UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 1997
Commission file number 1-6002
COMPUTER DATA SYSTEMS, INC.
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 52-0882982
- -------------------------- -------------------
(State or other jurisdiction (IRS Employer ID No.)
of incorporation or organization)
ONE CURIE COURT
ROCKVILLE, MARYLAND 20850-4389
- ---------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 921-7000
--------------
Securities registered pursuant to Section 12(b) of the Act: NONE
----
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.10 PER SHARE
--------------------------------------
(Title of class)
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 (or for such shorter period that the
registrant was required to file such reports), 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. ( X )
<PAGE>
The aggregate market value of the voting stock held by non-affiliates of
the Corporation at September 19, 1997 was $211,490,765 based on the closing
price of $36.25 per share. As of that date, 6,286,299 shares of Common Stock
were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
None
<PAGE>
PART I
------
ITEM 1. BUSINESS
Principal Services Rendered
- ---------------------------
Computer Data Systems, Inc. (the "Corporation") was incorporated in
the State of Maryland in 1968. The Corporation provides information technology
services and products including applications development and maintenance
services, network engineering and telecommunications integration, desktop
integration, data base support, data center management and processing services,
and systems engineering. The Corporation's products include financial and
accounting software, debt management, loan and mortgage processing, and
biometric identification systems. The Corporation's 3,900 employees serve a
wide array of government and private industry customers with information
technology expertise, systems, and products. The Corporation provides
information technology solutions on more than 100 current contracts from 34
office locations.
Through June 1997, the Corporation's operations were concentrated
in two business segments. In July 1996, the Corporation reorganized these
business segments into two unincorporated operating companies, CDSI Information
Technology Solutions Company (CDSI ITS) and CDSI Business Applications
Solutions Company (CDSI BAS).
Of these business segments, the larger CDSI ITS primarily markets
its expertise in software programming and network engineering to those federal
government agencies that demand highly technical information technology
solutions. CDSI ITS applies proven information technology to design,
implement, and operate data center facilities, networks, imaging systems,
interactive databases, and information management and reporting systems.
CDSI BAS provides financial systems and services to include debt
collection, pension trust fund support, loan processing, cash management,
mortgage servicing, and fulfillment systems and services. In addition,
CDSI BAS markets the Corporation's proprietary software packages. CDSI BAS
also operated a modern data center, which services the information processing
requirements, both mainframe and client-server, of numerous federal and
commercial clients. Data center services include the full range of
associated technical support: LAN administration, system and data security,
data integrity, user training, office automation support, hotline support,
and courier services. CDSI Solutions, Inc., a newly formed wholly-owned
subsidiary, assumed data center operations in July 1997.
In November 1996, the Corporation combined its student loan
guaranty agency services business with that of InTuition, Inc. to form a new
commercial company, GuaranTec, LLP. GuaranTec's primary business is providing
servicing for certain student loan guaranty agencies. Such services include
due diligence, report filing, collection efforts, maintaining loan data, as
well as obtaining money from the government and delivering guaranteed money
to lenders in satisfaction of claims.
<PAGE>
In June 1997, the Corporation acquired all of the capital stock of
Analytical Systems Engineering Corporation and its subsidiaries (ASEC). ASEC
is a federal government-focused engineering and technical services firm
headquartered in Burlington, Massachusetts. ASEC's core competencies are
systems engineering and technical assistance; information systems and techno-
logy support; technology transfer applications; engineering and installation;
and systems integration.
Also in 1997, the Corporation formed a new subsidiary, CDSI
Solutions, Inc., to provide information technology (IT) services to commercial
markets, with particular emphasis on commercial IT outsourcing.
Recent awards include new subcontracts for services for the Defense
Information Systems Agency, the National Institutes of Health, the Department
of Labor, and the Department of Justice. New contracts or extensions include
processing and/or services for USAGroup Loan Services, the Central Pension Fund
of the International Union of Operating Engineers and Participating Employers,
the General Services Administration (GSA) multiple award schedule contract for
automated data processing (ADP) services, Chugach Development Corporation, the
Department of Veterans Affairs, Group 1 Software, the Centers for Disease
Control and Prevention, the Naval Reserve Information Services Office, the
Department of Education, WinStar, and the Department of the Navy.
In addition, the Corporation was awarded a contract to continue to
provide ADP technical support services with the General Services Administration
for the Greater Southwest, Heartland, and Rocky Mountain Regions. The
contract, covering over 1,000 current employees, is for one year with four one-
year options and has a total estimated value of $310 million through May 2002.
In March 1995, the Corporation's Argentine subsidiary, along with
the prime contractor NetStar S.A., was awarded a contract with the Banco Social
de Cordoba to automate the state-owned Quiniela lottery. However, after
successfully completing acceptance testing on the prototype and investing $11
million in hardware and software development in the contract, a decree was
issued by the outgoing Governor of Cordoba on his last day in office effect-
ively cancelling all work on the contract and reopening the bidding process
from the initial receipt of proposals. In July 1996 the contract was rein-
stated. The Corporation completed final systems testing and received complete
and final acceptance in July 1997. Complete installation of the systems in
approximately 3,800 locations within the Province of Cordoba is expected to
take approximately one year. Annual revenues exceeding $5 million are
anticipated after installation is completed.
Most contracts are awarded on the basis of competitive bidding and
are generally structured as time-and-materials, cost-plus-fixed-fee, fixed-
price, or unit-price contracts. Such contracts include specific objectives and
performance periods ranging upwards of several years.
<PAGE>
Under time-and-materials contracts, the Corporation receives a
fixed hourly rate intended to cover salary costs attributable to work performed
under the contract, including related expenses and a specified profit margin.
Under cost-plus-fixed-fee contracts, the Corporation is reimbursed for allow-
able costs and is paid a negotiated fee. Under fixed-priced and unit-priced
contracts, the Corporation bears the risk of increased or unexpected costs and
benefits if its costs are lower than estimated. Key factors in the award of
such contracts have been technical expertise, past performance, and pricing.
Market and Competition
- ----------------------
A substantial number of companies offer information technology
services and products that overlap and are competitive with those offered by
the Corporation. These include: (1) companies that offer one or more inform-
ation technology services as a main line of their business; (2) computer
manufacturers who offer the same information technology services as adjunct
technical support for their equipment or as separate functions; and (3)
companies primarily engaged in other businesses that also outsource their
information technology facilities, services, and expertise.
The Corporation has many competitors in each of the areas in which
it does business. Some of its competitors are large, diversified firms having
substantially greater financial resources and larger technical staffs than the
Corporation. The primary competitive factors in the market are technical
qualifications, management performance, and price. Greater emphasis on value
rather than simply price considerations has been noted in recent contract
awards.
Federal government IT spending is projected to grow 2-3% annually,
and increasing federal regulation, continuing competition for qualified
technical personnel, and narrow profit margins are characteristic of this
highly competitive industry. In recent years, the trend toward consolidation
of existing contracts and an emphasis on indefinite delivery/indefinite
quantity (IDIQ) contracts has grown. Federal budget pressures continued to
affect portions of the marketplace in 1997.<PAGE>
Dependence on Government Contracts
Dependence on Government Contracts
- ----------------------------------
The Corporation's business with the federal government is subject
to various risks, including the reduction or modification of contracts due to
changing government needs and requirements. The Corporation's contracts are
not subject to renegotiation of profits. In the event of termination for
convenience, the Corporation would be reimbursed for the costs of terminating
the contract.
In fiscal year 1997, CDSI ITS sales to the General Services
Administration were $100,481,200 (33%) and CDSI BAS sales to the Department of
Education were $102,910,200 (34%). In fiscal year 1996, CDSI ITS sales to the
General Services Administration were $93,249,900 (37%). CDSI BAS revenues from
the Department of Education were $67,376,900 (27%) in fiscal year 1996. In
fiscal year 1995, CDSI ITS sales to the General Services Administration and
Department of Energy were $89,117,600 (40%) and $46,160,400 (21%), respect-
ively. CDSI BAS revenues from the Department of Education were $25,642,500
(12%) in fiscal year 1995.
<PAGE>
Backlog
- -------
As of June 30, 1997, the Corporation had a funded backlog of
approximately $90.1 million compared to $109.8 million as of June 30, 1996.
These amounts reflect the seasonal nature of the funding of contracts by the
federal government, whose appropriations are scheduled to take effect in
October. The Corporation expects that virtually all of the backlog will be
fulfilled during the current fiscal year. Most contracts are subject to
termination at the convenience of the government client.
Other Matters
- -------------
On September 20, 1997, the Corporation signed a definitive agree-
ment under which it will be acquired by and merged into Affiliated Computer
Services, Inc. For further information and disclosure regarding this matter,
see "Note 12 - Event (Unaudited) Subsequent to Date of Independent Auditors'
Report" of the Notes to Consolidated Financial Statements on page 29 of this
Annual Report on Form 10-K.
The Corporation is not materially dependent upon any raw materials
for its products and holds no material patents, licenses, or franchises.
However, the Corporation offers for license its proprietary software products:
Information Engineered Financial Accounting and Reporting System (i.e.FARS(R));
Debt Management and Collection System (DMCS); Cash Management System (CMS);
Automated Biometric Identification System (ABIDS(R)); Executive Information
Management System (Executive TouchTM).
The Corporation does not experience any significant seasonal
variations in its levels of operations, and neither the Corporation nor its
subsidiaries currently have any significant foreign operations.
This Annual Report on Form 10-K contains statements which, to the
extent that they are not recitations of historical fact, constitute "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act"). The forward looking statements in
this document are intended to be subject to the safe harbor protection provided
by Sections 27A of the Securities Act and 21E of the Exchange Act.
Management cautions that all forward looking statements as to
future results of operations are necessarily subject to risks, uncertainties
and events beyond the control of CDSI, and no assurances can be given that such
results will be achieved. Potential risks and uncertainties include budget
reductions or changes in funding priorities for existing Government programs,
fluctuations in interest rates, and pricing pressures from competitors.
<PAGE>
ITEM 2. PROPERTIES
The Corporation owns its corporate headquarters building at One
Curie Court, Rockville, Maryland. The 130,000 square foot facility is used by
both business segments.
The Corporation is a partner in a general partnership which owns a
25,000 square foot office building in California, Maryland. The building has
been leased to a tenant through September 1998.
