Note 1. Summary of Significant Accounting Policies
A. Consolidation and Basis of Preparation. The consolidated
financial statements include the accounts of Automatic Data Processing,
Inc. and its majority-owned subsidiaries. Inter- company accounts
and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes.
Actual results could differ from these estimates.
B. Accounting Changes. In fiscal 1994 the Company adopted FASB
Statements No. 109, "Accounting for Income Taxes", and
No. 112, "Employers' Accounting for Postemployment Benefits",
effective July 1, 1993. The cumulative effect of adopting Statement
No. 109 was to increase net earnings by $2.7 million ($.01 per
share). The cumulative effect of adopting Statement No. 112, which
requires certain postemployment benefits to be accrued as service
is provided, was to decrease net earnings by $7.5 million ($.03
per share), net of $5.0 million of income tax benefits.
C. Cash and Cash Equivalents. Highly liquid investments with
a maturity of three months or less at the time of purchase are
considered cash equivalents.
D. Marketable Securities. Marketable securities consist primarily
of high grade municipal investments. Most of the Company's marketable
securities are considered to be "avail- able-for-sale",
and, accordingly, are carried on the June 30, 1996 balance sheet
at fair market value which approximates cost. Gains/losses from
the sale of marketable securities have not been material. Approximately
$249 million of the Company's long-term marketable securities
mature in 1-2 years, $91 million in 2-3 years, and the remainder
in less than 7 years.
E. Property, Plant and Equipment. Property, plant and equipment
is depreciated over the estimated useful lives of the assets by
the straight-line method. Leasehold improvements are amortized
over the shorter of the term of the lease or the estimated useful
lives of the improvements.
The estimated useful lives of assets are primarily as follows:
| Data processing equipment ……………….. | |
| Buildings……………………………………. | |
| Furniture and fixtures……………………….. |
F. Intangibles. Intangible assets are recorded at cost and
are amortized primarily on a straight-line bases. Goodwill is
amortized over periods from 15 to 40 years, and is periodically
reviewed for impairment by comparing carrying value to undiscounted
expected future cash flows. If impairment is indicated, a write-down
to fair value (normally measured by discounting estimated future
cash flows) is taken.
G. Revenue Recognition. Service revenue, including software
license fees, maintenance fees and other ancillary fees, is recognized
as services are provided. In those instances where hardware is
sold to clients as part of a bundled service offering, the gross
profit on the sale of hardware and prepaid software license fees,
less costs of selling and installation, is deferred and recognized
on a straight-line basis over the initial contract period, which
generally is from 5 to 7 years.
H. Foreign Currency Translation. The net assets of the Company's
foreign subsidiaries are translated into U.S. dollars based on
exchange rates in effect at the end of each period, and revenue
and expenses are translated at average exchange rates during the
periods. Currency transaction gains or losses, which are included
in the results of operations, are immaterial for all periods presented.
Gains or losses from balance sheet translation, which are not
material, are included in shareholders' equity.
I. Stock Split. As of January 1, 1996, the Company had a two-for-one
stock split. All per share earnings and dividends and references
to common stock give effect to this split.
J. Earnings Per Share. Earnings per share are based upon the
weighted average number of shares outstanding during the respective
periods.
K. Line of Business. The Company is engaged in the computing
services business.
L. Reclassification of Prior Financial Statements. Certain
reclassifications have been made to previous years' financial
statements to conform to current classifications.
Note 2. Acquisitions and Dispositions
Effective November 1, 1995, ADP acquired control of GSI- Participations,
a leading computer services company based in Paris, France, for
approximately $460 million in cash plus transaction costs and
other related liabilities assumed. A portion of the purchase price
has been funded by borrowing approximately 466 million French
francs (equivalent to $91 million as of June 30, 1996) on a short-term
basis at an aver- age interest rate of 4.1% during the period
subsequent to the acquisition. This borrowing has been designated
as a hedge against the Company's net investment in GSI.
The financial results of GSI are included in ADP's consolidated
results on a one-month lag. Accordingly, the consolidated results
for fiscal 1996 include GSI's operations from November 1995 through
May 1996. During the fourth quarter, a decision was reached to
sell GSI's facilities management business. Consequently, the net
of revenues and pre-tax expenses of that business for the quarter,
which are not material, have been included in general, administrative
and selling expenses in the Statement of Consolidated Earnings.
