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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-5397
AUTOMATIC DATA PROCESSING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-1467904
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE ADP BOULEVARD, ROSELAND, NEW JERSEY 07068
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 201-994-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
(VOTING) CHICAGO STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
LIQUID YIELD OPTION NOTES DUE 2012 NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to the 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 (Section 229.405 of this chapter) 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 /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of September 12, 1997 was approximately $13,341,000,000.
On September 12, 1997, there were 292,353,349 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1997 Annual Report to
Shareholders Parts I, II & IV
Portions of the Registrant's Proxy Statement for
Annual Meeting of Stockholders to be held
on November 11, 1997. Part III
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PART I
ITEM 1. BUSINESS
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Automatic Data Processing, Inc., incorporated in Delaware in 1961, and its
subsidiaries (collectively, "ADP") are engaged in the computing services
business. The following summary describes ADP's activities.
INDUSTRY SEGMENT
All of ADP's computing services enable clients to process and/or distribute
data (their own, ADP's or that of third parties) and/or to interactively access
and utilize ADP and third party databases and information, utilizing ADP's
batch, interactive and client site systems.
EMPLOYER SERVICES
ADP's Employer Services offers a comprehensive range of payroll, payroll
tax filing and reporting, human resource (HR), benefits administration, time and
attendance, 401(k) recordkeeping, and unemployment compensation management
services. These services are provided to over 395,000 clients engaged in a wide
variety of businesses. In addition to its direct marketing, ADP has marketing
relationships with many banks and accountants whereby ADP offers its services to
their business clients.
Payroll and tax filing and reporting services comprise over 85% of Employer
Services' revenue. Payroll services include the preparation of pay checks and
direct deposits (with major bank partners), along with supporting journals,
summaries and management reports. ADP also supplies the quarterly and annual
social security, medicare, and federal, state and local income tax withholding
reports required to be filed by employers and employees. ADP's tax filing
services process federal, state and local payroll taxes on behalf of ADP clients
and remit such taxes to the appropriate taxing authorities when due. As new
products evolve (such as new hire reporting, ADP check/full service direct
deposit and wage garnishment payment), the ADP Tax Filing center is also
responsible for the efficient movement of funds and information to third
parties.
As market trends increasingly favor both outsourcing and software as
preferred payroll solutions, ADP's "Payroll AnyWay" strategy presents to
businesses of virtually every size and type an extensive menu of outsourced and
on-site payroll solutions, from turnkey service to client-site software.
Employers are segmented by size and complexity to effectively match their needs
to products and service teams that will best meet their expectations.
Approximately 35% of Employer Services' payroll and payroll tax filing services
revenue during the past fiscal year was attributable to its Emerging Business
Services (for companies with less than 100 employees); approximately 35% of such
revenue was attributable to Major Accounts (for companies with between 100 and
999 employees) and approximately 30% of such revenue was attributable to
National Accounts (for companies with 1,000 or more employees).
ADP's HR services, operating in conjunction with a client's payroll
database, provide comprehensive recordkeeping HR services, including benefits
administration and outsourcing, applicant tracking, employee history and
position control. The various HR systems run on standalone PC's, local or wide
area networks or client/server systems.
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Emerging Business Services processes payroll for approximately 300,000
clients. Major Accounts offers a robust line of best-of-breed payroll and human
resource solutions for medium-size companies with full database and functional
integration between payroll and HR. Many of the world's largest corporations
are ADP National Accounts clients. In many cases, ADP provides system solutions
for clients' entire human resource, payroll and benefits needs. For those
companies who choose to process these applications in-house, ADP delivers
stand-alone services such as tax filing, check printing and distribution,
year-end statements (W-2's), and benefits administration.
The ADP Tax Filing Center, which supports all three market segments,
electronically interfaces with over 2,000 tax agencies from the Internal Revenue
Service to local school districts. Over 285,000 clients rely on tax filing to
assure regulatory compliance.
ADP's Electronic Services Division complements Employer Services' market
segments with a product mix that augments ADP's payroll and HR services.
Included in such product mix are 401(k) recordkeeping and administrative
services (relating to defined benefit plans), flexible spending, healthcare and
other group benefits plans, and a comprehensive time and attendance system fully
integrated into ADP's payroll systems. ADP's unemployment compensation services
aid clients in managing and reducing unemployment insurance costs. Peachtree
and One Write software business applications are sold to small clients through
retail channels.
ADP's penetration of the benefits administration market accelerated with
its acquisition of Health Benefits America, a provider of health care benefits
design and communications programs, COBRA administration and other relevant
services. ADP has firmly established itself as a leading professional employer
organization through its TotalSource acquisition and positioned itself to
aggressively increase its presence in the fast-expanding employee leasing
industry.
The continued increase in multinational companies makes payroll and human
resource management services a global opportunity. This development and a
strong demand for outsourcing makes Europe a particularly attractive
marketplace. Employer Services already has 35,000 payroll and HR clients in
Belgium, France, Germany, Italy, the Netherlands, Spain, Switzerland and the
United Kingdom. The core of ADP's strength in the European market currently is
in the larger company segment - those firms with 1,000 or more employees. The
goal is to expand Employer Services to all major countries in Europe and be the
leading provider of outsourcing and on-site services for employer solutions in
all market segments.
ADP has also become the largest provider of payroll services to Canadian
businesses with its recent purchases of the Royal Bank of Canada's and
Scotiabank's payroll businesses. ADP's recent acquisition of a Brazilian
computing services company gives it a strong initial position in the growing
South American employer services marketplace.
BROKERAGE SERVICES
ADP's Brokerage Services provides securities processing, real-time market
information, and investor communications services to the financial services
industry. ADP is the largest provider of securities processing services in
North America. In fiscal 1997, ADP processed approximately 20% of the retail
equity transactions in the United States and Canada, handling an average of
over 475,000 trades per day. In the market information sector, Brokerage
Services supports more than 97,000 desktops in over 1,600 firms worldwide.
ADP provides shareholder communication services, handling all shareholder
mailings and proxy processing for shareholders whose securities are left in
"street name"
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in the custody of ADP's "nominee" clients (principally brokerage firms and
banks). In fiscal 1997, ADP processed over 285 million shareholder mailings for
over 12,000 publicly-traded companies on behalf of more than 800 brokerage firms
and banks and 400 mutual fund families. Shareholder ballots representing
approximately 155 billion shares were electronically processed.
ADP provides front-office database, news, analytic and quotation services
for the investment and brokerage community through terminals located on brokers'
desks. ADP provides such services through interactive work stations (utilizing
client-server architecture) for all active equity securities, commodities,
currencies, and interest rate futures. ADP also offers its international
clients real-time news processing systems, real-time fixed income, foreign
exchange and money market information, and sophisticated analytics.
ADP provides back-office stock brokerage and related financial computing
services such as trade processing, cage management, stock loan accounting,
on-line inquiry and data collection, portfolio reporting, order matching and
on-line trading. All of these services are offered in the United States and
Canada. ADP's Wilco Systems' Gloss series international trading and settlement
systems offer global multi-instrument, multi-currency trading, settlement and
accounting services.
As part of its shareholder communication services, StreetLink is a quickly
deliverable laser printed alternative to expensive quarterly mailings to
shareholders. Proxy Edge is an electronic voting service which dramatically
improves voting efficiency and record keeping. PhoneVOTE Services enable mutual
fund shareholders to vote their proxy over the telephone for same-day
tabulation.
DEALER SERVICES
ADP's Dealer Services provides computing, data and professional services to
automobile and truck dealers and manufacturers world-wide. Over 18,000 dealers
use ADP's on-site systems and communications networks to manage every area of
sales and operations in the U.S., Canada, Europe, Mexico and Taiwan. ADP
addresses critical dealership areas and offers software and professional
services to improve consumer loyalty, asset management, innovative technology,
employee productivity training, manufacturer relations, business improvements
and real-time information access.
It offers clients a service solution which includes ADP computer hardware,
licensed software, software support and hardware maintenance services. Clients
use ADP's systems to manage their accounting, inventory, factory communications,
scheduling, leasing, sales and service activities. ADP establishes and
maintains communications networks for its clients which allow interactive
communications between manufacturers and their respective dealers. These
communication networks are used for new vehicle ordering, status inquiry and
warranty claims, parts and vehicle locating, credit checks, vehicle repair
estimating, vehicle registration and vehicle lienholder information.
ADP continues to automate the business processes for its clients through
value-added products such as paperless parts cataloging, repair shop pricing and
scheduling, laser printing, and data archiving and document storage.
Changes in customer expectations and manufacturer's requirements are
modifying how the traditional dealership conducts business. In response to
these changes, ADP is providing consulting services to its dealer clients to
help them reengineer their management processes. It also offers solutions to
help employee productivity and training, and provides the tools and services
necessary to improve dealership productivity and profitability.
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CLAIMS SERVICES
ADP offers a broad line of claims information products to property and
casualty insurance companies, claims adjusters, repair shops and auto parts
recycling facilities in the United States and Canada to help its clients
accurately estimate auto damage, bodily injury and property claims. The
services include automated collision damage repair estimating for cars and
trucks, vehicle valuation services for total losses, and parts locating and
pricing services to auto insurers and repairers to facilitate the claims
settlement and parts locating processes. ADP provides management information
and vehicle damageability and repair cost statistics to insurance companies,
government agencies and automobile manufacturers. A pen-based, mobile auto
estimating system, using state-of-the-art technology and graphical user
interfaces, has won broad market acceptance.
ADP provides, through its Integrated Medical Solutions business,
services that evaluate the appropriateness of medical treatment and invoicing
for bodily injury claims arising from motor vehicle accidents. The core
product, Provider Bill Audit (PBA), is an expert system that performs fee and
utilization audits of medical provider bills involving soft tissue injury and
that provides auto insurers with a consistent methodology for assessing the
proper diagnoses and treatment of automobile-related injuries. The Injury
Claims Evaluations product compliments the PBA system with proprietary injury
valuations, helping adjusters to make fair and equitable settlements when usual
and customary costs are disputed.
NATURE OF SERVICES PROVIDED
In each of Employer Services, Dealer Services, Claims Services and most of
Brokerage Services, ADP's services primarily involve the processing and
utilization of client and/or third party data. In the front-office component of
the Brokerage Services business, the primary service takes the form of providing
securities, commodities and currencies quotation data (which data is provided by
various exchanges) and news to clients; this front-office component represents
less than 10% of consolidated revenue.
Services to all industries are generally available by the electronic
transmission (through communications lines) of computer-generated data and
information from and to clients. Services are offered through a variety of
systems and networks which run on industry-standard operating systems.
Virtually none of ADP's services require ADP-proprietary hardware and/or
operating systems.
All of ADP's services utilize somewhat similar facilities, computers,
communications networks, salesforces, and client service support personnel.
ADP's businesses share numerous facilities, selected computer rooms and
communications networks, and ADP occasionally transfers some of its employees
among business units. The input and output of all of ADP's businesses is data
and information. On occasion ADP has transferred services and products between
business units.
While the labor intensiveness of a service may vary somewhat based on the
degree of automation and complexity in providing the service, all services use
the same basic functions as described above. None of ADP's service offerings
are particularly capital intensive.
MARKETS AND MARKETING METHODS
All of ADP's services are sold broadly across the United States and Canada.
Non-North American services amounted to approximately 12.5% of fiscal 1997
revenue. All services use
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common marketing techniques, including direct sales methodologies with emphasis
on referral sources.
None of ADP's major business groups have a single homogenous client base or
market. For example, while Brokerage Services primarily serves the retail
brokerage market, it also serves banks, commodity dealers, the institutional
brokerage market and individual non-brokerage corporations. Dealer Services
primarily serves automobile dealers, but also serves truck and agricultural
equipment dealers, auto repair shops, used car lots, state departments of motor
vehicles, and manufacturers of automobiles, trucks and agricultural equipment.
Claims Services has many clients who are insurance companies, but also provides
services to automobile manufacturers, body repair shops, salvage yards,
distributors of new and used automobile parts and other non-insurance clients.
Employer Services has clients from a large variety of industries and markets.
Within this client base are concentrations of clients in specific industries.
While concentrations of clients exist, no one business group is material to
ADP's overall revenue. Employer Services also sells to auto dealers, brokerage
clients, and insurance clients.
None of ADP's businesses are overly sensitive to price changes. Economic
conditions among selected clients and groups of clients may and do have a
temporary impact on demand for ADP's services.
ADP enjoys a leadership position in each of its major service offerings and
does not believe any major service or business unit in ADP is subject to unique
market risk.
COMPETITION
The computing services industry is highly competitive. ADP knows of no
reliable statistics by which it can determine the number of its competitors, but
it believes that it is one of the largest independent computing services
companies in the United States.
ADP's competitors include other independent computing services companies,
divisions of diversified enterprises and banks. Another competitive factor in
the computing services industry is the in-house computing function, whereby a
company installs and operates its own computing systems.
Competition in the computing services industry is primarily based on
service responsiveness, product quality and price. ADP believes that it is
very competitive in each of these areas and that there are no material
negative factors impacting ADP's competitive position in the computing
services industry. No one competitor or group of competitors is dominant in
the computing services industry.
CLIENTS AND CLIENT CONTRACTS
ADP provides computing services to over 400,000 clients. Annual revenues
attributable to large client accounts range from $1 million to approximately
$50 million per client, while thousands of small client accounts produce
annual revenues of less than $1,000 each. ADP's largest single client
accounts for approximately 1% of its annual revenue.
ADP has no material "backlog" because the period between the time a
client agrees to use ADP's services and the time the service begins is
generally very short and because no sale is considered firm until it is
installed and begins producing revenue.
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ADP's average client retention is seven years in Employer Services and is
ten or more years in Brokerage, Dealer and Claims Services, and does not vary
significantly from period to period.