In connection with certain professional services contracts, the
Corporation leases general office space in the following locations: Huntsville
and Montgomery, Alabama; Aurora and Lakewood, Colorado; Jacksonville and
Pensacola, Florida; Morrow, Georgia; Chicago and Mt. Prospect, Illinois; New
Albany, Indiana; Overland Park, Kansas; New Orleans, Louisiana; California,
Columbia, Gaithersburg, Germantown, and Rockville, Maryland; Billerica and
Burlington, Massachusetts; Vicksburg, Mississippi; St. Louis, Missouri;
Shrewsburg, New Jersey; Fairborn, Ohio; Middletown, Rhode Island; Fort Worth
and San Antonio, Texas; and Alexandria, Arlington, Dumfries, and McLean,
Virginia. The leases provide space ranging from 500 to 35,000 square feet and
annual extension options generally concurrent with the Corporation's current
contract performance periods.
In the opinion of management, the Corporation's current space is
adequate for its operating needs.
ITEM 3. LEGAL PROCEEDINGS
The Corporation is party to various legal proceedings arising in
the normal course of its business. Management of the Corporation does not
believe that the outcome of any of these proceedings will have a material
adverse effect on the Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Corporation's common stock, par value $.10 per share ("Common
Stock") is publicly traded on the Nasdaq Stock Market ("Nasdaq") and is quoted
under the symbol "CDSI."
As of September 1, 1997, there were 632 record holders of Common
Stock. The number of record holders was determined from the records of the
Corporation's transfer agent and does not include beneficial owners of Common
Stock whose shares are held in the names of various securities brokers, dealers
and registered clearing agencies. The Corporation estimates that there are
approximately 3,000 stockholders.
The following table sets forth the high and low sales prices on the
Nasdaq for the Common Stock and dividends per share paid for fiscal years 1996
and 1997.
<TABLE>
1996 - 1997 1995 - 1996 DIVIDENDS PER SHARE
<CAPTION>
Quarter High Low High Low 1997 1996
- ------- ---- --- ---- --- ---- ----
<S> <C> <C> <C> <C> <C> <C>
First $25 1/8 $20 $11 3/4 $ 9 5/8 $ .06 $ .05
Second 32 1/2 22 3/8 16 10
Third 38 29 3/8 19 1/4 11 3/4 .06 .06
Fourth 33 3/8 20 1/2 24 1/4 15 1/2
</TABLE>
The Corporation has paid semi-annual dividends since 1976. The
payment and amount of any future dividends will necessarily depend upon the
existing conditions, including the Corporation's earnings, financial condition,
working capital requirements, and other factors.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 304,391,900 $ 251,098,700 $ 220,667,000 $ 205,923,300 $ 180,958,500
Costs & expenses 285,667,200 235,368,600 207,903,800 193,706,500 172,245,800
------------ ------------ ------------ ------------ ------------
Income from operations 18,724,700 15,730,100 12,763,200 12,216,800 8,712,700
Interest income and expense, net 51,400 267,900 420,000 290,400 71,000
Minority interest (200,200)
------------ ------------ ------------ ------------ ------------
Income before income taxes 18,575,900 15,998,000 13,183,200 12,507,200 8,783,700
Income tax expense 7,419,500 6,228,800 5,132,300 4,777,800 3,276,300
------------ ------------ ------------ ------------ ------------
Net Income $ 11,156,400 $ 9,769,200 $ 8,050,900 $ 7,729,400 $ 5,507,400
============ ============ ============ ============ ============
Net Income per Common Share $ 1.80 $ 1.65 $ 1.36 $ 1.31 $ .97
Dividends per Common Share $ .12 $ .11 $ .10 $ .09 $ .08
Total assets $ 187,450,000 $ 103,053,900 $ 84,923,000 $ 77,295,900 $ 68,189,300
Long-term debt $ 41,145,600 $ 4,533,300 $ 6,133,300
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1997 Compared With 1996
- -----------------------
Revenues in fiscal year 1997 increased approximately 21% over
fiscal 1996. The increase was primarily due to increased requirements on our
Department of Education contract (CDSI BAS) which accounted for approximately
66% of the revenue increase. The remainder of the revenue increase was
principally due to increased requirements on our two General Services
Administration contracts and to a lesser extent added revenues from our
subsidiaries, GuaranTec and ASEC. In fiscal year 1997, CDSI ITS accounted for
55% of consolidated revenues and 33% of income from operations. CDSI BAS
accounted for 41% of consolidated revenues and 67% of income from operations.
The shift in income from operations on a percent basis from ITS to BAS is
principally attributable to reduced margins to date on some of our recent
recompetition wins.
<PAGE>
Costs and expenses increased slightly more than 21%. The major
contributor to the increase in costs was the increase in subcontractor costs
primarily related to our Department of Education contract. The Company also
continued to incur costs related to the Argentina contract without any
corresponding revenue. In addition, costs related to the startup of CDSI
Solutions and the acquisitions and operations of GuaranTec and ASEC were
incurred for the first time.
Income from operations grew to $18,724,700 as compared to
$15,730,100 in fiscal 1996, a 19% increase, primarily due to the increase in
revenues. Operating margins decreased slightly from 6.3% to 6.2%. This
decrease was due to the lower margins on contract recompetes and the startup
investment in CDSI Solutions.
Interest income and expense, net decreased principally as a result
of the interest and amortization charges relating to the ASEC acquisition, and
continued periodic line of credit borrowings to fund accounts receivable growth
and other working capital needs.
The provision for income taxes increased due to higher operating
income before income taxes.
Net income increased by $1,387,200 due to the increase in operating
revenues resulting from the ability to sustain operating margin levels while
achieving revenue growth.
The Corporation has recorded a deferred tax asset of $1,085,200
related to initial losses on its Argentine subsidiary, CDSI Argentina, S.A.
(CDSIA). Since the automated systems required in CDSIA's only contract
received final acceptance in July 1997, management of the Corporation believes
it is more likely than not that the expected future profitability of CDSIA will
be sufficient to realize the deferred tax asset. Accordingly, no valuation
allowance has been provided.
1996 Compared With 1995
- -----------------------
Revenues in fiscal year 1996 increased approximately 14% from 1995.
The increase resulted primarily from the CDSI BAS' Department of Education
contract. CDSI BAS revenues grew 95% primarily as a result of $42 million
growth in the Department of Education contract. The expiration of a large CDSI
ITS contract during 1995 and the reduced scope on the Department of Energy
contract partially offset the increase in revenues. In fiscal year 1996, CDSI
ITS accounted for 65% of consolidated revenues and 60% of income from
operations. CDSI BAS accounted for 35% of consolidated revenues and 40% of
income from operations for the year.
Costs and expenses increased approximately 13%. Costs which
contributed to the increase in expenses included a significant increase in
subcontractor costs primarily related to our Department of Education contract,
investments in software for the Corporation's internal systems, and continued
emphasis on marketing initiatives.
<PAGE>
Income from operations was $15,730,100 compared to $12,763,200 in
the prior period. Operating margins increased to 6.3% from 5.7%. Margins
increased principally as a result of higher volume levels on contracts in both
segments. Concurrent with the higher revenue volumes, reductions in
i.e.FARS(R) proprietary development costs, proposal protest costs, and proposal
costs related to the Argentina gaming contract aided the margin improvement.
Interest income and expense, net decreased by $152,000 due to
higher investment gains more than offset by increased interest expense arising
from larger borrowing under the Corporation's line of credit for equipment
commitments on the Argentina contract and accounts receivable growth.
The provision for income taxes increased due to higher operating
income before income taxes.
Net income increased by $1,718,300 due to improved operating
results.
1995 Compared With 1994
- -----------------------
Revenues in fiscal year 1995 increased approximately 7% from 1994.
The increase resulted primarily from CDSI BAS' Department of Education Direct
Student Loan contract and growth on several contracts in CDSI ITS. The
expiration of two large CDSI ITS contracts during 1994 and the reduced contract
scope resulting from the settlement of the Department of Energy contract
protest partially offset the revenues increase. CDSI BAS revenues grew 70%
rimarily as a result of growth in the Department of Education contract ($14
million). In fiscal year 1995, CDSI ITS accounted for 80% of consolidated
revenues and 89% of income from operations. CDSI BAS accounted for 20% of
consolidated revenues and 11% of income from operations for the year.
Costs and expenses increased at a slightly higher rate than the
growth in revenues. Corporate investments in software development, marketing,
and implementation of Centers of Expertise initiatives offset cost savings from
the repayment of the note payable ($370,600) and operating efficiencies
realized on the expanding contract base.
Income from operations was $12,763,200 compared to $12,216,800 in
the prior period. Operating margins decreased to 5.7% from 5.9%. Lower
margins in the initial phases of new contracts in CDSI BAS and the corporate
investments noted above contributed to the decline in operating margins.
Interest income and expense, net increased by $129,600, principally
due to a $115,000 gain on the unwinding of an interest rate swap associated
with the note payable, prepaid in September 1994.
The provision for income taxes increased due to higher operating
income before income taxes and an increase from 38.2% to 38.9% in federal and
state tax rates.
Net income increased by $321,500 due to improved operating results.
<PAGE>
Liquidity
- ---------
The Corporation's working capital increased by $15,112,800 to
$45,079,500 at June 30, 1997. The increase was attributable to the increase in
accounts receivable. Cash and cash equivalents increased primarily due to cash
generated from operations and the exercise of employee stock options. The
Company entered into a bank credit facility, including a $50 million term loan
for the purchase of ASEC. The term loan is repayable quarterly based on a
seven-year straight line amortization schedule, with a final maturity in June
2002.
In addition, the Company has $25,000,000 available under a three-
year revolving line of credit as part of the bank credit facility.
Capital Resources
- -----------------
Capital expenditures were $4,736,400 in fiscal 1997. These
expenditures were for internal data processing equipment and software used
internally. Capital expenditures are anticipated to be in the $6,000,000 to
$8,000,000 range for fiscal 1998. The planned expenditures are for completion
of the implementation of the Argentina contract, internal use, and additional
equipment and software for CDSI Solutions. These expenditures are anticipated
to be funded from internally generated working capital and existing credit
facilities.
Effects of Inflation
- --------------------
The majority of the Corporation's contracts provide for annual
adjustments on prices. Increases in revenues are primarily the result of
increased levels of service and product sales rather than price increases.
