<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File No. 1-4850
COMPUTER SCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 95-2043126
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2100 East Grand Avenue
El Segundo, California 90245
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (310) 615-0311
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 [ ]
158,482,034 shares of Common Stock, $1.00 par value, were outstanding on
October 30, 1998.
<PAGE>
COMPUTER SCIENCES CORPORATION
Index to Form 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income, Second Quarter and
Six Months ended October 2, 1998 and September 26, 1997......... 3
Consolidated Condensed Balance Sheets,
October 2, 1998 and April 3, 1998............................... 4
Consolidated Condensed Statements of Cash Flows, Six Months
Ended October 2, 1998 and September 26, 1997.................... 5
Notes to Consolidated Condensed Financial Statements............... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders........... 16
Item 6. Exhibits and Reports on Form 8-K.............................. 17
2
<PAGE>
<TABLE>
PART I, ITEM 1. FINANCIAL STATEMENTS
COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (unaudited)
<CAPTION>
Second Quarter Ended Six Months Ended
---------------------- ----------------------
(In thousands except October 2, Sept. 26, October 2, Sept. 26,
per-share amounts) 1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $1,847,771 $1,578,824 $3,601,699 $3,067,574
---------- ---------- ---------- ----------
Costs of services 1,451,204 1,231,109 2,833,254 2,402,375
Selling, general and
administrative 172,650 148,269 335,474 286,882
Depreciation and
amortization 105,337 95,963 209,439 184,718
Interest expense 11,575 12,430 23,476 23,166
Interest income (2,542) (1,300) (5,926) (2,701)
Special charges (note A) 208,393
---------- ---------- ---------- ----------
Total costs and
expenses 1,738,224 1,486,471 3,395,717 3,102,833
---------- ---------- ---------- ----------
Income (loss) before taxes 109,547 92,353 205,982 (35,259)
Taxes on income (note A) 36,500 33,800 68,600 (146,400)
---------- ---------- ---------- ----------
Net income $ 73,047 $ 58,553 $ 137,382 $ 111,141
========== ========== ========== ==========
Earnings per share
(notes A and B):
Basic $ 0.46 $ 0.38 $ 0.87 $ 0.72
========== ========== ========== ==========
Diluted $ 0.45 $ 0.37 $ 0.85 $ 0.71
========== ========== ========== ==========
</TABLE>
[FN]
See accompanying notes.
3
<PAGE>
<TABLE>
COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
October 2, April 3,
(In thousands) 1998 1998
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 242,060 $ 274,688
Receivables 1,650,756 1,456,330
Prepaid expenses and other current assets 263,101 251,618
----------- -----------
Total current assets 2,155,917 1,982,636
----------- -----------
EXCESS OF COST OF BUSINESSES ACQUIRED
OVER RELATED NET ASSETS, NET 537,836 538,408
OTHER ASSETS 606,319 568,558
PROPERTY AND EQUIPMENT, at cost 2,117,217 1,944,799
Less accumulated depreciation and amortization 1,112,843 987,606
----------- -----------
Property and equipment, net 1,004,374 957,193
----------- -----------
Total assets $4,304,446 $4,046,795
=========== ===========
CURRENT LIABILITIES:
Short-term debt and current
maturities of long-term debt $ 183,352 $ 28,921
Accounts payable 284,438 317,787
Accrued payroll and related costs 335,177 299,062
Other accrued expenses 399,962 403,860
Deferred revenue 95,558 127,337
Income taxes payable 134,497 37,849
----------- -----------
Total current liabilities 1,432,984 1,214,816
----------- -----------
LONG-TERM DEBT, NET 575,692 736,054
----------- -----------
OTHER LONG-TERM LIABILITIES 85,708 94,650
----------- -----------
STOCKHOLDERS' EQUITY (note C):
Common stock issued, par value $1.00 per share 158,798 157,325
Additional paid in capital 710,024 660,971
Earnings retained for use in business 1,374,350 1,236,968
Accumulated other comprehensive income (note E) (19,096) (39,691)
Less common stock in treasury (13,468) (13,029)
Unearned restricted stock and other (546) (1,269)
----------- -----------
Total stockholders' equity 2,210,062 2,001,275
----------- -----------
Total liabilities and stockholders' equity $4,304,446 $4,046,795
=========== ===========
</TABLE>
[FN]
See accompanying notes.