Discounts, rebates and promotions offered by ADP to clients are not
material.
ADP's services are provided under written Price Quotations or Services
Agreements having varying terms and conditions. No one Price Quotation or
Service Agreement is material to ADP.
SYSTEMS DEVELOPMENT AND PROGRAMMING
During the fiscal years ended June 30, 1997, 1996 and 1995, ADP spent
$296,544,000, $249,635,000 and $193,173,000, respectively, on systems
development and programming activities for the development of new, and the
improvement and maintenance of existing, computing services.
PRODUCT DEVELOPMENT
ADP continually upgrades, enhances and expands its existing products and
services. Generally, no new product or service has a significant effect on
ADP's revenue or negatively impacts its existing products and services, and each
existing product and service has a significant remaining life cycle.
LICENSES
ADP is the licensee under a number of agreements for computer programs and
databases. ADP's business is not dependent upon a single license or group of
licenses. Licenses, patents, trademarks and franchises are not material to ADP's
business as a whole.
COMPENSATION OF MARKETING AND SALES PERSONNEL
The compensation arrangements of ADP's marketing and sales personnel vary
significantly based on the tenure of the particular salesperson, with the
commission-based portion of total compensation averaging approximately 40%. ADP
sets minimum sales quotas on an individual basis.
COMPUTER SYSTEMS
ADP does not manufacture computer systems or act as a distributor of
computer systems. ADP may, however, be deemed to be a value-added reseller of
computer systems insofar as its services often include computer equipment as
part of the total service solution.
ADP's services are offered on a variety of computer platforms which run
various operating systems. These computer platforms include those offered by
IBM, IBM-compatibles, Digital Equipment Corporation, Apple, Motorola, Hewlett
Packard and McDonnell Douglas. The industry-standard operating systems
supporting such computer platforms include DOS, Windows, OS2, VSE, MVS, VMS,
System 7 OS, Unix, Reality and Pick.
ADP's service warranty to its clients is that if any errors or omissions
occur in its service offerings, ADP will correct them as soon as possible. In
addition, ADP provides, either directly or through third parties, maintenance
and support for the ADP-provided equipment and software which facilitates the
delivery of its services to clients.
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NUMBER OF EMPLOYEES
ADP employed approximately 30,000 persons as of June 30, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 10 in Part III hereof.
ITEM 2. PROPERTIES
ADP leases space for more than 55 of its processing centers. In addition,
ADP leases numerous small processing centers and sales offices. All of these
leases, which aggregate approximately 5,300,000 square feet in the United
States, Canada, Europe, South America and Asia, expire at various times up to
the year 2016. ADP owns 27 of its processing facilities and its corporate
headquarters complex in Roseland, New Jersey, which aggregate approximately
2,750,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
See "Market Price and Dividend Data" on page 18 of the Registrant's 1997
Annual Report to Shareholders, which information is incorporated herein by
reference. As of August 24, 1997, the Registrant had 28,364 registered holders
of its Common Stock, par value $.10 per share. The Registrant's Common Stock is
traded on the New York, Chicago and Pacific Stock Exchanges.
On August 16, 1996, the Registrant issued an aggregate amount of 896,370
shares of its Common Stock to three shareholders of a company acquired by the
Registrant in exchange for all of the issued and outstanding shares of
capital stock of such company pursuant to the terms of a pooling agreement.
On August 26, 1996, the Registrant issued an aggregate amount of 1,930,212
shares of its Common Stock to the three principal shareholders (and certain
related trusts) of another company acquired by the Registrant in exchange for
all of the issued and outstanding shares of capital stock of that company
pursuant to the terms of a merger agreement. No underwriters were involved
in the foregoing sales of securities. The Company issued the foregoing
shares of Common Stock without registration under the Securities Act of 1933,
as amended, in reliance upon the exemption therefrom set forth in Section
4(2) of such Act, relating to sales by an issuer not involving a public
offering.
ITEM 6. SELECTED FINANCIAL DATA
See "Selected Financial Data" on page 16 of the Registrant's 1997 Annual
Report to Shareholders, which information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See "Management's Discussion and Analysis" on pages 17-18 of the
Registrant's 1997 Annual Report to Shareholders, the Letters to Shareholders on
pages 3-5 of such report and the business descriptions on pages 6-15 of such
report, which information is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Registrant's market risk sensitive instruments do not subject the
Registrant to material market risk exposures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements described in Item 14(a) hereof are incorporated
herein.
The following supplementary data is incorporated herein by reference:
Page in 1997 Annual
Report to Shareholders
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Quarterly Financial Results (unaudited) for
the three years ended June 30, 1997 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Registrant, their ages, positions and the
period during which they have been employed by ADP are as follows:
Employed by
Name Age Position ADP Since
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James B. Benson 52 Vice President, General 1977
Counsel and Secretary
Richard C. Berke 52 Vice President, Human 1989
Resources
Gary C. Butler 50 Group President of 1975
Employer Services
Richard J. Daly 44 Co-president of 1989
Brokerage Services
G. Harry Durity 50 Vice President, 1994
Worldwide Business
Development
Russell P. Fradin 42 Senior Vice President 1996
Richard J. Haviland 51 Chief Financial Officer 1982
John P. Hogan 49 Co-president of 1993
Brokerage Services
Peter M. Leger 46 President of 1992
Dealer Services
S. Michael Martone 49 President of Claims 1987
Services
Arthur F. Weinbach 54 President and 1980
Chief Executive Officer
Messrs. Benson, Berke, Butler, Daly, Haviland, Leger, Martone and Weinbach
have each been employed by ADP in senior executive positions for more than the
past five years.
G. Harry Durity joined ADP in August 1994 as Corporate Vice President,
Worldwide Business Development. Prior to joining ADP he was Senior Vice
President - Corporate Development of Revlon Consumer Products Company. Between
1990 and February 1993 when he joined Revlon, he was President of The Highlands
Group, Inc.
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Russell P. Fradin joined ADP in 1996 as Senior Corporate Vice President.
Prior to joining ADP, he was a senior partner of McKinsey & Company and had been
associated with that firm for 18 years.
John P. Hogan joined ADP in 1993. Prior to his promotion to Co-president
of the Brokerage Services Group in July 1997, he held various senior Brokerage
Services' positions. Prior to joining ADP in July 1993, he had been Senior Vice
President, Processing Division for Fidelity Investments/National Financial
Services, Inc. for three years.
Each of ADP's executive officers is elected for a term of one year and
until their successors are chosen and qualified or until their death,
resignation or removal.
DIRECTORS OF THE REGISTRANT
See "Election of Directors" in the Proxy Statement for Registrant's 1997
Annual Meeting of Stockholders, which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
See "Compensation of Executive Officers" in the Proxy Statement for
Registrant's 1997 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Election of Directors--Security Ownership of Certain Beneficial Owners
and Managers" in the Proxy Statement for Registrant's 1997 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Compensation of Executive Officers--Certain Transactions" in the Proxy
Statement for Registrant's 1997 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
The following consolidated financial statements of Automatic Data
Processing, Inc. and its subsidiaries are included in Part II, Item 8:
Page in 1997 Annual
Report to Shareholders
----------------------
Independent Auditors' Report 28
Consolidated Balance Sheets - June 30, 1997 and 1996 20
Statements of Consolidated Earnings - years
ended June 30, 1997, 1996 and 1995 19
Statements of Consolidated Shareholders' Equity -
years ended June 30, 1997, 1996 and 1995 21
Statements of Consolidated Cash Flows - years
ended June 30, 1997, 1996 and 1995 22
Notes to Consolidated Statements 23 - 27
Financial information of the Registrant is omitted because the Registrant
is primarily an operating company. The Registrant's subsidiaries which are
listed on Exhibit 21 attached hereto are wholly-owned.
2. FINANCIAL STATEMENT SCHEDULES
Page in Form 10-K
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Independent Auditors' Report on Schedule 14
Schedule II - Valuation and Qualifying Accounts 15
All other Schedules have been omitted because they are inapplicable or are
not required or the information is included elsewhere in the financial
statements or notes thereto.
3. The following exhibits are filed with this Form 10-K or incorporated
herein by reference to the document set forth next to the exhibit in the list
below:
3.1 - Amended and Restated Certificate of Incorporation dated December
15, 1994 - incorporated by reference to Exhibit (3)-#1 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995
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3.2 - By-Laws as currently in effect - incorporated by reference to
Exhibit (3)-#2 to Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 1997
4 - Indenture dated as of February 20, 1992 between Automatic Data
Processing, Inc. and Bankers Trust Company, as trustee, regarding
the Liquid Yield Option Notes due 2012 of the Registrant -
incorporated by reference to Exhibit (4)-#1 to Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30,
1992
10.1 - Letter Agreement dated as of August 1, 1996 between Automatic
Data Processing, Inc. and Arthur F. Weinbach - incorporated by
reference to Exhibit 10.2 to Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1996 (Management
Contract)
10.2 - Agreement with Gary C. Butler - incorporated by reference to
Exhibit 10(iii)(A)-#2 to Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1991 (Management Contract)
10.3 - 1981 Key Employees' Stock Option Plan - incorporated by reference
to Registrant's Registration Statement No. 2-75287 on Form S-8
(Management Compensatory Plan)
10.3(a) - Amendment to 1981 Key Employees' Stock Option Plan - incorporated
by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1989 (Management Compensatory Plan)
10.4 - Key Employees' Restricted Stock Plan - incorporated by reference
to Registrant's Registration Statement No. 33-25290 on Form S-8
(Management Compensatory Plan)
10.5 - Supplemental Officers' Retirement Plan, as amended and restated -
incorporated by reference to Exhibit 10(iii)(A)-#5 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1993 (Management Compensatory Plan)
10.5(a) - Amendment to Supplemental Officers' Retirement Plan (Management
Compensatory Plan)
10.6 - 1989 Non-Employee Director Stock Option Plan - incorporated by
reference to Exhibit 10(iii)(A)-#7 to Registrant's Annual Report
on Form 10-K for the fiscal year ended June 30, 1990 (Management
Compensatory Plan)
10.6(a) - Amendment to 1989 Non-Employee Director Stock Option Plan
(Management Compensatory Plan)
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10.7 - 1990 Key Employees' Stock Option Plan - incorporated by reference
to Exhibit 10(iii)(A)-#8 to Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1990 (Management
Compensatory Plan)
10.7(a) - Amendment to 1990 Key Employees' Stock Option Plan (Management
Compensatory Plan)
10.8 - 1994 Directors' Pension Arrangement - incorporated by reference
to Exhibit 10(iii)(A)-#10 to Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1994 (Management
Compensatory Plan)
10.9 - 1994 Executive Compensation Plan - incorporated by reference to
Exhibit A to Registrant's Proxy Statement for its Annual Meeting
of Stockholders held November 15, 1994 (Management Compensatory
Plan)
11 - Schedule of Calculation of Earnings Per Share
13 - Pages 3-28 of the 1997 Annual Report to Shareholders (with the
exception of the pages incorporated by reference herein, the
Annual Report is not a part of this filing)
21 - Subsidiaries of the Registrant
23 - Independent Auditors' Consent
27 - Financial Data Schedule
(b) None.
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INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors
and Shareholders of
Automatic Data Processing, Inc.
Roseland, New Jersey
We have audited the consolidated financial statements of Automatic Data
Processing, Inc. as of June 30, 1997 and 1996, and for each of the three years
in the period ended June 30, 1997, and have issued our report thereon dated
August 13, 1997; such consolidated financial statements and report are included
in your 1997 Annual Report to Shareholders and are incorporated herein by
reference. Our audits also included the financial statement schedule of
Automatic Data Processing, Inc., listed in Item 14. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
New York, New York
August 13, 1997
-14-
<PAGE>
AUTOMATIC DATA PROCESSING, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
ADDITIONS
------------------------
(1) (2)
Charged to
Balance at Charged to other Balance at
beginning costs and accounts- Deductions - end of
of period expenses describe describe period
--------- -------- --------- -------- ------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997:
Allowance for doubtful accounts:
Current $34,627 $13,230 $4,067(B) $12,382(A) $39,542
Long-term $25,727 $1,817 $7,174(A) $20,370
Year ended June 30, 1996:
Allowance for doubtful accounts:
Current $23,035 $9,115 $4,835(B) $2,358(A) $34,627
Long-term $26,166 $2,986 -- $3,425(A) $25,727
Year ended June 30, 1995:
Allowance for doubtful accounts:
Current $20,513 $8,415 $904(B) $6,797(A) $23,035
Long-term $24,526 $3,916 -- $2,276(A) $26,166
</TABLE>
(A) Doubtful accounts written off, less recoveries on accounts previously
written off.
(B) Acquired in purchase/pooling transactions.
-15-
<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.
AUTOMATIC DATA PROCESSING, INC.
(Registrant)
September 18, 1997 By: /s/ Arthur F. Weinbach
-------------------------------------
Arthur F. Weinbach
President and Chief 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 in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Arthur F. Weinbach President, Chief September 18, 1997
- -------------------------- Executive Officer,
(Arthur F. Weinbach) and Director
(Principal Executive Officer)
/s/ Richard J. Haviland Chief Financial Officer September 18, 1997
- ------------------------- (Principal Financial Officer)
(Richard J. Haviland)
/s/ Gary C. Butler Director September 18, 1997
- -------------------------
(Gary C. Butler)
- ------------------------- Director September , 1997
(Joseph A. Califano, Jr.)