Subsequent Event
- ----------------
On September 20, 1997, the Corporation signed a definitive agree-
ment under which it will be acquired by and merged into Affiliated Computer
Services, Inc. For further information and disclosure regarding this matter,
see "Note 12 - Event (Unaudited) Subsequent to the Date of Independent
Auditors' Report" of the Notes to Consolidated Financial Statements on page 29
of this Annual Report on Form 10-K.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors 14
Consolidated Statements of Income for the years ended
June 30, 1997, 1996, and 1995 15
Consolidated Balance Sheets as of June 30, 1997 and 1996 16
Consolidated Statements of Cash Flows for the years ended
June 30, 1997, 1996, and 1995 17
Consolidated Statements of Changes in Stockholders' Equity
for the years ended June 30, 1997, 1996, and 1995 18
Notes to Consolidated Financial Statements for the years ended
June 30, 1997, 1996, and 1995 19
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders of Computer Data Systems, Inc.
We have audited the accompanying consolidated balance sheets of Computer
Data Systems, Inc. as of June 30, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Corporation'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 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, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Computer Data Systems, Inc. at June 30, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Washington, D.C.
July 28, 1997
<PAGE>
<TABLE>
COMPUTER DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years Ended June 30,
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues $ 304,391,900 $ 251,098,700 $ 220,667,000
------------ ------------ ------------
Costs and Expenses:
Salaries, wages and benefits 150,482,000 135,370,400 138,758,200
Subcontractors 103,519,000 78,481,000 47,469,900
Travel, relocation, and subsistence 3,256,400 2,786,400 2,600,500
Rental of space and equipment 1,596,100 1,961,900 4,058,000
Depreciation and amortization 4,243,900 3,419,500 2,937,500
Other operating and administrative costs 22,569,800 13,349,400 12,079,700
------------ ------------ ------------
285,667,200 235,368,600 207,903,800
------------ ------------ ------------
Income from operations 18,724,700 15,730,100 12,763,200
Interest income and expense, net 51,400 267,900 420,000
Minority interest (200,200)
------------ ------------ ------------
Income before income taxes 18,575,900 15,998,000 13,183,200
------------ ------------ ------------
Income tax expense 7,419,500 6,228,800 5,132,300
------------ ------------ ------------
Net Income $ 11,156,400 $ 9,769,200 $ 8,050,900
============ ============ ============
Net income per common share $ 1.80 $ 1.65 $ 1.36
============ ============ ============
Net income per common share - assuming
full dilution $ 1.80 $ 1.61 $ 1.36
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
COMPUTER DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION> June 30,
-------
1997 1996
---- ----
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 4,330,000 $ 3,639,600
Accounts receivable 87,916,900 61,479,200
Deferred income taxes 4,660,400 1,252,300
Income tax refunds receivable 2,424,800 151,100
Prepaid expenses and deposits 2,254,100 1,255,300
------------ ------------
Total Current Assets 101,586,200 67,777,500
Long-term investments 2,406,600 1,922,000
Land, building, and equipment 30,767,800 29,664,000
Intangible assets, including goodwill of
$39,409,900 in 1997 48,811,900 2,739,100
Deferred income taxes 2,691,800
Other assets 1,185,700 951,300
------------ ------------
Total Assets $ 187,450,000 $ 103,053,900
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities $ 32,288,800 $ 23,149,400
Accrued wages and related benefits 17,088,600 13,875,000
Note payable 6,854,400
Income taxes payable 786,400
Deferred income taxes 274,900
------------ -----------
Total Current Liabilities 56,506,700 37,810,800
------------ -----------
Note payable 41,145,600
Deferred compensation 4,633,800 4,583,500
Deferred income taxes 5,726,800 409,900
Minority interest 503,500
Stockholders' Equity:
Common stock, par value $.10; 30,000,000
shares authorized; 6,260,311 shares
outstanding in 1997 and 5,867,330
shares in 1996 626,000 586,700
Capital in excess of par value 16,553,400 7,625,900
Retained earnings 61,754,200 52,037,100
------------ -----------
Total Stockholders' Equit 78,933,600 60,249,700
------------ -----------
Total Liabilities and Stockholders'
Equity $ 187,450,000 $ 103,053,900
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
COMPUTER DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended June 30,
-------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Income $ 11,156,400 $ 9,769,200 $ 8,050,900
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,243,900 3,419,500 2,937,500
Deferred income taxes (537,000) (224,300) 454,000
Deferred compensation 693,100 679,600 849,100
Minority interest 200,200
Other 21,000 (34,100) (121,800)
Net cash provided by (used in) changes
in operating assets and liabilities:
Accounts receivable (15,710,700) (8,455,600) (10,002,200)
Prepaid expenses and deposits (739,200) (68,000) (677,400)
Accounts payable and accrued liabilities 4,664,600 7,452,700 3,326,200
Accrued wages and related benefits (468,400) (488,800) 1,628,300
------------- ------------ -----------
Net cash provided by operating activities 3,523,900 12,050,200 6,444,600
------------- ------------ -----------
Cash flows from investing activities:
Capital expenditures (4,736,400) (9,729,600) (6,982,800)
Proceeds from sale of equipment 3,300 217,400 207,100
Purchase of long-term investments (98,500) (174,400) (166,800)
Businesses acquired (47,266,700)
Other (98,100) (38,300) (33,700)
------------- ------------- -----------
Net cash used in investing activities (52,196,400) (9,724,900) (6,976,200)
------------- ------------- -----------
Cash flows from financing activities:
Payments on notes payable (2,000,000) (8,000,000) (7,633,300)
Borrowings on note payable 50,000,000 8,000,000 1,500,000
Cash dividends (717,200) (633,000) (571,600)
Exercise of stock options 2,722,900 1,051,900 309,200
Payment of deferred compensation (642,800) (341,600) (17,800)
------------- ------------- -----------
Net cash provided by (used in) financing activities 49,362,900 77,300 (6,413,500)
------------- ------------- ------------
Net increase (decrease) in cash
and cash equivalents 690,400 2,402,600 (6,945,100)
------------- -------------- ------------
Cash and cash equivalents at
beginning of year 3,639,600 1,237,000 8,182,100
------------- -------------- ------------
Cash and cash equivalents at
end of year $ 4,330,000 $ 3,639,600 $ 1,237,000
============= ============== ============
Supplemental cash flow information:
Interest paid $ 128,000 $ 230,400 $ 95,100
Income taxes paid $ 7,828,500 $ 5,704,400 $ 4,513,100
Acquisitions:
Fair value of assets acquired $ 66,958,700
Less:
Liabilities assumed or created (11,245,800)
Stock issued (5,586,000)
Noncash assets as consideration (194,700)
Minority interest (303,300)
Cash acquired (2,362,200)
-------------
Cash paid, net of cash acquired $ 47,266,700
=============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
COMPUTER DATA SYSTEMS, INC.
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>
Years Ended June 30, 1997, 1996, and 1995
Capital in
Common Stock Excess of Retained
Shares Amount Par Value Earnings Total
------ ------ --------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994 5,689,919 $ 569,000 $ 5,564,200 $ 36,139,900 $ 42,273,100
Exercise of stock options, net 47,923 4,800 318,100 (145,900) 177,000
Tax benefit arising from exercise
of non-qualified stock options 132,200 132,200
Cash dividends (571,600) (571,600)
Net income for the year 8,050,900 8,050,900
----------- --------- ----------- ------------ -----------
Balance at June 30, 1995 5,737,842 573,800 6,014,500 43,473,300 50,061,600
Exercise of Stock Options, net 129,488 12,900 867,900 (572,400) 308,400
Tax benefit arising from exercise
of non-qualified stock options 743,500 743,500
Cash dividends (633,000) (633,000)
Net income for the year 9,769,200 9,769,200
----------- --------- ----------- ------------ -----------
Balance at June 30, 1996 5,867,330 586,700 7,625,900 52,037,100 60,249,700
Exercise of stock options, net 187,526 18,800 1,896,300 (722,100) 1,193,000
Tax benefit arising from exercise
of non-qualified stock options 1,465,700 1,465,700
Stock issued for businesses
acquired 205,455 20,500 5,565,500 5,586,000
Cash dividends (717,200) (717,200)
Net income for the year 11,156,400 11,156,400
----------- --------- ----------- ------------ -----------
Balance at June 30, 1997 6,260,311 $ 626,000 $ 16,553,400 $ 61,754,200 $ 78,933,600
=========== ========= =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996, and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation.
- ---------------------------
The consolidated financial statements include the accounts of Computer Data
Systems, Inc. and its wholly-owned and majority-owned subsidiaries (the
Corporation). All significant intercompany balances and transactions have
been eliminated in consolidation.
Revenue Recognition.
- -------------------
Revenues on time and material contracts are recorded at the contractual rates
as the labor hours and direct expenses are incurred. Revenues on cost-type
contracts are recorded as reimbursable costs are incurred. Revenues on
fixed-price contracts are recorded on the percentage of completion basis,
determined by the ratio of total incurred costs to anticipated total costs
of the project. Revenues on unit-price contracts are recorded at contractual
selling prices of work completed and accepted by the customer. Contract award
fees are recorded based on estimated current performance levels and historical
experience. Revenues on equipment and software sales are recorded when the
units are delivered and installed. Immediate recognition is made of any
anticipated losses.
Depreciation and Amortization.
- -----------------------------
Furniture, computer equipment and software, and leasehold improvements are
recorded at cost and are depreciated over their estimated useful lives on the
straight-line basis. Building and improvements are depreciated over a useful
life of 40 years. The useful lives of furniture and equipment range from 5
to 10 years. Leasehold improvements are amortized over a five-year period.
Investments.
- -----------
Deferred annuity contracts included in long-term investments are carried at
cost plus accrued interest, which approximates fair market value.
Intangible Assets.
- -----------------
Intangible assets, principally goodwill, are generally attributable to
business combinations. Intangibles are amortized using the straight-line
method over periods not exceeding 30 years and are displayed on the consoli-
dated balance sheets net of accumulated amortization of $2,817,300 and
$5,499,900 at June 30, 1997 and 1996, respectively. The carrying values of
intangible assets are reviewed if the facts and circumstances indicate
potential impairment of their carrying value. Any impairment determined is
recorded in the current period. The Corporation does not believe that an
impairment exists at June 30, 1997.
Long-Lived Assets.
- -----------------
In fiscal year 1997, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that certain long-lived assets to be held and used be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amounts of an asset may not be recoverable. Additionally, SFAS No.
121 requires that certain long-lived assets to be disposed of be reported at
the lower of carrying amount or fair value less cost to sell. The impact of
the adoption of this standard had no effect on the Corporation's consolidated
earnings or financial position.
<PAGE>
Income Taxes.
- ------------
The Corporation computes deferred income taxes under the liability method.
Deferred taxes are based on timing differences between financial statement
and income tax purposes, using the enacted tax rates in effect during the
years in which the differences are expected to reverse.