4
<PAGE>
<TABLE>
COMPUTER SCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
<CAPTION>
Six Months Ended
----------------------
(In thousands, increase (decrease) October 2, Sept. 26,
in cash and cash equivalents) 1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 137,382 $ 111,141
Adjustments to reconcile net income to net
cash provided by operating activities:
Special items, net of income tax effects 6,342
Depreciation and amortization 209,439 184,718
Provision for losses on accounts receivable 4,955 2,555
Changes in assets and liabilities, net of
effects of acquisitions:
Increase in assets (214,357) (135,112)
Increase (decrease) in liabilities 47,390 (6,752)
---------- ----------
Net cash provided by operating activities 184,809 162,892
---------- ----------
Investing activities:
Purchases of property, plant and equipment (192,552) (164,171)
Acquisitions, net of cash acquired (25,811) (50,349)
Dispositions 37,947
Outsourcing contracts (33,086) (105,991)
Purchased and internally developed software (35,201) (33,966)
Other investing cash flows 649 (4,625)
---------- ----------
Net cash used in investing activities (248,054) (359,102)
---------- ----------
Financing activities:
(Repayment) borrowings under commercial paper, net (887) 102,843
Borrowings under lines of credit, net 3,466 9,426
Principal payments on long-term debt (9,481) (4,901)
Proceeds from stock option transactions 31,492 37,431
Other financing cash flows 1,277 10,114
---------- ----------
Net cash provided by financing activities 25,867 154,913
---------- ----------
Effect of exchange rate changes on cash
and cash equivalents 4,750 (1,503)
---------- ----------
Net decrease in cash and cash equivalents (32,628) (42,800)
Cash and cash equivalents at beginning of year 274,688 110,726
---------- ----------
Cash and cash equivalents at end of period $ 242,060 $ 67,926
========== ==========
</TABLE>
[FN]
See accompanying notes.
5
<PAGE>
COMPUTER SCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(A) CSC recognized a net special credit of $1.7 million, or 1 cent per share
(diluted), during the first quarter of fiscal 1998 as a result of
developments at CSC Enterprises, a general partnership of which CSC,
through one of its affiliates, is the managing general partner. As
further described in Note 2 of the Company's Annual Report on Form 10-K
for fiscal 1998, this net credit resulted from a tax benefit of $135
million and an after-tax special charge of $133.3 million.
During the first quarter of fiscal 1998, certain partners withdrew from
CSC Enterprises. As a result of these withdrawals, CSC Enterprises took
actions that caused CSC to recognize an increase in the tax basis of
certain assets. As required by SFAS No. 109, this tax basis increase
resulted in a deferred tax asset of $135 million and a corresponding
reduction of CSC's provision for income taxes. The tax basis increase
will be realized over time through an increase in depreciation and
amortization expense for income tax purposes.
In connection with these developments, CSC Enterprises reviewed its
operations, its market opportunities and the carrying value of its assets
in accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." Based on this
review, plans were initiated during the first quarter of fiscal 1998 to
eliminate certain offerings and write down assets, primarily within its
telecommunications operations. As a result of these plans, CSC recognized
a pre-tax special charge of $208.4 million ($133.3 million after tax).
This special charge included goodwill write-offs of $56.3 million
($35 million after-tax), contract termination costs of $54.3 million
($33.8 million after tax), deferred contract costs and other assets of
$33.1 million ($20.5 million after tax), telecommunications software and
accruals of $35.8 million ($22.3 million after tax ), telecommunications
property, equipment and intangible assets of $18.9 million ($11.7 million
after tax), and other non-tax deductible costs of $10 million.
(B) During fiscal 1998, CSC adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share."