/s/ Leon G. Cooperman Director September 18, 1997
- -------------------------
(Leon G. Cooperman)
- ------------------------- Director September , 1997
(George H. Heilmeier)
/s/ Ann Dibble Jordan Director September 18, 1997
- -------------------------
(Ann Dibble Jordan)
-16-
<PAGE>
/s/ Harvey M. Krueger Director September 18, 1997
- -------------------------
(Harvey M. Krueger)
/s/ Charles P. Lazarus Director September 18, 1997
- -------------------------
(Charles P. Lazarus)
/s/ Fred V. Malek Director September 18, 1997
- -------------------------
(Frederic V. Malek)
/s/ Henry Taub Director September 18, 1997
- -------------------------
(Henry Taub)
/s/ Laurence A. Tisch Director September 18, 1997
- -------------------------
(Laurence A. Tisch)
/s/ Josh S. Weston Director September 18, 1997
- -------------------------
(Josh S. Weston)
-17-
<PAGE>
EXHIBIT 10.5(A)
AUTOMATIC DATA PROCESSING, INC.
SUPPLEMENTAL OFFICERS' RETIREMENT PLAN
Paragraph 3.1(b) of the Supplemental Officers' Retirement Plan is amended
to read as follows:
"(b) In addition, the Annual Plan Benefits otherwise payable to a
Participant under the Plan's basic benefit formula set forth in Section
3.1(a) above shall be reduced to the extent necessary to cause the total of
(i) Participant's Annual Plan Benefits and (ii) Participant's annual Other
Retirment Benefits not to exceed 60% of Participant's Final Average Annual
Pay."
<PAGE>
EXHIBIT 10.6(A)
RESOLVED, that the Automatic Data Processing, Inc. 1989 Non-Employee
Director Stock Option Plan be amended by adding the following language at the
end of Section 7 thereof:
"Notwithstanding the foregoing, or any other provision of the
Plan, the Board may in the applicable award agreement evidencing an
option granted under the Plan or at any time thereafter provide that
options granted hereunder may be transferred without consideration by
the grantee, subject to such rules as the Board may adopt to preserve
the purposes of the Plan, to:
(i) the grantee's spouse, children or grandchildren (including
adopted and stepchildren and grandchildren) (collectively,
the "Immediate Family")
(ii) a trust solely for the benefit of the grantee and his or her
Immediate Family;
(iii) a partnership or limited liability company whose only
partners or shareholders are the grantee and his or her
Immediate Family members; or
(iv) if and when, and to the extent, permitted by applicable law,
charitable trust designated by the grantee;
(each transferee described in clause (i), (ii) and (iii) above is
hereinafter referred to as a "Permitted Transferee"); provided that
the grantee gives the Board advance written notice describing the
terms and conditions of the proposed transfer and the Board notifies
the grantee in writing that such a transfer would comply with the
requirements of the Plan and any applicable award agreement evidencing
the option.
The terms of any Option transferred in accordance with the
immediately preceding sentence shall apply to the Permitted
Transferee, except that (a) Permitted Transferees shall not be
entitled to transfer any Options, other than by will or the laws of
descent and distribution; and (b) Permitted Transferees shall not be
entitled to exercise any transferred Options unless there shall be in
effect a registration statement on an appropriate form covering the
shares to be acquired pursuant to the exercise of such Option if the
Board determines that such a registration statement is necessary or
appropriate."
FURTHER RESOLVED, that Sections 15 and 16 of the Automatic Data
Processing, Inc. 1989 Non-Employee Director Stock Option Plan be amended to
read as follows:
"15. AMENDMENT. The Board shall have the authority to amend
the Plan at any time but no such amendment shall adversely affect any
right pursuant to an Optiopn granted prior thereto without the written
consent of the holder of such Option.
16. ADOPTION DATE AND TERM. The Plan is being adopted on
November 2, 1989, shall be effective as of such date and shall remain
in effect until terminated by action of the Board. No such
termination shall adversely affect any right pursuant to an Option
granted prior thereto without the written consent of the holder of
such Option."
<PAGE>
EXHIBIT 10.7(A)
RESOLVED, that the Automatic Data Processing, Inc. 1990 Key Employees'
Stock Option Plan be amended by adding the following language at the end of
Section 9 thereof:
"Notwithstanding the foregoing or any other provisions of the
Plan, the Committee may in the applicable award agreement evidencing
an option granted under the Plan or at any time thereafter provide
that options granted hereunder which are not intended to qualify as
Incentive Options may be transferred without consideration by the
grantee, subject to such rules as the Committee may adopt to preserve
the purposes of the Plan, to:
(i) the grantee's spouse, children or grandchildren (including
adopted and stepchildren and grandchildren) (collectively,
the "Immediate Family")
(ii) a trust solely for the benefit of the grantee and his or her
Immediate Family;
(iii) a partnership or limited liability company whose only
partners or shareholders are the grantee and his or her
Immediate Family members; or
(iv) ,if and when, and to the extent, permitted by applicable
law, charitable trust; designated by the grantee;
(each transferee described in clauses (i), (ii) and (iii) above
is hereinafter referred to as a "Permitted Transferee"); provided
that the grantee gives the Committee advance written notice
describing the terms and conditions of the proposed transfer and
the Committee notifies the grantee in writing that such a
transfer would comply with the requirements of the Plan and any
applicable award agreement evidencing the option.
The terms of any option transferred in accordance with the
immediately preceding sentence shall apply to the Permitted
Transferee, except that: (a) Permitted Transferees shall not be
entitled to transfer any options, other than by will or the laws of
descent and distribution; and (b) Permitted Transferees shall not be
entitled to exercise any transferred options unless there shall be in
effect a registration statement on an appropriate form covering the
shares to be acquired pursuant to the exercise of such option if the
Committee determines that such a registration statement is necessary
or appropriate."
<PAGE>
EXHIBIT 11
AUTOMATIC DATA PROCESSING, INC
AND SUBSIDIARIES
CALCULATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Earnings before cumulative effect of accounting changes $513,500 $454,700 $394,830 $334,120 $294,200
Cumulative effect of accounting changes - - - (4,800) -
-------- -------- -------- -------- --------
Net earnings applicable to common shares $513,500 $454,700 $394,830 $329,320 294,200
======== ======== ======== ======== ========
Average number of common shares outstanding 290,990 288,967 285,112 281,780 282,654
======== ======== ======== ======== ========
Primary earnings per share
before cumulative effect of accounting changes $1.76 $1.57 $1.38 $1.19 $1.04
Cumulative effect of accounting changes - - - (0.02) -
----- ----- ----- ----- -----
Primary earnings per share $1.76 $1.57 $1.38 $1.17 $1.04
===== ===== ===== ===== =====
FULLY DILUTED EARNINGS PER SHARE:
Net earnings used in primary earnings per share $513,500 $454,700 $394,830 $334,120 $294,200
Adjustment for interest (net of tax) -
Zero coupon convertible subordinated
notes (5 1/4% yield) 11,302 11,703 11,330 10,075 9,409
-------- -------- -------- -------- --------
Net earnings used for fully diluted earnings per share
before cumulative effect of accounting changes $524,802 $466,403 $406,160 $344,195 $303,609
Cumulative effect of accounting changes - - - (4,800) -
-------- -------- -------- -------- --------
Net earnings used for fully diluted earnings per share $524,802 $466,403 $406,160 $339,395 $303,609
======== ======== ======== ======== ========
Average number of shares outstanding on a fully
diluted basis:
Shares used in calculating primary earnings per share 290,990 288,967 285,112 281,780 282,654
Diluted effect of all stock options outstanding after
application of treasury stock method 6,805 6,483 5,836 5,382 5,962
Shares assumed to be issued upon conversion of Debentures-
Zero coupon convertible subordinated
notes (5 1/4% yield)(1) 9,686 10,360 10,402 10,402 10,402
-------- -------- -------- -------- --------
Average number of shares outstanding on a fully
diluted basis 307,481 305,810 301,350 297,564 299,018
======== ======== ======== ======== ========
Fully diluted earnings per share before cumulative
effect of accounting changes $1.71 $1.53 $1.35 $1.16 $1.02
Cumulative effect of accounting changes - - - (0.02) -
----- ----- ----- ----- -----
Fully diluted earnings per share $1.71 $1.53 $1.35 $1.14 $1.02
===== ===== ===== ===== =====
</TABLE>
- -------------------------------------
(1) Assumed converted at the beginning of periods reported.
<PAGE>
EXHIBIT 13
Letter from the Chief Executive Officer
We have just finished my first year as ADP's chief executive officer. I am
happy to tell you that we had an excellent year.
FISCAL 1997 RESULTS
In fiscal '97, ADP continued its unequaled growth record by reporting its
144th consecutive quarter of record revenues and earnings per share (EPS) and
its 36th consecutive year of double-digit increases in EPS.
Following last year's acquisition of GSI, we continued our international
expansion with additional acquisitions in '97. We have now achieved the #1
European market share position in both Employer and Dealer Services.
With this expansion, revenue increased 15% to over $4.1 billion. Prior to
minor non-recurring items, pretax earnings increased 19%, net earnings advanced
16% and earnings per share increased 15% to $1.80 from $1.57 last year.
Non-recurring items in the fourth quarter included an anticipated loss related
to the previously announced disposition of our Autolnfo business and reduced EPS
by $.04.
In recognition of these strong operating results, our Board declared its
twenty-third consecutive annual dividend increase, from $.40 to $.46 per share,
effective January 1, 1997.
ADP continues to operate from a position of significant strength and
liquidity. Cash flow from operations exceeded $700 million and year-end cash and
marketable securities approximated $1.5 billion, after spending of $243 million
in '97 to acquire businesses and ADP shares. We purchased 3.2 million ADP shares
on the open market to fund employee equity plans.
Shareholders' equity exceeds $2.6 billion. The ratio of long-term debt to
equity is a comfortable .15 to 1 and return on average shareholders' equity is a
very healthy 21%.
Capital expenditures for the year were $175 million, about 5% of revenue.
This compared to $164 million last year.
LOOK AHEAD
As we look to the future, we expect to capitalize on our strengths which include
(1) the good fortune of being in a growth industry, computing information
services; (2) leading market share positions in each of our four core
businesses: Employer, Brokerage, Dealer and Claims Services; (3) a strong client
service orientation; (4) a superb direct sales capability; (5) a powerful
financial position from which to compete; and (6) a trained, dedicated associate
team committed to our objectives.
As we leverage these strengths into our strategies over the next few years,
we expect our primary growth to be internally generated from our current core
businesses. This growth will come from further penetration of our markets,
extending our market opportunities through broader product offerings and through
additional international expansion. We also intend to supplement this internal
growth in our core markets with acquisitions which will further these
strategies.
3
<PAGE>
In addition, we continue to look for an entry into an additional computing
information services market which complements our core businesses and leverages
our existing strengths.
COMMITMENT TO WORLD CLASS SERVICE
Among ADP's strengths is a strong client service orientation. Our service levels
are very good today in each ADP business. But we are committed to achieving
world class service levels where we delight our clients and exceed our clients'
expectations. We define service broadly, from initial contact with a prospect,
to product quality, to client responsiveness and happiness. We clearly see world
class service as a journey where, whenever we get close to the destination, we
move it out farther. This year, we are investing more than ever before in our
associates, tools and processes to raise service quality levels. We believe
these investments will improve client retention, enhance sales and improve
associate retention. It is good for all of our stakeholders (clients, associates
and shareholders.)
CURRENT OPTIMISM
At ADP, there are always many exciting opportunities. It is one of our
strengths. Here are three perspectives to think about.
First, our internal growth rate -- excluding acquisitions and dispositions
- -- in Employer Services, ADP's largest business, expanded for the 4th year in a
row and we expect that trend to continue through '98 and beyond.
Second, we have more significant new client opportunities in our back
office Brokerage Services than we have had in over a decade. We are installing
Legg Mason now and we are getting close with additional prospects.
Third, our European expansion opportunities in both Dealer Services and
Employer Services are better than ever. While we already are the number one
European market share services leader in both of these businesses, we have
significant room for further penetration and acquisition of competitors ... and
we just entered South America with the acquisition of an Employer Services
business in Brazil.
Importance of People
The most critical element in our success is our team of 30,000 associates who
continually strive to provide world class service to our more than 400,000
clients. Fortunately, we attract exceptionally dedicated and motivated people
with a strong results orientation. They share our vision and help us win in the
marketplace. Each person counts, each client counts, and each contact between a
client and associate counts.
In '97, Russell Fradin joined ADP as Senior Vice President, Richard
Haviland was promoted to Chief Financial Officer, and Howard Koenig, Gordon
Mettam and Raymond Colotti were promoted to Corporate Vice President in
recognition of their important contributions and responsibilities.
After 10 years of valuable service, Charles Lazarus has decided not to
stand for re-election to our Board and after 9 years as Group President of our
Brokerage Services business, Robert Casale will be retiring shortly. We will
miss their contributions.
On a much sadder note, Joseph Pirret, our Treasurer and a 23 year ADP
associate, died suddenly in June. Joe's contributions over the years were
immense, and we will miss him greatly.
FORECAST
I am very confident that ADP is well positioned for long-term growth and
profitability. In '98, we expect both double-digit revenue and earnings per
share growth while we make significant investments in our future.
I hope you share my excitement, enthusiasm and optimism. I want to
especially tell our 30,000 ADP associates how much I appreciate their efforts
and results. Without them, none of this is possible.
/s/ Arthur F. Weinbach
Arthur F. Weinbach
President & Chief Executive Officer
August 13, 1997
4
<PAGE>
LETTER FROM THE CHAIRMAN
1997 marked my first ADP year in less than a full-time leadership role, and I am
pleased to observe the outstanding accomplishments of the current management
team under Art Weinbach's leadership.
