-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WJ5OaHOESVYMrT51hWZ8lzPOkyMLRpAVniW2KOiEZ7yqOVN+oCfF0fEi+mPzQi7n C0TW2Ij0zCrI3POjbDC35g== 0000898430-99-002581.txt : 19990623 0000898430-99-002581.hdr.sgml : 19990623 ACCESSION NUMBER: 0000898430-99-002581 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990402 FILED AS OF DATE: 19990622 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUTER SCIENCES CORP CENTRAL INDEX KEY: 0000023082 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 952043126 STATE OF INCORPORATION: NV FISCAL YEAR END: 0328 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04850 FILM NUMBER: 99650219 BUSINESS ADDRESS: STREET 1: 2100 E GRAND AVE CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3106150311 MAIL ADDRESS: STREET 1: 2100 EAST GRAND AVE CITY: EL SEGUNDO STATE: CA ZIP: 90245 10-K 1 FISCAL YEAR ENDED APRIL 2, 1999 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended April 2, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------- ---------- Commission File No.: 1-4850 COMPUTER SCIENCES CORPORATION (Exact name of Registrant as specified in its charter) [LOGO APPEARS HERE] Nevada 95-2043126 (State of incorporation or organization) (I.R.S. Employer Identification No.) 2100 East Grand Avenue El Segundo, California 90245 (Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (310) 615-0311 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of each exchange on which registered - --------------------------------------- ---------------------------------------- Common Stock, $1.00 par value per share New York Stock Exchange Preferred Stock Purchase Rights Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of June 18, 1999, the aggregate market value of stock held by non- affiliates of the Registrant was approximately $10,619,000,000. A total of 159,638,183 shares of common stock was outstanding as of such date. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after April 2, 1999, are incorporated by reference into Part III hereof. TABLE OF CONTENTS
Item Page ---- ---- Part I 1. Business........................................................... 1 2. Properties......................................................... 6 3. Legal Proceedings.................................................. 7 4. Submission of Matters to a Vote of Security Holders................ 7 Part II 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................................................ 9 6. Selected Financial Data............................................ 9 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 11 7A. Quantitative and Qualitative Disclosures about Market Risk......... 18 8. Financial Statements and Supplementary Data........................ 19 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................... 45 Part III 10. Directors and Executive Officers of the Registrant................. 45 11. Executive Compensation............................................. 45 12. Security Ownership of Certain Beneficial Owners and Management..... 45 13. Certain Relationships and Related Transactions..................... 45 Part IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 46
PART I Item 1. Business INTRODUCTION AND HISTORY General Computer Sciences Corporation ("CSC" or the "Company") is one of the world leaders in the information technology ("I/T") services industry. Since it was founded in 1959, the Company has helped clients use I/T more efficiently, thus improving their operations and profitability. CSC does not have exclusive agreements with hardware or software providers and believes that this "vendor neutrality" enables it to better identify and manage solutions specifically tailored to each client's needs. CSC offers a broad array of professional services to industry and government and specializes in the application of advanced and complex I/T to achieve its customers' strategic objectives. The Company's services, both U.S. federal and global commercial, include outsourcing, system integration and I/T and management consulting and other professional services. Outsourcing includes operating all or a portion of a customer's technology infrastructure, including systems analysis, applications development, network operations, desktop computing and data center management. CSC also provides business process outsourcing, which is the management of a client's non-core business functions, such as claims processing, credit checking, or customer call centers. Systems integration encompasses designing, developing, implementing and integrating complete information systems. I/T and management consulting and other professional services include advising clients on the strategic acquisition and utilization of I/T, and on business strategy, operations, change management and business process reengineering. The Company also licenses sophisticated software systems for certain vertical markets. Practice Areas The Company's service offerings are focused primarily on the U.S. federal government and on global commercial industries including aerospace; automotive; chemical and energy; consumer goods; financial services; healthcare; manufacturing; media; public sector; retail/distribution; telecommunications; traffic and transportation; travel and hospitality; and utilities. Because of the size of its offerings within the financial services, healthcare, and chemical and energy industries, CSC has formed vertical industry groups to better deliver integrated solutions to clients in these industries. CSC has also formed dedicated practice groups with respect to certain key technical solutions that have broad application to both industry and government. These solutions include: Electronic commerce--CSC expanded its global e-business offerings with five new solutions designed to accelerate the efforts of clients to meet the demands of the emerging digital economy. The offerings include: . Customer Relationship Management--provides applications and processes for acquiring and retaining customers, and increasing profitability via fundamental changes in marketing, sales and customer service; . Electronic Bill Presentation--delivers personalized, electronic bills over the Internet to reduce costs, improve customer service and exploit cross-selling opportunities; . Collaborative Planning--creates and facilitates processes, metrics and technologies among electronic trading partners; . Electronic Procurement--automates, streamlines and customizes a company's purchasing process; and . Secured Extranet Community--provides a secure online workspace for information dissemination and collaboration among customers and/or trade partners and employees. 1 CSC LynxSM--A framework for rapid systems development. Distributed information technology solutions enable faster access to information and the ability to process business transactions via the Internet. CSC has developed a framework that includes components, an architecture, a process and tools for creating these solutions quickly. Data Warehousing--A repository for company data that allows for complex analysis and decision making based on historical enterprise data. CSC's customers are able to "test drive" solutions in the Company's data warehouse applications lab. Enterprise Resource Planning ("ERP")--Enterprise-wide applications that can integrate disparate business functions, such as finance, manufacturing and human resources, into one cohesive system making data easier to find, update and analyze. CSC has global alliances with four software companies which comprise approximately 70% of the ERP market, and has developed a customized methodology for faster implementation of ERP systems. Information Security (INFOSECSM)--CSC's INFOSEC capabilities originated from its security contracts with the Department of Defense and other U.S. federal agencies. The Company's INFOSEC practice develops and tests new world-class solutions for both government and commercial clients. Supply Chain Management--A process for capturing efficiencies throughout the business and logistics functions that move goods and information between an organization and its suppliers, manufacturers, distributors and customers. This process can provide greater value to customers, quicker time-to-market and reduced costs. CSC's supply chain practice uses the Company's best practices center to demonstrate proven solutions to CSC's customers. Major Markets For four decades, CSC has provided I/T services to the U.S. federal government. In fiscal 1986, when U.S. federal contracts represented 70% of the Company's revenues, CSC decided to devote substantial resources to further develop global commercial business in order to accelerate its growth and take advantage of the competencies gained as a leader in the federal sector. As a result of this strategy, CSC has increased its penetration of the global commercial market and diversified its business. During the last three fiscal years, the Company's revenue mix was as follows:
1999 1998 1997 ---- ---- ---- U.S. Commercial.......................................... 41% 42% 39% Europe................................................... 29 27 26 Other International...................................... 7 6 6 --- --- --- Global Commercial.......................................... 77 75 71 U.S. Federal Government.................................... 23 25 29 --- --- --- Total Revenues............................................. 100% 100% 100% === === ===
Global Commercial Market United States--CSC is a major provider of outsourcing services to U.S. commercial clients, including systems analysis, applications development, network operations, and desktop and data center management. During fiscal 1999, the Company was awarded extensions and additional business with General Dynamics, and was awarded new outsourcing contracts with AT&T, Republic Services Corporation, Budget Group and Premier, Inc. - -------- INFOSECSM is a service mark of the National Security Agency. 2 General Dynamics extended its original 10-year outsourcing contract and signed a new contract extending through 2004 at an estimated value of $500 million for three business units. In addition, CSC was designated as the exclusive provider of I/T services to General Dynamics for all other business units and future acquisitions. As a result, the Company signed a 10-year outsourcing agreement with General Dynamics Information Systems and Computing Devices Company Limited. AT&T outsourced a portfolio of 50 systems applications supporting AT&T Consumer Services. Included in this applications outsourcing effort are software systems supporting telemarketing and customer support, provisioning and provisioning support, and compensation and commissions for sales and support. Under the agreement with Republic Services Corporation, CSC acquired and manages Republic National Bank's data center, help-desk, network and communications operations. For Budget Group, Inc., CSC is combining its outsourcing and business transformation skills to help streamline and consolidate I/T operations including data centers, networks, user support, applications and maintenance. Premier, Inc. is an alliance of approximately 220 U.S. hospitals and healthcare systems for which CSC will support internal I/T operations including application development, hardware, networks and desktop management. The application development support will include intranet, e-commerce and contract management associated with Premier's global purchasing operations. CSC also provides consulting and technical services to its U.S. commercial clients, both in the development and integration of computer and communications systems and in various industry-specific I/T services. The Company's experience includes business process reengineering, the setting of information technology strategy, the development of information systems for a wide range of applications and the operation of computer facilities. As a prime contractor to the U.S. Postal Service ("USPS"), CSC is providing comprehensive business consulting and I/T services to improve the payroll and benefit function of the USPS, one of the world's largest employers with a payroll of over 850,000 people. CSC also made two acquisitions during fiscal 1999 to broaden its offerings in the U.S. commercial consulting area. The Company acquired Onward Technologies Inc., a Web-focused consulting, development and systems integration firm to extend its expertise in Internet marketing, electronic commerce and customer extranets, accelerating the creation of a center of excellence focused on helping CSC achieve its electronic commerce goals. CSC also acquired T-Wack Software Group, Inc., a software design and development firm based in Buffalo Grove, IL. The Company markets business information systems, software and services to the insurance and financial services industries and to the U.S. managed healthcare industry, clinics and physicians. In addition, CSC provides services for administering life and disability insurance for credit loans and mortgages, collateral-protection insurance and warranty insurance. Also in the U.S. financial services arena, the Company provides consumer credit reports and account-management services to thousands of credit grantors nationwide. Through an agreement with Equifax Inc., a major credit services company, the Company offers retail chains and other large credit grantors the benefits of a national file of consumer credit histories. The national file enables customers to obtain credit information from a single source, instead of dealing with multiple reporting services. International--The Company's international operations provide a wide range of information technology services to commercial and public sector clients. CSC has major offices in the United Kingdom, France, Germany, Belgium, the Netherlands, Denmark, Italy, Australia, and Singapore, and provides substantially the same services to its international customers that it provides to its U.S. customers. These services span the range of consulting and professional services, systems integration and outsourcing. Current activities include recent contracts with Nokia Telecommunications, ICO Global Communications, Australian Mutual Provident Society, 3 Deutsche Leasing AG, New South Wales Department of Community Services, Kaman Aerospace and Belgian Ministry of Finance. During fiscal 1999, the Company increased its presence in the international markets through the following acquisitions: . Approximately 74% of CSA Holdings, Ltd., a leading Asian I/T services provider headquartered in Singapore. CSA has regional offices in 10 Asian countries with operations and distributor arrangements extending their presence to other countries; . KPMG Peat Marwick SA, a Paris-based management consulting and information technology services firm, significantly increasing CSC's capabilities in France; . SYS-AID, a Dutch management consulting and I/T services company specializing in logistics, finance and I/T support, including implementation of ERP systems; . Pergamon Gesellschaft fur angewandte Informatik mbH, an I/T consulting firm headquartered in Wurzburg, Germany specializing in the financial services market; . Informatica Group SpA, an Italian information technology consultancy and systems integration company, providing a full range of I/T services to the Italian banking and finance, industrial, telecommunications, insurance and public sectors; and . Progres 2, Progres Iniziativa, Progres Progetti, and Progres Veneto, four I/T services and consulting companies now operating as CSC Progres and headquartered in Milan, Italy. U.S. Federal Government Market The Company provides a broad array of services to the U.S. federal government, ranging from traditional systems integration and outsourcing to advanced technical undertakings and complex project management. CSC has extensive experience in the development of software for mission-critical systems for defense and civil agency applications, and also provides systems engineering and technical assistance in network management, satellite communications, intelligence, aerospace, logistics, and related high- technology fields. The Internal Revenue Service selected the CSC PRIME Alliance to enter into a strategic partnership with the IRS to modernize the United States tax system. CSC leads the CSC PRIME Alliance, which includes six other companies: International Business Machines Corporation, KPMG Peat Marwick LLP, Lucent Technologies Inc., Northrop Grumman Corporation, Science Applications International Corporation, and UNISYS Corporation. The CSC PRIME Alliance combines CSC's global capabilities with the specialized business, technical and consulting capabilities of the other alliance members. In August 1998, CSC was awarded the first U.S. federal government outsourcing contract involving the voluntary transition of federal employees to the private sector. Under the agreement with the National Security Agency ("NSA"), titled the NSA BREAKTHROUGH Program, CSC will maintain daily computer systems operations and provide services involving development support for software enhancements, configuration management, installations and upgrades of hardware and systems software and associated customer support. In January 1999, the U.S. General Service Administration selected CSC as one of ten companies to provide I/T services and support for the Federal Technology Service, Federal Information Systems Support program under an indefinite delivery/indefinite quantity contract. Under this type of contract, a group of service providers is selected to provide as yet unspecified services to a U.S. federal agency or department, which then assigns each required project within the specified scope of work to one of the service providers within the selected group. The contract calls for the ten selected companies to provide services and support for a two-year base period, with eight one-year extension options. 4 Other typical activities in the U.S. federal market include supporting the Federal Aviation Administration's National EnRoute Software system, developing the next generation of NAVSTAR Global Positioning System satellites for the Air Force, and operating the computer center and supporting management information systems for the Air Force's flight simulation test facilities at the Arnold Engineering Development Center. Federal activities also include providing command, control, and communication technical engineering and integration to the U.S. Army Communications Electronics Command, upgrading the Navy's AEGIS Weapon Systems and providing technical information systems security applications to the Department of Defense, among other federal agencies and departments. COMPETITION The I/T market in which CSC competes is not dominated by a single company or a small number of companies. A substantial number of companies offer services that overlap and are competitive with those offered by CSC. Some of these are large industrial firms, including computer manufacturers and major aerospace firms that have greater financial resources than CSC and, in some cases, may have greater capabilities to perform services similar to those provided by CSC. The Company's ability to obtain business is dependent upon its ability to offer better strategic concepts and technical solutions, better value, a quicker response, or a combination of these factors. In the opinion of the Company's management, CSC is positioned to compete effectively in the global commercial and U.S. federal government markets based on its technology and systems expertise and large project management skills. It is also management's opinion that CSC's competitive position is enhanced by its recognized position as a leader in management consulting and the full spectrum of services that it provides. EMPLOYEES The Company has 700 offices worldwide, and currently employs approximately 50,000 persons, of which more than 42,000 are professionals. The services provided by CSC require proficiency in many fields, such as computer sciences, programming, mathematics, physics, engineering, astronomy, geology, operations, research, economics, statistics and business administration. 5 Item 2. Properties
Owned properties as of Approximate April 2, 1999 Square Footage General Usage - ---------------------- -------------- ------------- Copenhagen, Denmark........ 423,000 Computer and General Office Facility Falls Church, Virginia..... 290,000 General Office El Segundo, California..... 206,000 General Office Austin, Texas.............. 187,000 General Office Newark, Delaware........... 183,000 Computer and General Office Facility San Diego, California...... 178,000 Computer and General Office Facility Wilmington, Delaware....... 175,000 Computer and General Office Facility Norwich, Connecticut....... 149,000 Computer and General Office Facility Meriden, Connecticut....... 119,000 Computer and General Office Facility Moorestown, New Jersey..... 99,000 General Office Herndon, Virginia.......... 87,000 General Office Maidstone, United Kingdom.. 79,000 Computer and General Office Facility Hong Kong.................. 73,000 General Office Singapore.................. 61,000 General Office St. Leonards, NSW, Australia................. 60,000 General Office Sterling, Virginia......... 45,000 General Office Various other U.S. and foreign locations......... 73,000 Primarily General Office Leased properties as of April 2, 1999 - ----------------------- Washington, D.C. area...... 948,000 Computer and General Office Facility Texas...................... 616,000 Computer and General Office Facility United Kingdom............. 538,000 General Office Germany.................... 453,000 General Office Australia and other Pacific Rim locations............. 443,000 Computer and General Office Facility New Jersey................. 413,000 General Office Boston, Massachusetts area. 255,000 General Office France..................... 165,000 General Office Chicago, Illinois area..... 161,000 General Office Ohio....................... 152,000 General Office Albany, New York area...... 134,000 General Office Detroit, Michigan area..... 120,000 General Office Denmark.................... 115,000 General Office California................. 114,000 General Office Connecticut................ 109,000 General Office Alabama.................... 109,000 General Office Various other U.S. and foreign locations......... 837,000 Computer and General Office Facility
Upon expiration of its leases, the Company does not anticipate any difficulty in obtaining renewals or alternative space. Lease expiration dates range from fiscal 2000 through 2018. 6 Item 3. Legal Proceedings The Company is engaged in several legal proceedings resulting from the unsolicited tender offer for the Company by Computer Associates International, Inc. during fiscal 1998. These proceedings include various stockholder class action lawsuits filed in Nevada, and litigation in California between the Company, Computer Associates, Bear, Stearns & Co. Inc. and certain related persons and entities. The Company is also party to a number of other disputes which involve or may involve litigation. It is the opinion of the Company's management that the ultimate liability, if any, with respect to these proceedings and disputes will not be material to the Company's consolidated financial statements. Item 4. Submission of Matters to a Vote of Security Holders None. Executive Officers of the Registrant
Year First Elected as Term as Position Held with the Family Name Age an Officer Officer Registrant Relationship ---- --- ---------- ---------- ---------------------- ------------ Van B. Honeycutt* 54 1987 Indefinite Chairman, President and None Chief Executive Officer Vice President and Chief Leon J. Level* 58 1989 Indefinite Financial Officer None Harvey N. Bernstein 52 1988 Indefinite Vice President None Edward P. Boykin 60 1995 Indefinite Vice President None Milton E. Cooper 60 1992 Indefinite Vice President None Vice President and Scott M. Delanty 44 1997 Indefinite Controller None Hayward D. Fisk 56 1989 Indefinite Vice President, General None Counsel and Secretary Ronald W. Mackintosh 50 1993 Indefinite Vice President None C. Bruce Plowman 61 1989 Indefinite Vice President None Paul T. Tucker 51 1997 Indefinite Vice President None
- -------- * Director of the Company Business Experience of Officers Van B. Honeycutt was elected Chairman of the Board of Directors effective March 29, 1997. He was appointed Chief Executive Officer of the Company effective April 1, 1995. He joined the Company in 1975 and was elected President and Chief Operating Officer during 1993. Prior to his election he was a Vice President of CSC and President of the Industry Services Group. He was formerly President of CSC Credit Services, Inc., where he directed the growth of this wholly owned subsidiary into one of the Company's major commercial units. He has held a variety of other positions with the Company. Leon J. Level joined the Company in 1989 as Vice President and Chief Financial Officer and as a member of CSC's Board of Directors. Former positions include Vice President and Treasurer of Unisys Corporation and Chairman of Unisys Finance Corporation; Assistant Corporate Controller and Executive Director of The Bendix Corporation; and Principal with the public accounting firm of Deloitte & Touche LLP. He is a Certified Public Accountant. Harvey N. Bernstein joined the Company as Assistant General Counsel in 1983. He became Deputy General Counsel and was elected a Vice President in 1988. Prior to joining the Company, he specialized in government procurement law at the firm of Fried, Frank, Harris, Shriver & Jacobson in Washington, D.C. Edward P. Boykin joined the Company in 1966 and has held numerous positions with several divisions of the Company. He was elected a Vice President in 1995. Since May, 1999, he has been President of the Financial 7 Services Group. From 1998 to 1999, he was responsible for leveraging the capabilities that exist within the J.P. Morgan and DuPont accounts in Delaware and Asia Pacific. Previously, he was President of The Pinnacle Alliance, a CSC-managed organization providing information technology outsourcing and other services to J.P. Morgan, from 1996 to 1998, and President of the Technology Management Group from 1993 to 1996. Milton E. Cooper joined the Company in 1984 as Group Vice President of program development. He was named President of the Federal Sector, formerly known as the Systems Group, in December 1991 and became a Corporate Vice President in January 1992. A veteran of 36 years in the information industry, he has held senior sales and marketing positions with IBM Corporation and Telex Corporation. He is a graduate of the United States Military Academy at West Point. Scott M. Delanty joined the Company in 1989 and served as Assistant Controller until December, 1997, when he was elected Vice President and Controller. Prior to joining the Company, he held various executive-level finance positions in the healthcare industry and was an audit manager with the public accounting firm of Ernst & Young LLP. He is a Certified Public Accountant. Hayward D. Fisk joined the Company in 1989 as Vice President, General Counsel and Secretary. Prior to joining the Company, he was associated for 21 years with Sprint Corporation (formerly United Telecommunications, Inc.), in various legal and executive officer positions, most recently as Vice President and Associate General Counsel. Ronald W. Mackintosh joined the Company in 1988 as a result of the Index acquisition, where he was Managing Director of its London office. Previously he was a partner in the London office of Nolan, Norton & Company. In 1991, he was named Chief Executive Officer of the Company's U.K. Operations and, subsequently, President of the European Group. In 1993 he was elected a Vice President of the Company. C. Bruce Plowman joined the Company in 1982 as Director of Corporate Communications. In 1989, he was elected a Vice President with responsibility for investor relations, marketing communications, public relations and employee communications. Prior to joining CSC, he spent 16 years at Continental Airlines, where he was Director of Public Information. Paul T. Tucker joined the Company in 1996 as a Corporate Development executive, and in August, 1997 was elected Vice President of Corporate Development. Prior to joining the Company, he was President and Chief Executive Officer of Knight-Ridder Financial, an electronic real-time financial market information company, from 1990 to 1995. Previously, he founded and served as President and Chief Technologist of HAL Communications Corp., a communications hardware and software company and was an Associate Professor and Senior Research Engineer at the University of Illinois. 8 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Common stock of Computer Sciences Corporation is listed and traded on the New York Stock Exchange and Pacific Exchange under the ticker symbol "CSC." As of June 18, 1999, the number of registered shareholders of Computer Sciences Corporation's common stock was 8,818. The table shows the high and low intra-day prices of the Company's common stock as reported on the composite tape of the New York Stock Exchange for each quarter during the last two calendar years and through June 18, 1999.