Basic and diluted earnings per share are calculated as follows (in
thousands except per share amounts):
<TABLE>
<CAPTION>
Second Quarter Ended
---------------------------------
Oct. 2, 1998 Sept. 26, 1997
------------ --------------
<S> <C> <C>
Net income for basic and diluted EPS $ 73,047 $ 58,553
======== ========
Common share information
Average common shares outstanding
for basic EPS 158,031 154,900
Dilutive effect of stock options 3,987 3,336
-------- --------
162,018 158,236
======== ========
Basic EPS $ 0.46 $ 0.38
Diluted EPS 0.45 0.37
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
Oct. 2, 1998 Sept. 26, 1997
------------ --------------
<S> <C> <C>
Net income for basic and diluted EPS $137,382 $111,141
======== ========
Common share information
Average common shares outstanding
for basic EPS 157,679 154,242
Dilutive effect of stock options 3,933 3,396
-------- --------
161,612 157,638
======== ========
Basic EPS $ 0.87 $ 0.72
Diluted EPS 0.85 0.71
</TABLE>
In accordance with SFAS No. 128, the computation of diluted EPS did not
include stock options which were antidilutive, as their exercise price was
greater than the average market price of the Company's common stock during
the year. The number of such options was 47,918 and 650,791 at
October 2, 1998 and September 26, 1997, respectively.
(C) No dividends were paid during the periods presented. There were
158,797,507 shares at October 2, 1998 and 157,324,565 shares at April 3,
1998 of $1.00 par value common stock issued with 353,853 and
346,170 shares, respectively, of treasury stock.
(D) Cash payments for interest on indebtedness were $22.3 million and
$24.3 million for the six months ended October 2, 1998 and September 26,
1997, respectively. Cash refunds received for taxes on income were
$54.7 million for the six months ended October 2, 1998 and cash payments
for taxes on income were $39.3 million for the six months ended
September 26, 1997.
(E) CSC adopted SFAS No. 130, "Reporting Comprehensive Income," as of
the first quarter of fiscal 1999. SFAS No. 130 establishes new rules for
the reporting and display of comprehensive income and its components.
The adoption of this statement affects only financial disclosures and has
no quantitative impact on CSC's net income or stockholders' equity.
7
<PAGE>
The components of comprehensive income, net of tax, are as follows
(in thousands):
<TABLE>
<CAPTION>
Second Quarter Ended
---------------------------------
Oct. 2, 1998 Sept. 26, 1997
------------ --------------
<S> <C> <C>
Net income $ 73,047 $ 58,553
Foreign currency translation
adjustment 29,697 (9,471)
--------- ---------
Comprehensive income $102,744 $ 49,082
========= =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
Oct. 2, 1998 Sept. 26, 1997
------------ --------------
<S> <C> <C>
Net income $137,382 $111,141
Foreign currency translation
adjustment 20,595 (15,981)
--------- ---------
Comprehensive income $157,977 $ 95,160
========= =========
</TABLE>
Accumulated other comprehensive income presented on the accompanying
consolidated condensed balance sheets consists of the accumulated
foreign currency translation adjustment and the minimum pension liability
adjustment.
(F) CSC adopted the American Institute of Certified Public Accountants
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" as of
the first quarter of fiscal 1999. SOP 97-2 supersedes SOP 91-1, "Software
Revenue Recognition." The adoption of SOP 97-2 had no material impact on
the Company's consolidated financial position, results of operations or
cash flows.
(G) In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement requires all derivatives to be recorded on the balance
sheet at fair value and establishes accounting standards for hedging
activities. The statement is effective for years beginning after
June 15, 1999. The Company is currently evaluating this standard but does
not expect the adoption of SFAS 133 to have a material impact on the
consolidated financial position or results of operations.
(H) The financial information reported, which is not necessarily indicative
of the results for a full year, is unaudited but includes all adjustments
which the Company considers necessary for a fair presentation. All such
adjustments are normal recurring adjustments except as described in
Note (A).
8
<PAGE>
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Second Quarter and First Six Months of Fiscal 1999 versus
Second Quarter and First Six Months of Fiscal 1998
Revenues
The Company derived its revenues for the second quarter and the first six
months from the following market sectors (dollars in millions):
<TABLE>
<CAPTION>
Second Quarter First Six Months
-------------- Pct. ---------------- Pct.
FY99 FY98 Change FY99 FY98 Change
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
U.S. Commercial $ 744 $ 680 9.5% $1,462 $1,285 13.8%
Europe 543 409 32.7 1,032 790 30.6
Other International 120 103 16.5 223 202 10.3
------ ------ ------ ------
Total Commercial 1,407 1,192 18.1 2,717 2,277 19.4
U.S. Federal Government 441 387 13.8 885 791 11.8
------ ------ ------ ------
Total $1,848 $1,579 17.0% $3,602 $3,068 17.4%
====== ====== ====== ======
</TABLE>
During the second quarter ended October 2, 1998, the Company's total revenue
increased 17.0%, or $269 million, over the same period last year. Commercial
revenues grew 18.1%, or $215 million over the same quarter of last year. U.S.
federal revenues increased 13.8% or $54 million over last year's second
quarter.
