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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): OCTOBER 31, 1996
COMPUTER SCIENCES CORPORATION
(Exact name of Registrant as specified in its charter)
NEVADA 1-4850 95-2043126
(State or Other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification
Incorporation) No.)
2100 EAST GRAND AVENUE
EL SEGUNDO, CALIFORNIA
(Address of Principal Executive 90245
Offices) (Zip Code)
Registrant's telephone number, including area code: (310) 615-0311
NOT APPLICABLE
(Former Name or Former Address, if Changed Since Last Report)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ITEM 5. OTHER EVENTS.
On August 1, 1996, the Registrant acquired The Continuum Company, Inc.
("Continuum") in a transaction accounted for as a pooling of interests. The
Registrant hereby restates the following previously reported financial
statements and information with respect to periods ended prior to the
acquisition in order to include Continuum, on this basis:
(a) the consolidated financial statements and financial statement schedule
included in Part II, Item 8 of the Registrant's Annual Report on Form
10-K for the fiscal year ended March 29, 1996 (the "Form 10-K");
(b) the five-year selected financial data included in Part II, Item 6 of the
Form 10-K;
(c) the quarterly financial information included in Part II, Item 8 of the
Form 10-K; and
(d) the consolidated financial statements included in Part I, Item 1 and the
Exhibits included in Part II, Item 6 of the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 28, 1996.
2
(A) FINANCIAL STATEMENTS AND SCHEDULE FOR THE FISCAL YEAR ENDED MARCH 29, 1996
COMPUTER SCIENCES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS
PAGE
-----
Independent Auditors' Reports.............................................................................. 4
Consolidated Statements of Income for the fiscal years ended March 29, 1996, March 31, 1995 and April 1,
1994..................................................................................................... 7
Consolidated Balance Sheets as of March 29, 1996 and March 31, 1995........................................ 8
Consolidated Statements of Cash Flows for the fiscal years ended March 29, 1996, March 31, 1995 and April
1, 1994.................................................................................................. 10
Consolidated Statements of Stockholders' Equity for the fiscal years ended March 29, 1996, March 31, 1995
and April 1, 1994........................................................................................ 11
Notes to Consolidated Financial Statements................................................................. 12
SCHEDULE
Schedule VIII--Valuation and Qualifying Accounts........................................................... 30
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.
3
INDEPENDENT AUDITORS' REPORT ON THE FINANCIAL STATEMENTS,
ADDITIONAL NOTE AND FINANCIAL STATEMENT SCHEDULE
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 29, 1996 and
March 31, 1995, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three years in the period
ended March 29, 1996. Our audits also included the financial statement schedule
listed in the Index at Item 5(a). 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. These consolidated financial
statements and financial statement schedule give retroactive effect to the
merger of Computer Sciences Corporation and The Continuum Company, Inc. on
August 1, 1996, which has been accounted for as a pooling of interests as
described in Note 1 to the consolidated financial statements. We did not audit
the financial statements of The Continuum Company, Inc. as of March 31, 1996 and
1995 and for each of the three years in the period ended March 31, 1996. Such
statements reflect aggregate total assets constituting 12% and 11% for 1996 and
1995 respectively, and aggregate total revenues constituting 11%, 11% and 11% in
1996, 1995 and 1994 respectively, of the related consolidated totals. Those
statements were audited by other auditors, whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for The
Continuum Company, Inc. is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
such consolidated financial statements present fairly, in all material respects,
the financial position of Computer Sciences Corporation and Subsidiaries as of
March 29, 1996 and March 31, 1995, and the results of their operations and their
cash flows for each of the three years in the period ended March 29, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
based on our audits and the report of the other auditors, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in fiscal
1994 the Company changed its method of accounting for income taxes and for
postretirement benefits other than pensions to conform with pronouncements of
the Financial Accounting Standards Board.
DELOITTE & TOUCHE LLP
Los Angeles, California
May 24, 1996, except for the business combination described
in Note 1, as to which the date is October 28, 1996.
4
REPORT OF INDEPENDENT AUDITORS
STOCKHOLDERS AND BOARD OF DIRECTORS
The Continuum Company, Inc.
We have audited the consolidated balance sheets of The Continuum Company,
Inc. as of March 31, 1996 and 1995 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended March 31, 1996 (not presented separately herein). The
consolidated financial statements give retroactive effect to the acquisition of
Hogan Systems, Inc. in March 1996, which has been accounted for using the
pooling of interests method as described in the notes to the consolidated
financial statements. These financial statements are the responsibility of the
management of The Continuum Company, Inc. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
1995 and 1994 financial statements of Hogan Systems, Inc., which statements
reflect total assets constituting 33% as of March 31, 1995 and net income
constituting approximately 19% and 27% for the years ended March 31, 1995 and
1994, respectively, of the related consolidated financial statement totals.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to data included for Hogan
Systems, Inc. for 1995 and 1994, is based solely on the report of other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits, and for 1995 and 1994 the report of
other auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Continuum Company, Inc. at March 31, 1996 and 1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1996, after giving effect to the merger of Hogan Systems,
Inc., as described in the notes to the consolidated financial statements, in
conformity with generally accepted accounting principles.
As described in Note 2 to the consolidated financial statements, during the
year ended March 31, 1994, The Continuum Company, Inc. changed its method of
accounting for income taxes.
ERNST & YOUNG LLP
Austin, Texas
May 1, 1996
5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Hogan Systems, Inc.
In our opinion, the consolidated balance sheet and the related consolidated
statements of income, of cash flows and of changes in shareholders' equity as of
and for each of the two years in the period ended March 31, 1995 (not presented
separately herein) present fairly, in all material respects, the financial
position, results of operations and cash flows of Hogan Systems, Inc. and its
subsidiaries (Hogan) as of and for each of the two years in the period ended
March 31, 1995, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of Hogan's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Hogan for
any period subsequent to March 31, 1995.
PRICE WATERHOUSE LLP
Dallas, Texas
April 21, 1995
6
COMPUTER SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR ENDED
----------------------------------------
MARCH 29, MARCH 31, APRIL 1,
IN THOUSANDS EXCEPT PER-SHARE AMOUNTS 1996 1995 1994
- ------------------------------------------------------------------------ ------------ ------------ ------------
Revenues................................................................ $ 4,740,760 $ 3,788,026 $ 2,896,390
------------ ------------ ------------
Costs of services....................................................... 3,692,267 2,961,955 2,268,655
Selling, general and administrative..................................... 471,309 383,973 294,641
Depreciation and amortization........................................... 272,058 190,240 146,602
Interest expense........................................................ 37,925 31,419 21,055
Interest income......................................................... (5,782) (4,115) (8,076)
Restructuring and other costs (note 2).................................. 50,053 3,740 32,629
Charge for purchased research and development (note 1).................. 26,000 15,963
------------ ------------ ------------
Total costs and expenses................................................ 4,543,830 3,567,212 2,771,469
------------ ------------ ------------
Income before taxes..................................................... 196,930 220,814 124,921
Taxes on income (note 3)................................................ 87,499 77,577 57,499
------------ ------------ ------------
Income before cumulative effect of accounting change.................... 109,431 143,237 67,422
Cumulative effect of accounting change for income taxes
(note 1).............................................................. 4,900
------------ ------------ ------------
Net income.............................................................. $ 109,431 $ 143,237 $ 72,322
------------ ------------ ------------
------------ ------------ ------------
Earnings per common share before cumulative effect of accounting
change................................................................ $ 1.43 $ 1.99 $ .99
Cumulative effect of accounting change for income taxes................. .07
------------ ------------ ------------
Earnings per common share (note 1)...................................... $ 1.43 $ 1.99 $ 1.06
------------ ------------ ------------
------------ ------------ ------------
(See notes to consolidated financial statements)
7
COMPUTER SCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 29, MARCH 31,
IN THOUSANDS 1996 1995
- -------------------------------------------------------------------------------------- ------------ ------------
Current assets:
Cash and cash equivalents (note 1).................................................. $ 113,873 $ 207,599
Receivables, net of allowance for doubtful accounts of $45,425 (1996) and $32,254
(1995) (note 4)................................................................... 1,106,857 943,602
Prepaid expenses and other current assets........................................... 134,033 119,893
------------ ------------
Total current assets.............................................................. 1,354,763 1,271,094
------------ ------------
Investments and other assets (note 1):
Purchased and internally developed software, net of accumulated amortization of
$123,310 (1996) and $88,083 (1995)................................................ 97,011 91,800
Excess of cost of businesses acquired over related net assets, net of accumulated
amortization of $62,748 (1996) and $45,610 (1995)................................. 457,912 447,069
Other assets........................................................................ 345,878 257,157
------------ ------------
Total investments and other assets................................................ 900,801 796,026
------------ ------------
Property and equipment--at cost (notes 1 and 5):
Land, buildings and leasehold improvements.......................................... 201,494 182,187
Computers and related equipment..................................................... 939,298 717,277
Furniture and other equipment....................................................... 108,937 95,056
------------ ------------
1,249,729 994,520
Less accumulated depreciation and amortization...................................... 569,670 430,249
------------ ------------
Property and equipment, net....................................................... 680,059 564,271
------------ ------------
$ 2,935,623 $ 2,631,391
------------ ------------
------------ ------------
(See notes to consolidated financial statements)
8
COMPUTER SCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 29, MARCH 31,
IN THOUSANDS EXCEPT SHARES 1996 1995