1999 1998 1997 ---------------- ----------------- ---------------- Calendar Quarter High Low High Low High Low ---------------- ------ -------- -------- -------- ------- -------- 1st................... 74 3/8 54 15/16 56 3/4 39 31/32 41 3/16 30 13/16 2nd................... 68 1/8* 52 3/8* 65 49 1/8 40 1/16 28 15/16 3rd................... 74 7/8 51 1/2 41 9/16 34 1/2 4th................... 70 15/16 46 1/4 43 7/8 33 5/8
- -------- * Through June 18, 1999 Item 6. Selected Financial Data COMPUTER SCIENCES CORPORATION
Five-Year Review ------------------------------------------------------ April 2, April 3, March 28, March 29, March 31, In thousands except per-share 1999 1998 1997 1996 1995 amounts ---------- ---------- ---------- ---------- ---------- Total assets................. $5,007,709 $4,046,795 $3,493,087 $2,936,019 $2,631,580 Debt: Long-term.................. 397,860 736,054 630,842 426,634 335,696 Short-term................. 426,421 7,110 20,311 71,422 128,237 Current maturities......... 166,521 21,811 9,622 6,917 11,933 ---------- ---------- ---------- ---------- ---------- Total.................... 990,802 764,975 660,775 504,973 475,866 Stockholders' equity......... 2,399,854 2,001,275 1,669,560 1,420,113 1,290,769 Working capital.............. 587,573 767,820 533,915 430,484 390,726 Property and equipment: At cost.................... 2,313,444 1,944,799 1,668,905 1,249,729 994,520 Accumulated depreciation and amortization.......... 1,226,569 987,606 780,836 569,670 430,249 ---------- ---------- ---------- ---------- ---------- Property and equipment, net....................... 1,086,875 957,193 888,069 680,059 564,271 Current assets to current liabilities................. 1.3:1 1.6:1 1.5:1 1.5:1 1.4:1 Debt to total capitalization. 29.2% 27.7% 28.4% 26.2% 26.9% Book value per share......... $15.08 $12.75 $10.88 $9.43 $8.70 Stock price range (high)..... 74.88 56.75 43.25 40.38 26.31 (low)................ 46.25 28.94 30.81 23.25 17.63
9 Five-Year Review (continued)
Fiscal Year ------------------------------------------------------- In thousands except per- 1999 1998 1997 1996 1995 share amounts ---------- ---------- ---------- ---------- ---------- Revenues................ $7,659,965 $6,600,838 $5,616,048 $4,740,760 $3,788,026 ---------- ---------- ---------- ---------- ---------- Costs of services....... 5,973,837 5,149,218 4,413,173 3,692,267 2,961,955 Selling, general and administrative......... 695,828 602,708 485,113 471,309 383,973 Depreciation and amortization........... 445,035 386,854 333,247 272,058 190,240 Interest, net........... 33,908 42,096 32,273 32,143 27,304 Special charges......... 229,093 48,929 76,053 3,740 ---------- ---------- ---------- ---------- ---------- Total costs and expenses............... 7,148,608 6,409,969 5,312,735 4,543,830 3,567,212 ---------- ---------- ---------- ---------- ---------- Income before taxes..... 511,357 190,869 303,313 196,930 220,814 Taxes on income......... 170,200 (69,500) 110,900 87,499 77,577 ---------- ---------- ---------- ---------- ---------- Net income.............. $ 341,157 $ 260,369 $ 192,413 $ 109,431 $ 143,237 ========== ========== ========== ========== ========== Basic earnings per common share........... $2.16 $1.68 $1.27 $0.74 $1.02 ========== ========== ========== ========== ========== Diluted earnings per common share........... $2.11 $1.64 $1.23 $0.71 $1.00 ========== ========== ========== ========== ========== Average common shares outstanding............ 158,213 155,125 151,895 148,865 140,297 Average common shares outstanding assuming dilution............... 161,949 158,526 156,394 153,070 143,702
Notes: A discussion of "Income Before Taxes" and "Net Income and Earnings per Share" before and after special items is included in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"). A discussion of "Special Items" for fiscal years ended 1997 and 1998 is also included in MD&A. The fiscal 1996 special charge of $76,053 (40 cents per share after tax) relates to two acquisitions by a company subsequently acquired by CSC and accounted for as a pooling of interests. The fiscal 1995 special charge of $3,740 (1 cent per share after tax) relates to the sale of the Company's tax processing operations. The selected financial data has been restated for fiscal 1995 through 1996 to include the results of business combinations accounted for as poolings of interests. No dividends were paid by CSC during the five years presented. A fiscal 1996 acquisition, accounted for as a pooling of interests, paid dividends of $.17 per share during fiscal 1995. 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Revenues The Company derived its revenues for fiscal years 1999, 1998 and 1997 from the following market sectors:
Fiscal 1999 Fiscal 1998 Fiscal 1997 ---------------- ---------------- ----------- Percent Percent Amount Change Amount Change Amount Dollars in millions -------- ------- -------- ------- ----------- U. S. Commercial................ $3,128.3 13% $2,775.5 29% $2,159.7 Europe.......................... 2,250.1 27 1,771.0 20 1,474.9 Other International............. 516.1 22 423.6 22 345.8 -------- -------- -------- Global Commercial................. 5,894.5 19 4,970.1 25 3,980.4 U. S. Federal Government.......... 1,765.5 8 1,630.7 0 1,635.6 -------- -------- -------- Total............................. $7,660.0 16 $6,600.8 18 $5,616.0 ======== ======== ========
The Company's 16% overall revenue growth for fiscal 1999 over 1998 resulted principally from continued strong global demand for information technology ("I/T") services. Global commercial revenue grew 19%, or $924 million, during fiscal 1999. Over 60% of the global commercial growth was provided from international operations. For fiscal 1999, U.S. commercial revenue grew 13%, or 17% excluding fiscal 1998 revenue from activities in the Company's collections and telecommunications operations, which were subsequently sold or phased out. More than two-thirds of the U.S. commercial growth was generated by information technology outsourcing contracts. The remainder of the growth was fueled by demand for consulting and systems integration activities and by further expansion in the Company's financial services and healthcare vertical markets. For fiscal 1998, U.S. commercial revenues grew 29%, or $616 million. More than half of the growth was provided by increases in outsourcing activities. Major new outsourcing contracts, including E.I. du Pont de Nemours and Company ("DuPont") and increases in revenues from vertical markets such as financial services and healthcare, contributed to U.S. commercial revenue growth. Consulting and systems integration services contributed about a quarter of the Company's other U.S. commercial revenue growth during fiscal 1998 as a result of strong demand for enterprise resource planning ("ERP") services, electronic commerce and Year 2000 assessment and renovation activities. The Company's European operations accounted for revenue growth of 27%, or $479 million, for fiscal 1999 compared to 1998. The growth was primarily due to (a) outsourcing services provided to British Aerospace plc ("BAe"), DuPont, Hartmann & Braun, (b) the acquisition of KPMG Peat Marwick SA, a Paris-based management consulting and I/T services firm, and (c) continued strong demand throughout Europe for consulting and systems integration activities and ERP services. CSC's European operations accounted for revenue growth of 20%, or $296 million, for fiscal 1998 versus 1997. The growth was principally due to increases in outsourcing services provided to BAe, DuPont and J.P. Morgan & Co. Incorporated and increased demand for consulting and systems integration activities. Other international operations provided revenue growth of 22%, or $93 million, during fiscal 1999. The growth was primarily attributable to the acquisition of CSA Holdings, Ltd., a leading Asian information technology services provider headquartered in Singapore, expansion of the financial services sector and additional outsourcing activities in Australia. During fiscal 1998, other international revenues increased 22%, or $78 million. The growth was primarily attributable to increased outsourcing business in Australia as well as increases in the financial services sector. 11 The Company's U.S. federal government revenues were derived from the following sources:
Fiscal 1999 Fiscal 1998 Fiscal 1997 ---------------- ---------------- ----------- Percent Percent Amount Change Amount Change Amount Dollars in millions -------- ------- -------- ------- ----------- Department of Defense............. $1,112.7 4% $1,071.9 (1)% $1,082.8 Civil agencies.................... 652.8 17 558.8 1 552.8 -------- -------- -------- Total U. S. Federal............... $1,765.5 8 $1,630.7 0 $1,635.6 ======== ======== ========
Revenue from the U.S. federal government increased 8% during fiscal 1999 versus 1998. The increase includes additional task order contracts with the General Services Administration, increased ordering of a management information system for the U.S. Department of Defense ("DOD") and the acquisition of the DOD Ballistic Missile Defense Organization support contract. Revenue gains during fiscal 1999 were partially offset by reductions in work performed for NASA and the winding down of several contracts. Federal revenues for fiscal 1998 were essentially unchanged compared to 1997. Gains were generated on certain task order contracts with the General Services Administration and the Defense Integration Systems Agency and by the acquisition of Information Technology Solutions, Inc. These gains were offset primarily by the conclusion of two large contracts in late fiscal 1997. During fiscal 1999, CSC announced federal contract awards with a total value of $2.9 billion, compared with the $1.0 billion and $2.1 billion announced during fiscal 1998 and 1997, respectively. In addition, during December 1998, the Internal Revenue Service selected the CSC PRIME Alliance to enter into a strategic partnership with the IRS to modernize the U.S. tax system. This award, the value of which is not quantified, has the potential to become the Company's largest contract. Costs and Expenses The Company's costs and expenses before special charges were as follows:
Dollar Amount Percentage of Revenue -------------------------- ----------------------- 1999 1998 1997 1999 1998 1997 Dollars in millions -------- -------- -------- ------- ------- ------- Costs of services........... $5,973.9 $5,149.2 $4,413.2 78.0% 78.0% 78.6% Selling, general and administrative............. 695.8 602.7 485.1 9.1 9.1 8.6 Depreciation and amortization............... 445.0 386.9 333.2 5.8 5.9 5.9 Interest expense, net....... 33.9 42.1 32.3 .4 .6 .6 -------- -------- -------- ------- ------- ------- Total....................... $7,148.6 $6,180.9 $5,263.8 93.3% 93.6% 93.7% ======== ======== ======== ======= ======= =======
Costs of Services For fiscal 1999, the Company's costs of services as a percentage of revenue was unchanged. The decrease in costs of services as a percent of revenue for fiscal 1998 was principally related to commercial growth in the healthcare and financial services vertical markets, as well as outsourcing, consulting and European operations, combined with performance improvements generated in Europe. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses as a percentage of revenue was unchanged for fiscal 1999 versus 1998. During fiscal 1998, SG&A as a percent of revenue increased to 9.1% from 8.6%. The increase was primarily attributable to growth in the Company's healthcare and financial services groups. 12 Special Items There were no special items during fiscal 1999. The fiscal 1998 special items represent costs, expenses and benefits associated with developments at CSC Enterprises and the Company's response to a failed take-over attempt. The Company recorded a first quarter net special credit of $1.7 million, or 1 cent per share, at CSC Enterprises, a general partnership which then operated certain of the Company's credit services operations and carried out other business strategies through acquisition and investment. The net credit resulted from a tax benefit of $135 million and an after-tax charge of $133.3 million ($208.4 million before tax). During the first quarter, several partners withdrew from CSC Enterprises. These withdrawals caused CSC Enterprises to take actions which caused CSC to recognize an increase in the tax basis of certain assets. As required by Statement of Financial Accounting Standards ("SFAS") No. 109, this tax basis increase from the previous tax basis resulted in a deferred tax asset of $135 million and a corresponding reduction in the Company's provision for taxes. The tax basis increase is temporary and will be realized over time through an increase in depreciation and amortization expense for income tax purposes. In connection with the partner withdrawals and related developments, CSC Enterprises reviewed its operations, its market opportunities and the carrying value of its assets. Based on this review, plans were initiated to eliminate certain offerings and write down assets, primarily within its telecommunications operations. As a result of these plans, a pre-tax special charge of $208.4 million ($133.3 million after tax) was recognized. The charge is comprised of goodwill write-offs of $56.3 million ($35 million after tax), contract termination costs of $54.3 million ($33.8 million after tax), deferred contract costs and other assets of $33.1 million ($20.5 million after tax), telecommunications software and accruals of $35.8 million ($22.3 million after tax), telecommunications property, equipment and intangible assets of $18.9 million ($11.7 million after tax), and other non-deductible costs of $10 million. During the fourth quarter of fiscal 1998, the Company recorded a before-tax special charge of $20.7 million, or equivalent to 9 cents per share after tax, for costs relating to the Company's response to a failed take-over attempt. The charge is comprised of $14.4 million for investment banking expenses and $6.3 million for other expenses such as legal costs, public relations and shareholder communications. The fiscal 1997 special charge represents costs and expenses related to the August 1, 1996, acquisition of the Continuum Company, Inc. The amount of the charge, net of income tax benefits on the tax-deductible portion, is $35.3 million or 23 cents per share. The charge is comprised of $11.0 million for investment banking and other merger expenses; $11.8 million related to the write-off of certain capitalized software, other assets and intangibles; and $26.1 million related to the elimination of duplicate data-processing facilities, employee severance costs and contract termination costs. Income Before Taxes The Company's income before taxes and margin for the most recent three fiscal years is as follows:
Dollar Amount Margin -------------------- ---------------- 1999 1998 1997 1999 1998 1997 Dollars in millions ------ ------ ------ ---- ---- ---- Before special charges................... $511.4 $420.0 $352.2 6.7% 6.4% 6.3% Income before taxes...................... 511.4 190.9 303.3 6.7 2.9 5.4
Income before special charges and taxes improved during fiscal 1999 as a percentage of revenue. The .3% margin improvement to 6.7% principally relates to lower depreciation and amortization as a percent of revenue in both the U.S. Federal and Global Commercial operations of the Company. Lower net interest expense as a percent of revenue also contributed to the margin improvement. During fiscal 1998, income before special charges and taxes increased principally to the performance improvements in costs of services and depreciation and amortization. Partially offsetting the improvements were increases in SG&A expenses. 13 Taxes The provision for (benefit from) income taxes as a percentage of pre-tax earnings was 33.3%, (36.4)% and 36.6% for fiscal 1999, 1998 and 1997, respectively. The fiscal 1998 rate includes the tax benefit associated with the partnership withdrawals at CSC Enterprises. Before special items, the tax rate was 35.1% and 35.4% for fiscal 1998 and 1997, respectively. The decrease in the fiscal 1999 tax rate from 35.1% to 33.3% is principally the result of utilization of foreign operating losses not previously recognized and research tax credits. Net Income and Earnings per Share The Company's net income and diluted earnings per share for fiscal years 1999, 1998 and 1997 is as follows:
Dollar Amount Margin -------------------- ---------------- 1999 1998 1997 1999 1998 1997 Dollars in millions, except EPS ------ ------ ------ ---- ---- ---- Net income: Before special items................... $341.2 $272.6 $227.7 4.5% 4.1% 4.1% As reported............................ 341.2 260.4 192.4 4.5 3.9 3.4 Diluted earnings per share: Before special items................... 2.11 1.72 1.46 As reported............................ 2.11 1.64 1.23
During fiscal 1999, the Company's net income margin improved to 4.5% from 3.9%. The improvement is primarily related to a reduction in depreciation and amortization as a percent of revenue, lower net interest and a lower tax rate. For 1998, the Company's net income margin improved to 3.9% from 3.4%. The net special items incurred during fiscal 1998 reduced net income by $12.2 million, principally related to the costs relating to the Company's response to a failed take-over attempt described above. Before special items, the net earnings margin was 4.1% for fiscal 1998 and 1997. Although the net earnings margin before special items for 1998 was the same as 1997, the Company registered an improvement in cost of services as a percent of revenue and a lower tax rate before special items. Cash Flows
Fiscal Fiscal 1999 Fiscal 1998 1997 --------------- --------------- ------ Percent Percent Amount Change Amount Change Amount Dollars in millions ------ ------- ------ ------- ------ Cash from operations................ $814.1 40% $583.3 17 % $500.4 Net cash used in investing.......... (705.1) 22 (577.1) (14) (676.5) Net cash provided by financing...... 219.2 35 162.7 (7) 175.0 Effect of exchange rate changes on cash and cash equivalents.......... (.3) (4.9) (2.1) ------ ------ ------ Net increase (decrease) in cash and cash equivalents................... 327.9 164.0 (3.2) Cash at beginning of year........... 274.7 110.7 113.9 ------ ------ ------ Cash at end of year............... $602.6 $274.7 $110.7 ====== ====== ======
Historically, the majority of the Company's cash has been provided from operating activities. The increases in cash from operations during fiscal 1999 and 1998 are primarily due to higher earnings, non-cash charges (depreciation and amortization) and lower net income tax payments, partially offset by increased working capital requirements. 14 The Company's investments principally relate to purchases of computer equipment and software that support the Company's expanding global commercial operations. Investments include computer equipment purchased at the inception of outsourcing contracts as well as subsequent upgrades, expansion or replacement of these client-supporting assets. The Company's investments also include several acquisitions during fiscal 1997 through 1999. The acquisitions, individually or collectively, were not material to the Company's consolidated financial statements. As described above, a majority of the Company's capital investments have been funded by cash from operations. During fiscal 1999 the Company issued $200 million of 6.25% notes due in 2009. Proceeds were used for general corporate purposes and, subsequent to year end, to repay the $150 million 6.80% notes due April 1999. Liquidity and Capital Resources The balance of cash and cash equivalents was $602.6 million at April 2, 1999, $274.7 million at April 3, 1998 and $110.7 million at March 28, 1997. During this period, the Company's earnings have added substantially to equity. At the end of fiscal 1999, CSC's ratio of debt to total capitalization was 29.2%. Giving effect to the aforementioned April 1999 paydown of the $150 million notes, the ratio of debt to total capitalization was 25.9%.
