fiscal 2000, 37% of the Company's revenue was generated outside of
the United States. Using sensitivity analysis, a hypothetical ten-percent
increase in the value of the U.S. dollar against all currencies would decrease
revenue by 3.7% or $346 million, while a hypothetical ten-percent decrease in
the value of the U.S. dollar against all currencies would increase revenue by
3.7% or $346 million. In the opinion of management, a substantial portion of
this fluctuation would be offset by expenses incurred in local currency. As a
result, a
17
hypothetical 10% movement of the value of the U.S. Dollar against all
currencies in either direction would impact the Company's earnings before
interest and taxes by $18 million. This amount would be offset, in part, from
the impacts of local income taxes and local currency interest expense.
At March 31, 2000, the Company had approximately $116 million of non-U.S.
dollar denominated cash and cash equivalents, and approximately $107 million
of non-U.S. dollar borrowings.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Financial Statement Schedules
Financial Statements
Page
----
Independent Auditors' Report.............................................. 19
Consolidated Balance Sheets as of March 31, 2000 and April 2, 1999 ....... 20
Consolidated Statements of Income for the fiscal years ended March 31,
2000, April 2, 1999 and April 3, 1998.................................... 22
Consolidated Statements of Cash Flows for the fiscal years ended March 31,
2000, April 2, 1999 and April 3, 1998.................................... 23
Consolidated Statements of Stockholders' Equity for the fiscal years ended
March 31, 2000, April 2, 1999 and April 3, 1998.......................... 24
Notes to Consolidated Financial Statements................................ 25
Quarterly Financial Information (Unaudited)............................... 43
Schedule
Schedule VIII--Valuation and Qualifying Accounts.......................... 50
Schedules other than that listed above have been omitted since they are
either not required, are not applicable, or the required information is shown
in the financial statements or related notes.
Separate financial statements of the Registrant have been omitted since it
is primarily an operating company, and the minority interests in subsidiaries
and long-term debt of the subsidiaries held by other than the Registrant are
less than five percent of consolidated total assets. Financial statements (or
summarized financial information) for unconsolidated subsidiaries and 50%-
owned companies accounted for by the equity method have been omitted because
they are inapplicable, or do not, considered individually or in the aggregate,
constitute a significant subsidiary.
18
INDEPENDENT AUDITORS' REPORT ON THE FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
Computer Sciences Corporation
El Segundo, California
We have audited the accompanying consolidated balance sheets of Computer
Sciences Corporation and Subsidiaries (the Company) as of March 31, 2000 and
April 2, 1999, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 2000. Our audits also included the financial statement
schedule listed in the Index at Item 8. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Computer Sciences Corporation
and Subsidiaries as of March 31, 2000 and April 2, 1999, and the results of
their operations and their cash flows for each of the three years in the
period ended March 31, 2000 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Deloitte & Touche LLP
Los Angeles, California
May 22, 2000
19
COMPUTER SCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, April 2,
2000 1999
In thousands ---------- ----------
Current assets:
Cash and cash equivalents............................ $ 260,403 $ 617,879
Receivables, net of allowance for doubtful accounts
of $72,981 (2000) and $81,549 (1999) (notes 4 and
10)................................................. 2,191,519 1,890,461
Prepaid expenses and other current assets............ 314,413 296,352
---------- ----------
Total current assets............................... 2,766,335 2,804,692
---------- ----------
Investments and other assets:
Software, net of accumulated amortization of $199,065
(2000) and $160,761 (1999)............................ 267,577 172,184
Excess of cost of businesses acquired over related
net assets, net of accumulated amortization of
$155,255 (2000) and $120,917 (1999)................. 903,194 726,951
Other assets......................................... 662,099 444,319
---------- ----------
Total investments and other assets................. 1,832,870 1,343,454
---------- ----------
Property and equipment--at cost (note 5):
Land, buildings and leasehold improvements........... 413,741 364,168
Computers and related equipment...................... 2,067,988 1,798,784
Furniture and other equipment........................ 262,511 205,812
---------- ----------
2,744,240 2,368,764
Less accumulated depreciation and amortization....... 1,469,321 1,256,557
---------- ----------
Property and equipment, net........................ 1,274,919 1,112,207
---------- ----------
$5,874,124 $5,260,353
========== ==========
(See notes to consolidated financial statements)
20
COMPUTER SCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, April 2,
2000 1999
In thousands except shares ---------- ----------
Current liabilities:
Short-term debt and current maturities of long-term
debt (note 5)......................................... $ 249,227 $ 603,939
Accounts payable....................................... 406,905 403,154
Accrued payroll and related costs (note 6)............. 485,821 405,160
Other accrued expenses................................. 598,546 460,937
Deferred revenue....................................... 137,061 138,340
Federal, state and foreign income taxes (note 3)....... 106,406 131,673
---------- ----------
Total current liabilities............................ 1,983,966 2,143,203
---------- ----------
Long-term debt, net of current maturities (note 5)....... 652,367 399,672
---------- ----------
Deferred income taxes (note 3)........................... 83,796
---------- ----------
Other long-term liabilities (note 6)..................... 110,021 128,957
---------- ----------
Commitments and contingencies (notes 6 and 7)............
Stockholders' equity (notes 5, 8 and 9)..................
Preferred stock, par value $1 per share; authorized
1,000,000 shares; none issued.........................
Common stock, par value $1 per share; authorized
275,000,000 shares; issued 167,903,047 (2000) and
165,520,548 (1999).................................... 167,903 165,521
Additional paid-in capital............................. 907,123 823,285
Earnings retained for use in business.................. 2,061,043 1,667,734
Accumulated other comprehensive loss................... (75,800) (53,235)
---------- ----------
3,060,269 2,603,305
Less common stock in treasury, at cost, 394,915 shares
(2000) and 369,607 shares (1999)........................ (16,140) (14,413)
Unearned restricted stock and other (note 8)........... (155) (371)
---------- ----------
Stockholders' equity, net............................ 3,043,974 2,588,521
---------- ----------
$5,874,124 $5,260,353
========== ==========
(See notes to consolidated financial statements)
21
COMPUTER SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended
----------------------------------
March 31, April 2, April 3,
2000 1999 1998
In thousands except per-share amounts ---------- ---------- ----------
Revenues.................................... $9,370,694 $8,111,405 $7,027,881
---------- ---------- ----------
Costs of services........................... 7,352,544 6,349,471 5,500,478
Selling, general and administrative......... 779,367 735,756 640,624
Depreciation and amortization............... 545,723 456,897 397,805
Interest expense............................ 58,135 49,358 51,418
Interest income............................. (17,612) (14,950) (10,031)
Special charges (note 2).................... 41,065 233,219
---------- ---------- ----------
Total costs and expenses.................... 8,759,222 7,576,532 6,813,513
---------- ---------- ----------
Income before taxes......................... 611,472 534,873 214,368
Taxes on income (notes 2 and 3)............. 208,600 179,371 (60,199)
---------- ---------- ----------
Net income.................................. $ 402,872 $ 355,502 $ 274,567
========== ========== ==========
Earnings per common share:
Basic..................................... $ 2.42 $ 2.17 $ 1.71
========== ========== ==========
Diluted................................... $ 2.37 $ 2.12 $ 1.67
========== ========== ==========
(See notes to consolidated financial statements)
22
COMPUTER SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
---------------------------------
March 31, April 2, April 3,
2000 1999 1998
In thousands ----------- --------- ---------
Cash flows from operating activities:
Net income................................ $ 402,872 $ 355,502 $ 274,567
Adjustments to reconcile net income to net
cash provided:
Depreciation and amortization........... 545,723 456,897 397,805
Deferred taxes.......................... 68,791 89,400 (96,343)
Special items, net of tax............... 17,014 101,847
Provision for losses on accounts
receivable............................. 6,070 9,226 20,411
Changes in assets and liabilities, net