As cited in Art's letter to shareholders, we concluded our 36th year (144
consecutive quarters) of uninterrupted growth in both revenue and earnings per
share. According to the Compustat database of 9,500 publicly owned companies,
only one other company's growth record has endured half as long as our 144
fiscal quarters. Consistency in continually attaining new heights without
occasional financial disappointments is most difficult and unusual. The whole
ADP team deserves special recognition for their collective achievement. I am
quite confident that four more growth quarters will be added to that record in
fiscal '98.
Many shareholders have asked me how my time has been redirected after so
many years of more than full-time focus on ADP matters. During the past year, I
am pleased to have played a leading role on two government-related
"commissions," one to help restructure the Internal Revenue Service and the
other to help shift military resources from overhead functions to more
cutting-edge, rapid response defense capabilities. In between times, I've also
played pro bono roles in several endeavors to enhance our nation's educational
and economic development accomplishments.
I think that it is most appropriate for those individuals and companies who
have benefited from our society to give back to that society so that others may
be assisted.
I thank our shareholders for their support and confidence in ADP. The Board
of Directors and our 30,000 ADP associates are committed to providing you with
continued growth and good return on your investment.
/s/ Josh S. Weston
- ----------------------
Josh S. Weston
Chairman
August 13, 1997
5
<PAGE>
EMPLOYER SERVICES
ADP's oldest and largest business is Employer Services (ES), which contributes
more than half of ADP's revenues. ES provides a comprehensive range of payroll,
human resource, benefits administration, time and attendance, and tax filing and
reporting services to about 400,000 employers in the U.S., Canada, and Europe.
Pull Quote:
"WE AT PIERCE LEAHY TAKE PRIDE IN MAKING THE STAFFS OF ACQUIRED COMPANIES FEEL
THAT THEY'RE PART OF THE TEAM RIGHT AWAY. ADP HELPS US ACHIEVE THAT OBJECTIVE BY
COMPLETING EACH PAYROLL CONVERSION IN AN EFFICIENT, COST EFFECTIVE AND TIMELY
MANNER."
This year, ES revenue increased 19% to over $2.2 billion. Today ADP
processes the paychecks of over 21 million employees in North America and 2
million in Europe. In '97, we also printed 35 million W-2 forms at our 40
computer centers in the U.S.
As market trends increasingly favor both outsourcing and software as
preferred payroll solutions, ES is uniquely positioned to be the logical vendor
of choice for more and more companies. ADP's "Payroll AnyWay" strategy presents
to businesses of virtually every size and type an extensive menu of outsourced
and on-site payroll solutions, from turnkey service to client-site software. In
addition, we have segmented employers by size and complexity to effectively
match their needs to products and service teams that will best meet
expectations.
In North America, ES focuses on three market segments: National Accounts
(for companies with 1,000 or more employees), Major Accounts (100 to 999
employees), and Emerging Business Services (for companies with fewer than 100
employees).
Many of the world's largest corporations are ADP National Accounts clients.
In many cases, we provide system solutions for their entire human resource,
payroll and benefits needs. For those companies who choose to process these
applications in-house, we deliver valuable stand-alone services such as tax
filing, check printing and distribution, year-end statements (W-2s), and
benefits administration. This year, National Accounts revenue grew rapidly and
average client tenure is over a decade, and rising.
Major Accounts offers a robust line of best-of-breed payroll and human
resource solutions for medium-size companies with full database and functional
integration between payroll and human resources (HR). Nearly 65% of the
medium-size firms in the U.S., who have elected to outsource their payrolls, are
ADP Major Accounts clients.
Emerging Business Services processes payroll for 300,000 clients--far more
than any other small business payroll provider. Over 10 million small and
emerging companies are in the domestic marketplace, and represent a $12 billion
market opportunity for ES.
The ADP Tax Center, which supports all three market segments,
electronically interfaces with 2,000 tax agencies from the IRS to local school
districts.
Last year the Tax Center processed 13 million federal and state employer
payroll tax returns, and transmitted over $200 billion in taxes to appropriate
tax collection agencies.
The Electronic Services Division (ESD) also complements our market segments
with a product mix that augments our payroll and HR services--from 401(k) to
time and attendance tracking. Additionally, we offer Peachtree software business
applications and Business Express bill payment services for small clients.
6
<PAGE>
In colored boxes, one on each page of spread:
Challenge
Pierce Leahy Corp. is one of the largest international providers of records
management and related services--and it's still growing. Acquired companies not
only bring growth but numerous additions and adjustments to payroll. So paying
new employees accurately and on-time is a high priority for Pierce Leahy's
management.
SOLUTION
ADP ASSOCIATES DEVELOPED A TAILORED PLAN TO EFFICIENTLY MANAGE THE PAYROLL
CONVERSION PROCESS FOR EACH OF PIERCE LEAHY'S ACQUISITIONS. THE MODEL PROVIDED A
LIST OF ACTION ITEMS--"DELIVERABLES"--REQUIRED BY BOTH ADP AND THE CLIENT. BY
CLOSELY FOLLOWING THE PLAN AND MONITORING EACH TASK, THE CONVERSIONS OF FOUR NEW
ACQUISITIONS TO THE ADP SYSTEM WENT SMOOTHLY. NOBODY MISSED A BEAT--OR A
PAYCHECK.
7
<PAGE>
We anticipate sustained growth at buoyant levels in ESD because these additional
applications are high value-added and its products are in high-growth markets.
From time to time, we supplement our internal growth through selective
acquisitions. This strategy allows us to expand existing products and services
or pursue entirely new opportunities by shortening the time to market.
We became the largest provider of payroll services to Canadian businesses
with our purchases of and alliances with Royal Bank of Canada's and the
Scotiabank's payroll businesses. In July, we also acquired a Brazilian computing
services company, giving us a strong initial position in the growing South
American employer services marketplace.
Additionally, we made three important moves to accelerate our penetration
of the multi-billion dollar benefits administration market. First, we acquired
Health Benefits America (HBA), a provider of health care benefits administration
services. Then we formed a strategic alliance in benefits administration with
William M. Mercer, Inc., one of the leading benefits consulting firms in the
U.S.
We also acquired Staff Management Services of Florida, Inc., which we
renamed TotalSource. This acquisition firmly establishes ADP as a leading
professional employer organization (PEO), and positions us to aggressively
increase our presence in the rapidly-expanding employee leasing business.
The continued increase in multinational companies clearly makes payroll and
human resource management services a global opportunity. This development and a
strong demand for outsourcing make Europe a particularly attractive marketplace
for ADP.
ES already has 35,000 payroll and
8
<PAGE>
HR clients in Belgium, France, Germany, Italy, the Netherlands, Spain,
Switzerland and the United Kingdom. Our client retention rate in Europe is
especially high, averaging over 90%. Our core strength in Europe currently is
with larger companies--those with 1,000 or more employees. Our aim is to
rapidly expand ES' business in major European countries and be the leading
provider of employer solutions in all market segments. We strengthened our
product offerings to smaller companies by introducing new "payroll by phone"
offerings in France.
9
<PAGE>
BROKERAGE SERVICES
ADP's second largest business, Brokerage Services, contributes over 20% of ADP's
overall revenues. Brokerage Services is a leading provider of securities
processing, real-time market information and investor communications services.
Pull Quote:
"WHEN WE NEEDED NEW INNOVATIONS TO MAINTAIN OUR COMPETITIVE EDGE, ADP STEPPED UP
TO THE PLATE WITH THE RIGHT TECHNOLOGY, THE SOLUTIONS, AND HIGH QUALITY SERVICE
TO HELP US MEET THE NEEDS OF OUR 750,000 CLIENTS. ADP HAS BEEN KEY TO OUR GROWTH
AS A NATIONALLY RECOGNIZED LEADER IN OUR INDUSTRY."
ADP is the largest provider of securities processing services in North
America. This year we processed approximately 20% of the retail equity
transactions in the United States and Canada, handling an average of over
475,000 trades per day. We also added Legg Mason Wood Walker Incorporated as a
processing client. In the market information sector, we support more than 97,000
desktops in over 1,600 firms worldwide.
ADP Investor Communications Services (ICS) is the largest processor and
provider of shareholder communications services, and serves more than 12,000
publicly traded companies on behalf of more than 800 brokerage firms and banks
and 400 mutual fund families. During '97, ICS processed over 285 million
mailings.
In addition, ICS received and tabulated shareholder ballots that
represented over 155 billion shares. ICS introduced ADP GLOBAL PROXY SERVICES
which operates in 50 countries and aims to be the global processing standard.
While handling these increased volumes, ICS received ISO 9002
certification, recognizing our superior level of quality assurance.
Brokerage Services continues to provide quality, highly integrated products
supported by reliable service, as indicated by our new products and
enhancements.
This year, we introduced BPS ADVANTAGE, a client/server-based relational
database that allows our brokerage clients to easily access real-time customer
information, such as account holdings and transactions, and customize and
distribute data within their firms.
ADP's POWER PARTNER, which provides advanced market information, has become
the product of choice for retail brokers.
10
<PAGE>
This powerful system delivers real-time information, analytics and custom
charting for equity, options, and futures traded on all North American exchanges
and over 100 foreign exchanges.
We also launched K2, a state-of-the-art market information and analytical
product, designed for traders and money managers in the institutional
marketplace. ADP developed K2 with the goal of integrating all of our
institutional products on a common platform. This sets the stage for bringing
together front-, middle-, and back-office services at the desktop for integrated
processing.
Many of our investments also are helping our clients to expand their
internal information management capabilities.
Starting with Deutsche Bank AG's New York branch, our new Impact
transaction processing product will help to clear fixed income securities, track
instrument positions, produce confirmations and settle transactions more
effectively than ever.
Wilco Systems is a rapidly growing ADP subsidiary, which offers
international trading and settlement systems. Wilco recently introduced GLOSS HV
which is a multi-instrument, multi-currency, trading, settlement and accounting
system. In December '96, Bankers Trust signed a global license agreement to use
Wilco's Gloss HV trading and settlement system. Wilco continues to make gains in
the global market with several more large prospects in the offing.
In colored boxes, one on each page of spread:
Challenge
During the past year Waterhouse Securities, the 4th largest discount brokerage
in the U.S., started a new correspondent clearing division--National Investor
Services Corp. (NISC), to supplement its discount brokerage business. To make a
difference in such a competitive marketplace, the firm needed a partner that
could provide comprehensive, leading-edge brokerage processing
applications--supported by responsive, reliable systems and service.
SOLUTION
WATERHOUSE, AN ADP CLIENT FOR 10 YEARS, AND ITS NEW NISC AFFILIATE KNEW EXACTLY
WHERE TO TURN FOR A ONE-STOP SOLUTION. ADP'S BROKERAGE SERVICES TEAM UPGRADED
WORKSTATIONS IN 100 BRANCH OFFICES TO POWER PARTNER, A STATE-OF-THE-ART MARKET
INFORMATION SYSTEM. ADP'S TECHNOLOGY NOW ENABLES WATERHOUSE AND NISC TO ACCESS
HIGH PERFORMANCE NETWORKS FOR TRADE EXECUTIONS, PROVIDE CUSTOMERS INTERNET
ACCESS TO THEIR ACCOUNTS, AND QUICKLY FULFILL REQUESTS FOR MUTUAL FUND
INFORMATION THROUGH ADP'S PROSPECTUS FULFILLMENT SERVICE.
11
<PAGE>
ADP Dealer Services is the world's largest provider of computing, data and
professional services to auto and truck dealers and manufacturers. Over 18,000
dealers in the United States, Canada, Europe, Asia and Latin America use ADP's
on-site systems and communications networks to manage virtually every area of
operations.
Pull Quote:
"THE MEASURE OF A COMPANY'S COMMITMENT IS WHEN THEY STAND BY IT UNDER THE MOST
DIFFICULT CONDITIONS. ADP DID THAT AND WE KNOW FROM EXPERIENCE WE CAN COUNT ON
THEM."
In '97, Dealer Services revenue increased 17% and client retention rates
remained very strong--over 95% in the U.S., Canada, Europe, Mexico and Taiwan.
This year, we began to segment our client base by size and complexity. Our
objective is to better align product and service offerings to dealerships
according to their needs.
We entered into an agreement with Credit Management Solutions, Inc. (CMSI),
permitting us to market their CREDIT CONNECTION product. This real-time, on-line
credit processing system expeditiously links dealers to lending institutions and
accelerates decisions on consumer auto loans. A process that had once taken
hours now only takes minutes.
We introduced ADP MANAGEMENT ADVISOR, a graphical user interfaced, on-line
analytical application that enables dealers to control their expenses and
maximize profits. In addition, we unveiled our new high-power systems platform,
Millennia3, which includes flexible, cost-effective, and scalable
enterprise-wide system solutions.
ADP Dealer Services also is the leading service provider to the emerging
retail auto "super-store" market. We help these very large dealers design and
implement enterprise-wide information and technology strategies, including
state-of-the-art retailing systems, which enable customers to very easily select
and even purchase a vehicle at touch-screen kiosks.
12
<PAGE>
Both manufacturers and dealers are placing greater emphasis on effective
contact with consumers. ADP is well positioned to assist. ADP AutoConnect
already has 4,500 web sites which connect consumers and dealers on the Internet.
Our Relationship Marketing System uses laptops and work-stations to aid the
customer handling process. In addition, the recently acquired Picture Perfect
Promotions, Inc. offers our clients on-demand, direct mail marketing
capabilities.
As auto and truck manufacturers become more proactive in creating brand
awareness, ADP Dealer Services, through the Professional Services of our Sandy
Group, helps dealers and manufacturers promote brand identity. This year, Sandy
began a multi-year marketing program for one large manufacturer, which conveys
highly individualized, tailored one-on-one monthly mailings to all vehicle
owners of that manufacturer's brand.