Net Income Per Common Share.
- ---------------------------
Net income per share of common stock is based on the weighted average number of
common and common equivalent shares outstanding during the year. Common
equivalent shares consist of the number of shares issuable upon exercise of
outstanding stock options, reduced by the number of shares that could have
been repurchased with the proceeds of such options based on the average
market price of the Corporation's common stock during the year. The weighted
average number of common and common equivalent shares outstanding was
6,187,964, 5,935,522, and 5,902,419 in 1997, 1996, and 1995, respectively.
Net income per share, assuming full dilution, is based on the weighted average
number of common and common equivalent shares outstanding during the year.
Common equivalent shares consist of the number of shares issuable upon exercise
of outstanding stock options, reduced by the number of shares that could have
been repurchased with the proceeds of such options based on the ending market
price of the Corporation's common stock. The weighted average number of common
and common equivalent shares outstanding on a fully diluted basis was
6,193,702, 6,059,971, and 5,914,907 in 1997, 1996, and 1995, respectively.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share," which is required to be adopted for the second quarter of
fiscal 1998. At that time, the Corporation will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact is
expected to result in an increase in reported net income per common share of
$.06, $.04, and $.05 for the years ended June 30, 1997, 1996, and 1995,
respectively. The impact of SFAS No. 128 on the calculation of net income per
common share, assuming full dilution for these years is not expected to be
material.
Cash and Cash Equivalents.
- -------------------------
The Corporation considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
Stock-Based Compensation.
- ------------------------
In fiscal 1997, the Corporation adopted SFAS No. 123, "Accounting for Stock-
Based Compensation." While SFAS No. 123 established financial accounting and
reporting standards for stock-based employee compensation plans using a fair
value method of accounting, it allows companies to continue to measure
compensation costs for those plans using the intrinsic value method of
accounting prescribed in Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock issued to Employees." As permitted by SFAS No. 123,
the Corporation elected to continue its APB Opinion No. 25 accounting
treatment for stock-based compensation, and has adopted the provisions of
SFAS No. 123 requiring disclosure of the pro forma effect on net earnings and
earnings per share as if compensation cost had been recognized based upon the
estimated fair value at the date of grant for options awarded.
(See Note 7.)
<PAGE>
Use of Estimates.
- ----------------
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions, in particular, estimates of anticipated contract
costs and revenues utilized in the earnings recognition process, that affect
the reported amounts in the consolidated financial statements and
accompanying notes. Actual results could differ from these estimates.
Reclassifications.
- -----------------
Certain reclassifications have been made to prior year amounts to conform to
current year classifications.
2. ACQUISITIONS On May 29, 1997, the Corporation entered into an agreement
with the shareholders of Analytical Systems Engineering Corporation (ASEC) to
acquire all the outstanding capital stock of ASEC and its subsidiaries. The
transaction was consummated on June 18, 1997, and ASEC operations have been
included in the consolidated financial statements since that date. ASEC
provides systems engineering and engineering services primarily to the
Department of Defense and certain intelligence agencies, both domestically and
abroad.
The consideration paid was $51 million, 90% in cash and 10% in common stock of
Computer Data Systems, Inc. The Corporation financed the cash portion (see
Note 6) and issued 185,455 shares of stock, valued for purposes of this
transaction at $27.50 per share. This transaction has been accounted for under
the purchase method of accounting, wherein approximately $39.5 million in
goodwill was recognized by the Corporation after recording approximately $5.4
million in other intangibles (representing the estimated fair market value of
certain assets acquired) and other purchase adjustments necessary to allocate
the purchase price to the fair value of assets acquired and liabilities
assumed. Goodwill is being amortized on a straight-line basis over a 30-year
period and the other intangibles are being amortized over periods ranging from
2 to 17 years.
The following unaudited pro forma summary presents information as if the
acquisition of ASEC had occurred at the beginning of the earliest period
presented. The pro forma information is provided for information purposes
only. This pro forma information does not purport to be indicative of what
would have occurred had the acquisition been made as of that date or of results
which might occur in the future.
<TABLE>
Pro Forma Information (Unaudited)
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenue $ 370,656,400 $ 298,197,400
Net income $ 12,476,600 $ 7,932,000
Earnings per share $ 1.96 $ 1.30
</TABLE>
In November 1996, the Corporation combined its student loan guaranty agency
services business with that of InTuition, Inc. and formed a new commercial
company called GuaranTec, LLP, of which the Corporation is a 51% owner and
InTuition 49% owner. In connection with the formation of this company, the
Corporation paid $1.9 million in cash, stock, and assets to InTuition and
GuaranTec. Of this amount, InTuition received 20,000 shares of the
Corporation's stock valued at $24.30 per share, or $486,000 in the aggregate,
along with $300,000 in cash, in return for certain InTuition assets, which were
then contributed to GuaranTec by the Corporation. The Corporation and
InTuition also contributed their interests in their licensing agreements and
<PAGE>
guaranty agency servicing contracts and certain related assets and liabilities
to GuaranTec. The assets acquired have been accounted for under the purchase
method of accounting, wherein approximately $.8 million was recorded on the
books of GuaranTec as an intangible asset for the fair value of the acquired
licensing agreements and servicing contracts. This asset is being amortized
over its estimated remaining component life, which is two years for the
licensing agreements and five years for the contracts.
The financial statements of GuaranTec from date of acquisition are included in
the consolidated financial statements of the Corporation, with InTuition's
portion included as minority interest.
3. ACCOUNTS RECEIVABLE The components of accounts receivable are as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Amounts billed:
U.S. government $ 45,881,400 $ 34,008,900
Commercial and state governments 3,964,800 507,800
------------- --------------
49,846,200 34,516,700
------------- --------------
Amounts unbilled:
Amounts currently billable 33,691,800 23,522,000
Excess of actual indirect costs over
amounts currently billable under
cost reimbursable contracts 1,662,800 1,293,800
Contract retainages not currently billable 363,600 269,900
Fixed price work not currently billable 2,533,000 1,877,000
------------- --------------
38,251,200 26,962,700
------------- --------------
Total accounts receivable 88,097,400 61,479,400
Allowance for doubtful accounts (180,500) (200)
------------- --------------
$ 87,916,900 $ 61,479,200
============= ==============
</TABLE>
To the extent not currently billable at June 30, 1997 and 1996, unbilled costs
and accrued profits above are billable upon delivery or acceptance of services,
upon receipt of contract funding, or upon contract completion. Of the above
unbilled costs and accrued profits at June 30, 1997, approximately $1,922,100
are not expected to be billed and collected within one year.
<PAGE>
4. LAND, BUILDING, AND EQUIPMENT
The components of land, building, and equipment are as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Land $ 2,200,000 $ 2,200,000
Furniture 5,141,500 4,652,400
Computer equipment and software 24,218,600 21,324,200
Building and improvements 15,401,400 15,121,900
------------- --------------
46,961,500 43,298,500
Less accumulated depreciation
and amortization (16,193,700) (13,634,500)
------------- --------------
$ 30,767,800 $ 29,664,000
============= ==============
</TABLE>
5. OTHER ASSETS The Corporation maintains a program to provide senior
executives with additional life insurance coverage, supplementing the coverage
available under the Corporation's group insurance plan. Under the program,
officers participate with the Corporation in the payment of premiums. The
Corporation has an interest in such policies to the extent of its accumulated
premium payments. At June 30, 1997 and 1996, accumulated premiums of
$1,049,400 and $951,300, respectively, were included in Other assets.
6. DEBT On June 18, 1997, the Corporation borrowed $50 million under a term
loan to finance the ASEC acquisition (see Note 2), of which $48 million remains
outstanding at June 30, 1997. Additionally, the Corporation entered into a $25
million, three-year revolving line of credit available at June 30, 1997 for
working capital, future acquisition, and general corporate needs. Both credit
facilities bear interest at the Corporation's option of prime rate, floating
rate, or a variable rate based on LIBOR for 30, 60, 90, 180, or 360 days, plus
a margin that can vary from 62.5 basis points to 115 basis points. The
applicable margin is determined by the ratio of outstanding debt to the
Corporation's earnings before interest, taxes, depreciation, and amortization
(EBITDA), calculated on a quarterly basis. The weighted average interest rate
in effect for the period June 18, 1997 to June 30, 1997 was 6.52%. There are
unused commitment fees on the available revolving line ranging from 9 to 23
basis points per year, also depending on the ratio of debt to EBITDA.
The term loan is repayable quarterly, for a five-year period, based on a seven-
year straight-line amortization schedule, with the remaining balance due in
June 2002. The revolving line matures in June 2000. The term loan and any
revolving loans are unsecured, except that 65% of the stock of CDSI Argentina,
S.A., the Corporation's wholly-owned foreign subsidiary, is pledged as col-
lateral.
Prior to closing on the three-year revolving line of credit in June 1997, the
Corporation had an $8 million revolving line of credit and a $14 million demand
facility, both of which were replaced by the three-year revolving line of
credit. Interest rates on these unsecured facilities were at LIBOR plus 110 to
120 basis points.
Interest expense, included in Interest income and expense, net, was $145,200,
$185,400, and $1,600 in 1997, 1996, and 1995, respectively.
<PAGE>
7. STOCK OPTIONS In November 1991, the stockholders approved a long-term
incentive plan that provides for the granting of incentive awards to various
employees and officers of the Corporation. The plan also provides for the
annual grant of nonqualified options for 2,000 shares to each of the non-
employee directors. The employee options are exercisable in cumulative annual
installments after one year and before the end of the fifth year. The non-
employee directors' options are fully exercisable one year after grant and
before the end of the fifth year. At June 30, 1997, options to purchase 96,500
share are exercisable. Exercise prices of options awarded in all years were
equal to the market price of the stock on the date of grant. Under APB Opinion
No. 25, because the exercise price of the Corporation's employee stock options
equals the market price of the stock on the date of grant, no compensation
expense is recognized. The following table summarizes the changes in the number
of common shares under the 1991 option plan during fiscal years 1997, 1996, and
1995.