1999 1998 1997 Dollars in millions -------- -------- -------- Debt............................................. $ 990.8 $ 765.0 $ 660.8 Equity........................................... 2,399.9 2,001.3 1,669.6 -------- -------- -------- Total capitalization............................. $3,390.7 $2,766.3 $2,330.4 ======== ======== ======== Debt to total capitalization..................... 29.2% 27.7% 28.4%
During fiscal 1997, the Company increased its affiliates' credit agreement from $350 million to $490 million to provide stand-by support for commercial paper. $115 million was available for borrowing under this program, at the end of both fiscal 1999 and 1998. In the opinion of management, CSC will be able to meet its liquidity and cash needs for the foreseeable future through the combination of cash flows from operating activities, cash balances, unused borrowing capacity and other financing activities. If these resources need to be augmented, major additional cash requirements would likely be financed by the issuance of debt and/or equity securities and/or the exercise of the put option (as described in Note 11 to the Company's consolidated financial statements). Dividends and Redemption It has been the Company's policy to invest earnings in the growth of the Company rather than distribute earnings as dividends. This policy, under which dividends have not been paid since fiscal 1969, is expected to continue, but is subject to regular review by the Board of Directors. On February 27, 1998, the Board of Directors redeemed the stock purchase rights, which had been issued under the 1988 stockholder rights plan, for one sixth of one cent per right. The redemption was paid on April 13, 1998. Year 2000 Readiness Disclosure Since its inception, CSC has dealt with ongoing significant changes in the information technology industry. As a result, resources are constantly being employed to modify, upgrade and enhance systems and infrastructure on behalf of clients and for internal needs. The Year 2000 issue represents another one of these changes. It is the result of computer systems that represent years as a two-digit rather than a four-digit field. Any of such systems that utilize date sensitive data may not properly recognize a date field of 00 as the year 2000, but as some other date, typically the year 1900. This could result in possible system failure, miscalculations, or data corruption, thereby affecting normal business activity. 15 The Company has established a two-phase program to ensure that its proprietary products, internal computer systems and facilities are Year 2000 ready. In order to launch this program, monitor progress and coordinate the Company's Year 2000 activities, the Year 2000 Assurance Office was established with this charter and reports directly to the Chairman, President, and Chief Executive Officer. The initial phase, which included planning, inventory and assessment, has been completed for all of the Company's existing business. The final phase, which consists of correction, testing, deployment and acceptance, is in process and is expected to be substantially completed during the Company's quarter ending October 1, 1999. A very small percentage of the final phase activities may not be completed by October 1, 1999, as certain clients have not yet upgraded applications for which they are responsible, thereby delaying their move from a non-year 2000 ready platform. The Company expects that its Year 2000 preparation efforts will not have a material effect on its overall financial position or results of operations. The Company currently estimates that the total fiscal 1999 and 2000 operating costs associated with making its proprietary products, internal systems and infrastructure Year 2000 ready, as well as estimates for contingency planning and monitoring, including the cost of Company personnel diverted to Year 2000 assignments, will total approximately $51 million, of which approximately $25 million had been incurred as of the end of fiscal 1999. In addition, the Company currently estimates that related capital expenditures for fiscal 1999 and 2000 will be approximately $13 million, of which approximately $8 million had been incurred as of the end of fiscal 1999. The Company's total current estimate for Year 2000 compliance has increased by approximately $7 million since the third quarter of fiscal 1999 due to revised remediation estimates in Australia, some clients scheduling system changes later than originally planned, and increased estimates for contingency and crisis management planning. Some of these capital expenditures represent equipment replacements that have been or will be accelerated due to Year 2000 issues. The operating costs described above are generally not incremental, but reflect the reallocation of existing resources. The Company has not deferred any significant information technology projects as a result of the Year 2000 efforts. As of the end of fiscal 1999, (a) the Company had completed approximately 78% of items it has identified as necessary to be Year 2000 ready, including activities to correct Year 2000 issues, contingency planning and ancillary efforts and (b) the Company had completed approximately 89% of items it has identified as necessary to correct critical Year 2000 items. The Company has completed an assessment of its obligations and responsibilities to its customers in respect of Year 2000 issues arising from contractual engagements for computer goods and services, including obligations arising from the licensing of the Company's proprietary software products. As a result of this assessment, it is management's opinion that these obligations will not have a material effect on the Company. The Company has initiated formal communications with all of its crucial suppliers to determine whether they are or will be Year 2000 ready. By October 1, 1999, the Company expects to have identified and replaced any such suppliers that will not be Year 2000 ready. The Company is also contacting property owners to determine the readiness of its leased facilities with respect to facility infrastructure systems. As of the end of fiscal 1999, over 80% of the company's crucial suppliers, property owners, and landlords have been determined to have adequate programs in place to be Year 2000 ready before the end of 1999. Evaluation of the remaining 20% should be completed by October 1, 1999. In the opinion of the Company's management, the most reasonably likely worst case scenario includes the possibility that the Company and/or its crucial suppliers are unable to complete their Year 2000 readiness efforts prior to the onset of failures, the effects of which could have a material adverse impact on the Company's operations. The Company could also be impacted materially by any significant economic, financial market or infrastructure disruption attributable to the Year 2000 issue. The Company has developed initial drafts of Year 2000 transition, contingency and crisis management plans. Final drafts will be completed during the quarter ending October 1, 1999. These plans include the use of 16 exercises and drills with various relevant scenarios. As a result of lessons learned from the exercises, the contingency plans may be modified. The Company has also established the infrastructure for a Year 2000 corporate command center that will be fully operational during November 1999. This command center will be linked to each business unit's Year 2000 crisis management center, which will be connected to internal and client-support help desks. Euro Conversion On January 1, 1999 the euro currency was introduced in 11 of the 15 member countries in the European Union. Although euro notes and coins will not be available until the latter part of the transition period in 2002, the euro is traded on the currency exchanges and is available for non-cash transactions. The Company established a European steering group during 1997 to determine the Company's approach to the euro and to develop plans to ensure that customer expectations and statutory requirements are met. The Company was ready by January 1, 1999 to deal with any customer or supplier who wished to transact in euros and all European intercompany transactions since January 1 have been invoiced and settled in euros. The Company's European Group plans to implement infrastructure during calendar 1999 which will provide all the internal systems functionality required to deal with the euro during the transition period and thereafter. The transition period lasts until July 2002 when the national currencies will no longer be legal tender. The incremental system cost to CSC of introducing the euro will not be material. The Company does not believe that the introduction of the euro will negatively impact the enforceability of client contracts or require it to incur any material cost thereunder for which it will not be paid. CSC will continue to review the impact of the euro conversion during the transition period, but does not expect it to have a material impact on its overall financial position or results of operations. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires all derivatives to be recorded on the balance sheet at fair value and establishes accounting standards for hedging activities. In May 1999, the FASB proposed amending SFAS No. 133 to defer its effective date one year to fiscal years beginning after June 15, 2000. The Company is currently assessing the impact this statement will have and, based on preliminary estimates, does not expect the adoption to have a material impact on its consolidated financial position or results of operations. During 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement requires the capitalization of internal use computer software costs provided that certain criteria are met. These capitalized software costs will be amortized on a straight-line basis over the useful life of the software. The Company will adopt this statement effective April 3, 1999. The adoption of this statement is not expected to have a material impact on the company's consolidated financial position, results of operations or cash flows. Forward-Looking Statements All statements contained in this annual report, or in any document filed by the Company with the Securities and Exchange Commission, or in any press release or other written or oral communication by or on behalf of the Company, that do not directly and exclusively relate to historical facts constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent the Company's expectations and beliefs, and no assurance can be given that the results described in such statements will be achieved. 17 These statements are subject to risks, uncertainties and other factors, many of which are outside of the Company's control, that could cause actual results to differ materially from the results described in such statements. These factors include, without limitation, the following: (i) general economic conditions in countries in which the Company does business; (ii) competitive pressures; (iii) changes in the financial condition of the Company's major commercial customers; (iv) changes in the demand for information technology outsourcing and business process outsourcing; (v) changes in U.S. federal government spending levels for information technology services; (vi) the future profitability of the Company's customer contracts; (vii) the Company's ability to consummate strategic acquisitions and alliances; (viii) the Company's ability to attract and retain key personnel; (ix) the Company's ability to continue to develop and expand its service offerings to address emerging business demands and technological trends; and (x) the ability of the Company, and the ability of its customers and suppliers to become Year 2000 ready. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Interest Rates The Company has fixed-rate long-term debt obligations, short-term commercial paper and other borrowings subject to market risk from changes in interest rates. Sensitivity analysis is one technique used to measure the impact of changes in interest rates on the value of market-risk sensitive financial instruments. A hypothetical 10% movement in interest rates would not have a material impact on the Company's future earnings, fair value, or cash flows. Foreign Currency During the ordinary course of business, the Company enters into certain contracts denominated in foreign currency. Potential foreign currency exposures arising from these contracts are analyzed during the contract bidding process. The Company generally manages these transactions by ensuring costs to service contracts are incurred in the same currency in which revenue is received. Short-term contract financing requirements are met by borrowing in the same currency. By matching revenues, costs and borrowings to the same currency, the Company has been able to substantially mitigate foreign currency risk to earnings. If necessary, the Company may also use foreign currency forward contracts or options to hedge exposures arising from these transactions. The Company does not foresee changing its foreign currency exposure management strategy. During fiscal 1999, 36% of the Company's revenue was generated outside of the United States. Using sensitivity analysis, a hypothetical ten-percent increase in the value of the U.S. dollar against all currencies would decrease revenue by 3.6% or $277 million, while a hypothetical ten-percent decrease in the value of the U.S. dollar against all currencies would increase revenue by 3.6% or $277 million. In the opinion of management, a substantial portion of this fluctuation would be offset by expenses incurred in local currency. As a result, a hypothetical 10% movement of the value of the U.S. Dollar against all currencies in either direction would not have a material impact on the Company's net income. The Company's primary unhedged assets and liabilities consist of local currency cash balances and borrowings, respectively. At April 2, 1999, the Company had approximately $135 million of non-U.S. dollar denominated cash and short-term investments, and approximately $114 million of non-U.S. dollar borrowings. 18 Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements and Financial Statement Schedules Financial Statements
Page ---- Independent Auditors' Report.............................................. 20 Consolidated Statements of Income for the fiscal years ended April 2, 1999, April 3, 1998, and March 28, 1997.................................. 21 Consolidated Balance Sheets as of April 2, 1999 and April 3, 1998......... 22 Consolidated Statements of Cash Flows for the fiscal years ended April 2, 1999, April 3, 1998, and March 28, 1997.................................. 24 Consolidated Statements of Stockholders' Equity for the fiscal years ended April 2, 1999, April 3, 1998 and March 28, 1997.......................... 25 Notes to Consolidated Financial Statements................................ 26 Quarterly Financial Information (Unaudited)............................... 44 Schedule Schedule VIII, Valuation and Qualifying Accounts.......................... 50
Schedules other than that listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements or related notes. Separate financial statements of the Registrant have been omitted since it is primarily an operating company, and the minority interests in subsidiaries and long-term debt of the subsidiaries held by other than the Registrant are less than five percent of consolidated total assets. Financial statements (or summarized financial information) for unconsolidated subsidiaries and 50%- owned companies accounted for by the equity method have been omitted because they are inapplicable, or do not, considered individually or in the aggregate, constitute a significant subsidiary. 19 INDEPENDENT AUDITORS' REPORT ON THE FINANCIAL STATEMENTS 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 April 2, 1999 and April 3, 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended April 2, 1999. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with 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 provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Computer Sciences Corporation and Subsidiaries as of April 2, 1999 and April 3, 1998, and the results of their operations and their cash flows for each of the three years in the period ended April 2, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Los Angeles, California May 26, 1999 20 COMPUTER SCIENCES CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended ---------------------------------- April 2, April 3, March 28, 1999 1998 1997 In thousands except per-share amounts ---------- ---------- ---------- Revenues.................................... $7,659,965 $6,600,838 $5,616,048 ---------- ---------- ---------- Costs of services........................... 5,973,837 5,149,218 4,413,173 Selling, general and administrative......... 695,828 602,708 485,113 Depreciation and amortization............... 445,035 386,854 333,247 Interest expense............................ 48,496 50,951 40,268 Interest income............................. (14,588) (8,855) (7,995) Special charges (note 2).................... 229,093 48,929 ---------- ---------- ---------- Total costs and expenses.................... 7,148,608 6,409,969 5,312,735 ---------- ---------- ---------- Income before taxes......................... 511,357 190,869 303,313 Taxes on income (notes 2 and 3)............. 170,200 (69,500) 110,900 ---------- ---------- ---------- Net income.................................. $ 341,157 $ 260,369 $ 192,413 ========== ========== ========== Earnings per common share: Basic..................................... $ 2.16 $ 1.68 $ 1.27 ========== ========== ========== Diluted................................... $ 2.11 $ 1.64 $ 1.23 ========== ========== ==========
(See notes to consolidated financial statements) 21 COMPUTER SCIENCES CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
April 2, April 3, 1999 1998 In thousands ---------- ---------- Current assets: Cash and cash equivalents.............................. $ 602,593 $ 274,688 Receivables, net of allowance for doubtful accounts of $80,607 (1999) and $75,373 (1998) (notes 4 and 10).... 1,777,262 1,456,330 Prepaid expenses and other current assets.............. 289,130 251,618 ---------- ---------- Total current assets................................. 2,668,985 1,982,636 ---------- ---------- Investments and other assets: Software, net of accumulated amortization of $158,906 (1999) and $120,675 (1998)............................ 168,237 125,430 Excess of cost of businesses acquired over related net assets, net of accumulated amortization of $112,292 (1999) and $90,007 (1998)............................. 653,034 538,408 Other assets........................................... 430,578 443,128 ---------- ---------- Total investments and other assets................... 1,251,849 1,106,966 ---------- ---------- Property and equipment--at cost (note 5): Land, buildings and leasehold improvements............. 364,168 301,437 Computers and related equipment........................ 1,757,822 1,490,765 Furniture and other equipment.......................... 191,454 152,597 ---------- ---------- 2,313,444 1,944,799 Less accumulated depreciation and amortization......... 1,226,569 987,606 ---------- ---------- Property and equipment, net.......................... 1,086,875 957,193 ---------- ---------- $5,007,709 $4,046,795 ========== ==========
(See notes to consolidated financial statements) 22 COMPUTER SCIENCES CORPORATION CONSOLIDATED BALANCE SHEETS (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY
April 2, April 3, 1999 1998 In thousands except shares ---------- ---------- Current liabilities: Short-term debt and current maturities of long-term debt (note 5)......................................... $ 592,942 $ 28,921 Accounts payable....................................... 374,978 317,787 Accrued payroll and related costs (note 6)............. 386,788 299,062 Other accrued expenses................................. 459,821 403,860 Deferred revenue....................................... 137,378 127,337 Federal, state and foreign income taxes (note 3)....... 129,505 37,849 ---------- ---------- Total current liabilities............................ 2,081,412 1,214,816 ---------- ---------- Long-term debt, net of current maturities (note 5)....... 397,860 736,054 ---------- ---------- Other long-term liabilities (note 6)..................... 128,583 94,650 ---------- ---------- Commitments and contingencies (notes 6 and 7) Stockholders' equity (notes 5, 8 and 9) Preferred stock, par value $1 per share; authorized 1,000,000 shares; none issued........................................... Common stock, par value $1 per share; authorized 275,000,000 shares; issued 159,510,065 (1999) and 157,324,565 (1998)...... 159,510 157,325 Additional paid-in capital............................. 730,238 660,971 Earnings retained for use in business.................. 1,578,125 1,236,968 Accumulated other comprehensive income (loss).......... (53,235) (39,691) ---------- ---------- 2,414,638 2,015,573 Less common stock in treasury, at cost, 369,607 shares (1999) and 346,170 shares (1998)...................... (14,413) (13,029) Unearned restricted stock and other (note 8)........... (371) (1,269) ---------- ---------- Stockholders' equity, net............................ 2,399,854 2,001,275 ---------- ---------- $5,007,709 $4,046,795 ========== ==========