During the second quarter of fiscal 1999, U.S. commercial revenues grew $64
million over the same quarter last year. At $744 million, U.S. commercial
revenues were up 9.5%, or 14.8% excluding last year's revenues from activities
in the Company's telecommunications operations and collections unit which were
subsequently sold or phased out. Approximately half of the U.S. commercial
growth was provided by information technology outsourcing contracts. The
remainder was derived principally from demand for consulting and systems
integration activities and continued expansion within the financial services
and healthcare vertical markets.
European revenues grew $134 million during the second quarter or 32.7% over
the same period last year. A majority of the European growth was generated
from CSC's United Kingdom and German operations, reflecting growth in European
outsourcing business and growth in consulting and systems integration services
and expansion of enterprise-wide solution activities.
The second quarter growth of 16.5% in other international revenues resulted
principally from growth in the Company's Australia and Asia operations,
particularly expansion in CSC's financial services sector.
9
<PAGE>
U.S. federal government revenue accounted for 23.9% of total revenue for the
quarter compared to 24.5% for the second quarter of last year. Federal
revenue increased 13.8% or $54 million, principally due to additional revenue
from new contracts, increased task orders on numerous existing contracts and
from the acquisition of Information Technology Solutions, Inc. during the
fourth quarter of fiscal 1998.
For the first six months, the Company's total revenue increased 17.4% or $534
million and the Company announced $3.2 billion in international and U.S.
commercial and U.S. federal awards. The Company's continued growth has
created a broad revenue base across numerous customers, industries, geographic
regions and service offerings. The Company's revenues by market sector are as
follows:
<TABLE>
<CAPTION>
Second Quarter First Six Months
Revenue by Market Sector, ---------------- ----------------
as a percentage of total FY99 FY98 FY99 FY98
- ---------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
U.S. Commercial 40% 43% 41% 42%
Europe 29 26 29 26
Other International 7 7 5 6
------ ------ ------ ------
Total Commercial 76 76 75 74
U.S. Federal Government 24 24 25 26
------ ------ ------ ------
Total Revenue 100% 100% 100% 100%
====== ====== ====== ======
</TABLE>
Costs and Expenses
The Company's costs and expenses as a percentage of revenue are as follows
(dollars in millions, before special items):
<TABLE>
<CAPTION>
Dollar Amount Percentage of Revenue
-------------- ---------------------------------
Second Quarter Second Quarter First Six Months
-------------- -------------- ----------------
FY99 FY98 FY99 FY98 FY 99 FY 98
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Costs of services $1,451 $1,231 78.5% 78.0% 78.7% 78.3%
Selling, general & admin. 173 148 9.3 9.4 9.3 9.4
Depreciation and amort. 105 96 5.7 6.1 5.8 6.0
Interest expense, net 9 11 .5 .7 .5 .7
------ ------ ------ ------ ------ ------
Total $1,738 $1,486 94.0% 94.2% 94.3% 94.4%
====== ====== ====== ====== ====== ======
</TABLE>
Compared with the corresponding periods of the prior year, there were no
material changes in the elements of costs and expenses for the second quarter
and first six months ended October 2, 1998.
10
<PAGE>
Special Items
As previously reported, the results of operations for the first quarter ended
June 27, 1997 included a net special credit of $1.7 million, or 1 cent per
share (diluted), resulting from developments at CSC Enterprises, a general
partnership which operates certain credit services operations and carries out
other business strategies through acquisition and investment. This net credit
resulted from a tax benefit of $135 million and a special charge of $208.4
million($133.3 million after tax), as described in Note A of the Consolidated
Condensed Financial Statements (see Part I, Item I).
Income Before Taxes
Reflecting the Company's revenue growth, income before taxes increased to
$109.5 million, up $17.2 million, or 18.6% compared with the same quarter last
year. The resulting margin was 5.9% compared to 5.8% for last year's second
quarter and was 5.7% versus 5.6% for the first six months of fiscal 1999 and
fiscal 1998, respectively.