- -------------------------------------------------------------------------------------- ------------ ------------
Current liabilities:
Short-term debt and current maturities of long-term debt (note 5)................... $ 78,339 $ 140,170
Accounts payable.................................................................... 186,460 206,481
Accrued payroll and related costs (note 6).......................................... 222,620 176,142
Other accrued expenses.............................................................. 262,961 206,944
Deferred revenue.................................................................... 111,075 97,961
Federal, state and foreign income taxes (note 3).................................... 67,677 58,237
------------ ------------
Total current liabilities......................................................... 929,132 885,935
------------ ------------
Long-term debt, net of current maturities (note 5).................................... 426,634 335,696
------------ ------------
Deferred income taxes (note 3)........................................................ 84,977 66,774
------------ ------------
Other long-term liabilities........................................................... 79,620 57,784
------------ ------------
Commitments and contingencies (note 7)
Stockholders' equity (notes 1 and 8)
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
75,428,622 (1996) and 74,248,357 shares (1995).................................... 75,429 74,248
Additional paid-in capital.......................................................... 502,112 460,364
Earnings retained for use in business............................................... 862,770 753,339
Foreign currency translation and unfunded pension adjustments....................... (7,214) 6,652
------------ ------------
1,433,097 1,294,603
Less common stock in treasury, at cost, 311,928 shares (1996) and 215,047 shares
(1995)............................................................................ (10,488) (5,179)
Unearned restricted stock (note 8).................................................. (2,484) (3,170)
Notes receivable for shares sold (note 8)........................................... (4,865) (1,052)
------------ ------------
Stockholders' equity, net......................................................... 1,415,260 1,285,202
------------ ------------
$ 2,935,623 $ 2,631,391
------------ ------------
------------ ------------
(See notes to consolidated financial statements)
9
COMPUTER SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
----------------------------------------
MARCH 29, MARCH 31, APRIL 1,
IN THOUSANDS, INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1996 1995 1994
- ------------------------------------------------------------------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income............................................................ $ 109,431 $ 143,237 $ 72,322
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization....................................... 272,057 190,240 146,602
Restructuring and other costs....................................... 47,186 8,600
Purchased research and development.................................. 26,000 15,963
Provision for losses on accounts receivable......................... 20,623 8,881 11,547
Cumulative effect of accounting change for income taxes............. (4,900)
Changes in assets and liabilities, net of effects of acquisitions:
Increase in receivables........................................... (163,517) (141,590) (98,543)
Decrease (increase) in prepaid expenses........................... 7,441 (27,364) (7,762)
(Increase) decrease in other assets............................... (10,250) 369 17,908
Increase (decrease) in accounts payable and accruals.............. 27,847 96,712 (36,332)
Increase in income taxes payable.................................. 25,959 14,580 10,075
Increase (decrease) in deferred revenue........................... 12,518 (13,182) 59,519
Other changes, net................................................ 7,977 5,668 (8,707)
------------ ------------ ------------
Net cash provided by operating activities........................... 383,272 277,551 186,292
------------ ------------ ------------
Cash flows from investing activities:
Short-term investments................................................ 57,464
Purchases of property and equipment................................... (275,841) (207,474) (131,633)
Outsourcing contracts................................................. (114,144) (103,280) (114,403)
Acquisitions, net of cash acquired.................................... (76,878) (76,924) (98,803)
Dispositions.......................................................... 7,380
Purchased and internally developed software........................... (56,767) (37,076) (35,964)
Other investing cash flows............................................ (14,555) (5,397) (8,526)
------------ ------------ ------------
Net cash used in investing activities................................. (530,805) (430,151) (331,865)
------------ ------------ ------------
Cash flows from financing activities:
Net repayment of commercial paper..................................... (587)
Borrowings under lines of credit...................................... 78,457 209,778 105,273
Repayment of borrowings under lines of credit......................... (38,376) (215,667) (93,549)
Proceeds from term debt issuance...................................... 43,541 158,920
Principal payments on long-term debt.................................. (58,476) (43,550) (35,382)
Outsourcing contract financing........................................ (114,403) 114,403
Proceeds from equity offering......................................... 196,290
Proceeds from stock option transactions............................... 18,511 21,954 17,615
Dividends paid........................................................ (2,443) (2,510)
Other financing cash flows............................................ 10,737 1,462 541
------------ ------------ ------------
Net cash provided by financing activities............................. 53,807 212,341 106,391
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents.................... (93,726) 59,741 (39,182)
Cash and cash equivalents at beginning of year.......................... 207,599 147,858 187,040
------------ ------------ ------------
Cash and cash equivalents at end of year................................ $ 113,873 $ 207,599 $ 147,858
------------ ------------ ------------
------------ ------------ ------------
(See notes to consolidated financial statements)
10
COMPUTER SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOREIGN
CURRENCY
EARNINGS AND
COMMON STOCK ADDITIONAL RETAINED UNFUNDED
---------------------- PAID-IN FOR USE IN PENSION
IN THOUSANDS EXCEPT SHARES SHARES AMOUNT CAPITAL BUSINESS ADJUSTMENTS
- ------------------------------------------------------------ --------- ----------- ----------- ----------- -----------
Balance at April 2, 1993.................................... 32,032,558 $ 32,033 $ 191,779 $ 576,370 $ (9,542)
Issuance of common stock for acquisition.................... 3,160,000 3,160 37,140
Stock option transactions................................... 667,671 667 23,771
Granting of restricted stock of $1,111,000 net of
forfeitures and amortization of $2,376,000................ 39,484 39 1,072
Net income.................................................. 72,322
Currency translation adjustment............................. (3,243)
Unfunded pension obligation................................. 110
Hogan dividend.............................................. (2,510)
Acquisition of Hogan treasury stock......................... (5,855)
Repayment of notes..........................................
Effect of 3-for-1 stock split............................... 33,636,982 33,637 (33,637)
--------- ----------- ----------- ----------- -----------
Balance at April 1, 1994.................................... 69,536,695 69,536 247,907 612,545 (12,675)
Issuance of common stock.................................... 4,000,000 4,000 192,290
Stock option transactions................................... 707,897 708 20,161
Granting of restricted stock of $90,000 net of forfeitures
and amortization of $1,993,000............................ 7,000 7 83
Cancellation of stock subscriptions......................... (3,235) (3) (77)
Net income.................................................. 143,237
Currency translation adjustment............................. 19,963
Unfunded pension obligation................................. (636)
Hogan dividend.............................................. (2,443)
Repayment of notes..........................................
--------- ----------- ----------- ----------- -----------
Balance at March 31, 1995................................... 74,248,357 74,248 460,364 753,339 6,652
Stock option transactions................................... 1,333,763 1,334 40,895
Granting of restricted stock of $700,000 net of forfeitures
and amortization of $1,386,000............................ 17,735 18 682
Net income.................................................. 109,431
Currency translation adjustment............................. (12,218)
Unfunded pension obligation................................. (1,648)
Retirement of Hogan treasury stock.......................... (171,233) (171) 171
Repayment of notes..........................................
--------- ----------- ----------- ----------- -----------
Balance at March 29, 1996................................... 75,428,622 $ 75,429 $ 502,112 $ 862,770 $ (7,214)
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
NOTES
COMMON UNEARNED RECEIVABLE
STOCK IN RESTRICTED FOR SHARES
IN THOUSANDS EXCEPT SHARES TREASURY STOCK SOLD
- ------------------------------------------------------------ ----------- ----------- -----------
Balance at April 2, 1993.................................... $ (3,969) $ (6,338) $ (3,198)
Issuance of common stock for acquisition....................
Stock option transactions................................... (626)
Granting of restricted stock of $1,111,000 net of
forfeitures and amortization of $2,376,000................ 1,265
Net income..................................................
Currency translation adjustment.............................
Unfunded pension obligation.................................
Hogan dividend..............................................
Acquisition of Hogan treasury stock.........................
Repayment of notes.......................................... 487
Effect of 3-for-1 stock split...............................
----------- ----------- -----------
Balance at April 1, 1994.................................... (4,595) (5,073) (2,711)
Issuance of common stock....................................
Stock option transactions................................... (584)
Granting of restricted stock of $90,000 net of forfeitures
and amortization of $1,993,000............................ 1,903
Cancellation of stock subscriptions.........................
Net income..................................................
Currency translation adjustment.............................
Unfunded pension obligation.................................
Hogan dividend..............................................
Repayment of notes.......................................... 1,659
----------- ----------- -----------
Balance at March 31, 1995................................... (5,179) (3,170) (1,052)
Stock option transactions................................... (5,309) (3,888)
Granting of restricted stock of $700,000 net of forfeitures
and amortization of $1,386,000............................ 686
Net income..................................................
Currency translation adjustment............................. (28)
Unfunded pension obligation.................................
Retirement of Hogan treasury stock..........................
Repayment of notes.......................................... 103
----------- ----------- -----------
Balance at March 29, 1996................................... $ (10,488) $ (2,484) $ (4,865)
----------- ----------- -----------
----------- ----------- -----------
(See notes to consolidated financial statements)
11
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
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
On August 1, 1996, CSC acquired The Continuum Company, Inc. ("Continuum").