(See notes to consolidated financial statements) 23 COMPUTER SCIENCES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended ------------------------------- April 2, April 3, March 28, In thousands, increase (decrease) in cash and 1999 1998 1997 cash equivalents --------- --------- --------- Cash flows from operating activities: Net income...................................... $ 341,157 $ 260,369 $ 192,413 Adjustments to reconcile net income to net cash provided: Depreciation and amortization.................. 445,035 386,854 333,247 Deferred taxes................................. 91,243 (94,473) 5,121 Special items, net of tax...................... 97,870 11,884 Provision for losses on accounts receivable.... 8,818 20,058 33,501 Changes in assets and liabilities, net of effects of acquisitions: Increase in receivables...................... (249,028) (221,974) (164,184) Increase in prepaid expenses................. (8,674) (86,815) (39,692) Increase in accounts payable and accruals.... 71,043 109,575 97,294 Increase in income taxes payable............. 96,340 98,156 23,907 Increase (decrease) in deferred revenue...... 10,042 13,817 (3,304) Other changes, net........................... 8,086 (133) 10,235 --------- --------- --------- Net cash provided by operating activities...... 814,062 583,304 500,422 --------- --------- --------- Cash flows from investing activities: Purchases of property and equipment............ (425,716) (349,316) (322,434) Outsourcing contracts.......................... (85,286) (145,974) (102,508) Acquisitions, net of cash acquired............. (156,965) (103,269) (176,693) Dispositions................................... 37,947 75,827 6,229 Software....................................... (86,835) (64,052) (77,227) Other investing cash flows, net................ 11,785 9,663 (3,900) --------- --------- --------- Net cash used in investing activities.......... (705,070) (577,121) (676,533) --------- --------- --------- Cash flows from financing activities: Net (repayment) borrowing of commercial paper.. (42) 77,953 50,188 Borrowings under lines of credit............... 40,440 61,281 48,180 Repayment of borrowings under lines of credit.. (34,679) (73,022) (99,283) Proceeds from term debt issuance............... 200,000 32,568 150,000 Principal payments on long-term debt........... (34,804) (10,959) (29,843) Proceeds from stock option transactions........ 45,109 61,488 42,869 Other financing cash flows..................... 3,190 13,356 12,964 --------- --------- --------- Net cash provided by financing activities...... 219,214 162,665 175,075 --------- --------- --------- Effect of exchange rate changes on cash and cash equivalents..................................... (301) (4,886) (2,111) --------- --------- --------- Net increase (decrease) in cash and cash equivalents..................................... 327,905 163,962 (3,147) Cash and cash equivalents at beginning of year... 274,688 110,726 113,873 --------- --------- --------- Cash and cash equivalents at end of year......... $ 602,593 $ 274,688 $ 110,726 ========= ========= =========
(See notes to consolidated financial statements) 24 COMPUTER SCIENCES CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Earnings Accumulated Unearned Common Stock Additional Retained Other Common Restricted --------------------- Paid-In for Use in Comprehensive Stock in Stock and In thousands except Shares Amount Capital Business Income (Loss) Treasury Other Total shares ----------- -------- ---------- ---------- ------------- -------- ---------- ---------- Balance at March 29, 1996................... 75,428,622 $ 75,429 $506,569 $ 862,770 $ (7,214) $(10,488) $(6,953) $1,420,113 Comprehensive income: Net income.............. 192,413 192,413 Currency translation adjustment............. (7,182) (7,182) Unfunded pension obligation............. (229) (229) ---------- Comprehensive income... 185,002 ---------- Stock option transactions........... 1,501,214 1,501 63,240 (1,494) (1,125) 62,122 Amortization and forfeitures of restricted stock....... (5,000) (5) (90) 813 718 Repayment of notes...... 1,605 1,605 ----------- -------- -------- ---------- -------- -------- ------- ---------- Balance at March 28, 1997................... 76,924,836 76,925 569,719 1,055,183 (14,625) (11,982) (5,660) 1,669,560 Comprehensive income: Net income.............. 260,369 260,369 Currency translation adjustment............. (23,287) (23,287) Unfunded pension obligation............. (1,779) (1,779) ---------- Comprehensive income... 235,303 ---------- Stock option transactions........... 2,077,103 2,077 91,252 (1,047) 92,282 Amortization and forfeitures of restricted stock....... 109 109 Repayment of notes...... 4,282 4,282 Effect of two-for-one stock split............ 78,322,626 78,323 (78,323) Stock purchase rights redemption............. (261) (261) ----------- -------- -------- ---------- -------- -------- ------- ---------- Balance at April 3, 1998................... 157,324,565 157,325 660,971 1,236,968 (39,691) (13,029) (1,269) 2,001,275 Comprehensive income: Net income.............. 341,157 341,157 Currency translation adjustment............. (12,860) (12,860) Unfunded pension obligation............. (684) (684) ---------- Comprehensive income... 327,613 ---------- Stock option transactions........... 2,185,500 2,185 69,267 (1,384) 70,068 Amortization and forfeitures of restricted stock....... 893 893 Repayment of notes...... 5 5 ----------- -------- -------- ---------- -------- -------- ------- ---------- Balance at April 2, 1999................... 159,510,065 $159,510 $730,238 $1,578,125 $(53,235) $(14,413) $ (371) $2,399,854 =========== ======== ======== ========== ======== ======== ======= ==========
(See notes to consolidated financial statements) 25 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per-share amounts) Note 1--Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include those of Computer Sciences Corporation, its subsidiaries and those joint ventures and partnerships over which it exercises control, hereafter collectively referred to as "CSC" or "the Company." All material intercompany transactions and balances have been eliminated. Business Combination CSC acquired The Continuum Company, Inc. ("Continuum") on August 1, 1996. Upon consummation of the merger, Continuum became a wholly owned subsidiary of the Company. Each outstanding share of Continuum common stock was converted into 1.58 shares of common stock of the Company and each outstanding option to purchase shares of Continuum common stock was converted into an option to purchase 1.58 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 During the three years ended April 2, 1999, the Company made a number of acquisitions in addition to the one described above which, either individually or collectively, are not material. In conjunction with business combinations accounted for as purchases, the Company acquired assets with an estimated fair value of $231,367, $61,460 and $199,302; and assumed liabilities of $191,911, $47,632 and $125,511 for fiscal 1999, 1998 and 1997 respectively. The excess of cost of businesses acquired over related net assets was $152,294, $89,028 and $139,504 for the three fiscal years ended 1999. Income Recognition The Company provides services under time and materials, level of effort, cost-based and fixed-price contracts. For time and materials and level of effort types of contracts, income is recorded as the costs are incurred, income being the difference between such costs and the agreed-upon billing amounts. For cost-based contracts, income is recorded by applying an estimated factor to costs as incurred, such factor being determined by the contract provisions and prior experience. For fixed-price contracts, income is recorded on the basis of the estimated percentage of completion of services rendered. Losses, if any, on long-term contracts are recognized during the period in which the loss is determined. Revenues from certain information processing services are recorded at the time the service is utilized by the customer. Revenues from sales of proprietary software are recognized upon receipt of a signed contract documenting customer commitment, delivery of the software and determination of the fee amount and its probable collection. However, if significant customization is part of the transaction, such revenues are recognized over the period of delivery. 26 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 1--Summary of Significant Accounting Policies (continued) Depreciation and Amortization The Company's depreciation and amortization policies are as follows: Property and Equipment: Buildings.......................... 10 to 40 years Computers and related equipment.... 3 to 10 years Furniture and other equipment...... 2 to 10 years Leasehold improvements............. Shorter of lease term or useful life Investments and Other Assets: Software........................... 2 to 10 years Credit information files........... 10 to 20 years Excess of cost of businesses acquired over related net assets.. Up to 40 years Deferred contract costs............ Contract life
For financial reporting purposes, computer equipment is depreciated using either the straight-line or sum-of-the-years'-digits method, depending on the nature of the equipment's use. The cost of other property and equipment, less applicable residual values, is depreciated on the straight-line method. Depreciation commences when the specific asset is complete, installed and ready for normal use. Investments and other assets are amortized on a straight-line basis over the years indicated above. Included in software are unamortized capitalized software development costs of $122,208 and $76,969 as of April 2, 1999 and April 3, 1998, respectively. The related amortization expense was $22,378, $17,358 and $20,073 for the three fiscal years ended April 2, 1999. 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 $92,717 and $102,723 for fiscal 1999 and 1998, respectively. The related amortization expense was $18,408, $15,371 and $12,112 for the three fiscal years ended April 2, 1999. The Company evaluates at least annually the recoverability of its excess cost of businesses acquired over related net assets. In assessing recoverability, the current and future profitability of the related operations are considered, along with management's plans with respect to the operations and the projected undiscounted cash flows. Cash Flows Cash payments for interest on indebtedness and cash (refunds)/payments for taxes on income are as follows:
Fiscal Year ------------------------- 1999 1998 1997 -------- ------- ------- Interest......................................... $ 45,327 $50,909 $37,910 Taxes on income.................................. (31,041) 30,613 63,899
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 27 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 1--Summary of Significant Accounting Policies (continued) exposure to concentrations of credit risk. With respect to financial instruments, the Company's carrying amounts of its other current assets and liabilities were deemed to approximate their market values due to their short maturity. The Company has no material hedge contracts with respect to its foreign exchange or interest rate positions. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions, in particular estimates of anticipated contract costs utilized in the revenue recognition process, that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Stock Split All historical weighted average and per share amounts in the Consolidated Statements of Income have been restated to reflect a two-for-one stock split in the form of a 100% stock dividend paid on March 23, 1998. The Consolidated Balance Sheets and the Consolidated Statements of Stockholders' Equity reflect the actual number and par value of the issued and outstanding shares for each of the fiscal periods presented. The Consolidated Statements of Stockholders' Equity reflects the actual stock dividend in the period paid. Earnings per Share Basic earnings per common share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the incremental shares issuable upon the assumed exercise of stock options. Basic and diluted earnings per share are calculated as follows:
Fiscal Year -------------------------- 1999 1998 1997 -------- -------- -------- Net income for basic and diluted EPS............. $341,157 $260,369 $192,413 ======== ======== ======== Common share information (in thousands) Average common shares outstanding for basic EPS........................................... 158,213 155,125 151,895 Dilutive effect of stock options............... 3,736 3,401 4,499 -------- -------- -------- Shares for diluted EPS......................... 161,949 158,526 156,394 ======== ======== ======== Basic EPS........................................ $ 2.16 $ 1.68 $ 1.27 Diluted EPS...................................... 2.11 1.64 1.23
The computation of diluted EPS did not include stock options which were antidilutive, as their exercise price was greater than the average market price of the Company's common stock during the year. The number of such options was 88,451, 95,310 and 249,813 for the year ended April 2, 1999, April 3, 1998 and March 28, 1997, respectively. Recent Accounting Pronouncements During fiscal 1999, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," SFAS No. 131, "Disclosures about Segments of an Enterprise and Related 28 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 1--Summary of Significant Accounting Policies (continued) Information" and SFAS No. 132, "Employers' Disclosures about Pensions and other Postretirement Benefits." The adoption of these standards expanded or modified disclosures but had no impact on consolidated financial position, results of operations or cash flows. The Company also adopted the American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2 provides further guidance on recognizing revenue from sales of proprietary software. The adoption of SOP 97-2 had no material impact on consolidated financial position, results of operations or cash flows. In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires all derivatives to be recorded on the balance sheet at fair value and establishes accounting standards for hedging activities. In May 1999, the FASB proposed amending SFAS No. 133 to defer its effective date one year to fiscal years beginning after June 15, 2000. The Company is currently assessing the impact this statement will have and, based on preliminary estimates, does not expect the adoption to have a material impact on its consolidated financial position or results of operations. During 1998, the American Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement requires the capitalization of internal use computer software costs provided that certain criteria are met. These capitalized software costs will be amortized on a straight-line basis over the useful life of the software. The Company will adopt this statement effective April 3, 1999. The adoption of this statement is not expected to have a material impact on the company's consolidated financial position, results of operations or cash flows. Reclassifications Certain reclassifications have been made to the prior years' financial statements in order to conform to the current presentation. Note 2--Special Items There were no special items during fiscal 1999. Special items in fiscal 1998 represent costs, expenses and benefits associated with developments at CSC Enterprises and the Company's response to a failed take-over attempt. During the first quarter of fiscal 1998, CSC recorded a net special credit of $1,707, or 1 cent per share, at CSC Enterprises, a general partnership of which CSC, through one of its affiliates, is the managing general partner. This net credit resulted from a tax benefit of $135,000 and an after-tax special charge of $133,293 ($208,393 before tax). During the fiscal quarter ended June 27, 1997, several partners withdrew from CSC Enterprises. These withdrawals caused CSC Enterprises to take actions that caused CSC to recognize an increase in the tax basis of certain assets. As required by SFAS No. 109, this tax basis increase from the previous tax basis resulted in a deferred tax asset of $135,000 and a corresponding reduction of CSC's provision for income taxes during the quarter ended June 27, 1997. The tax basis increase is temporary and will be realized over time through an increase in depreciation and amortization expense for income tax purposes. In connection with the partner withdrawals and related developments, CSC Enterprises reviewed its operations, its market opportunities and the carrying value of its assets. Based on this review, certain offerings and assets were eliminated, primarily within its telecommunications operations. As a result of these plans, CSC recognized a pre-tax special charge of $208,393 ($133,293 after tax). This special charge included goodwill write-offs of $56,300 ($35,000 after tax), 29 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 2--Special Items (continued) contract termination costs of $54,300 ($34,000 after tax), deferred contract costs and other assets of $33,093 ($20,493 after tax), telecommunications software and accruals of $35,800 ($22,300 after tax), telecommunications property, equipment and intangible assets of $18,900 ($11,700 after tax) and other non-deductible costs of $10,000. During the fourth quarter of fiscal 1998, the Company recorded a before-tax special charge of $20,700, or 9 cents per share after tax, for costs relating to the Company's response to a failed take-over attempt. The charge is comprised of $14,400 for investment banking expenses and $6,300 for other expenses such as legal costs, public relations and shareholder communications. The fiscal 1997 special charge represents costs and expenses related to the August 1, 1996, acquisition of Continuum. The amount of the charge, net of income tax benefits on the tax deductible portion, is $35,280, or 23 cents per share. The charge is composed of $11,040 for investment banking and other merger expenses; $11,785 related to the write-off of certain capitalized software, other assets and intangibles; and $26,104 related to the elimination of duplicate data processing facilities, employee severance costs and contract termination costs. Note 3--Income Taxes The sources of income before taxes, classified as between domestic entities and those entities domiciled outside of the United States, are as follows:
Fiscal Year -------------------------- 1999 1998 1997 -------- -------- -------- Domestic entities................................ $357,090 $ 96,438 $270,353 Entities outside the United States............... 154,267 94,431 32,960 -------- -------- -------- $511,357 $190,869 $303,313 ======== ======== ========
The provisions (credits) for taxes on income, classified as between current and deferred and as between taxing jurisdictions, consist of the following:
Fiscal Year --------------------------- 1999 1998 1997 -------- -------- -------- Current portion: Federal....................................... $ 29,306 $(12,275) $ 83,185 State......................................... 5,289 (2,051) 12,065 Foreign....................................... 44,362 39,299 10,529 -------- -------- -------- 78,957 24,973 105,779 -------- -------- -------- Deferred portion: Federal....................................... 78,930 (82,170) 3,566 State......................................... 10,820 (8,812) 664 Foreign....................................... 1,493 (3,491) 891 -------- -------- -------- 91,243 (94,473) 5,121 -------- -------- -------- Total provision (credit) for taxes.............. $170,200 $(69,500) $110,900 ======== ======== ========
30 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 3--Income Taxes (continued) Included in the fiscal 1998 current portion is $27,000 (composed of $26,200 federal and $800 state) of the $135,000 deferred tax asset described in Note 2 and $81,900 related to the other fiscal 1998 special items, also described in Note 2. The fiscal 1998 deferred portion includes the remaining $108,000 (composed of $104,800 federal and $3,200 state) of the $135,000 deferred tax asset. The major elements contributing to the difference between the federal statutory tax rate and the effective tax rate are as follows:
Fiscal Year ------------------ 1999 1998 1997 ---- ----- ---- Statutory rate........................................... 35.0% 35.0% 35.0% State income tax, less effect of federal deduction....... 2.1 2.2 2.8 Goodwill amortization.................................... .3 .4 .6 Utilization of tax credits/losses........................ (3.3) (2.2) (1.9) Special items............................................ (71.5) 1.2 Other.................................................... (.8) (.3) (1.1) ---- ----- ---- Effective tax rate....................................... 33.3% (36.4)% 36.6% ==== ===== ====
The fiscal 1998 special items percentage relates principally to the $135,000 tax benefit described in Note 2. The fiscal 1997 special items percentage is the result of non-deductible acquisition-related costs. The tax effects of significant temporary differences that comprise deferred tax balances are as follows:
April 2, April 3, 1999 1998 --------- -------- Deferred tax assets (liabilities) Deferred income...................................... $ 7,816 $ 1,457 Employee benefits.................................... 18,846 (1,421) Provisions for contract settlement................... 1,086 4,121 Currency exchange.................................... 23,765 18,909 Other assets......................................... 17,037 22,438 Contract accounting.................................. (111,537) (109,343) Depreciation and amortization........................ (50,922) 54,420 Prepayments.......................................... (79,676) (41,083) Tax loss/credit carryforwards........................ 37,351 20,231 Other assets (liabilities)........................... 13,722 (998) --------- -------- Total deferred taxes................................... $(122,512) $(31,269) ========= ========