ADP serves over 9,000 European dealers. In '97, we expanded to Norway,
Sweden, Denmark, Italy, Spain, Switzerland and Finland, and now have operations
in every major European country. As part of our global strategy, we made two
significant acquisitions: Istel Nordic (operating as JDC) in Denmark and
Germany, and Sicit MT&T S.p.A., Italy's largest dealer system provider.
Today, over 40% of ADP Dealer Services clients are outside the North
American market. We are clearly Europe's leading dealer services provider.
In colored boxes, one on each page of spread:
Challenge
The morning after his business had been burglarized and he discovered that his
ADP server was missing, the owner of the Bjorn Canning's Eftf ApS auto
dealership called ADP Dealer Services in Denmark for help. Without a server to
operate ADP's AD2000 software, the car dealer was unable to register sales,
access inventory or effectively manage the administrative and financial aspects
of his business.
SOLUTION
ADP TECHNICAL CONSULTANT, KASPER SCHULTZ, IMMEDIATELY GOT ON THE ROAD TO MAKE
THE LONG DRIVE TO COPENHAGEN FROM HIS OFFICE IN CENTRAL DENMARK. DESPITE ICY
ROADS AND BRIDGES CLOSED BY DETERIORATING WEATHER CONDITIONS, KASPER WAS ABLE TO
REACH THE DANISH CAPITAL THE FOLLOWING MORNING. HE INSTALLED THE SERVER, ENSURED
THE SYSTEM WAS IN GOOD WORKING ORDER, AND THE DEALERSHIP WAS ABLE TO RESUME
NORMAL OPERATIONS THAT VERY SAME DAY.
13
<PAGE>
CLAIMS SERVICES
ADP's Claims Services, the leading claims information provider to the property
and casualty insurance industry, offers a broad line of products to help clients
accurately estimate auto damage, bodily injury, and property claims.
Pull Quote
"OUR INDUSTRY SURVIVES BY MAKING WISE CHOICES TO CAREFULLY MANAGE RISK. WHEN IT
COMES TO TIMELY AND RESPONSIVE SERVICE, WE COULDN'T HAVE CHOSEN A CLAIMS
SOLUTION PARTNER BETTER THAN ADP."
Our clients include 14 of the 15 largest auto insurance carriers, more than
250 additional insurance carriers and independent adjusting companies, over
7,000 collision repair facilities, and more than 3,600 auto parts recycling
facilities in the United States and Canada. Revenue grew over 20% this year, and
we succeeded in renewing all our major contracts.
In Estimating Services, virtually every product increased its market
penetration. Our pen-based vehicle damage appraisal system, PenPro, operates on
a PC laptop and has won broad market acceptance. This year, we installed over
1,500 new users.
AUTOSOURCE, our total loss valuation product, grew nearly 30%. SHOPLINK
estimating systems for collision repair facilities achieved 70% revenue growth
in '97, and is now installed in over 7,000 auto body shops. PHOTOLINK is the de
facto industry standard for digital imaging between repair shops, claims
adjusters and insurance companies. It is used by 75% of the claims professionals
who employ imaging system.
Over 3,600 auto parts recycling facilities and salvage yards now manage
their inventories using ADP Parts Services, which helps the flow of parts
information between insurers, body shops and parts recyclers. ADP is also the
data collector for the ARA International Database. Updated daily, it contains
over 10 million items and is the preferred resource for locating recycled auto
parts. Under a recent agreement with the FTC, we have agreed to sell part of
this service in order to create a more competitive environment.
ACCUPRO is our building and structure estimating product launched in
January '97. It already has 1,650 installations, and is growing steadily.
14
<PAGE>
Integrated Medical Solutions (IMS), which processes bodily injury claims
arising from auto accidents, increased revenue 60%. Provider Bill Audit (PBA) is
IMS's computerized system that reviews medical bills. PBA software is licensed
by many major insurance carriers and is clearly the most successful of its kind.
This year, IMS became the first vendor to offer automated medical
utilization review, preferred provider access and managed care services via an
integrated product expressly designed for the auto claims market.
We further expanded our capabilities to claims adjusters by introducing
Injury Claims Evaluations (ICE) as a complement of the PBA system. ICE helps
adjusters to make fair and equitable settlements when pain and suffering claims
are involved in third party auto liability claims.
IMS recently expanded further into workers' compensation bill review by
acquiring Medical Bill Review Services.
We will continue to sharpen our focus on major strategic opportunities that
add value for our clients in the property and casualty industry.
In colored boxes, one on each page of spread:
Challenge
In September 1996, Hurricane Fran did more than $3.2 billion in damage on the
North Carolina coast. United Services Automobile Association (USAA), one of the
country's leading insurers of homes and automobiles, needed to respond quickly
to a veritable flood of insurance claims.
SOLUTION
ADP SET UP AUTOMATED CLAIMS ESTIMATE SITES, INCLUDING ONE IN A CONVERTED GARAGE
ON A MILITARY BASE. A TEAM OF ADP ASSOCIATES OPERATED THE SITES 18 HOURS A DAY
FOR THREE STRAIGHT WEEKS. USING ADP'S POWERFUL AND RELIABLE CLAIMS ESTIMATING
SOFTWARE, USAA'S ESTIMATORS WERE ABLE TO EVALUATE DAMAGED VEHICLES, PROCESS
CLAIMS, AND PROVIDE SETTLEMENT CHECKS ON-THE-SPOT.
15
<PAGE>
SELECTED FINANCIAL DATA
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
YEARS ENDED JUNE 30, 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 4,112,186 $3,566,597 $2,893,742 $2,468,966 $2,223,374
---------- ---------- ---------- ---------- ----------
Cost of operations 3,331,093 2,901,476 2,335,122 2,001,796 1,816,995
Interest expense 27,794 29,731 24,340 20,840 19,819
Non-recurring items 29,289 -- -- -- --
---------- ---------- ---------- ---------- ----------
3,388,176 2,931,207 2,359,462 2,022,636 1,836,814
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Earnings before income taxes
and cumulative effect of
accounting changes 724,010 635,390 534,280 446,330 386,560
Provision for income taxes 210,510 180,690 139,450 112,210 92,360
---------- ---------- ---------- ---------- ----------
Net earnings before
cumulative effect of
accounting changes 513,500 454,700 394,830 334,120 294,200
Cumulative effect of
accounting changes -- -- -- (4,800) --
---------- ---------- ---------- ---------- ----------
Net earnings $ 513,500 $ 454,700 $ 394,830 $ 329,320 $ 294,200
---------- ---------- ---------- ---------- ----------
Earnings per share $ 1.76(a) $ 1.57 $ 1.38 $ 1.17 $ 1.04
---------- ---------- ---------- ---------- ----------
Average number of common
shares outstanding 290,990 288,967 285,112 281,780 282,654
---------- ---------- ---------- ---------- ----------
Cash dividends per share $ .445 $ .3875 $ .3125 $ .27 $ .2375
---------- ---------- ---------- ---------- ----------
Return on equity 20.6% 20.3% 20.9% 21.0% 20.9%
---------- ---------- ---------- ---------- ----------
At year end:
Cash, cash equivalents and
marketable securities $ 1,495,083 $ 1,098,620 $ 1,291,889 $ 1,062,190 $ 886,452
Working capital $ 785,450 $ 618,670 $ 667,920 $ 507,243 $ 355,047
Total assets $ 4,382,772 $ 3,839,885 $ 3,201,096 $ 2,711,751 $ 2,439,400
Long-term debt $ 401,162 $ 403,743 $ 390,177 $ 372,959 $ 347,583
Shareholders' equity $ 2,660,565 $ 2,315,346 $ 2,096,615 $ 1,691,251 $ 1,494,456
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) AFTER IMPACT OF NON-RECURRING ITEMS (SEE NOTE 3).
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS
Revenue and earnings reached record levels during each of the past three fiscal
years. During fiscal '97, revenue increased 15% to over $4.1 billion. Prior to
minor non-recurring charges, pretax earnings increased 19% and earnings per
share (EPS) increased 15% to $1.80. The Company reached a settlement with the
Federal Trade Commission to divest certain assets acquired in fiscal '95, and
consequently, a non-recurring charge was recorded in the fourth quarter lowering
EPS by $.04 to $1.76 for the year. Fiscal '97 EPS was not impacted by the net
effect of certain non-recurring items related to the Brokerage Front Office
business (see Brokerage discussion below). Fiscal '97 was ADP's 36th consecutive
year of double-digit earnings per share growth since becoming a public company
in 1961.
Revenue and revenue growth by ADP's major service groups are shown below:
REVENUE REVENUE GROWTH
- --------------------------------------------------------------------------------
YEARS ENDED JUNE 30, YEARS ENDED JUNE 30,
------------------------ ---------------------------
1997 1996 1995 1997 1996 1995
- ------------------------------------------------- ---------------------------
($ in millions)
- ------------------------------------------------- ---------------------------
Employer Services (a) $2,275 $1,911 $1,612 19% 19% 13%
Brokerage Services 892 787 657 13 20 8
Dealer Services 651 555 440 17 26 32
Other (a) 294 314 185 (6) 70 78
- -------------------------------------------------- ---------------------------
Consolidated $4,112 $3,567 $2,894 15% 23% 17%
- --------------------------------------------------------------------------------
(A) RECLASSIFIED
Consolidated revenue grew 15% in fiscal '97 primarily from increased market
penetration, an expanded array of products and services and from acquisitions,
with relatively minor contributions from price increases. Prior to acquisitions,
business dispositions and foreign exchange differences, revenue increased
approximately 12%.
Prior to non-recurring charges, the consolidated pretax margin was 18.3% in
'97, 17.8% in '96 and 18.5% in '95. Pretax margin improved over the previous
year as continued automation and operating efficiencies enabled the Company to
offset start-up costs associated with new products and acquisitions. Pretax
margin in '97 after non-recurring charges was 17.6%.
The Company does not prepare its financial statements in a manner that
generates the true stand-alone profitability for each unit and profitability
measurements are not maintained in a consistent manner among the Company's major
service groups. Certain revenues and expenses are charged to business units at a
standard rate for management and motivation reasons. Other costs are recorded
based on management responsibility. As a result, various income and expense
items are recorded at the corporate level and certain shared costs are not
allocated. Consequently, comparisons of specific margins between groups are not
meaningful, although trend information within a service group is a useful
directional indicator.
EMPLOYER SERVICES (ES)
Employer Services' revenue grew 19% in fiscal '97, and in the absence of
acquisitions revenue growth would have been about 11%, up from 10% in '96.
In '97 and '96 the overall operating margin was 22%. The margin in North
America has improved by about 1% versus fiscal '96 primarily due to continued
automation and operating efficiencies. This increased field margin has enabled
ES to increase investments in product development and sales. The overall ES
margin remained flat as a result of greater weighting of international
operations which have somewhat lower margins in '97.
ES' revenue shown above includes the pretax equivalent of interest earned
on funds collected from clients as part of the Company's integrated payroll and
payroll tax filing services. The pretax equivalent has been calculated at a
standard rate. In fiscal '97 the standard rate was changed from 7.8% in prior
years to 6% and, accordingly, the previously reported balances for Employer
Services' and "Other" revenue have been reclassified. As a result of this
change, the ES margin is 3% lower than previously reported.
BROKERAGE SERVICES
Brokerage revenue grew by 13% aided by very high back-office trading volumes. In
the absence of acquisitions, revenue growth would have been about 12%, the same
as in '96.
Prior to non-recurring items in '97, Brokerage Services' operating margin was
about 14% in '97, compared to 13% in both '96 and '95. In '97 the Company
recorded a non-taxable $19 million gain to net earnings related to the return of
a front-office client deposit. The Company also recorded a provision of $31
million ($19 million after tax) to restructure its front-office business in
order to reduce product lines and platforms and consolidate data centers. This
effort will continue and will result in about $25 million lower earnings in the
front-office business in '98.
DEALER SERVICES
Dealer Services' revenue grew 17% in '97, compared to 26% in '96 and 32% in '95.
Revenue growth in each year was aided by several small acquisitions. In the
absence of acquisitions, '97 revenue growth would have been 6%. Revenue growth
has been aided by increased usage of applications at auto dealerships, while at
the same time changes in industry distribution channels have slowed auto
dealership investments in new computer systems. Dealer Services' margins
decreased slightly to 17% in fiscal '97 from 18% in '96 and 20% in '95 primarily
due to the integration of acquisitions and a shift in product mix.
OTHER
The primary components of "Other" revenue are claims services, services for
wholesalers, interest income, foreign exchange differences, and miscellaneous
processing services. In addition, "Other" revenue has been reduced to adjust for
17
<PAGE>
the difference between actual interest income earned on invested tax filing
funds and income credited to Employer Services at a standard rate of 6.0%.
A non-recurring pre-tax charge of $17.8 million was recorded in the fourth
quarter of fiscal '97 reflecting the Company's settlement with the Federal Trade
Commission, under which the Company will divest certain non-material assets.
In each of the past three years, investments in systems development and
programming have increased at a greater rate than the Company's overall growth
rate. Investments have increased to accelerate automation, migrate to new
computing technologies, address Year 2000 compliance, and develop new products.
In '97 the Company's effective tax rate was approximately 29%, up from 28%
in '96 and 26% in '95. The increased rate is primarily as a result of the
greater weighting of taxable versus non-taxable earnings, and the impact of
non-deductible goodwill arising from the '96 GSI acquisition.
For '98 ADP is planning another record year with about 15% growth in
revenue and double-digit growth in earnings per share over the '97 results prior
to non-recurring items.
Additional comments and operating results are included in the Letters to
Shareholders on pages 3 through 5 and in the business descriptions presented on
pages 6 through 15.
FINANCIAL CONDITION
ADP's financial condition and balance sheet remains exceptionally strong. At
June 30, 1997, cash and marketable securities approximated $1.5 billion.