Net Income
Net income was $73 million for the second quarter of fiscal 1999, up $14.5
million, or 24.8% over last year's earnings. This year's second quarter
diluted earnings per share of 45 cents increased 21.6% over last year's second
quarter diluted earnings per share of 37 cents. On a year to date basis,
diluted earnings per share were 85 cents, up 16 cents, or 23.2% over the same
period last year, excluding last year's net special credit of $1.7 million or
1 cent per share.
Cash Flows
Cash provided by operating activities was $184.8 million for the six months
ended October 2, 1998, compared with $162.9 million during the same period
last year. An increase in earnings and non-cash depreciation and amortization
expenses partially offset by changes in working capital were the principal
causes.
The Company's cash expenditures for investing activities totaled $248.1
million for the most recent six months versus $359.1 million during the same
period of last year. The decrease principally relates to significant
acquisitions of outsourcing assets made in the prior year and proceeds
received in the first quarter of 1999 in connection with the sale of the
Company's collection business.
Cash provided by financing activities was $25.9 million for the most recent
six months versus $154.9 million for the same period last year. The decrease
is principally due to the Company having lower borrowing requirements than the
prior year as a result of last year's acquisitions of outsourcing assets as
described above.
11
<PAGE>
Financial Condition
During the first six months of fiscal 1999, the Company's capital outlays
included $251.4 million of business investments in the form of fixed asset
purchases, acquisitions and new outsourcing contracts. These amounts were
funded from operating cash flows, additional borrowings and existing cash,
which decreased from $274.7 million to $242.1 million. The Company's debt-to-
total capitalization ratio improved to 25.6% at October 2, 1998 from 27.7% at
fiscal 1998 year end.
The Company has an option to require a subsidiary of Equifax Inc. to purchase
the Company's credit reporting business as further described in Note 11 of the
Company's Annual Report on Form 10-K for fiscal 1998. The exercise price of
this put option is equal to the appraised value of the business.
It is management's opinion that the Company will be able to meet its liquidity
and cash needs for the foreseeable future through a combination of cash flows
from operating activities, cash balances, unused borrowing capacity and other
financing activities, including the issuance of debt and/or equity securities,
and/or the exercise of the put option described above.
New Accounting Pronouncements
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," as of the first quarter of fiscal 1999. The
adoption of this statement affects only financial disclosures and has no
quantitative impact on the Company's consolidated financial position or
results of operations.
The Company has adopted the American Institute of Certified Public Accountants
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" as of the
first quarter of fiscal 1999. SOP 97-2 supersedes SOP 91-1, "Software Revenue
Recognition." The adoption of SOP 97-2 had no material impact on the
Company's consolidated financial position, results of operations or cash
flows.
Year 2000 Readiness Disclosure
Since its inception, CSC has dealt with ongoing significant changes in the
information technology industry. As a result, resources are constantly being
employed to modify, upgrade and enhance systems and infrastructure on behalf
of clients and for internal needs. The Year 2000 issue represents another one
of these changes. It is the result of computer systems that represent years
as a two-digit rather than a four-digit field. Any of such systems that
utilize date sensitive data may not properly recognize a date field of 00 as
the year 2000, but as some other date, typically the year 1900. This could
result in possible system failure, miscalculations, or data corruption thereby
affecting normal business activity.
The Company has established a two-phase program to ensure that its proprietary
products, internal computer systems, and facilities are Year 2000 ready. The
initial phase, which included planning, inventory and assessment, has been
completed for all of the Company's existing business. The final phase, which
consists of correction, testing, deployment and acceptance, is in process and
is expected to be completed by mid-1999. In order to launch this program,
monitor progress and coordinate the Company's Year 2000 activities, the Year
2000 Assurance Office was established with this charter and reports directly
to the Chairman, President, and Chief Executive Officer.
12
<PAGE>
The Company expects that its Year 2000 compliance efforts will not have a
material effect on its overall financial position or overall trends in results
of operations. The Company's estimates of the total fiscal 1999 and 2000
operating costs associated with making its proprietary products, internal
systems and infrastructure Year 2000 ready, including the cost of Company
personnel diverted to Year 2000 assignments, total approximately $43 million,
of which approximately $12 million has been incurred to date. In addition,
related capital expenditures for fiscal 1999 and 2000 are estimated to be
approximately $18 million, of which approximately $5 million has been incurred
to date. Currently, the Company estimates that it is approximately 50%
complete with these activities. As a result of progress achieved to date,
future estimates of the costs may be revised downward.
