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<SEC-DOCUMENT>0000008670-03-000283.txt : 20030912
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<ACCEPTANCE-DATETIME>20030912082158
ACCESSION NUMBER: 0000008670-03-000283
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20030912
FILED AS OF DATE: 20030912
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AUTOMATIC DATA PROCESSING INC
CENTRAL INDEX KEY: 0000008670
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374]
IRS NUMBER: 221467904
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-05397
FILM NUMBER: 03892866
BUSINESS ADDRESS:
STREET 1: ONE ADP BOULVARD
CITY: ROSELAND
STATE: NJ
ZIP: 07068
BUSINESS PHONE: 9739747849
MAIL ADDRESS:
STREET 1: ONE ADP BOULEVARD
CITY: ROSELAND
STATE: NJ
ZIP: 07068
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<TEXT>
________________________________________________________________________________
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, 2003
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: 973-974-5000
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 (ss.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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No _____
-----
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant as of the last trading day of the Registrant's
most recently completed second fiscal quarter was approximately $23,534,103,946.
On August 31, 2003, there were 594,883,230 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 2003 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, 2003. Part III
- --------------------------------------------------------------------------------
<PAGE>
Part I
Item 1. Business
Automatic Data Processing, Inc., incorporated in Delaware in 1961
(together with its subsidiaries "ADP" or the "Registrant"), is one of the
largest providers of computerized transaction processing, data communication and
information services in the world. For financial information by segment and by
geographic area, see Note 13 of the "Notes to Consolidated Financial Statements"
contained in ADP's 2003 Annual Report to Shareholders, which information is
incorporated herein by reference. The Registrant's Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments
to those reports, Proxy Statement for its Annual Meeting of Stockholders and
Annual Report to Shareholders are made available, free of charge, on its website
at www.adp.com as soon as reasonably practicable after such reports have been
filed with or furnished to the Securities and Exchange Commission. The following
summary describes ADP's activities.
Employer Services
Employer Services offers a comprehensive range of payroll processing,
human resource ("HR") and benefits administration products and services,
including traditional and Web-based outsourcing solutions that help over 460,000
employers in North America, Europe, South America (primarily Brazil), Australia
and Asia staff, manage, pay and retain their employees. Employer Services
markets these products and services through its direct marketing sales force
and, on a limited basis, through indirect sales channels, such as marketing
relationships with banks, accountants and online companies. In fiscal 2003, 90%
of Employer Services' revenues were from North America, 9% were from Europe and
1% was from South America (primarily Brazil), Australia and Asia.
Employer Services' approach to the market is to match a client's needs
with the product that will best meet expectations. To facilitate this approach,
in North America, Employer Services is comprised of the following groups: Small
Business Services (which was previously known as Emerging Business Services)
("SBS") (primarily companies with fewer than 50 employees); Major Accounts
(primarily companies with between 50 and 999 employees); and National Accounts
Services (primarily companies with 1,000 or more employees).
SBS processes payroll for smaller companies and provides them with
leading solutions, including a range of value-added services that are
specifically designed for small business clients. Major Accounts and National
Accounts Services offer a full suite of best-of-breed employer services
solutions, including full database and other functional integration between
payroll and HR for clients ranging from mid-sized through many of the world's
largest corporations. In fiscal 2003, ADP expanded its presence in its National
Accounts Services market through its acquisition of ProBusiness Services, Inc.,
a provider of comprehensive payroll, tax filing and HR processing services to
large companies in the United States.
In some cases, ADP provides system solutions for its clients' entire
human resource, payroll and benefits needs. Through ADP Connection(R), ADP can
enable its largest clients to interface their major enterprise resource planning
applications with ADP's outsourced payroll services. For those companies that
choose to process these applications in-house, ADP delivers stand-alone services
such as payroll tax filing, check printing and distribution and year-end tax
statements (i.e., W-2s). Other large clients rely on ADP to design and deliver
customized human resource information systems and benefits outsourcing
solutions.
-2-
<PAGE>
In North America, ADP provides payroll services that include the
preparation of client employee paychecks and electronic direct deposits, 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.
In Europe, South America (primarily Brazil), Australia and Asia, Employer
Services provides full departmental outsourcing of payroll services.
The ADP Financial and Compliance Services business (which was
previously known as ADP Tax and Financial Services) processes and collects
federal, state and local payroll taxes on behalf of, and from, ADP clients and
remits such taxes to the appropriate taxing authorities. The ADP Financial and
Compliance Services business is also responsible for the efficient movement of
funds and information from clients to third parties through service offerings
such as new hire reporting, ADP's TotalPay(TM) payroll check (ADPCheck(TM)),
full service direct deposit (FSDD) and, in conjunction with major bank partners,
stored value payroll card (TotalPay Card) products and the collection and
payment of wage garnishments. The ADP Financial and Compliance Services business
supports large, mid-sized and small clients. It provides an electronic interface
between approximately 364,000 ADP clients in the United States and Canada and
about 2,000 federal, state, provincial and local tax agencies, from the Internal
Revenue Service to local town governments. In fiscal 2003, the ADP Financial and
Compliance Services business printed and delivered approximately 38 million
year-end tax statements in North America and moved over $620 billion in client
funds to taxing authorities and its clients' employees via electronic transfer,
direct deposit and ADPCheck.
ADP's HR services, by interfacing with a client's payroll database,
provide comprehensive HR recordkeeping services, including benefits
administration and outsourcing, applicant tracking, employee history and
position control. ADP's Benefits Services provides benefits administration
across all market segments, including management of the open enrollment of
benefits, COBRA and flexible spending account administration, Section 529
College Savings Plan administrative services and 401(k) recordkeeping. In fiscal
2003, ADP greatly expanded its retirement services business through its
acquisition of the retirement services recordkeeping operations of Scudder
Investments, making ADP the 4th largest recordkeeper of retirement plans in the
United States (based on number of plans).
ADP TotalSource, ADP's professional employer organization ("PEO")
business, provides clients with comprehensive employment administration
outsourcing solutions, including payroll, tax filing, employee background
checks, HR guidance, 401(k) plan administration, benefits administration,
regulatory compliance services, workers' compensation insurance and supplemental
benefits for employees. ADP TotalSource, the second largest PEO in the U.S.
(based on the number of worksite employees), has 29 offices located in fifteen
states and serves over 3,800 PEO clients and over 85,000 work-site employees in
all 50 states.
ADP complements its payroll and HR services with additional employer
services that include products such as time and labor management, pre-employment
screening and selection services and unemployment compensation management. In
fiscal 2003, ADP expanded its service offerings by acquiring the assets of the
SMS companies, leading providers of job tax credit services that assist
employers in the identification of, and filing for, special tax credits based
on geography, demographics and other criteria.
During fiscal 2003, ADP continued the process of Web-enabling existing
product offerings, while at the same time creating new products expressly
designed for the Internet. ADP's Internet offerings now include its
EasyPayNet(sm) Web-based payroll solution for SBS clients, Pay eXpert(R)
Web-based payroll solution for Major Accounts clients and its PayForce(sm)
Web-based payroll solution and
-3-
<PAGE>
Enterprise HRMS integrated HR, payroll and benefits solution for National
Accounts Services clients, all of which feature Web-based employer self-service
capabilities. Further, during fiscal 2003, ADP continued its rollout of its new
TotalChoice(sm) Solutions Web-based payroll solution, a fully-integrated,
Web-native human resource and payroll management solution hosted by ADP that was
originally launched in fiscal 2002. For benefits administration, ADP offers
Benefits eXpert(sm), a Web-based benefits administration and employee
self-service solution that allows mid-sized companies in Major Accounts to
manage more efficiently their employees' health and welfare benefits. For large
clients, ADP Benefit Services offers a Web-based COBRA administrative solution,
as well as employee self-service applications for open-enrollment, flexible
spending account administration and other employee-administered benefit options.
The continued increase in the number of multi-national companies makes
payroll and human resource management services a global opportunity. In fiscal
2003, ADP increased payroll sales to multi-national employers throughout Europe
by nearly 36% over the previous fiscal year.
Brokerage Services
Brokerage Services provides transaction processing systems, desktop
productivity applications and investor communications services to the financial
services industry worldwide. ADP's products and services include: (i) global
order entry, trade processing and settlement systems that enable firms to trade
virtually any financial instrument, in any market, at any time; (ii)
full-service investor communications services including: electronic delivery and
Web solutions; workflow services; financial, offset, and on-demand printing;
proxy distribution and vote processing; householding; regulatory mailings;
fulfillment; and customized communications; (iii) real-time order entry and
processing services for Web-based brokerage firms; (iv) automated, browser-based
desktop productivity tools for financial consultants and back office personnel;
and (v) integrated delivery of multiple products and services through ADP's
Global Processing Solution.