The acquisition was structured as a merger of Continental Acquisition, Inc., a
wholly owned subsidiary of the Company, with and into Continuum. Upon
consummation of the merger, Continuum became a wholly owned subsidiary of the
Company, each outstanding share of its common stock was converted into .79 of a
share of common stock of the Company, and each outstanding option to purchase
shares of Continuum common stock was converted into an option to purchase a pro
rata number of shares of CSC common stock.
The acquisition has been accounted for as a pooling of interests, and
previously reported consolidated financial statements of the Company for periods
ended prior to August 1, 1996 have been restated to include the financial
position and results of operations of Continuum.
OTHER ACQUISITIONS
On March 15, 1996, Continuum acquired Hogan Systems, Inc. ("Hogan") through
the issuance of 4,814,000 shares of its Common Stock (equivalent to 3,803,000
shares of CSC's Common Stock). Continuum assumed outstanding Hogan stock options
equivalent to 505,000 options of Continuum's Common Stock at an average exercise
price of $20.71 (which is equivalent to 399,000 shares of CSC's common stock at
an average exercise price of $26.22). The acquisition was accounted for as a
pooling of interests and, accordingly, the Company's consolidated financial
statements have been restated to include the results of Hogan for all periods
presented.
On December 28, 1995, Continuum acquired all of the shares of SOCS Holding
("SOCS") for $37,600,000 in cash. The acquisition has been accounted for using
the purchase method of accounting and, accordingly, the operating results of
SOCS have been included in the consolidated financial statements from the date
of acquisition. SOCS' tangible assets and liabilities were recorded at their
estimated fair value of $11,100,000 and $17,200,000, respectively. The excess of
the purchase price over the net assets acquired totaled $43,700,000, with
$2,400,000 assigned to purchased software, $15,300,000 assigned to goodwill, and
$26,000,000 assigned to purchased research and development which was expensed in
connection with the fiscal 1996 acquisition. Except for the expense for
purchased research and development, the acquisition did not have a material
effect on operations.
On September 30, 1993, Continuum acquired all of the outstanding shares of
Vantage Computer Systems, Inc. ("Vantage") through the issuance of 4,000,000
shares of its Common Stock (equivalent to 3,160,000 shares of CSC's Common
Stock) valued at $40,300,000. The acquisition has been accounted for using the
purchase method of accounting and, accordingly, the operating results of Vantage
have been included in the consolidated financial statements from the date of
acquisition. Vantage's tangible assets and liabilities were recorded at their
estimated fair value of $14,293,000 and $13,599,000, respectively. The estimated
excess of the purchase price over the net assets acquired totaled $39,606,000,
with $8,543,000
12
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assigned to purchased software, $17,255,000 to goodwill, $2,155,000 to deferred
taxes, and $15,963,000 to purchased research and development, which was expensed
in connection with the acquisition.
During August 1993, Continuum issued 3,859,000 shares of its Common Stock
(equivalent to 3,048,000 shares of CSC Common Stock) for all of the outstanding
common stock of Paxus Corporation Limited ("Paxus"). The acquisition was
accounted for as a pooling of interests and, accordingly, the Company's
consolidated financial statements have been restated to include the results of
Paxus for all periods presented.
During the three years ended March 29, 1996, the Company made a number of
acquisitions in addition to those described above which, either individually or
collectively, are not material. In conjunction with these purchases, the Company
acquired assets with an estimated fair value of $34,497,000, $63,102,000 and
$125,912,000; and assumed liabilities of $18,628,000, $85,465,000 and
$76,815,000 for fiscal 1996, 1995 and 1994 respectively. The excess of cost of
businesses acquired over related net assets was $22,448,000, $103,626,000 and
$54,531,000 for fiscal 1996, 1995 and 1994, respectively.
INCOME RECOGNITION
The Company provides services under fixed price, cost-based, time and
materials, and level of effort contracts. For fixed price contracts, income is
recorded on the basis of the estimated percentage of completion of services
rendered. Losses, if any, on fixed price contracts are recognized during the
period in which the loss is determined. 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 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.
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 generally recognized upon receipt of a signed contract or other
form of evidence documenting a customer commitment, 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:
Purchased and internally developed 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
13
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 purchased and internally developed software are unamortized
capitalized software development costs of $51,205,000 and $54,248,000 as of
March 29, 1996 and March 31, 1995, respectively. The related amortization
expense was $19,947,000, $8,814,000 and $8,126,000 for fiscal years 1996, 1995
and 1994, respectively. During March 1996, $20,200,000 of capitalized software
was written off to reflect a decline in net realizable value associated
primarily with changes in market conditions and changes in business strategy
relating to Hogan's banking products.
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 $99,551,000 and $91,324,000 for fiscal 1996 and 1995,
respectively. The related amortization expense was $12,764,000, $11,601,000 and
$6,169,000 for fiscal 1996, 1995 and 1994, respectively.
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 taxes on income are as
follows:
FISCAL YEAR
-------------------------------
IN THOUSANDS 1996 1995 1994
- ------------------------------------------------------------- --------- --------- ---------
Interest..................................................... $ 36,322 $ 26,311 $ 21,349
Taxes on income.............................................. 50,703 59,391 60,208
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.
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.
14
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Primary earnings per common share are computed on the basis of the weighted
average number of shares of common stock plus common stock equivalents (stock
options) outstanding during the year. Fully diluted earnings per common share
are not presented since dilution is less than three percent.
During February 1995, the Company issued 4,000,000 shares of common stock
through a public offering, resulting in net proceeds of $196,290,000. The
proceeds were used to reduce short-term indebtedness and for general corporate
purposes, including the financing of working capital needs and capital
expenditures. If the reduction of indebtedness and the offering of related
shares had occurred at the beginning of fiscal 1995, the corresponding effect on
earnings per share for the year would not have been significant.
As described in Note 1 above, during September 1993, Continuum acquired all
of the outstanding shares of Vantage Computer Systems, Inc. ("Vantage") through
the issuance of 4,000,000 shares of its Common Stock (equivalent to 3,160,000
shares of CSC's Common Stock).
During December 1993, the Board of Directors declared a three-for-one stock
split in the form of a 200 percent stock dividend distributed January 13, 1994
on the Company's common stock, with no change in par value.
Shares used to compute earnings per share, restated for the stock split, are
as follows:
FISCAL YEAR
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Average shares outstanding.......................... 74,432,531 70,148,723 67,132,261
Common stock equivalents............................ 2,102,263 1,702,226 1,234,043
------------ ------------ ------------
76,534,794 71,850,949 68,366,304
------------ ------------ ------------
------------ ------------ ------------
ACCOUNTING CHANGES
Effective April 3, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") 106, "Employers" Accounting for Post-Retirement
Benefits Other Than Pensions" and SFAS 109, "Accounting for Income Taxes." Under
SFAS 106, the Company changed from the cash basis of accounting for
post-retirement benefits other than pensions to the accrual of the estimated
costs of such benefits during the period that covered employees render services
(see Note 6). The adoption of SFAS 109 changed the Company's method of
accounting for income taxes from the "deferred method" to the "asset and
liability method." Under the asset and liability method of SFAS 109, deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases (see Note 3).
RECENT ACCOUNTING PRONOUNCEMENTS
During fiscal 1996, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS No. 121). This statement requires
that such assets be reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable and
that such assets be reported at the lower of carrying amount or fair value. The
Company will adopt SFAS No. 121 during fiscal 1997
15
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and, based on current circumstances, does not expect a material impact on its
results of operations or financial position.
Also during fiscal 1996, Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," was issued, which is effective
for fiscal years beginning after December 15, 1995. This statement requires
footnote disclosure of the pro forma impact on net income and earnings per share
of the compensation cost that would have been recognized if the fair value of
all stock-based awards was recorded in the income statement. The disclosure
provisions of this statement will be adopted during fiscal 1997.
RECLASSIFICATIONS
Certain reclassifications have been made to reflect the acquisition of
Continuum, which was accounted for as a pooling of interests. Continuum's
expense classifications have been reclassified to conform to CSC's presentation.
Continuum's interest income has been removed from its revenues to conform to
CSC's presentation of interest income. Additionally, Continuum's common stock
equivalents have been converted to CSC shares at the exchange rate of .79 and
included in the average common shares outstanding.
NOTE 2--RESTRUCTURING AND OTHER COSTS
In connection with the fiscal 1996 acquisition discussed in Note 1,
Continuum effected a plan to integrate, restructure and realign its expanded
business. As a result, Continuum expensed approximately $50,100,000 in
non-recurring charges, including $9,600,000 of transaction and $9,800,000 of
restructuring costs (which includes the consolidation of facilities and data
processing and employee terminations). At March 29, 1996, $16,031,000 of
restructuring and transaction costs are included in other accrued expenses. In
addition, non-cash adjustments to the carrying value of certain operating assets
of $30,700,000 were recorded, including $20,200,000 to capitalized software (see
Note 1), $8,700,000 to allowances for certain receivables and $1,800,000 to
other intangibles.
During January 1995, the Company sold its tax processing operation and
incurred an after-tax loss on sale of $940,000. The pre-tax loss of $3,740,000
was reduced by related income tax effects of $2,800,000.
