-----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, TO6atXz7aoD5Tf9X4CL9qZk/AwdRwsr8vNWZ/aCeXn9JCrOy3CV2bwKy4Rnfpv8k fVYLWO/jiNWbcRuUCfmCmA== 0000898430-99-002762.txt : 19990708 0000898430-99-002762.hdr.sgml : 19990708 ACCESSION NUMBER: 0000898430-99-002762 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990402 FILED AS OF DATE: 19990707 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/A SEC ACT: SEC FILE NUMBER: 001-04850 FILM NUMBER: 99660102 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/A 1 FORM 10-K -- AMENDMENT #2 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K/A AMENDMENT NO. 2 TO ANNUAL REPORT 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. The Registrant hereby amends and restates this Annual Report on Form 10-K to correct a typographical error in the initial filing and the first amendment thereto: the signature date of both filings was inadvertently indicated as 1998 rather than 1999. 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 Leon J. Level* 58 1989 Indefinite Vice President and None Chief Financial Officer 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 Scott M. Delanty 44 1997 Indefinite Vice President and None Controller 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 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 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
- -------- * 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: July 7, 1999 By: /s/ Scott M. Delanty ---------------------------- Scott M. Delanty, Vice President and Controller 48 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. 49 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 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 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
- -------- * Management contract or compensatory plan or agreement 50 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 51 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
EX-99.1 6 ANNUAL REPORT ON FORM 11-K FOR MATCHED ASSET PLAN Exhibit 99.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 11-K ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended: December 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to __________ Commission file number: 1-4850 A. Full title of plan and the address of the plan, if different from that of the issuer named below: Computer Sciences Corporation Matched Asset Plan B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: Computer Sciences Corporation 2100 East Grand Avenue El Segundo, California 90245 1 TABLE OF CONTENTS ----------------- Description Page - ----------- ---- (a) Financial Statements: Independent Auditors' Report ........................................ 3 Statements of Net Assets Available for Benefits As of December 31, 1998 and 1997 .................................... 4 Statements of Changes in Net Assets Available for Benefits For the Years Ended December 31, 1998 and 1997 ...................... 5 Notes to Financial Statements ....................................... 6 (b) Exhibit: Independent Auditors' Consent ....................................... E-1 (c) Supplemental Schedules: Schedule of Assets Held for Investment Purposes ..................... S-1 Schedule of Reportable Transactions ................................. S-2 2 INDEPENDENT AUDITORS' REPORT Employee Retirement Plan Committee Computer Sciences Corporation El Segundo, California We have audited the accompanying statements of net assets available for benefits of the Computer Sciences Corporation Matched Asset Plan (the "Plan") as of December 31, 1998 and 1997, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 1998 and 1997, and the changes in net assets available for benefits for the years then ended in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules listed in Section C of the table of contents are presented for the purpose of additional analysis and are not a required part of the basic financial statements, but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. These supplemental schedules are the responsibility of the Plan's management. Such schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/Deloitte & Touche LLP June 11, 1999 3 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
December 31 ----------------------------- 1998 1997 -------------- ------------ ASSETS Investments (Notes 2, 5, 9 and 10): Short-term investments $ 10,297,485 $ 14,812,841 Long-term investments--at fair value: Interest in registered investment companies Brinson U.S. Balanced Fund 71,679,904 84,332,245 Mellon Enhanced Asset Fund 77,207,126 40,159,408 Brinson U.S. Equity Fund 263,161,997 249,786,910 Mellon Stock Index Funds 179,469,818 110,042,765 CSC Company stock 380,378,825 238,770,004 Employee loans (Note 6) 21,042,106 20,422,664 Plan interest in Master Trust 174,961,001 142,956,868 Guaranteed investment contracts -at contract value 15,231,349 Cash 508,529 -------------- ------------ Total investments 1,178,706,791 916,515,054 Receivables: Employer contribution 293,000 452,287 Participants' contribution 1,565,285 3,900,688 Accrued income 16,760 15,259 Unsettled Trades 864,521 -------------- ------------ Total Receivables 2,739,566 4,368,234 -------------- ------------ Total Assets 1,181,446,357 920,883,288 -------------- ------------ LIABILITIES Accounts Payable 1,914,407 1,482,254 Accrued Expenses 693,068 325,925 Unsettled Trade Payables 2,791,900 -------------- Total Liabilities 5,399,375 1,808,179 -------------- ------------ NET ASSETS AVAILABLE FOR BENEFITS $1,176,046,982 $919,075,109 ============== ============
See Notes to Financial Statements 4 COMPUTECR SCIENCES CORPORATION MATCHED ASSET PLAN STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
Years Ended December 31 ------------------------------- 1998 1997 -------------- ------------ ADDITIONS Investment Income: Net appreciation in fair value of investments (Note 9) $ 190,408,299 $ 65,905,291 Interest 927,110 3,031,996 Dividends 19,529,963 15,217,887 Plan interest in Master Trust investment income 11,827,691 7,283,958 -------------- ------------ 222,693,063 91,439,132 Less Investment Management Fees (1,454,871) (972,982) -------------- ------------ 221,238,192 90,466,150 Contributions: Employee 98,450,484 88,006,055 Employer 16,139,568 14,800,519 Employee Rollovers 9,782,838 18,922,266 Transfers From Other Plans (Note 8) 13,861,524 23,324,149 -------------- ------------ 138,234,414 145,052,989 -------------- ------------ Total Additions 359,472,606 235,519,139 -------------- ------------ DEDUCTIONS Distributions to Participants (Notes 1 and 7) 102,500,733 70,914,853 -------------- ------------ Total Deductions 102,500,733 70,914,853 -------------- ------------ Net Increase 256,971,873 164,604,286 Net Assets Available for Benefits at Beginning of Year 919,075,109 754,470,823 -------------- ------------ NET ASSETS AVAILABLE FOR BENEFITS AT END OF YEAR $1,176,046,982 $919,075,109 ============== ============
See Notes to Financial Statements 5 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 Note 1 Description of the Plan ----------------------- The following brief description of the Computer Sciences Corporation Matched Asset Plan (the "Plan") is provided for general information purposes only. Participants should refer to the Plan documents for more complete information. The Plan was adopted by the action of the Board of Directors of Computer Sciences Corporation (the "Company") taken on November 3, 1986, and constitutes an amendment and restatement of the Employee Stock Purchase Plan ("the Prior Plan"). The Plan is a continuation of the Prior Plan and is qualified under the Internal Revenue Code (the "Code"), as amended, Section 401(a) and, effective as of January 1, 1987, with respect to the portion thereof that qualifies as a qualified cash or deferred arrangement, to satisfy the requirement of Code Section 401(k). It is also subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). The Company reserves the right to discontinue its contributions and terminate the Plan subject to the provisions of ERISA. Upon such termination, the participants' rights to the Company's contributions vest immediately and the account balances are fully paid to the participants. Eligibility and Participation - ----------------------------- Any eligible employee who has satisfied the Plan's age and service requirements, and is employed by the Company, and who receives a stated compensation in respect of employment on the payroll of the Company, is eligible to become a participant, with the exception of a person who is represented by a collective bargaining unit and whose benefits have been the subject of good faith bargaining under a contract that does not specify that such person is eligible to participate in the Plan. In addition, the Company may determine to exempt all employees of any division, unit, facility or class from coverage under the Plan. Any person who leaves the employ of the Company and, at a later time becomes re-employed, must reapply to participate in the Plan, provided he or she otherwise meets the eligibility requirements. There were approximately 25,005 and 18,755 participating employees at December 31, 1998 and 1997, respectively. 6 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 Employee and Company Contributions - ---------------------------------- Subject to certain limitations described below, an eligible employee who elects to become a participant may authorize any whole percentage (at least 1% but not more than 15%) of such employee's monthly compensation (as defined in the Plan) to be deferred and contributed to the trust fund on his or her behalf, up to a maximum amount of $10,000 and $9,500 for 1998 and 1997, respectively. Any compensation deferral in excess of $10,000 and $9,500 in 1998 and 1997, respectively, together with income allocable to that excess, will be returned to a participant. Any matching Company contributions attributable to any excess contribution, and income allocable thereto, will either be returned to the Company or applied to reduce future matching Company contributions. In order to qualify for the special tax treatment accorded to plans by Section 401(k) of the Code, contributions on behalf of participants under the Plan must meet two nondiscrimination tests designed to prevent a disproportionate compensation deferral election by employees who are highly compensated in relation to other employees. The Committee may cause the percentage authorized by the highly compensated participants to be reduced if the Plan does not meet both of the nondiscrimination tests. A participant is not permitted to make voluntary after-tax contributions to the Plan. The Company will contribute and forward to the trust fund, together with a compensation deferral contribution equal to each participant's qualifying compensation deferral, an amount equal to 50% of the first 3% of the participant's compensation deferral (except for three groups of employees: the first group is a small number of employees to whom under the terms of their contract agreement the Company will contribute an amount equal to 50% of the first 4% of the participant's compensation deferral; the second group to whom under the terms of their contract agreement the Company will contribute an amount equal to 100% of the first 7% of the participant's compensation deferral; and the third group to whom under the terms of their contract agreement the Company will contribute an amount equal to 50% of the first 6% of the participant's compensation deferral). Matching contributions will be invested in the Company Stock Fund, which invests in the common stock of Computer Sciences Corporation. 7 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 Participant Accounts - -------------------- Each participant's account is credited with the participant's contribution and the Company's matching contribution and allocations of Plan earnings, and is charged with an allocation of investment management fees. Allocations are based on participant earnings or account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account. Vesting of Participants' Interests/Forfeitures - ---------------------------------------------- A participant's interest in his or her Compensation Deferral Account, Retirement Account, After Tax Account, and Rollover Account is at all times fully vested in the participant or, when appropriate, in the participant's beneficiary or legal representative. Each participant has a vested interest in the value of his or her Matching Contribution Account equal to twenty-five percent (25%) after completing two full years of service and increasing by twenty-five percent (25%) for each additional full year of service (except for a small number of participants who, under the terms of their contract agreement, will vest 100% after 2 years). Vesting accelerates to 100% in the event of reaching age 65 while employed by the Company or upon severance by reason of death or total and permanent disability. Any nonvested portion of the Matching Contributions Account will be forfeited upon withdrawal from the Plan. Forfeitures may be applied to reduce future matching contributions by the Company. Such forfeitures during 1998 and 1997 amounted to $2,186,594 and $1,410,024, respectively. Distributable Amounts, Withdrawals and Refunds - ---------------------------------------------- A participant may become entitled to a distribution of his or her distributable benefit by reason of retirement, death, total and permanent disability, voluntary termination of employment, or dismissal. The rules of payment of a participant's distributable benefit depend upon age of the participant, the number of years of service completed by the participant and the type of severance. The total amounts distributed during 1998 and 1997 were $101,578,143 and $70,097,198, respectively. While still an employee, a participant may, upon at least a 30 day written notice to the Committee, make a withdrawal of his or her compensation deferral contributions if the Committee finds, after considering the participant's request, that an adequate financial hardship and resulting need for such amount has been demonstrated by the participant. These withdrawals during 1998 and 1997 totaled $922,590 and $817,655, respectively. 