Brokerage Services serves a large client base in the financial services
industry, including: retail and institutional brokerage firms; global banks;
mutual funds; annuity companies; institutional investors; specialty trading
firms; clearing firms; hedge funds; and publicly owned corporations. Brokerage
Services provides securities transaction processing, printing and electronic
distribution of shareholder communications and other services to clients in more
than 25 countries in North America, Europe, Asia, South America and Australia.
Brokerage Services also provides computerized proxy vote tabulation and
shareholder communication, distribution and fulfillment services, including
Web-enabled products and services. ADP served approximately 14,000 publicly
traded companies and 450 mutual funds and annuity companies with proxy services
on behalf of more than 800 brokerage firms and banks in fiscal 2003. In fiscal
2003, Brokerage Services received ISO 9001:2000 certification, an international
standard for the highest quality, for its vote processing, production
operations, print operations and client services systems.
In fiscal 2003, Brokerage Services acquired the assets of Vantra Group,
Inc., a leading provider of specialized Web-based solutions to brokerage
clients; all of the capital stock of Power Securities Systems, Inc., a leading
back-office software provider for niche market firms; and all of the capital
stock of Dataphile Software, Ltd., a leading provider of real-time,
straight-through-processing solutions for brokerage firms and mutual fund
securities dealers in Canada.
-4-
<PAGE>
Dealer Services
Dealer Services provides integrated dealer management computer systems
(such a system is also known in the industry as a "DMS") and other business
performance solutions to automotive retailers and their manufacturers throughout
North America and Europe. More than 16,000 automobile and truck dealers and more
than 30 manufacturers use ADP's DMS, networking solutions, data integration,
consulting and/or marketing services.
Dealer Services offers its dealership clients a service solution that
includes computer hardware, hardware maintenance services, licensed software,
software support, system design and network consulting services. Dealer Services
also offers its clients "front-end" dealership sales process and business
development training services, consulting services, software products and
customer relationship management solutions. Clients use an ADP DMS to manage
business activities such as accounting, inventory, factory communications,
scheduling, vehicle financing, insurance, sales and service. Dealer Services
also designs, establishes and maintains communications networks for its
dealership clients that allow interactive communications among multiple site
locations (for larger dealers), as well as links between franchised dealers and
their vehicle manufacturer franchisors. These networks are used for activities
such as new vehicle ordering and status inquiry, warranty submission and
validation, parts and vehicle locating, dealership customer credit application
submission and decisioning, vehicle repair estimating and obtaining vehicle
registration and lien holder information. Dealer Services also offers an
Application Service Provider Managed Services solution to its dealership clients
pursuant to which such clients outsource all information technology management,
computing and network infrastructure, technology decisions and system support to
Dealer Services.
Claims Services
Claims Services offers integrated business solutions for clients in the
property and casualty insurance, auto collision repair and auto recycling
industries. These products help clients manage costs and improve efficiency and
accelerate the claims review and settlement process. These products and services
include (i) claims management applications such as automated repair estimating,
total loss vehicle valuation, first notice of loss, dispatch and assignment,
claims audit, parts exchange and workflow applications that streamline the
end-to-end claims process, (ii) body shop and auto recycler management systems
and (iii) other applications, databases and services that enhance and optimize
the claims process.
Markets and Marketing Methods
All of ADP's services are offered broadly across North America and
Europe. Some employer services and brokerage services are also offered in South
America (primarily Brazil), Australia and Asia.
None of ADP's major business groups have a single homogenous client
base or market. For example, Brokerage Services serves a large client base in
the financial services industry including retail and institutional firms, banks
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 it 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
-5-
<PAGE>
industries. Employer Services also sells to auto dealers, brokerage clients and
insurance clients. While concentrations of clients exist, no one client or
business group is material to ADP's overall revenues.
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. In fiscal 2003, despite the
continued impact of weak economic conditions, Employer Services continued to
grow, primarily due to the increase in its North America payroll and tax
businesses, including strong growth in its "beyond payroll" products and in its
PEO business, and improved client retention; in Brokerage Services, weakness in
the brokerage and financial services industry reduced Brokerage Services'
primarily volume-based back-office processing and investor communications
activities; and interest rates in the U.S. continued to decline over the last
fiscal year, significantly impacting interest earnings on our client and
corporate funds.
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 providers of computerized transaction
processing, data communication and information services in the world.
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 its services to approximately 500,000 clients. In fiscal
2003, no single client or group of affiliated clients accounted for revenues in
excess of 2% of annual consolidated revenues.
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. Depending on the service agreement and/or the size of the client,
the installation or conversion period for new clients could vary from a short
period of time (up to two weeks) for an SBS client to a longer period (generally
six to twelve months) for a National Accounts Services or Dealer Services client
with multiple deliverables.
ADP's average client retention is more than 8 years in Employer
Services and is 10 or more years in Brokerage Services and Dealer Services, and
does not vary significantly from period to period.
ADP's services are provided under written price quotations or service
agreements having varying terms and conditions. No one price quotation or
service agreement is material to ADP. Discounts, rebates and promotions offered
by ADP to clients are not material.
-6-
<PAGE>
Systems Development and Programming
During the fiscal years ended June 30, 2003, 2002 and 2001, ADP
invested $604 million, $535 million and $584 million, respectively, in systems
development and programming, migration to new computing technologies and the
development of new products and maintenance of our existing technologies,
including purchases of new software and software licenses.
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 revenues or negatively impacts its existing products and services, and
ADP's products and services have 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. Third-party licenses, patents, trademarks and franchises are not
material to ADP's business as a whole.
Number of Employees
ADP employed approximately 41,000 persons as of June 30, 2003.
Item 2. Properties
ADP leases space for 24 of its principal processing centers. In
addition, ADP leases numerous other operational offices and sales offices. All
of these leases, which aggregate approximately 7,100,000 square feet in North
America, Europe, South America (primarily Brazil), Asia, Australia and South
Africa, expire at various times up to the year 2018. ADP owns 14 of its
processing facilities, other operational offices and its corporate headquarters
complex in Roseland, New Jersey, which aggregate approximately 3,000,000 square
feet. None of ADP's owned facilities is subject to any material encumbrances.
ADP believes its facilities are currently adequate for their intended purposes
and are adequately maintained.
Item 3. Legal Proceedings
In the normal course of business, the Registrant is subject to various
claims and litigation. While the outcome of any litigation is inherently
unpredictable, the Registrant believes it has valid defenses with respect to the
legal matters pending against it and the Registrant believes that the ultimate
resolution of these matters will not have a material adverse impact on its
financial condition, results of operations or cash flows. Among the various
claims and litigation pending against the Registrant is the following:
The Registrant and its indirect wholly-owned subsidiaries Dealer
Solutions, L.L.C. and Dealer Solutions Holdings, Inc. ("DSI") are named as
defendants in a lawsuit filed on March 4, 1999 in the 133rd Judicial District
Court of Harris County, Texas by Universal Computer Systems, Inc., Universal
Computer Consulting, Ltd., Universal Computer Services, Inc., and Dealer
Computer Services, Inc. (collectively, "UCS"), which lawsuit has since been
referred by the District Court to arbitration and was tried before an
arbitration panel in June 2003 with a final decision expected in October 2003.
This lawsuit alleges trade secret violations by DSI in the creation by DSI of
the CARMan automobile
-7-
<PAGE>
dealership software product and misappropriation of those trade secrets by the
Registrant through its acquisition of DSI. UCS is seeking injunctive relief and
damages of $56 million. The Registrant believes it has valid defenses with
respect to the above matter and should prevail.
Item 4. Submission of Matters to a Vote of Security Holders
None
-8-
<PAGE>
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
See "Market Price, Dividend Data and Other" contained in the
Registrant's 2003 Annual Report to Shareholders, which information is
incorporated herein by reference. As of August 31, 2003, the Registrant had
36,439 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 February 11, 2003, the Registrant issued 9,430 shares of its Common
Stock in respect of an earnout paid to a company in accordance with an asset
purchase agreement dated November 30, 2000 pursuant to which the Registrant
acquired substantially all of the assets of such company. The Registrant 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" contained in the Registrant's 2003 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" contained in the
Registrant's 2003 Annual Report to Shareholders, which information is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See "Management's Discussion and Analysis - Liquidity and Capital
Resources" contained in the Registrant's 2003 Annual Report to Shareholders,
which information is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements described in Item 15(a)1. hereof are
incorporated herein.
The following supplementary data is incorporated herein by reference:
Quarterly Financial Results (unaudited) for the two years ended June
30, 2003 (see Note 14 of the "Notes to Consolidated Financial
Statements" contained in ADP's 2003 Annual Report to Shareholders)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
-9-
<PAGE>
Item 9A. Controls and Procedures
The Registrant carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Registrant's disclosure controls and procedures, as defined
in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that the Registrant's disclosure controls and procedures
as of June 30, 2003 were effective to ensure that information required to be
disclosed by the Registrant in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission's rules
and forms.