During the year ended April 1, 1994, in connection with Continuum's
acquisitions of Paxus and Vantage, approximately $23,700,000 in restructuring
charges were expensed, including $7,000,000 for facilities, $1,500,000 for data
center consolidation, $4,200,000 for employee reductions, $8,600,000 for the
write-down of certain operating assets and $2,400,000 in other costs. In
addition, approximately $8,900,000 for anticipated expenses associated with
changes in product strategy were accrued.
16
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INCOME TAXES
The sources of income (loss) before taxes, classified as between domestic
entities and those entities domiciled outside of the United States, are as
follows:
FISCAL YEAR
----------------------------------
IN THOUSANDS 1996 1995 1994
- --------------------------------------------------------- ---------- ---------- ----------
Domestic entities........................................ $ 168,816 $ 203,968 $ 132,711
Entities outside the United States....................... 28,114 16,846 (7,790)
---------- ---------- ----------
$ 196,930 $ 220,814 $ 124,921
---------- ---------- ----------
---------- ---------- ----------
The provisions for taxes on income, classified as between current and
deferred and as between taxing jurisdictions, consist of the following:
FISCAL YEAR
-------------------------------
IN THOUSANDS 1996 1995 1994
- ------------------------------------------------------------- --------- --------- ---------
Current portion:
Federal.................................................... $ 40,897 $ 50,190 $ 34,772
State...................................................... 3,400 5,983 5,592
Foreign.................................................... 14,258 7,153 4,729
--------- --------- ---------
58,555 63,326 45,093
--------- --------- ---------
Deferred portion:
Federal.................................................... 25,694 12,339 12,622
State...................................................... 6,422 1,223 641
Foreign.................................................... (3,172) 689 (857)
--------- --------- ---------
28,944 14,251 12,406
--------- --------- ---------
Total provision for taxes.................................. $ 87,499 $ 77,577 $ 57,499
--------- --------- ---------
--------- --------- ---------
The major elements contributing to the difference between the federal
statutory tax rate and the effective tax rate are as follows:
FISCAL YEAR
-------------------------------
1996 1995 1994
--------- --------- ---------
Statutory rate................................................... 35.0% 35.0% 35.0%
State income tax, less effect of federal deduction............... 3.7 2.7 3.7
Goodwill amortization............................................ 1.8 1.3 1.8
Utilization of tax credits....................................... (.2) (.9) (.5)
Tax benefit of loss on sale...................................... (2.2) (3.0) .1
Foreign losses without tax benefits.............................. 1.1 .9 3.6
Tax-exempt investments........................................... (.2) (.1) (1.2)
Effect of U.S. tax law change.................................... 1.1
Restructuring/purchased R&D...................................... 5.5 4.8
R&D incentives................................................... (.2) (.5)
Other............................................................ (.1) (.6) (1.9)
--------- --------- ---------
Effective tax rate............................................... 44.4% 35.1% 46.0%
--------- --------- ---------
--------- --------- ---------
17
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INCOME TAXES (CONTINUED)
The tax effects of significant temporary differences that comprise deferred
tax balances are as follows:
MARCH 29, MARCH 31,
IN THOUSANDS 1996 1995
- -------------------------------------------------------------------- ----------- -----------
Deferred tax assets (liabilities)
Deferred income................................................... $ 8,153 $ 3,210
Employee benefits................................................. (761) (11,262)
Provisions for contract settlement................................ 15,866 7,517
Currency exchange................................................. 1,427 (7,429)
Other assets...................................................... 10,879 15,290
Contract accounting............................................... (75,925) (53,129)
Depreciation and amortization..................................... (69,875) (41,735)
Prepayments....................................................... (24,601) (15,136)
R&D venture....................................................... 2,371 4,164
Tax loss/credit carryforwards..................................... 2,405 2,013
Other liabilities................................................. (6,536) (10,851)
----------- -----------
Total deferred taxes................................................ $ (136,597) $ (107,348)
----------- -----------
----------- -----------
Of the above deferred amounts, $75,282,000 and $50,821,000 are included in
current income taxes payable at March 29, 1996 and March 31, 1995, respectively.
During fiscal 1996, the Company received the revenue agent's report
regarding the Internal Revenue Service's audit of fiscal 1987 through 1991. The
Company has filed a protest regarding the substantive issues in that report with
the Appeals Division of the IRS. In the opinion of management the results of the
appeal will not have a material effect on the financial statements.
18
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--RECEIVABLES
Receivables consist of the following:
MARCH 29, MARCH 31,
IN THOUSANDS 1996 1995
- -------------------------------------------------------------------- ------------ ----------
Billed trade accounts............................................... $ 844,914 $ 756,219
Recoverable amounts under contracts in progress..................... 234,195 157,838
Other receivables................................................... 27,748 29,545
------------ ----------
$ 1,106,857 $ 943,602
------------ ----------
------------ ----------
Amounts due under long-term contracts include the following items:
MARCH 29, MARCH 31,
IN THOUSANDS 1996 1995
- ---------------------------------------------------------------------- ---------- ----------
Included in billed trade accounts receivable--
Amounts retained in accordance with contract terms, due upon
completion or other specified event............................... $ 8,764 $ 6,496
---------- ----------
---------- ----------
Included in recoverable amounts under contracts in progress:
Amounts on fixed price contracts not billable in accordance with
contract terms until some future date............................. $ 113,920 $ 69,807
Excess of costs over provisional billings, awaiting clearance for
final billing or future negotiation............................... 18,093 10,786
Accrued award fees.................................................. 11,756 9,546
Amounts retained in accordance with contract terms, due upon
completion or other specified event............................... 17,412 7,358
Amounts on completed work, negotiated and awaiting contractual
document.......................................................... 3,082 2,754
Unrecovered costs related to claims................................. 11,202 9,569
---------- ----------
$ 175,465 $ 109,820
---------- ----------
---------- ----------
The recoverable amounts under contracts in progress which have not yet been
billed comprise amounts of contract revenue not billable at the balance sheet
date. Such amounts 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.
All items relating to long-term contracts shown above are expected to be
collected during fiscal 1997 except for $11,202,000 of unrecovered costs related
to claims and $113,482,000 of other items to be collected during 1998 and
thereafter. The unrecovered costs related to claims are recorded at net
realizable value and consist primarily of amounts due under long-term contracts
which are pending determination by negotiation or legal proceedings.
19
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--DEBT
SHORT-TERM
At March 29, 1996 and March 31, 1995, the Company had uncommitted lines of
credit of $80,000,000 with domestic banks. As of March 29, 1996 and March 31,
1995, the Company had no borrowings outstanding under these lines of credit. The
Company, excluding Continuum, also has committed lines of credit of $140,000,000
with certain foreign banks; as of March 29, 1996 and March 31, 1995, there were
$64,421,000 and $28,896,000, respectively, of borrowings outstanding under these
lines of credit. Interest rates approximate the applicable prime rate. These
short-term lines of credit carry no commitment fees or significant covenants. At
March 29, 1996, the weighted average interest rate on borrowings under these
short-term lines of credit was 5.2%. At March 31, 1995, the rate was 6.1%.
During fiscal 1996, Continuum and Hogan's respective lines of credit
increased to $80,000,000. At March 29, 1996 and March 31, 1995, borrowings under
the lines of credit were $7,001,000 with a weighted average interest rate of
7.6% and $1,920,000 with a weighted average interest rate of 9.0%, respectively.
Both lines of credit have since expired.
LONG-TERM
MARCH 29, MARCH 31,
IN THOUSANDS 1996 1995
- ------------------------------------------------------------------------------------------ ---------- ----------
Commercial paper.......................................................................... $ 246,834 $ 150,000
6.8% term notes........................................................................... 150,000 150,000
Collateralized notes...................................................................... 18,379 19,052
8.95% Senior Notes........................................................................ 5,000 10,000
Capitalized lease liabilities, at varying interest rates, payable in monthly installments
through fiscal 2001..................................................................... 9,313 6,223
Notes payable, at varying interest rates through fiscal 1999.............................. 3,711 12,205
Other obligations......................................................................... 314 149
---------- ----------
Total long-term debt...................................................................... 433,551 347,629
Less current maturities................................................................... 6,917 11,933
---------- ----------
$ 426,634 $ 335,696
---------- ----------
---------- ----------
At March 29, 1996, the weighted average interest rate on the Company's
commercial paper was 5.2%. During September 1995, CSC Enterprises (see Note 10)
entered into a new $350,000,000 credit agreement to provide standby support for
the commercial paper program. The standby agreement expires during September
1999.
During April 1994, CSC Enterprises borrowed $150,000,000 through a 144A
Private Placement offering of 6.8% fixed rate term notes due April 15, 1999.
The collateralized notes are secured by a mortgage of real estate and an
assignment of a Continuum building lease. Principal and interest are paid
monthly with a final balloon payment of $16,143,000 due December 29, 1998.
Interest accrues at prime plus 1.5% (9.75% at March 29, 1996 and 10.5% at March
31, 1995).
20
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--DEBT (CONTINUED)
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 $10,362,000 (1996) and $13,439,000 (1995), less
accumulated amortization of $4,396,000 and $7,370,000, 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 $334,000,000 of retained earnings were available for cash
dividends at March 29, 1996.
The carrying value of the Company's long-term debt is $433,551 at March 29,
1996, as shown above. The corresponding fair value, as defined by Statement of
Financial Accounting Standards No. 107, approximates $442,000 using the current
rates available to the Company for debt of the same remaining maturities.