8 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 In order for the Plan to meet the nondiscrimination tests, the Committee has caused the compensation deferral percentage for certain highly compensated employees to be reduced, which has also resulted in the return of excess compensation deferrals. Note 2 Summary of Significant Accounting Policies ------------------------------------------ The accounting and reporting policies followed in preparation of the financial statements of the Plan of the Company conform with generally accepted accounting principles. The following is a summary of the significant policies. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Assets of the Plan - ------------------ The assets of the Plan are held in a trust with five sub-accounts representing the investment options. The investment income in the respective sub-accounts is allocated to the participants. Contributions to, and payments from, the Plan are specifically identified to the applicable sub-accounts within the trust. Security Transactions - --------------------- Security transactions are accounted for on a trade-date basis. Dividend income is recorded on the ex-dividend date. Interest income is accounted for on the accrual basis. In general, participants in the Company Stock Fund receive distributions in certificates for shares of the common stock of the Company. Valuation of Investment Securities - ---------------------------------- Investments in common stocks and institutional investment vehicles are stated at fair value based upon closing sales prices reported on recognized securities exchanges on the last business day of the plan year or, for the listed securities having no sales reported and for unlisted securities, upon 9 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 last reported bid prices on that date. Investments in short-term investments are stated at cost which approximates fair value. Valuation of Guaranteed Investment Contracts - -------------------------------------------- At December 31, 1997, the Plan held guaranteed investment contracts, which are considered to be fully benefit responsive as access to the funds of these contracts is not restricted. The guaranteed investment contracts are valued at contract value in accordance with SOP 94-4. Contract value represents contributions made by participants, plus interest at the contract rates, less withdrawals or transfers by participants. No guaranteed investment contracts were held by the plan at December 31, 1998. Based on the treasury yield curve for similar types of investments, the fair value of the guaranteed investment contracts at December 31, 1997 was approximately $15,294,818. The average yield and average crediting interest rate was approximately 6.79% for 1997. The crediting interest rate is based on an agreed-upon formula with the issuer, but cannot be less than zero. Payment of Benefits - ------------------- Benefits are recorded when paid. Note 3 Income Tax Status ----------------- The Internal Revenue Service has determined and informed the Company by a letter dated July 18, 1996, that the Plan and related trust are designed in accordance with applicable sections of the Internal Revenue Code (IRC). The Committee believes that the Plan is designed and operated to qualify under Section 401(a) of the Code and, with respect to its qualified cash or deferred arrangement, under Section 401(k) of the Code. When the requirements of Section 401(k) of the Code are satisfied, the following tax consequences result: (i) A participant is not subject to federal income tax on Company contributions to the Plan or on income or realized gains in Plan Accounts attributable to the participant until a distribution from the Plan is made to him or her. (ii) The participant is able to exclude from his or her income for federal income tax purposes, the amount of his or her compensation deferral contributions, subject to a maximum exclusion of $10,000 and $9,500 for the 1998 and 1997 taxable years of the participant, respectively. 10 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 (iii) On distribution of a participant's vested interest in the Plan, the participant generally is subject to federal income taxation, except that: (1) tax on "net unrealized appreciation" on any Company stock distributed as a part of a "lump sum distribution" generally is deferred until the participant disposes of such stock, and (2) tax may be deferred to the extent the participant is eligible for and complies with certain rules permitting the "rollover" of a qualifying distribution to another retirement plan, or individual retirement account. Note 4 Reconciliation of Financial Statements to Form 5500 -----------------------------------------------------
December 31, ----------------------------------------- 1998 1997 -------------- -------------- Net assets available for benefits per the financial statements $1,176,046,982 $919,075,109 Amounts allocated to withdrawing participants (8,055,721) (11,552,858) -------------- -------------- Net assets available for benefits per Form 5500 $1,167,991,261 $907,522,251 ============== =============
The following is a reconciliation of benefits paid to participants per the financial statements to the Form 5500:
Year ended December 31, 1998 ----------------- Benefits paid to participants per the financial statements $102,500,733 Add: Amounts allocated to withdrawing participants at December 31, 1998 8,055,721 Less: Amounts allocated to withdrawing participants at December 31, 1997 (11,552,858) -------------- Benefits paid to participants per the Form 5500 $ 99,003,596 ==============
Amounts allocated to withdrawing participants are recorded on the Form 5500 for benefit claims that have been processed and approved for payment prior to December 31, 1998 but not paid as of that date. 11 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 Note 5 Investment Funds ---------------- Participant contributions - Subject to rules the Committee may from time to time adopt, each participant has the right to designate one or more of the following investment funds established by the Committee for the investment of his or her compensation deferral contributions, in increments of 10%. After an initial election has been made, a participant may designate a different Fund into which future compensation deferral contributions shall be invested as of the first day of any payroll period that coincides with or immediately follows the first day of any month once within a calendar quarter. In addition, a participant may elect to redesignate any amounts in his or her accounts as of the last business day of any month once within a calendar quarter to be invested in a different Fund. These elections may be made by giving such advance notice as may be required by the Plan administrator. Following are the investment funds available for participant contributions: The Fixed Income Fund - --------------------- The Fixed Income Fund represents holdings of units in a Master Trust investment vehicle and is managed by BlackRock Financial Management. The investment portfolio is actively managed and consists of short-term (1-3 year) fixed income instruments which include: U.S. Treasury and agency securities, corporate bonds, mortgage-backed securities and asset-backed fixed income securities. All of the Fund's assets are rated single-A or better at the time of purchase and all securities must be U.S. dollar denominated. All new cash flows into the Fund are invested in this actively managed bond fund. At December 31, 1998 and 1997, the Plan's interest in the net assets of the Master Trust was approximately 89% for both years. Investment income and administrative expenses relating to the Master Trust are allocated to individual plans based upon average monthly balances invested by each plan. 12 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 The following table represents the fair value of investments for the Master Trust.
December 31, ---------------------------- 1998 1997 ------------ ------------ Investments at fair value: Corporate bonds $118,380,288 $105,242,979 U.S. government securities 57,684,732 46,459,080 Other bonds 16,164,613 6,446,213 Short-term investments 3,777,721 1,371,261 Accrued income 966,721 1,198,486 ------------ ------------ $196,974,075 $160,718,019 ============ ============
Investment income for the Master Trust is as follows:
December 31, ---------------------------- 1998 1997 ------------ ------------ Investment income: Net appreciation (depreciation) in fair value of investments $ 1,731,522 $ 450,257 Interest: Corporate bonds 6,710,396 4,037,722 U.S. government securities 3,786,462 3,243,205 Other bonds 691,664 366,303 Short-term investments 365,214 485,226 ------------ ------------ 13,285,258 8,582,713 Less investment management fees (227,349) (208,306) ------------ ------------ $ 13,057,909 $ 8,374,407 ============ ============
The Balanced Fund - ----------------- The Balanced Fund is co-managed by Mellon Capital Management (51% as of December 31, 1998) and Brinson Partners, Inc. (49% as of December 31, 1998). The Balanced Fund is invested in an actively managed combination of U.S. equity securities, U.S. fixed income securities and cash equivalents. The U.S. equity portfolio consists of large, intermediate and small company stocks. The bond portfolio consists primarily of U.S. Treasury, government agency and corporate issues. This Fund's objective is to maximize risk-adjusted total returns relative to the U.S. Balanced Index over a full economic cycle. 13 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 The Active Equity Fund - ---------------------- The Active Equity Fund is managed by Brinson Partners, Inc. The Fund is broadly diversified by issue and industry relative to the Wilshire 5000 index. The Fund is typically invested in 70% large capitalization and 30% intermediate and small capitalization stocks. The Fund may hold up to 50% in cash equivalents for portfolio risk management purposes. The Fund's objective is to maximize risk- adjusted total returns relative to the Wilshire 5000 index over a full economic cycle. The Stock Index Fund - -------------------- The fund is managed by Mellon Capital Management. The objective of the fund is to modestly exceed the performance of the Standard & Poor's 500 Stock Index. The Stock Index Fund either invests in a stock portfolio designed to track the performance of the S&P Stock Index and/or creates a synthetic S&P 500 portfolio using (unleveraged) financial futures and options. Assets used as collateral for futures/options positions are comprised of various market or debt instruments. The Company Stock Fund - ---------------------- Amounts allocated to this investment alternative will be used to purchase shares of Computer Sciences Corporation common stock which will be held for the benefit of the participant. The performance of this fund will depend upon the performance of Computer Sciences Corporation stock. The Bank of New York (the "Trustee") may purchase Company stock on national securities exchanges or elsewhere. Company contributions - In accordance with the provisions of the Plan, the Trustee must promptly invest matching Company contributions paid into the trust fund in the Company Stock Fund. An exception is in the case of a participant who has (i) attained at least age 59 1/2, or (ii) has been credited with at least five years of service and has attained at least age 55 and has made an election to designate different Funds. 14 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 Note 6 Participant Loans ----------------- The Plan allows participants to borrow from their vested account balances from a minimum of $1,000 up to a maximum of $50,000 or 50% of their vested account balances, subject to certain limitations. The loans bear interest at the prime rate quoted in the Wall Street Journal plus 1%, which is set on a quarterly basis. Loan terms range from 1-5 years or up to 15 years for purchase of a primary residence. Loans are recorded at cost, which approximate fair value, on the Statement of Net Assets Available for Benefits. The loans (which are accounted for in the Loan Fund) are deducted from the participants' accounts according to a priority specified in the Plan's loan rules and, within each account, pro rata from the funds based on their balances at the time. Loan repayments are reinvested in the participants' funds according to their current investment election. The repayments are similarly allocated among participants' accounts according to the priority specified in the Plan's rules. Note 7 Benefits Payable ---------------- As of December 31, 1998 and 1997, net assets available for benefits included benefits of $8,055,721 and $11,552,858 respectively, due to participants who have withdrawn from participation in the Plan. Note 8 Transfers from Other Plans -------------------------- During the two years ended December 31, 1998, the Plan had several transfers from other plans. The asset values of these transfers were as follows: $7,380,010 in 1998 from APM; $2,816,617 in 1998 from BDM; $1,736,677 in 1998 from Security Life; $776,503 in 1998 from Heller; $637,478 and $15,612,395 in 1998 and 1997, respectively from Dupont Conoco; $224,931 in 1998 from Liberty; $206,213 in 1998 from Statistica; $75,615 and $8,168,573 in 1998 and 1997, respectively from CNA Employees' Saving Plan; $66,426 in 1998 from Electronic Data Systems; $53,500 in 1998 from Volpe; $5,079 and $128,350 in 1998 and 1997, respectively from Credit Services; $2,394,153 in 1997 from Bath Iron Works Corporation Tax Deferred Savings Plan; $1,371,171 in 1997 from Planmetrics, Inc. Savings and Profit Sharing Plan; and $355,773 in 1997 from SunBeam-Oster Company, Inc. 401(K) Savings and Profit Sharing Plan. The Plan also had several transfers to other plans in 1998 and 1997 as a result of spin-offs. The asset values of these transfers were as follows: $80,399 in 1998 to Faxnet; $33,046 in 1998 to ITDS; $3,343 and $740,644 in 1998 and 1997, respectively to Artemis Holding; $737 in 1998 to 15 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 Planmetrics, Inc. Savings and Profit Sharing Plan; $3,270,348 in 1997 to Mutual of New York; $609,053 in 1997 to ST Research; and $86,221 in 1997 to CTI. 16 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 Note 9 Statements of Net Assets Available for Benefits by Fund -------------------------------------------------------