There were no changes in the Registrant's internal control over
financial reporting that occurred during the quarter ended June 30, 2003 that
have materially affected, or are reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
-10-
<PAGE>
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:
<TABLE>
<CAPTION>
Employed by
Name Age Position ADP Since
- -------------------- --- -------------------------- ----------
<S> <C> <C> <C>
John D. Barfitt 50 Vice President 1979
James B. Benson 58 Vice President, General 1977
Counsel and Secretary
Richard C. Berke 58 Vice President, Human 1989
Resources
Gary C. Butler 56 President and Chief 1975
Operating Officer
Raymond L. Colotti 57 Vice President and 1995
Treasurer
Richard J. Daly 50 Group President, 1989
Brokerage Services
G. Harry Durity 56 Vice President, 1994
Worldwide Business
Development
Karen E. Dykstra 44 Chief Financial Officer 1981
Russell P. Fradin 48 Group President, 1996
Employer Services
Eugene A. Hall 47 President,
Employer Services -
Major Accounts Division 1998
John Hogan 55 Group President, 1993
Brokerage Services
Campbell Langdon 42 President,
Tax, Financial and Time
Management Services 2000
-11-
<PAGE>
S. Michael Martone 55 Group President, Dealer 1987
Services
Peter Op de Beeck 47 President, 1998
Claims Solutions Group
Dan Sheldon 47 Vice President, 1984
Corporate Controller
George I. Stoeckert 55 President, Employer 1991
Services - International
Arthur F. Weinbach 60 Chairman and 1980
Chief Executive Officer
</TABLE>
Messrs. Benson, Berke, Butler, Daly, Durity, Fradin, Hall, Hogan,
Martone and Weinbach have each been employed by ADP in senior executive
positions for more than the past five years.
John D. Barfitt joined ADP in 1979. He is a Vice President. He served
as President, Employer Services -International from 2000 to 2003, President,
Claims Services at ADP from 1998 to 2000 and Senior Vice President - Automotive
Claims Services at ADP from 1996 to 1998.
Raymond L. Colotti joined ADP in 1995. Prior to his promotion to Vice
President and Treasurer in 1997, he served as President of ADP Atlantic, Inc.
and its related companies from 1995 to 1997.
Karen E. Dykstra joined ADP in 1981. Prior to her promotion to Chief
Financial Officer in 2003, she served as Vice President, Finance from 2001 to
2003, Vice President and Controller from 1998 to 2001 and Assistant Corporate
Controller from 1996 to 1998.
Campbell Langdon joined ADP in 2000 as Vice President, Strategic
Development. In 2003, he was promoted to President, Tax, Financial and Time
Management Services. Prior to joining ADP, he was a partner of McKinsey &
Company and had been associated with that firm for 11 years.
Peter Op de Beeck joined ADP in 1998 as Managing Director of Claims
Solutions Group's Audatex. In 2001, he became President of ADP Claims Solutions
Group. Prior to joining ADP, he was Chairman and Chief Executive Officer of
Online Internet from 1996 to 1998.
Dan Sheldon joined ADP in 1984. Prior to his promotion to Vice
President, Corporate Controller in 2003, he served as Chief Financial Officer of
Brokerage Services from 2001 to 2003 and Chief Financial Officer of Dealer
Services from 1996 to 2001.
George I. Stoeckert joined ADP in 1991. Prior to his promotion to
President, Employer Services International in 2003, he served as President -
Major Accounts Division, Employer Services from 1995 to 2003.
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.
-12-
<PAGE>
Directors of the Registrant
See "Election of Directors" in the Proxy Statement for Registrant's
2003 Annual Meeting of Stockholders, which information is incorporated herein by
reference.
Section 16(a) Beneficial Ownership Reporting Compliance
See "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Proxy Statement for Registrant's 2003 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
Item 11. Executive Compensation
See "Compensation of Executive Officers" and "Election of Directors" in
the Proxy Statement for Registrant's 2003 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
See "Election of Directors - Security Ownership of Certain Beneficial
Owners and Managers" and "Compensation of Executive Officers - Equity
Compensation Plan Information" in the Proxy Statement for Registrant's 2003
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 2003 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
See "Independent Auditors' Fees" in the Proxy Statement for
Registrant's 2003 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
-13-
<PAGE>
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)1. Financial Statements
The following reports and consolidated financial statements of the
Registrant contained in the Registrant's 2003 Annual Report to Shareholders are
also included in Part II, Item 8:
Statements of Consolidated Earnings - years ended June 30, 2003, 2002
and 2001
Consolidated Balance Sheets - June 30, 2003 and 2002
Statements of Consolidated Shareholders' Equity - years ended June 30,
2003, 2002 and 2001
Statements of Consolidated Cash Flows - years ended June 30, 2003, 2002
and 2001
Notes to Consolidated Financial Statements
Report of Management
Independent Auditors' Report
Financial information of the Registrant is omitted because the
Registrant is primarily a holding company. The Registrant's subsidiaries, which
are listed on Exhibit 21 attached hereto, are wholly owned.
2. Financial Statement Schedules
<TABLE>
<CAPTION>
Page in Form 10-K
<S> <C> <C>
Independent Auditors' Report on Schedule 17
Schedule II - Valuation and Qualifying Accounts 18
</TABLE>
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. Exhibits
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 November 11, 1998 - incorporated by reference
to Exhibit 3.1 to Registrant's Registration Statement
No. 333-72023 on Form S-4 filed with the Commission
on February 9, 1999
-14-
<PAGE>
3.2 - Amended and Restated By-laws of the Registrant -
incorporated by reference to Exhibit 3.2 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002
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 13, 2001
between Automatic Data Processing, Inc. and
Arthur F. Weinbach - incorporated by reference to
Exhibit 10.1 to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 2001
(Management Contract)
10.2 - Letter Agreement dated September 14, 1998 between
Automatic Data Processing, Inc. and Gary Butler -
incorporated by reference to Exhibit 10.2 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1998 (Management
Contract)
10.3 - Key Employees' Restricted Stock Plan -
incorporated by reference to Registrant's
Registration Statement No. 33-25290 on Form S-8
(Management Compensatory Plan)
10.4 - Supplemental Officers' Retirement Plan, as
amended - incorporated by reference to Exhibit
10.4 to Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 2002
(Management Compensatory Plan)
10.5 - 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)
10.5(a) - Amendment to 1989 Non-Employee Director Stock
Option Plan - incorporated by reference to
Exhibit 10(6)(a) to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1997
(Management Compensatory Plan)
10.6 - 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)
10.6(a) - Amendment to 1990 Key Employees' Stock Option
Plan - incorporated by reference to Exhibit
10(7)(a) to Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1997
(Management Compensatory Plan)
-15-
<PAGE>
10.7 - 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)
10.8 - 2000 Key Employees' Stock Option Plan, as amended
- incorporated by reference to Exhibit 10.8 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002 (Management
Compensatory Plan)
10.9 - 2001 Executive Incentive Compensation Plan -
incorporated by reference to Exhibit 10.9 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2001 (Management
Compensatory Plan)
10.10 - Change in Control Severance Plan for Corporate
Officers - incorporated by reference to Exhibit
10.3 to Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 2001
(Management Compensatory Plan)
10.11 - Employees' Saving-Stock Option Plan -
incorporated by reference to Registrant's
Registration Statement No. 333-10281 on Form S-8
(Management Compensatory Plan)
13 - Pages 16 to 39 of the 2003 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
31.1 - Certification by Arthur F. Weinbach pursuant to
Rule 13a-14(a) of the Securities Exchange Act of
1934
31.2 - Certification by Karen E. Dykstra pursuant to
Rule 13a-14(a) of the Securities Exchange Act of
1934
32.1 - Certification by Arthur F. Weinbach pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 - Certification by Karen E. Dykstra pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K during the fiscal quarter ended June 30, 2003
A Form 8-K was filed on April 17, 2003 under Items 9 and 12 of Form
8-K, announcing the Registrant's financial results for the third fiscal quarter
ended March 31, 2003.