Of the above deferred amounts, $127,576 and $111,277 are included in current income taxes at April 2, 1999 and April 3, 1998, respectively. The Internal Revenue Service ("IRS") has completed its examination of the Company's consolidated federal income tax returns for fiscal years 1987 through 1991. The results did not have a material effect on the Company's financial position or results of operations. The IRS has substantially completed its examination of the Company's federal income tax returns for fiscal years 1992 through 1994. The results are not expected to have a material effect on the Company's financial position or results of operations. 31 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 4--Receivables Receivables consist of the following:
April 2, April 3, 1999 1998 ---------- ---------- Billed trade accounts................................ $1,329,487 $1,043,703 Recoverable amounts under contracts in progress...... 414,321 366,778 Other receivables.................................... 33,454 45,849 ---------- ---------- $1,777,262 $1,456,330 ========== ==========
Recoverable amounts under contracts in progress generally become billable upon completion of a specified phase of the contract, negotiation of contract modifications, completion of government audit activities, or upon acceptance by the customer. The balance at April 2, 1999 is expected to be collected during fiscal 2000 except for $80,835 to be collected during fiscal 2001 and thereafter. Note 5--Debt Short-term At April 2, 1999, the Company had an uncommitted line of credit of $45,000 with a domestic bank. As of April 2, 1999, the Company had no borrowings outstanding under this line of credit. At April 2, 1999, the Company had uncommitted lines of credit of $171,202 with certain foreign banks. As of April 2, 1999, the Company had $46,452 of borrowings outstanding under these lines of credit. These short-term lines of credit carry no commitment fees or significant covenants. The weighted average interest rate on borrowings under these short-term lines of credit was 3.9% and 4.7% at April 2, 1999, and April 3, 1998, respectively. The Company also had outstanding borrowings of $4,988 with a foreign bank as of April 2, 1999. The interest rate on these borrowings was 3.95%. At April 2, 1999, the Company had $374,981 of commercial paper outstanding. The weighted average interest rate on the Company's commercial paper was 4.9% and 5.5% at April 2, 1999 and April 3, 1998, respectively. The Company's commercial paper is backed by a $490,000 multi-year committed credit facility which expires on September 15, 1999. The classification of the Company's outstanding commercial paper is determined by the expiration date of this credit facility. In previous years, commercial paper outstanding at year- end was classified as long-term debt because the facility had more than one year before its expiration. At April 2, 1999, commercial paper was classified as short-term debt. The Company intends to replace the credit facility prior to expiration. 32 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 5--Debt (continued) Long-term
April 2, April 3, 1999 1998 -------- -------- Commercial paper........................................ $375,023 6.80% notes, due April 1999............................. $150,000 150,000 6.50% notes, due November 2001.......................... 150,000 150,000 6.25% notes, due March 2009............................. 200,000 Capitalized lease liabilities, at varying interest rates, payable in monthly installments through fiscal 2002................................................... 11,425 21,603 Notes payable, at varying interest rates (from 3.5% to 6.0%) through fiscal 2005.............................. 52,956 61,239 -------- -------- Total long-term debt.................................... 564,381 757,865 Less current maturities................................. 166,521 21,811 -------- -------- $397,860 $736,054 ======== ========
During fiscal 1999 the Company issued $200,000 of 6.25% notes due in March 2009. Proceeds were used for general corporate purposes and, subsequent to year end, to repay the $150,000 6.80% notes due April 1999. 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 $20,030 (1999) and $18,895 (1998), less accumulated amortization of $9,892 and $5,378, respectively. Certain of the Company's borrowing arrangements contain covenants that require the Company to maintain certain financial ratios and that limit the amount of dividend payments. Under the most restrictive requirement, approximately $1,189,000 of retained earnings was available for cash dividends at April 2, 1999. The carrying value of the Company's long-term debt is $564,381 at April 2, 1999, as shown above. The corresponding fair value approximates the carrying value using the current interest rates available to the Company for debt of the same remaining maturities. Maturities of long-term debt by fiscal year are $166,521 (2000), $24,539 (2001), $155,842 (2002), $3,672 (2003), $499 (2004) and $213,308 thereafter. Note 6--Pension and Other Postretirement Benefit Plans The Company and its subsidiaries have several pension and postretirement healthcare and life insurance benefit plans, as described below. A contributory, defined benefit pension plan is generally available to U.S. employees. Certain non-U.S. employees are enrolled in defined benefit pension plans in the country of domicile. In addition, the Company has a Supplemental Executive Retirement Plan ("SERP"), which is a nonqualified, noncontributory pension plan. The Company provides healthcare and life insurance retirement benefits for certain U.S. employees, generally for those employed prior to August 1992. Most non-U.S. employees are covered by government sponsored programs at no direct cost to the Company other than related payroll taxes. 33 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 6--Pension and Other Postretirement Benefit Plans (continued) Net periodic cost for U.S. and non-U.S. pension and other benefit plans included the following components:
Fiscal Year ---------------------------- 1999 1998 1997 -------- -------- -------- Pensions Service cost................................. $ 68,199 $ 54,629 $ 42,831 Interest cost................................ 63,050 50,469 36,553 Expected return on plan assets............... (71,438) (54,314) (39,630) Amortization of transition obligation........ 482 280 (320) Amortization of prior service costs.......... 2,829 2,830 1,703 Recognized actuarial loss.................... 1,326 965 999 -------- -------- -------- Net periodic pension cost.................... $ 64,448 $ 54,859 $ 42,136 ======== ======== ======== Other Postretirement Benefits Service cost................................. $ 819 $ 662 $ 865 Interest cost................................ 3,384 3,044 3,031 Expected return on plan assets............... (1,698) (944) (590) Amortization of transition obligation........ 1,633 1,633 1,633 Amortization of prior service cost........... 490 490 36 Recognized actuarial gain.................... (292) (389) (44) -------- -------- -------- Net provision for postretirement benefits.... $ 4,336 $ 4,496 $ 4,931 ======== ======== ========
34 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 6--Pension and Other Postretirement Benefit Plans (continued) The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets for the fiscal years ended April 2, 1999 and April 3, 1998, and a statement of the funded status at April 2, 1999 and April 3, 1998:
Other Postretirement Pensions Benefits -------------------- ------------------ 1999 1998 1999 1998 ---------- -------- -------- -------- Change in benefit obligation: Benefit obligation at beginning of year............................... $ 912,984 $655,536 $ 47,826 $ 36,929 Service cost........................ 68,199 54,629 819 662 Interest cost....................... 63,050 50,469 3,384 3,044 Plan participants' contributions.... 30,119 34,301 943 962 Amendments.......................... 13,476 71,133 4,742 Actuarial loss (gain)............... 65,012 73,652 (5,815) 4,254 Benefits paid....................... (36,212) (27,807) (2,632) (2,767) Foreign currency exchange rate changes............................ (8,034) 1,071 ---------- -------- -------- -------- Benefit obligation at end of year... $1,108,594 $912,984 $ 44,525 $ 47,826 ========== ======== ======== ======== Change in plan assets: Fair value of plan assets at beginning of year.................. $ 902,162 $731,495 $ 19,934 $ 12,586 Actual return on plan assets........ 122,743 66,650 3,830 3,543 Employer contributions.............. 65,539 35,455 5,654 5,987 Plan participants' contributions.... 30,119 34,301 943 962 Asset transfers..................... 14,086 66,694 Benefits paid....................... (36,212) (27,807) (2,632) (2,767) Foreign currency exchange rate changes............................ 7 (4,626) ---------- -------- -------- -------- Fair value of plan assets at end of year............................... $1,098,444 $902,162 $ 27,729 $ 20,311 ========== ======== ======== ======== Reconciliation of funded status to net amount recorded: Funded status....................... $ (10,150) $(10,822) $(16,796) $(27,515) Unrecognized actuarial loss (gain).. (49,644) (54,547) (15,672) (7,481) Unrecognized transition obligation.. 5,314 5,245 22,093 23,726 Unrecognized prior service cost..... 20,637 22,826 4,712 4,900 Contribution in fourth fiscal quarter............................ 2,500 2,560 ---------- -------- -------- -------- Net amount recorded................. $ (31,343) $(34,738) $ (5,663) $ (6,370) ========== ======== ======== ========
Plan assets include equity and fixed income securities and short-term investments. Pension plan assets also include real estate investments and insurance contracts. 35 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 6--Pension and Other Postretirement Benefit Plans (continued) The following table provides the amounts recorded in the Company's consolidated balance sheets:
Other Postretirement Pensions Benefits ------------------ ---------------- April 2, April 3, April April 1999 1998 2, 1999 3, 1998 -------- -------- ------- ------- Prepaid benefit cost................ $ 14,074 $ 10,289 Accrued benefit liability........... (54,279) (53,802) $(5,663) $(6,370) Intangible asset.................... 2,301 3,266 Accumulated other comprehensive income............................. 6,561 5,509 -------- -------- ------- ------- Net amount recorded................. $(31,343) $(34,738) $(5,663) $(6,370) ======== ======== ======= =======
The following table lists selected information for the pension plans with accumulated benefit obligations in excess of plan assets as of April 2, 1999 and April 3, 1998. The fair value of plan assets shown for fiscal 1998 represents two plans which became fully funded in fiscal 1999. The reported amounts for fiscal 1999 consist only of plans with no assets.
April April 2, 1999 3, 1998 ------- ------- Projected benefit obligation.............................. $39,139 $92,594 Accumulated benefit obligation............................ 35,054 84,741 Fair value of plan assets................................. 0 53,826
Weighted average assumptions used in the accounting for the Company's plans were:
Fiscal Year ---------------- 1999 1998 1997 ---- ---- ---- Discount or settlement rates............................. 6.7% 7.1% 7.6% Rates of increase in compensation levels................. 5.0 5.2 5.7 Expected long-term rates of return on assets............. 8.1 8.3 8.6
The Company sponsors several defined contribution plans for substantially all U.S. employees and certain foreign employees. The plans allow employees to contribute a portion of their earnings in accordance with specified guidelines. At April 2, 1999, plan assets included 5,878,348 shares of the Company's common stock. During fiscal 1999, 1998 and 1997, the Company contributed $41,367, $35,216 and $29,772, respectively. The assumed healthcare cost trend rate used in measuring the expected benefit obligation was 7.5% for fiscal 1999, declining to 5.0% for 2004 and subsequent years. A one-percentage point change in the assumed healthcare cost trend rate would have the following effects:
One Percentage Point ----------------- Increase Decrease -------- -------- Effect on accumulated postretirement benefit obligation as of April 2, 1999..................................... $5,835 $(3,522) Effect on net periodic postretirement benefit cost for fiscal 1999............................................. $ 643 $ (356)
36 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 7--Commitments and Contingencies Commitments The Company has operating leases for the use of certain property and equipment. Substantially all operating leases are noncancelable or cancelable only by the payment of penalties. All lease payments are based on the lapse of time but include, in some cases, payments for insurance, maintenance and property taxes. There are no purchase options on operating leases at favorable terms, but most leases have one or more renewal options. Certain leases on real property are subject to annual escalations for increases in utilities and property taxes. Lease rental expense amounted to $180,783 (1999), $162,795 (1998) and $162,777 (1997). Minimum fixed rentals required for the next five years and thereafter under operating leases in effect at April 2, 1999 are as follows:
Fiscal Year Real Estate Equipment ----------- ----------- --------- 2000................................................. $102,718 $ 57,174 2001................................................. 90,325 22,818 2002................................................. 76,672 10,408 2003................................................. 58,477 5,761 2004................................................. 46,332 2,486 Thereafter........................................... 101,128 3,094 -------- -------- $475,652 $101,741 ======== ========
DST Systems, Inc., a shareholder of the Company, provides data processing and consulting services and licenses certain software products to the Company. During the three fiscal years ended April 2, 1999, the Company incurred aggregate expenses of $27,065, $27,271 and $22,788, respectively, related thereto, which are included in costs of services. Contingencies The primary financial instruments which potentially subject the Company to concentrations of credit risk are accounts receivable. The Company's customer base includes Fortune 500 companies, the U.S. Federal government and other significant, well-known companies operating in North America, Europe and the Pacific Rim. Credit risk with respect to accounts receivable is minimized because of the nature and diversification of the Company's customer base. Furthermore, the Company continuously reviews its accounts receivables and records provisions for doubtful accounts as needed. The Company is currently party to a number of disputes which involve or may involve litigation. It is the opinion of Company management that ultimate liability, if any, with respect to these disputes will not be material to the Company's consolidated financial statements. Note 8--Stock Incentive Plans Stock Options. The Company has eight 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. At April 2, 1999, April 3, 1998 and March 28, 1997, 9,897,768, 1,938,838 and 4,588,930 shares, respectively, of CSC common stock were available for the grant to employees of future stock options, restricted stock or other stock- based incentives. 37 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 8--Stock Incentive Plans (continued) Information concerning stock options granted under stock incentive plans is as follows:
Fiscal Year -------------------------------------------------------------- 1999 1998 1997 -------------------- -------------------- -------------------- Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price ---------- -------- ---------- -------- ---------- -------- Outstanding, beginning of year................ 11,846,858 $25.48 13,157,762 $20.23 13,972,880 $15.45 Granted................. 2,095,750 54.80 3,285,950 35.36 3,148,736 34.74 Exercised............... (2,185,600) 21.51 (3,820,152) 15.20 (2,918,180) 12.77 Canceled................ (1,075,592) 32.26 (776,702) 28.83 (1,045,674) 20.90 ---------- ---------- ---------- Outstanding, end of year................... 10,681,416 31.35 11,846,858 25.48 13,157,762 20.23 ========== ========== ========== Exercisable, end of year................... 4,360,449 $19.47 4,261,089 $16.21 5,412,886 $13.79 ========== ========== ==========
April 2, 1999 ----------------------------------------------------- Options Outstanding Options Exercisable -------------------------------- -------------------- Weighted Weighted Average Weighted Average Remaining Average Range of Option Exercise Number Exercise Contractual Number Exercise Price Outstanding Price Life Exercisable Price - ------------------------ ----------- -------- ----------- ----------- -------- $ .17-$19.00............ 2,752,600 $11.79 3.6 2,530,645 $11.42 19.63-33.94............ 3,623,810 29.71 7.2 1,135,272 26.95 34.00-53.13............ 3,850,006 43.40 8.2 694,532 36.60 53.25-72.94............ 455,000 60.81 9.5 None N/A
The Company uses the intrinsic value based method of accounting for stock options, under which compensation cost is equal to the excess, if any, of the quoted market price of the stock at the option grant date over the exercise price, and is amortized over the vesting period. Compensation cost recognized with respect to stock options was $300, $377 and $442 for fiscal 1999, 1998 and 1997, respectively. Restricted Stock. Restricted stock awards consist of shares of common stock of the Company sold at par value ($1 per share). Upon sale to an employee, shares of restricted stock become outstanding, receive dividends and have voting rights. The shares are subject to forfeiture and to restrictions which limit the sale or transfer during the restriction period. The restrictions on shares of Continuum restricted stock lapse ratably on the first five anniversaries of the date of sale. The restrictions on shares of CSC restricted stock (other than Continuum restricted stock) generally lapse on the fifth, sixth and seventh anniversaries of the date of sale. At April 2, 1999, April 3, 1998 and March 28, 1997, 66,304, 165,302 and 296,482 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. The Company uses the intrinsic value based method of accounting for restricted stock, under which compensation cost is equal to the excess, if any, of the quoted market price of the stock at the date of sale to the employee over the sales price, and is amortized over the restriction period. Compensation cost recognized with respect to restricted stock was $411, $645 and $742 during fiscal 1999, 1998 and 1997, respectively. 38 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 8--Stock Incentive Plans (continued) Restricted Stock Units. During fiscal 1998, the Company adopted a stock incentive plan which authorizes the issuance of stock options, restricted stock and other stock-based incentives to nonemployee directors upon terms approved by the Company's Board of Directors. As of April 2, 1999 and April 3, 1998, 22,488 restricted stock units ("RSUs") had been awarded to nonemployee directors under this plan and were outstanding on that date. When a holder of RSUs ceases to be a director of the Company, the RSUs are automatically redeemed for shares of CSC common stock and dividend equivalents with respect to such shares. At the holder's election, which must be made within 30 days after the date of the award, the RSUs may be redeemed (i) as an entirety, upon the day the holder ceases to be a director, or (ii) in substantially equal amounts upon the first five, ten or fifteen anniversaries of such day. There are two types of RSUs: (i) those awarded in lieu of vested retirement benefits under other plans ("Accrued Benefit RSUs"); and (ii) those awarded as a form of future retirement benefits ("Future Benefit RSUs"). When a holder of Accrued Benefit RSUs ceases to be a director of the Company, the number of shares of CSC common stock to be delivered by the Company upon redemption of the RSUs is equal to the number of such RSUs awarded. When a holder of Future Benefit RSUs ceases to be a director, the number of shares to be delivered upon redemption is equal to 20% of the number of such RSUs awarded, multiplied by the number of full years (but not in excess of 5) that the holder served as a director after the date of award. At April 2, 1999 and April 3, 1998, 8,778 Accrued Benefit RSUs and 13,710 Future Benefit RSUs were outstanding, and 77,512 shares of CSC common stock remained available for the grant to nonemployee directors of future RSUs or other stock-based incentives. The Company uses the intrinsic value based method of accounting for RSUs, under which compensation cost is equal to 100% of the total number of the RSUs awarded, multiplied by the quoted market price of the stock at the date of award, and is amortized, in the case of Future Benefit RSUs, over the vesting period. Compensation cost recognized with respect to RSUs was $109 for fiscal 1999. Pro Forma Information. In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the following pro forma net income and earnings per share information is presented as if the Company accounted for stock-based compensation awarded under the stock incentive plans using the fair value based method. Under the fair value method, the estimated fair value of stock incentive awards is charged against income on a straight-line basis over the vesting period.