December 31, 1998 ---------------------------------------------------------------------------------------------------- Fixed Active Stock Company Employee Income Balanced Equity Index Stock Loans Total ------------ ------------ ------------ ------------ ------------- ----------- -------------- Assets Investments Short-term investments $ 419,934 $ 1,305,353 $ 3,204,113 $ 1,921,866 $ 3,446,219 $ 10,297,485 Long-term investments At fair value Interest in registered investment companies: 148,887,030 263,161,997 179,469,818 591,518,845 CSC Company stock 380,378,825 380,378,825 Employee loans $21,042,106 21,042,106 Plan interest in Master Trust 174,961,001 174,961,001 Guaranteed investment contracts--at contract value - Receivables Employer contribution 1,000 1,000 1,000 290,000 293,000 Participants' contribution 163,697 232,000 482,000 424,000 263,045 543 1,565,285 Accrued Income 2,540 1,222 5,074 2,843 5,081 16,760 Plan to plan transfers - Interfund Transfers 621,209 (82,682) (1,048,277) (420,511) 930,261 - Unsettled Trades 322,520 542,001 864,521 Cash 508,529 508,529 ------------ ------------ ------------ ------------ ------------- ----------- -------------- Total Assets 176,169,381 151,173,972 266,347,908 181,399,016 385,313,431 21,042,649 1,181,446,357 Liabilities Accounts Payable 68,028 82,191 104,103 104,440 762,078 793,567 1,914,407 Accrued Expenses 156,741 177,790 315,243 42,800 494 693,068 Unsettled Trades 829,539 542,001 1,420,360 2,791,900 ------------ ------------ ------------ ------------ ------------- ----------- -------------- Total Liabilities 224,769 1,089,520 961,347 147,240 2,182,932 793,567 5,399,375 ------------ ------------ ------------ ------------ ------------- ----------- -------------- Net Assets Available for Benefits $175,944,612 $150,084,452 $265,386,561 $181,251,776 $383,130,499 $20,249,082 $1,176,046,982 ============ ============ ============ ============ ============= =========== ==============
17 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 Note 9 Statements of Net Assets Available for Benefits by Fund -------------------------------------------------------
December 31, 1997 ------------------------------------------------------------------------------------------------------ Fixed Active Stock Company Employee Income Balanced Equity Index Stock Loans Total ------------ ------------ ------------ ------------ ------------ ----------- ------------- Assets Investments Short-term investments $ 6,176,886 $ 7,192,178 $ 885,362 $ 460,515 $ 97,900 $ 14,812,841 Long-term investments At fair value Interest in registered investment companies: 124,491,653 249,786,910 110,042,765 484,321,328 CSC Company stock 238,770,004 238,770,004 Employee loans $ 20,422,664 20,422,664 Plan interest in Master Trust 142,956,868 142,956,868 Guaranteed investment contracts--at contract value 15,231,349 15,231,349 Receivables - Employer contribution 3,649 2,568 6,006 3,887 436,177 452,287 Participants' contribution 619,957 500,627 1,155,151 779,456 845,624 (127) 3,900,688 Accrued Income 3,207 2,140 5,575 2,125 2,212 15,259 Plan to plan transfers - Interfund Transfers 480,752 (43,101) (240,573) 2,237,379 (2,434,457) - ------------ ------------ ------------ ------------ ------------ ------------ ------------ Total Assets 165,472,668 132,146,065 251,598,431 113,526,127 237,717,460 20,422,537 920,883,288 Liabilities Accounts Payable 324,067 74,935 155,307 136,793 809,105 (17,953) 1,482,254 Accrued Expenses 70,786 80,935 154,190 19,265 749 325,925 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Total Liabilities 394,853 155,870 309,497 156,058 809,854 (17,953) 1,808,179 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net Assets Available for Benefits $165,077,815 $131,990,195 $251,288,934 $113,370,069 $236,907,606 $ 20,440,490 $919,075,109 ============ ============ ============ ============ ============ ============ ============
18 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 Note 9 Statements of Changes in Net Assets Available for Benefits by Fund ------------------------------------------------------------------
Year Ended December 31, 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Fixed Active Stock Company Employee Income Balanced Equity Index Stock Loans Total ------------ ------------ ------------ ------------ ------------ ----------- -------------- Additions to Net Assets Attributable to: Investment Income Net Appreciation in Fair Value of Investments $ 11,917,119 $ 20,288,161 $ 28,706,995 $129,496,024 $ 190,408,299 Interest $ 418,548 300,456 82,123 62,848 63,135 927,110 Dividend 6,675,426 4,715,321 8,139,216 19,529,963 Plan interest in Master Trust Investment Income 11,827,691 11,827,691 Investment Mgmt/Admin. Fees (330,895) (357,012) (644,731) (116,952) (5,281) (1,454,871) ------------ ------------ ------------ ------------ ------------ ----------- -------------- 11,915,344 18,535,989 24,440,874 36,792,107 129,553,878 221,238,192 ------------ ------------ ------------ ------------ ------------ ----------- -------------- Contributions: Employee 14,938,449 14,327,240 31,052,917 25,066,123 21,319,413 $ (8,253,658) 98,450,484 Employer 81,177 56,332 135,876 90,174 15,776,009 16,139,568 Employee Rollovers 1,139,099 1,339,920 2,497,846 3,242,117 1,563,856 9,782,838 Transfers From Other Plans 5,624,438 948,568 2,467,909 3,691,630 846,182 282,797 13,861,524 Interfund Transfers 317,725 (2,267,708) (18,821,620) 12,699,474 8,072,129 - ------------ ------------ ------------ ------------ ------------ ----------- -------------- 22,100,888 14,404,352 17,332,928 44,789,518 47,577,589 (7,970,861) 138,234,414 ------------ ------------ ------------ ------------ ------------ ----------- -------------- TOTAL ADDITIONS 34,016,232 32,940,341 41,773,802 81,581,625 177,131,467 (7,970,861) 359,472,606 ------------ ------------ ------------ ------------ ------------ ----------- -------------- Deductions to Net Assets Attributable to: Distributions to Participants 23,149,435 14,846,084 27,676,175 13,699,918 30,908,574 (7,779,453) 102,500,733 ------------ ------------ ------------ ------------ ------------ ----------- -------------- TOTAL DEDUCTIONS 23,149,435 14,846,084 27,676,175 13,699,918 30,908,574 (7,779,453) 102,500,733 ------------ ------------ ------------ ------------ ------------ ----------- -------------- NET INCREASE 10,866,797 18,094,257 14,097,627 67,881,707 146,222,893 (191,408) 256,971,873 ------------ ------------ ------------ ------------ ------------ ----------- -------------- Net Assets Available for Benefits: Beginning of Year 165,077,815 131,990,195 251,288,934 113,370,069 236,907,606 20,440,490 919,075,109 ------------ ------------ ------------ ------------ ------------ ----------- -------------- End of Year $175,944,612 $150,084,452 $265,386,561 $181,251,776 $383,130,499 $20,249,082 $1,176,046,982 ============ ============ ============ ============ ============ =========== ==============
19 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 Note 9 Statements of Changes in Net Assets Available for Benefits by Fund ------------------------------------------------------------------
Year Ended December 31, 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Fixed Active Stock Company Employee Income Balanced Equity Index Stock Loans Total ------------ ----------- ----------- ----------- ----------- ---------- ----------- Additions to Net Assets Attributable to: Investment Income: Net Appreciation in Fair Value of Investments $ 206,077 $ 10,812,740 $ 31,087,793 $ 18,326,612 $ 5,472,069 $ 65,905,291 Interest 2,838,297 34,120 75,383 41,929 42,267 3,031,996 Dividend 6,101,150 4,585,948 4,530,789 15,217,887 Plan interest in Master Trust investment income 7,283,958 7,283,958 Investment Management Fees (70,280) (303,570) (551,674) (43,349) (4,109) (972,982) ------------ ----------- ----------- ----------- ----------- ---------- ----------- 10,258,052 16,644,440 35,197,450 22,855,981 5,510,227 90,466,150 ------------ ----------- ----------- ----------- ----------- ---------- ------------ Contributions Employee 15,787,189 13,765,687 29,150,336 15,921,012 20,266,502 (6,884,671) 88,006,055 Employer 104,254 72,544 183,292 96,929 14,343,500 14,800,519 Employee Rollovers 3,337,470 2,596,418 6,213,624 3,969,856 2,804,898 18,922,266 Transfers From Other Plans 13,215,479 1,247,156 3,005,062 3,283,548 (165,934) 2,738,838 Interfund Transfers (11,683,241) (1,195,825) 3,818,292 15,708,532 (6,647,758) ------------ ----------- ----------- ----------- ----------- ---------- ----------- 20,761,151 16,485,980 42,370,606 38,979,877 30,601,208 (4,145,833) 145,052,989 TOTAL ADDITIONS 31,019,203 33,130,420 77,568,056 61,835,858 36,111,435 (4,145,833) 235,519,139 ------------ ----------- ----------- ----------- ----------- ---------- ----------- Deductions to Net Assets Attributable to: Distributions to Participants 19,506,618 10,772,788 20,503,101 8,132,543 20,265,818 (8,266,015) 70,914,853 ------------ ----------- ----------- ----------- ----------- ---------- ----------- TOTAL DEDUCTIONS 19,506,618 10,772,788 20,503,101 8,132,543 20,265,818 (8,266,015) 70,914,853 ------------ ----------- ----------- ----------- ----------- ---------- ----------- NET INCREASE 11,512,585 22,357,632 57,064,955 53,703,315 15,845,617 4,120,182 164,604,286 ------------ ----------- ----------- ----------- ----------- ---------- ----------- Net Assets Available for Benefits: Beginning of Year 153,565,230 109,632,563 194,223,979 59,666,754 221,061,989 16,320,308 754,470,823 ------------ ------------ ------------ ------------ ------------ ---------- ------------ End of Year $165,077,815 $131,990,195 $251,288,934 $113,370,069 $236,907,606 $20,440,490 $919,075,109
20 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 Note 10 Investments 1998 ----------------
Principal Amount or Fair Value or Shares Cost Contract Value ---------------- ------------ -------------- Fixed Income Fund Interest in Master Trust* sh. 282,086,762 $174,339,624 $ 174,961,001 BNY Collective Short-Term Invst. Fund sh. 419,934 419,934 419,934 Balanced Fund Brinson Partners Inc.: U.S. Bond Fund* sh. 377,098 47,231,044 49,321,216 U.S. Stock Equity Fund sh. 54,362 13,335,155 22,358,688 Mellon Bank Enhanced Asset Fund* sh. 718,239 72,377,700 77,207,126 BNY Collective Short-Term Invst. Fund sh. 1,305,353 1,305,353 1,305,353 Cash $ 508,529 508,529 508,529 Active Equity Fund Brinson Partners Inc.: U.S. Equity Portfolio* sh. 686,993 156,058,114 263,161,997 U.S. Cash Management Fund sh. 2 2 2 BNY Collective Short-Term Invst. Fund sh. 3,204,111 3,204,111 3,204,111 Stock Index Fund Mellon Capital: Mellon Capital Mgmt. Stock Index Fund* sh. 451,193 118,174,427 178,136,929 Mellon EB Daily Opening Stock Index Fund sh. 4,429 1,260,964 1,332,889 Mellon Temporary Investment Fund sh. 71,688 71,688 71,688 BNY Collective Short-Term Invst. Fund sh. 1,850,178 1,850,178 1,850,178 Company Stock Fund Computer Sciences Common Stock* sh. 5,920,293 119,007,404 380,378,825 BNY Collective Short-Term Invst. Fund sh. 3,446,219 3,446,219 3,446,219 Employee Loan Fund Participant Loans $ 21,042,106 $ 21,042,106 21,042,106 ------------ ------------- $733,632,552 $1,178,706,791 ============= ============== Total Long-Term Investments $722,826,538 $1,167,900,777 Total Short-Term Investments 10,806,014 10,806,014 ------------ -------------- $733,632,552 $1,178,706,791 ============= ==============
*represents investments greater than 5% of net assets 21 COMPUTER SCIENCES CORPORATION MATCHED ASSET PLAN NOTES TO FINANCIAL STATEMENTS For the two years ended December 31, 1998 Note 10 Investments 1997 ----------------
Principal Amount or Fair Value or Shares Cost Contract Value ---------------- ------------ -------------- Fixed Income Fund Guaranteed Investment Contracts $ 15,231,349 $ 15,231,349 $ 15,231,349 Interest in Master Trust* sh. 234,665,405 142,864,685 142,956,868 BNY Collective Short-Term Invst. Fund sh. 6,176,886 6,176,886 6,176,886 Balanced Fund Brinson Partners Inc.: U.S. Bond Fund* sh. 698,494 81,072,821 84,332,245 U.S. Stock Only Fund* sh. 113,806 25,472,338 40,159,408 U.S. Cash Management Fund sh. 6,569,237 6,569,237 6,569,237 BNY Collective Short-Term Invst. Fund sh. 622,941 622,941 622,941 Active Equity Fund Brinson Partners Inc.: U.S. Equity Portfolio* sh. 719,179 152,634,615 249,786,910 U.S. Cash Management Fund sh. 2 2 2 BNY Collective Short-Term Invst. Fund sh. 885,360 885,360 885,360 Stock Index Fund Mellon Capital: Mellon Capital Mgmt. Stock Index Fund* sh. 350,600 76,226,631 107,371,946 Mellon EB Daily Opening Stock Index Fund sh. 11,230 2,628,795 2,670,819 Mellon Temporary Investment Fund sh. 465 465 465 BNY Collective Short-Term Invst. Fund sh. 460,050 460,050 460,050 Company Stock Fund Computer Sciences Common Stock* sh. 2,859,521 96,856,806 238,770,004 BNY Collective Short-Term Invst. Fund sh. 97,900 97,900 97,900 Employee Loan Fund Participant Loans $ 20,422,664 20,422,664 20,422,664 ------------ ------------ $ 628,223,545 $916,515,054 ============ ============ Total Long-Term Investments $613,410,704 $901,702,213 Total Short-Term Investments 14,812,841 14,812,841 ------------ ------------ $628,223,545 $916,515,054 ============ ============