-16-
<PAGE>
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. and subsidiaries (the "Company") as of June 30, 2003 and 2002,
and for each of the three years in the period ended June 30, 2003, and have
issued our report thereon dated July 28, 2003; such consolidated financial
statements and report are included in your 2003 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 15. 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, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
New York, New York
July 28, 2003
-17-
<PAGE>
<TABLE>
<CAPTION>
AUTOMATIC DATA PROCESSING, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- ---------
Additions
------------------------------
<S> <C> <C> <C> <C> <C>
(1) (2)
Charged
to
Balance at Charged to other Balance at
beginning costs and accounts- Deductions- end of
of period expenses describe describe period
--------- --------- --------- ---------- ----------
Year ended June 30, 2003:
Allowance for doubtful accounts:
Current $52,873 $17,588 $ 712 (B) $(16,519) (A) $54,654
Long-term $16,019 $ 1,534 $ -- $ (6,450) (A) $11,103
Deferred tax valuation allowance $40,140 $ 5,318 $ 899 (C) $(14,137) (E) $32,220
Year ended June 30, 2002:
Allowance for doubtful accounts:
Current $41,996 $27,703 $ 743 (B) $(17,569) (A) $52,873
Long-term $16,666 $ 1,176 $ -- $ (1,823) (A) $16,019
Deferred tax valuation allowance $41,930 $ 3,179 $ 313 (C) $ (5,282) (D) $40,140
Year ended June 30, 2001:
Allowance for doubtful accounts:
Current $48,448 $16,431 $ 114 (B) $(22,997) (A) $41,996
Long-term $16,946 $ 1,369 $ -- $ (1,649) (A) $16,666
Deferred tax valuation allowance $43,700 $ 6,145 $ (165)(C) $ (7,750) (D) $41,930
</TABLE>
(A) Doubtful accounts written off, less recoveries on accounts previously
written off.
(B) Acquired in purchase transactions.
(C) Related to foreign exchange fluctuation.
(D) Related to the net deferred tax assets recorded in purchase accounting. The
recognition of this allowance is allocated to reduce the excess purchase price
over the net assets acquired.
(E) A portion of this allowance is related to the net deferred tax assets
recorded in purchase accounting, the recognition of which is allocated to reduce
the excess purchase price over the net assets acquired. The remaining portion
reduced the current year provision for income taxes.
-18-
<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 12, 2003 By: /s/ Arthur F. Weinbach
---------------------------
Arthur F. Weinbach
Chairman 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Arthur F. Weinbach Chairman, Chief Executive September 12, 2003
- --------------------------------- Officer and Director
(Arthur F. Weinbach) (Principal Executive Officer)
/s/ Karen E. Dykstra Chief Financial Officer September 12, 2003
- --------------------------------- (Principal Financial Officer)
(Karen E. Dykstra)
/s/ Gregory D. Brenneman Director September 12, 2003
- ---------------------------------
(Gregory D. Brenneman)
/s/ Leslie A. Brun Director September 12, 2003
- ---------------------------------
(Leslie A. Brun)
/s/ Gary C. Butler Director September 12, 2003
- ---------------------------------
(Gary C. Butler)
/s/ Joseph A. Califano, Jr. Director September 12, 2003
- ---------------------------------
(Joseph A. Califano, Jr.)
/s/ Leon G. Cooperman Director September 12, 2003
- ---------------------------------
(Leon G. Cooperman)
-19-
<PAGE>
Signature Title Date
- --------- ----- ----
/s/ Ann Dibble Jordan Director September 12, 2003
- ---------------------------------
(Ann Dibble Jordan)
Director September __, 2003
- ---------------------------------
(Harvey M. Krueger)
Director September __, 2003
- ---------------------------------
(Frederic V. Malek)
/s/ Henry Taub Director September 12, 2003
- ---------------------------------
(Henry Taub)
/s/ Laurence A. Tisch Director September 12, 2003
- ---------------------------------
(Laurence A. Tisch)
/s/ Josh S. Weston Director September 12, 2003
- ---------------------------------
(Josh S. Weston)
</TABLE>
-20-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>4
<FILENAME>exhibit13.txt
<DESCRIPTION>EXHIBIT 13 ANNUAL REPORT
<TEXT>
Selected Financial Data
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Years ended June 30, 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 7,147,017 $ 7,004,263 $ 6,853,652 $ 6,168,432 $ 5,455,707
Earnings before income taxes $ 1,645,200 $ 1,786,970 $ 1,525,010 $ 1,289,600 $ 1,084,500
Net earnings $ 1,018,150 $ 1,100,770 $ 924,720 $ 840,800 $ 696,840
Pro forma net earnings* $ 971,680 $ 881,890 $ 739,260
- ----------------------------------------------------------------------------------------------
Basic earnings per share $ 1.70 $ 1.78 $ 1.47 $ 1.34 $ 1.13
Diluted earnings per share $ 1.68 $ 1.75 $ 1.44 $ 1.31 $ 1.10
Pro forma basic earnings per
share* $ 1.54 $ 1.41 $ 1.20
Pro forma diluted earnings
per share* $ 1.51 $ 1.37 $ 1.17
Basic average shares
outstanding 600,071 618,857 629,035 626,766 615,630
Diluted average shares
outstanding 605,917 630,579 645,989 646,098 636,892
Cash dividends per share $ .4750 $ .4475 $ .3950 $ .3388 $ .2950
Return on equity 19.4% 22.4% 19.9% 19.7% 18.7%
- ----------------------------------------------------------------------------------------------
At year end:
Cash, cash equivalents and
marketable securities $ 2,344,343 $ 2,749,583 $ 2,596,964 $ 2,452,549 $ 2,169,040
Working capital $ 1,676,718 $ 1,406,155 $ 1,747,187 $ 1,767,784 $ 907,864
Total assets before funds
held for clients $ 8,025,922 $ 7,051,251 $ 6,549,980 $ 6,429,927 $ 5,824,820
Total assets $19,833,671 $18,276,522 $17,889,090 $16,850,816 $12,839,553
Long-term debt $ 84,674 $ 90,648 $ 110,227 $ 132,017 $ 145,765
Shareholders' equity $ 5,371,473 $ 5,114,205 $ 4,700,997 $ 4,582,818 $ 4,007,941
- ----------------------------------------------------------------------------------------------
</TABLE>
*Pro forma net earnings and earnings per share reflect the impact relating to
the July 1, 2001 adoption of Statement of Financial Accounting Standards No.
142, which eliminated goodwill amortization.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
CRITICAL ACCOUNTING POLICIES
Our Consolidated Financial Statements and accompanying notes have been
prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial
statements requires management to make estimates, judgments and
assumptions that affect reported amounts of assets, liabilities, revenues
and expenses. We continually evaluate the accounting policies and
estimates used to prepare the consolidated financial statements. The
estimates are based on historical experience and assumptions believed to
be reasonable under current facts and circumstances. Actual amounts and
results could differ from these estimates made by management. Certain
accounting policies that require significant management estimates and are
deemed critical to our results of operations or financial position are
discussed below.
Revenue Recognition. Our revenues are primarily attributable to fees for
providing services (e.g., Employer Services' payroll processing fees and
Brokerage Services' trade processing fees) as well as investment income
on payroll funds, tax filing funds and other Employer Services client-
related funds. We typically enter into agreements for a fixed fee per
transaction (e.g., number of payees). Fees associated with services are
recognized in the period services are rendered and earned under service
arrangements with clients where service fees are fixed or determinable
and collectibility is reasonably assured. Interest income on collected
but not yet remitted funds held for clients is recognized in revenues as
earned.
We also recognize revenues associated with the sale of software systems
and associated software licenses. For a majority of our software sales
arrangements, which provide hardware, software licenses, installation and
post customer support, revenues are recognized ratably over the software
license term as objective evidence of the fair values of the individual
elements in the sales arrangement does not exist.
The majority of our revenues are generated from a fee for service model
(e.g., fixed-fee per transaction processed) in which revenue is recognized
when the related services have been rendered under written price
quotations or service agreements having stipulated terms and conditions
which do not require management to make any significant judgments or
assumptions regarding any potential uncertainties.
Goodwill. We review the carrying value of all our goodwill in accordance
with Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," by comparing the carrying value of
our reporting units to their fair values. We are required to perform
this comparison at least annually or more frequently if circumstances
indicate possible impairment. When determining fair value, we utilize
various assumptions, including projections of future cash flows, our
weighted average cost of capital and long-term growth rates for our
businesses. Any significant adverse changes in key assumptions about our
businesses and their prospects or an adverse change in market conditions
may cause a change in the estimation of fair value and could result in an
impairment charge. We have approximately $2.0 billion of goodwill that
is not impaired, based on our impairment testing as of June 30, 2003.
Given the significance of our goodwill, an adverse change to the fair
value could result in an impairment charge, which could be material to
our financial statements.
Income taxes. We account for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes," which establishes financial
accounting and reporting standards for the effect of income taxes. The
objectives of accounting for income taxes are to recognize the amount of
taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that
have been recognized in an entity's financial statements or tax returns.
Judgment is required in addressing the future tax consequences of events
that have been recognized in our financial statements or tax returns
(e.g., realization of deferred tax assets, results of IRS and other tax
authorities' examinations of our tax returns). Fluctuations in the
actual outcome of these future tax consequences could materially impact
our financial statements.