Maturities of long-term debt are $6,917,000 (1997), $5,811,000 (1998),
$19,666,000 (1999), $397,489,000 (2000) and $3,668,000 thereafter.
21
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--RETIREMENT PLANS
PENSIONS
The Company and its subsidiaries have several pension plans, as described
below.
A contributory, defined benefit pension plan is generally available to U.S.
employees. The benefits under this plan are based on years of participation and
the employee's compensation over the entire period of participation. It is the
Company's funding policy to make contributions to the plan as required by
applicable regulations. Certain non-U.S. employees are enrolled in defined
benefit pension plans in the country of domicile. The benefits for these plans
generally are based on years of participation and the employee's average
compensation during the final years of employment. In addition, the Company has
a Supplemental Executive Retirement Plan (SERP) and a Nonemployee Director
Retirement Plan, which are nonqualified, noncontributory pension plans. The SERP
is a defined benefit retirement plan for designated officers and key executives
of the Company. It restores benefits limited by tax regulations and provides for
additional benefits based on years of service and the participant's average
compensation during a final period of employment.
Net periodic pension cost for U.S. and non-U.S. pension plans included the
following components:
FISCAL YEAR
----------------------------
IN THOUSANDS 1996 1995 1994
- -------------------------------------------------- -------- -------- --------
Service cost--benefits earned during the year..... $ 32,351 $ 28,016 $ 17,238
Interest cost on projected benefit obligation..... 28,590 24,645 14,097
Actual return on assets........................... (68,449) (10,425) (20,036)
Net amortization and deferral:
Amortization of initial net asset gains......... (538) (520) (529)
Amortization of prior service costs............. 1,432 1,393 678
Amortization of net loss........................ 518 613 6
Asset gain (loss) deferred...................... 37,893 (15,704) 4,520
SFAS 88 curtailment............................. (2,090)
-------- -------- --------
Net periodic pension cost......................... $ 31,797 $ 25,928 $ 15,974
-------- -------- --------
-------- -------- --------
22
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--RETIREMENT PLANS (CONTINUED)
The following table sets forth the funded status and amounts recognized in
the Company's consolidated balance sheets:
FISCAL YEAR
-------------------------------------------------------------
1996 1995
----------------------------- -----------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFIT ACCUMULATED BENEFIT
BENEFIT OBLIGATIONS BENEFIT OBLIGATIONS
IN THOUSANDS OBLIGATIONS EXCEED ASSETS OBLIGATIONS EXCEED ASSETS
- -------------------------------------------------- ------------- ------------- ------------- -------------
Actuarial present value of benefit obligations:
Vested benefit obligation....................... $(302,917) $(54,306) $(240,733) $(21,564)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Accumulated benefit obligation.................. $(322,233) $(70,626) $(262,550) $(30,281)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Projected benefit obligation...................... $(382,798) $(87,278) $(318,253) $(33,217)
Plan assets at fair market value.................. 419,915 55,292 322,970 8,981
------------- ------------- ------------- -------------
Projected benefit obligation less than (in excess
of) plan assets................................. 37,117 (31,986) 4,717 (24,236)
Unrecognized net (gain) loss...................... (20,005) 2,423 13,972 2,654
Prior service cost not yet recognized in net
periodic pension cost........................... 2,514 7,398 2,971 5,778
Unrecognized (net asset) obligation being
amortized over future service periods of plan
participants.................................... 1,095 940 (105) 1,114
Adjustment to reflect minimum liability........... (9,934) (8,634)
Contribution in fourth fiscal quarter............. 323
------------- ------------- ------------- -------------
Pension asset (liability)......................... $ 20,721 $(31,159) $ 21,878 $(23,324)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Assumptions used in the accounting for the Company's plans were:
FISCAL YEAR
----------------------------------
1996 1995 1994
---------- ---------- ----------
U.S. PLAN
Discount or settlement rate....................... 7.50% 8.00% 7.50%
Rate of increase in compensation levels........... 5.85 6.25 6.00
Expected long-term rate of return on assets....... 8.50 8.50 8.50
NON-U.S. PLANS
Discount or settlement rates...................... 7.00-9.00% 7.00-9.00% 6.00-8.00%
Rates of increase in compensation levels.......... 3.50-6.50 3.50-6.50 3.50-6.00
Expected long-term rates of return on assets...... 7.00-9.25 7.00-9.00 6.00-9.00
Plan assets include actively managed funds, indexed funds and short-term
investment funds.
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.
For some plans, the Company matches a percentage of the
23
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--RETIREMENT PLANS (CONTINUED)
employee's contribution within limits as defined by each plan. Prior to August
1, 1996, Continuum's employer contributions were calculated on the basis of the
greater of a portion of employee compensation or a portion of Continuum's income
before taxes. At March 29, 1996, plan assets included 2,595,000 shares of the
Company's common stock. During fiscal 1996, 1995 and 1994, the Company
contributed $18,016,000, $16,278,000 and $13,205,000, respectively.
OTHER POST-RETIREMENT BENEFITS
The Company provides health care and life insurance benefits for certain
retired 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.
As discussed in Note 1, the Company adopted SFAS 106 during fiscal 1994.
Under SFAS 106 the net periodic post-retirement benefit costs, relating
principally to retiree health care, amounted to $5,100,000, $5,368,000 and
$4,988,000 in 1996, 1995 and 1994, respectively.
Net periodic post-retirement benefit cost included the following components:
FISCAL YEAR
----------------------
IN THOUSANDS 1996 1995 1994
- -------------------------------------------------- ------ ------ ------
Service cost, benefits earned during the period... $ 831 $ 969 $ 818
Interest cost on accumulated benefit obligation... 3,018 2,885 2,586
Actual return on plan assets...................... (1,463) (7) (81)
Amortization of initial obligation................ 1,633 1,633 1,633
Amortization of net (gain) loss................... (42) 78
Asset gain (loss) deferred........................ 1,123 (190) 32
------ ------ ------
Net provision for post-retirement benefits........ $5,100 $5,368 $4,988
------ ------ ------
------ ------ ------
The status of the plan and amounts recognized in the Company's consolidated
balance sheets are as follows:
MARCH 29, MARCH 31,
IN THOUSANDS 1996 1995
- -------------------------------------------------- --------- ---------
Actuarial present value of benefit obligation
applicable to:
Retirees........................................ $ (21,047) $ (19,132)
Fully eligible plan participants................ (4,309) (5,291)
Other active plan participants.................. (16,056) (14,362)
--------- ---------
Accumulated post-retirement benefit obligation.... (41,412) (38,785)
Plan assets at fair market value.................. 8,582 4,016
--------- ---------
Accumulated post-retirement benefit obligation in
excess of plan assets........................... (32,830) (34,769)
Unrecognized net gain............................. (2,105) (843)
Unrecognized transition obligation................ 26,992 28,625
Prior service cost not yet recognized in net
periodic
post-retirement benefit cost.................... 501
--------- ---------
Accrued post-retirement benefit liability......... $ (7,442) $ (6,987)
--------- ---------
--------- ---------
24
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--RETIREMENT PLANS (CONTINUED)
The assumed rate of return on plan assets was 7.0% and the discount rate
used to estimate the accumulated post-retirement benefit obligation was 7.5% and
8.0% for fiscal 1996 and 1995, respectively. Plan assets include actively
managed funds, indexed funds and short-term investment funds. The assumed health
care cost trend rate used in measuring the expected benefit obligation was 9.5%
for fiscal 1996, declining to 5.0% for 2004 and thereafter. A one-percentage
point change in the assumed health care cost trend rate would increase or
decrease the accumulated post-retirement benefit obligation as of March 29,
1996, and the net periodic post-retirement benefit cost for fiscal year 1996 by
$4,150,000 and $474,000, respectively.
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
property are subject to annual escalations for increases in utilities and
property taxes. Lease rental expense amounted to $148,088,000 (1996),
$138,222,000 (1995) and $108,579,000 (1994).
Minimum fixed rentals required for the next five years and thereafter under
operating leases in effect at March 29, 1996, are as follows (in thousands):
FISCAL YEAR REAL ESTATE EQUIPMENT
- -------------------------------------------------- ----------- ---------
1997.............................................. $ 75,325 $47,366
1998.............................................. 59,576 21,759
1999.............................................. 43,327 9,859
2000.............................................. 34,804 4,899
2001.............................................. 26,097 1,645
Thereafter to 2018................................ 74,134 855
----------- ---------
$313,263 $86,383
----------- ---------
----------- ---------
CONTINGENCIES
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily 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. Although the Company is directly affected by the financial
well-being of its customers' respective industries, management does not believe
significant credit risks exist at March 29, 1996.
During September 1993, Continuum entered into an agreement with a
shareholder to purchase data processing services at commercial rates for a
period of six years. During the three fiscal years ended March 29, 1996, the
Company has incurred related expenses of $22,647,000, $15,662,000 and
$6,100,000, respectively, for data processing and other consulting services,
which are included in costs of services. In addition, during fiscal 1994, the
shareholder assumed responsibility for certain of the Company's capital
25
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--COMMITMENTS AND CONTINGENCIES (CONTINUED)
leases of computer equipment and purchased at book value certain of the
Company's data processing assets.
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 ultimate liability, if any, with respect to these
disputes will not be material to the Company's financial position.