of effects of acquisitions:
Increase in receivables............... (278,679) (243,188) (239,893)
Increase in prepaid expenses.......... (9,035) (8,674) (86,815)
Increase in accounts payable and
accruals............................. 159,457 72,894 109,956
Increase in income taxes payable...... 44,446 98,385 99,047
(Decrease) increase in deferred
revenue.............................. (4,019) 10,042 13,817
Other changes, net.................... (6,372) 6,867 (1,041)
----------- --------- ---------
Net cash provided by operating activities. 946,268 847,351 593,358
----------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment....... (585,593) (438,926) (358,589)
Outsourcing contracts..................... (218,689) (85,286) (145,974)
Acquisitions, net of cash acquired........ (294,239) (184,281) (116,447)
Dispositions.............................. 29,875 37,947 75,827
Software.................................. (127,129) (87,598) (64,774)
Other investing cash flows, net........... 19,219 15,357 10,834
----------- --------- ---------
Net cash used in investing activities..... (1,176,556) (742,787) (599,123)
----------- --------- ---------
Cash flows from financing activities:
Net borrowing (repayment) of commercial
paper.................................... 40,504 (42) 77,953
Borrowings under lines of credit.......... 75,989 70,440 66,281
Repayment of borrowings under lines of
credit................................... (89,671) (59,679) (83,022)
Proceeds from term debt issuance.......... 200,000 32,568
Principal payments on long-term debt...... (179,471) (35,940) (12,260)
Proceeds from stock option transactions... 57,079 49,684 67,048
Other financing cash flows, net........... (15,780) 3,190 13,356
----------- --------- ---------
Net cash (used in) provided by financing
activities............................... (111,350) 227,653 161,924
----------- --------- ---------
Effect of exchange rate changes on cash and
cash equivalents........................... (3,717) (301) (4,886)
----------- --------- ---------
Net (decrease) increase in cash and cash
equivalents................................ (345,355) 331,916 151,273
Cash and cash equivalents at beginning of
year....................................... 617,879 285,963 134,690
Effect of pooling restatement............... (12,121)
----------- --------- ---------
Cash and cash equivalents at end of year.... $ 260,403 $ 617,879 $ 285,963
=========== ========= =========
(See notes to consolidated financial statements)
23
COMPUTER SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Earnings Accumulated Unearned
Common Stock Additional Retained Other Common Restricted
-------------------- Paid-In for Use in Comprehensive Stock in Stock and
In thousands except Shares Amount Capital Business Income (Loss) Treasury Other Total
shares ----------- -------- ---------- ---------- ------------- --------- ---------- -----------
Balance at March 28,
1997................... 82,586,625 $ 82,587 $652,980 $1,116,728 $ (14,625) $ (11,982) $(5,660) $1,820 ,028
----------- -------- -------- ---------- --------- --------- ------- -----------
Comprehensive income:
Net income.............. 274,567 274,567
Currency translation
adjustment............. (23,287) (23,287)
Unfunded pension
obligation............. (1,779) (1,779)
-----------
Comprehensive income... 249,501
-----------
Stock option
transactions........... 2,264,962 2,264 96,625 (1,047) 97,842
Amortization and
forfeitures of
restricted stock....... 109 109
Repayment of notes...... 4,282 4,282
Adjustments for pooling
of interests........... (479) (479)
Effect of two-for-one
stock split............ 78,322,626 78,323 (78,323)
Stock purchase rights
redemption............. (261) (261)
----------- -------- -------- ---------- --------- --------- ------- -----------
Balance at April 3,
1998................... 163,174,213 163,174 749,605 1,312,232 (39,691) (13,029) (1,269) 2,171,022
----------- -------- -------- ---------- --------- --------- ------- -----------
Comprehensive income:
Net income.............. 355,502 355,502
Currency translation
adjustment............. (12,860) (12,860)
Unfunded pension
obligation............. (684) (684)
-----------
Comprehensive income... 341,958
-----------
Stock option
transactions........... 2,346,335 2,347 73,680 (1,384) 74,643
Amortization and
forfeitures of
restricted stock....... 893 893
Repayment of notes...... 5 5
----------- -------- -------- ---------- --------- --------- ------- -----------
Balance at April 2,
1999................... 165,520,548 165,521 823,285 1,667,734 (53,235) (14,413) (371) 2,588,521
----------- -------- -------- ---------- --------- --------- ------- -----------
Comprehensive income:
Net income.............. 402,872 402,872
Currency translation
adjustment............. (30,547) (30,547)
Unfunded pension
obligation............. 1,060 1,060
Unrealized gain on
available for sale
securities............. 6,922 6,922
-----------
Comprehensive income... 380,307
-----------
Stock option
transactions........... 2,382,499 2,382 83,838 (1,727) 84,493
Amortization and
forfeitures of
restricted stock....... 203 203
Repayment of notes...... 13 13
Adjustments for pooling
of interests........... (9,563) (9,563)
----------- -------- -------- ---------- --------- --------- ------- -----------
Balance at March 31,
2000................... 167,903,047 $167,903 $907,123 $2,061,043 $(75,800) $(16,140) $ (155) $3,043,974
=========== ======== ======== ========== ========= ========= ======= ===========
(See notes to consolidated financial statements)
24
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per-share amounts)
Note 1--Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include those of Computer
Sciences Corporation, its subsidiaries and those joint ventures and
partnerships over which it exercises control, hereafter collectively referred
to as "CSC" or "the Company." All material intercompany transactions and
balances have been eliminated.
Business Combination
CSC acquired Nichols Research Corporation ("Nichols") on November 16, 1999.
Upon consummation of the merger, Nichols became a wholly owned subsidiary of
the Company. Each outstanding share of Nichols common stock was converted into
.423 shares of common stock of the Company and each outstanding option to
purchase shares of common stock was converted into an option to purchase .423
shares of CSC common stock. The acquisition has been accounted for under the
pooling of interests method, and previously reported consolidated financial
statements of the Company for periods ended prior to November 16, 1999 have
been restated. The restatement combines results from Nichols' fiscal 1999 and
1998, which ended August 31, with results from CSC's fiscal 1999 and 1998,
which ended April 2 and April 3, respectively. Therefore, the restated twelve
months for fiscal 1999 and 1998 reflect Nichols' twelve months ended August
31. The restated fiscal 2000 data include results based on CSC's fiscal year.
Due to the alignment of fiscal periods, Nichols' results of operations for the
same five month period of April to August 1999 are reported in both CSC's
fiscal 2000 and 1999. As a result, Nichols' revenue of $220,551 and net income
of $9,563 are included in both fiscal 2000 and 1999. On this basis for the six
months ended October 1, 1999 and fiscal years 1999 and 1998 (periods prior to
the merger), Nichols' revenues were $245,918, $451,440 and $427,043,
respectively, and net income was $9,820, $14,345 and $14,198, respectively.
Other Acquisitions
During the three fiscal years ended March 31, 2000, the Company made a
number of acquisitions in addition to the one described above which, either
individually or collectively, are not material. In conjunction with business
combinations accounted for as purchases, the Company acquired tangible assets
with an estimated fair value of $146,000, $239,000 and $64,000; and assumed
liabilities of $89,000, $195,000 and $49,000 for fiscal 2000, 1999 and 1998
respectively. The excess of cost of businesses acquired over related net
assets was $262,000, $175,000 and $101,000 for the three fiscal years ended
2000.
Income Recognition
The Company provides services under time and materials, level of effort,
cost-based and fixed-price contracts. For time and materials and level of
effort types of contracts, income is recorded as the costs are incurred,
income being the difference between such costs and the agreed-upon billing
amounts. For cost-based contracts, income is recorded by applying an estimated
factor to costs as incurred, such factor being determined by the contract
provisions and prior experience. For fixed-price contracts, income is recorded
on the basis of the estimated percentage of completion of services rendered.
Losses, if any, on long-term contracts are recognized during the period in
which the loss is determined.
Revenues from certain information processing services are recorded at the
time the service is utilized by the customer. Revenues from sales of
proprietary software are recognized upon receipt of a signed contract
documenting customer commitment, delivery of the software and determination of
the fee amount and its
25
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 1--Summary of Significant Accounting Policies (continued)
probable collection. However, if significant customization is part of the
transaction, such revenues are recognized over the period of delivery.