<PAGE>
RESULTS OF OPERATIONS
ANALYSIS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
(In millions, except per share amounts)
Years Ended June 30, Change
----------------------- --------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total revenues $7,147 $7,004 $6,854 2% 2% 11%
----------------------- --------------------
Total expenses $5,502 $5,217 $5,329 5% (2%) 9%
----------------------- --------------------
Earnings before income
taxes $1,645 $1,787 $1,525 (8%) 17% 18%
Margin 23.0% 25.5% 22.3%
----------------------- --------------------
Provision for income
taxes $ 627 $ 686 $ 600 (9%) 14% 34%
Effective tax rate 38.1% 38.4% 39.4%
----------------------- --------------------
Net earnings $1,018 $1,101 $ 925 (8%) 19% 10%
Diluted earnings per
share $ 1.68 $ 1.75 $ 1.44 (4%) 22% 10%
----------------------- --------------------
</TABLE>
2003
- ----
Our consolidated revenues grew 2% to $7.1 billion in fiscal 2003,
primarily due to an increase in Employer Services of 5% to $4.4 billion
and an increase in Dealer Services of 12% to $788 million. These
increases were offset by a decrease in our Brokerage Services business of
9%, or $165 million. Interest income on client funds decreased due to
lower interest yields, despite 7% growth in our average client balances
during the year to $8.9 billion. The average interest rate earned on
both client funds and corporate funds, exclusive of realized
gains/(losses) in fiscal 2003 was 3.9% compared to 4.9% in fiscal 2002.
Our revenue growth was impacted primarily by continued weak economic
conditions impacting our Employer Services and Brokerage Services
businesses and our interest income.
Earnings before income taxes in fiscal 2003 decreased 8% to $1.6 billion
as total expenses grew at a faster rate than revenues. This decrease
primarily reflects the 35% decrease in earnings before income taxes in
Brokerage Services. While we have focused on cost containment
initiatives throughout the fiscal years ended June 30, 2002 and 2003 in
order to bring our expense structure in line with our slower revenue
growth, our Brokerage Services' cost reductions did not offset the 9%
decline in revenues in this business. In March 2003, we announced plans
to reduce costs in underperforming or non-strategic businesses. Selling,
general and administrative expenses grew 9% to $1.8 billion and include
approximately $60 million of incremental restructuring charges relating
to exiting of certain businesses and cost reduction efforts in
certain slow growth businesses, most of which occurred in the fourth
quarter of 2003. The restructuring is primarily severance costs,
including charges to exit our medical claims business within Claims
Services and a small payroll business servicing primarily government
agencies, separate from our core payroll business, in the United
Kingdom. Operating expenses increased 4% to $3.1 billion, primarily
driven by revenue growth in Employer Services and Dealer Services.
Systems development and programming costs increased 5% to $499 million
due to continued investment in our products, primarily in our
Employer Services business, and the maintenance of our existing
technology throughout all of our businesses. Depreciation and
amortization expense decreased 2% to $275 million due to a decrease in
capital expenditures of approximately $12 million in fiscal 2003 and $40
million in fiscal 2002. Other income for the year increased to $127
million, or 12%, from the prior year due to an increase in our net
realized gains associated with our investment portfolio of $13.1 million.
Our effective tax rate for fiscal 2003 was 38.1%, a decrease of 0.3% from
fiscal 2002. The decrease is attributable to a favorable mix in income
among tax jurisdictions.
Fiscal 2003 net earnings decreased 8% to $1.0 billion and the related
diluted earnings per share decreased 4% to $1.68. The decrease in net
earnings primarily reflects the decrease in earnings before income taxes,
slightly offset by a lower effective tax rate. The decrease in diluted
earnings per share reflects the decrease in net earnings, partially
offset by fewer shares outstanding due to the repurchase of approximately
27.4 million shares for approximately $940 million during the year and
the lower impact of stock options on dilution during fiscal 2003. The total
share repurchases in fiscal 2003 is a reflection of our confidence in the
long-term growth prospects of our businesses.
For fiscal 2004, we are forecasting mid-single digit revenue growth and
diluted earnings per share of $1.50 - $1.60. This reflects our
anticipation of the ongoing impact of the continued weak economy on
Employer Services and Brokerage Services, and lower interest rates,
causing a decline in interest income on corporate and client funds of $60
- - $80 million from 2003. We expect to invest an incremental $90 - $100
million in our highest growth opportunities, primarily in Employer
Services. We also expect to spend $40 - $45 million on our Employer of
Choice initiatives aimed at retaining our quality associates.
2002
- ----
In fiscal 2002, our consolidated revenues increased 2% to $7.0 billion
compared to fiscal 2001. The increase was primarily due to an increase
in Employer Services of 5% to $4.2 billion offset by a decrease in
interest income. Interest income decreased due to lower interest
yields, despite higher average client fund balances. Revenue growth in
fiscal 2002 was impacted by weak economic conditions resulting in slower
sales, lower client retention and fewer employees on our clients'
payrolls in our Employer Services business and reductions in
discretionary spending in the financial services industry, particularly
in research and implementation services.
Fiscal 2002 earnings before income taxes increased 17% to $1.8 billion,
primarily due to growth in revenue, declines in selling, general and
administrative expenses and systems development and programming costs and
a significant increase in other income. Operating expenses increased 2%
to $3.0 billion compared to fiscal 2001 primarily driven by revenue
growth in Employer Services, Brokerage Services and Dealer Services.
Selling, general and administrative expenses decreased 4% to $1.6 billion
as a result of our cost containment initiatives during the year, to bring
our expense structure in line with our slower revenue growth. Systems
development and programming costs decreased 8% to $475 million as a
result of our cost containment initiatives during the year, primarily
related to the maintenance of existing applications, while funding of
investments in new products continued. Depreciation and amortization
expense decreased 13% to $279 million compared to the prior year due to
the adoption of SFAS No. 142 which resulted in the elimination of
goodwill amortization. Other income increased 58% to $114 million,
primarily due to the $90 million write-off of our investment in Bridge
Information Systems, Inc. (Bridge) in fiscal 2001 which was a non-cash,
non-recurring write-off of our total investment in Bridge offset by a $45
million decrease in interest income attributable to a 1.3% decrease in
the average interest rates earned on corporate funds in fiscal 2002.
Our effective tax rate for fiscal 2002 was 38.4%, a decrease of 1% from
fiscal 2001. The decrease in the effective tax rate was primarily due to
the impact of adopting SFAS No. 142 and the resulting elimination of
goodwill amortization expense in fiscal 2002. Adjusting fiscal 2001 for
the pro forma impact of SFAS No. 142, the effective income tax rate was
38.5%.
Net earnings in fiscal 2002 increased 19% to $1.1 billion and the related
diluted earnings per share increased 22% to $1.75. The increase in net
earnings primarily reflected the increase in earnings before income
taxes. The increase in diluted earnings per share primarily reflected
the increase in net earnings, as well as fewer shares outstanding due to
the repurchase of 17.4 million shares during fiscal 2002.
<PAGE>
ANALYSIS OF BUSINESS SEGMENTS
<TABLE>
<CAPTION>
REVENUES
Years Ended June 30, Change
---------------------------- --------------------------
(In millions) 2003 2002 2001 2003 2002 2001
---------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Employer Services $4,401 $4,180 $3,964 5% 5% 12%
Brokerage Services 1,593 1,758 1,742 (9) 1 19
Dealer Services 788 706 683 12 3 (4)
Other 420 425 412 (1) 4 7
Reconciling items:
Foreign exchange 119 8 23 - - -
Client fund interest (174) (73) 30 - - -
---------------------------- --------------------------
Total revenues $7,147 $7,004 $6,854 2% 2% 11%
============================ ==========================
</TABLE>
EARNINGS BEFORE INCOME TAXES
<TABLE>
<CAPTION>
Years Ended June 30, Change
----------------------- --------------------------
(In millions) 2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Employer Services $1,193 $1,110 $ 937 7% 18% 21%
Brokerage Services 230 354 332 (35) 7 (1)
Dealer Services 132 116 99 14 17 (12)
Other 143 157 60 (9) 162 84
Reconciling items:
Foreign exchange 12 1 3 - - -
Client fund interest (174) (73) 30 - - -
Cost of capital charge 109 122 64 - - -
----------------------- --------------------------
Total earnings before
income taxes $1,645 $1,787 $1,525 (8%) 17% 18%
======================= ==========================
</TABLE>
MAJOR BUSINESS UNITS
Certain revenues and expenses are charged to the business units at a
standard rate for management and motivational reasons. Other costs are
recorded based on management responsibility. As a result, various income
and expense items, including certain non-recurring gains and losses, are
recorded at the corporate level and certain shared costs are not
allocated. The prior years' business unit revenues and earnings before
income taxes have been adjusted to reflect fiscal 2003 budgeted foreign
exchange rates.