Fiscal Year ----------------------------------------------------------------- 1999 1998 1997 --------------------- --------------------- --------------------- As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma ----------- --------- ----------- --------- ----------- --------- Net income.............. $341,157 $325,027 $260,369 $246,161 $192,413 $182,649 Basic earnings per share.................. 2.16 2.05 1.68 1.59 1.27 1.20 Diluted earnings per share.................. 2.11 2.01 1.64 1.55 1.23 1.17
The weighted average fair values of stock awards granted during fiscal 1999, 1998 and 1997 were $19.12, $12.08 and $11.53, respectively. The fair value of each stock award was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1999, 1998 and 1997, respectively: risk-free interest rates of 5.48%, 6.43% and 6.55%; expected volatility of 32%, 28% and 26%; and expected lives of 5.96, 6.06 and 5.75 years. 39 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 9--Stockholder Purchase Rights Plan On December 21, 1988, the Company adopted a stockholder rights plan pursuant to which it issued one right for each outstanding share of its common stock. On February 27, 1998, the Company's Board of Directors redeemed these rights for one sixth of one cent per right. The redemption price was paid on April 13, 1998, to the holders of record of rights as of the close of business on March 30, 1998. On February 18, 1998, the Company adopted a new stockholder rights plan pursuant to which it issued one right for each outstanding share of its common stock. These rights, which are attached to and trade only together with the common stock, are not currently exercisable. On the tenth business day after any person or entity becomes the beneficial owner of 10% or more of CSC's common stock, each right (other than rights held by the 10% stockholder, which will become void) will become exercisable to purchase, for $250, CSC common stock having a market value of $500. The rights expire February 18, 2008, and may be redeemed by the Board of Directors at $.0005 per right at any time before they become exercisable. 40 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 10--Segment and Geographic Information The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," during fiscal 1999. SFAS No. 131 establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. All of the Company's business involves operations which provide management and information technology consulting, systems integration and outsourcing. Although the Company presents estimates of revenue by business service and geography, the Company's expenses and assets are not identified or accumulated in this manner due to, among other reasons, cross-utilization of personnel and assets across the Company. Based on SFAS No. 131 criteria, the Company's reportable operating segments consist of the U.S. Federal Sector and the Global Commercial Sector. The U.S. Federal Sector operates principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations, Cost Accounting Standards and audits by various U.S. Federal agencies. The U.S. Federal Sector revenue reported below will not agree to U.S. Federal government revenue presented elsewhere in the Annual Report due to overlapping activities between segments. The Company utilizes uniform accounting policies across all of its operating units (see Note 1). The table below presents financial information for the three fiscal years ended April 2, 1999, for the two reportable segments, and for financial items that cannot be allocated to either operating segment:
Global U.S. Commercial Federal Sector Sector Corporate Total ---------- ---------- --------- ---------- 1999 Revenues....................... $5,824,427 $1,835,017 $ 521 $7,659,965 Earnings (loss) before interest and taxes..................... 452,751 109,157 (16,643) 545,265 Depreciation and amortization.. 411,697 25,132 8,206 445,035 Assets......................... 3,877,832 665,894 463,983 5,007,709 Capital expenditures for long- lived assets.................. 559,080 17,343 21,414 597,837 1998 Revenues....................... $4,934,269 $1,666,448 $ 121 $6,600,838 Earnings (loss) before interest and taxes..................... 392,120 93,734 (23,796) 462,058 Depreciation and amortization.. 355,639 25,629 5,586 386,854 Assets......................... 3,096,610 586,801 363,384 4,046,795 Capital expenditures for long- lived assets.................. 488,444 19,644 51,254 559,342 1997 Revenues....................... $3,929,959 $1,685,903 $ 186 $5,616,048 Earnings (loss) before interest and taxes..................... 281,483 104,965 (1,933) 384,515 Depreciation and amortization.. 305,643 24,417 3,187 333,247 Assets......................... 2,802,993 513,531 176,563 3,493,087 Capital expenditures for long- lived assets.................. 459,651 17,547 24,971 502,169
A reconciliation of earnings before interest and taxes to income before taxes is as follows:
Fiscal Year ---------------------------- 1999 1998 1997 -------- -------- -------- Earnings before interest and taxes........... $545,265 $462,058 $384,515 Interest expense............................. (48,496) (50,951) (40,268) Interest income.............................. 14,588 8,855 7,995 Special charges.............................. (229,093) (48,929) -------- -------- -------- Total...................................... $511,357 $190,869 $303,313 ======== ======== ========
41 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 10--Segment and Geographic Information (continued) Enterprise-wide information is provided in accordance with SFAS No. 131. Revenue by country is based on the location of the selling business unit. Property and equipment information is based on the physical location of the asset. Geographic revenue and property and equipment, net for the three years ended April 2, 1999 is as follows:
Fiscal Year ----------------------------------------------------------------- 1999 1998 1997 --------------------- --------------------- --------------------- Property Property Property and and and Equipment, Equipment, Equipment, Revenues Net Revenues Net Revenues Net ---------- ---------- ---------- ---------- ---------- ---------- United States........... $4,893,730 $ 722,859 $4,406,236 $691,472 $3,795,361 $648,730 Europe: United Kingdom........ 1,134,923 130,577 929,717 136,062 749,203 140,982 Other Europe.......... 1,115,174 110,139 841,238 87,046 725,730 62,812 Other International..... 516,138 123,300 423,647 42,613 345,754 35,545 ---------- ---------- ---------- -------- ---------- -------- Total................. $7,659,965 $1,086,875 $6,600,838 $957,193 $5,616,048 $888,069 ========== ========== ========== ======== ========== ========
The Company derives a significant portion of its revenues from departments and agencies of the United States government. U.S. Federal government revenue accounted for 23%, 25% and 29% of the Company's revenue for fiscal 1999, 1998 and 1997, respectively. At April 2, 1999, approximately 28% of the Company's accounts receivable were due from the federal government. No single commercial customer exceeded 10% of the Company's revenue during fiscal 1999, 1998 and 1997, respectively. Note 11--Agreement with Equifax During fiscal 1989, the Company entered into an agreement (the "Operating Agreement") with Equifax Inc. and its subsidiary, Equifax Credit Information Services, Inc. ("ECIS"), pursuant to which certain of the Company's subsidiaries (collectively, the "Bureaus") became affiliated credit bureaus of ECIS and purchased credit reporting services from the ECIS system for resale to their customers. The Bureaus retain ownership of their credit files stored in the ECIS system and receive revenues generated from the sale of the credit information they contain. The Bureaus pay ECIS a fee for storing and maintaining the files and for each report supplied by the ECIS system. Pursuant to the Operating Agreement, the Company acquired an option to require ECIS to purchase the collections business (the "Collections Put Option"), and a separate option to require ECIS to purchase the credit reporting business and, if not previously sold, the collections business (the "Credit Reporting Put Option"). Both options require six months' advance notice and expire on August 1, 2013. On November 25, 1997, the Collections Put Option was exercised and the collections business was sold for approximately $38,000. The transaction was completed during May 1998. Since July 31, 1998, the exercise price of the Credit Reporting Put Option has been equal to the appraised value of the credit reporting business. The Operating Agreement has a 10-year term, which will automatically be renewed indefinitely for successive 10-year periods unless the Company gives notice of termination at least six months prior to the expiration of any such term. In the event that on or prior to August 1, 2013 (i) the Company gives such notice of 42 COMPUTER SCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per-share amounts) Note 11--Agreement with Equifax (continued) termination and does not exercise the Credit Reporting Put Option prior to the termination of the then-current term or (ii) there is a change in control of the Company, then ECIS has an option for 60 days thereafter to require the Company to sell to it the credit reporting business at the Credit Reporting Put Option exercise price. The Company's rights under the Operating Agreement, including its right to exercise the Credit Reporting Put Option, remain exercisable by the Company through its affiliates. 43 COMPUTER SCIENCES CORPORATION Quarterly Financial Information (Unaudited)
Fiscal 1999 ------------------------------------------- lst 2nd 3rd 4th In thousands except per-share Quarter Quarter Quarter Quarter amounts ---------- ---------- ---------- ---------- Revenues.......................... $1,753,928 $1,847,771 $1,927,888 $2,130,378 Income before taxes............... 96,435 109,547 130,418 174,957 Net income........................ 64,335 73,047 87,018 116,757 Net earnings per share: Basic........................... 0.41 0.46 0.55 0.73 Diluted......................... 0.40 0.45 0.54 0.72
Fiscal 1998 -------------------------------------------- lst 2nd 3rd 4th Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- Revenues........................... $1,488,750 $1,578,824 $1,664,092 $1,869,172 Income (loss) before taxes......... (127,612) 92,353 106,632 119,496 Net income......................... 52,588 58,553 69,132 80,096 Net earnings per share: Basic............................ 0.34 0.38 0.44 0.51 Diluted.......................... 0.33 0.37 0.44 0.50
A discussion of "special items" for fiscal 1998 is included in Note 2 to the consolidated financial statements. 44 PART II--(Continued) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions Information regarding executive officers of the Company is included in Part I. For the other information called for by Items 10, 11, 12 and 13, reference is made to the sections entitled "Voting Securities and Principal Holders Thereof," "Item 1--Election of Directors" and "Executive Compensation" in the Registrant's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after April 2, 1999. Such sections are incorporated herein by reference in their entirety, except for the material included in the "Executive Compensation" section under the captions "Report of Compensation Committee on Annual Compensation of Executive Officers" and "Comparison of Cumulative Total Return." 45 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) and (2) Financial Statements and Financial Statement Schedules These documents are included in the response to Item 8 of this report. See the index on page 51. (3) Exhibits The following exhibits are filed with this report:
Exhibit Number Description of Exhibit ------- ---------------------- 3.1 Restated Articles of Incorporation, effective October 31, 1988 (c) 3.2 Amendment to Restated Articles of Incorporation, effective August 10, 1992 (j) 3.3 Amendment to Restated Articles of Incorporation, effective July 31, 1996 (m) 3.4 Certificate of Amendment of Certificate of Designations of Series A Junior Participating Preferred Stock, effective August 1, 1996 (o) 3.5 Bylaws, amended and restated effective May 4, 1998 (g) 10.1 1978 Stock Option Plan, amended and restated effective March 31, 1988* (n) 10.2 1980 Stock Option Plan, amended and restated effective March 31, 1988* (n) 10.3 1984 Stock Option Plan, amended and restated effective March 31, 1988* (n) 10.4 1987 Stock Incentive Plan* (b) 10.5 Schedule to the 1987 Stock Incentive Plan for United Kingdom personnel* (b) 10.6 1990 Stock Incentive Plan* (h) 10.7 1992 Stock Incentive Plan, amended and restated effective August 9, 1993* (n) 10.8 Schedule to the 1992 Stock Incentive Plan for United Kingdom personnel* (q) 10.9 1995 Stock Incentive Plan* (k) 10.10 1998 Stock Incentive Plan* (v) 10.11 Form of Stock Option Agreement* (u) 10.12 Form of Restricted Stock Agreement* (u) 10.13 Annual Management Incentive Plan, effective April 2, 1983* (a) 10.14 Supplemental Executive Retirement Plan, amended and restated effective February 27, 1998* (u) 10.15 Deferred Compensation Plan, amended and restated effective February 2, 1998* (s) 10.16 Severance Plan for Senior Management and Key Employees, amended and restated effective February 18, 1998. (t) 10.17 Severance Agreement with Van B. Honeycutt, effective February 2, 1998. (s) 10.18 Employee Agreement with Van B. Honeycutt, effective May 1, 1999. 10.19 Form of Indemnification Agreement for Officers (e) 10.20 Form of Indemnification Agreement for Directors (d) 10.21 1997 Nonemployee Director Stock Incentive Plan (r) 10.22 Form of Restricted Stock Unit Agreement (g) 10.23 1990 Nonemployee Director Retirement Plan, amended and restated effective February 2, 1998 (s) 10.24 Information Technology Services Agreements with General Dynamics Corporation, dated as of November 4, 1991 (i) 10.25 Rights Agreement dated February 18, 1998 (t) 10.26 $350 million Credit Agreement dated as of September 6, 1995 (k) 10.27 First Amendment to $350 million Credit Agreement dated September 23, 1996 (p) 21 Significant Active Subsidiaries and Affiliates of the Registrant 23 Independent Auditors' Consent 27 Financial Data Schedule 99.1 Annual Report on Form 11-K for the Matched Asset Plan of the Registrant for the fiscal year ended December 31, 1998 (to be filed by amendment) 99.2 Annual Report on Form 11-K for the Hourly Savings Plan of CSC Outsourcing, Inc. for the fiscal year ended December 31, 1998 (to be filed by amendment) 99.3 Annual Report on Form 11-K for the CUTW Hourly Savings Plan of CSC Outsourcing, Inc. for the fiscal year ended December 31, 1998 (to be filed by amendment)
- -------- * Management contract or compensatory plan or agreement 46 Notes to Exhibit Index: (a)-(g) These exhibits are incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal years ended on the respective dates indicated below: (a) March 30, 1984 (e) March 31, 1995 (b) April 1, 1988 (f) March 28, 1997 (c) March 31, 1989 (g) April 3, 1998 (d) April 3, 1992
(h) Incorporated herein by reference to the Registrant's Registration Statement on Form S-8 filed on August 15, 1990. (i) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated November 4, 1991. (j) Incorporated herein by reference to the Registrant's Proxy Statement for its August 10, 1992 Annual Meeting of Stockholders. (k) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q filed on November 13, 1995. (l) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated April 28, 1996. (m) Incorporated herein by reference to the Registrant's Proxy Statement for its July 31, 1996 Annual Meeting of Stockholders. (n) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q filed on August 12, 1996. (o) Incorporated herein by reference to the Registrant's Current Report of Form 8-K dated August 1, 1996. (p) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q filed on November 12, 1996. (q) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q filed on February 10, 1997. (r) Incorporated herein by reference to the Registrant's Proxy Statement for its August 11, 1997 Annual Meeting of Stockholders. (s) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q filed on February 9, 1998. (t) Incorporated herein by reference to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on February 26, 1998. (u) Incorporated herein by reference to Amendment No. 2 to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on March 2, 1998. (v) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q filed on August 14, 1998 (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter of fiscal 1999. 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Computer Sciences Corporation Dated: June 22, 1998 /s/ Van B. Honeycutt By: ___________________________ Van B. Honeycutt, Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Van B. Honeycutt Chairman, President and June 22, 1999 ____________________________________ Chief Executive Officer Van B. Honeycutt (Principal Executive Officer) /s/ Leon J. Level Vice President, Chief June 22, 1999 ____________________________________ Financial Officer and Leon J. Level Director (Principal Financial Officer) /s/ Scott M. Delanty Vice President and June 22, 1999 ____________________________________ Controller (Principal Scott M. Delanty Accounting Officer) /s/ Irving W. Bailey, II Director June 22, 1999 ____________________________________ Irving W. Bailey, II /s/ Stephen L. Baum Director June 22, 1999 ____________________________________ Stephen L. Baum /s/ William R. Hoover Director June 22, 1999 ____________________________________ William R. Hoover /s/ Thomas A. McDonnell Director June 22, 1999 ____________________________________ Thomas A. McDonnell
48
Signature Title Date --------- ----- ---- /s/ F. Warren McFarlan Director June 22, 1999 ____________________________________ F. Warren McFarlan /s/ James R. Mellor Director June 22, 1999 ____________________________________ James R. Mellor /s/ William P. Rutledge Director June 22, 1999 ____________________________________ William P. Rutledge
49 COMPUTER SCIENCES CORPORATION AND SUBSIDIARIES SCHEDULE VIII, Valuation and Qualifying Accounts Three Years Ended April 2, 1999
Additions ------------------------- Balance, Charged to cost Balance, beginning of period and expenses Other (1) Deductions end of period In thousands ------------------- --------------- --------- ---------- ------------- Year ended April 2, 1999 Allowance for doubtful receivables............ $75,373 $ 8,818 $4,032 $ 7,616 $80,607 Year ended April 3, 1998 Allowance for doubtful receivables............ 52,507 31,828 3,724 12,686 75,373 Year ended March 28, 1997 Allowance for doubtful receivables............ 45,425 22,288 (618) 14,588 52,507
- -------- (1) Includes balances from acquisitions, changes in balances due to foreign currency exchange rates and recovery of prior-year charges. 50 INDEX TO EXHIBIT
Exhibit Number Description of Exhibit ------- ---------------------- 3.1 Restated Articles of Incorporation, effective October 31, 1988 (c) 3.2 Amendment to Restated Articles of Incorporation, effective August 10, 1992 (j) 3.3 Amendment to Restated Articles of Incorporation, effective July 31, 1996 (m) 3.4 Certificate of Amendment of Certificate of Designations of Series A Junior Participating Preferred Stock, effective August 1, 1996 (o) 3.5 Bylaws, amended and restated effective May 4, 1998 (g) 10.1 1978 Stock Option Plan, amended and restated effective March 31, 1988* (n) 10.2 1980 Stock Option Plan, amended and restated effective March 31, 1988* (n) 10.3 1984 Stock Option Plan, amended and restated effective March 31, 1988* (n) 10.4 1987 Stock Incentive Plan* (b) 10.5 Schedule to the 1987 Stock Incentive Plan for United Kingdom personnel* (b) 10.6 1990 Stock Incentive Plan* (h) 10.7 1992 Stock Incentive Plan, amended and restated effective August 9, 1993* (n) 10.8 Schedule to the 1992 Stock Incentive Plan for United Kingdom personnel* (q) 10.9 1995 Stock Incentive Plan* (k) 10.10 1998 Stock Incentive Plan* (v) 10.11 Form of Stock Option Agreement* (u) 10.12 Form of Restricted Stock Agreement* (u) 10.13 Annual Management Incentive Plan, effective April 2, 1983* (a) 10.14 Supplemental Executive Retirement Plan, amended and restated effective February 27, 1998* (u) 10.15 Deferred Compensation Plan, amended and restated effective February 2, 1998* (s) 10.16 Severance Plan for Senior Management and Key Employees, amended and restated effective February 18, 1998. (t) 10.17 Severance Agreement with Van B. Honeycutt, effective February 2, 1998. (s) 10.18 Employee Agreement with Van B. Honeycutt, effective May 1, 1999. 10.19 Form of Indemnification Agreement for Officers (e) 10.20 Form of Indemnification Agreement for Directors (d) 10.21 1997 Nonemployee Director Stock Incentive Plan (r) 10.22 Form of Restricted Stock Unit Agreement (g) 10.23 1990 Nonemployee Director Retirement Plan, amended and restated effective February 2, 1998 (s) 10.24 Information Technology Services Agreements with General Dynamics Corporation, dated as of November 4, 1991 (i) 10.25 Rights Agreement dated February 18, 1998 (t) 10.26 $350 million Credit Agreement dated as of September 6, 1995 (k) 10.27 First Amendment to $350 million Credit Agreement dated September 23, 1996 (p) 21 Significant Active Subsidiaries and Affiliates of the Registrant 23 Independent Auditors' Consent 27 Financial Data Schedule 99.1 Annual Report on Form 11-K for the Matched Asset Plan of the Registrant for the fiscal year ended December 31, 1998 (to be filed by amendment) 99.2 Annual Report on Form 11-K for the Hourly Savings Plan of CSC Outsourcing, Inc. for the fiscal year ended December 31, 1998 (to be filed by amendment) 99.3 Annual Report on Form 11-K for the CUTW Hourly Savings Plan of CSC Outsourcing, Inc. for the fiscal year ended December 31, 1998 (to be filed by amendment)
- -------- * Management contract or compensatory plan or agreement 51 Notes to Exhibit Index: (a)-(g) These exhibits are incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal years ended on the respective dates indicated below: (a) March 30, 1984 (e) March 31, 1995 (b) April 1, 1988 (f) March 28, 1997 (c) March 31, 1989 (g) April 3, 1998 (d) April 3, 1992