Net assets of the business are included as assets held for sale
in other current assets on the Consolidated Balance Sheet.
Based on preliminary allocations of purchase price, the GSI
transaction results in approximately $523 million of goodwill
and other intangibles (primarily customer lists and software),
which are being amortized over periods ranging from 5 to 40 years.
The allocation of purchase price is preliminary and subject to
adjustment upon receipt of final valuation information and management's
final estimates as to the fair value of assets acquired and liabilities
assumed.
On an unaudited pro forma basis, assuming that the acquisition
had been made as of July 1, 1994, the consolidated revenue of
ADP for fiscal 1996 and 1995 would have increased by approximately
$173 million and $400 million, respectively, and net earnings
would have decreased by approximately $9 million ($.03 per share)
and $31 million ($.11 per share), respectively.
During fiscal 1996, 1995 and 1994, the Company purchased several
other businesses for approximately $91 mil- lion (including $20
million in common stock), $123 million (including $16 million
in common stock) and $81 million, respectively. The results of
these acquired businesses were not material to the Company's consolidated
financial statements, and are included from the date of acquisition.
The Company also acquired several businesses in fiscal 1996
and 1995 in pooling of interest transactions in exchange for 969,000
and 2,362,000 shares of common stock, respectively. The Company's
consolidated financial statements were not restated because in
the aggregate these transactions were not material.
Note 3. Receivables
Accounts receivable is net of an allowance for doubtful accounts
of $35 million and $23 million at June 30, 1996 and 1995, respectively.
The Company finances the sale of computer systems to certain
of its clients. These finance receivables, substantially all of
which are due from automobile and truck dealerships, are reflected
in the consolidated balance sheets as follows:
| (In thousands) | ||||
| June 30, | ||||
| Receivables | ||||
| Less: | ||||
| Allowance for doubtful accounts | ||||
| Unearned income | ||||
Unearned income from finance receivables represents the excess
of gross receivables over the sales price of the computer systems
financed. Unearned income is amortized using the interest method
to maintain a constant rate of return on the net investment over
the term of each contract.
Long-term receivables at June 30, 1996 mature as follows:
(In thousands)
| 1998 | |
| 1999 | |
| 2000 | |
| 2001 | |
| Thereafter | |
Note 4. Intangible Assets
Components of intangible assets are as follows:
(In thousands)
| June 30, | ||
| Goodwill | ||
| Other | ||
| Less accumulated amortization | ||
Other intangibles consist primarily of purchased rights (acquired
directly or through acquisitions) to provide data processing services
to various groups of clients (amortized over periods from 5 to
36 years) and purchased software (amortized over periods from
3 to 10 years). Amortization of intangibles totalled $81 million
for fiscal 1996, $66 million for 1995 and $61 million for 1994.
Note 5. Long-Term Debt
Components of long-term debt are as follows:
(In thousands)
| Zero coupon convertible subordinated notes (5 1/4% yield) .................. | ||
| Industrial revenue bonds(with fixed and variable interest rates from 3.6% to 8.3%). | ||
| Other................................... | ||
| Less current portion..................... | ||
The zero coupon convertible subordinated notes have a face
value of approximately S802 million at June 30, 1996, and mature
February 20, 2012, unless converted or redeemed earlier. The notes
are convertible into approximately 10.4 million shares of the
Company's common stock. The notes are callable at the option of
the Company since February 1996, and the holders of the notes
can convert into common stock at any time or require redemption
in 1997, Automatic Data Processing, Inc. and Subsidiaries 2002,
and 2007. During fiscal 1996, approximately $3 mil- lion face
value of notes were converted. As of June 30, 1996 and 1995, the
quoted market prices for the zero coupon notes were approximately
$400 million and $360 million, respectively. The fair value of
the other debt included above, based on available market information,
approximates its carrying value.
Long-term debt repayments are due as follows:
| (In thousands) | |
| 1998 | |
| 1999 | |
| 2000 | |
| 2001 | |
| Thereafter | |
Interest payments were approximately $8 million during fiscal
1996 and $4 million during the years ended June 30, 1995 and 1994.