*represents investments greater than 5% of net assets 22 SIGNATURES The Plan. Pursuant to the requirements of the Securities Act of 1934, the Computer Sciences Corporation Retirement Plans Committee has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. Computer Sciences Corporation MATCHED ASSET PLAN Date: June 25, 1999 By: /s/ LEON J. LEVEL ---------------------------------- Leon J. Level Chairman, Computer Sciences Corporation Retirement Plans Committee 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Computer Sciences Corporation Registration Statement No. 333-00755 on Form S-8 of our report dated June 11, 1999, appearing in this Annual Report on Form 11-K of the Computer Sciences Corporation Matched Asset Plan for the year ended December 31, 1998. /s/ DELOITTE & TOUCHE LLP Los Angeles, California June 25, 1999 E-1 1998 Form 5500 Item 27(a) Computer Sciences Corporation EIN 95-2043126 Matched Asset Plan 001 SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES - ----------------------------------------------
(a) (b) Identity of issue, (c) Description of investment including (d) Cost (e) Current Value borrower, lessor maturity date, rate of interest, or similar party collateral, par or maturity value - ------------------------------------------------------------------------------------------------------------------------------------ Mellon Capital Management Corp. Mutual Fund - EB Daily Liquidity Enhanced $ 72,377,700 $ 77,207,126 Brinson Trust Company, Inc. Mutual Fund - U.S. Bond Fund 47,231,044 49,321,216 Brinson Trust Company, Inc. Mutual Fund - U.S. Stock Fund 13,335,155 22,358,688 Brinson Trust Company, Inc. Mutual Fund - U.S. Equity Portfolio 156,058,114 263,161,997 Mellon Capital Management Corp. Mutual Fund - Stock Index Fund 118,174,427 178,136,929 Mellon Capital Management Corp. Mutual Fund - EB Daily Opening Stock Index Fund 1,260,964 1,332,889 * Computer Sciences Corporation Common Stock 119,007,404 380,378,825 * Computer Sciences Corporation Employee Loan Fund (8.75%-10%) (1/25/13) 21,042,106 21,042,106 Brinson Trust Company, Inc. U.S. Cash Management Fund 2 2 Mellon Capital Management Corp. Mellon Temporary Investment Fund 71,688 71,688 * Bank of New York BNY Collective Short-Term Invst. Fund 10,225,795 10,225,795 Cash Cash 508,529 508,520 ------------ -------------- Total Assets Held for Investment Purposes $559,292,928 $1,003,745,790 ============ ==============
*represents party in interest S-1 1998 Form 5500 Item 27(d) Computer Sciences Corporation EIN 95-2043126 Matched Asset Plan 001 SCHEDULE OF REPORTABLE TRANSACTIONS ----------------------------------- Series Transactions in the Aggregate in Excess of 5% - ----------------------------------------------------
(h) Current Value (a) Identity of (b) Description (c) Purchase (d) Selling (g) Cost of of Asset on (i) Net Gain Party Involved of Asset Price Price Asset Transaction Date or (Loss) - ------------------------------------------------------------------------------------------------------------------------------- Brinson Trust Mutual Fund - Company U.S. Bond Fund - Sales $49,094,329 $46,959,112 $49,094,329 $2,135,217 Mellon Capital Mutual Fund - Management EB Liquidity Enhanced - Purchases $ 72,377,700 72,377,700 72,377,700 Mellon Capital Mutual Fund - Management EB Enhanced Asset Allocation Fund - Purchases 55,431,826 55,431,826 55,431,826 - Sales 55,987,747 55,431,826 55,987,747 555,921 Bank of New York BNY Short - Term Money Market Fund - Purchases 296,193,238 296,193,238 296,193,238 - Sales 294,210,580 294,210,580 294,210,580
EX-99.2 7 ANNUAL REPORT ON FORM 11-K FOR HOURLY SAVING PLAN Exhibit 99.2 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 11-K ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended: December 31, 1998 [_] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to __________ Commission file number: 1-4850 A. Full title of plan and the address of the plan, if different from that of the issuer named below: CSC Outsourcing Inc. Hourly Savings Plan B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: Computer Sciences Corporation 2100 East Grand Avenue El Segundo, California 90245 TABLE OF CONTENTS -----------------
Description Page - ----------- ---- (a) Financial Statements: Independent Auditors' Report .................................. 3 Statements of Net Assets Available for Benefits As of December 31, 1998 and 1997 .............................. 4 Statements of Changes in Net Assets Available for Benefits For the Years Ended December 31, 1998 and 1997 ................ 5 Notes to Financial Statements ................................. 6 (b) Exhibit: Independent Auditors' Consent ................................. E-1 (c) Supplemental Schedules: Schedule of Assets Held for Investment Purposes ............... S-1 Schedule of Reportable Transactions ........................... S-2
2 INDEPENDENT AUDITORS' REPORT Employee Retirement Plan Committee Computer Sciences Corporation El Segundo, California We have audited the accompanying statements of net assets available for benefits of the CSC Outsourcing Inc. Hourly Savings Plan (the "Plan") as of December 31, 1998 and 1997, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 1998 and 1997, and the changes in net assets available for benefits for the years then ended in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules listed in Section C of the table of contents are presented for the purpose of additional analysis and are not a required part of the basic financial statements, but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. These supplemental schedules are the responsibility of the Plan's management. Such schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/Deloitte & Touche LLP June 11, 1999 Los Angeles, California 3 CSC OUTSOURCING INC. HOURLY SAVINGS PLAN STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
December 31 ----------------------- 1998 1997 ---------- --------- ASSETS Investments (Notes 2, 5, 8 and 9): Short-term $ 14,587 $ 24,281 Long-term--at fair value Mellon Capital Government Bond Fund 981,182 972,097 Brinson U.S. Equity Fund 1,591,617 1,502,152 CSC common stock 666,915 438,292 Employee loans (Note 6) 13,983 17,258 Interest in Master Trust 1,906,881 714,880 Guaranteed investment contracts --at contract value 1,394,969 ---------- ---------- Total investments 5,175,165 5,063,929 ---------- ---------- Receivables: Participants' Contributions 2,129 7,172 Employer Contributions 1,412 Other 10,683 1,573 ---------- ---------- Total receivables 14,224 8,745 ---------- ---------- Total assets 5,189,389 5,072,674 ---------- ---------- LIABILITIES Accrued expenses 3,641 1,323 Other 13,579 1,390 ---------- ---------- Total Liabilities 17,220 2,713 ---------- ---------- NET ASSETS AVAILABLE FOR BENEFITS $5,172,169 $5,069,961 ========== ==========
See notes to financial statements 4 CSC OUTSOURCING INC. HOURLY SAVINGS PLAN STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
For the Years Ended December 31 ------------------------- 1998 1997 ----------- ----------- ADDITIONS Investment Income: Net appreciation in fair value of Investments $ 378,557 $ 199,727 Interest 81,547 155,032 Dividends 64,841 107,411 Plan interest in Master Trust investment income 89,229 19,303 ---------- ---------- 614,174 481,473 Investment Management Fees (6,856) (4,092) ---------- ---------- 607,318 477,381 Contributions: Employee 182,437 183,550 Employer 78,049 79,199 ---------- ---------- 260,486 262,749 ---------- ---------- Total Additions 867,804 740,130 ---------- ---------- DEDUCTIONS Distributions to Participants (Notes 1 and 7) 765,596 945,711 ---------- ---------- Total Deductions 765,596 945,711 ---------- ---------- Net Increase (Decrease) 102,208 (205,581) Net assets available for benefits at beginning of year 5,069,961 5,275,542 ---------- ---------- NET ASSETS AVAILABLE FOR BENEFITS AT END OF YEAR $5,172,169 $5,069,961 ========== ==========
See notes to financial statements 5 CSC OUTSOURCING INC. HOURLY SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Note 1 Description of the Plan ----------------------- The following brief description of the CSC Outsourcing Inc. Hourly Savings Plan (the "Plan"), formerly the TMD Hourly Savings Plan, of CSC Outsourcing Inc. (the "Company") is provided for general information purposes only. Participants should refer to the Plan document for more complete information. The Plan became effective May 2, 1992, as a result of the Company acquiring the Data Systems Division of General Dynamics Corporation. The Plan is administered by a committee consisting of four members who are appointed by the Board of Directors of the Company and serve without compensation, being reimbursed by the Company for all expenditures incurred in the discharge of their duties as members of the committee. The committee has the power to interpret, construe and administer the Plan and to decide any dispute which may arise under the Plan. The Bank of New York (the "Trustee") administers the Plan pursuant to a Trust Agreement entered into with the Company. Certain administrative expenses (including Trustee fees) incurred for services rendered to the Plan are paid by the Company. The Plan is a voluntary, contributory, defined contribution plan and is intended to satisfy the requirements of Section 401(a) and 401(k) of the Internal Revenue Code (the "Code"). It is also subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). The Company reserves the right to discontinue contributions and to terminate the Plan subject to the provisions of ERISA. Upon such termination, the participants' rights to the Company's contributions vest immediately and the account balances are fully paid to the participants. Eligibility and Participation - ----------------------------- Employees are eligible to participate on specified enrollment dates if they satisfy the Plan's service requirements, are hourly paid employees of CSC Outsourcing Inc. and are members of a collective bargaining unit for which participation in this Plan has been provided by negotiated agreement. A rehired eligible employee may receive service credit for his or her previous employment and is eligible to rejoin the Plan on the next enrollment date. There were approximately 137 and 121 participating employees at December 31, 1998 and 1997, respectively. 6 CSC OUTSOURCING INC. HOURLY SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Employee and Company Contributions - ---------------------------------- A participant may authorize before-tax and after-tax contributions to the Plan subject to a maximum level of contributions (a certain percentage of base earnings), as specified by the bargaining agreement covering the employee. Depending on the investment election option the participant elects, the Company will contribute, and forward to the trust fund $0.50 for each $1.00 of the employee matched contribution together with the participant's before-tax and after-tax contribution. Participants in certain bargaining units who direct 100 percent of their contributions to the Plan's stock fund will receive a monthly matching contribution of $1.00 for each $1.00 of employee matched contributions. Participants under certain bargaining units may contribute additional unmatched contributions at various percentages of base earnings to a maximum specified by the union agreement covering the employee, but only if a participant contributes the maximum matched percentage for which he or she is eligible. The employee's base earnings deferred and contributed to the Trust fund cannot exceed $10,000 for calendar year 1998, the maximum allowable under the Code. Annual after-tax contributions to the Plan (including employee and Company matching contributions) are limited to $30,000 for each participant. Any compensation deferral in excess of $10,000 and any after-tax contributions with matching Company contributions in excess of $30,000, together with income allocable to those excess contributions will be returned to a participant. Any matching Company contributions attributable to any excess contribution, and income allocable thereto, will either be returned to the Company or applied to reduce future matching Company contributions. Participants may change their investment elections as of any enrollment date if at least a 30 day prior notice is given. However, participants under certain circumstances may be eligible to change their investment elections within a 30 day window period. Participants may transfer their existing account balances in 25 percent increments. Transfer elections are effective on the first quarterly enrollment date following receipt of a 30 day prior notice from the participant. Company contributions - In accordance with the provisions of the Plan, the Trustee must promptly invest matching Company contributions paid into the trust fund in the same funds as the participant contributions. The Plan does not permit employees to rollover a qualified distribution from another plan. 7 CSC OUTSOURCING INC. HOURLY SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Participant Accounts - -------------------- Each