(h) Incorporated herein by reference to the Registrant's Registration Statement on Form S-8 filed on August 15, 1990. (i) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated November 4, 1991. (j) Incorporated herein by reference to the Registrant's Proxy Statement for its August 10, 1992 Annual Meeting of Stockholders. (k) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q filed on November 13, 1995. (l) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated April 28, 1996. (m) Incorporated herein by reference to the Registrant's Proxy Statement for its July 31, 1996 Annual Meeting of Stockholders. (n) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q filed on August 12, 1996. (o) Incorporated herein by reference to the Registrant's Current Report of Form 8-K dated August 1, 1996. (p) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q filed on November 12, 1996. (q) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q filed on February 10, 1997. (r) Incorporated herein by reference to the Registrant's Proxy Statement for its August 11, 1997 Annual Meeting of Stockholders. (s) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q filed on February 9, 1998. (t) Incorporated herein by reference to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on February 26, 1998. (u) Incorporated herein by reference to Amendment No. 2 to the Registrant's Solicitation/Recommendation Statement on Schedule 14D-9 filed on March 2, 1998. (v) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q filed on August 14, 1998 52 EX-10.18 2 EMPLOYMENT AGREEMENT EXHIBIT 10.18 EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into as of the 1st day of May, 1999 (the "Effective Date"), by and between Computer Sciences Corporation, a Nevada corporation (the "Company"), and Van B. Honeycutt ("Executive"). W I T N E S S E T H: ------------------- WHEREAS, Executive, since December 28, 1987, has served as an officer of the Company, most recently as the Company's Chairman of the Board of Directors ("Chairman"), President and Chief Executive Officer; and WHEREAS, the Company desires to obtain the benefit of continued services by Executive as Chairman, President and Chief Executive Officer, and Executive desires to continue to render services to the Company; and WHEREAS, the Board of Directors of the Company (the "Board") has determined that it is in the Company's best interest and that of its stockholders to recognize the substantial contribution that Executive has made and is expected to continue to make to the Company's business and to retain his services in the future; and WHEREAS, Executive and the Company deem it to be in their respective best interests to enter into an agreement providing for the Company's continued employment of Executive pursuant to terms herein stated, which terms include provisions for compensation and benefits to be paid or otherwise provided by the Company to Executive or his designated beneficiaries; NOW, THEREFORE, in consideration of the mutual promises and agreements herein, it is hereby agreed as follows: 1. Term of Employment; Duties. -------------------------- (a) As used herein, the phrase "Term of Employment" shall mean the period commencing on the Effective Date and ending on the earliest to occur of the fourth anniversary of the Effective Date or the date of termination of the Executive's employment in accordance with any one of Sections 6(a) through 6(e) below; provided, however, that the Term of Employment shall be automatically -------- ------- extended without further action of either party for one additional four-year period (the "Single Automatic Extension") unless written notice of either party's intention not to extend has been given to the other party hereto at least 60 days prior to the expiration of the effective Term of Employment; provided further that the Term of Employment may be extended after the Single - -------- ------- Automatic Extension, by action of the Company's Board of Directors approving the terms and conditions of an offer of any such extension and giving written notice to Executive of such offer at least 60 days prior to the expiration of the then effective Term of Employment, followed by Executive's acceptance of such offer within such time as may be provided by the Board as a condition of such offer. (b) The Company hereby agrees to employ Executive as its Chairman and Chief Executive Officer for the Term of Employment, and Executive agrees to serve in these capacities with the duties and responsibilities customary to such positions in a company of the size and nature of the Company, to use his best efforts to protect, encourage and promote the interests of his Company, and to perform such other duties consistent with the offices held by Executive as may be reasonably assigned to him from time to time by the Board. During the Term of Employment, Executive shall report solely and directly to the Board. (c) Executive shall devote substantially all of his business time and attention to his duties on the Company's behalf except for sick leave, vacations and approved leaves of absence; provided, however, that nothing shall preclude Executive from (i) managing his personal investments and affairs and (ii) participating in civic and nonprofit activities provided that, in either case, such activities do not materially interfere with or adversely affect the performance of his duties under this Agreement and (iii) participating as a member of the board of directors of such other companies as he may be invited and elected to serve with the consent of the Board of the Company, which consent shall not be unreasonably withheld. 2. Compensation. ------------ (a) Base Salary. The Company agrees to pay to Executive as a minimum ----------- salary during the Term of Employment the sum of $1,040,000 per year ("Base Salary") subject to increase as provided herein, payable in twenty-six biweekly installments in accordance with the normal payroll procedure of the Company. Such Base Salary shall be subject to annual review by the Board and may be adjusted at or above such minimum by the Board from time to time. (b) Annual Incentive Awards. Executive shall participate in the ----------------------- Company's Annual Management Incentive Plan, and any successor plan, on terms and conditions that are appropriate to his positions and responsibilities at the Company and are no less favorable than those applying to other senior executive officers of the Company. Any annual incentive paid to Executive shall be in addition to the Base Salary and to any and all other benefits to which Executive is entitled as provided in this Agreement. Payment of annual incentive awards shall be made at the same time that other senior executive officers of the Company receive their incentive awards. (c) Long-Term Incentive Programs. Executive shall participate in the ---------------------------- stock option plans and other long-term incentive compensation plans available to other senior executive officers of the Company from time to time on terms and conditions that are appropriate to his positions and responsibilities at the Company and are no less favorable than those applying to such other senior executive officers. 3. Employee Benefit Programs. During the Term of Employment, Executive ------------------------- shall be entitled to participate in all employee pension and welfare benefit plans made available to the Company's executive officers, as such plans may be in effect from time to time and on terms and conditions that are no less favorable than those applying to other senior executive officers, including, without limitation, pension, profit sharing, savings and other retirement plans or programs, medical, dental, hospitalization, short-term and long-term disability and life insurance plans, accidental death and dismemberment protection, travel accident insurance, and any welfare benefit plans for senior executive officers that may be sponsored by the Company from time to time, including any retirement or welfare plans that supplement the above-listed types of plans, whether funded or unfunded. Executive shall, in all events, be entitled during the Term of Employment to term life insurance which, together with other life insurance under the Company's term life insurance program, shall provide face amount coverage which shall be no less than $750,000. 4. Supplemental Pension Benefit. ----------------------------- Notwithstanding Section 3 hereof, Executive shall be entitled to participate in the Company's Supplemental Executive Retirement Plan, amended and restated as of February 27, 1998, or such successor or amended SERP as shall be adopted from time to time (collectively, the "SERP") on terms and conditions that are no less favorable than those applying to other senior executive officers of the Company; provided, that the following additional provisions -------- shall apply to Executive's right to benefits under the SERP: (i) Executive's right to benefits as provided in Article IV(a) and IV(b) of the SERP shall at all times be fully vested and nonforefeitable regardless of the age at which Executive's Separation from Service occurs if the cause of his Separation from Service is either termination by the Company without Cause or termination by the Executive for Good Reason (both as described in Section 6(d) hereof); (ii) notwithstanding any provision of the SERP (including any provision of Articles III, VIII, IX and XV of the SERP) to the contrary, Executive may not be removed as a participant thereunder at any time and the SERP may not be amended, modified, suspended or terminated as to Executive without Executive's express written consent; and (iii) if Executive's Separation from Services occurs prior to his attaining age sixty-two (62) by reason of Executive's termination of employment by the Company without Cause or by Executive for Good Reason, Executive shall be entitled to receive commencing immediately upon such Separation from Service benefits thereunder in accordance with Section IV(b) and Articles V, VI and VII, as applicable, without the requirement of any approval by the Chief Executive Officer or any other persons(s) and such benefits shall be calculated as if on the date of such Separation from Service, Executive had attained an age equal to the lesser of sixty-two (62) or his actual age plus three (3). 5. Perquisites, Vacations and Reimbursement of Expenses. During the Term ---------------------------------------------------- of Employment: (a) The Company shall furnish Executive with, and Executive shall be allowed full use of, office facilities, automobiles, secretarial and clerical assistance and other Company property and services commensurate with his position and of at least comparable quality, nature and extent to those made available to other senior executive officers of the Company from time to time; (b) Executive shall be allowed vacations and leaves of absence with pay on a basis no less favorable than that applying to other senior executive officers of the Company; and (c) The Company shall reimburse Executive for all monies which he has expended for purposes of the Company's business, such reimbursements to be effected in accordance with normal Company reimbursement procedures from time to time in effect. The Company shall also promptly pay all adequately documented reasonable costs and expenses (including reasonable legal fees) incurred on Executive's behalf in connection with entering into this Agreement. (d) The Company shall in all events continue to provide use of the Company's aircraft at the Company's expense for Executive's business use, it being recognized that some of Executive's travel by the Company's aircraft may be required for security purposes and, as such, shall constitute business use of the aircraft. In addition, the Company shall reimburse Executive for travel expenses incurred by Executive's spouse in accompanying Executive on Company business, on an occasional basis. (e) It is the intention of the Company that Executive shall be kept whole with respect to reimbursements or other benefits under Section 5(a), (b), and (d) after taking into account taxes, if any, on such amounts, but, except with respect to payments to cover the occasional travel of Executive's spouse accompanying him on business trips, this sentence shall not apply to any such benefits described in this Section 5 that are for personal rather than business use. 6. Termination of Employment. ------------------------- The rights and obligations of Executive and the Company in the event of Executive's employment termination following a change of control, as defined in the Company's Severance Plan for Senior Management and Key Employees, adopted as of February 2, 1998 and amended February 18, 1998, or amended or successor plan then in effect (the "Severance Plan") shall be governed exclusively by the Severance Plan. No further payment or benefit shall be made or granted under this Agreement in such event. (a) Termination Due to Death. In the event that Executive's ------------------------ employment is terminated due to his death, the Company's payment obligations under this Agreement shall terminate, except that Executive's estate or his beneficiaries, as the case may be, shall be entitled to the following: (1) Base Salary through the end of the month in which death occurs; (2) a pro rata annual incentive award for the year in which Executive's death occurs, based on the maximum award opportunity for such year, payable in a single installment promptly following Executive's death; and (3) full vesting of any outstanding long-term incentive awards, stock options and restricted stock, granted to Executive under any long-term plan or plans of the Company in which Executive has participated. (b) Termination due to Disability. ----------------------------- (1) If, as a result of Executive's incapacity due to physical or mental illness, accident or other incapacity (as determined by the Board in good faith, after consideration of such medical opinion and advice as may be available to the Board from medical doctors selected by Executive or by the Board or both separately or jointly), Executive shall have been absent from his duties with the Company on a full-time basis for six consecutive months and, within 30 days after written Notice of Termination thereafter given by the Company, Executive shall not have returned to the full-time performance of Executive's duties, the Company or Executive may terminate Executive's employment for "Disability." (2) In the event that Executive's employment is terminated due to Disability, he shall be entitled to the following benefits: (i) disability benefits in accordance with the long-term disability ("LTD") program then in effect for senior executive officers of the Company; (ii) a pro rata annual incentive award for the year in which Executive's termination occurs, based on the maximum award opportunity for such year, payable in a single installment promptly following Executive's termination; (iii) full vesting of any outstanding long-term incentive awards, stock options and restricted stock, granted to Executive under any long-term incentive plan or plans of the Company in which Executive has participated. (c) Termination by the Company for Cause. ------------------------------------ (1) The Company shall have the right to terminate Executive's employment at any time for Cause in accordance with this Section 6(c). (2) For purposes of this Agreement, "Cause" shall mean: (i) fraud, misappropriation, embezzlement or other act of material misconduct against the Company or any of its affiliates; (ii) conviction of a felony involving a crime of moral turpitude; (iii) willful and knowing violation of any rules or regulations of any governmental or regulatory body material to the business of the Company; or (iv) substantial and willful failure to render services in accordance with the terms of this Agreement (other than as a result of illness, accident, or other physical or mental incapacity), provided that (A) a demand for performance of services has been delivered to Executive in writing by or on behalf of the Board of Directors of the Company at least 60 days prior to termination identifying the manner in which such Board of Directors believes that Executive has failed to perform and (B) Executive has thereafter failed to remedy such failure to perform. (3) No termination of Executive's employment by the Company for Cause shall be effective unless the provisions of this Section 6(c)(3) shall have been complied with. Executive shall be given written notice by the Board of the intention to terminate him for Cause, such notice (i) to state in detail the particular circumstances that constitute the grounds on which the proposed termination for Cause is based and (ii) to be given no later than 60 days after the Board first learns of such circumstances. Executive shall have 15 days after receiving such notice in which to cure such grounds, to the extent such cure is possible. If he fails to cure such grounds, Executive shall then be entitled to a hearing before the Board. Such hearing shall be held within 20 days of his receiving such notice, provided that he requests such hearing within 15 days of receiving such notice. If, within five days following such hearing, the Board gives written notice to Executive confirming that, in the judgment of at least two-thirds of the members of the Board, Cause for terminating his employment on the basis set forth in the original notice exists, his employment with the Company shall thereupon be terminated for Cause. (4) In the event the Company terminates Executive's employment for Cause, he shall be entitled to the following: (i) Base Salary through the date of termination; (ii) all vested stock options shall remain exercisable for at least 90 days except as otherwise expressly required by the applicable shareholder-approved stock incentive plan and all unvested stock options shall be forfeited; and (iii) all restricted stock as to which restrictions have not lapsed shall be forfeited, notwithstanding any contrary provisions in any restricted stock grant. (d) Termination Without Cause or for Good Reason. -------------------------------------------- (1) In the event Executive's employment is terminated by the Company without Cause or other than due to death or Disability ("Without Cause"), or in the event Executive terminates his employment for Good Reason, Executive shall be entitled to receive the following: (i) Base Salary through the date of termination; (ii) a lump sum severance payment in an amount equal to the lesser of three (3) or the number of years (including fractions thereof) by which the termination precedes Executive's 62nd birthday times his Base Salary, as in effect immediately prior to the delivery of notice of termination, plus the lesser of three (3) or the number of years (including fractions thereof) by which the termination precedes Executive's 62nd birthday times Executive's average annual cash incentive compensation bonus over the three most recent fiscal years preceding the year in which the date of termination occurs for which such a bonus was paid or deferred or for which the amount of such a bonus, if any, was determined, payable in a single installment promptly following Executive's termination; (iii) a pro rata annual incentive award for the year in which termination occurs, based on his target award for such year, payable in a single installment promptly following Executive's termination; (iv) continuation of coverage by the benefits provided in Section 3 above, including, without limitation, all medical and hospitalization (including dependent coverage), life, accident and disability protection, maintained for Executive's benefit immediately prior to the date of Executive's termination, for a period thereafter equal to the lesser of three (3) years or the number of years (including fractions thereof) by which the termination precedes Executive's 62nd birthday (followed by an 18-month period of COBRA continuation), provided that if Executive is ineligible under the terms of such benefit plans or programs to be covered, the Company shall provide Executive with substantially equivalent coverage through other sources or will provide Executive with a lump sum payment in such amount that after all taxes on that amount shall be equal to the cost to Executive of providing himself such benefit coverage, and (v) full vesting of any outstanding long-term incentive awards, and, with respect to any stock options and restricted stock grants, full vesting of any options or shares which would have vested within the three (3) year period following the date of employment termination if Executive had continued to be employed during such period, and, with respect to stock options, extension of the term during which each option maybe exercised by a period equal to three years from the employment termination date, but not beyond the maximum permitted term of the option. (2) For purpose of this Agreement, Good Reason shall mean the occurrence of any of the following subsequent to the date of this Agreement without Executive's express written consent: (i) the failure to elect or reelect Executive to the positions of Chairman and Chief Executive Officer described in Section 1; the removal of him from either such position; or any material diminution in his duties or responsibilities in such positions (other than in connection with a termination of Executive's employment in accordance with Sections 6(a)-(c) above or 6(e) below); (ii) the assignment to Executive of duties that are materially inconsistent with, or that materially impair his ability to perform, the duties customarily assigned to a Chairman and Chief Executive Officer of a corporation of the size and nature of the Company; or a change in the reporting structure so that Executive reports to someone other than the Board or is subject to the direct or indirect authority or control of a person or entity other than the Board; (iii) the Company awards Executive an annual bonus in respect of any year that is less than 100% of the amount awarded him in respect of any prior year unless due to reduced performance by the Company or by Executive, applying reasonably equivalent standards with respect to both years; (iv) the Company fails to comply with the provisions hereof governing compensation and benefits to Executive or otherwise materially breaches any provision of this Agreement or any other agreement with Executive and fails to cure the same within 15 days following receipt of written notification from Executive specifying such failure to comply or material breach; (v) conduct by the Company occurs that would cause Executive to commit fraudulent acts or would expose Executive to criminal liability; (vi) the Company's principal office or Executive's own office as assigned to him by the Company is moved to a location more than 35 miles from El Segundo, California or Executive's own office as assigned to him by the Company is moved to a location outside of the Company's principal office; or (vii) the Company fails to obtain the assumption in writing of its obligation to perform this Agreement by any successor to all or substantially all of the business or assets of the Company within 15 days after the occurrence of the transaction resulting in such succession. (3) For purposes of this Agreement, a determination by the Company not to renew this Agreement for the Single Automatic Extension described in the first proviso to Section 1(a) shall be deemed a termination Without Cause unless the Company establishes that such determination was based on a ground or grounds that would justify a termination for Cause as defined in Section 6(c)(2) hereof, such determination to be made without regard to Section 6(c)(3) hereof. (e) Voluntary Termination. Executive shall have the right to --------------------- terminate his employment with the Company at any time. A voluntary termination shall mean a termination of employment by Executive on his own initiative, other than a termination due to death or Disability or for Good Reason, and shall have the same consequences as provided in Section 6(c)(4) for a termination for Cause. (f) Other Termination Benefits. In the case of any of the foregoing -------------------------- terminations, Executive or his estate shall also be entitled to the following, to the extent not otherwise payable under this Agreement: (1) the balance of any incentive awards, including awards due for performance periods which have been completed, which have been earned but have not yet been paid; (2) any amounts due under Sections 2(a), 3, 4 and 5; (3) a lump sum payment in respect of accrued but unused vacation days at his Base Salary rate in effect on the date of termination; and (4) other or additional benefits, if any, in accordance with applicable plans of the Company. (g) Base Salary for Severance Benefit Determinations. Anything in ------------------------------------------------ this Section 6 to the contrary notwithstanding, if, prior to a termination under this Section 6, the Company has reduced Executive's Base Salary, then Base Salary for purposes of determining severance benefits shall mean the highest Base Salary as in effect during the Term of Employment prior to any such reduction. 