Note 6. Payroll and Payroll Tax Filing Services
As part of its integrated payroll and payroll tax filing services,
the Company collects funds for federal, state and local employment
taxes from approximately 260,000 clients, files over 11.S million
applicable returns, handles all regulatory correspondence and
amendments, absorbs regulatory charges for certain penalties and
interest, and remits the funds to the appropriate tax agencies.
In addition to fees paid by clients for these services, the Company
receives interest during the interval between the receipt and
disbursement of funds by investing the funds primarily in AA or
better rated municipal instruments, with no more than $80 million
in any single instrument. The amount of collected but unremitted
funds varies significantly during the year and averaged approximately
$3.7 billion in fiscal 1996, $3.3 billion in fiscal 1995 and $2.8
billion in fiscal 1994. The amount of such funds was $S.0 billion
as of June 30, 1996, of which $1 billion was supported by a letter
of credit and a related ADP guarantee, and was $4.6 billion as
of June 30, 199S. Interest on collected but unremitted funds amounted
to approximately $178 million in fiscal 1996, $148 million in
199S, and $111 million in 1994.
Note 7. Employee Benefit Plans
A. Stock Option Plans. The Company has stock option plans which
provide for the issuance to eligible employees of incentive and
non-qualified stock options, which may expire as much as 10 and
12 years, respectively, from the date of grant, at prices not
less than the fair market value on the date of grant. At June
30, 1996, there were 5,116 participants in the plans. The aggregate
purchase price for options outstanding at June 30, 1996 was approximately
$556 million. The options expire between 1996 and 2006.
A summary of changes in the stock option plans for the three
years ended June 30, 1996 is as follows:
| (In thousands, except per share amounts) | |||
| Year ended June 30, | |||
| Options outstanding, beginning of year | |||
| Options granted ($33 to $39 per share in 1996, $27 to $31 in 1995 and $ 24 to $ 26 in 1994) | |||
| Options exercised ($6 to $31 per share in 1996, $4 to $25 in 1995 and $4 to $24 in 1994) | |||
| Options cancelled | |||
| Other | |||
| Options outstanding, end of year ($8 to $39 per share in 1996, $6 to $31 in 1995 and $5 to $26 in 1994) | |||
| Options exercisable, end of year | |||
| Shares available for future grants, end of year | |||
| Shares reserved for issuance under stock option plans | |||
The Financial Accounting Standards Board has issued a statement
on accounting for stock-based compensation, which allows companies
to either retain APB Opinion 25 for recognizing expense for stock-based
compensation, or adopt a new accounting method based on estimated
fair value. The Company has decided to continue to follow APB
25 and will describe the impact of using an estimated fair value
approach on a pro forma basis in fiscal 1997.
B. Restricted Stock Plan. The Company has a restricted stock
plan under which shares of common stock have been sold for nominal
consideration to certain key employees. These shares are restricted
as to transfer and in certain circumstances must be resold to
the Company at the original purchase price. The restrictions lapse
over periods of up to six years. During the years ended June 30,
1996, 199S and 1994, the Company issued 186,800, 106,300 and 188,100
restricted shares, and repurchased 47,200, S0,200 and 46,200 shares,
respectively.
C. Employee Stock Purchase Plans. The Company has stock purchase
plans under which eligible employees have the ability to purchase
shares of common stock at 85% of the lower of market value as
of the date of purchase election or end of the plan. Approximately
1.9 million shares are scheduled for issuance on December 31,
1996 and 2.3 million on December 31, 1997. Approximately 1.9 million
and 2.0 million shares were issued during the years ended June
30, 1996 and 1995, respectively. At June 30, 1996 and 1995, there
were approximately 8.6 million and 10.6 million shares reserved
for purchase under the plan. Included in liabilities as of June
30, 1996 and 1995 are employee stock purchase plan with- holdings
of approximately $51 million and $45 million, respectively.
D. Pension Plan. The Company has a defined benefit cash balance
pension plan covering substantially all domestic employees, under
which employees are credited with a percentage of base pay each
year plus 7% interest. Employees are fully vested on completion
of five years service. The Company's policy is to make contributions
within the range determined by generally accepted actuarial principles.