Depreciation and Amortization
The Company's depreciation and amortization policies are as follows:
Property and Equipment:
Buildings.......................... 10 to 40 years
Computers and related equipment.... 3 to 10 years
Furniture and other equipment...... 2 to 10 years
Leasehold improvements............. Shorter of lease term or useful life
Investments and Other Assets:
Software........................... 2 to 10 years
Credit information files........... 10 to 20 years
Excess of cost of businesses
acquired over related net assets.. Up to 40 years
Deferred contract costs............ Contract life
For financial reporting purposes, computer equipment is depreciated using
either the straight-line or sum-of-the-years'-digits method, depending on the
nature of the equipment's use. The cost of other property and equipment, less
applicable residual values, is depreciated on the straight-line method.
Depreciation commences when the specific asset is complete, installed and
ready for normal use. Investments and other assets are amortized on a
straight-line basis over the years indicated above.
Included in software are unamortized capitalized software development costs
of $168,663 and $122,208 as of March 31, 2000 and April 2, 1999, respectively.
The related amortization expense was $34,337, $22,378 and $17,358 for the
three fiscal years ended March 31, 2000.
Included in other assets are deferred contract costs related to the initial
purchase of assets under outsourcing contracts. The balance of such costs, net
of amortization, was $155,757 and $92,717 as of March 31, 2000 and April 2,
1999, respectively. The related amortization expense was $26,893, $18,408 and
$15,371 for the three fiscal years ended March 31, 2000.
The Company evaluates at least annually the recoverability of its excess
cost of businesses acquired over related net assets. In assessing
recoverability, the current and future profitability of the related operations
are considered, along with management's plans with respect to the operations
and the projected undiscounted cash flows.
Cash Flows
Cash payments for interest on indebtedness and cash payments (refunds) for
taxes on income are as follows:
Fiscal Year
-------------------------
2000 1999 1998
------- -------- -------
Interest......................................... $59,429 $ 46,189 $51,376
Taxes on income.................................. 97,608 (20,510) 39,802
26
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 1--Summary of Significant Accounting Policies (continued)
For purposes of reporting cash and cash equivalents, the Company considers
all investments purchased with an original maturity of three months or less to
be cash equivalents. The Company's investments consist of high quality
securities issued by a number of institutions having high credit ratings,
thereby limiting the Company's exposure to concentrations of credit risk. With
respect to financial instruments, the Company's carrying amounts of its other
current assets and liabilities were deemed to approximate their market values
due to their short maturity. The Company has no material hedge contracts with
respect to its foreign exchange or interest rate positions.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions, in particular estimates of anticipated contract costs utilized in
the revenue recognition process, that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Stock Split
All historical weighted average and per share amounts in the Consolidated
Statements of Income have been restated to reflect a two-for-one stock split
in the form of a 100% stock dividend paid on March 23, 1998. The Consolidated
Statements of Stockholders' Equity reflects the actual number and par value of
the issued and outstanding shares for fiscal 1998. The Consolidated Statements
of Stockholders' Equity reflects the actual stock dividend in the period paid.
Earnings per Share
Basic earnings per common share are computed using the weighted average
number of common shares outstanding during the period. Diluted earnings per
share reflect the incremental shares issuable upon the assumed exercise of
stock options.
Basic and diluted earnings per share are calculated as follows:
Fiscal Year
--------------------------
2000 1999 1998
-------- -------- --------
Net income for basic and diluted EPS........... $402,872 $355,502 $274,567
======== ======== ========
Common share information (in thousands)
Average common shares outstanding
for basic EPS............................... 166,311 164,124 160,881
Dilutive effect of stock options............. 3,438 3,862 3,620
-------- -------- --------
Shares for diluted EPS....................... 169,749 167,986 164,501
======== ======== ========
Basic EPS...................................... $ 2.42 $ 2.17 $ 1.71
Diluted EPS.................................... 2.37 2.12 1.67
The computation of diluted EPS did not include stock options which were
antidilutive, as their exercise price was greater than the average market
price of the Company's common stock during the year. The number of such
options was 135,797, 88,451 and 95,310 for the years ended March 31, 2000,
April 2, 1999 and April 3, 1998, respectively.
27
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 1--Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
During fiscal 2000 the Company adopted the American Institute of Certified
Public Accountants Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires the capitalization of internal use computer software costs provided
certain criteria are met. These capitalized costs will be amortized on a
straight-line basis over the useful life of the software. The adoption of SOP
98-1 had no material impact on the Company's consolidated financial position,
results of operations or cash flows.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires all derivatives to be recorded on the balance sheet at fair
value and establishes accounting standards for hedging activities. In June
1999, the FASB issued SFAS No. 137, which amended SFAS No. 133 by deferring
its effective date by one year to fiscal years beginning after June 15, 2000.
The Company is currently assessing the impact this statement will have and,
based on preliminary estimates, does not expect the adoption to have a
material impact on its consolidated financial position, results of operations
or cash flows.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements in order to conform to the current presentation.
Note 2--Special Items
Special items of $41,065 ($29,845 after tax), or 18 cents per share, were
recorded during fiscal 2000.
During the third quarter ended December 31, 1999, the Company recorded a
special item of $39,068 ($28,519 after tax), or 17 cents per share after tax,
related to the November 16 acquisition of Nichols. This charge
is comprised of $9,304 for investment banking and other transaction expenses;
$23,462 related to the write-off of capitalized software attributable to
duplicate market offerings and the write-off of other assets and intangibles;
and $6,303 related to employee severance costs and elimination of duplicate
facilities. The involuntary termination benefits accrued and expensed were
$5,060 and related to 60 employees; as of March 31, 2000, approximately $4,232
had been paid.
The Company also recorded a special item of $1,997 ($1,326 after tax) for
legal and other costs, net of recoveries, associated with the final
resolution, during the third quarter, of the remaining issues relating to the
Company's fiscal 1998 response to a failed take-over attempt.
There were no special items during fiscal 1999.
Special items in fiscal 1998 represent costs, expenses and benefits
associated with developments at CSC Enterprises, the Company's response to a
failed take-over attempt and merger-related charges associated with several
acquisitions made by Nichols.
During the first quarter of fiscal 1998, CSC recorded a net special credit
of $1,707, or 1 cent per share, at CSC Enterprises, a general partnership of
which CSC, through one of its affiliates, is the managing general partner.
This net credit resulted from a tax benefit of $135,000 and an after-tax
special charge of $133,293 ($208,393 before tax). During the quarter, several
partners withdrew from CSC Enterprises. These withdrawals
28
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 2--Special Items (continued)
caused CSC Enterprises to take actions that caused CSC to recognize an
increase in the tax basis of certain assets. As required by SFAS No. 109, this
tax basis increase from the previous tax basis resulted in a deferred tax
asset of $135,000 and a corresponding reduction of CSC's provision for income
taxes during the quarter. The tax basis increase is temporary and will be
realized over time through an increase in depreciation and amortization
expense for income tax purposes. In connection with the partner withdrawals
and related developments, CSC Enterprises reviewed its operations, its market
opportunities and the carrying value of its assets. Based on this review,
certain offerings and assets were eliminated, primarily within its
telecommunications operations. As a result of these plans, CSC recognized a
pre-tax special charge of $208,393 ($133,293 after tax). This special charge
included goodwill write-offs of $56,300 ($35,000 after tax), contract
termination costs of $54,300 ($34,000 after tax), deferred contract costs and
other assets of $33,093 ($20,493 after tax), telecommunications software and
accruals of $35,800 ($22,300 after tax), telecommunications property,
equipment and intangible assets of $18,900 ($11,700 after tax) and other non-
deductible costs of $10,000.
During the fourth quarter of fiscal 1998, the Company recorded a before-tax
special charge of $20,700, or 8 cents per share after tax, for costs relating
to the Company's response to a failed take-over attempt. The charge is
comprised of $14,400 for investment banking expenses and $6,300 for other
expenses such as legal costs, public relations and shareholder communications.
Also, during fiscal 1998, special charges of $4,126, or 2 cents per share
after tax, were recorded by Nichols. The charges were comprised of $2,000 for
purchased in-process research and development activities and $226 for merger-
related expenses in connection with several acquisitions made during the year
and $1,900 related to the impairment of assets within Nichols' insurance line
of business.