1991 Plan
- ---------
<TABLE>
<CAPTION> Weighted
Number Per Share Average
of Shares Option Price Exercise Price
--------- ------------ --------------
<S> <C> <C> <C>
Outstanding Balance at June 30, 1994 428,267 $ 4.19 - 8.75 $ 7.31
Granted 144,900 11.50 - 14.13 13.99
Exercised (29,600) 4.19 - 8.75 5.39
Expired (6,000) 8.75 - 14.13 11.44
-------- ---------------- --------
Outstanding Balance at June 30, 1995 537,567 4.19 - 14.13 8.56
Granted 219,900 10.50 - 21.75 13.19
Exercised (148,050) 4.19 - 14.13 6.17
Expired (29,700) 4.19 - 14.13 8.98
-------- ---------------- --------
Outstanding Balance at June 30, 1996 579,717 4.19 - 21.75 10.91
Granted 186,500 22.00 - 35.50 23.45
Exercised (223,917) 4.19 - 21.75 8.86
Expired (110,300) 8.75 - 22.00 13.42
-------- ---------------- --------
Outstanding Balance at June 30, 1997 432,000 $ 5.73 - 35.50 $ 16.66
======== ================ ========
</TABLE>
<PAGE>
A summary of the Corporation's stock option activity and related information
for the year ended June 30, 1997 follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------
Weighted Average
Weighted Remaining Weighted
Range of Number of Average Contractual Number of Average
Exercise Price Options Exercise Price Life Options Exercise Price
-------------- ------- -------------- ---- ------- --------------
<S> <C> <C> <C> <C> <C>
$ 5.00 - $15.00 235,000 $11.14 2 Years 96,500 $10.52
$ 15.00 - $25.00 168,500 $21.95 4 Years
Greater than $25 28,000 $31.69 4 1/2 Years
------- ------ ----------- ------ ------
Total 432,000 $16.69 3 Years 96,500 $10.52
======= ====== =========== ====== ======
</TABLE>
Pro forma information regarding net income and earnings per share as required
by SFAS No. 123 has been determined as if the Corporation had accounted for its
employee stock options under the fair value method. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for both 1997 and 1996:
risk-free interest rate of 6.14%, dividend yield of .40%, volatility factor
related to the expected market price of the Corporation's common stock of .50
and weighted-average expected option life of three years. The weighted average
fair values of options granted during fiscal year 1997 and 1996 were $9.07 and
$5.10, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Therefore, the pro
forma results for 1997 and 1996 presented below include up to 33% of the total
pro forma expense for options awarded in that year depending on the date of
grant.
The Corporation's pro forma information follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Pro forma net income $ 10,877,000 $ 9,607,900
Pro forma earnings per share:
Primary $1.76 $1.62
Fully diluted $1.76 $1.59
</TABLE>
8. EMPLOYEE INCENTIVE PLANS The Corporation has incentive compensation plans
for officers and certain key employees. The incentive compensation plans'
formulas are reviewed and approved annually by the Board of Directors.
Operations were charged $1,823,900, $2,742,200, and $2,546,600 to fund the
incentive compensation plans for the years ended June 30, 1997, 1996, and 1995,
respectively. Under the terms of the incentive compensation plans, officers
may elect to defer payment of all or a portion of the amount awarded under the
plan until retirement or termination of employment with the Corporation. The
deferred amounts earn interest, compounded quarterly, at the greater of the
current 13-week Treasury bill rate effective the beginning of each quarter, or
7%.
<PAGE>
The Corporation has defined contribution retirement plans for eligible
employees. Contributions to the plans are discretionary as determined by the
Board of Directors. Operations were charged $2,285,800, $2,079,300, and
$1,974,500 to fund the plans in 1997, 1996, and 1995, respectively. Under
terms of the plans, contributions to certain long-term employees are made to a
non-qualified supplemental deferred retirement account.
9. PROVISION FOR INCOME TAXES The income tax provision is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal income taxes:
Current $ 6,729,300 $ 5,446,000 $ 4,210,500
Deferred (454,200) (189,300) 408,600
---------- ---------- ----------
Total federal income taxes 6,275,100 5,256,700 4,619,100
---------- ---------- ----------
State income taxes:
Current 1,227,200 1,007,100 467,800
Deferred (82,800) (35,000) 45,400
----------- ---------- ----------
Total state income taxes 1,144,400 972,100 513,200
----------- ---------- ----------
Total $ 7,419,500 $ 6,228,800 $ 5,132,300
========== ========== ==========
</TABLE>
Income tax payments were $7,828,500 in 1997 and $5,704,400 in 1996.
The difference between the tax provision and the amount computed by applying
the federal statutory income tax rate to income before income taxes is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income tax computed at
federal statutory rate $ 6,501,600 $ 5,599,800 $ 4,610,300
Add:
State income tax, net
of federal tax benefit 917,900 629,000 522,000
---------- ---------- ----------
Total income taxes $ 7,419,500 $ 6,228,800 $ 5,132,300
========== ========== ==========
Effective tax rate 39.9% 38.9% 38.9%
========== ========== ==========
</TABLE>
Deferred tax assets and liabilities on the balance sheets reflect the net tax
effect of temporary differences between carrying amounts of assets and
liabilities for financial statement purposes and the amounts used for income
tax purposes. The Corporation believes a valuation allowance is not required.
<PAGE>
The components of the Corporation's deferred tax assets and liabilities at
June 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 1,969,800 $
Accrued vacation benefits 1,265,200 618,100
Deferred compensation 1,836,000 1,760,000
Argentina operations 1,085,200 340,000
Stock options 525,000 779,800
Other 671,000 119,200
----------- ------------
Total deferred tax assets 7,352,200 3,617,100
----------- ------------
Deferred tax liabilities:
Depreciation and amortization (4,386,100) (2,085,000)
Annuity interest (431,800) (400,700)
Interest in partnership (908,900)
Other (274,900) (289,000)
----------- ------------
Total deferred tax liabilities (6,001,700) (2,774,700)
----------- ------------
Net deferred tax asset $ 1,350,500 $ 842,400
=========== ============
</TABLE>
The net operating loss carryforward is $4.5 million and relates to the
acquisition of ASEC in June of 1997 (see Note 2). The carryforward will expire
in 2011 and is subject to both the separate return year and change in ownership
limitations. The limitations are not expected to materially affect the
Corporation's ability to use the loss carryforward.
10. BUSINESS SEGMENT INFORMATION The Corporation operates in two business
segments: Professional Services and Processing Services. Professional Services
encompasses consulting, systems development, and programming. Processing
Services includes a variety of activities primarily concerned with the
processing of data for customers requiring computer-based support services and
equipment and software sales. Services range from the complete processing and
preparation of reports from data supplied by customers, including related
programming support, to individual specialized services such as data entry.
<PAGE>
Financial information by business segment for the years ended June 30 is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Professional Services $ 171,828,600 $ 163,433,700 $ 175,851,500
Processing Services 142,757,800 99,361,700 54,879,000
Intersegment (10,194,500) (11,696,700) (10,063,500)
------------ ------------ ------------
Total Revenues $ 304,391,900 $ 251,098,700 $ 220,667,000
============ ============ ============
Income from operations:
Professional Services $ 6,182,200 $ 9,462,600 $ 11,381,500
Processing Services 12,542,500 6,267,500 1,381,700
------------ ----------- ------------
18,724,700 15,730,100 12,763,200
Interest income and expense, net 51,400 267,900 420,000
Minority interest (200,200)
------------ ------------ ------------
Income Before Income Taxes $ 18,575,900 $ 15,998,000 $ 13,183,200
============ ============ ============
Identifiable assets:
Professional Services $ 114,368,200 $ 48,432,400 $ 42,293,200
Processing Services 46,318,100 36,742,200 27,809,700
Corporate assets 26,763,700 17,879,300 14,820,100
------------ ------------ ------------
Total Assets $ 187,450,000 $ 103,053,900 $ 84,923,000
============ ============ ============
Depreciation and amortization expense:
Professional Services $ 395,300 $ 200,900 $ 86,000
Processing Services $ 2,728,900 $ 2,492,600 $ 2,165,800
Corporate assets $ 1,119,700 $ 726,000 $ 685,700
Capital expenditures (including businesses
acquired):
Professional Services $ 48,034,600 $ 5,193,100 $ 3,472,800
Processing Services $ 3,574,200 $ 3,714,500 $ 2,882,800
Corporate assets $ 394,300 $ 822,000 $ 627,200
</TABLE>
For the years ended June 30, 1997, 1996, and 1995, substantially all
Professional Services revenues and 96%, 93%, and 89%, respectively, of
Processing Services revenues were derived from federal government agencies.
Professional Services revenues from one federal government agency under various
contracts were $100,481,220 and $93,249,900 in 1997 and 1996, respectively.
Processing Services revenues from one government agency were $102,910,190 and
$67,376,900 in 1997 and 1996, respectively. Professional Services revenues
from two government agencies under various contracts were $89,117,600 and
$46,460,400 in 1995. Processing Services revenues from one government agency
were $25,642,500 in 1995. No other customers account for 10% or more of total
revenues. Intersegment revenues represent primarily unit-price costs billed
for general corporate purposes.
<PAGE>
11. COMMITMENTS AND CONTINGENCIES The Corporation leases office and warehouse
space and equipment under agreements that provide for minimum aggregate rentals
through 2002 as follows:
<TABLE>
<CAPTION>
Fiscal Year Minimum Aggregate Rentals
----------- -------------------------
<S> <C>
1998 $ 2,758,700
1999 1,853,200
2000 1,637,200
2001 1,029,600
2002 524,800
----------
Total $ 7,803,500
==========
</TABLE>
In addition, the office space leases provide for escalation and pass-through of
increases in operating expenses and renewal options.
Government contracts are subject to review and audit by various governmental
authorities in the normal course of the Corporation's business. Cost audits
have been completed through fiscal 1995, with the exception of ASEC operations,
which have been audited through calendar year 1993. In management's opinion,
any such reviews and the results of cost audits for subsequent fiscal years
will not have a material effect on the Corporation's financial position or
results of operations.
The Corporation is a party to various legal proceedings arising in the normal
course of business. Management believes that the outcome of these proceedings
will not have a material adverse effect on the Corporation.
12. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF INDEPENDENT AUDITORS' REPORT
On September 20, 1997, the Corporation signed a definitive agreement pursuant
to which a wholly-owned subsidiary of Affiliated Computer Services, Inc.
("ACS") will be merged with and into the Corporation. Under the terms of the
Agreement and Plan of Merger (the "Agreement"), stockholders of the Corporation
will receive 1.759 shares of ACS Class A Common Stock for each share of the
Corporation's Common Stock. The closing price of ACS Class A Common Stock on
September 19, 1997, the last trading day prior to the public announcement of
the transaction, was $29.375 per share.