The plan's funded status is as follows:
(In thousands)
| June 30, | ||
| Funded plan assets at market value, primarily stocks and bonds | ||
| Actuarial present value of benefit obligations: | ||
| Vested benefits | ||
| Non-vested benefits | ||
| Accumulated/projected benefit obligation | ||
| Plan assets in excess of projected benefits | ||
| Prior service cost | ||
| Transition obligation | ||
| Unrecognized net actuarial loss due to different experience than that assumed | ||
| Prepaid pension cost |
The components of net pension expense were as follows:
| (in thousands) | |||
| Year ended June 30, | |||
| Service cost - benefits earned during the period | |||
| Interest cost on projected benefits | |||
| Return on plan assets | |||
| Net amortization and deferral | |||
E. Retirement and Savings Plan. The Company has a 401(k) retirement
and savings plan which allows eligible employees to contribute
up to 12% of their compensation annually. The. Company matches
a portion of this contribution which amounted to approximately
$18 million, S11 million and S9 million for calendar years 1995.
1994 and 1993. respectively.
Note 8. Income Taxes
In accordance with FASB statement No. 109, accounting for income
taxes follows the asset and liability approach. Deferred taxes
reflect the tax consequences on future years of differences between
the financial reporting and tax bases of assets and liabilities.
The provision for income taxes consists of the following components:
| (In thousands) | |||
| Year ended June 30, | |||
| Current: | |||
| Federal | |||
| Foreign | |||
| State | |||
| Total current | |||
| Deferred: | |||
| Federal | |||
| Foreign | |||
| State | |||
| Total deferred | |||
At June 30, 1996 and 1995, the Company had gross deferred tax
assets of approximately $114 million and $78 million, respectively,
consisting primarily of operating expenses not currently deductible
for tax return purposes. Valuation allowances approximated $23
million as of June 30, 1996, and were not material as of June
30, 199S. Gross deferred tax liabilities approximated $214 million
as of June 30, 1996 and $85 million as of June 30, 1995, consisting
primarily of differences in the accounting and tax values of certain
fixed and intangible assets.
Income tax payments were approximately $178 million in 1996,
$131 million in 1995 and $90 million in 1994. Pretax domestic
earnings approximated $592 million in 1996, $505 million in 1995
and $430 million in 1994.
A reconciliation between the Company's effective tax rate and
the U.S. federal statutory rate is as follows:
(In thousands, except percentages)
| Year ended June 30, | ||||||
| Provision for taxes at statutory rate | ||||||
| Increase(decrease) in provision from: | ||||||
| Investments in municipals and preferred stocks | ||||||
| State taxes, net of federal tax benefit | ||||||
| Other | ||||||
Note 9. Lease Obligations
The Company and its subsidiaries have various facilities and
equipment lease obligations. Total rental expense was approximately
$164 million in 1996, $152 million in 1995 and $135 million in
1994 with minimum lease commitments under operating leases as
follows:
(In thousands)
| Year ending June 30, | |
| 1997 | |
| 1998 | |
| 1999 | |
| 2000 | |
| 2001 | |
| Thereafter | |
In addition to fixed rentals, certain leases require payment
of maintenance and real estate taxes and contain escalation provisions
based on future adjustments in price indices.
Note 10. Financial Dab By Geographic Area
Information about the Company's operations by geographic area
for the year ended June 30, 1996 is as follows (in millions):
| Revenue | |||||
| Earnings before income taxes. | |||||
| Identifiable assets |
International operations prior to fiscal 1996 were not material
to the Company's consolidated financial results.
Note 11. Quarterly Financial Results (Unaudited)
Summarized quarterly results of operations (as restated for
a two-for-one stock split on January 1, 1996) for the three years
ended June 30, 1996 are as follows:
(In thousands, except per share amounts)
| Year ended June 30, 1996 | ||||
| Revenue | ||||
| Net earnings | ||||
| Earnings per share |
| Year ended June 30, 1995 | ||||
| Revenue | ||||
| Net earnings | ||||
| Earnings per share |
| Year ended June 30, 1994 | ||||
| Revenue | ||||
| Net earnings | ||||
| Earnings per share |
(a) After decrease of S4.8 million (S.02 per share) from the cumulative
effect of accounting changes.
Third quarter revenue and earnings have historically been positively
impacted by calendar year-end processings associated with many
of the Company's services.