Shareholders' equity exceeded $2.6 billion, and return on average equity for the
year was 21%. The ratio of long-term debt to equity at June 30, 1997 was 15%.
Cash flow from operating activities exceeded $700 million in '97. We expect
another excellent cash-flow year in '98.
In '97, 3.2 million shares of common stock were purchased at an average
price of approximately $40, as part of an ongoing program to fund equity related
employee benefits. The board of directors has authorized the purchase of up to
4.4 million additional shares.
During '97, the Company purchased several businesses for approximately $115
million in cash and $7 million in common stock. The cost of acquisitions in '96
and '95 aggregated $473 million and $123 million, respectively. The Company also
acquired several businesses in the three years ended 1997, 1996 and 1995 in
pooling of interest transactions in exchange for 3.0, 1.0 and 2.4 million shares
of common stock, respectively. The company's historical financial statements
were not restated because in the aggregate these pooling transactions were not
material.
Capital expenditures during '97 were approximately $175 million following
investments of $164 million in '96 and $118 million in '95. Capital spending in
fiscal '98 should approximate $230 million and remains at a very comfortable
level at about 5% of revenues.
MARKET PRICE AND DIVIDEND DATA
The market price of Automatic Data Processing, Inc. (AUD) common shares based on
New York Stock Exchange composite transactions and cash dividends per share
declared during the past two years have been:
- -------------------------------------------------------------------------------
PRICE PER SHARE DIVIDENDS
----------------
FISCAL 1997 QUARTER ENDED HIGH LOW PER SHARE
- -------------------------------------------------------------------------------
June 30 $50 1/8 $40 5/8 $.115
March 31 45 1/8 39 1/2 .115
December 31 44 3/4 40 .115
September 30 45 3/4 35 5/8 .10
- -------------------------------------------------------------------------------
Fiscal 1996 quarter ended
- -------------------------------------------------------------------------------
June 30 $40 1/8 $36 3/8 $.10
March 31 43 3/8 35 1/4 .10
December 31 41 1/8 34 .10
September 30 35 3/8 31 .0875
- -------------------------------------------------------------------------------
As of June 30, 1997 there were approximately 28,000 holders of record of
Automatic Data Processing, Inc. common stock. Over 100,000 additional holders
have their stock in "street name".
18
<PAGE>
STATEMENTS OF CONSOLIDATED EARNINGS
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------------------------------------------------------
YEARS ENDED JUNE 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $4,112,186 $3,566,597 $2,893,742
----------- ----------- -----------
Operating expenses 1,722,846 1,516,407 1,177,292
General, administrative and selling expenses 1,088,268 933,805 792,121
Depreciation and amortization 223,435 201,629 172,536
Systems development and programming costs 296,544 249,635 193,173
Interest expense 27,794 29,731 24,340
Non-recurring items 29,289 -- --
----------- ----------- -----------
3,388,176 2,931,207 2,359,462
----------- ----------- -----------
----------- ----------- -----------
Earnings before income taxes 724,010 635,390 534,280
Provision for income taxes 210,510 180,690 139,450
----------- ----------- -----------
Net earnings $ 513,500 $ 454,700 $ 394,830
----------- ----------- -----------
Earnings per share $ 1.76 $ 1.57 $ 1.38
----------- ----------- -----------
Average number of common shares outstanding 290,990 288,967 285,112
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 590,578 $314,416
Short-term marketable securities 434,341 321,743
Accounts receivable 605,068 507,198
Other current assets 175,335 310,926
--------- ---------
Total current assets 1,805,322 1,454,283
--------- ---------
--------- ---------
Long-term marketable securities 470,164 462,461
--------- ---------
Long-term receivables 176,771 188,184
--------- ---------
Property, plant and equipment -- at cost:
Land and buildings 361,594 322,975
Data processing equipment 626,013 578,935
Furniture, leaseholds and other 364,161 330,610
--------- ---------
1,351,768 1,232,520
Less accumulated depreciation 832,423 764,254
--------- ---------
519,345 468,266
--------- ---------
Other assets 96,383 19,597
--------- ---------
Intangibles 1,314,787 1,247,094
--------- ---------
--------- ---------
$4,382,772 $3,839,885
--------- ---------
--------- ---------
Liabilities and Shareholders' Equity Current liabilities:
Notes payable $ 129,168 $90,746
Accounts payable 110,266 96,351
Accrued expenses and other current liabilities 717,868 590,355
Income taxes 61,479 52,954
Current portion of long-term debt 1,091 5,207
--------- ---------
Total current liabilities 1,019,872 835,613
--------- ---------
--------- ---------
Long-term debt 401,162 403,743
--------- ---------
Other liabilities 91,685 78,508
--------- ---------
Deferred income taxes 102,751 112,880
--------- ---------
Deferred revenue 106,737 93,795
--------- ---------
Shareholders' equity:
Preferred stock, $1.00 par value:
Authorized, 300 shares; issued, none Common stock, $.10 par value:
Authorized, 500,000 shares; issued, 314,288 and
314,277 shares, respectively 31,429 31,428
Capital in excess of par value 480,492 420,463
Retained earnings 2,922,317 2,537,952
Treasury stock-- at cost 21,439 and 26,656 shares, respectively (697,887) (660,234)
Translation adjustments (75,786) (14,263)
--------- ---------
Total shareholders' equity 2,660,565 2,315,346
--------- ---------
$4,382,772 $3,839,885
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL IN
COMMON STOCK EXCESS OF RETAINED TREASURY TRANSLATION
- ---------------------------------------------------------------------------------------------------------------------------
SHARES AMOUNT PAR VALUE EARNINGS STOCK ADJUSTMENTS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1994 314,234 $ 31,424 $ 312,672 $1,883,423 $(532,913) $ (3,355)
Employee stock plans and related
tax benefits -- -- 43,498 -- 39,384 --
Treasury stock acquired
(438 shares) -- -- -- -- (13,146) --
Acquisitions (2,956 shares) -- -- (13,045) (6,206) 37,225 --
Net earnings -- -- -- 394,830 -- --
Dividends ($.3125 per share) -- -- -- (89,224) -- --
Other transactions -- -- 5,072 15 (104) 7,065
--------- ---------- ----------- ------------ ----------- -----------
BALANCE, JUNE 30, 1995 314,234 31,424 348,197 2,182,838 (469,554) 3,710
Employee stock plans and related
tax benefits -- -- 68,286 -- 37,080 --
Treasury stock acquired
(6,640 shares) -- -- -- -- (245,224) --
Debt conversion (42 shares) 42 4 1,459 -- -- --
Acquisitions (1,513 shares) -- -- 4,007 12,530 17,809 --
Net earnings -- -- -- 454,700 -- --
Dividends ($.3875 per share) -- -- -- (112,116) -- --
Other transactions 1 -- (1,486) -- (345) (17,973)
--------- ---------- ----------- ------------ ----------- -----------
BALANCE, JUNE 30, 1996 314,277 31,428 420,463 2,537,952 (660,234) (14,263)
Employee stock plans and related
tax benefits -- -- 83,283 -- 44,167 --
Treasury stock acquired
(3,166 shares) -- -- -- -- (127,709) --
Acquisitions (2,978 shares) -- -- (35,390) 679 35,727 --
Debt conversion (629 shares) 11 1 13,139 -- 10,162 --
Net earnings -- -- -- 513,500 -- --
Dividends ($.445 per share) -- -- -- (129,814) -- --
Other transactions -- -- (1,003) -- -- (61,523)
--------- ---------- ----------- ------------ ----------- -----------
BALANCE, JUNE 30, 1997 314,288 $31,429 $ 480,492 $2,922,317 $(697,887) $(75,786)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
YEARS ENDED JUNE 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 513,500 $ 454,700 $ 394,830
Depreciation and amortization 223,435 201,629 172,536
Deferred income taxes (35,291) 13,940 (11,050)
Changes in operating assets and liabilities:
Receivables and other assets (108,786) (46,321) (89,131)
Accounts payable and accrued expenses 48,263 (36,175) (1,975)
Other 77,938 86,494 28,247
------------- ------------- -------------
Net cash flows from operating activities 719,059 674,267 493,457
------------- ------------- -------------
------------- ------------- -------------
Cash Flows From Investing Activities
Purchase of marketable securities (1,395,210) (1,014,244) (1,080,989)
Proceeds from sale of marketable securities 1,362,061 1,208,317 926,276
Capital expenditures (175,289) (163,525) (117,698)
Additions to intangibles (15,292) (111,054) (38,612)
Acquisitions of businesses, net of cash acquired (115,438) (472,783) (107,457)
Other 39,683 5,563 3,756
------------- ------------- -------------
Net cash flows from investing activities (299,485) (547,726) (414,724)
------------- ------------- -------------
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes 45,395 90,746 --
Proceeds from issuance of common stock 71,263 125,617 99,412
Repurchases of common stock (127,709) (245,224) (13,146)
Dividends paid (129,814) (112,116) (89,224)
Other (2,547) 15,240 (789)
------------- ------------- -------------
Net cash flows from financing activities (143,412) (125,737) (3,747)
------------- ------------- -------------
------------- ------------- -------------
Net change in cash and cash equivalents 276,162 804 74,986
Cash and cash equivalents, at beginning of period 314,416 313,612 238,626
------------- ------------- -------------
Cash and cash equivalents, at end of period $ 590,578 $ 314,416 $ 313,612
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Consolidation and Basis of Preparation. The consolidated financial statements
include the accounts of Automatic Data Processing, Inc. and its majority-owned
subsidiaries. Intercompany balances and transactions have been eliminated in
consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from these
estimates.
B. Cash and Cash Equivalents. Highly liquid investments with a maturity of three
months or less at the time of purchase are considered cash equivalents.
C. Marketable Securities. Marketable securities consist primarily of high grade
fixed income investments. Most of the Company's marketable securities are
considered to be "available-for-sale", and, accordingly, are carried on the
balance sheet at fair market value, which approximates cost. Gains/losses from
the sale of marketable securities have not been material. Approximately $131
million of the Company's long-term marketable securities mature in 1-2 years,
$158 million in 2-3 years, $115 million in 3-4 years, and the remainder in less
than 7 years.
D. Property, Plant and Equipment. Property, plant and equipment is depreciated
over the estimated useful lives of the assets by the straight-line method.
Leasehold improvements are amortized over the shorter of the term of the lease
or the estimated useful lives of the improvements.
The estimated useful lives of assets are primarily as follows:
- -------------------------------------------------------------------------------
DATA PROCESSING EQUIPMENT 2 TO 3 YEARS
- -------------------------------------------------------------------------------
BUILDINGS 20 TO 40 YEARS
- -------------------------------------------------------------------------------
FURNITURE AND FIXTURES 3 TO 7 YEARS
- -------------------------------------------------------------------------------
E. Intangibles. Intangible assets are recorded at cost and are amortized
primarily on a straight-line basis. Goodwill is amortized over periods from 15
to 40 years, and is periodically reviewed for impairment by comparing carrying
value to undiscounted expected future cash flows. If impairment is indicated, a
write-down to fair value (normally measured by discounting estimated future cash
flows) is taken.
F. Revenue Recognition. Service revenue, including software license fees,
maintenance fees and other ancillary fees, is recognized as services are
provided. In those instances where hardware is sold to clients as part of a
bundled service offering, the gross profit on the sale of hardware and prepaid
software license fees, less costs of selling and installation, is deferred and
recognized on a straight-line basis over the initial contract period, which
generally is from 5 to 7 years.
G. Foreign Currency Translation. The net assets of the Company's foreign
subsidiaries are translated into U.S. dollars based on exchange rates in effect
at the end of each period, and revenue and expenses are translated at average
exchange rates during the periods. Currency transaction gains or losses, which
are included in the results of operations, are immaterial for all periods
presented. Gains or losses from balance sheet translation are included as a
separate component of shareholders' equity.
H. Earnings Per Share. Earnings per share are based upon the weighted average
number of shares outstanding during the respective periods.
I. Line of Business. The Company is engaged in the computing services business.
J. Reclassification of Prior Financial Statements. Certain reclassifications
have been made to previous years' financial statements to conform to current
classifications.
NOTE 2. ACQUISITIONS
Effective November 1, 1995, ADP acquired control of GSI-Participations, a
computer services company based in Paris, France for approximately $460 million
in cash plus transaction costs and other related liabilities assumed. The GSI
transaction resulted in approximately $596 million of goodwill and other
intangibles (primarily customer lists and software), which are being amortized
over periods ranging from 5 to 40 years.
During fiscal 1997, 1996 and 1995, the Company purchased several other
businesses for approximately $122 million (including $7 million in common
stock), $91 million (including $20 million in common stock), and $123 million
(including $16 million in common stock), respectively, net of cash acquired. The
results of these acquired businesses were not material to the Company's
consolidated financial statements, and are included from the date of
acquisition.
The Company also acquired several businesses in fiscal 1997, 1996 and 1995 in
pooling of interest transactions in exchange for 2,827,000, 969,000 and
2,362,000 shares of common stock, respectively. The Company's consolidated
financial statements were not restated because in the aggregate these
transactions were not material.
NOTE 3. NON-RECURRING ITEMS
In the fourth quarter of fiscal 1997, the Company reached a settlement with the
Federal Trade Commission under which the Company will divest certain assets, the
amount of which is not material. An estimated pretax loss of $17.8 million was
recorded in connection with the settlement.
In the fourth quarter of fiscal 1997, a major Brokerage Services client
formalized its intention to cancel its services contract with the Company, and,
as a result, a client contract
23
<PAGE>
Notes to Consolidated Financial Statements (continued)
Automatic Data Processing, Inc. and Subsidiaries
deposit was returned to the Company resulting in a non-taxable gain to net
earnings of approximately $19 million. The Company is restructuring the internal
operations of the Brokerage front office business to better align the business'
cost structure with the lower revenue which will result as this client reduces
its use of ADP services over the next 12-18 months. A provision of approximately
$31 million ($19million after tax) was recorded in order to reduce product lines
and platforms and consolidate data centers.