Note 3--Income Taxes
The sources of income before taxes, classified as between domestic entities
and those entities domiciled outside of the United States, are as follows:
Fiscal Year
--------------------------
2000 1999 1998
-------- -------- --------
Domestic entities.............................. $404,571 $380,606 $119,937
Entities outside the United States............. 206,901 154,267 94,431
-------- -------- --------
$611,472 $534,873 $214,368
======== ======== ========
29
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 3--Income Taxes (continued)
The provisions (credits) for taxes on income, classified as between current
and deferred and as between taxing jurisdictions, consist of the following:
Fiscal Year
--------------------------
2000 1999 1998
-------- -------- --------
Current portion:
Federal.................................... $ 40,375 $ 39,116 $ (2,509)
State...................................... 5,517 6,493 (646)
Foreign.................................... 93,917 44,362 39,299
-------- -------- --------
139,809 89,971 36,144
-------- -------- --------
Deferred portion:
Federal.................................... 50,832 77,373 (83,723)
State...................................... 12,714 10,534 (9,129)
Foreign.................................... 5,245 1,493 (3,491)
-------- -------- --------
68,791 89,400 (96,343)
-------- -------- --------
Total provision (credit) for taxes....... $208,600 $179,371 $(60,199)
======== ======== ========
Included in the fiscal 1998 current portion is $27,000 (composed of $26,200
federal and $800 state) of the $135,000 deferred tax asset described in Note 2
and $81,900 related to the other fiscal 1998 special items, also described in
Note 2. The fiscal 1998 deferred portion includes the remaining $108,000
(composed of $104,800 federal and $3,200 state) of the $135,000 deferred tax
asset.
The major elements contributing to the difference between the federal
statutory tax rate and the effective tax rate are as follows:
Fiscal Year
--------------------
2000 1999 1998
---- ----- -----
Statutory rate.......... 35.0 % 35.0 % 35.0 %
State income tax, less
effect of federal
deduction.............. 1.9 2.1 2.3
Goodwill and other
intangibles
amortization........... (1.2) .4 .6
Utilization of tax
credits/losses......... (1.7) (1.0) (2.0)
Special items........... .5 (63.7)
Foreign rate
differential........... 4.7 (2.2)
Depreciable asset basis
adjustment............. (3.3)
Other................... (1.8) (.8) (.4)
---- ----- -----
Effective tax rate...... 34.1 % 33.5 % (28.2)%
==== ===== =====
The fiscal 1998 special items percentage relates principally to the $135,000
tax benefit described in Note 2.
30
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 3--Income Taxes (continued)
The tax effects of significant temporary differences that comprise deferred
tax balances are as follows:
March 31, April 2,
2000 1999
--------- ---------
Deferred tax assets (liabilities)
Deferred income................................... $ 17,028 $ 7,816
Employee benefits................................. 24,900 21,396
Provisions for contract settlement................ 134 1,086
Currency exchange................................. 43,817 23,765
Other assets...................................... 44,221 45,748
Contract accounting............................... (101,065) (111,537)
Depreciation and amortization..................... (207,504) (49,954)
Prepayments....................................... (64,637) (79,676)
Tax loss/credit carryforwards..................... 64,460 37,351
Other liabilities................................. (12,657) (13,863)
--------- ---------
Total deferred taxes................................ $(191,303) $(117,868)
========= =========
Of the above deferred amounts, $107,507 and $111,277 are included in current
income taxes at March 31, 2000 and April 2, 1999, respectively.
The IRS has substantially completed its examination of the Company's federal
income tax returns for fiscal years 1992 through 1994. The results are not
expected to have a material effect on the Company's financial position or
results of operations.
Note 4--Receivables
Receivables consist of the following:
March 31, April 2,
2000 1999
---------- ----------
Billed trade accounts................................ $1,634,239 $1,400,069
Recoverable amounts under contracts in progress...... 491,429 456,264
Billed trade accounts................................ $1,634,239 $1,400,069
---------- ----------
$2,191,519 $1,890,461
========== ==========
Recoverable amounts under contracts in progress generally become billable
upon completion of a specified phase of the contract, negotiation of contract
modifications, completion of government audit activities, or upon acceptance
by the customer. The balance at March 31, 2000 is expected to be collected
during fiscal 2001 except for $86,193 to be collected during fiscal 2002 and
thereafter.
Note 5--Debt
Short-term
At March 31, 2000, the Company had an uncommitted line of credit of $25,000
with a domestic bank. As of March 31, 2000, the Company had no borrowings
outstanding under this line of credit.
31
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 5--Debt (continued)
At March 31, 2000, the Company had uncommitted lines of credit of $220,053
with certain foreign banks. As of March 31, 2000, the Company had $59,876 of
borrowings outstanding under these lines of credit. These short-term lines of
credit carry no commitment fees or significant covenants. The weighted average
interest rate on borrowings under these short-term lines of credit was 3.9% at
March 31, 2000, and April 2, 1999.
The Company also had outstanding borrowings of $12,687 with foreign banks as
of March 31, 2000. The weighted average interest rate on these borrowings was
9.5%.
At March 31, 2000, the Company had $415,575 of commercial paper outstanding
of which $165,575 was classified as short-term debt and $250,000 was
classified as long-term debt. The weighted average interest rate on the
Company's commercial paper was 6.0% and 4.9% at March 31, 2000 and April 2,
1999, respectively.
The Company's commercial paper is backed by two $250,000 committed credit
facilities which expire on August 18, 2000 and August 20, 2004. The
classification of the Company's outstanding commercial paper is determined by
the expiration dates of these credit facilities. The Company intends to renew
the short-term credit facility prior to expiration.
Long-term
March 31, April 2,
2000 1999
--------- --------
Commercial paper....................................... $250,000
6.80% term notes, due April 1999....................... $150,000
6.50% term notes, due November 2001.................... 150,000 150,000
6.25% term notes, due March 2009....................... 200,000 200,000
Capitalized lease liabilities, at varying interest
rates, payable in monthly installments through fiscal
2002.................................................. 6,062 11,425
Notes payable, at varying interest rates (from 3.5% to
11.0%) through fiscal 2005............................ 57,394 55,765
-------- --------
Total long-term debt................................... 663,456 567,190
Less current maturities................................ 11,089 167,518
-------- --------
$652,367 $399,672
======== ========
Capitalized lease liabilities shown above represent amounts due under leases
for the use of computers and related equipment. Included in property and
equipment are related assets of $13,531 (2000) and $20,030 (1999), less
accumulated amortization of $7,794 and $9,892, respectively.
Certain of the Company's borrowing arrangements contain covenants that
require the Company to maintain certain financial ratios and that limit the
amount of dividend payments. Under the most restrictive requirement,
approximately $1,942,000 of retained earnings was available for cash dividends
at March 31, 2000.
The carrying value of the Company's long-term debt is $663,456 and $567,190
at March 31, 2000 and April 2, 1999, respectively. The corresponding fair
value is approximately $646 million using the current interest rates available
to the Company for debt of the same remaining maturities.
Maturities of long-term debt by fiscal year are $11,089 (2001), $157,340
(2002), $2,386 (2003), $1,071 (2004), $250,528 (2005) and $241,042 thereafter.
32
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 6--Pension and Other Postretirement Benefit Plans
The Company and its subsidiaries have several pension and postretirement
healthcare and life insurance benefit plans, as described below.
A contributory, defined benefit pension plan is generally available to U.S.
employees. Certain non-U.S. employees are enrolled in defined benefit pension
plans in the country of domicile. In addition, the Company has a Supplemental
Executive Retirement Plan ("SERP"), which is a nonqualified, noncontributory
pension plan. The Company provides healthcare and life insurance retirement
benefits for certain U.S. employees, generally for those employed prior to
August 1992. Most non-U.S. employees are covered by government sponsored
programs at no direct cost to the Company other than related payroll taxes.