EMPLOYER SERVICES
Employer Services' revenues grew 5% in fiscal 2003. Despite the
continued negative impacts of the weak economy, Employer Services
continued to grow primarily due to the increases in our North America
payroll and tax businesses, as well as strong growth in our beyond
payroll products including our Professional Employer Organization (PEO)
business. Client retention improved 1% from the prior year, however, new
business sales declined 2% for the year and pays per control, which
represents the number of employees on our clients' payrolls, also
decreased 1% for the year. Employer Services' revenues include interest
earned on collected but not yet remitted funds held for clients at a
standard rate of 6%, or $543 million, an increase of 7% over fiscal 2002.
Earnings before income taxes grew 7% as a result of increased revenues
and our continued cost containment efforts.
On June 20, 2003, we acquired all of the outstanding shares of
ProBusiness Services, Inc. for cash of approximately $517 million, net of
cash acquired. ProBusiness Services, Inc., which has become a part of
our Employer Services segment, is expected to generate approximately $150
million in revenue in fiscal 2004.
In fiscal 2002, Employer Services' revenues grew 5%, compared to 12% in
2001. Revenue growth was impacted by weak economic conditions, which
resulted in slower sales, lower client retention due primarily to
bankruptcies, and fewer pays per control. Employer Services' revenues
shown above include interest earned on collected but not yet remitted
funds held for clients at a standard rate of 6%, or $505 million, an
increase of 3% over fiscal 2001. Earnings before income taxes grew 18%
as a result of increased revenues and continued cost containment efforts.
BROKERAGE SERVICES
Brokerage Services' revenues declined 9% in fiscal 2003 when compared to
fiscal 2002 primarily due to continued industry consolidations which
impact trades per day, reduced discretionary spending and reduced mutual
fund and equity proxy mailings. Trade processing revenues declined due
to a 13% decline in trades per day from 1.5 million in fiscal 2002 to 1.3
million in fiscal 2003. Revenue per trade also declined due to the
change in the mix of retail vs. institutional trades, industry
consolidations and pricing pressures. Proxy revenues declined due to a
6% decline in pieces delivered from 806 million in fiscal 2002 to 754
million in fiscal 2003. Stock record growth, which is a measure of how
many shareholders own a security compared with the prior year and a key
factor in the number of pieces delivered, decreased 1% in fiscal 2003 as
compared to 10% growth in fiscal 2002. Earnings before income taxes
declined 35% primarily due to the decline in revenues. We have continued
to focus on cost reductions in our under-performing businesses in order
to properly align our cost structure with the slower growth levels.
In fiscal 2002, revenues increased 1% compared to 19% in fiscal 2001.
Excluding acquisitions, revenues would have decreased 4% primarily due to
consolidations within the financial services industry affecting trade
volumes and lower revenue per trade due to pricing pressures. A
reduction in discretionary spending in the financial services industry,
particularly in research and implementation services also contributed to
the decline in fiscal 2002 revenue growth. Earnings before income taxes
increased 7% as a result of operating efficiencies, the impact of our
cost containment initiatives and the transition of the proxy mailings and
voting process to electronic delivery.
DEALER SERVICES
Dealer Services' revenues increased 12% in fiscal 2003 when compared to
fiscal 2002. Excluding acquisitions, revenue growth increased
approximately 8%. Revenue growth was generated by strong client
retention and increased revenues in the traditional core business as well
as from new services, primarily Application Service Provider (ASP)
managed services, Networking and Computer Vehicle Registration. Sales of
our Customer Relationship Management Systems continue to be strong.
Earnings before income taxes grew 14% as a result of increased revenues
and continued cost containment efforts.
Fiscal 2002 revenues increased 3% compared to fiscal 2001. This revenue
growth compares to a 4% revenue decline in fiscal 2001. Earnings before
income taxes grew 17% due to operating efficiencies and cost containment
efforts, offset by investments in new products and acquisitions.
OTHER
The primary components of "Other" revenues are Claims Services,
miscellaneous processing services and corporate expenses.
Reconciling items for revenues and earnings before income taxes include
foreign exchange differences between the actual and the fiscal year 2003
budgeted foreign exchange rates and the adjustment for the difference
between actual interest income earned on invested funds held for clients
and interest credited to Employer Services at a standard rate of 6%.
The business unit results also include an internal cost of capital charge
related to the funding of acquisitions and other investments. This charge
is eliminated in consolidation and as such, represents a reconciling item
to earnings before income taxes.
FINANCIAL CONDITION
Our financial condition and balance sheet remain exceptionally strong. At
June 30, 2003, cash and marketable securities approximated $2.3 billion.
Shareholders' equity was approximately $5.4 billion and return on average
equity for the year was over 19%. The ratio of long-term debt to equity
at June 30, 2003 was 1.6%.
In fiscal 2003, zero coupon convertible subordinated notes were converted
to 0.5 million shares of common stock.
On June 20, 2003, we purchased ProBusiness Services, Inc. for a total of
approximately $517 million, net of cash acquired, of which $351 million
was paid as of June 30, 2003 and the remaining $166 million will be paid
as former ProBusiness shareholders tender their shares. We also acquired
ten other businesses during 2003 for approximately $118 million, net of
cash acquired. The cost of acquisitions in 2002 and 2001 aggregated $232
million (including $12 million in common stock) and $75 million,
respectively. The cash used in all of our acquisitions was generated
from our cash flows from operations. See Note 3 to the Consolidated
Financial Statements for more information regarding acquisitions.
Capital expenditures during 2003 were $134 million following
investments of $146 million in 2002 and $185 million in 2001. Capital
expenditures in fiscal 2004 should approximate $150 to $175 million.
The following table provides a summary of our contractual obligations as
of June 30, 2003:
<TABLE>
<CAPTION>
Payments due by period
----------------------------------------------------
(In thousands) Less than 1-3 3-5 More than
Contractual Obligations 1 year years years 5 years Total
- ----------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Debt Obligations (1) $ 825 $ 574 $ 1,017 $ 83,083 $ 85,499
Operating Lease Obligations (2) 296,258 366,042 168,298 99,057 929,655
Purchase Obligations (3) 40,109 19,817 6,394 101 66,421
-------- -------- -------- -------- ----------
Total $337,192 $386,433 $175,709 $182,241 $1,081,575
</TABLE>
(1) These amounts are included in our Consolidated Balance Sheets. See
Note 7 to the Consolidated Financial Statements for additional
information about our debt and related matters.
(2) Included in these amounts are various facilities and equipment
leases, and software license agreements. We enter into operating
leases in the normal course of business relating to facilities and
equipment. The majority of our lease agreements have fixed payment
terms based on the passage of time. Certain leases require payment
of maintenance and real estate taxes and contain escalation
provisions based on future adjustments in price indices. Our
future operating lease obligations could change if we exit certain
contracts and if we enter into additional operating lease
agreements.
(3) Purchase obligations primarily relate to maintenance agreements on
our software, equipment and other assets.
It is not our business practice to enter into off-balance sheet
arrangements. However, in the normal course of business, we do enter
into contracts in which we make certain representations and warranties
that guarantee the performance of our products and services as well as
other indemnifications in the normal course of business. There have
historically been no material losses related to such guarantees and
indemnifications and we do not expect there to be any in the future.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of our liquidity is our net earnings of $1.0 billion
in fiscal 2003. Cash flows generated from operations were approximately
$1.6 billion for the year ended June 30, 2003, supporting our strong cash
position. This amount compares to cash flows from operations of $1.5
billion in fiscal 2002 and 2001.
Cash flows provided by investing activities in fiscal 2003 totaled $177
million compared to cash flows used in investing activities in fiscal
2002 of approximately $1.1 billion. This fluctuation between periods is
primarily due to the timing of purchases and proceeds of marketable
securities and client fund money market securities, the net change in
client funds obligations and an increase in acquisitions in fiscal
2003.
Cash flows used in financing activities in fiscal 2003 totaled $1.1
billion compared to $928 million in fiscal 2002. This increase reflects
higher repurchases of common stock of approximately $63 million and lower
proceeds from stock purchase plan and exercises of stock options of
approximately $135 million. In fiscal 2003, we purchased approximately
27.4 million shares of common stock at an average price per share of
approximately $34. As of June 30, 2003, we had remaining Board of
Directors' authorization to purchase up to 43.5 million additional shares.
During fiscal 2003, approximately twenty percent of our overall
investment portfolio was invested in cash and cash equivalents, which are
therefore impacted almost immediately by changes in short-term interest
rates. The other eighty percent of our investment portfolio was invested
in fixed-income securities, with varying maturities of less than ten
years, which are also subject to interest rate risk including
reinvestment risk. We have historically had the ability to hold most of
these investments until maturity, and therefore, fluctuations in interest
rates have not had an adverse impact on income or cash flows.