Some of the capital expenditures represent equipment replacements that have
been or will be accelerated due to Year 2000 issues. The operating costs
described above are generally not incremental, but reflect the reallocation of
existing resources. The Company has not deferred any significant information
technology projects as a result of the Year 2000 efforts.
The Company has completed an assessment of its obligations and
responsibilities to its customers in respect of Year 2000 issues arising from
contractual engagements for computer goods and services, including obligations
arising from the licensing of the Company's proprietary software products. As
a result of this assessment, it is management's opinion that these obligations
will not have a material effect on the Company.
The Company has initiated formal communications with all of its crucial
suppliers to determine whether they are or will be Year 2000 capable. By mid-
1999, the Company expects to have identified and replaced any such suppliers
who will not be Year 2000 ready. The Company is also contacting property
owners to determine the readiness of its leased facilities with respect to
facility infrastructure systems.
In the opinion of Company management, the most reasonably likely worst case
scenario includes the possibility that the Company and/or its crucial
suppliers are unable to complete their Year 2000 readiness efforts prior to
the initiation of failures, the effects of which could have a material adverse
impact on the Company's operations. The Company could also be impacted
materially by any significant economic, financial market or infrastructure
disruption attributable to the Year 2000 issue.
The Company is currently developing contingency plans with respect to the most
reasonably likely worst case scenario and expects to have finalized such plans
by mid-1999.
The discussion above contains forward-looking statements which should be read
in conjunction with the following section.
13
<PAGE>
Forward-Looking Statements
All statements contained in this quarterly report, or in any document filed by
the Company with the Securities and Exchange Commission, or in any press
release or other written or oral communication by or on behalf of the Company,
that do not directly and exclusively relate to historical facts constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements represent the Company's
expectations and beliefs, and no assurance can be given that the results
described in such statements will be achieved.
These statements are subject to risks, uncertainties and other factors, many
of which are outside of the Company's control, that could cause actual results
to differ materially from the results described in such statements. These
factors include, without limitation, the following: (i) competitive pressures;
(ii) the Company's ability to attract and retain key personnel; (iii) changes
in the demand for information technology outsourcing and business process
outsourcing; (iv) changes in the financial condition of the Company's major
commercial customers; (v) changes in U.S. federal government spending levels
for information technology services; (vi) the Company's ability to consummate
strategic acquisitions and alliances; (vii) the future profitability of the
Company's customer contracts; (viii) the Company's ability to continue to
develop and expand its service offerings to address emerging business demand
and technological trends; (ix) general economic conditions in countries in
which the Company does business; and (x) the ability of the Company, its
customers and suppliers to become Year 2000 ready.
14
<PAGE>
PART I, ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's market-risk sensitive financial instruments
as of April 3, 1998, see "Market Risk" in the Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," of
the Company's Annual Report on Form 10-K for the fiscal year then ended. For
the six months ended October 2, 1998, there has been no significant change in
related market risk factors.
15
<PAGE>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security-Holders.
a. The Company held its Annual Meeting of Stockholders on August 10, 1998.
b. Proxies for the Annual Meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934; there were no solicitations in
opposition to management's nominees for director as listed in the Proxy
Statement; and all such nominees were elected.
The directors elected were Irving W. Bailey, II, Van B. Honeycutt, William R.
Hoover, Richard C. Lawton, Leon J. Level, Thomas A. McDonnell, F. Warren
McFarlan, James R. Mellor and William P. Rutledge.