Net periodic cost for U.S. and non-U.S. pension and other benefit plans
included the following components:
Fiscal Year
-------------------------
2000 1999 1998
------- ------- -------
Pensions
Service cost.................................... $76,673 $68,199 $54,629
Interest cost................................... 71,117 63,050 50,469
Expected return on plan assets.................. (84,544) (71,438) (54,314)
Amortization of prior service costs............. 3,302 3,311 3,110
Amortization of unrecognized net loss........... 967 1,326 965
------- ------- -------
Net periodic pension cost....................... $67,515 $64,448 $54,859
======= ======= =======
Other Postretirement Benefits
Service cost.................................... $ 763 $ 819 $ 662
Interest cost................................... 3,033 3,384 3,044
Expected return on plan assets.................. (2,312) (1,698) (944)
Amortization of transition obligation........... 1,633 1,633 1,633
Amortization of prior service cost.............. 490 490 490
Recognized actuarial gain....................... (813) (292) (389)
------- ------- -------
Net provision for postretirement benefits....... $ 2,794 $ 4,336 $ 4,496
======= ======= =======
33
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 6--Pension and Other Postretirement Benefit Plans (continued)
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the fiscal years ended March
31, 2000 and April 2, 1999, and a statement of the funded status at March 31,
2000 and April 2, 1999:
Other
Postretirement
Pensions Benefits
---------------------- ------------------
Fiscal Year Fiscal Year
---------------------- ------------------
2000 1999 2000 1999
---------- ---------- -------- --------
Change in benefit obligation:
Benefit obligation at beginning of
year............................. $1,108,594 $ 912,984 $ 44,525 $ 47,826
Service cost...................... 76,673 68,199 763 819
Interest cost..................... 71,117 63,050 3,033 3,384
Plan participants' contributions.. 36,213 30,119 983 943
Amendments........................ 29,909 13,476
Actuarial (gain) loss............. (53,530) 65,012 (413) (5,815)
Benefits paid..................... (54,494) (36,212) (1,909) (2,632)
Foreign currency exchange rate
changes.......................... (6,593) (8,034)
---------- ---------- -------- --------
Benefit obligation at end of year. $1,207,889 $1,108,594 $ 46,982 $ 44,525
========== ========== ======== ========
Change in plan assets:
Fair value of plan assets at
beginning of year................ $1,098,444 $ 902,162 $ 27,729 $ 19,934
Actual return on plan assets...... 142,742 122,743 3,077 3,830
Employer contributions............ 70,294 65,539 6,458 5,654
Plan participants' contributions.. 36,213 30,119 983 943
Asset transfers................... 18,090 14,086
Benefits paid..................... (54,494) (36,212) (1,909) (2,632)
Foreign currency exchange rate
changes.......................... (4,379) 7
---------- ---------- -------- --------
Fair value of plan assets at end
of year.......................... $1,306,910 $1,098,444 $ 36,338 $ 27,729
========== ========== ======== ========
Reconciliation of funded status to
net amount recorded:
Funded status..................... $ 99,021 $ (10,150) $(10,644) $(16,796)
Unrecognized actuarial (gain)..... (162,689) (49,644) (16,037) (15,672)
Unrecognized transition
obligation....................... 4,229 5,314 20,460 22,093
Unrecognized prior service cost... 29,588 20,637 4,222 4,712
Contribution in fourth fiscal
quarter.......................... 215 2,500
---------- ---------- -------- --------
Net amount recorded............... $ (29,636) $ (31,343) $ (1,999) $ (5,663)
========== ========== ======== ========
Plan assets include equity and fixed income securities and short-term
investments. Pension plan assets also include real estate investments and
insurance contracts.
34
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 6--Pension and Other Postretirement Benefit Plans (continued)
The following table provides the amounts recorded in the Company's
consolidated balance sheets:
Other
Postretirement
Pensions Benefits
------------------ -----------------
March April 2, March 31, April
31, 2000 1999 2000 2, 1999
-------- -------- --------- -------
Prepaid benefit cost............... $ 20,718 $ 14,074
Accrued benefit liability.......... (57,230) (54,279) $(1,999) $(5,663)
Intangible asset................... 1,946 2,301
Accumulated other comprehensive
income............................ 4,930 6,561
-------- -------- ------- -------
Net amount recorded................ $(29,636) $(31,343) $(1,999) $(5,663)
======== ======== ======= =======
The following table lists selected information for the pension plans with
accumulated benefit obligations in excess of plan assets as of March 31, 2000
and April 2, 1999. The reported amounts below consist only of unfunded plans.
March 31, April
2000 2, 1999
--------- -------
Projected benefit obligation............................ $51,442 $39,139
Accumulated benefit obligation.......................... 45,158 35,054
Fair value of plan assets............................... 0 0
Weighted average assumptions used in the accounting for the Company's plans
were:
Fiscal Year
----------------
2000 1999 1998
---- ---- ----
Discount or settlement rates............................. 6.9% 6.7% 7.1%
Rates of increase in compensation levels................. 5.0 5.0 5.2
Expected long-term rates of return on assets............. 8.0 8.1 8.3
The assumed healthcare cost trend rate used in measuring the expected
benefit obligation was 7.5% for fiscal 2000, declining to 5.0% for 2005 and
subsequent years. A one-percentage point change in the assumed healthcare cost
trend rate would have the following effects:
One Percentage
Point
-----------------
Increase Decrease
-------- --------
Effect on accumulated postretirement benefit obligation
as of March 31, 2000................................... $5,016 $(4,195)
Effect on net periodic postretirement benefit cost for
fiscal 2000............................................ $ 580 $ (386)
The Company sponsors several defined contribution plans for substantially
all U.S. employees and certain foreign employees. The plans allow employees to
contribute a portion of their earnings in accordance with specified
guidelines. At March 31, 2000, plan assets included 6,040,431 shares of the
Company's common stock. During fiscal 2000, 1999 and 1998, the Company
contributed $49,164, $48,351 and $43,328, respectively.
35
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 7--Commitments and Contingencies
Commitments
The Company has operating leases for the use of certain property and
equipment. Substantially all operating leases are noncancelable or cancelable
only by the payment of penalties. All lease payments are based on the lapse of
time but include, in some cases, payments for insurance, maintenance and
property taxes. There are no purchase options on operating leases at favorable
terms, but most leases have one or more renewal options. Certain leases on
real estate property are subject to annual escalations for increases in
utilities and property taxes. Lease rental expense amounted to $191,511
(2000), $192,094 (1999) and $171,315 (1998).
Minimum fixed rentals required for the next five years and thereafter under
operating leases in effect at March 31, 2000 are as follows:
Fiscal Year Real Estate Equipment
----------- ----------- ---------
2001................................................. $112,463 $ 47,096
2002................................................. 95,623 30,513
2003................................................. 77,256 19,598
2004................................................. 58,538 10,304
2005................................................. 40,894 5,859
Thereafter........................................... 85,840 5,723
-------- --------
$470,614 $119,093
======== ========
DST Systems, Inc., a shareholder of the Company, provides data processing
and consulting services and licenses certain software products to the Company.
During the three fiscal years ended March 31, 2000, the Company incurred
aggregate expenses of $28,618, $27,065 and $27,271, respectively, related
thereto, which are included in costs of services.
Contingencies
The primary financial instruments which potentially subject the Company to
concentrations of credit risk are accounts receivable. The Company's customer
base includes Fortune 500 companies, the U.S. Federal government and other
significant, well-known companies operating in North America, Europe and the
Pacific Rim. Credit risk with respect to accounts receivable is minimized
because of the nature and diversification of the Company's customer base.
Furthermore, the Company continuously reviews its accounts receivables and
records provisions for doubtful accounts as needed.
The Company is currently party to a number of disputes which involve or may
involve litigation. It is the opinion of Company management that ultimate
liability, if any, with respect to these disputes will not be material to the
Company's consolidated financial statements.
Note 8--Stock Incentive Plans
Stock Options. The Company has seven stock incentive plans which authorize
the issuance of stock options, restricted stock and other stock-based
incentives to employees upon terms approved by the Compensation Committee. In
addition, on November 16, 1999, in connection with the acquisition of Nichols,
the Company assumed outstanding employee options to purchase an aggregate of
1,432,842 shares of Nichols common stock at an average exercise price of
$19.98 per share (which is equivalent to 606,170 shares of CSC common stock at
an average exercise price of $47.24 per share).