NOTE 8--STOCK INCENTIVE AND STOCK PURCHASE PLANS
STOCK INCENTIVE PLANS
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 August 1,
1996, in connection with the acquisition of Continuum, the Company assumed
outstanding employee and non-employee director options (the "Continuum Stock
Options") to purchase an aggregate of 2,976,000 shares of Continuum common stock
at an average exercise price of $26.77 per share (which is equivalent to
2,351,000 shares of CSC common stock at an average exercise price of $33.89 per
share), and 28,628 shares of restricted Continuum common stock (the "Continuum
Restricted Stock") were converted into 22,616 shares of restricted CSC common
stock.
At March 29, 1996, March 31, 1995 and April 1, 1994, 3,426,000, 1,574,000
and 2,183,000 shares, respectively, of CSC common stock were available for the
grant of future stock options. These amounts represent the number of CSC shares
then available for option under the Company's seven stock incentive plans, plus
the number of CSC share equivalents then available for option as Continuum Stock
Options, minus the 61,075 CSC share equivalents that were available for option
as Continuum Stock Options immediately prior to, but not after, the acquisition
of Continuum by CSC on August 1, 1996.
During the year ended April 1, 1994, Continuum granted an option to purchase
200,000 shares of Continuum common stock at $25.00 per share (equivalent to
158,000 shares of CSC stock at $31.65 per share) to a third party. The option
was exercised prior to August 1, 1996.
At March 29, 1996, options to purchase 6,962,088 shares of CSC common stock
were outstanding, of which 2,719,945 were exercisable. The status of all
optioned CSC shares is as follows:
FISCAL YEAR
------------------------------------
1996 1995 1994
----------- ---------- -----------
Outstanding--beginning of year.................... 7,203,345 6,466,170 5,461,591
Granted during year, at prices ranging from $12.25
to $76.13 (1996), $15.19 to $51.88 (1995), $1.00
to $44.71 (1994)................................ 1,348,126 1,739,778 2,374,203
Exercised during year, at prices ranging from
$1.00 to $50.50 (1996), $1.00 to $39.50 (1995),
$1.00 to $27.63 (1994).......................... (1,284,151) (660,565) (1,105,238)
Canceled during year, at prices ranging from
$12.58 to $65.00 (1996), $1.00 to $46.75 (1995),
$12.58 to $28.63 (1994)......................... (305,232) (342,038) (264,386)
----------- ---------- -----------
Outstanding--end of year, at prices ranging from
$1.00 to $76.13, all years...................... 6,962,088 7,203,345 6,466,170
----------- ---------- -----------
----------- ---------- -----------
Average price of outstanding options.............. $ 30.90 $ 25.54 $ 21.31
----------- ---------- -----------
----------- ---------- -----------
26
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCK INCENTIVE AND STOCK PURCHASE PLANS (CONTINUED)
At March 29, 1996, March 31, 1995 and April 1, 1994, 206,970, 273,150 and
355,470 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. Shares of Continuum Restricted Stock vest
ratably on the first five anniversaries of the date of issuance, and were
granted coincident with cash bonuses aggregating $211,000, $77,000 and $332,000
during the fiscal years ended March 29, 1996, March 31, 1995 and April 1, 1994,
respectively. Shares of CSC restricted stock other than Continuum Restricted
Stock generally vest on the fifth, sixth and seventh anniversaries of the date
of issuance. During the fiscal years ended March 29, 1996, March 31, 1995 and
April 1, 1994, the market price per share of CSC restricted stock on the date of
issuance ranged from $12.75 to $48.42, $12.75 to $34.38, and $12.75 to $34.75,
respectively, and amortization of unearned restricted stock was 1,262,000,
1,639,000 and 1,831,000, respectively.
Prior to the acquisition of Paxus by Continuum on August 13, 1993, Paxus
sold shares of its common stock to employees and directors in exchange for
non-interest bearing notes secured by the shares. Note payments aggregating
$103,000, $1,659,000 and $487,000 were received in the fiscal years ended March
29, 1996, March 31, 1995 and April 1, 1994, respectively.
Prior to the acquisition of Continuum by CSC on August 1, 1996, certain
officers of Continuum's subsidiary, Hogan, exercised stock options by the
delivery of a recourse note in the amount of the exercise price, which notes
were secured by the shares purchased. Notes aggregating $3,888,00 were received
in the fiscal year ended March 29, 1996.
The outstanding principal balances of the Paxus notes and the Hogan notes
are classified as a reduction of stockholders' equity.
STOCK PURCHASE PLAN
Prior to the acquisition of Continuum by CSC on August 1, 1996, Continuum
maintained an Employee Stock Purchase Plan which provided for the purchase of up
to 300,000 shares of Continuum common stock (equivalent to 237,000 shares of CSC
stock) by its employees. Substantially all employees of Continuum were eligible
to participate, subject to certain limitations. The plan provided for
semi-annual purchases of stock at 85% of the market value of the stock on the
first day or, if lower, the last day of the six-month offering period. During
the fiscal years ended March 29, 1996, March 31, 1995 and April 1, 1994, 80,383,
71,834 and 33,270 shares of Continuum common stock (equivalent to 63,503,
56,749, and 26,283 shares of CSC common stock), respectively, were purchased
with net proceeds of $2,172,000, $1,208,000 and $502,000, respectively.
NOTE 9--STOCKHOLDER RIGHTS PLAN
Pursuant to its stockholder rights plan, the Company has issued one right
for each outstanding share of its common stock. These rights, which are attached
to and trade together with the common stock, are not currently exercisable. On
the tenth business day after any person or entity acquires 20% or more of CSC's
common stock, each right (other than rights held by the 20% stockholder, which
will become void) will become exercisable to purchase one share of CSC common
stock at 10% of the then-current market value. The rights expire December 21,
1998, and may be redeemed by the Board of Directors at $.01 per right at any
time before they become exercisable.
27
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--SEGMENT AND GEOGRAPHIC INFORMATION
The Company's business involves operations in principally one industry
segment, providing information technology consulting, systems integration and
outsourcing. The following data has been segmented between operations within the
United States, Europe and other countries. The other countries consist primarily
of Australia and other Pacific Rim countries.
FISCAL YEAR
----------------------------------
IN THOUSANDS 1996 1995 1994
- -------------------------------------------------- ---------- ---------- ----------
Revenues
United States................................... $3,342,317 $2,871,164 $2,390,597
Europe.......................................... 1,109,616 663,394 357,400
Other........................................... 288,827 253,468 148,393
---------- ---------- ----------
Total......................................... $4,740,760 $3,788,026 $2,896,390
---------- ---------- ----------
---------- ---------- ----------
Operating income
United States................................... $ 290,780 $ 258,373 $ 198,229
Europe.......................................... 38,330 8,033 16,384
Other........................................... 13,836 21,758 3,593
---------- ---------- ----------
Total......................................... $ 342,946 $ 288,164 $ 218,206
---------- ---------- ----------
---------- ---------- ----------
Identifiable assets at year end
United States................................... $1,843,909 $1,704,821 $1,335,255
Europe.......................................... 931,183 786,370 588,243
Other........................................... 160,531 140,200 140,062
---------- ---------- ----------
Total......................................... $2,935,623 $2,631,391 $2,063,560
---------- ---------- ----------
---------- ---------- ----------
Operating income is generally calculated as total revenue less operating
expenses, without adding or deducting corporate general and administrative
costs, interest income and expense, income taxes or other items.
The Company derives a major portion of its revenues from departments and
agencies of the United States government. At March 29, 1996, approximately 32%
of the Company's accounts receivable were due from the federal government.
Federal government revenues by agency/department are as follows:
FISCAL YEAR
------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
IN THOUSANDS AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
- -------------------------------------------------- ---------- -------- ---------- -------- ---------- --------
Department of Defense............................. $ 961,587 20% $ 823,812 22% $ 693,172 24%
National Aeronautics and Space Administration..... 292,900 6 312,377 8 221,977 7
Other civil agencies.............................. 317,012 7 353,206 9 308,041 11
-- -- --
---------- ---------- ----------
Total........................................... $1,571,499 33% $1,489,395 39% $1,223,190 42%
-- -- --
-- -- --
---------- ---------- ----------
---------- ---------- ----------
28
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--AGREEMENTS WITH EQUIFAX
During fiscal 1989, the Company signed an agreement with Equifax Inc. and
its subsidiary, Equifax Credit Information Services, Inc. ("ECIS"), pursuant to
which certain of the Company's wholly owned subsidiaries (collectively, the
"Bureaus") became affiliated credit bureaus of ECIS and use its credit reporting
system. The Bureaus retain ownership of their credit files and continue to
receive the revenues generated from the sale of the credit information they
contain. The Bureaus pay ECIS a fee for maintaining the files and for each
report supplied.
The agreement also provides the Company with an option to sell its credit
reporting and collection businesses to ECIS. This option requires six months'
advance notice and expires August 1, 2013. The option price is determined by
certain financial formulas if notification is given on or before July 31, 1998,
and if notification is given thereafter, is equal to appraised value.
In the opinion of management, the option price, as determined using
consistent methods of calculation under the financial formulas, approached $500
million at March 29, 1996. In its quarterly report for the quarter ended March
31, 1996, ECIS stated that the option price is "currently estimated at
approximately $400 million."