The transaction is structured to be tax-free to the Corporation's stockholders
and accounted for as a pooling of interests. The merger is subject to
regulatory approvals and certain other conditions, including without limita-
tion, approval of the merger by a two-thirds vote of the Corporation's stock-
holders, approval of the issuance of additional shares of ACS Class A Common
Stock by ACS' stockholders, and confirmation from the independent accountants
for ACS and the Corporation that the transaction shoule be accounted for as a
pooling of interests. With respect to the stockholder votes, all the directors
and certain executive officers of both companies have agreed to vote their
stock in favor of the transaction. In the case of ACS, such directors and
officers have sufficient voting power to satisfy the stockholder vote condition
in the Agreement. The directors and officers of the Corporation hold stock
representing approximately ten percent of the outstanding shares.
<PAGE>
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997 Quarters
--------------------------------------------------------------------
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenues $ 70,073,200 $ 75,155,300 $ 75,832,200 $ 83,331,200
Income before
income taxes 4,632,400 4,211,700 4,514,400 5,217,400
Net income 2,785,700 2,546,200 2,699,600 3,124,900
Net income per
common share 0.46 0.41 0.43 0.50
<CAPTION>
1996 Quarters
--------------------------------------------------------------------
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenues $ 59,873,000 $ 61,183,200 $ 64,199,300 $ 65,843,200
Income before
income taxes 3,690,300 3,469,800 4,332,200 4,505,700
Net income 2,251,000 2,111,800 2,649,300 2,757,100
Net income per
common share 0.38 0.36 0.44 0.47
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
(a) Identification of directors
---------------------------
The Board of Directors of the Corporation is comprised of eight
directors. One of the directors elected at the 1996 Annual Meeting, Elmer B.
Staats, resigned his position in March 1997. In June 1997, upon the closing of
the Corporation's acquisition of Analytical Systems Engineering Corporation,
James W. Henderson was elected to fill the vacancy. The names of the directors
and certain information about them are set forth below. Except as indicated,
the principal occupation for the past five years of each nominee is as listed
below.
<TABLE>
<CAPTION>
PRINCIPAL
NAME OCCUPATION ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DR. RAYMOND B. HOXENG Retired Prior to his retirement in 1982,
Director since 1968 Tampa, FL Dr. Hoxeng was involved in university
Age 78 and hospital administration. His
earlier career was distinguished by
accomplishments in industrial
engineering and research.
CLIFFORD M. KENDALL Chairman of From 1970 to 1991, Mr. Kendall
Director since 1970 the Board served as Chief Executive Officer
Age 66 of the Corporation of the Corporation. Mr. Kendall
Member-Executive Committee currently serves as the Chairman of
the Board of Objective
Communications, Inc.
HILLIARD W. PAIGE Retired Mr. Paige is a former President of
Director since 1974 Washington, DC General Dynamics Corporation.
Age 77 Mr. Paige serves as a Director of The Member-
Executive, Atlantic Council of the United States,
Audit/Compensation Committees Washington, D.C.
WYATT D. TINSLEY Executive Mr. Tinsley serves as the
Director since 1988 Vice President of Corporation's Chief Financial
Age 54 the Corporation Officer.
<PAGE>
<CAPTION>
PRINCIPAL
NAME OCCUPATION ADDITIONAL INFORMATION
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PAUL R. IGNATIUS Retired Mr. Ignatius is a former Secretary
Director since 1991 Washington, DC of the Navy. From 1987 to
Age 76 December 1993, Mr. Ignatius
Member-Executive, served as the Chairman of the
Audit/Compensation Committees Board, Logistics Institute, Bethesda, MD.
JAMES A. PARKER President, Mr. Parker serves as President of
Director since 1991 Jay Parker & the Lincoln Institute for Research
Age 60 Associates, & Education, Inc., a non-profit
Member-Executive, Washington, DC public policy organization in
Audit/Compensation Committees (International Washington, D.C.
Consulting Firm)
PETER A. BRACKEN Chief Executive Mr. Bracken has served as Chief
Director since 1996 Officer and Executive Officer and President
Age 56 President of the since May 1996. Prior to joining
Corporation CDSI, Mr. Bracken served as President
of the Information Sciences Group of
Lockheed Martin Corporation.
JAMES W. HENDERSON President, Mr. Henderson has served as
Director since 1997 Analytical Systems President of ASEC since 1978.
Age 54 Engineering Corporation ASEC became a wholly-owned
(ASEC), Burlington, MA subsidiary of CDSI in June 1997.
</TABLE>
(b) Identification of executive officers
------------------------------------
The names of the Corporation's executive officers and certain
information about them are set forth below:
CLIFFORD M. KENDALL, age 66, has been with CDSI since its founding in 1968 and
is currently the Chairman of the Board of Directors. From 1970 to 1991, Mr.
Kendall served as Chief Executive Officer of the Corporation.
<PAGE>
PETER A. BRACKEN, age 56, joined the Corporation in May 1996 as Chief Executive
Officer and President. From 1986 to 1996, Mr. Bracken was employed by Martin
Marietta Corporation (now Lockheed Martin Corporation), most recently as
President of the Information Sciences Group. Before joining Martin Marietta in
1986, Mr. Bracken served as Director of Mission Operations and Data Systems for
NASA's Goddard Space Flight Center.<PAGE>
WYATT D. TINSLEY, age 54, is currently
Executive Vice President and the Corporation's Chief Financial Officer. Mr.
Tinsley joined CDSI in 1969.
JAMES W. HENDERSON, age 54, is currently President of Analytical Systems
Engineering Corporation, a wholly-owned subsidiary of the Corporation ("ASEC").
Mr. Henderson has been with ASEC since its founding in 1969 and has served as
President since 1978.
MARY ANN MAYHEW, age 45, is currently President of the CDSI Information
Technology Solutions Company, a division of the Corporation ("CDSI ITS"). Ms.
Mayhew joined CDSI in 1980.
THOMAS A. GREEN, age 51, is currently President of the CDSI Business
Applications Solutions Company, a division of the Corporation ("CDSI BAS").
Mr. Green joined CDSI in 1976.
ROBERT L. VESCHI, age 57, is currently President of CDSI Solutions, Inc., a
wholly-owned subsidiary of the Corporation, which began operations in July
1997. Prior to joining CDSI, Mr. Veschi was employed by Lockheed Martin
Corporation, most recently as President of its Integrated Business Solutions
unit.
EDWARD D. JOHNSON, age 43, is currently Senior Vice President of CDSI ITS.
Mr. Johnson joined CDSI in 1981.
JOHN C. KEZER, age 47, joined the Corporation in February 1997 as Treasurer and
Secretary of the Corporation. From 1995 to 1997, Mr. Kezer was Chief Financial
Officer of American Home Landscape, Inc. From 1992 to 1995, he was Chief
Financial Officer of Home Owners Warranty Corporation.
(c) Section 16(a) beneficial ownership reporting compliance
-------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Corporation's directors and executive officers to file reports of
ownership and changes of ownership with the SEC and the Nasdaq Stock Market.
The Corporation believes that during the period from July 1, 1996 through June
30, 1997, its directors and executive officers complied with all applicable
Section 16(a) filing requirements.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
(a) Summary compensation table
--------------------------
The following table reports the compensation paid or accrued during
the three fiscal years ended June 30, 1997, for each of the five most highly
compensated CDSI executive officers.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
YEAR OTHER SECURITIES
NAME AND ENDED ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION 6/30 SALARY BONUS COMPENSATION OPTIONS (#) COMPENSATION(1)
- ------------------ ---- ------ ----- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLIFFORD M. KENDALL 1997 $200,000 $114,587 ----- 15,000 $ 15,451
Chairman of the Board 1996 $178,769 $142,000 ----- 8,000 $ 17,290
1995 $148,000 $148,000 ----- 6,000 $ 16,259
PETER A. BRACKEN 1997 $300,000 $173,690 -0- $ 3,750
Chief Executive Officer 1996 $ 28,846 N/A $21,750(2) 40,000 $ 361
and President
WYATT D. TINSLEY 1997 $160,000 $ 86,845 ----- 12,000 $ 11,378
Chief Financial Officer 1996 $149,385 $118,500 ----- 12,000 $ 11,304
1995 $131,846 $130,000 ----- 6,000 $ 10,336
MARY ANN MAYHEW 1997 $175,000 $100,264 ----- 15,000 $ 11,318
President, CDSI ITS 1996 $149,038 $118,500 ----- 12,000 $ 10,142
1995 $122,654 $121,000 ----- 6,000 $ 9,355
THOMAS A. GREEN 1997 $175,000 $ 94,987 ----- 15,000 $ 10,890
President, CDSI BAS 1996 $149,077 $118,500 ----- 12,000 $ 10,533
1995 $123,077 $121,000 ----- 6,000 $ 8,954
</TABLE>
_________________________
(1) Amounts represent: (a) Corporation contributions to qualified and
nonqualified employee retirement plans (including matching contributions
to the 401(k) Savings Plan) and (b) Split Dollar Life Insurance. The
values for two component amounts for each named executive officer are as
follows for the fiscal year ended June 30, 1997: Mr. Kendall,
(a) $10,567 and (b) $4,884; Mr. Bracken, (a) $3,750 and (b) $0; Mr.
Tinsley, (a) $10,505 and (b) $873; Ms. Mayhew, (a) $10,828 and (b) $490;
and Mr. Green, (a) $10,599 and (b) $291.
(2) Mr. Bracken joined the Corporation as President and CEO on May 13, 1996.
Amount shown represents fees paid to Mr. Bracken for consulting services
provided between April 10 and May 13.
<PAGE>
(b) Option grants in last fiscal year
---------------------------------
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
PERCENT OF ASSUMED ANNUAL RATES OF
TOTAL OPTIONS EXERCISE STOCK PRICE APPRECIATION FOR
OPTIONS GRANTED TO OR BASE OPTION TERM(4)
GRANTED EMPLOYEE IN PRICE EXPIRATION
NAME (#) FISCAL YEAR(1) ($/SHR)(2) DATE(3) 5%($) 10%($)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Clifford M. Kendall 15,000 8.0% $22.00 07/16/01 $ 91,200 $ 201,450
Wyatt D. Tinsley 12,000 6.4% $22.00 07/16/01 $ 72,960 $ 161,160
Mary Ann Mayhew 15,000 8.0% $22.00 07/16/01 $ 91,200 $ 201,450
Thomas A. Green 15,000 8.0% $22.00 07/16/01 $ 91,200 $ 201,450
</TABLE>
______________________________
(1) Stock options exercisable into 186,500 shares of Common Stock were granted
to all employees and non-employee directors of the Corporation as a group
during the fiscal year ended June 30, 1997.