NOTE 4. RECEIVABLES
Accounts receivable is net of an allowance for doubtful accounts of $40 million
and $35 million at June 30, 1997 and 1996, respectively.
The Company finances the sale of computer systems to certain of its clients.
These finance receivables, substantially all of which are due from automobile
and truck dealerships, are reflected in the consolidated balance sheets as
follows:
1997 1996
- ----------------------------------------------------------
(IN THOUSANDS) CURRENT LONG-TERM CURRENT LONG-TERM
- ------------ -------- --------- -------- ---------
JUNE 30,
- ------------ -------- --------- -------- ---------
Receivables $134,506 $221,783 $126,415 $243,522
Less:
Allowance
for doubtful
accounts (13,401) (20,370) (14,715) (25,727)
Unearned
income (24,048) (24,642) (25,144) (29,611)
--------- ---------- --------- ---------
$ 97,057 $176,771 $ 86,556 $188,184
- ----------------------------------------------------------
Unearned income from finance receivables represents the excess of gross
receivables over the sales price of the computer systems financed. Unearned
income is amortized using the interest method to maintain a constant rate of
return on the net investment over the term of each contract.
Long-term receivables at June 30, 1997 mature as follows:
(In thousands)
- -------------------------------------------------------
1999 $ 99,989
2000 68,958
2001 37,739
2002 12,203
Thereafter 2,894
---------
$221,783
- -------------------------------------------------------
NOTE 5. INTANGIBLE ASSETS
Components of intangible assets are as follows:
(In thousands)
- -----------------------------------------------------------
JUNE 30, 1997 1996
- -----------------------------------------------------------
Goodwill $1,062,193 $ 931,424
Other 739,323 709,803
----------- -----------
1,801,516 1,641,227
Less accumulated amortization (486,729) (394,133)
----------- -----------
$1,314,787 $1,247,094
- -----------------------------------------------------------
Other intangibles consist primarily of purchased rights (acquired directly or
through acquisitions) to provide data processing services to various groups of
clients (amortized over periods from 5 to 36 years) and purchased software
(amortized over periods from 3 to 10 years). Amortization of intangibles totaled
$92 million for fiscal 1997, $81 million for 1996 and $66 million for 1995.
NOTE 6. Debt
A portion of the purchase price of certain international acquisitions
has been funded by borrowing in local currency (equivalent to $129 million as of
June 30, 1997 and $91 million as of June 30, 1996) on a short-term basis at an
average interest of 5.8% in fiscal 1997 and 4.1% in fiscal 1996. These
borrowings have been designated as hedges against the Company's net investment
in the businesses acquired.
Components of long-term debt are as follows:
(IN THOUSANDS)
- -----------------------------------------------------------------
JUNE 30, 1997 1996
- -----------------------------------------------------------------
Zero coupon convertible subordinated
notes (5 1/4% yield) $350,897 $356,561
Industrial revenue bonds
(with fixed and variable interest rates
from 3.6% to 8.3%) 38,690 39,200
Other 12,666 13,189
--------- ---------
402,253 408,950
Less current portion (1,091) (5,207)
--------- ---------
$401,162 $403,743
- ------------------------------------------------------------------
The zero coupon convertible subordinated notes have a face value of
approximately $750 million at June 30, 1997, and mature February 20, 2012,
unless converted or redeemed earlier. The notes are convertible into
approximately 9.7 million shares of the Company's common stock. The notes are
callable at the option of the Company, and the holders of the notes can convert
into common stock at any time or require redemption in 1997, 2002, and 2007.
During fiscal 1997 and 1996 approximately $52 million and $3 million face value
of notes were converted or redeemed. As of June 30, 1997 and 1996, the quoted
market prices for the zero coupon notes were approximately $443 million and $400
million, respectively. The fair value of the other debt included above, based on
available market information, approximates its carrying value.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
Long-term debt repayments are due as follows:
(IN THOUSANDS)
- ---------------------------------------------------------
1999 $ 435
2000 435
2001 1,690
2002 --
Thereafter 398,602
---------
$ 401,162
- ---------------------------------------------------------
Interest payments were approximately $10 million in fiscal 1997, $8 million
in 1996 and $4 million in 1995.
NOTE 7. PAYROLL AND PAYROLL TAX FILING SERVICES
As part of its integrated payroll and payroll tax filing services, the Company
collects funds for federal, state and local employment taxes from approximately
285,000 clients, files annually over 13.0 million returns, handles all
regulatory correspondence, amendments, and penalty and interest disputes, remits
the funds to the appropriate tax agencies, and handles other employer related
services. In addition to fees paid by clients for these services, the Company
receives interest during the interval between the receipt and disbursement of
funds by investing the funds primarily in AA or better rated fixed income
municipal instruments, with no more than $80 million in any single instrument.
The amount of collected but unremitted funds varies significantly during the
year and averaged approximately $4.5 billion in fiscal 1997, $3.7 billion in
fiscal 1996 and $3.3 billion in fiscal 1995. The amount of such funds was $5.8
billion as of June 30, 1997, of which $1 billion was supported by a letter of
credit and a related ADP guarantee, and $5.0 billion as of June 30, 1996.
Interest on collected but unremitted funds amounted to approximately $213
million in fiscal 1997, $178 million in 1996, and $148 million in 1995.
NOTE 8. EMPLOYEE BENEFIT PLANS
A. Stock Plans. The Company has stock option plans which provide for the
issuance to eligible employees of incentive and non-qualified stock options,
which may expire as much as 10 and 12 years, respectively, from the date of
grant, at prices not less than the fair market value on the date of grant. At
June 30, 1997, there were 6,200 participants in the plans. The aggregate
purchase price for options outstanding at June 30, 1997 was approximately $615
million. The options expire between 1997 and 2007.
A summary of changes in the stock option plans for the three years ended June
30, 1997 is as follows: (In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Number of Options Weighted Average Price
- --------------------------------------------------------------------------------
Years ended June 30 1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------------
Options outstanding,
beginning of year 22,707 20,724 19,340 $25 $21 $18
Options granted 3,566 6,080 5,384 $45 $37 $28
Options exercised (2,952) (2,445) (2,282) $18 $14 $11
Options canceled (2,036) (1,652) (1,718) $29 $28 $24
------ ------ ------
Options outstanding,
end of year 21,285 22,707 20,724 $29 $25 $21
------ ------ ------
Options exercisable,
end of year 7,250 6,677 5,652 $19 $16 $14
------ ------ ------
Shares available for
future grants,
end of year 8,485 10,015 4,442
------ ------ -----
Shares reserved for
issuance under
stock option plans 29,770 32,722 25,166
- --------------------------------------------------------------------------------
Summarized information about stock options outstanding as of June 30, 1997 is
as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
- ----------------------------------------------------------------------------------------------------
AVERAGE AVERAGE
EXERCISE # OF SHARES REMAINING EXERCISE # OF SHARES EXERCISE
PRICE RANGE (IN THOUSANDS) (LIFE IN YEARS) PRICE (IN THOUSANDS) PRICE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Under $10 482 1.4 $ 9 482 $ 9
$10 to $20 3,613 3.3 $15 3,386 $ 14
$20 to $30 7,630 6.2 $25 2,597 $ 25
$30 to $40 6,065 8.2 $36 776 $ 35
Over $40 3,495 9.5 $46 9 $ 42
- ----------------------------------------------------------------------------------------------------
</TABLE>
The Company has stock purchase plans under which eligible employees have the
ability to purchase shares of common stock at 85% of the lower of market value
as of the date of purchase election or end of the plan. Approximately 2.0
million shares are scheduled for issuance on December 31, 1997 and on December
31, 1998. Approximately 1.8 million and 1.9 million shares were issued during
the years ended June 30, 1997 and 1996 respectively. At June 30, 1997 and 1996,
there were approximately 8.6 million shares reserved for purchase under the
plan. Included in liabilities as of June 30, 1997 and 1996 are employee stock
purchase plan withholdings of approximately $56 million and $51 million,
respectively.
The Company has elected to continue to follow APB 25 to account for its stock
plans. FASB Statement No. 123 requires that the Company disclose the pro forma
net income impact of options and stock purchase plan rights granted subsequent
to July 1, 1995. The fair value for these instruments was estimated at the date
of grant using a Black-Scholes
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
option pricing model with the following weighted
average assumptions:
- -----------------------------------------------------------
YEARS ENDED JUNE 30, 1997 1996
- -----------------------------------------------------------
Risk-free interest rate 5.8-6.6% 5.2-6.5%
Dividend yield 1.0-1.1% 1.1%
Volatility factor 12.7-13.2% 11.9-13.3%
Expected life:
Options 6.2 6.2
Purchase rights 2.0 2.0
Weighted average fair value:
Options $12.43 $9.53
Purchase rights $11.94 $9.53
- -----------------------------------------------------------
The Company's pro forma information, amortizing the fair value of the stock
options and stock purchase plan rights issued in 1997 and 1996 over their
vesting period, is as follows:
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------
YEARS ENDED JUNE 30, 1997 1996
- ------------------------------------------------------------
Pro forma net earnings $ 492 $ 442
Pro forma earnings per share $ 1.69 $ 1.53
- ------------------------------------------------------------
The Company has a restricted stock plan under which shares of common stock
have been sold for nominal consideration to certain key employees. These shares
are restricted as to transfer and in certain circumstances must be resold to the
Company at the original purchase price. The restrictions lapse over periods of
up to six years. During the years ended June 30, 1997, 1996 and 1995, the
Company issued 148,800, 186,800, and 106,300 restricted shares, and repurchased
20,000, 47,200 and 50,200 shares, respectively.
B. Pension Plan. The Company has a defined benefit cash balance pension
plan covering substantially all U.S. employees, under which employees are
credited with a percentage of base pay each plus 7% interest. Employees are
fully vested on completion of five years service. The Company's policy is to
make contributions within the range determined by generally accepted actuarial
principles.
The plan's funded status is as follows:
(IN THOUSANDS)
- ------------------------------------------------------------------------
JUNE 30, 1997 1996
- ------------------------------------------------------------------------
Funded plan assets at market value,
primarily stocks and bonds $264,400 $191,400
---------- -----------
Actuarial present value of benefit obligations:
Vested benefits 170,900 140,900
Non-vested benefits 9,200 8,200
---------- -----------
Accumulated/projected benefit obligation 180,100 149,100
Plan assets in excess of projected benefits 84,300 42,300
Prior service cost (2,500) (3,400)
Transition obligation 1,200 1,500
Unrecognized net actuarial loss due to
different experience than that assumed (8,100) 22,700
---------- -----------
Prepaid pension cost $ 74,900 $ 63,100
- ------------------------------------------------------------------------
The components of net pension expense were as follows:
(IN THOUSANDS)
- ------------------------------------------------------------------------
YEARS ENDED JUNE 30, 1997 1996 1995
- ------------------------------------------------------------------------
Service cost - benefits earned
during the period $15,500 $13,600 $12,600
Interest cost on projected benefits 11,800 10,000 8,400
Return on plan assets (53,500) (20,000) (11,600)
Net amortization and deferral 36,500 9,900 3,600
-------- -------- --------
$10,300 $13,500 $13,000
- ------------------------------------------------------------------------
Assumptions used to develop the actuarial present value of benefit
obligations for the three years ended June 30, 1997 were:
1997 1996 1995
- ------------------------------------------------------------------------
Discount rate 7.75% 8.0% 8.0%
Expected long-term
rate of return on assets 8.5% 8.5% 8.5%
Rate of increase in
compensation levels 6.0% 6.0% 6.0%
- ------------------------------------------------------------------------
C. Retirement and Savings Plan. The Company has a 401(k) retirement and savings
plan which allows eligible employees to contribute up to 12% of their
compensation annually. The Company matches a portion of this contribution which
amounted to approximately $19 million, $18 million and $11 million for calendar
years 1996, 1995 and 1994, respectively.
NOTE 9. INCOME TAXES
In accordance with FASB Statement No. 109, accounting for income taxes follows
the asset and liability approach. Deferred taxes reflect the tax consequences on
future years of differences between the financial reporting and tax bases of
assets and liabilities.
The provision for income taxes consists of the following components:
(IN THOUSANDS)
- -------------------------------------------------------------------
YEARS ENDED JUNE 30, 1997 1996 1995
- -------------------------------------------------------------------
Current:
Federal $170,826 $124,400 $106,440
Non-U.S. 37,090 20,750 19,150
State 37,885 21,600 24,910
--------- --------- ---------
Total current 245,801 166,750 150,500
Deferred:
Federal (29,741) 6,060 (4,440)
Non-U.S. 4,360 5,860 (5,430)
State (9,910) 2,020 (1,180)
--------- --------- ---------
Total deferred (35,291) 13,940 (11,050)
--------- --------- ---------
$210,510 $180,690 $139,450
- -------------------------------------------------------------------
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
At June 30, 1997 and 1996, the Company had gross deferred tax assets of
approximately $142 million and $114 million, respectively, consisting primarily
of operating expenses not currently deductible for tax return purposes.
Valuation allowances approximated $23 million as of June 30, 1997 and 1996.
Gross deferred tax liabilities approximated $214 million as of June 30, 1997 and
June 30, 1996, consisting primarily of differences in the accounting and tax
values of certain fixed and intangible assets.
Income tax payments were approximately $200 million in 1997, $178 million
in 1996 and $131 million in 1995. Pretax U.S. earnings approximated $649 million
in 1997, $592 million in 1996, and $505 million in 1995.