36
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 8--Stock Incentive Plans (continued)
At March 31, 2000, 8,039,754 shares of CSC common stock were available for
the grant to employees of future stock options, restricted stock or other
stock-based incentives.
Information concerning stock options granted under stock incentive plans is
as follows:
Fiscal Year
--------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ---------- --------
Outstanding, beginning
of year................ 11,403,487 $32.03 12,441,657 $26.05 13,760,265 $20.62
Granted................. 2,853,062 60.06 2,389,331 53.76 3,447,299 36.31
Exercised............... (2,435,399) 23.14 (2,280,512) 21.60 (3,973,324) 15.53
Canceled................ (1,123,180) 44.75 (1,146,989) 33.27 (792,583) 29.05
---------- ---------- ----------
Outstanding, end of
year................... 10,697,970 40.19 11,403,487 32.03 12,441,657 26.05
========== ========== ==========
Exercisable, end of
year................... 4,120,304 $25.59 4,532,483 $19.82 4,394,946 $16.36
========== ========== ==========
March 31, 2000
-----------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------- --------------------------
Weighted
Average
Weighted Remaining Weighted
Range of Option Exercise Number Average Contractual Number Average
Price Outstanding Exercise Price Life Exercisable Exercise Price
- ------------------------ ----------- -------------- ----------- ----------- --------------
$ .17-$25.94......... 2,688,621 $15.85 3.6 2,343,493 $14.89
26.45-35.69.......... 2,682,727 34.23 6.6 1,084,844 34.31
35.75-58.06.......... 4,344,314 52.99 8.0 638,472 46.83
58.88-93.25.......... 982,308 66.44 8.8 53,495 64.28
The Company uses the intrinsic value based method of accounting for stock
options, under which compensation cost is equal to the excess, if any, of the
quoted market price of the stock at the option grant date over the exercise
price, and is amortized over the vesting period. Compensation cost recognized
with respect to stock options was $525, $300 and $377 for fiscal 2000, 1999
and 1998, respectively.
Restricted Stock. Restricted stock awards consist of shares of common stock
of the Company sold at par value ($1 per share). Upon sale to an employee,
shares of restricted stock become outstanding, receive dividends and have
voting rights. The shares are subject to forfeiture and to restrictions which
limit the sale or transfer during the restriction period.
The restrictions on shares of the Continuum Company, Inc. ("Continuum")
restricted stock lapse ratably on the first five anniversaries of the date of
sale. The restrictions on shares of CSC restricted stock (other than Continuum
restricted stock) generally lapse on the fifth, sixth and seventh
anniversaries of the date of sale.
At March 31, 2000, April 2, 1999 and April 3, 1998, 7,651, 66,304 and
165,302 shares, respectively, of CSC restricted stock were outstanding, net of
shares forfeited by or repurchased from terminated employees, and shares for
which the restrictions have lapsed.
37
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 8--Stock Incentive Plans (continued)
The Company uses the intrinsic value based method of accounting for
restricted stock, under which compensation cost is equal to the excess, if
any, of the quoted market price of the stock at the date of sale to the
employee over the sales price, and is amortized over the restriction period.
Compensation cost recognized with respect to restricted stock was $203, $411
and $645 during fiscal 2000, 1999 and 1998, respectively.
Restricted Stock Units. During fiscal 1998, the Company adopted a stock
incentive plan which authorizes the issuance of stock options, restricted
stock and other stock-based incentives to nonemployee directors upon terms
approved by the Company's Board of Directors. As of March 31, 2000, April 2,
1999 and April 3, 1998, 25,777, 22,488 and 22,488 restricted stock units
("RSUs"), respectively, had been awarded to nonemployee directors under this
plan and were outstanding on that date.
When a holder of RSUs ceases to be a director of the Company, the RSUs are
automatically redeemed for shares of CSC common stock and dividend equivalents
with respect to such shares. At the holder's election, which must be made
within 30 days after the date of the award, the RSUs may be redeemed (i) as an
entirety, upon the day the holder ceases to be a director, or (ii) in
substantially equal amounts upon the first five, ten or fifteen anniversaries
of such day.
There are two types of RSUs: (i) those awarded in lieu of vested retirement
benefits under other plans ("Accrued Benefit RSUs"); and (ii) those awarded as
a form of future retirement benefits ("Future Benefit RSUs"). When a holder of
Accrued Benefit RSUs ceases to be a director of the Company, the number of
shares of CSC common stock to be delivered by the Company upon redemption of
the RSUs is equal to the number of such RSUs awarded. When a holder of Future
Benefit RSUs ceases to be a director, the number of shares to be delivered
upon redemption is equal to 20% or 33 1/3% of the number of such RSUs awarded,
multiplied by the number of full years (but not in excess of 5 or 3,
respectively) that the holder served as a director after the date of award.
At March 31, 2000, April 2, 1999 and April 3, 1998, 8,778 Accrued Benefit
RSUs and 16,999, 13,710 and 13,710 Future Benefit RSUs, respectively, were
outstanding, and at March 31, 2000, 74,223 shares of CSC common stock remained
available for the grant to nonemployee directors of future RSUs or other
stock-based incentives.
The Company uses the intrinsic value based method of accounting for RSUs,
under which compensation cost is equal to 100% of the total number of the RSUs
awarded, multiplied by the quoted market price of the stock at the date of
award, and is amortized, in the case of Future Benefit RSUs, over the vesting
period. Compensation cost recognized with respect to RSUs was $150 for fiscal
2000.
Pro Forma Information. In accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," the following pro forma net income and earnings per
share information is presented as if the Company accounted for stock-based
compensation awarded under the stock incentive plans using the fair value
based method. Under the fair value method, the estimated fair value of stock
incentive awards is charged against income on a straight-line basis over the
vesting period.
Fiscal Year
-----------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- -------- -------- -------- -------- --------
Net income............... $402,872 $381,355 $355,502 $337,590 $274,567 $258,912
Basic earnings per share. 2.42 2.29 2.17 2.06 1.71 1.61
Diluted earnings per
share................... 2.37 2.25 2.12 2.01 1.67 1.57
38
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 8--Stock Incentive Plans (continued)
The weighted average fair values of stock awards granted during fiscal 2000,
1999 and 1998 were $23.59, $19.68 and $12.84, respectively. The fair value of
each stock award was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
grants in fiscal 2000, 1999 and 1998, respectively: risk-free interest rates
of 5.69%, 5.48% and 6.43%; expected volatility of 36%, 32% and 28%; and
expected lives of 6.08, 5.96 and 6.06 years.
Note 9--Stockholder Purchase Rights Plan
On December 21, 1988, the Company adopted a stockholder rights plan pursuant
to which it issued one right for each outstanding share of its common stock.
On February 27, 1998, the Company's Board of Directors redeemed these rights
for one sixth of one cent per right. The redemption price was paid on April
13, 1998, to the holders of record of rights as of the close of business on
March 30, 1998.
On February 18, 1998, the Company adopted a new stockholder rights plan
pursuant to which it issued one right for each outstanding share of its common
stock. These rights, which are attached to and trade only together with the
common stock, are not currently exercisable. On the tenth business day after
any person or entity becomes the beneficial owner of 10% or more of CSC's
common stock, each right (other than rights held by the 10% stockholder, which
will become void) will become exercisable to purchase, for $250, CSC common
stock having a market value of $500. The rights expire February 18, 2008, and
may be redeemed by the Board of Directors at $.0005 per right at any time
before they become exercisable.
39
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 10--Segment and Geographic Information
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," during fiscal 1999. SFAS No. 131
establishes standards for reporting information about operating segments and
related disclosures about products and services, geographic areas and major
customers.
All of the Company's business involves operations which provide management
and information technology consulting, systems integration and outsourcing.