Details regarding our corporate investments and funds held for clients
are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
(In millions)
YEARS ENDED JUNE 30: 2003 2002 2001
--------- --------- ---------
Average investment balances at cost:
<S> <C> <C> <C>
Corporate investments $ 3,374.4 $ 2,752.3 $ 2,598.9
Funds held for clients 8,936.8 8,376.6 8,188.6
---------- ---------- ---------
Total $12,311.2 $11,128.9 $10,787.5
========== ========== =========
Average interest rates earned exclusive
of realized gains/(losses) on corporate
investments and funds held for clients 3.9% 4.9% 6.2%
========== ========== =========
Realized gains on available-for-sale
securities $ 34.5 $ 22.7 $ 15.0
========== ========== =========
Realized losses on available-for-sale
securities $ (4.9) $ (6.2) $ (92.6)*
========== ========== =========
AS OF JUNE 30:
Unrealized pre-tax gains on available-for-
sale securities $ 375.9 $ 208.8 $ 140.2
========== ========== =========
Total available-for-sale securities $ 9,875.9 $ 9,856.4 $ 7,729.4
========== ========== =========
</TABLE>
*Includes a $90 million ($54 million after-tax) non-cash, non-recurring
write-off of our investment in Bridge Information Systems, Inc. See Note
2 to the Consolidated Financial Statements.
- --------------------------------------------------------------------------------
The earnings impact of future interest rate changes is based on many
factors, which influence the return on our portfolio. These factors
include, among others, the amount of invested funds and the overall
portfolio mix between short-term and long-term investments. This mix
varies during the year and is impacted by daily interest rate changes. A
hypothetical change in interest rates of 25 basis points applied to
estimated average investment balances in fiscal 2004 would result in
approximately an $11.0 million impact to earnings before income taxes over
the twelve-month period.
In October 2002, we entered into a new $4.0 billion unsecured revolving
credit agreement with certain financial institutions, replacing an
existing $4.0 billion credit agreement. The interest rate applicable to
the borrowings is tied to LIBOR or prime rate depending on the
notification provided to the syndicated financial institutions prior to
borrowing. We are also required to pay a facility fee on the credit
agreement. The primary uses of the credit facility are to provide
liquidity to the unsecured commercial paper program and to fund normal
business operations, if necessary. There have been no borrowings through
June 30, 2003 under the credit agreement, which expires in October 2003.
In April 2002, we initiated a short-term commercial paper program
providing for the issuance of up to $ 4.0 billion in aggregate maturity
value of commercial paper at our discretion. Our commercial paper
program is rated A-l+ by Standard and Poor's and Prime 1 by Moody's.
These ratings denote the highest quality investment grade securities.
Maturities of commercial paper can range from overnight to 270 days. We
use the commercial paper issuances as a primary instrument to meet
short-term financing requirements related to client funds obligations.
At June 30, 2003 and 2002, there was no commercial paper outstanding.
For the year ended June 30, 2003, we had average borrowings of $879
million at an effective weighted average interest rate of 1.5%. From the
inception of the commercial paper program in April 2002 through the
fiscal year ended June 30, 2002, we had average borrowings of $667
million at an effective weighted average interest rate of 1.8%.
Our short-term financing is sometimes obtained on a secured basis through
the use of repurchase agreements, which are collateralized principally by
U.S. government securities. These agreements generally have terms
ranging from overnight up to ten days. At June 30, 2003 and 2002, there
were no outstanding repurchase agreements. For the fiscal years ended
June 30, 2003 and 2002, we had average outstanding borrowings of $6
million and $361 million, respectively, at an average interest rate of
3.0% and 2.6%, respectively.
In June 2003, we formed a new wholly-owned subsidiary, ADP Indemnity,
Inc. The primary purpose of this subsidiary is to provide workers'
compensation insurance coverage for our PEO worksite employees. This
insurance was previously provided by a third party. At June 30, 2003,
ADP Indemnity, Inc. had a cash balance of approximately $62.1 million to
cover potential future insurance claims.
MARKET PRICE, DIVIDEND DATA AND OTHER
The market price of our common stock (symbol: ADP) 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 2003 quarter ended High Low Per Share
---------------------- ---------
June 30 $36.08 $30.80 $ .1200
March 31 $40.81 $27.24 $ .1200
December 31 $45.96 $33.76 $ .1200
September 30 $43.75 $31.15 $ .1150
- ------------------------------------------------------------------
Fiscal 2002 quarter ended
June 30 $58.00 $42.35 $ .1150
March 31 $59.53 $51.00 $ .1150
December 31 $60.37 $46.70 $ .1150
September 30 $53.97 $41.00 $ .1025
- ------------------------------------------------------------------
As of June 30, 2003, there were approximately 35,884 holders of
record of our common stock. Approximately 316,607 additional holders have
their stock in "street name."
NEW ACCOUNTING PRONOUNCEMENTS
In March 2003, the Emerging Issues Task Force (EITF) published EITF Issue
No. 00-21 "Accounting for Revenue Arrangements with Multiple
Deliverables" (EITF 00-21). EITF 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which it performs multiple
revenue-generating activities and how to determine whether such an
arrangement involving multiple deliverables contains more than one unit
of accounting for purposes of revenue recognition. The guidance in EITF
00-21 is effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. Accordingly, we have adopted EITF
00-21 effective July 1, 2003. We do not expect EITF 00-21 to have a
material impact on our Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
This report and other written or oral statements made from time to time
by ADP may contain "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Statements that are
not historical in nature and which may be identified by the use of words
like "expects," "projects," "anticipates," "estimates," "we believe,"
"could be" and other words of similar meaning, are forward-looking
statements. These statements are based on management's expectations and
assumptions and are subject to risks and uncertainties that may cause
actual results to differ materially from those expressed. Factors that
could cause actual results to differ materially from those contemplated
by the forward-looking statements include: ADP's success in obtaining,
retaining and selling additional services to clients; the pricing of
products and services; changes in laws regulating payroll taxes,
professional employer organizations and employee benefits; overall market
and economic conditions, including interest rate and foreign currency
trends; competitive conditions; stock market activity; auto sales and
related industry changes; employment and wage levels; changes in
technology; availability of skilled technical associates and the impact
of new acquisitions and divestitures. ADP disclaims any obligation to
update any forward-looking statements, whether as a result of new
information, future events or otherwise.
<PAGE>
Statements of Consolidated Earnings
<TABLE>
<CAPTION>
Automatic Data Processing, Inc. and Subsidiaries
- --------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Years Ended June 30, 2003 2002 2001
---------- ---------- ----------
<S> <C> <C> <C>
Revenues other than interest on funds held for clients
and PEO revenues $6,412,059 $6,305,206 $6,100,112
Interest on funds held for clients 368,727 431,236 518,956
PEO revenues(A) 366,231 267,821 234,584
---------- ---------- ----------
Total revenues 7,147,017 7,004,263 6,853,652
---------- ---------- ----------
Operating expenses 3,096,719 2,970,645 2,900,124
Selling, general and administrative expenses 1,758,353 1,606,690 1,665,447
Systems development and programming costs 499,192 474,843 514,279
Depreciation and amortization 274,682 279,077 320,856
Other income, net (127,129) (113,962) (72,064)
---------- ---------- ----------
5,501,817 5,217,293 5,328,642
---------- ---------- ----------
Earnings before income taxes 1,645,200 1,786,970 1,525,010
Provision for income taxes 627,050 686,200 600,290
---------- ---------- ----------
Net earnings $1,018,150 $1,100,770 $ 924,720
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share $ 1.70 $ 1.78 $ 1.47
---------- ---------- ----------
Diluted earnings per share $ 1.68 $ 1.75 $ 1.44
---------- ---------- ----------
Basic average shares outstanding 600,071 618,857 629,035
---------- ---------- ----------
Diluted average shares outstanding 605,917 630,579 645,989
========== ========== ==========
- --------------------------------------------------------------------------------------------
</TABLE>
(A) Net of pass-through costs of $3,462,783, $2,648,321 and $2,446,768,
respectively.
See notes to consolidated financial statements.