The agreement is for a 10-year term, renewable indefinitely at the option of
the Company for successive 10-year periods. In the event the Company does not
renew or does not exercise its option to sell, or if there is a change in
control of the Company, ECIS has the option to purchase the Company's credit
reporting and collection businesses at the option prices described above.
Effective December 1990, the Company, through affiliates, formed a general
partnership with affiliates of Equifax Inc. and a third party, Merel
Corporation. The partnership was formed to operate the Company's credit services
operations and to carry out other business strategies through acquisition and
investment. The Company, through affiliates, has a 97.1% interest in the
partnership, named CSC Enterprises, and is the managing general partner. The
Company's rights under the 1988 agreement remain exercisable through the
partnership in accordance with the original terms.
29
COMPUTER SCIENCES CORPORATION AND SUBSIDIARIES
SCHEDULE VIII, VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED MARCH 29, 1996
ADDITIONS
---------------------------
CHARGED TO
BALANCE, BEGINNING COST AND BALANCE, END
IN THOUSANDS OF PERIOD EXPENSES OTHER (1) DEDUCTIONS OF PERIOD
- --------------------------------------- ------------------ -------------- ----------- ----------- ------------
Year ended March 29, 1996
Allowance for doubtful receivables..... $ 32,254 $ 20,623 $ 1,001 $ 8,453 $ 45,425
Year ended March 31, 1995
Allowance for doubtful receivables..... 35,099 8,881 1,643 13,369 32,254
Year ended April 1, 1994
Allowance for doubtful receivables..... 22,529 11,547 7,903 6,880 35,099
- ------------------------
(1) All years include balances from acquisitions, changes in balances due to
foreign currency exchange rates and recovery of prior-year charges.
30
(B) FIVE-YEAR SELECTED FINANCIAL DATA (UNAUDITED)
COMPUTER SCIENCES CORPORATION
FIVE-YEAR REVIEW
-----------------------------------------------------
IN THOUSANDS EXCEPT PER-SHARE MARCH 29, MARCH 31, APRIL 1, APRIL 2, APRIL 3,
AMOUNTS 1996 1995 1994 1993 1992
- ----------------------------------- --------- --------- --------- --------- ---------
Total assets....................... $2,935,623 $2,631,391 $2,063,560 $1,703,476 $1,637,679
Debt:
Long-term........................ 426,634 335,696 292,493 319,829 362,410
Short-term....................... 71,422 128,237 17,772 6,220 42,396
Current maturities............... 6,917 11,933 35,761 32,905 23,621
--------- --------- --------- --------- ---------
Total.......................... 504,973 475,866 346,026 358,954 428,427
Stockholders' equity............... 1,415,260 1,285,202 908,651 782,008 691,364
Working capital.................... 425,631 385,159 241,457 395,160 325,076
Property and equipment:
At cost.......................... 1,249,729 994,520 778,376 602,916 503,238
Accumulated depreciation and
amortization................... 569,670 430,249 352,852 287,028 213,026
--------- --------- --------- --------- ---------
Property and equipment, net...... 680,059 564,271 425,524 315,888 290,212
Current assets to current
liabilities...................... 1.5:1 1.4:1 1.3:1 1.8:1 1.6:1
Debt to total capitalization....... 26.3% 27.0% 27.6% 31.5% 38.3%
Book value per share............... $ 18.84 $ 17.36 $ 13.11 $ 12.02 $ 10.77
Stock price range (high)........... 80.75 52.63 41.75 26.83 28.00
(low)............... 46.50 35.25 23.33 19.00 17.42
31
FIVE-YEAR REVIEW (UNAUDITED) (CONTINUED)
FISCAL YEAR
-------------------------------------------------------------------------
IN THOUSANDS EXCEPT PER-SHARE AMOUNTS 1996 1995 1994 1993 1992
- ------------------------------------- ------------- ------------- ------------- ------------- -------------
Revenues............................. $ 4,740,760 $ 3,788,026 $ 2,896,390 $ 2,780,828 $ 2,431,200
------------- ------------- ------------- ------------- -------------
Costs of services.................... 3,695,989 2,961,955 2,268,655 2,204,933 1,951,426
Selling, general and
administrative..................... 467,588 383,973 294,641 287,645 254,904
Depreciation and amortization........ 272,057 190,240 146,602 135,813 102,136
Interest, net........................ 32,143 27,304 12,979 15,222 15,888
Restructuring and other items, net
(note 2)........................... 50,053 3,740 32,629 460 3,250
Charge for purchased research &
development (note 1)............... 26,000 15,963
------------- ------------- ------------- ------------- -------------
Total costs and expenses............. 4,543,830 3,567,212 2,771,469 2,644,073 2,327,604
------------- ------------- ------------- ------------- -------------
Income before taxes.................. 196,930 220,814 124,921 136,755 103,596
Taxes on income...................... 87,499 77,577 57,499 58,487 48,845
------------- ------------- ------------- ------------- -------------
Income before cumulative effect of
accounting change, extraordinary
credit and discontinued
operations......................... 109,431 143,237 67,422 78,268 54,751
Cumulative effect of accounting
change for income taxes............ 4,900
Extraordinary credit--utilization of
tax loss carry-forwards............ 800
Discontinued operations.............. (8,870)
------------- ------------- ------------- ------------- -------------
Net income........................... $ 109,431 $ 143,237 $ 72,322 $ 79,068 $ 45,881
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Earnings per common share before
cumulative effect of accounting
change and discontinued
operations......................... $ 1.43 $ 1.99 $ 0.99 $ 1.19 $ 0.85
Cumulative effect of accounting
change for income taxes............ 0.07
Extraordinary credit................. .01
Discontinued operations.............. (.14)
------------- ------------- ------------- ------------- -------------
Earnings per common share............ $ 1.43 $ 1.99 $ 1.06 $ 1.20 $ 0.71
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Shares used to compute earnings per
share.............................. 76,534,794 71,850,949 68,366,304 65,670,506 64,793,760
Dividends per common share........... * * * *
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Note: The selected financial data has been restated to include the results of
Continuum, Paxus and Hogan, accounted for as poolings of interests, for
all periods presented. Per-share amounts are restated for a three-for-one
stock split, distributed in the form of a 200% stock dividend on January
13, 1994.
* Hogan paid dividends to its shareholders of record of $.15 per share during
fiscal 1992 and 1993 and $.17 per share during fiscal 1994 and 1995. Hogan did
not pay a dividend to its shareholders of record for fiscal 1996. No other
dividends were paid by CSC or any of its affiliates during fiscal 1992 through
1996.
32
(C) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)*
COMPUTER SCIENCES CORPORATION
FISCAL 1996
-----------------------------------------------------
IN THOUSANDS EXCEPT PER-SHARE AMOUNTS 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- --------------------------------------------- ----------- ----------- ----------- -----------
Revenues..................................... $ 1,082,963 $ 1,128,648 $ 1,236,674 $ 1,292,475
Costs of services............................ 849,725 881,692 956,840 1,004,010
Selling, general and administrative.......... 109,033 112,157 129,817 120,302
Depreciation and amortization................ 60,188 63,547 69,296 79,027
Interest, net................................ 7,395 8,352 8,616 7,780
Charge for purchased research & development
(note 1)................................... 26,000
Restructuring and other items (note 2)....... 50,053
----------- ----------- ----------- -----------
Total costs and expenses..................... 1,026,341 1,065,748 1,190,569 1,261,172
----------- ----------- ----------- -----------
Income before taxes.......................... 56,622 62,900 46,105 31,303
Net income................................... 35,941 39,569 19,721 14,200
Net earnings per share....................... 0.47 0.51 0.25 0.18
FISCAL 1995
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Revenues..................................... $ 831,202 $ 888,701 $ 930,570 $ 1,137,553
Costs of services............................ 646,922 698,466 731,942 884,625
Selling, general and administrative.......... 92,939 91,593 91,094 108,347
Depreciation and amortization................ 41,737 44,133 45,851 58,519
Interest, net................................ 5,766 5,910 8,017 7,611
Other items (note 2)......................... 3,740
----------- ----------- ----------- -----------
Total costs and expenses..................... 787,364 840,102 876,904 1,062,842
----------- ----------- ----------- -----------
Income before taxes.......................... 43,838 48,599 53,666 74,711
Net income................................... 27,502 30,544 33,903 51,288
Net earnings per share....................... 0.39 0.43 0.48 0.70
* Quarterly financial information has been restated to reflect the merger with
Continuum. Interest income has been removed from Continuum's revenues to
conform with CSC's presentation.