Although the Company presents estimates of revenue by business service and
geography, the Company's expenses and assets are not identified or accumulated
in this manner due to, among other reasons, cross-utilization of personnel and
assets across the Company. Based on SFAS No. 131 criteria, the Company's
reportable operating segments consist of the U.S. Federal Sector and the
Global Commercial Sector. The U.S. Federal Sector operates principally within
a regulatory environment subject to governmental contracting and accounting
requirements, including Federal Acquisition Regulations, Cost Accounting
Standards and audits by various U.S. federal agencies. The U.S. Federal Sector
revenue reported below will not agree to U.S. Federal government revenue
presented elsewhere in the Annual Report due to overlapping activities between
segments. The Company utilizes uniform accounting policies across all of its
operating units (see Note 1). The table below presents financial information
for the three fiscal years ended March 31, 2000, for the two reportable
segments, and for financial items that cannot be allocated to either operating
segment:
Global U.S.
Commercial Federal
Sector Sector Corporate Total
---------- ---------- --------- ----------
2000
Revenues.......................... $6,989,391 $2,378,113 $ 3,190 $9,370,694
Earnings (loss) before interest
and taxes........................ 548,279 150,540 (5,759) 693,060
Depreciation and amortization..... 511,601 27,319 6,803 545,723
Assets............................ 4,766,963 735,139 372,022 5,874,124
Capital expenditures for long-
lived assets..................... 852,613 30,924 47,874 931,411
1999
Revenues.......................... $5,930,681 $2,180,203 $ 521 $8,111,405
Earnings (loss) before interest
and taxes........................ 455,060 130,864 (16,643) 569,281
Depreciation and amortization..... 418,048 30,642 8,207 456,897
Assets............................ 3,980,689 815,681 463,983 5,260,353
Capital expenditures for long-
lived assets..................... 565,788 24,608 21,414 611,810
1998
Revenues.......................... $5,021,212 $2,006,548 $ 121 $7,027,881
Earnings (loss) before interest
and taxes........................ 399,154 113,616 (23,796) 488,974
Depreciation and amortization..... 361,012 31,207 5,586 397,805
Assets............................ 3,274,562 745,884 253,685 4,274,131
Capital expenditures for long-
lived assets..................... 493,216 24,867 51,254 569,337
40
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 10--Segment and Geographic Information (continued)
A reconciliation of earnings before interest and taxes to income before
taxes is as follows:
Fiscal Year
----------------------------
2000 1999 1998
-------- -------- --------
Earnings before interest and taxes............. $693,060 $569,281 $488,974
Interest expense............................... (58,135) (49,358) (51,418)
Interest income................................ 17,612 14,950 10,031
Special charges................................ (41,065) (233,219)
-------- -------- --------
Income before taxes.......................... 611,472 $534,873 $214,368
======== ======== ========
Enterprise-wide information is provided in accordance with SFAS No. 131.
Revenue by country is based on the location of the selling business unit.
Property and equipment information is based on the physical location of the
asset. Geographic revenue and property and equipment, net for the three years
ended March 31, 2000 is as follows:
Fiscal Year
-----------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- ---------------------
Property Property Property
and and and
Equipment, Equipment, Equipment,
Revenues Net Revenues Net Revenues Net
---------- ---------- ---------- ---------- ---------- ----------
United States........... $5,914,716 $ 851,473 $5,345,170 $ 748,191 $4,833,279 $713,907
Europe:
United Kingdom........ 1,215,030 158,367 1,134,923 130,577 929,717 136,062
Other Europe.......... 1,311,000 107,086 1,115,174 110,139 841,238 87,046
Other International..... 929,948 157,993 516,138 123,300 423,647 42,613
---------- ---------- ---------- ---------- ---------- --------
Total................. $9,370,694 $1,274,919 $8,111,405 $1,112,207 $7,027,881 $979,628
========== ========== ========== ========== ========== ========
The Company derives a significant portion of its revenues from departments
and agencies of the United States government. U.S. Federal government revenue
accounted for 24%, 26% and 28% of the Company's revenues for fiscal 2000, 1999
and 1998, respectively. At March 31, 2000, approximately 32% of the Company's
accounts receivable were due from the federal government. No single commercial
customer exceeded 10% of the Company's revenues during fiscal 2000, 1999 and
1998, respectively.
Note 11--Agreements with Equifax
During fiscal 1989, the Company entered into an agreement (the "Operating
Agreement") with Equifax Inc. and its subsidiary, Equifax Credit Information
Services, Inc. ("ECIS"), pursuant to which certain of the Company's
subsidiaries (collectively, the "Bureaus") became affiliated credit bureaus of
ECIS and purchased credit reporting services from the ECIS system for resale
to their customers. The Bureaus retain ownership of their credit files stored
in the ECIS system and receive revenues generated from the sale of the credit
information they contain. The Bureaus pay ECIS a fee for storing and
maintaining the files and for each report supplied by the ECIS system.
Pursuant to the Operating Agreement, the Company acquired an option to
require ECIS to purchase the collections business (the "Collections Put
Option"), and a separate option to require ECIS to purchase the credit
41
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per-share amounts)
Note 11--Agreements with Equifax (continued)
reporting business and, if not previously sold, the collections business (the
"Credit Reporting Put Option"). Both options require six months' advance
notice and expire on August 1, 2013.
On November 25, 1997, the Collections Put Option was exercised and the
collections business was sold for approximately $38,000. The transaction was
completed during May 1998.
Since July 31, 1998, the exercise price of the Credit Reporting Put Option
has been equal to the appraised value of the credit reporting business.
The Operating Agreement has a 10-year term, which will automatically be
renewed indefinitely for successive 10-year periods unless the Company gives
notice of termination at least six months prior to the expiration of any such
term. In the event that on or prior to August 1, 2013 (i) the Company gives
such notice of termination and does not exercise the Credit Reporting Put
Option prior to the termination of the then-current term or (ii) there is a
change in control of the Company, then ECIS has an option for 60 days
thereafter to require the Company to sell to it the credit reporting business
at the Credit Reporting Put Option exercise price.
The Company's rights under the Operating Agreement, including its right to
exercise the Credit Reporting Put Option, remain exercisable by the Company
through its affiliates.
42
COMPUTER SCIENCES CORPORATION
Quarterly Financial Information (Unaudited)
Fiscal 2000
-------------------------------------------
lst 2nd 3rd 4th
In thousands except per-share Quarter Quarter Quarter Quarter
amounts ---------- ---------- ---------- ----------
Revenues.......................... $2,203,373 $2,232,025 $2,360,071 $2,575,225
Income before taxes............... 127,790 140,499 127,851 215,332
Net income........................ 84,564 93,147 82,329 142,832
Net earnings per share:
Basic........................... 0.51 0.56 0.49 0.85
Diluted......................... 0.50 0.55 0.48 0.84
Fiscal 1999
-------------------------------------------
lst 2nd 3rd 4th
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
Revenues.......................... $1,855,277 $1,946,387 $2,054,691 $2,255,050
Income before taxes............... 102,190 111,150 138,286 183,247
Net income........................ 67,824 74,168 91,696 121,814
Net earnings per share:
Basic........................... 0.42 0.45 0.56 0.74
Diluted......................... 0.41 0.44 0.55 0.72
A discussion of "special items" for fiscal 2000 is included in Note 2 to the
consolidated financial statements.
43
PART II--(Continued)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Information regarding executive officers of the Company is included in Part
I. For the other information called for by Items 10, 11, 12 and 13, reference
is made to the sections entitled "Voting Securities and Principal Holders
Thereof," "Item 1--Election of Directors" and "Executive Compensation" in the
Registrant's definitive Proxy Statement for its 2000 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after March 31, 2000. Such sections are incorporated herein by
reference in their entirety, except for the material included in the
"Executive Compensation" section under the captions "Report of Compensation
Committee on Annual Compensation of Executive Officers" and "Comparison of
Cumulative Total Return."
44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) Financial Statements and Financial Statement Schedules
These documents are included in the response to Item 8 of this report. See
the index on page 51.