7. Indemnification and Insurance. ----------------------------- (a) In any situation where under applicable law the Company has the power to indemnify (or advance expenses to) Executive in respect of any judgments, fines, settlements, loss, cost or expense (including attorneys' fees) of any nature related to or arising out of Executive's activities as an agent, employee, officer or director of the Company or in any other capacity on behalf of or at the request of the Company, the Company agrees that it shall, promptly on written request, indemnify (and advance expenses to) Executive to the fullest extent permitted by applicable law, including but not limited to making such findings and determinations and taking any and all such actions as the Company may, under applicable law, be permitted to have the discretion to take so as to effectuate such indemnification or advancement. Such agreement by the Company shall not be deemed to impair any other obligation of the Company respecting indemnification of Executive otherwise arising out of this or any other agreement or promise of the Company or under any statute. (b) Without limiting the generality of Section 7(a) above but subject to Section 14 below, including without limitation Section 14(b), the Company shall pay any and all reasonable fees and expenses incurred by Executive in seeking to obtain or enforce any rights or benefits provided by this Agreement, including all reasonable attorneys' and experts' fees and expenses, accountants' fees and expenses, and court costs (if any) incurred by Executive in pursuing a claim for payment of compensation or benefits or other right or entitlement under this Agreement provided that Executive is successful as to at least part of the disputed claim by reason of litigation, arbitration or settlement. (c) The Company further agrees to furnish Executive for the remainder of his life (without reference to whether the Term of Employment continues in effect) or for six (6) years after the expiration of the Term of Employment, whichever is later, with Directors' and Officers' liability insurance insuring Executive against insurable events which occur during the Term of Employment, such insurance to have policy limits and otherwise to be in substantially the same form and to contain substantially the same terms, conditions and exceptions as the liability insurance policies provided for officers and directors of the Company in force from time to time. 8. No Mitigation; No Offset. In the event of a termination of Executive's ------------------------ employment for any reason, Executive shall not be required to seek other employment or to mitigate any of the Company's obligations under this Agreement, and no amount payable under Section 6 shall be reduced (i) by any claim the Company may assert against Executive or (ii) by any compensation or benefits earned by Executive as a result of employment by another employer, self- employment or from any other source after such termination of employment with the Company. Notwithstanding any other provision of this Agreement, any sum or sums paid under this Agreement shall be reduced and offset by any sums paid to Executive under the Severance Plan. 9. Designated Beneficiary. In the event of the death of Executive while ---------------------- in the employ of the Company, or at any time thereafter during which amounts remain payable to Executive under Section 6 above, such payments shall thereafter be made to such person or persons as Executive may specifically designate (successively or contingently) to receive payments under this Agreement following Executive's death by filing a written beneficiary designation with the Company during Executive's lifetime. Such beneficiary designation shall be in such form as may be reasonably prescribed by the Company and may be amended from time to time or may be revoked by Executive pursuant to written instruments filed with the Company during his lifetime. Beneficiaries by Executive may be any natural or legal person or persons, including a fiduciary, such as a trustee of a trust, or the legal representative of an estate. Unless otherwise provided by the beneficiary designation filed by Executive, if all of the persons so designated die before Executive on the occurrence of a contingency not contemplated in such beneficiary designation, or if Executive shall have failed to provide such beneficiary designation, then the amount payable under this Agreement shall be paid to Executive's estate. 10. Ethics. During the Term of Employment, Executive shall be subject to ------ the Company's Code of Ethics and Standards of Conduct (the "Policies"), which is attached to this Agreement as Appendix A. If for any reason an arbitrator, subject to judicial review as provided by law, or a court should determine that any provision of the Policies is unreasonable in scope or otherwise unenforceable, such provision shall be deemed modified and fully enforceable as so modified to the extent the arbitrator and any reviewing court determines what would be reasonable and enforceable under the circumstances. 11. Inventions ---------- (a) All inventions, discoveries, developments and improvements conceived or made by Executive, alone or with others, prior to Executive's employment by the Company, or during Executive's employment by the Company prior to the date of this Agreement but which Executive believes that he owns, are listed and described on Appendix B to this Agreement. To the best of Executive's knowledge this list is complete (or if no items are so listed, Executive has nothing to so disclose). Executive understands that his failure to list any item will require that he demonstrate through clear, tangible and convincing evidence that he or his assigns own an item which the Company believes it owns. If it is determined that Executive owns any unlisted item, and the Company has expended monies to develop it, the Company shall be entitled to the use of same without royalty payments to Executive or his assigns. (b) Executive will promptly and fully inform the Company of all inventions, discoveries, developments and improvements that he may conceive, discover, develop or make during his employment, whether made solely or jointly with others, whether or not patentable, and whether or not such conception, discovery or making involves the use of the Company's time, facilities, equipment or personnel (collectively, "Inventions"). Executive acknowledges and agrees that all such Inventions relating to any work he performs for the Company or any business in which the Company is or intends to be engaged are "works for hire" under applicable law and shall belong to the Company. Executive further agrees to assign, and does hereby assign, to the Company all right, title and interest in and to any and all such Inventions and agrees to execute all documents deemed necessary or desirable by the Company in connection therewith, including patent and/or copyright assignments, and to cooperate both during and after his employment with the Company, at the Company's expense, in all further actions deemed necessary or desirable to confirm, register, protect or enforce the Company's right therein. The Company and Executive acknowledges that the foregoing assignment does not include any invention unrelated to the Company's business or research which meets the requirements of Section 2870 of the California Labor Code, or any successor provision thereto. 12. Confidential Information and Trade Secrets ------------------------------------------ (a) Executive acknowledges that the term "Confidential Information" as used in this Agreement means all items, materials and information (whether or not reduced to writing and whether or not patentable or copyrightable) which belong to the Company or which the Company's suppliers or customers or clients have communicated to the Company in the course of the Company's business, and which reflect, consist of or refer to: (1) information technology; methods and processes; designs and formulations; the content or composition of goods or services; techniques; business strategies or operations; formulas; compilations of data or reports; plans; tools or equipment; inventions; know-how; technical disclosures, patent applications, blueprints or specifications; financial, marketing, sales, personnel or salary information; forms, legal documents or memoranda; software, computer programs or databases; any documents prepared by or on behalf of the Company or Company suppliers, customers or clients; (2) information compiled, collected or developed by the Company reflecting the identities of those customers and clients of the Company which are not generally known outside the Company or whose relationship with the Company as a customer or client is not generally known outside the Company; characteristics of any customers or clients of the Company or of customer or client representatives, including without limitation product or service preferences or requirements, cost or price information for goods or services offered or sold, credit terms or credit performance, actual or likely order cycles, the nature of goods delivered or services performed, or research or development plans or activities; (3) information compiled, collected, or developed by the Company reflecting identities of any suppliers of the Company which are not generally known outside the Company or whose relationship with the Company as a supplier is not generally known outside the Company; characteristics of any supplier of the Company, or supplier representatives, including without limitation cost or price information for goods or services offered or purchased, audit terms, the nature of goods delivered or service performed, product or service quality and reliability, delivery terms, or research or development plans or activities; (4) prices, fees, discounts, selling techniques or distribution methods used by the Company; or (5) any other confidential or proprietary information obtained directly or indirectly while employed by the Company. (b) Executive acknowledges that the term "Trade Secret" as used in this Agreement means the whole or any portion or phrase of any scientific or technical or business information, including, but not limited to, any design, process, procedure or system, formula, improvement, or invention that (i) derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of the Company's reasonable efforts to maintain its secrecy. In addition to information belonging to the Company, information furnished to the Company by other parties can be a Trade Secret. (c) The term "Confidential Information" includes information which may also be a Trade Secret, but does not include anything described above which is now generally known by parties other than the Company, its affiliates and employees, or becomes generally known, through no breach of this Section 12 on the part of Executive. (d) Executive acknowledges that Confidential Information is and remains confidential regardless of whether or not any Company report or form or other document contains any statement regarding confidentiality. (e) Executive agrees to hold all Confidential Information in confidence and to not use directly or indirectly, for Executive's own benefit or the benefit of any other party, corporate or otherwise, or publish or cause to be published or otherwise disclose to anyone other than the Company or its designee, any Confidential Information or Trade Secrets except as compelled by law and except as required to conduct the Company's business. (f) Executive will, upon demand, and without demand immediately upon the termination of Executive's employment, surrender to the Company any and all documents, including without limitation computer memory, reports and forms containing Confidential Information and any and all other business records, prototypes and materials which Executive may have created or received from the Company during Executive's employment, or which pertain to the Company's business, and all copies thereof, which are in Executive's possession or control at the time of the demand or the termination of Executive's employment, however made or obtained. 13. No Solicitation. During Executive's employment, and for a period of --------------- two years immediately following Executive's employment termination (voluntary or otherwise), Executive agrees to honor the following representations: (a) Executive shall not induce, or aid others to induce, any Company employee to terminate his or her employment or do anything which violates any oral or written employment agreement he or she may have with the Company, (b) in recognition of the status of information regarding compensation and other personnel information of Company employees as Confidential Information, Executive shall not solicit or aid others to solicit Company employees for, or offer to them, competitive employment, and (c) Executive agrees not to interfere with the business of the Company in any manner including, without limitation, inducing any consultant or independent contractor or customer or client of the Company to sever or diminish that person's or entity's relationship with the Company. 14. Arbitration. ----------- (a) In the event of any dispute between the parties concerning the validity, interpretation, enforcement or breach of this Agreement or in any way related to Executive's Employee's employment or any termination of such employment (including any claims involving any officers, managers, directors, employees, shareholders or agents of the Company) excepting only any rights the parties may have to seek injunctive relief, the dispute shall be resolved by final and binding arbitration administered by JAMS/Endispute in Los Angeles, California in accordance with the then existing JAMS/Endispute Arbitration Rules and Procedures for Employment Disputes. Resolution by arbitration, either in lieu of or after exhausting the procedures of Section 7 of the Severance Plan, shall be at the election of Executive with respect to any claim to which Section 7 of the Severance Plan shall apply. In the event of such an arbitration proceeding, the parties shall select a mutually acceptable neutral arbitrator from among the JAMS/Endispute panel of arbitrators. In the event the parties cannot agree on an arbitrator, the Administrator of JAMS/Endispute shall appoint an arbitrator. Neither party nor the arbitrator shall disclose the existence, content, or results of any arbitration hereunder without the prior written consent of all parties, except as may be compelled by court order. Except as provided herein, the Federal Arbitration Act shall govern the interpretation and enforcement of such arbitration and all proceedings. The arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the state of California, or Federal law, or both, as applicable and the arbitrator is without jurisdiction to apply any different substantive law. The arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. The arbitrator shall render an award and a written, reasoned opinion in support thereof. Judgment upon the award may be entered in any court having jurisdiction thereof. The parties intend this arbitration provision to be valid, enforceable, irrevocable and construed as broadly as possible. Pending the resolution of any dispute between the parties, the Company shall continue prompt payment of all amounts due to Executive under this Agreement and prompt provision of all benefits to which Executive is otherwise entitled. (b) Costs of arbitration shall be borne by the Company. Reasonable attorney fees and costs and the reasonable fees and costs of any experts incurred by Executive shall be borne and paid by the Company if Executive prevails on any portion of his claims. Such fees and costs incurred by Executive shall be paid by the Company in advance of the final disposition of such claims, as such fees are incurred, upon receipt of an undertaking by Executive to repay such amounts net of any income taxes paid or payable by Executive with respect to such amounts, if it is ultimately determined that he did not prevail on any portion of his claims. (c) Notwithstanding the foregoing provisions of this Section 14, Executive and the Company agree that Executive or the Company may seek and obtain otherwise available injunctive relief in Court for any violation of obligations concerning confidential information or trade secrets that cannot adequately be remedied at law or in arbitration. (d) If the Company terminates Executive's employment hereunder or Executive terminates his employment alleging that such termination is for Good Reason, and if there is a dispute as to whether Executive is entitled to receive any payments and benefits provided under this Agreement, including the severance and other benefits set forth in Section 6(d)(1), during the period of the dispute the Company shall continue to pay Executive his Base Salary and continue to provide Executive and his family with the benefits provided in Section 3, provided, however, that if the dispute is resolved against Executive, Executive agrees that he will promptly refund to the Company all payments he receives hereunder which he would not otherwise have been entitled to receive, plus interest at the rate provided in Section 1274(d) of the Code, compounded quarterly. If the dispute is resolved in Executive's favor, promptly after resolution of the dispute the Company shall pay Executive the sum that was withheld during the period of the dispute plus interest at the rate provided in Section 1274(d) of the Code compounded quarterly. 15. Notices. For purposes of this Agreement, notices and all other ------- communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, or delivered by private courier, as follows: if to the Company -- Computer Sciences Corporation, 2100 East Grand Avenue, El Segundo, California 90245 Attention: Vice President, General Counsel and Secretary; and if to Executive at the address specified at the end of this Agreement. Notice may also be given at such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 16. Miscellaneous. This Agreement shall also be subject to the following ------------- miscellaneous provisions: (a) The Company represents and warrants to Executive that it has the authorization, power and right to deliver, execute and fully perform its obligations under this Agreement in accordance with its terms. (b) This Agreement and the Severance Plan contain a complete statement of all the agreements between the parties with respect to Executive's employment by the Company, supersede all prior and existing negotiations and agreements between them concerning the subject matter thereof and can only be changed or modified pursuant to a written instrument duly executed by each of the parties hereto and stating an intention to change or modify this Agreement or the Severance Plan, as the case may be. No waiver by either party of any breach by the other party of any condition or provision contained in this Agreement or the Severance Plan to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. (c) If any provision of this Agreement or any portion thereof is declared invalid, illegal or incapable of being enforced by any arbitrator or court of competent jurisdiction, the remainder of such provisions and all of the remaining provisions of this Agreement shall continue in full force and effect. (d) This Agreement shall be governed by and construed in accordance with the internal laws of the State of California except to the extent governed by Federal law, and shall be construed according to its fair meaning and not for or against any party. (e) All compensation payable hereunder shall be subject to such withholding taxes as may be required by law. (f) This Agreement shall be binding upon and inure to the benefit of the successors and assigns, of the Company. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder. Except as expressly provided herein, Executive may not sell, transfer, assign, or pledge any of his rights or obligations pursuant to this Agreement. (g) Any rights of Executive hereunder shall be in addition to any rights Executive may otherwise have under written benefit plans or agreements of the Company to which he is a party or in which he is a participant, including, but not limited to, any Company sponsored written employee benefit plans, stock option plans, grants and agreements. Provisions of this Agreement shall not in any way abrogate Executive's rights under such other plans and agreements. (h) The respective rights and obligations of the parties hereunder shall survive any termination of Executive's employment to the extent necessary to the intended preservation of such rights and obligations. (i) The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. (j) This Agreement may be executed in two or more counterparts each of which shall be legally binding and enforceable. * * * IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. VAN B. HONEYCUTT COMPUTER SCIENCES CORPORATION /s/ Van B. Honeycutt By: /s/ Hayward D. Fisk - --------------------------- ---------------------------- Its: Vice President EX-21 3 SIGNIFICANT ACTIVE SUBSIDIARIES AND AFFILIATES COMPUTER SCIENCES CORPORATION EXHIBIT 21, Significant Active Subsidiaries and Affiliates As of April 2, 1999
Jurisdiction of Name Organization - ---- --------------- Aerospace Center Support (Partnership) Tennessee Alliance-One Services, Inc. Delaware Autec Range Services (Partnership) Florida Automated Systems (HK) Limited Hong Kong Automated Systems Holdings Limited Bermuda Calva Realty Corporation Nevada Capsco Pty. Limited Australia Century Corporation Nevada Computer Sciences Canada Inc. Canada Computer Sciences Corporation Administration Services (Pty) Limited South Africa Computer Sciences Corporation Continuum--Informatica, Lda Portugal Computer Sciences Corporation Services (Pty) Limited South Africa Computer Sciences Gestion S.A. France Computer Sciences International A/S Norway Computer Sciences Raytheon (Partnership) Florida Computer Systems Advisers (M) Bhd Malaysia Continuum (Deutschland) GmbH Germany Continuum Direct Limited United Kingdom Continuum France SARL France Continuum SICS S.A. Belgium Credit Bureau of Tulsa, Inc. Oklahoma CSA Automated Private Limited Singapore CSA Holdings Ltd Singapore CSA Private Limited Singapore CSC Accounts Management, Inc. Texas CSC Accounts Resolution, Inc. Nevada CSC Asset Management Inc. Nevada CSC Australia Pty. Limited Australia CSC Computer Management A/S Denmark CSC Computer Sciences B.V. Netherlands CSC Computer Sciences Corporation Ireland Limited Ireland CSC Computer Sciences Iberica, S.A. Spain CSC Computer Sciences Italia S.p.A. Italy CSC Computer Sciences Limited United Kingdom CSC Computer Sciences N.V./S.A. Belgium CSC Computer Sciences Pte Limited Singapore CSC Computer Sciences S.A. France CSC Computer Sciences S.A. Luxembourg CSC Computer Sciences s.r.o. Czech Republic CSC Computer Sciences SARL Switzerland CSC Computer Sciences Sdn Bhd Malaysia CSC Computer Sciences Services Management GmbH Germany CSC Computer Sciences spol. s.r.o. Slovakia CSC Computer Sciences VOF/SNC (Partnership) Belgium CSC Consulting B.V. Netherlands CSC Consulting, Inc. Massachusetts
Jurisdiction of Name Organization - ---- --------------- CSC Corporation Limited United Kingdom CSC Credit Services, Inc. Texas CSC Danmark A/S Denmark CSC Domestic Enterprises, Inc. Nevada CSC Enterprises (Partnership) Delaware CSC Enterprises, Inc. Nevada CSC Financial Services Canada Inc. Canada CSC Financial Services GmbH Germany CSC Financial Services Group (Hong Kong) Limited Hong Kong CSC Financial Services Group Pty. Limited Australia CSC Financial Services Limited United Kingdom CSC Financial Services S.A. France CSC Foreign Sales Corporation Barbados CSC Geographic Technologies Inc. Nevada CSC Healthcare Inc. California CSC Holdings Inc. Nevada CSC Infogerance S.A. France CSC Information Systems A/S Denmark CSC International Consulting AB Sweden CSC International Systems Management Inc. Nevada CSC Investment Services Management Limited United Kingdom CSC Japan, Ltd. Delaware CSC Kobra Beheer B.V. Netherlands CSC Logic, Inc. Texas CSC New Zealand Limited New Zealand CSC Outsourcing Inc. Nevada CSC Peat Marwick S.A. France CSC Pergamon GmbH Germany CSC Ploenzke (Austria) GmbH Austria CSC Ploenzke (Schweiz) AG Switzerland CSC Ploenzke AG Germany CSC Ploenzke Akademie GmbH Germany CSC Ploenzke IT--Services GmbH Germany CSC Ploenzke, S.A. Spain CSC PMF S.A. France CSC PM Services SARL France CSC Professional Services Group, Inc. Maryland CSC Services Management B.V. Netherlands CSC Services No. 1 Limited United Kingdom Experteam S.A./N.V. Belgium Informatica S.p.A. Italy Kalchas Limited United Kingdom Key Choice Insurance Marketing Limited United Kingdom Paxus Australia Pty. Limited Australia Paxus Broker Services Pty. Ltd. Australia Paxus Corporation Limited New Zealand Paxus Financial R&D Pty. Limited Australia PT. CSC Computer Services Indonesia Sys-Aid Beheer B.V. Netherlands Sys-Aid Deutschland GmbH Germany
EX-23 4 INDEPENDENT AUDITORS CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-26977, 33-36379, 33-50746, 333-00733, 333-00749, 333-00755, 333-00757, 333- 09387, 333-33327, 333-75383 and 333-77599 of Computer Sciences Corporation on Forms S-8 of our report dated May 26, 1999, appearing in this Annual Report on Form 10-K of Computer Sciences Corporation for the year ended April 2, 1999. DELOITTE & TOUCHE LLP Los Angeles, California June 22, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 1000 12-MOS APR-02-1999 APR-04-1998 APR-02-1999 602,593 0 1,857,869 80,607 0 2,668,985 2,313,444 1,226,569 5,007,709 2,081,412 397,860 0 0 159,510 2,240,344 5,007,709 0 7,659,965 0 5,965,019 445,035 8,818 33,908 511,357 170,200 341,157 0 0 0 341,157 2.16 2.11
-----END PRIVACY-ENHANCED MESSAGE-----