participant's account is credited with the participant's contribution and the Company's matching contribution and allocations of Plan earnings, and is charged with an allocation of investment management fees. Allocations are based on participant earnings or account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account. Vesting of Participants' Interests/Forfeitures - ---------------------------------------------- Participants are 100 percent vested at all times in their before-tax and after- tax contribution accounts. Each participant has a vested interest in the value of his or her Company matching contributions account and investment earnings thereon equal to 100 percent after completing five full years of service. The five-year cliff vesting schedule is overridden under extraordinary circumstances as specified in the Plan document, in which the participant (or beneficiary(ies)) immediately becomes fully vested in all employer contributions and earnings, regardless of his or her number of years of service. Any nonvested balances will be immediately forfeited from the participant's account at termination. Distributable Amounts, Withdrawals and Refunds - ---------------------------------------------- The entire balance in all accounts is distributed to participants who retire, die, become disabled, are laid-off for four consecutive weeks, are discharged without fault, or who involuntarily enter military service. Participants who terminate for other reasons receive their vested balances. Nonvested balances are forfeited immediately. The amounts distributed during 1998 and 1997 totaled $765,596 and $945,711, respectively. While still an employee, a participant may make an in-service withdrawal of all or a portion of his or her after-tax contributions, subject to frequency of withdrawal penalties, as well as vested Company matching contributions, plus the earnings on those amounts. Upon at least a 30 day written notice to the Committee, a participant may make a hardship withdrawal of his or her before-tax and after-tax contributions, as well as vested Company matching contributions if the Committee finds, after considering the participant's request, that an adequate financial hardship and resulting need for such amount has been demonstrated by the participant. Both types of withdrawals are subject to certain restrictions as described in the Plan document. No hardship withdrawals were made in 1998 and 1997. Note 2 Summary of Significant Accounting Policies ------------------------------------------ The accounting and reporting policies followed in preparation of the financial statements of the Plan of the Company conform with generally accepted accounting principles. The following is a summary of the significant policies. 8 CSC OUTSOURCING INC. HOURLY SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Assets of the Plan - ------------------ The assets of the Plan are held in a trust with four sub-accounts. The investment income in the respective sub-accounts is allocated to the participants. Contributions to, and payments from, the Plan are specifically identified to the applicable sub-accounts within the trust. Security Transactions - --------------------- Security transactions are accounted for on a trade date basis. Dividend income is recorded on the ex-dividend date. Interest income is accounted for on the accrual basis. In general, participants in the Stock Fund receive distributions in certificates for shares of the common stock of the Computer Sciences Corporation. Valuation of Investment Securities - ---------------------------------- Investments in common stocks and institutional investment vehicles are stated at fair value based upon closing sales prices reported on recognized securities exchanges on the last business day of the plan year or, for the listed securities having no sales reported and for unlisted securities, upon last reported bid prices on that date. Investments in short-term securities are stated at cost which approximates fair value. Valuation of Guaranteed Investment Contracts - -------------------------------------------- The Plan held guaranteed investment contracts, which are considered to be fully benefit responsive as access to the funds of these contracts is not restricted. The guaranteed investment contracts are valued at contract value in accordance with SOP 94-4. Contract value represents contributions made by participants, plus interest at the contract rates, less withdrawals or transfers by participants. Based on treasury yield curves for similar type investments, the fair value of guaranteed investment contracts at December 31, 1998 and 1997, was approximately $0 and $1,407,371, respectively. The average yield and average crediting interest rate was approximately 7.64% for 1997. The crediting interest rate is based on an agreed-upon formula with the issuer, but cannot be less than zero. 9 CSC OUTSOURCING INC. HOURLY SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Payment of Benefits - ------------------- Benefits are recorded when paid. Note 3 Income Tax Status ----------------- The Internal Revenue Service has determined and informed the Company by a letter dated June 1, 1995, that the Plan and related trust are designed in accordance with applicable sections of the Internal Revenue Code (IRC). The Committee believes that the Plan is designed and operated to qualify under Section 401(a) of the Code and, with respect to its qualified cash or deferred arrangement, under Section 401(k) of the Code. Since the requirements of Section 401(k) of the Code are satisfied, the following tax consequences result: (i) A participant is not subject to federal income tax on Company contributions to the Plan or on income or realized gains in Plan Accounts attributable to the participant until a distribution from the Plan is made to him or her. (ii) The participant is able to exclude from his or her income for federal income tax purposes, the amount of his or her compensation deferral contributions, subject to a maximum exclusion of $10,000 and $9,500 for 1998 and 1997 taxable years of the participant, respectively. (iii) On distribution of a participant's vested interest in the Plan, the participant generally is subject to federal income taxation, except that: (1) tax on "net unrealized appreciation" on any Computer Sciences Corporation stock distributed as a part of a "lump sum distribution" generally would be deferred until the participant disposes of such stock, and (2) tax may be deferred to the extent the participant is eligible for and complies with certain rules permitting the "rollover" of a qualifying distribution to another retirement plan, or individual retirement account. Note 4 Reconciliation of Financial Statements to Form 5500 -----------------------------------------------------
December 31 -------------------------- 1998 1997 ---------- ------------ Net assets available for benefits per the financial statements $5,172,169 $5,069,961 Amounts allocated to withdrawing Participants (167,744) (29,969) ---------- ------------ Net assets available for benefits per Form 5500 $5,004,425 $5,039,992 ========== ============
10 CSC OUTSOURCING INC. HOURLY SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 The following is a reconciliation of benefits paid to participants per the financial statements to the Form 5500:
Year Ended December 31, 1998 ----------------- Benefits paid to participants per the financial statements $765,596 Add: Amounts allocated to withdrawing participants at December 31, 1998 167,744 Less: Amounts allocated to withdrawing participants at December 31, 1997 (29,969) -------- Benefits paid to participants per the Form 5500 $903,371 ========
Amounts allocated to withdrawing participants are recorded on the Form 5500 for benefit claims that have been processed and approved for payment prior to December 31, 1998 but not yet paid as of that date. Note 5 Investment Funds ---------------- Participant contributions - Subject to rules the bargaining units have adopted, each participant has the right to designate one or more of the following investment funds established by the Committee for the investment of his or her compensation deferral contributions and after-tax contributions in percentages determined by the bargaining units. The Fixed Income Fund - --------------------- The Fixed Income Fund represents holdings of units in a Master Trust investment vehicle and is managed by BlackRock Financial Management. The investment portfolio is actively managed and consists of short-term (1-3 year) fixed income instruments which include: U.S. Treasury and agency securities, corporate bonds, mortgage-backed securities and asset-backed fixed income securities. All of the Fund's assets are rated single-A or better at the time of purchase and all securities must be U.S dollar denominated. All new cash flows into the Fund are invested in this actively managed bond fund. At December 31, 1998 and 1997, the Plan's interest in the net assets of the Master Trust was approximately 0.97% and 0.44%, respectively. Investment income and administrative expenses relating to the Master Trust are allocated to individual plans based upon average monthly balances invested by each plan. 11 CSC OUTSOURCING INC. HOURLY SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 The following table represents the fair value of investments for the Master Trust.
December 31 ---------------------------- 1998 1997 ------------ ------------ Investments at fair value: Corporate bonds $118,380,288 $105,242,979 U.S. government securities 57,684,732 46,459,080 Other bonds 16,164,613 6,446,213 Short-term investments 3,777,721 1,371,261 Accrued income 966,721 1,198,486 ------------ ------------ $196,974,075 $160,718,019
Investment income for the Master Trust is as follows:
December 31 ---------------------------- 1998 1997 ------------ ------------ Investment income: Net appreciation (depreciation) in fair value of Investments $ 1,731,522 $ 450,257 Interest: Corporate bonds 6,710,396 4,037,722 U.S. government securities 3,786,462 3,243,205 Other bonds 691,664 366,303 Short-term investments 365,214 485,226 ------------ ------------ 13,285,258 8,582,713 Less investment management fees (227,349) (208,306) ------------ ------------ $ 13,057,909 $ 8,374,407 ============ ============
12 CSC OUTSOURCING INC. HOURLY SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Government Bond Fund - -------------------- This fund is invested in bonds issued or guaranteed by the U.S. Government or U.S. Government agencies. The Fund is managed by Mellon Capital with the objective of tracking to the Intermediate Government Bond Index. The Active Equity Fund - ---------------------- The Active Equity Fund is managed by Brinson Partners, Inc. The Fund is broadly diversified by issue and industry relative to the Wilshire 5000 index. The Fund is typically invested in 70% large capitalization and 30% intermediate and small capitalization stocks. The Fund may hold up to 50% in cash equivalents for portfolio risk management purposes. The Fund's objective is to maximize risk- adjusted total returns relative to the Wilshire 5000 index over a full economic cycle. The Company Stock Fund - ---------------------- Amounts allocated to this investment alternative will be used to purchase shares of Computer Sciences Corporation common stock that are held for the benefit of the participant. The performance of this investment depends upon the performance of Computer Sciences Corporation's stock. The Trustee may purchase Computer Sciences Corporation stock on national securities exchanges or elsewhere. Note 6 Participant Loans ----------------- The Plan has a loan provision in place which is available to participants covered by certain bargaining units. The Plan allows participants to borrow from their vested account balances from a minimum of $500 up to a maximum of $50,000 or 50% of their vested account, subject to certain limitations. The loans bear interest at the prime rate quoted in the Wall Street Journal plus 1%, which is set on a quarterly basis. Loan terms range from 1-5 years or up to 15 years for purchase of a primary residence. Loans are recorded at cost, which approximate fair value, on the Statement of Net Assets Available for Benefits. The loans (which are accounted for in the Loan Fund) are deducted from the participants' accounts according to a priority specified in the Plan's loan rules and, within each account, pro rata from the funds based on their balances at the time. Loan repayments are reinvested in the participants' funds according to their current investment election. The repayments are similarly allocated among participants' accounts according to the priority specified in the Plan's rules. Note 7 Benefits Payable ---------------- As of December 31, 1998 and 1997, net assets available for benefits included benefits of $167,744 and $29,969, respectively, due to participants who have withdrawn from participation in the Plan. 13 CSC OUTSOURCING INC. HOURLY SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Note 8 Investments 1998 ----------------
Principal Amount or Fair Value or Shares Cost Contract Value ---------------- ----------- -------------- Fixed Income Fund Interest in Master Trust* sh. 3,080,507 $1,188,504 $1,906,881 BNY Short-Term Money Market Fund 1,610 1,610 1,610 Government Bond Fund Mellon Capital: Government Bond Fund* sh. 6,921 964,200 981,182 Temporary Investment Fund 73 73 73 BNY Short-Term Money Market Fund 1,185 1,185 1,185 Active Equity Fund Brinson Partners Inc.: U.S. Equity Portfolio* sh. 4,155 830,813 1,591,617 U.S. Cash Management Fund 2 2 2 BNY Short-Term Money Market Fund 7,335 7,335 7,335 Company Stock Fund Computer Sciences Common Stock* sh. 10,380 222,716 666,915 BNY Short-Term Money Market Fund 4,382 4,382 4,382 Employee Loan Fund Participant Loan $ 13,983 13,983 13,983 ---------- ---------- $3,234,803 $5,175,165 ========== ========== Total Long-Term Investments $3,220,216 $5,160,578 Total Short-Term Investments 14,587 14,587 ---------- ---------- $3,234,803 $5,175,165 ========== ==========