A reconciliation between the Company's effective tax rate and the U.S.
federal statutory rate is as follows:
(IN THOUSANDS, EXCEPT PERCENTAGES)
- -----------------------------------------------------------------------------
YEARS ENDED JUNE 30, 1997 % 1996 % 1995 %
- -----------------------------------------------------------------------------
Provision for taxes
at statutory rate $253,400 35.0 $222,400 35.0 $187,000 35.0
Increase (decrease)
in provision from:
Investments in
municipals and
and preferred
stock (62,200) (8.6) (55,300) (8.7) (57,995) (10.9)
State taxes, net
of federal tax
benefit 18,180 2.5 15,370 2.4 15,425 2.9
Other 1,130 0.2 (1,780) (.3) (4,980) (.9)
-------------- ---------------- --------------
$210,510 29.1 $180,690 28.4 $139,450 26.1
- -----------------------------------------------------------------------------
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have various facilities and equipment lease
obligations. Total rental expense was approximately $165 million in 1997, $164
million in 1996 and $152 million in 1995 with minimum lease commitments under
operating leases as follows:
(IN THOUSANDS)
- -----------------------------------------------------------
YEARS ENDING JUNE 30,
- -----------------------------------------------------------
1998 $158,000
1999 115,000
2000 67,000
2001 39,000
2002 29,000
Thereafter 65,000
--------
$473,000
- -----------------------------------------------------------
In addition to fixed rentals, certain leases require payment of maintenance
and real estate taxes and contain escalation provisions based on future
adjustments in price indices.
In the normal course of business, the Company is subject to various claims
and litigation. The Company does not believe that the resolution of these
matters will have a material impact on the consolidated financial statements.
NOTE 11. FINANCIAL DATA BY GEOGRAPHIC AREA
Information about the Company's operations by geographic area for the two years
ended June 30, 1997 is as follows (in millions):
- -----------------------------------------------------------------------------
OTHER
NON-U.S.
UNITED (PRIMARILY CONSOLI-
STATES EUROPE CANADA) CORPORATE DATED
- -----------------------------------------------------------------------------
Revenue
1997 $3,417 $512 $131 $ 52 $4,112
1996 $3,020 $388 $115 $ 44 $3,567
- ---------------- ------- ----- ------ ------- -------
Earnings before
income taxes
1997 $ 633 $057 $018 $ 16 $ 724
1996 $0,562 $035 $008 $ 30 $ 635
- ---------------- ------- ----- ------ ------- -------
Identifiable
assets
1997 $1,659 $1,315 $ 84 $1,325 $4,383
1996 $1,553 $1,244 $ 65 $ 978 $3,840
- -----------------------------------------------------------------------------
International operations prior to fiscal 1996 were not material to the
Company's consolidated financial results.
NOTE 12. QUARTERLY FINANCIAL RESULTS(Unaudited)
Summarized quarterly results of operations for the three years ended
June 30, 1997 are as follows:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
YEAR ENDED JUNE 30, 1997 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------
Revenue $910,730 $995,575 $ 1,126,284 $1,079,597
Net earnings $ 93,280 $127,580 $ 164,930 $ 127,710(a)
Earnings per share $ .32 $ .44 $ .56 $ .44(a)
- ------------------------------------------------------------------------------
(A) AFTER IMPACT OF NON-RECURRING ITEMS (SEE NOTE 3).
YEAR ENDED JUNE 30, 1996
- ------------------------------------------------------------------------------
Revenue $747,094 $819,723 $ 1,031,864 $ 967,916
Net earnings $ 81,900 $108,900 $ 143,900 $ 120,000
Earnings per share $ .28 $ .38 $ .49 $ .42
- ------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1995
- ------------------------------------------------------------------------------
Revenue $622,286 $672,597 $ 798,989 $ 799,870
Net earnings $ 68,700 $ 94,920 $ 125,270 $ 105,940
Earnings per share $ .24 $ .33 $ .44 $ .37
- ------------------------------------------------------------------------------
Third quarter revenue and earnings have historically been positively impacted
by calendar year-end processing associated with many of the Company's services.
27
<PAGE>
REPORT OF MANAGEMENT
Management is responsible for the preparation of the accompanying financial
statements. The financial statements, which include amounts based on the
application of business judgments, have been prepared in conformity with
generally accepted accounting principles. Deloitte & Touche LLP, independent
certified public accountants, have audited our consolidated financial statements
as described in their report.
The Company maintains financial control systems designed to provide
reasonable assurance that assets are safeguarded and that transactions are
executed and recorded in accordance with management authorization. The
control systems are supported by written policies and the control environment
is regularly evaluated by both the Company's internal auditors and Deloitte &
Touche.
The Board of Directors has an Audit Committee comprised of four outside
directors. The Audit Committee meets with both Deloitte & Touche and the
internal auditors with and without management's presence. It monitors and
reviews the Company's financial statements and internal controls, and the
scope of the internal auditors' and Deloitte & Touche's audits.
Deloitte & Touche and the internal auditors have free access to the Audit
Committee.
/s/ Arthur F. Weinbach
Arthur F. Weinbach
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ Richard J. Haviland
Richard J. Haviland
CHIEF FINANCIAL OFFICER
Roseland, New Jersey August 13, 1997
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Automatic Data Processing, Inc.
Roseland, New Jersey
We have audited the accompanying consolidated balance sheets of Automatic Data
Processing, Inc. and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1997. These consolidated
financial statements are the responsibility of the company'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, such consolidated financial statements present fairly,
in all material respects, the financial position of Automatic Data
Processing, Inc. and subsidiaries at June 30, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
New York, New York, August 13, 1997
28
<PAGE>
APPENDIX
(As required pursuant to Rule 304(a) of Regulation S-T)
The following is a narrative description of the graphic or image
material which appears in Exhibit 13 to the Registrant's Annual Report on
Form 10-K (the "Form 10-K"). Exhibit 13 contains particular pages from the
Registrant's 1997 Annual Report to Shareholders (the "1997 Annual Report")
which are incorporated by reference into the Form 10-K.
Page in 1997
ANNUAL REPORT DESCRIPTION
3 The photograph on page 3 of the 1997 Annual Report is of
Arthur F. Weinbach, President and Chief Executive Officer.
5 The photograph on page 5 of the 1997 Annual Report is of
Josh S. Weston, Chairman.
7 The photograph on page 7 of the 1997 Annual Report is
described in the following caption on page 7: "Below:
Following their successful payroll conversions, Pierce
Leahy's Director of Human Resources, Lawrence J. Sparacino
(left), and Payroll Supervisor, Regina A. Walsh, take ADP
Senior Implementation Consultant, Hugh McGovern on a tour
of one of their archives. The company has 161 storage
facilities in the U.S. and Canada."
8 The photograph on page 8 of the 1997 Annual Report is
described in the following caption on page 8: "Left: ADP's
"payroll by phone" is a fast and easy solution for Image
Force, a Paris-based advertising agency. Receptionist
Nazanine Amini-Majdi (right), phones her ADP client
representative to submit employee hours and wage
information as Gilles Vetillart, Account Director, confirms
the data.
9 The photograph on page 9 of the 1997 Annual Report is
described in the following caption on page 9: "Above: The
Application Group's Practice Area Manager, Martia DeLauro
(far left); and Susan Gallagher, Engagement Manager, ADP;
discuss the successful implementation of ADP's full-featured
HR management system, CSS Hrizon, with Catherine E. Scism,
Business Leader; and Stephen Capuccio, HRIS Manager Human
Resources of Blue Cross Blue Shield of Massachusetts."
10 The photographs on page 10 of the 1997 Annual Report are
described in the following captions on page 10:
"Far left: Claudia Holcomsbe (left), Director of Shareowner
Services, AT&T, with Robert Kalenka (center), Vice President
Production Operations and Mary Ann Butera (right), Vice
President Sales, ADP ICS. ICS's extensive capacity and
sophisticated systems support an ongoing project with AT&T
which eliminates duplicate shareowner mailings to about 10%
of street name shareowners and provides a cost efficient
distribution process which allows AT&T to reach its more
than 3 million shareowners.
Left: J.W. Charles Financial Services, Inc., one of the
largest broker/dealers in Southern Florida, and ADP work
together to facilitate the firm's future growth. John C.
Sease, Jr., ADP Account Manager (right), helps the firm's
management
<PAGE>
team, Thomas Terpko, Vice President Management Information
Services (left), and Greg Glaser, Executive Vice President
and Treasurer (center), to maximize the unique benefits
derived from ADP's integrated product offerings."
11 The photograph on page 11 of the 1997 Annual Report is
described in the following caption on page 11: "Below:
Peter A. Wigger (left), Chairman, and CEO, and Joseph N.
Barra (right), President and COO of National Investor
Services Corp., along with John Chapel (center right),
President, and Frank Conti (center left), Executive Vice
President, of Waterhouse Securities, Inc., discuss with
ADP's Mark J. Coviello (second from left), Senior Director
Account Management, and Marianne C. Brown (second from
right), Senior Vice President of Service Delivery, how ADP
can provide the technology and solutions to help Waterhouse
Securities, Inc. and its affiliate NISC maintain a
competitive edge."
12 The photograph on page 12 of the 1997 Annual Report is
described in the following caption on page 12: "Tony Solano
(right), ADP Major Account Executive, discusses the new
MILLENNIA3 SYSTEMS SERIES at Maroone Plaza in Ft.
Lauderdale, FL with Michael E. Maroone (center right),
President, New Vehicle Division, Republic Industries, Inc.,
H. Scott Barrett (left), Senior Vice President, Information
Technology, Republic Industries, Inc., and Don Reese
(center left), Vice President, Corporate Controller,
Republic Industries, Inc. ADP Dealer Services is working
with innovators such as Republic Industries, Inc., which is
the fastest growing automotive organization in the United
States with involvement in new car retailing, used car
super stores and the rental car industry."
13 The photograph on page 13 of the 1997 Annual Report is
described in the following caption on page 13: "Below:
Kasper Lydom Schultz, Technical Consultant for ADP Dealer
Services Denmark discusses ADP's commitment to providing
world class service to ADP clients in Denmark and around
the world with Asbjorn Jensen, Owner, Bjorn Cannings Etft.
ApS."
14 The photograph on page 14 of the 1997 Annual Report is
described in the following caption on page 14: "Left:
Progressive Insurance Company uses ADP's Provider Bill
Audit System for first and third party claims, has
implemented ADP's managed care network in Florida, and is
co-developing the Injury Claim Evaluation (ICE) product.
John P. Bindseil (left), Medical Claim Manager, Corporate
Claims for Progressive and Martha Herbig (right), Director,
Managed Care Networks for ADP Integrated Medical Solutions
discuss the impact of the managed care network in
Progressive's Tampa office."
15 The photograph on page 15 of the 1997 Annual Report is
described in the following caption on page 15. "Below:
ADP's Catastrophe Services assist clients by providing both
staff and estimating equipment at vital disaster areas.
Senior Account Representatives David Roberts (left), and
Aaron DeGroat (right), demonstrate ADP's PenPro for Colin
Caron (center), Managing Appraiser for Amica Mutual
Insurance Company, who recently utilized ADP's Catastrophe
Services, and is currently in the process of testing this
latest generation of estimating software."
<PAGE>
EXHIBIT 21
Jurisdiction of
Name of Subsidiary Incorporation
- ------------------ -----------------
ADP Atlantic, Inc. Delaware
ADP Claims Solutions Group, Inc. Delaware
ADP Deutschland Autonom Computer AG Germany
ADP Nederland B.V. The Netherlands
ADP Central, Inc. Delaware
ADP Credit Corp. Delaware
ADP Dealer Services Ltd. Canada (Federal)
ADP East, Inc. Delaware
ADP Europe S.A. France
ADP Financial Information Services, Inc. Delaware
ADP Financial Information Services (UK) Limited United Kingdom
ADP, Inc. Delaware
ADP Insurance Company, Ltd. Delaware
ADP Network Services International, Inc. Delaware
Automatic Data Processing Limited United Kingdom
ADP of New Jersey, Inc. Delaware
ADP of North America, Inc. Delaware
ADP Pacific, Inc. Delaware
ADP Savings Association Pennsylvania
ADP Tax Services, Inc. Delaware
ADP Broker-Dealer, Inc. New Jersey
Securities Industry Software Corporation Colorado
ADP Hollander, Inc. Delaware
ADP of Roseland, Inc. Delaware
Peachtree Software, Inc. Delaware
The Application Group, Inc. California
Canadian Automatic Data Processing Services Ltd. Canada (Federal)
Taylorix AG Germany
In accordance with Item 601(b)(21) of Regulation S-K, the Registrant has omitted
the names of particular subsidiaries because the unnamed subsidiaries,
considered in the aggregate as a single subsidiary, would not have constituted a
significant subsidiary as of June 30, 1997.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Automatic Data Processing,
Inc.'s Registration Statement Nos. 33-45150, 33-52876, 33-55909, 33-57207,
33-58165, 33-61629, 333-01839, 333-02331, 333-12767, 333-15103 and 333-29713 on
Form S-3 and Registration Statements Nos. 33-24987, 33-25290, 33-38338, 2-75287,
33-38366, 33-38365, 33-46168, 33-51979, 33-51977, 33-52629, 33-56419, 33-56463,
333-10281, 333-10279, 333-10277 and 333-13945 on Form S-8 of our report dated
August 13, 1997, included in the 1997 Annual Report to Shareholders and
incorporated by reference in this Annual Report on Form 10-K of Automatic Data
Processing, Inc. for the year ended June 30, 1997.
/s/ Deloitte & Touche LLP
New York, New York
September 18, 1997
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<OTHER-SE> 2,629,136
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<SALES> 0
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