With respect to each nominee, the results of the vote were as follows:
<TABLE>
<CAPTION>
Votes
--------------------------------
For Withheld
------------- ------------
<S> <C> <C>
Irving W. Bailey, II 131,325,630 1,192,352
Van B. Honeycutt 131,320,604 1,197,378
William R. Hoover 131,321,055 1,196,927
Richard C. Lawton 131,263,044 1,254,938
Leon J. Level 131,335,125 1,182,857
Thomas A. McDonnell 130,502,324 2,015,658
F. Warren McFarlan 131,332,620 1,185,362
James R. Mellor 131,302,459 1,215,523
William P. Rutledge 131,321,637 1,196,345
</TABLE>
c. There was submitted to the stockholders a proposal to approve the 1998
Stock Incentive Plan, which proposal was approved by the stockholders. The
results of the vote were as follows: 95,211,604 votes cast for, 22,452,913
votes cast against and 477,312 abstentions. There were 14,376,153 broker
non-votes.
16
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
a. Exhibits
<S> <C> <C>
3.1 Restated Articles of Incorporation, effective
October 31, 1988 (c)
3.2 Amendment to Restated Articles of Incorporation,
effective August 10, 1992 (j)
3.3 Amendment to Restated Articles of Incorporation,
effective July 31, 1996 (m)
3.4 Certificate of Amendment of Certificate of Designations
of Series A Junior Participating Preferred Stock,
effective August 1, 1996 (o)
3.5 Bylaws, amended and restated effective May 4, 1998 (g)
10.1 1978 Stock Option Plan, amended and restated
effective March 31, 1988* (n)
10.2 1980 Stock Option Plan, amended and restated
effective March 31, 1988* (n)
10.3 1984 Stock Option Plan, amended and restated
effective March 31, 1988* (n)
10.4 1987 Stock Incentive Plan* (b)
10.5 Schedule to the 1987 Stock Incentive Plan for
United Kingdom personnel* (b)
10.6 1990 Stock Incentive Plan* (h)
10.7 1992 Stock Incentive Plan, amended and restated
effective August 9, 1993* (n)
10.8 Schedule to the 1992 Stock Incentive Plan for
United Kingdom personnel* (q)
10.9 1995 Stock Incentive Plan* (k)
10.10 1998 Stock Incentive Plan* (v)
10.11 Form of Stock Option Agreement* (u)
10.12 Form of Restricted Stock Agreement* (u)
10.13 Annual Management Incentive Plan, effective April 2, 1983* (a)
10.14 Supplemental Executive Retirement Plan, amended and
restated effective February 27, 1998* (u)
10.15 Deferred Compensation Plan, amended and restated
effective February 2, 1998* (s)
10.16 Severance Plan for Senior Management and Key Employees,
amended and restated effective February 18, 1998 (t)
10.17 Severance Agreement with Van B. Honeycutt, effective
February 2, 1998 (s)
10.18 Form of Indemnification Agreement for Officers (e)
10.19 Form of Indemnification Agreement for Directors (d)
10.20 1997 Nonemployee Director Stock Incentive Plan (r)
10.21 Form of Restricted Stock Unit Agreement (g)
10.22 1990 Nonemployee Director Retirement Plan, amended
and restated effective February 2, 1998 (s)
17
<PAGE>
10.23 Information Technology Services Agreements with General
Dynamics Corporation, dated as of November 4, 1991 (i)
10.24 Rights Agreement dated December 21, 1988, amended
and restated effective February 18, 1998 (t)
10.25 Rights Agreement dated February 18, 1998 (t)
27 Financial Data Schedule
28 Revenues by Market Sector
99.1 Annual Report on Form 11-K for the Matched Asset Plan of the
Registrant for the fiscal year ended December 31, 1997 (g)
99.2 Annual Report on Form 11-K for the Hourly Savings Plan of
CSC Outsourcing, Inc. for the fiscal year ended
December 31, 1997 (g)
99.3 Annual Report on Form 11-K for the CUTW Hourly Savings
Plan of CSC Outsourcing, Inc. for the fiscal year
ended December 31, 1997 (g)
</TABLE>
18
<PAGE>
Notes to Exhibit Index:
*Management contract or compensatory plan or agreement
(a)-(g) These exhibits are incorporated herein by reference to the
Company's Annual Report on Form 10-K for the fiscal years ended
on the respective dates indicated below:
(a) March 30, 1984 (d) April 3, 1992
(b) April 1, 1988 (e) March 31, 1995
(c) March 31, 1989 (f) March 28, 1997
(g) April 3, 1998
(h) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 filed on August 15, 1990.
(i) Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated November 4, 1991.
(j) Incorporated herein by reference to the Registrant's Proxy
Statement for its August 10, 1992 Annual Meeting of Stockholders.