(2) The exercise price is the closing market price on the date of grant.
(3) Options vest and become exercisable in annual installments of 25% of
shares covered by each grant commencing on the first anniversary of the
grant date, and expire in five years from the grant date.
(4) The dollar amounts under the potential realizable values columns use the
5% and 10% rates of appreciation permitted by the SEC, and are not
intended to forecast actual future appreciation in the stock price.
Actual gains, if any, on stock option exercises are dependent on the
future performance of the Corporation's Common Stock. There can be no
assurance the amounts reflected in this table will be achieved. The
assumed rates are compounded annually to the full five-year term of the
options.
(c) Aggregate option exercises in last fiscal year and year-end option
------------------------------------------------------------------
values
- ------
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
OPTIONS EXERCISED IN FY 1997 UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT 6/30/97 AT 6/30/97 (2)
---------------------------- ---------- --------------
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($)(1) UNEXERCISABLE UNEXERCISABLE
---- ----------- -------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
Clifford M. Kendall 13,000 $ 168,500 -0- / 26,000 -0- $ 303,125
Peter A. Bracken 10,000 $ 5,000 -0- / 30,000 -0- $ 225,000
Wyatt D. Tinsley 8,400 $ 158,025 20,000 / 26,000 $ 410,375 $ 335,375
Mary Ann Mayhew 6,000 $ 121,750 8,000 / 29,000 $ 140,375 $ 357,125
Thomas A. Green 5,850 $ 126,750 10,500 / 28,500 $ 191,625 $ 346,875
</TABLE>
______________________________
(1) Value is calculated based on the difference between the option price and
the average of the high and low market price of the Common Stock on the
date of the exercise multiplied by the number of shares to which the
exercise relates.
(2) The closing price for the Corporation's Common Stock as reported by the
Nasdaq Stock Market on June 30, 1997 was $29.25. Value is calculated on
the basis of the difference between the option exercise price and $29.25,
multiplied by the number of shares of Common Stock underlying the option.
<PAGE>
(d) Report of Audit/Compensation Committee on Executive Compensation
----------------------------------------------------------------
The Audit/Compensation Committee of the Board of Directors, which is
composed of outside directors of the Corporation, is responsible for developing
and recommending to the Board of Directors the Corporation's general
compensation policies. The Committee approves the compensation plans for the
Corporation's executive officers, including the Chief Executive Officer (CEO),
and determines the compensation to be paid to the executive officers. The
Audit/Compensation Committee also is responsible for the granting of stock
options to the executive officers and the administration thereof.
The Audit/Compensation Committee has furnished the following report for
fiscal year 1997:
Compensation Philosophy.
- -----------------------
The following general principles have been adopted by the Committee and
represent the guidelines upon which compensation decisions are based.
Executive compensation is designed to:
Provide a competitive total compensation package that enables the
Corporation to attract and retain key executives who demonstrate
outstanding performance, technical expertise, business responsibility,
personal integrity, and professionalism.
Encourage cooperation and coordination among executives and motivate them
to meet the Corporation's long-term business objectives and strategy.
Provide variable compensation that is directly linked with the financial
performance of the Corporation, the achievement of increased stockholder
value, and individual performance.
Executive Officer Compensation.
- ------------------------------
The Corporation's executive compensation program consists of three main
components: (i) annual base salary, (ii) annual incentive cash bonus, and
(iii) equity participation. The executive officers, including the CEO, are
eligible for the same benefits, including group health and life insurance and
participation in the Corporation's Employee Profit-Sharing Retirement Plan
and 401(k) Savings Plan, as are available generally to the Corporation's
professional staff. The Corporation also provides whole life "split dollar"
insurance policies on the lives of certain of the executive officers. Under
these policies, in the event of an executive's death, the Corporation is a
beneficiary to the extent of the amount of its premiums paid, with any
remaining amounts payable to the officers' estates. The executives may
elect, under certain circumstances, to convert the policy to an annuity based
on the face amount of the policy less premiums paid.
The compensation policies that are administered by the Committee are
further explained below:
<PAGE>
Base Salary - Base salaries are competitive, but not excessive, assuring the
Corporation the ability to attract and retain qualified officers. Base pay
levels are reviewed annually and established through comparisons with other
professional services firms of similar size and complexity.
Annual Incentive - Executive officers participate as a team in an incentive
compensation program with awards based on the attainment of predetermined
financial targets set annually by the Committee and individual performance. For
1997, the targets were based on achieving certain Corporation pre-tax levels of
income. The objective is to reward executives for meeting the predetermined
targets and to incentivize them to achieve above-average earnings by attaining
superior financial results for the Corporation and the stockholders.
Equity Participation - Nonqualifying stock option awards are granted
annually based on performance and serve as an incentive to enhance stockholder
value. Options are issued to executive officers, (as well as other line
officers and key employees) who have substantial responsibility for the manage-
ment and growth of the Corporation. Options granted are evidenced by an agree-
ment setting forth the number of shares awarded, and such other terms
and conditions as determined by the Committee. Options generally vest and
become exercisable in annual installments of twenty-five percent of the
shares covered by each grant commencing on the first anniversary of the grant
date and expire five years from the grant date. In setting the size of grants
for the CEO and other executives, the Committee considers their position,
individual performance, stock options presently held, and the total number of
shares available for issuance under the Corporation's stock option plan.
Compensation of the CEO.
- -----------------------
The annual salary for the CEO is established by the Audit/Compensation
Committee using the same criteria as discussed above for the executive
officers. The CEO's annual incentive compensation payment is determined by
the Committee based entirely on targets for the Corporation's pre-tax income.
The amount of stock options granted to the CEO are intended to align the
future rewards of the CEO with the interests of the stockholders.
Peter A. Bracken has served as CEO and President of the Corporation since
May 1996. Mr. Bracken's salary for fiscal year 1997 was $300,000. Mr.
Bracken's cash award for fiscal year 1997 (shown in the Bonus column of the
Summary Compensation Table) was determined based on the Corporation's
performance with respect to the targets for 1997 pre-tax profits. Mr. Bracken
was also awarded stock options upon joining the Corporation in May 1996. In
June 1997, the Committee determined it would be in the best interests of the
Corporation and its stockholders to accelerate the vesting of Mr. Bracken's
unexercised options. As amended, options for 30,000 shares of CDSI Common
Stock granted to Mr. Bracken in May 1996 will be fully exercisable as of
May 13, 1998.
<PAGE>
Tax Compliance Policy.
- ---------------------
Section 162(m) of the Internal Revenue Code generally limits to $1,000,000
the tax deductible compensation paid to the CEO and to each of the four
highest-paid executives employed as executive officers on the last day of the
fiscal year. However, the limitation does not apply to performance-based
compensation provided certain conditions are satisfied. The Committee does
not anticipate that in the foreseeable future any officer of the Corporation
will earn compensation in excess of $1 million that would not qualify as
performance-based compensation. Therefore, the Committee has not yet
determined a policy with respect to Section 162(m). The Committee intends
to review the implications of Section 162(m) when it becomes more relevant with
respect to the Corporation's executive compensation policies.
The Audit/Compensation Committee
Hilliard W. Paige, Chairman
Paul R. Ignatius
James A. Parker
(e) Compensation of directors
-------------------------
Directors who are employees receive no additional compensation for
serving as directors. All non-employee directors receive fees for each meeting
of the Board of Directors they attend, and those non-employee directors who
also serve as members of the Executive and Audit/Compensation Committees of the
Board of Directors receive a monthly retainer. These fees were increased by
the Board of Directors effective February 1, 1997. Dr. Hoxeng receives travel
expenses in addition to $2,200 per Board meeting attended ($8,800 annually).
Messrs. Paige, Ignatius and Parker receive $1,200 per Board meeting attended
and a monthly retainer of $1,300 per month for services rendered as members of
the Executive and Audit/Compensation Committees ($20,400 annually).
Pursuant to the Corporation's 1991 Long-Term Incentive Plan (the
"Plan"), non-employee directors of the Corporation also are granted stock
options upon being named a director and thereafter on an annual basis. In the
fiscal year ended June 30, 1997, each non-employee director was granted options
to purchase 1,500 shares. The options become exercisable one year after the
date of grant and expire five years from the date of grant.
(f) Five-year stockholder return comparison
---------------------------------------
Set forth below is a chart comparing the cumulative stockholder
return on the Corporation's Common Stock, on an indexed basis, against the
cumulative total returns of the Nasdaq Stock Market - U.S. Index and the S&P
Computer Software and Services Index for the period of the Corporation's
last five fiscal years (June 30, 1992 = 100):
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
----------------------------------------
6/92 6/93 6/94 6/95 6/96 6/97
<S> <C> <C> <C> <C> <C> <C> <C>
Computer Data Sys Inc CDSI 100 183 269 217 443 586
NASDAQ STOCK MARKET (U.S.) INAS 100 126 127 169 218 265
S & P COMPUTERS (SOFTWARE & SERVIES) ICSF 100 148 167 260 347 577
</TABLE>
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Information with respect to certain stockholders
------------------------------------------------
The stockholders named in the following table are those known to
the Corporation to be the beneficial owners of 5% or more of the Corporation's
Common Stock. Unless otherwise indicated, the information is as of July 29,
1997. For purposes of this table, and as used elsewhere in this Proxy
Statement, the term "beneficial owner" means any person who, directly or
indirectly, has or shares the power to vote, or to direct the voting of a
security or the power to dispose, or to direct the disposition of, a security.
Except as otherwise indicated, the Corporation believes that each individual
owner listed below exercises sole voting and dispositive power over their
shares.
<TABLE>
<CAPTION> PERCENTAGE OF
AMOUNT OF BENEFICIAL OUTSTANDING
NAME AND ADDRESS OWNERSHIP (SHARES) COMMON STOCK
- ---------------- ------------------------------------------------------
<S> <C> <C>
FMR Corporation 623,600 (1) 9.93%
82 Devonshire Street
Boston, Massachusetts 02109
Calvin S. Koonce 445,106 (2) 7.09%
6229 Executive Boulevard
Rockville, Maryland 20852
Dimensional Fund Advisors, Inc. 371,400 (3) 5.92%
1099 Ocean Avenue
11th Floor
Santa Monica, California 90401
Avenir Corporation 342,800 (4) 5.46%
1725 K Street, N.W.
Suite 410
Washington, D.C. 20006
</TABLE>
__________________________________
(1) As reported on Schedule 13G, dated June 9, 1997. Includes sole
dispositive power over 623,600 shares. FMR Corp. beneficially owns the
shares through its wholly-owned subsidiary, Fidelity Management and
Research Corporation ("Fidelity"), an investment adviser to several
investment companies registered under the Investment Corporation Act of
1940 that own shares of CDSI (the "Fidelity Funds"). The Board of
Trustees of the Fidelity Funds has the authority to vote or direct the
voting of the shares under written guidelines established by the Board of
Trustees of the Fidelity Funds. FMR Corp. through control of Fidelity,
and each of the Fidelity Funds has sole power to dispose of shares held by
the Funds. Mr. Edward C. Johnson, Chairman of FMR Corp., reported in the
statement on Schedule 13G sole dispositive power with respect to the
shares owned by FMR Corp.