*represents investments greater than 5% of net assets 14 CSC OUTSOURCING INC. HOURLY SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Note 8 Investments 1997 ----------------
Principal Amount or Fair Value or Shares Cost Contract Value --------- ----------- -------------- Fixed Income Fund Guaranteed Investment Contracts: Hartford Life* $ 1,232,200 $1,232,200 $1,232,200 Canada Life Insurance Company 38,268 38,268 38,268 Pacific Mutual Life Insurance 104,106 104,106 104,106 Prudential Life Insurance Company 20,395 74,302 74,302 Interest in Master Trust sh. 1,173,484 124,382 120,628 BNY Short-Term Money Market Fund 21,195 21,195 21,195 Government Bond Fund Mellon Capital: Government Bond Fund* sh. 7,450 970,317 972,097 Temporary Investment Fund 44 44 44 BNY Short-Term Money Market Fund 780 780 780 Active Equity Fund Brinson Partners Inc.: U.S. Equity Portfolio* sh. 4,325 807,043 1,502,152 U.S. Cash Management Fund 2 2 2 BNY Short-Term Money Market Fund 2,211 2,211 2,211 Company Stock Fund Computer Sciences Common Stock* sh. 5,249 199,055 438,292 BNY Stort-Term Money Market Fund 49 49 49 Employee Loan Fund Participant Loan $ 17,258 17,258 17,258 ---------- ---------- $4,127,803 $5,063,929 ========== ========== Total Long-Term Investments $4,103,522 $5,039,648 Total Short-Term Investments 24,281 24,281 ---------- ---------- $4,127,803 $5,063,929 ========== ==========
*represents investments greater than 5% of net assets 15 CSC OUTSOURCING INC. HOURLY SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Note 9 Statements of Net Assets Available for Benefits by Fund -------------------------------------------------------
December 31, 1998 --------------------------------------------------------------------------- Fixed Government Active Company Employee Income Bond Equity Stock Loans Total ---------- ----------- ----------- -------- ---------- ---------- Assets Investments Short-term investments $ 1,610 $ 1,258 $ 7,337 $ 4,382 $ 14,587 Long-term investments At fair value Interest in registered investment companies 981,182 1,591,617 2,572,799 CSC Company stock 666,915 666,915 Employee loans $ 13,983 13,983 Interest in Master Trust 1,906,881 1,906,881 At contract value Guaranteed investment contracts Receivables Participants' Contributions 529 300 800 500 2,129 Employer Contributions 698 53 485 176 1,412 Accrued Income 24 5 22 8 59 Interfund Transfers 317 (176) (283) 142 0 Other 7,352 3,272 10,624 ---------- -------- ---------- -------- --------- ---------- Total Assets 1,910,059 989,974 1,603,250 672,123 13,983 5,189,389 Liabilities Accrued Expenses 1,588 143 1,910 3,641 Forfeitures Payable 328 865 1,193 Other 7,352 3,272 1,097 665 12,386 ---------- -------- ---------- -------- ---------- ---------- Total Liabilities 1,916 7,495 6,047 1,097 665 17,220 ---------- -------- ---------- -------- ---------- ---------- Net Assets Available for Benefits $1,908,143 $982,479 $1,597,203 $671,026 $ 13,318 $5,172,169 ========== ======== ========== ======== ========== ==========
16 CSC OUTSOURCING INC. HOURLY SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Note 9 Statements of Net Assets Available for Benefits by Fund -------------------------------------------------------
December 31, 1997 ------------------------------------------------------------------------ Fixed Government Active Company Employee Income Bond Equity Stock Loans Total ---------- ----------- ---------- -------- -------- ---------- Assets Investments Short-term investments $ 21,195 $ 824 $ 2,213 $ 49 $ 24,281 Long-term investments At fair value Interest in registered investment companies 972,097 1,502,152 2,474,249 CSC Company stock 438,292 438,292 Employee loans $ 17,258 17,258 Interest in Master Trust 714,880 714,880 At contract value Guaranteed investment contracts 1,394,969 1,394,969 Receivables Participants' Contributions 2,530 670 2,505 1,467 7,172 Employer Contributions 738 (100) 469 343 1,450 Accrued Income 60 9 17 37 123 ---------- -------- ---------- -------- -------- ---------- Total Assets 2,134,372 973,500 1,507,356 440,188 17,258 5,072,674 Liabilities Accrued Expenses 318 78 927 1,323 Forfeitures Payable 297 607 904 Other 486 486 ---------- -------- ---------- -------- -------- ---------- Total Liabilities 615 78 1,534 486 2,713 ---------- -------- ---------- -------- -------- ---------- Net Assets Available for Benefits $2,133,757 $973,422 $1,505,822 $440,188 $ 16,772 $5,069,961 ========== ======== ========== ======== ======== ==========
17 CSC OUTSOURCING INC. HOURLY SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Note 9 Statements of Changes in Net Assets Available for Benefits by Fund ------------------------------------------------------------------
Year Ended December 31, 1998 ----------------------------------------------------------------------------- Fixed Government Active Company Employee Income Bond Equity Stock Loans Total ----------- ----------- ----------- --------- --------- ----------- Additions to Net Assets Attributable to: Investment Income: Net Appreciation (Depreciation) in Fair Value of Investments $ 3,497 $ 15,495 $ 127,499 $232,066 $ 378,557 Interest in Master Trust Investment Income 89,229 89,229 Interest 52,289 92 29,075 91 81,547 Dividends 64,841 64,841 Investment Management Fees (2,610) (297) (3,949) (6,856) ---------- ---------- ---------- -------- ------- --------- 142,405 80,131 152,625 232,157 607,318 ---------- -------- ---------- -------- ------- --------- Contributions: Employee 62,919 22,284 59,776 40,912 $(3,454) 182,437 Employer 27,186 9,954 25,742 15,167 78,049 Interfund Transfers 6,581 (1,404) (3,467) (1,710) - ---------- -------- ---------- -------- ------- ---------- 96,686 30,834 82,051 54,369 (3,454) 260,486 ---------- -------- ---------- -------- ------- ---------- TOTAL ADDITIONS 239,091 110,965 234,676 286,526 (3,454) 867,804 ---------- -------- ---------- -------- ------- ---------- Deductions to Net Assets Attributable to: Distributions to Participants 464,705 101,909 143,295 55,687 765,596 ---------- -------- ---------- -------- ------- ---------- TOTAL DEDUCTIONS 464,705 101,909 143,295 55,687 765,596 ---------- -------- ---------- -------- ------- ---------- NET INCREASE (DECREASE) (225,614) 9,056 91,381 230,839 (3,454) 102,208 ---------- -------- ---------- -------- ------- ---------- Net Assets Available for Benefits: Beginning of Year 2,133,757 973,422 1,505,822 440,188 16,772 5,069,961 ---------- -------- ---------- -------- ------- ---------- End of Year $1,908,143 $982,478 $1,597,203 $671,027 $13,318 $5,172,169 ========== ======== ========== ======== ======= ==========
18 CSC OUTSOURCING INC. HOURLY SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Note 9 Statements of Changes in Net Assets Available for Benefits by Fund ------------------------------------------------------------------
Year Ended December 31, 1997 ----------------------------------------------------------------------------- Fixed Government Active Company Employee Income Bond Equity Stock Loans Total ----------- ----------- ----------- --------- --------- ----------- Additions to Net Assets Attributable to: Investment Income: Net Appreciation (Depreciation) in Fair Value of Investments $ 374 $ 4,076 $ 197,464 $ (2,187) $ 199,727 Interest in Master Trust Investment Income 19,303 19,303 Interest 154,354 306 272 100 155,032 Dividends 68,760 29,119 9,532 107,411 Investment Management Fees (282) (339) (3,471) (4,092) ---------- -------- ---------- -------- -------- ---------- 173,749 72,803 223,384 7,445 477,381 ---------- -------- ---------- -------- -------- ---------- Contributions: Employee 65,498 23,376 61,263 35,541 $ (2,128) 183,550 Employer 28,880 9,815 26,452 14,052 79,199 Interfund Transfers (1,345) (444) 826 963 - ---------- -------- ---------- -------- -------- ---------- 93,033 32,747 88,541 50,556 (2,128) 262,749 ---------- -------- ---------- -------- -------- ---------- TOTAL ADDITIONS 266,782 105,550 311,925 58,001 (2,128) 740,130 ---------- -------- ---------- -------- -------- ---------- Deductions to Net Assets Attributable to: Distributions to Participants 683,460 121,979 113,206 45,966 (18,900) 945,711 ---------- -------- ---------- -------- -------- ---------- TOTAL DEDUCTIONS 683,460 121,979 113,206 45,966 (18,900) 945,711 ---------- -------- ---------- -------- -------- ---------- NET INCREASE (DECREASE) (416,678) (16,429) 198,719 12,035 16,772 (205,581) ---------- -------- ---------- -------- -------- ---------- Net Assets Available for Benefits: Beginning of Year 2,550,435 989,851 1,307,103 428,153 5,275,542 ---------- -------- ---------- -------- -------- ---------- End of Year $2,133,757 $973,422 $1,505,822 $440,188 $ 16,772 $5,069,961 ========== ======== ========== ======== ======== ==========
19 SIGNATURES The Plan. Pursuant to the requirements of the Securities Act of 1934, the Computer Sciences Corporation Retirement Plans Committee has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. CSC OUTSOURCING INC. HOURLY SAVINGS PLAN Date: June 25, 1999 By: /S/ LEON J. LEVEL ------------------------------------- Leon J. Level Chairman, Computer Sciences Corporation Retirement Plans Committee 20 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Computer Sciences Corporation Registration Statement No. 333-00757 on Form S-8 of our report dated June 11, 1999, appearing in this Annual Report on Form 11-K of the CSC Outsourcing Inc. Hourly Savings Plan for the year ended December 31, 1998. /S/ DELOITTE & TOUCHE LLP Los Angeles, California June 25, 1999 E-1 1998 Form 5500 Item 27(a) CSC Outsourcing Inc. Hourly Savings Plan EIN 88-0276684 SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES - -----------------------------------------------
(a) (b) Identity of issue, (c) Description of investment including (d) Cost (e) Current Value borrower, lessor maturity date, rate of interest, or similar party collateral, par or maturity value -------------------------------- --------------------------------------- ---------- ------------------ Mellon Capital Management Corp. Mutual Fund - Government Bond Fund $ 964,200 $ 981,182 Brinson Trust Company, Inc. Mutual Fund - U.S. Equity Portfolio 830,813 1,591,617 * Computer Sciences Corporation Common Stock 222,716 666,915 * Computer Sciences Corporation Employee Loan Fund (9.25%, 3/29/02) 13,983 13,983 Brinson Trust Company, Inc. U.S. Cash Management Fund 2 2 Mellon Capital Management Corp. Mellon Bank Temporary Investment Fund 73 73 * Bank of New York BNY Short-Term Money Market Fund 14,512 14,512 --------------------------------------- ---------- ---------- Total Assets Held for Investment Purposes $2,046,299 $3,268,284 ========== ==========
* represents party in interest S-1 1998 Form 5500 Item 27(d) CSC Outsourcing Inc. Hourly Savings Plan EIN 88-0276684 SCHEDULE OF REPORTABLE TRANSACTIONS ----------------------------------- Single Transactions in Excess of 5% - -----------------------------------
(h) Current Value (a) Identity of (b) Description (c) Purchase (d) Selling (g) Cost of of Asset on (i) Net Gain Party Involved of Asset Price Price Asset Transaction Date or (Loss) - ------------------- --------------- ----------- ---------- ----------- -------------------- ------------ Bank of New York Short-Term Money Market Fund - Purchase $ 264,669 $ 264,669 $ 264,669 - Purchase 1,271,087 1,271,087 1,271,087 - Sale $ 267,396 267,396 267,396 - - Sale 1,284,449 1,284,449 1,284,449 - Hartford Life Guaranteed Insurance Co. Investment Contract - Sale 1,279,222 1,279,222 1,279,222 -
S-2 1998 Form 5500 Item 27(d) CSC Outsourcing Inc. Hourly Savings Plan EIN 88-0276684 SCHEDULE OF REPORTABLE TRANSACTIONS ----------------------------------- Series Transactions in the Aggregate in Excess of 5% - ----------------------------------------------------
(h) Current Value (a) Identity of (b) Description (c) Purchase (d) Selling (g) Cost of of Asset on (i) Net Gain Party Involved of Asset Price Price Asset Transaction Date or (Loss) - ------------------- --------------- ---------------- ---------- ----------- -------------------- --------------- Bank of New York BNY Short-Term Money Market Fund - Purchases $2,345,620 $2,345,620 $2,345,620 - Sales $2,355,344 2,355,344 2,355,344 - Hartford Life Guaranteed Insurance Co. Investment Contract - Purchases 47,022 47,022 47,022 - Sales 1,279,222 1,279,222 1,279,222 -
S-3 EX-99.3 8 ANNUAL REPORT ON FORM 11-K FOR CUTW HOURLY SAVINGS Exhibit 99.3 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 11-K ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended: December 31, 1998 [_] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to __________ Commission file number: 1-4850 A. Full title of plan and the address of the plan, if different from that of the issuer named below: CSC Outsourcing Inc. CUTW Hourly Savings Plan B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: Computer Sciences Corporation 2100 East Grand Avenue El Segundo, California 90245 TABLE OF CONTENTS Description Page - ----------- ---- Statements of Net Assets Available for Benefits As of December 31, 1998 and 1997 .................................... 3 Statements of Changes in Net Assets Available for Benefits As of December 31, 1998 and 1997 .................................... 4 Notes to the Financial Statements ................................... 5 2 CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