(k) Incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q filed on November 13, 1995.
(l) Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated April 28, 1996.
(m) Incorporated herein by reference to the Registrant's Proxy
Statement for its July 31, 1996 Annual Meeting of Stockholders.
(n) Incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q filed on August 12, 1996.
(o) Incorporated herein by reference to the Registrant's Current
Report of Form 8-K dated August 1, 1996.
(p) Incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q filed on November 12, 1996.
(q) Incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q filed on February 10, 1997.
(r) Incorporated herein by reference to the Registrant's Proxy
Statement for its August 11, 1997 Annual Meeting of Stockholders.
(s) Incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q filed on February 9, 1998.
(t) Incorporated herein by reference to the Registrant's
Solicitation/Recommendation Statement on Schedule 14D-9 filed on
February 26, 1998.
(u) Incorporated herein by reference to Amendment No. 2 to the
Registrant's Solicitation/Recommendation Statement on Schedule
14D-9 filed on March 2, 1998.
(v) Incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q filed on August 14, 1998
b. Reports on Form 8-K:
There were no reports on Form 8-K filed during the second quarter of fiscal
1999.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMPUTER SCIENCES CORPORATION
Date: November 13, 1998 By: /s/ Scott M. Delanty
-----------------------------
Scott M. Delanty
Vice President and Controller
Chief Accounting Officer
20
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<S> <C>
27 Financial Data Schedule
28 Revenues by Market Sector
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<FISCAL-YEAR-END> Apr-02-1999
<PERIOD-START> Apr-04-1998
<PERIOD-END> Oct-02-1998
<PERIOD-TYPE> 6-MOS
<CASH> 242,060
<SECURITIES> 0
<RECEIVABLES> 1,725,398
<ALLOWANCES> 74,642
<INVENTORY> 0
<CURRENT-ASSETS> 2,155,917
<PP&E> 2,117,217
<DEPRECIATION> 1,112,843
<TOTAL-ASSETS> 4,304,446
<CURRENT-LIABILITIES> 1,432,984
<BONDS> 575,692
<COMMON> 158,798
0
0
<OTHER-SE> 2,051,264
<TOTAL-LIABILITY-AND-EQUITY> 4,304,446
<SALES> 0
<TOTAL-REVENUES> 3,601,699
<CGS> 0
<TOTAL-COSTS> 2,828,299
<OTHER-EXPENSES> 335,474
<LOSS-PROVISION> (4,955)
<INTEREST-EXPENSE> 17,550
<INCOME-PRETAX> 205,982
<INCOME-TAX> 68,600
<INCOME-CONTINUING> 137,382
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137,382
<EPS-PRIMARY> .87
<EPS-DILUTED> .85
</TABLE>
<TABLE>
EXHIBIT 28
COMPUTER SCIENCES CORPORATION
REVENUES BY MARKET SECTOR
(In millions)
<CAPTION>
Fiscal Period Ended % of Total
---------------------- ----------------------
Oct. 2, Sept. 26, Oct. 2, Sept. 26,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SECOND QUARTER
Global commercial:
U.S. commercial $ 744.5 $ 679.8 40% 43%
Europe 542.6 408.9 29 26
Other International 119.8 102.8 7 7
--------- --------- --------- ---------
Total 1,406.9 1,191.5 76 76
U.S. federal government:
Department of Defense 277.2 253.2 15 16
Civil agencies 163.7 134.1 9 8
--------- --------- --------- ---------
Total 440.9 387.3 24 24
--------- --------- --------- ---------
Total revenues $1,847.8 $1,578.8 100% 100%
--------- --------- --------- ---------
SIX MONTHS
Global commercial:
U.S. commercial $1,462.4 $1,284.6 41% 42%
Europe 1,031.5 789.6 29 26
Other International 223.4 202.5 5 6
--------- --------- --------- ---------
Total 2,717.3 2,276.7 75 74
U.S. federal government:
Department of Defense 565.7 521.0 16 17
Civil agencies 318.7 269.9 9 9
--------- --------- --------- ---------
Total 884.4 790.9 25 26
--------- --------- --------- ---------
Total revenues $3,601.7 $3,067.6 100% 100%
========= ========= ========= =========
</TABLE>
</PAGE>