(2) As reported on Schedule 13D, dated April 27, 1992. Number of shares
adjusted to reflect the August 1993, 2-for-1 stock split effected in the
form of a dividend.
(3) As reported on Form 13F-E, dated April 18, 1997.
(4) As reported on Schedule 13G, dated May 16, 1997.
<PAGE>
(b) Securities ownership of directors and executive officers
--------------------------------------------------------
The following table sets forth certain information regarding
beneficial ownership of the Corporation's Common Stock as of July 29, 1997 by:
(i) each director of the Corporation, (ii) each executive officer named in the
table above labeled Summary Compensation Table, and (iii) all directors and
executive officers of the Corporation as a group. This table is based on
information provided by the Corporation's directors and executive officers.
Unless otherwise indicated in the footnotes below, and subject to community
property laws where applicable, each of the named persons exercises sole voting
and dispositive power over his or her shares.
<TABLE>
<CAPTION>
NAME OF AMOUNT OF PERCENTAGE
BENEFICIAL BENEFICIAL OF OUTSTANDING
OWNER OWNERSHIP COMMON STOCK
- ----------- ---------- ---------------
<S> <C> <C>
Peter A. Bracken 11,000 *
Thomas A. Green 31,753 (1) *
James W. Henderson 111,011 1.76%
Raymond B. Hoxeng 33,500 (2) *
Paul R. Ignatius 12,700 (3) *
Clifford M. Kendall 269,536 (4) 4.29%
Mary Ann Mayhew 22,190 (5) *
Hilliard W. Paige 18,500 (6) *
James A. Parker 9,011 (7) *
Wyatt D. Tinsley 43,563 (8) *
All directors & executive
officers as a group
(13 persons) 587,705 (9) 9.36%
</TABLE>
____________________________
* Less than one percent
(1) Includes 20,250 shares subject to acquisition by the exercise of options
exercisable within 60 days.
(2) Includes 1,500 shares subject to acquisition by the exercise of options
exercisable within 60 days. Shares are held in two revocable trusts, one
in Dr. Hoxeng's name (20,000 shares) and one in the name of Dr. Hoxeng's
spouse (12,000 shares). Dr. Hoxeng and his spouse are co-trustees of both
trusts.
(3) Includes 6,500 shares subject to acquisition by the exercise of options
exercisable within 60 days.
(4) Includes 120,364 shares held by Mr. Kendall's spouse and 9,250 shares
subject to acquisition by the exercise of options exercisable within 60
days.
(5) Includes 18,250 shares subject to acquisition by the exercise of options
exercisable within 60 days.
(6) Includes 6,500 shares subject to acquisition by the exercise of options
exercisable within 60 days.
(7) Includes 6,500 shares subject to acquisition by the exercise of options
exercisable within 60 days.
(8) Includes 21,500 shares subject to acquisition by the exercise of options
exercisable within 60 days.
(9) Includes 105,125 shares subject to acquisition by the exercise of options
exercisable within 60 days.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Consolidated Financial Statements
------------------------------------------
Data submitted herewith under Item 8:
Report of Independent Auditors
Consolidated Statements of Income for the years ended June 30,
1997, 1996, and 1995
Consolidated Balance Sheets as of June 30, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended June 30,
1997, 1996, and 1995
Consolidated Statements of Changes in Stockholders' Equity for the
years ended June 30, 1997, 1996, and 1995
Notes to Consolidated Financial Statements for the years ended June
30, 1997, 1996, and 1995
Schedules otherwise required to be listed under Item 14(d) are
inapplicable and therefore have been omitted.
(b) Reports on Form 8-K
-------------------
On May 30, 1997, the Corporation filed a current Report on Form 8-K
pursuant to Item 5 thereof, reporting the execution of a definitive
agreement for the Corporation's acquisition of Analytical Systems
Engineering Corporation (ASEC).
On June 27, 1997, the Corporation filed a current Report on Form
8-K pursuant to Item 2 thereof, reporting the closing of the
Corporation's acquisition of ASEC. An amendment to this Form 8-K
was filed on August 29, 1997.
(c) Exhibits
--------
3.1 Restated Articles of Incorporation of the Corporation, as amended,
included as an exhibit to the Corporation's Form 10-Q Quarterly
Report for the three months ended December 31, 1988 filed February
14, 1989 are incorporated herein by reference.
3.2 By-laws of the Corporation, as amended, included as an exhibit to
the Corporation's Form 10-K Annual Report for the fiscal year ended
June 30, 1988 filed September 14, 1988 are incorporated herein by
reference.
10.1 Certificate of Limited Partnership and Limited Partnership Agree-
ment - M/GA Fields Roads Limited Partnership included as an exhibit
on Form 8 to Form 10-K filed March 1, 1989 are incorporated herein
by reference.
<PAGE>
10.2 1991 Long-Term Incentive Plan, as amended and restated as of July
12, 1994, included as an exhibit to the Corporation's Form 10-K
Annual Report for the fiscal year ended June 30, 1994, filed
September 28, 1994, is incorporated herein by reference.
10.3 Incentive Compensation Plan, restated as of July 1, 1994, included
as an exhibit to the Corporation's Form 10-K Annual Report for the
fiscal year ended June 30, 1994, filed September 28, 1994, is
incorporated herein by reference.
10.4 U.S. Department of Education Contract No. PM94017001 (portions of
which are subject to an Order for Confidential Treatment pursuant
to Rule 24b-2) included as an exhibit to the Form 10-Q/A filed
August 24, 1994 is incorporated herein by reference.
*11 Statement re: Computation of Per Share Earnings.
*21 Significant Subsidiaries of the Corporation.
*23 Consent of Ernst & Young LLP, Independent Auditors.
*27 Financial Data Schedule.
___________________
* = Filed herewith.
<PAGE>
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, in Rockville,
Maryland on September 29, 1997.
Computer Data Systems, Inc.
/s/ Peter A. Bracken
By ------------------------
Peter A. Bracken
President and Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Peter A. Bracken
- --------------------------- President and Chief Executive September 29, 1997
Peter A. Bracken Officer; Director
(Principal Executive Officer)
/s/ Wyatt D. Tinsley
- --------------------------- Executive Vice President and September 29, 1997
Wyatt D. Tinsley Chief Financial Officer;
Director
(Principal Financial and
Accounting Officer)
/s/ Clifford M. Kendall
- ---------------------------- Chairman of the Board of September 29, 1997
Clifford M. Kendall Directors; Director
<PAGE>
<CAPTION>
Signature Title Date
- --------- ----- ----
/s/ Raymond B. Hoxeng
- ---------------------------- Director September 29, 1997
Raymond B. Hoxeng
/s/ Hilliard W. Paige
- ---------------------------- Director September 29, 1997
Hilliard W. Paige
/s/ Paul R. Ignatius
- ---------------------------- Director September 29, 1997
Paul R. Ignatius
/s/ James A. Parker
- ---------------------------- Director September 29, 1997
James A. Parker
/s/ James W. Henderson
- ---------------------------- Director September 29, 1997
James W. Henderson
</TABLE>
<PAGE>
EXHIBIT INDEX
Page Number
-----------
11 Statement re: Computation of Per Share Earnings. 47
21 Significant Subsidiaries of the Corporation. 48
23 Consent of Ernst & Young LLP, Independent Auditors. 49
27 Financial Data Schedule. N/A
Exhibit 11
----------
STATEMENT RE: COMPUTATION OF
PER SHARE EARNINGS
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Average shares outstanding 6,006,449 5,756,344 5,735,892
Dilutive effect of stock
options computed by use
of treasury stock method 181,515 179,178 166,527
----------- ----------- ----------
Average common and common
equivalent shares
outstanding 6,187,964 5,935,522 5,902,419
=========== =========== ===========
Computation of Earnings
Per Share = Net Income
divided by Average common and
common equivalent shares $ 11,156,400 $ 9,769,200 $ 8,050,900
outstanding 6,187,964 5,935,522 5,902,419
------------ ----------- -----------
Earnings Per Share $ 1.80 $ 1.65 $ 1.36
============ ============ ===========
</TABLE>
Exhibit 21
----------
SIGNIFICANT SUBSIDIARIES OF THE CORPORATION
Active subsidiaries of Computer Data Systems, Inc. and their subsidiaries as
of June 30, 1997, are listed below. The names of certain subsidiaries, which
considered in the aggregate would not constitute a significant subsidiary, have
been omitted.
State or
Name Country of Organization
---- -----------------------
Analytical Systems Engineering Corporation Massachusetts
CDSI International, Inc. Delaware
CDSI Argentina, S.A. Argentina
Exhibit 23
----------
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 333-17739) and in Registration Statement (Form S-8 No. 33-47358)
pertaining to the Computer Data Systems, Inc. 1991 Long Term Incentive Plan of
our report dated July 28, 1997, with respect to the consolidated financial
statements of Computer Data Systems, Inc. included in the Annual Report (Form
10-K) for the year ended June 30, 1997.
/s/ Ernst & Young LLP
Washington, D.C.
September 26, 1997<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CDSI'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE
NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,330,000
<SECURITIES> 0
<RECEIVABLES> 87,916,900
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 101,586,200
<PP&E> 79,579,700
<DEPRECIATION> 4,243,900
<TOTAL-ASSETS> 187,450,000
<CURRENT-LIABILITIES> 56,506,700
<BONDS> 0
0
0
<COMMON> 626,000
<OTHER-SE> 78,307,600
<TOTAL-LIABILITY-AND-EQUITY> 187,450,000
<SALES> 0
<TOTAL-REVENUES> 304,391,900
<CGS> 0
<TOTAL-COSTS> 285,667,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 145,200
<INCOME-PRETAX> 18,575,900
<INCOME-TAX> 7,419,500
<INCOME-CONTINUING> 11,156,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,156,400
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.80
</TABLE>