(3) Exhibits
The following exhibits are filed with this report:
Exhibit
Number Description of Exhibit
------- ----------------------
3.1 Restated Articles of Incorporation, effective October 31, 1988 (c)
3.2 Amendment to Restated Articles of Incorporation, effective
August 10, 1992 (i)
3.3 Amendment to Restated Articles of Incorporation, effective July
31, 1996 (k)
3.4 Certificate of Amendment of Certificate of Designations of
Series A Junior Participating Preferred Stock, effective August
1, 1996 (m)
3.5 Bylaws, amended and restated effective December 6, 1999
10.1 1978 Stock Option Plan, amended and restated effective March 31,
1988* (l)
10.2 1980 Stock Option Plan, amended and restated effective March 31,
1988* (l)
10.3 1984 Stock Option Plan, amended and restated effective March 31,
1988* (l)
10.4 1987 Stock Incentive Plan* (b)
10.5 Schedule to the 1987 Stock Incentive Plan for United Kingdom
personnel* (b)
10.6 1990 Stock Incentive Plan* (h)
10.7 1992 Stock Incentive Plan, amended and restated effective August
9, 1993* (o)
10.8 Schedule to the 1992 Stock Incentive Plan for United Kingdom
personnel* (n)
10.9 1995 Stock Incentive Plan* (j)
10.10 1998 Stock Incentive Plan* (s)
10.11 Form of Stock Option Agreement* (r)
10.12 Form of Restricted Stock Agreement* (r)
10.13 Annual Management Incentive Plan, effective April 2, 1983* (a)
10.14 Supplemental Executive Retirement Plan, amended and restated
effective February 27, 1998* (r)
10.15 Deferred Compensation Plan, amended and restated effective
February 2, 1998* (p)
10.16 Severance Plan for Senior Management and Key Employees, amended
and restated effective February 18, 1998. (q)
10.17 Severance Agreement with Van B. Honeycutt, effective February 2,
1998* (p)
10.18 Employment Agreement with Van B. Honeycutt, effective May 1,
1999* (g)
10.19 Form of Indemnification Agreement for Officers (e)
10.20 Form of Indemnification Agreement for Directors (d)
10.21 1997 Nonemployee Director Stock Incentive Plan (o)
10.22 Form of Restricted Stock Unit Agreement (f)
10.23 1990 Nonemployee Director Retirement Plan, amended and restated
effective February 2, 1998 (p)
10.24 Rights Agreement dated February 18, 1998 (q)
10.25 $250 million Credit Agreement (Long Term Facility) dated as of
August 20, 1999 (t)
10.26 $250 million Credit Agreement (Short Term Facility) dated as of
August 20, 1999 (t)
10.27 First Amendment to $350 million Credit Agreement dated September
23, 1996 (p)
21 Significant Active Subsidiaries and Affiliates of the Registrant
23 Independent Auditors' Consent
27 Financial Data Schedule
99.1 Annual Report on Form 11-K for the Matched Asset Plan of the
Registrant for the fiscal year ended December 31, 1999 (to be
filed by amendment)
99.2 Annual Report on Form 11-K for the Hourly Savings Plan of CSC
Outsourcing, Inc. for the fiscal year ended December 31, 1999
(to be filed by amendment)
99.3 Annual Report on Form 11-K for the CUTW Hourly Savings Plan of
CSC Outsourcing, Inc. for the fiscal year ended December 31,
1999 (to be filed by amendment)
45
Notes to Exhibit Index:
*Management contract or compensatory plan or agreement
(a)-(g) These exhibits are incorporated herein by reference to the Company's
Annual Report on Form 10-K for the fiscal years ended on the
respective dates indicated below:
(a) March 30, 1984 (e) March 31, 1995
(b) April 1, 1988 (f) April 3, 1998
(c) March 31, 1989 (g) April 2, 1999
(d) April 3, 1992
(h) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 filed on August 15, 1990.
(i) Incorporated herein by reference to the Registrant's Proxy Statement
for its August 10, 1992 Annual Meeting of Stockholders.
(j) Incorporated herein by reference to the Registrant's Quarterly Report
on Form 10-Q filed on November 13, 1995.
(k) Incorporated herein by reference to the Registrant's Proxy Statement
for its July 31, 1996 Annual Meeting of Stockholders.
(l) Incorporated herein by reference to the Registrant's Quarterly Report
on Form 10-Q filed on August 12, 1996.
(m) Incorporated herein by reference to the Registrant's Current Report of
Form 8-K dated August 1, 1996.
(n) Incorporated herein by reference to the Registrant's Quarterly Report
on Form 10-Q filed on February 10, 1997.
(o) Incorporated herein by reference to the Registrant's Proxy Statement
for its August 11, 1997 Annual Meeting of Stockholders.
(p) Incorporated herein by reference to the Registrant's Quarterly Report
on Form 10-Q filed on February 9, 1998.
(q) Incorporated herein by reference to the Registrant's Registration
Statement on Form 8-A filed on February 25, 1998.
(r) Incorporated herein by reference to Amendment No. 2 to the
Registrant's Solicitation/Recommendation Statement on Schedule 14D-9
filed on March 2, 1998.
(s) Incorporated herein by reference to the Registrant's Quarterly Report
on Form 10-Q filed on August 14, 1998.
(t) Incorporated herein by reference to the Registrant's Quarterly Report
on Form 10-Q filed on November 15, 1999.
(b) Reports on Form 8-K
There were two reports on Form 8-K filed during the fourth quarter of fiscal
2000, all of which related to the Registrant's acquisition of Nichols Research
Corporation ("Nichols") on November 16, 1999 in a transaction accounted for as
a pooling of interests. On March 31, 1999, the Registrant filed a Current
Report on Form 8-K
46
in which it released restated revenues of the Registrant by market sector,
including Nichols on a pooling of interests basis, for the fiscal year ended
April 2, 1999 and each of the quarters in such fiscal year, and for the first
three quarters of the fiscal year ending March 31, 2000. On February 9, 2000,
the Registrant filed a Current Report on Form 8-K in which it released
preliminary, restated unaudited consolidated condensed statements of income of
the Registrant, including Nichols on a pooling of interests basis, for the
fiscal year ended April 2, 1999 and each of the quarters in such fiscal year,
and for the first three quarters of the fiscal year ending March 31, 2000.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Computer Sciences Corporation
Dated: June 14, 2000 /s/ Van B. Honeycutt
By: ___________________________
Van B. Honeycutt,
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Van B. Honeycutt Chairman, President and June 14, 2000
____________________________________ Chief Executive Officer
Van B. Honeycutt (Principal Executive
Officer)
/s/ Leon J. Level Vice President, Chief June 14, 2000
____________________________________ Financial Officer and
Leon J. Level Director (Principal
Financial Officer)
/s/ Bryan Brady Vice President and June 14, 2000
____________________________________ Controller (Principal
Bryan Brady Accounting Officer)
/s/ Irving W. Bailey, II Director June 14, 2000
____________________________________
Irving W. Bailey, II
/s/ Stephen L. Baum Director June 14, 2000
____________________________________
Stephen L. Baum
/s/ William R. Hoover Director June 14, 2000
____________________________________
William R. Hoover
/s/ Thomas A. McDonnell Director June 14, 2000
____________________________________
Thomas A. McDonnell
48
Signature Title Date
--------- ----- ----
/s/ F. Warren McFarlan Director June 14, 2000
____________________________________
F. Warren McFarlan
/s/ James R. Mellor Director June 14, 2000
____________________________________
James R. Mellor
/s/ William P. Rutledge Director June 14, 2000
____________________________________
William P. Rutledge
49
COMPUTER SCIENCES CORPORATION AND SUBSIDIARIES
SCHEDULE VIII, Valuation and Qualifying Accounts
Three Years Ended March 31, 2000
Additions
-------------------------
Balance, Charged to cost Balance,
beginning of period and expenses Other (1) Deductions end of period
In thousands ------------------- --------------- --------- ---------- -------------
Year ended March 31,
2000
Allowance for doubtful
receivables............ $81,549 $ 6,070 $(1,703) $12,935 $72,981
Year ended April 2, 1999
Allowance for doubtful
receivables............ 75,907 9,226 4,032 7,616 81,549
Year ended April 3, 1998
Allowance for doubtful
receivables............ 52,688 31,828 4,077 12,686 75,907
- --------
(1) Includes balances from acquisitions, changes in balances due to foreign
currency exchange rates and recovery of prior-year charges.
50