December 31 --------------------- 1998 1997 ---------- -------- Assets Investments (Note 2, 5, 8 and 9): Short-term $ 8,094 $ 4,824 Long-term - at fair value: Brinson U.S. Bond Fund 57,871 46,049 Brinson U.S. Stock Fund 25,748 21,912 Mellon Enhanced Asset Fund 7,151 Brinson U.S. Equity Fund 284,552 262,330 Mellon Stock Index Fund 117,654 62,609 CSC Company stock 676,231 370,740 Employee Loans (Note 6) 27,660 28,881 Plan interest in Master Trust 151,592 144,470 ---------- -------- Total Investments 1,356,553 941,815 ---------- -------- Receivables: Employee Contributions 1,715 876 Employer Contributions 750 1,814 Other Receivables 966 7 ---------- -------- Total Receivables 3,431 2,697 ---------- -------- Total Assets 1,359,984 944,512 ---------- -------- Liabilities Accounts Payable 13,494 2,974 ---------- -------- Total Liabilities 13,494 2,974 ---------- -------- Net Assets Available for Benefits $1,346,490 $941,538 ========== ========
See Notes to Financial Statements 3 CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
For the Year For the Year Ended Ended December 31, December 31, 1998 1997 ------------- ------------- ADDITIONS Investment Income: Net appreciation in fair value of investments (Note 9) $ 266,598 $ 64,395 Interest 563 400 Dividends 13,449 10,574 Plan interest in Master Trust investment income 9,551 5,424 ---------- -------- 290,161 80,793 Less Investment Management Fees (1,191) (770) ---------- -------- 288,970 80,023 Contributions: Employee 107,697 91,718 Employer 49,488 45,963 ---------- -------- 157,185 137,681 ---------- -------- Total Additions 446,155 217,704 DEDUCTIONS Distributions to Participants (Notes 1 and 7) 41,203 ---------- -------- Total Deductions 41,203 ---------- -------- Net Increase 404,952 217,704 ---------- -------- Net Assets Available for Benefits: Beginning of Year 941,538 723,834 ---------- -------- End of Year $1,346,490 $941,538 ========== ========
See Notes to Financial Statements 4 CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN NOTES TO THE FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Note 1 Description of the Plan ----------------------- The following brief description of the CSC Outsourcing Inc. CUTW Hourly Savings Plan (the "Plan") of CSC Outsourcing Inc. (the "Company") is provided for general information purposes only. Participants should refer to the Plan document for more complete information. The Plan became effective August 5, 1995, as a result of the Company acquiring certain employees of the Southern New England Telephone Company. The Plan is administered by a Committee consisting of four members (the "Committee) who are appointed by the Board of Directors of the Company and serve without compensation, being reimbursed by the Company for all expenditures incurred in the discharge of their duties as members of the Committee. The Committee has the power to interpret, construe and administer the Plan and to decide any dispute which may arise under the Plan. The Bank of New York (the "Trustee"), administers the Trust pursuant to a Trust Agreement entered into with the Company. All administrative expenses incurred for services rendered to the Plan shall be paid from the Trust to the extent not paid by the Company. The Plan is a voluntary, contributory, defined contribution plan and is intended to satisfy the requirements of Section 401(a) and 401(k) of the Internal Revenue Code (the "Code"). It is also subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). The Company reserves the right to discontinue contributions and to terminate the Plan at anytime. Upon such termination, the participants' rights to the Company's contributions vest immediately and the account balances are fully paid to the participants. Eligibility and Participation - ----------------------------- Employees are eligible to participate on specified enrollment dates if they satisfy the Plan's eligibility requirements, are hourly paid employees of CSC Outsourcing Inc. and are members of a collective bargaining unit for which participation in this Plan has been provided by negotiated agreement. A rehired eligible employee is eligible to rejoin the Plan on the next enrollment date. There were approximately 65 and 54 participating employees at December 31, 1998 and 1997, respectively. 5 CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN NOTES TO THE FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Employee and Company Contributions - ---------------------------------- A participant may authorize before-tax and after-tax contributions to the Plan subject to a maximum level of contributions (a certain percentage of base earnings), as specified by the bargaining agreement covering the employee. The Company will contribute, and forward to the Trust fund 66 2/3% of the first 1% to 6% for the employee matched contribution together with the participant's before-tax and after-tax contribution. The employee base earnings deferred and contributed to the Trust fund cannot exceed $10,000 and $9,500 for calendar years 1998 and 1997, respectively, the maximum allowable under the Code. Annual after-tax contributions to the Plan (including employee and Company matching contributions) are limited to $30,000 for each participant. Any compensation deferral in excess of $10,000 and any after-tax contributions with matching Company contributions in excess of $30,000, together with income allocable to those excess contributions will be returned to a participant. Any matching Company contributions attributable to any excess contribution, and income allocable thereto, will either be returned to the Company or applied to reduce future matching Company contributions. Participant Accounts - -------------------- Each participant's account is credited with the participant's contribution and allocations of the Company's contribution and Plan earnings, and is charged with an allocation of investment management fees. Allocations are based on participant earnings or account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account. Vesting of Participants' Interests/Forfeitures - ---------------------------------------------- Participants are 100 percent vested at all times in their before-tax, after-tax contribution and Company matching accounts. Distributable Amounts, Withdrawals and Refunds - ---------------------------------------------- The entire balance in all accounts for participants who retire, die, become disabled, or are discharged is distributed according to the provisions of the Plan. There are no forfeitures. The amounts distributed during 1998 and 1997 totaled $3,161 and $0, respectively. 6 CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN NOTES TO THE FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 While still an employee, a participant may make an in-service withdrawal of all or a part of the vested portion of his or her accounts attributable to their contributions, as well as vested Company matching contributions, plus the earnings on those amounts subject to the provisions of the Plan. Upon written notice to the Committee, a participant may make a hardship withdrawal of his or her before-tax and after-tax contributions, as well as Company matching contributions if the Committee finds, after considering the participant's request, that an adequate financial hardship and resulting need for such amount has been demonstrated by the participant. A participant may request a hardship withdrawal only if he or she first takes a loan of any available monies in the Plan. Both types of withdrawals are subject to certain restrictions as described in the Plan document. The withdrawals made in 1998 and 1997 totaled $38,042 and $0, respectively. Note 2 Summary of Significant Accounting Policies ------------------------------------------ The accounting and reporting policies followed in preparation of the financial statements of the Plan of the Company conform with generally accepted accounting principles. The following is a summary of the significant policies. Assets of the Plan - ------------------ The assets of the Plan are held in a trust with five sub-accounts, which represents the investment options. The investment income in the respective sub- accounts is allocated to the participants. Contributions to, and payments from, the Plan are specifically identified to the applicable sub-accounts within the Trust. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Security Transactions - --------------------- Security transactions are accounted for on a trade date basis. Dividend income is recorded on the ex-dividend date. Interest income is accounted for on the accrual basis. Participants in the Stock Fund may elect to receive distributions in certificates for shares of the common stock of Computer Sciences Corporation. 7 CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN NOTES TO THE FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Valuation of Investment Securities - ---------------------------------- Investments in common stocks and mutual funds are stated at fair value based upon closing sales prices reported on recognized securities exchanges on the last business day of the month or, for the listed securities having no sales reported and for unlisted securities, upon last reported bid prices on that date. Investments in certificates of deposit, money market funds and corporate debt instruments (commercial paper) are stated at cost which approximates fair value. Payment of Benefits - ------------------- Benefits are recorded when paid. Note 3 Income Tax Status ----------------- The Company will apply for a determination letter from the Internal Revenue Service substantiating that the Plan, as amended, qualifies under Section 401(a) of the Code and, with respect to its qualified cash or deferred arrangement, under Section 401(k) of the Code. The Committee believes the Plan is designed and operated to qualify as such. When the requirements of Section 401(k) of the Code are satisfied, the following tax consequences result: (i) A participant is not subject to federal income tax on Company contributions to the Plan or on income or realized gains in Plan Accounts attributable to the participant until a distribution from the Plan is made to him or her. (ii) The participant is able to exclude from his or her income for federal income tax purposes, the amount of his or her compensation deferral contributions, subject to a maximum exclusion of $10,000 and $9,500 for 1998 and 1997, respectively. (iii) On distribution of a participant's vested interest in the Plan, the participant generally is subject to federal income taxation, except that: (1) tax on "net unrealized appreciation" on any Computer Sciences Corporation stock distributed as a part of a "lump sum distribution" generally is deferred until the participant disposes of such stock, and (2) tax may be deferred to the extent the participant is eligible for and complies with certain rules permitting the "rollover" of a qualifying distribution to another retirement plan, or individual retirement account. 8 CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN NOTES TO THE FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Note 4 Reconciliation of Financial Statements to Form 5500 ---------------------------------------------------
December 31 ---------------------- 1998 1997 ---------- -------- Net assets available for benefits per the financial statements $1,346,490 $941,538 Amounts allocated to withdrawing Participants (1,075) (4,237) ---------- -------- Net assets available for benefits per Form 5500 $1,345,415 $937,301 ========== ========
The following is a reconciliation of benefits paid to participants per the financial statements to the Form 5500:
Year ended December 31, 1998 ----------------- Benefits paid to participants per the financial statements $41,203 Add: Amounts allocated to withdrawing participants at December 31, 1998 1,075 Less: Amounts allocated to withdrawing participants at December 31, 1997 (4,237) ------- Benefits paid to participants per the Form 5500 $38,041 =======
Amounts allocated to withdrawing participants are recorded on the Form 5500 for benefit claims that have been processed and approved for payment prior to December 31, 1998 but not paid as of that date. Note 5 Investment Funds ---------------- Participant contributions - Subject to rules the bargaining unit has adopted, each participant has the right to designate one or more of the following investment funds established by the Committee for the investment of his or her compensation deferral contributions and after-tax contributions in percentages determined by the bargaining unit. 9 CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN NOTES TO THE FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 The Fixed Income Fund - --------------------- The Fixed Income Fund represents holdings of units in a Master Trust investment vehicle and is managed by BlackRock Financial Management. The investment portfolio is actively managed and consists of short-term (1-3 year) fixed income instruments which include: U.S. Treasury and agency securities, corporate bonds, mortgage-backed securities and asset-backed fixed income securities. All of the Fund's assets are rated single-A or better at the time of purchase and all securities must be U.S. dollar denominated. All new cash flows into the Fund are invested in this actively managed bond fund. At December 31, 1998 and 1997, the Plan's interest in the net assets of the Master Trust was approximately .08% and .09%, respectively. Investment income and administrative expenses relating to the Master Trust are allocated to individual plans based upon average monthly balances invested by each plan. The following table represents the fair value of investments for the Master Trust.