33
(D) FINANCIAL STATEMENTS AND EXHIBITS FOR THE FISCAL QUARTER ENDED JUNE 28, 1996
COMPUTER SCIENCES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT EXHIBITS
FINANCIAL STATEMENTS
PAGE
-----
Consolidated Condensed Statements of Income for the first quarters ended June 28, 1996 and June 30, 1995... 35
Consolidated Condensed Balance Sheets as of June 28, 1996 and March 29, 1996............................... 36
Consolidated Condensed Statements of Cash Flows for the first quarters ended June 28, 1996 and June 30,
1995..................................................................................................... 37
Notes to Consolidated Condensed Financial Statements....................................................... 38
EXHIBITS
Exhibit 11--Calculation of Earnings per Share.............................................................. 39
Exhibit 28--Revenues by Market Sector...................................................................... 40
34
COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
FIRST QUARTER ENDED
--------------------------
JUNE 28, JUNE 30,
IN THOUSANDS EXCEPT PER-SHARE AMOUNTS 1996 1995
- -------------------------------------------------------------------------------------- ------------ ------------
Revenues.............................................................................. $ 1,303,892 $ 1,082,963
------------ ------------
Costs of services..................................................................... 1,037,208 849,725
Selling, general and administrative................................................... 116,453 109,033
Depreciation and amortization......................................................... 71,607 60,188
Interest expense...................................................................... 8,314 9,352
Interest income....................................................................... (1,463) (1,957)
------------ ------------
Total costs and expenses.............................................................. 1,232,119 1,026,341
------------ ------------
Income before taxes................................................................... 71,773 56,622
Taxes on income....................................................................... 26,496 20,681
------------ ------------
Net income............................................................................ $ 45,277 $ 35,941
------------ ------------
------------ ------------
Earnings per common share (note A).................................................... $ 0.58 $ 0.47
------------ ------------
------------ ------------
(See accompanying notes)
35
COMPUTER SCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 28, MARCH 29,
IN THOUSANDS 1996 1996
- --------------------------------------------------------------------- --------- ---------
(UNAUDITED)
Current assets:
Cash and cash equivalents.......................................... $ 33,293 $ 113,873
Receivables........................................................ 1,228,062 1,106,857
Prepaid expenses and other current assets.......................... 126,418 134,033
--------- ---------
Total current assets............................................. 1,387,773 1,354,763
--------- ---------
Property and equipment--at cost...................................... 1,367,113 1,249,729
Less accumulated depreciation and amortization..................... 624,624 569,670
--------- ---------
Property and equipment, net...................................... 742,489 680,059
--------- ---------
Excess of cost of businesses acquired over related net assets, net... 472,396 457,912
Other assets......................................................... 454,726 442,889
--------- ---------
Total assets....................................................... $3,057,384 $2,935,623
--------- ---------
--------- ---------
Current liabilities:
Short-term debt and current maturities of long-term debt........... $ 99,148 $ 78,339
Accounts payable................................................... 177,182 186,460
Accrued payroll and related costs.................................. 237,853 222,620
Other accrued expenses............................................. 243,459 262,961
Deferred revenue................................................... 117,203 111,075
Income taxes payable............................................... 72,602 67,677
--------- ---------
Total current liabilities........................................ 947,447 929,132
--------- ---------
Long-term debt, net.................................................. 458,679 426,634
--------- ---------
Other long-term liabilities.......................................... 174,269 164,597
--------- ---------
Stockholders' equity (note B)
Common stock issued, par value $1.00 per share..................... 75,810 75,429
Other stockholders' equity......................................... 1,401,179 1,339,831
--------- ---------
Total stockholders' equity....................................... 1,476,989 1,415,260
--------- ---------
Total liabilities and stockholders' equity....................... $3,057,384 $2,935,623
--------- ---------
--------- ---------
(See accompanying notes)
36
COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FIRST QUARTER ENDED
------------------------
JUNE 28, JUNE 30,
IN THOUSANDS, INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1996 1995
- ---------------------------------------------------------------------------------------- ----------- -----------
Cash flows from operating activities:
Net income............................................................................ $ 45,277 $ 35,941
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization....................................................... 71,607 60,105
Provision for losses on accounts receivable......................................... 2,677 6,412
Increase in assets................................................................ (88,766) (121,019)
Decrease in liabilities........................................................... (42,046) (51,518)
----------- -----------
Net cash used in operating activities................................................... (11,251) (70,079)
----------- -----------
Investing activities:
Purchases of property, plant and equipment............................................ (64,131) (45,365)
Acquisitions, net of cash acquired.................................................... (55,366) (24,830)
Outsourcing contracts................................................................. (21,108)
Purchased and internally developed software........................................... (13,180) (5,953)
Other investing cash flows............................................................ 2,415 (6,291)
----------- -----------
Net cash used in investing activities................................................... (130,262) (103,547)
----------- -----------
Financing activities:
Borrowing under (repayment of) commercial paper, net.................................. 27,009 (1,338)
Borrowing under lines of credit, net.................................................. 18,977 27,437
Principal payments on long-term debt.................................................. (303) (877)
Proceeds from stock option transactions............................................... 11,424 4,176
Other financing cash flows............................................................ 3,826 (988)
----------- -----------
Net cash provided by financing activities............................................... 60,933 28,410
----------- -----------
Net decrease in cash and cash equivalents............................................... (80,580) (145,216)
Cash and cash equivalents at beginning of year.......................................... 113,873 207,599
----------- -----------
Cash and cash equivalents at end of period.............................................. $ 33,293 $ 62,383
----------- -----------
----------- -----------
(See accompanying notes)
37
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
A) Primary earnings per common share are based on the weighted average number of
common stock and common stock equivalent shares (dilutive stock options)
outstanding of 77,677,000 and 76,245,000 respectively, for the three months
ended June 28, 1996, and June 30, 1995 (see Part II, Exhibit 11).
B) No dividends were paid during the periods presented. There were 75,810,240
shares at June 28, 1996 and 75,428,622 shares at March 29, 1996 of $1.00 par
value common stock issued with 324,220 and 311,928 shares, respectively, of
treasury stock.
C) Cash payments for interest on indebtedness were $11,362,000 and $12,773,000,
respectively, for the three months ended June 28, 1996, and June 30, 1995.
Cash payments for taxes on income were $9,354,000 and $14,719,000,
respectively, for the three months ended June 28, 1996, and June 30, 1995.
D) The financial information reported, which is not necessarily indicative of
the results for a full year, is unaudited but includes all adjustments which
the Company considers necessary for a fair presentation. All such
adjustments are normal recurring adjustments.
E) Certain reclassifications have been made to reflect the acquisition of
Continuum, which was accounted for as a pooling of interests. Continuum's
expense classifications have been reclassified to conform to CSC's
presentation. Continuum's interest income has been removed from its revenues
to conform to CSC's separate presentation of interest income. Additionally,
Continuum's common stock equivalents have been converted to CSC shares at
the exchange rate of .79 and included in the average common shares
outstanding.
38
EXHIBIT 11
COMPUTER SCIENCES CORPORATION
CALCULATION OF EARNINGS PER SHARE (UNAUDITED)
FIRST QUARTER ENDED
--------------------
JUNE 28, JUNE 30,
IN THOUSANDS EXCEPT PER-SHARE AMOUNTS 1996 1995
- -------------------------------------------------------------------------------------------- --------- ---------
Net income.................................................................................. $ 45,277 $ 35,941
--------- ---------
--------- ---------
Shares:
Weighted average shares outstanding....................................................... 75,273 74,017
Common stock equivalents.................................................................. 2,404 2,228
--------- ---------
Total for primary and fully diluted....................................................... 77,677 76,245
--------- ---------
--------- ---------
Earnings Per Share:
Primary and fully diluted*.............................................................. $ 0.58 $ 0.47
--------- ---------
--------- ---------
* The fully diluted calculation is submitted in accordance with Regulation S-K
item 601 (b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
39
EXHIBIT 28
COMPUTER SCIENCES CORPORATION
REVENUES BY MARKET SECTOR (UNAUDITED)
FIRST QUARTER ENDED % OF TOTAL
-------------------- ------------------------
JUNE 28, JUNE 30, JUNE 28, JUNE 30,
DOLLARS IN MILLIONS 1996 1995 1996 1995
- ---------------------------------------------------------------------- --------- --------- ----------- -----------
U. S. Commercial.................................................... $ 482.4 $ 409.6 37 38
International....................................................... 375.8 290.7 29 27
--------- --------- --- ---
Global Commercial................................................. 858.2 700.3 66 65
--------- --------- --- ---
Dept. of Defense.................................................... 297.0 224.6 23 21
NASA................................................................ 75.6 79.0 6 7
Civil Agencies...................................................... 73.1 79.1 5 7
--------- --------- --- ---
U. S. Federal Government.......................................... 445.7 382.7 34 35
--------- --------- --- ---
Total revenues...................................................... $ 1,303.9 $ 1,083.0 100% 100%
--------- --------- --- ---
--------- --------- --- ---
40
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
The financial statements and exhibits listed below are filed as a part of
this report:
(a)FINANCIAL STATEMENTS.
The consolidated financial statements of the Registrant as of March 29,
1996 and March 31, 1995 and for each of the three years in the period
ended March 29, 1996, the report of Deloitte & Touche LLP dated October
25, 1996 with respect thereto, the report of Ernst & Young LLP dated May
1, 1996, included therein, on the financial statements of The Continuum
Company, Inc. as of March 31, 1996 and 1995 and for each of the three
years in the period ended March 31, 1996, and the report of Price
Waterhouse LLP dated April 1, 1995, included therein, on the financial
statements of Hogan Systems, Inc. at March 31, 1995 and 1994 and for each
of the three years in the period ended March 31, 1995.
(b)EXHIBITS.
None.
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
COMPUTER SCIENCES CORPORATION
By /s/ DENIS M. CRANE
----------------------------------
Denis M. Crane
VICE PRESIDENT AND CONTROLLER
Dated: October 31, 1996 CHIEF ACCOUNTING OFFICER
42