December 31 ---------------------------- 1998 1997 ------------ ------------ Investments at fair value: Corporate bonds $118,380,288 $105,242,979 U.S. government securities 57,684,732 46,459,080 Other bonds 16,164,613 6,446,213 Short-term investments 3,777,721 1,371,261 Accrued income 966,721 1,198,486 ------------ ------------ $196,974,075 $160,718,019 ============ ============
Investment income for the Master Trust is as follows:
December 31 ---------------------------- 1998 1997 ------------ ------------ Investment income: Net appreciation (depreciation) in fair value of investments $ 1,731,522 $ 450,257 Interest: Corporate bonds 6,710,396 4,037,722 U.S. government securities 3,786,462 3,243,205 Other bonds 691,664 366,303 Short-term investments 365,214 485,226 ------------ ------------ 13,285,258 8,582,713 Less investment management fees (227,349) (208,306) ------------ ------------ $ 13,057,909 $ 8,374,407 ============ ============
10 CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN NOTES TO THE FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 The Balanced Fund - ----------------- The Balanced Fund is co-managed by Brinson Partners, Inc. (approximately 89% as of December 31, 1998) and Mellon Capital Management (approximately 11% as of December 31, 1998). The Balanced Fund is invested in an actively managed combination of U.S. equity securities, U.S. fixed income securities and cash equivalents. The U.S. equity portfolio consists of large, intermediate and small company stocks. The bond portfolio consists primarily of U.S. Treasury, government agency and corporate issues. This Fund's objective is to maximize risk-adjusted total returns relative to the U.S. Balanced Index over a full economic cycle. The Active Equity Fund - ---------------------- The Active Equity Fund is managed by Brinson Partners, Inc. The Fund is broadly diversified by issue and industry relative to the Wilshire 5000 index. The Fund is typically invested in 70% large capitalization and 30% intermediate and small capitalization stocks. The Fund may hold up to 50% in cash equivalents for portfolio risk management purposes. The Fund's objective is to maximize risk- adjusted total returns relative to the Wilshire 5000 index over a full economic cycle. The Stock Index Fund - -------------------- The Fund is managed by Mellon Capital Management. The objective of the Fund is to modestly exceed the performance of the Standard & Poor's 500 Stock Index. The Stock Index Fund either invests in a stock portfolio designed to track the performance of the S&P Stock Index and/or creates a synthetic S&P 500 portfolio using (unleveraged) financial futures and options. Assets used as collateral for futures/options positions are comprised of various market or debt instruments. The Company Stock Fund - ---------------------- Amounts allocated to this investment alternative will be used to purchase shares of Computer Sciences Corporation common stock which will be held for the benefit of the participant. The performance of this fund will depend upon the performance of Computer Sciences Corporation stock. The Trustee may purchase Computer Sciences Corporation stock on national securities exchanges or elsewhere. 11 CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN NOTES TO THE FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 In accordance with rules established by the Committee, participants may change their investment elections as of the first day of the first payroll period in the month, if filed within the prescribed time, by delivering an election form to the Company. Participants may transfer their existing account balances in 1 percent increments. Transfer elections are effective as of the first day of the month, or the second month if the participant's election form is not filed within the time prescribed by the Committee, following the month in which the participant files his election form with the Company. Company contributions - In accordance with the provisions of the Plan, the Trustee must promptly invest matching Company contributions paid into the Trust fund in the same fund as the participant contributions. Note 6 Participant Loans ----------------- The Plan has a loan provision in place which is available to participants covered by the bargaining unit. As of December 31, 1998 and 1997, $27,660 and $28,881 of loans were outstanding, respectively. The loans (which are accounted for in the Loan Fund) are deducted from the participants' accounts according to a priority specified in the Plan's loan rules and, within each account, pro rata from the funds based on their balances at the time. Loan repayments are reinvested in the participants' funds according to their current investment election. The repayments are similarly allocated among participants' accounts according to the priority specified in the Plan's rules. Note 7 Benefits Payable ---------------- As of December 31, 1998 and 1997, net assets available for benefits included benefits of $1,075 and $4,237 respectively, due to participants who have withdrawn from participation in the Plan. 12 CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN NOTES TO THE FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Note 8 Investments 1998 ----------------
Shares/Units Cost Fair Value -------------- ---------- ---------- Fixed Income Fund Plan Interest in Master Trust sh. 44,409 $ 152,183 $ 151,592 BNY Short-Term Money Market Fund sh. 905 905 905 Balanced Fund Brinson Trust Company Inc. U.S. Bond Fund sh. 442 55,654 57,871 U.S. Stock Fund sh. 63 16,041 25,748 Mellon EB Enhanced Asset Allocation sh. 21 6,566 7,151 Mellon Temporary Investment Fund sh. 174 174 174 BNY Short-Term Money Market Fund sh. 2,355 2,355 2,355 Active Equity Fund Brinson Trust Company, Inc. U.S. Equity Portfolio sh. 743 198,141 284,552 BNY Short-Term Money Market Fund sh 62 62 62 Stock Index Fund Mellon EB Stock Index Fund sh. 298 80,064 117,654 Mellon Temporary Investment Fund sh. 417 417 417 BNY Short-Term Money Market Fund sh 21 21 21 Company Stock Fund Computer Sciences Common Stock sh. 10,525 419,017 676,231 BNY Short-Term Money Market Fund sh. 4,160 4,160 4,160 CSC Employee Loan Fund Participant Loans $ 27,660 27,660 27,660 ---------- ---------- $ 963,420 $1,356,553 ========== ========== Total Long-Term Investments $ 955,326 $1,348,459 Total Short-Term Investments 8,094 8,094 ---------- ---------- $ 963,420 $1,356,553 ========== ==========
13 CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN NOTES TO THE FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Note 8 Investments 1997 ----------------
Shares/Units Cost Fair Value -------------- ---------- ---------- Fixed Income Fund Plan Interest in Master Trust sh. 37,149 $ 145,491 $ 144,470 Balanced Fund Brinson Trust Company Inc. U.S. Bond Fund sh. 380 44,369 46,049 U.S. Stock Fund sh. 63 14,634 21,912 U.S. Cash Management Fund sh. 3,564 3,564 3,564 BNY Short-Term Money Market Fund sh. 856 856 856 Active Equity Fund Brinson Trust Company, Inc. U.S. Equity Portfolio sh. 755 191,200 262,330 Stock Index Fund Mellon EB Stock Index Fund sh. 199 43,383 60,944 Mellon EB Daily Opening Stock Index sh. 7 1,627 1,665 Mellon Temporary Investment Fund sh. 393 393 393 Company Stock Fund Computer Sciences Common Stock sh. 4,440 315,269 370,740 BNY Short-Term Money Market Fund sh. 11 11 11 CSC Employee Loan Fund Participant Loans $ 28,881 28,881 28,881 ---------- ---------- $ 789,678 $ 941,815 ========== ========== Total Long-Term Investments $ 784,854 $ 936,991 Total Short-Term Investments 4,824 4,824 ---------- ---------- $ 789,678 $ 941,815
14 CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN NOTES TO THE FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Note 9 Statements of Net Assets Available for Benefits by Fund -------------------------------------------------------
December 31, 1998 ----------------------------------------------------------------------------- Fixed Balanced Active Stock Company Loan Income Fund Equity Index Stock Fund Total -------- ------- -------- -------- --------- -------- ---------- Assets Short-term Investments $ 905 $ 2,529 $ 62 $ 438 $ 4,160 $ 8,094 Long-term Investments: Interest in registered investment Companies 90,770 284,552 117,654 492,976 CSC Company stock 676,231 676,231 Employee Loans $ 27,660 27,660 Plan Interest in Master Trust 151,592 151,592 Employee Contributions Receivable 240 163 230 265 817 1,715 Employer Contribution Receivable 750 750 Other Receivables 2 371 585 1 7 966 Interfund Transfers (2,613) 486 1,438 1,922 (1,233) 0 -------- ------- -------- -------- --------- -------- ---------- Total Assets 150,126 94,319 286,867 120,280 680,732 27,660 1,359,984 Liabilities Accounts Payable 133 1,980 923 24 4,130 6,304 13,494 -------- ------- -------- -------- --------- -------- ---------- Total Liabilities 133 1,980 923 24 4,130 6,304 13,494 -------- ------- -------- -------- --------- -------- ---------- Net Assets Available for Benefits $149,993 $92,339 $285,944 $120,256 $ 676,602 $ 21,356 $1,346,490 ======== ======= ======== ======== ========= ======== ==========
15 CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN NOTES TO THE FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Note 9 Statements of Net Assets Available for Benefits by Fund -------------------------------------------------------
December 31, 1997 ----------------------------------------------------------------------------- Fixed Balanced Active Stock Company Loan Income Fund Equity Index Stock Fund Total -------- ------- -------- -------- --------- -------- ---------- Assets Short-term Investments $ 4,420 $ 393 $ 11 $ 4,824 Long-term Investments: Interest in registered investment Companies 67,961 $262,330 62,609 392,900 CSC Company stock 370,740 370,740 Employee Loans $ 28,881 28,881 Plan Interest in Master Trust $144,470 144,470 Employee Contributions Receivable 1,079 454 714 393 (1,764) 876 Employer Contribution Receivable 1,814 1,814 Other Receivables 1 3 3 7 Interfund Transfers 41 (321) (704) 117 867 0 -------- ------- -------- -------- --------- -------- ---------- Total Assets 145,591 72,517 262,340 63,512 371,671 28,881 944,512 Liabilities Accounts Payable 43 42 160 9 2,720 2,974 -------- ------- -------- -------- --------- -------- ---------- Total Liabilities 43 42 160 9 2,720 2,974 -------- ------- -------- -------- --------- -------- ---------- Net Assets Available for Benefits $145,548 $72,475 $262,180 $ 63,503 $ 371,671 $ 26,161 $ 941,538 ======== ======= ======== ======== ========= ======== ==========
16 CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN NOTES TO THE FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Note 9 Statements of Changes in Net Assets Available for Benefits by Fund ------------------------------------------------------------------
December 31, 1998 ----------------------------------------------------------------------------- Fixed Balanced Active Stock Company Loan Income Fund Equity Index Stock Fund Total -------- ------- -------- -------- --------- -------- ---------- Additions to Net Assets Attributable to: Investment Income: Net Appreciation in Fair Value of Investments $ 431 $ 5,056 $ 21,044 $ 19,627 $ 220,440 $ 266,598 Interest 29 326 30 42 136 563 Dividends 3,796 5,067 4,586 13,449 Plan Interest in Master Trust Investment Income 9,551 9,551 Investment Management Fees (263) (195) (678) (55) (1,191) -------- ------- -------- -------- --------- -------- ---------- 9,748 8,983 25,463 24,200 220,576 288,970 -------- ------- -------- -------- --------- -------- ---------- Contributions: Employee 24,230 10,533 15,162 11,865 58,389 $(12,482) 107,697 Employer 49,488 49,488 Interfund Transfers (23,985) 539 (10,262) 23,526 10,182 0 -------- ------- -------- -------- --------- -------- ---------- 245 11,072 4,900 35,391 118,059 (12,482) 157,185 -------- ------- -------- -------- --------- -------- ---------- Total Additions 9,993 20,055 30,363 59,591 338,635 (12,482) 446,155 -------- ------- -------- -------- --------- -------- ---------- Deductions to Net Assets Attributable to: Distributions to Participants 5,548 191 6,599 2,838 33,704 (7,677) 41,203 -------- ------- -------- -------- --------- -------- ---------- Total Deductions 5,548 191 6,599 2,838 33,704 (7,677) 41,203 -------- ------- -------- -------- --------- -------- ---------- Net Increase 4,445 19,864 23,764 56,753 304,931 (4,805) 404,952 -------- ------- -------- -------- --------- -------- ---------- Net Assets Available for Benefits: Beginning of Year 145,548 72,475 262,180 65,503 371,671 26,161 941,538 -------- ------- -------- -------- --------- -------- ---------- End of Year $149,993 $92,339 $285,944 $120,256 $676,602 $ 21,356 $1,346,490
17 CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN NOTES TO THE FINANCIAL STATEMENTS For the Two Years Ended December 31, 1998 Note 9 Statements of Changes in Net Assets Available for Benefits by Fund ------------------------------------------------------------------
December 31, 1997 ----------------------------------------------------------------------------- Fixed Balanced Active Stock Company Loan Income Fund Equity Index Stock Fund Total -------- ------- -------- -------- --------- -------- ---------- Additions to Net Assets Attributable to: Investment Income: Net Appreciation in Fair Value of Investments $ 147 $ 5,640 $ 32,552 $ 11,862 $ 14,194 $ 64,395 Interest 8 86 27 202 77 400 Dividends 3,082 4,801 2,691 10,574 Plan Interest in Master Trust Investment Income 5,424 5,424 Investment Management Fees (21) (149) (571) (29) (770) -------- ------- -------- -------- --------- -------- ---------- 5,558 8,659 36,809 14,726 14,271 80,023 -------- ------- -------- -------- --------- -------- ---------- Contributions: Employee 21,249 10,870 16,371 9,814 43,556 $(10,142) 91,718 Employer 45,963 45,963 Interfund Transfers 47,524 (579) 425 (47) (47,323) 0 -------- ------- -------- -------- --------- -------- ---------- 68,773 10,291 16,796 9,767 42,196 (10,142) 137,681 -------- ------- -------- -------- --------- -------- ---------- Total Additions 74,331 18,950 53,605 24,493 56,467 (10,142) 217,704 -------- ------- -------- -------- --------- -------- ---------- Deductions to Net Assets Attributable to: Distributions to Participants 2,592 1,479 3,273 1,798 10,557 (19,700) 0 -------- ------- -------- -------- --------- -------- ---------- Total Deductions 2,592 1,479 3,273 1,798 10,557 (19,700) 0 -------- ------- -------- -------- --------- -------- ---------- Net Increase 71,739 17,471 50,332 22,695 45,910 9,558 217,704 -------- ------- -------- -------- --------- -------- ---------- Net Assets Available for Benefits: Beginning of Year 73,809 55,004 211,848 40,808 325,761 16,603 723,834 -------- ------- -------- -------- --------- -------- ---------- End of Year $145,548 $72,475 $262,180 $ 63,503 $ 371,671 $ 26,161 $ 941,538 ======== ======= ======== ======== ========= ======== ==========
18 SIGNATURES The Plan. Pursuant to the requirements of the Securities Act of 1934, the Computer Sciences Corporation Retirement Plans Committee has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. CSC OUTSOURCING INC. CUTW HOURLY SAVINGS PLAN Date: June 25, 1999 By: /S/ LEON J. LEVEL ----------------------------------------- Leon J. Level Chairman, Computer Sciences Corporation Retirement Plans Committee 19 -----END PRIVACY-ENHANCED MESSAGE-----