<PAGE>
Consolidated Balance Sheets
Automatic Data Processing, Inc. and Subsidiaries
- -----------------------------------------------------------------------------
(In thousands, except per share amounts)
June 30, 2003 2002
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 1,410,218 $ 798,810
Short-term marketable securities 595,166 677,005
Accounts receivable, net 1,005,833 1,045,170
Other current assets 664,284 296,272
----------- -----------
Total current assets 3,675,501 2,817,257
Long-term marketable securities 338,959 1,273,768
Long-term receivables 180,354 192,769
Property, plant and equipment:
Land and buildings 477,682 458,478
Data processing equipment 780,044 696,829
Furniture, leaseholds and other 603,451 540,217
----------- -----------
1,861,177 1,695,524
Less accumulated depreciation (1,246,476) (1,099,073)
----------- -----------
614,701 596,451
Other assets 565,385 293,808
Goodwill 1,981,131 1,375,654
Intangible assets, net 669,891 501,544
----------- -----------
Total assets before funds held for clients 8,025,922 7,051,251
Funds held for clients 11,807,749 11,225,271
----------- -----------
Total assets $19,833,671 $18,276,522
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 173,988 $ 148,694
Accrued expenses and other current liabilities 1,609,665 1,035,389
Income taxes payable 215,130 227,019
----------- -----------
Total current liabilities 1,998,783 1,411,102
Long-term debt 84,674 90,648
Other liabilities 270,267 233,671
Deferred income taxes 320,796 237,633
Deferred revenues 338,763 138,893
----------- -----------
Total liabilities before client funds obligations 3,013,283 2,111,947
Client funds obligations 11,448,915 11,050,370
----------- -----------
Total liabilities 14,462,198 13,162,317
----------- -----------
Shareholders' equity:
Preferred stock, $1.00 par value:
Authorized, 300 shares; issued, none -- --
Common stock, $.10 par value:
Authorized, 1,000,000 shares; issued,
638,702 shares at June 30, 2003 and 2002 63,870 63,870
Capital in excess of par value 211,339 333,371
Retained earnings 6,710,863 5,977,318
Treasury stock - at cost: 43,863 and 22,385
shares, respectively (1,773,418) (1,142,041)
Accumulated other comprehensive income (loss) 158,819 (118,313)
----------- -----------
Total shareholders' equity 5,371,473 5,114,205
----------- -----------
Total liabilities and shareholders' equity $19,833,671 $18,276,522
=========== ===========
- -----------------------------------------------------------------------------
See notes to consolidated financial statements.
<PAGE>
Statements of Consolidated Shareholders' Equity
Automatic Data Processing, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Capital in Other
------------------- Excess of Retained Treasury Comprehensive Comprehensive
(In thousands, except per share amounts) Shares Amount Par Value Earnings Stock Income Income (Loss)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 2000 631,443 $63,144 $402,767 $4,477,141 $ (130,800) $(229,434)
Net earnings -- -- -- 924,720 -- $ 924,720 --
Currency translation adjustments (80,816) (80,816)
Unrealized net gain on securities, net
of tax 77,286 77,286
----------
Comprehensive income $ 921,190
----------
----------
Employee stock plans and
related tax benefits 6,878 688 163,464 -- 187,058
Treasury stock acquired (16,558 shares) -- -- -- -- (935,064)
Acquisitions (22 shares) -- -- 234 -- 839
Debt conversion (1,303 shares) 381 38 (12,538) -- 40,723
Dividends ($.3950 per share) -- -- -- (248,453) --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 638,702 63,870 553,927 5,153,408 (837,244) (232,964)
Net earnings -- -- -- 1,100,770 -- $1,100,770 --
Currency translation adjustments 73,504 73,504
Unrealized net gain on securities, net
of tax 41,147 41,147
----------
Comprehensive income $1,215,421
----------
----------
Employee stock plans and
related tax benefits -- -- (197,083) -- 515,729
Treasury stock acquired (17,412 shares) -- -- -- -- (875,449)
Acquisitions (226 shares) -- -- (423) -- 12,848
Debt conversion (705 shares) -- -- (23,050) -- 42,075
Dividends ($.4475 per share) -- -- -- (276,860) --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 638,702 63,870 333,371 5,977,318 (1,142,041) (118,313)
Net earnings -- -- -- 1,018,150 -- $1,018,150 --
Currency translation adjustments 174,046 174,046
Unrealized net gain on securities, net
of tax 108,562 108,562
Minimum pension liability adjustment,
net of tax (5,476) (5,476)
----------
Comprehensive income $1,295,282
----------
----------
Employee stock plans and
related tax benefits -- -- (103,593) -- 268,938
Treasury stock acquired (27,413 shares) -- -- -- -- (938,545)
Acquisitions (294 shares) -- -- (3,056) -- 14,883
Debt conversion (462 shares) -- -- (15,383) -- 23,347
Dividends ($.4750 per share) -- -- -- (284,605) --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003 638,702 $63,870 $211,339 $6,710,863 $(1,773,418) $ 158,819
======= ======= ======== ========== =========== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Statements of Consolidated Cash Flows
Automatic Data Processing, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(In thousands)
Years Ended June 30, 2003 2002 2001
-------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 1,018,150 $ 1,100,770 $ 924,720
Adjustments to reconcile net earnings to net cash flows
provided by operating activities:
Depreciation and amortization 274,682 279,077 320,856
Write-off of investment in Bridge Information Systems, Inc. - - 90,000
Deferred income taxes (15,775) 8,680 29,450
Increase in receivables and other assets (94,422) (73,511) (70,699)
Increase in accounts payable and accrued expenses 287,174 138,141 182,634
Other 95,280 78,547 14,063
----------- ----------- -----------
Net cash flows provided by operating activities 1,565,089 1,531,704 1,491,024
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities (3,451,554) (6,243,228) (6,864,707)
Proceeds from sale of marketable securities 4,014,300 4,167,028 3,087,406
Net proceeds from client fund money market securities 1,501,286 1,645,908 2,891,273
Net change in client funds obligations (967,797) (188,484) 818,082
Capital expenditures (133,758) (145,621) (185,406)
Additions to intangibles (144,728) (109,799) (97,448)
Acquisitions of businesses, net of cash acquired (651,320) (219,783) (73,667)
Disposals of businesses 4,035 7,200 900
Other 6,609 6,286 (32,267)
----------- ----------- -----------
Net cash flows provided by (used in) investing activities 177,073 (1,080,493) (455,834)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of debt (1,384) (3,919) (48,567)
Proceeds from issuance of notes 964 358 26,435
Repurchases of common stock (938,545) (875,449) (935,064)
Proceeds from stock purchase plan and exercises of stock
options 92,816 228,113 218,178
Dividends paid (284,605) (276,860) (248,453)
----------- ----------- -----------
Net cash flows used in financing activities (1,130,754) (927,757) (987,471)
----------- ----------- -----------
Net change in cash and cash equivalents 611,408 (476,546) 47,719
Cash and cash equivalents, at beginning of period 798,810 1,275,356 1,227,637
----------- ----------- -----------
Cash and cash equivalents, at end of period $ 1,410,218 $ 798,810 $ 1,275,356
----------- ----------- -----------
----------- ----------- -----------
- ------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Notes to Consolidated Financial Statements
Automatic Data Processing, Inc. and Subsidiaries
Years ended June 30, 2003, 2002 and 2001
(Unless otherwise noted, amounts in thousands, except per share amounts)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. CONSOLIDATION AND BASIS OF PREPARATION. The consolidated financial
statements include the financial results of Automatic Data Processing,
Inc. and its majority-owned subsidiaries (the "Company" or "ADP").
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. REVENUE RECOGNITION.
A majority of the Company's revenues are attributable to fees for
providing services (e.g., Employer Services' payroll processing fees and
Brokerage Services' trade processing fees) as well as investment income
on payroll funds, tax filing funds and other Employer Services'
client-related funds. The Company typically enters into agreements for a
fixed fee per transaction (e.g., number of payees). Fees associated with
services are recognized in the period services are rendered and earned
under service arrangements with clients where service fees are fixed or
determinable and collectibility is reasonably assured. Interest income
on collected but not yet remitted funds held for clients is recognized in
revenues as earned.
The Company also recognizes revenues associated with the sale of software
systems and associated software licenses. For a majority of the
Company's software sales arrangements, which provide hardware, software
licenses, installation and post customer support, revenues are recognized
ratably over the software license term as objective evidence of the fair
values of the individual elements in the sales arrangement does not
exist. As part of the sale of software systems, the Company recognizes
revenues from the sale of hardware, which is recorded net of the
associated costs.
Postage fees for client mailings are included in revenues and the
associated postage expenses are included in operating expenses.
Professional Employer Organization (PEO) service revenues are included in
revenues and are reported net of direct costs billed and incurred for PEO
worksite employees, which primarily include payroll wages and payroll
taxes.
C. CASH AND CASH EQUIVALENTS. Highly-liquid investments with a maturity
of ninety days or less at the time of purchase are considered cash
equivalents.
D. INVESTMENTS. Corporate investments and funds held for clients at June
30, 2003 and 2002.
<TABLE>
<CAPTION>
2003 2002
Cost Fair Value Cost Fair Value
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Money market securities
and other cash
equivalents:
Corporate investments $ 1,410,218 $ 1,410,218 $ 798,810 $ 798,810
Funds held for clients 2,865,957 2,865,957 3,319,646 3,319,646
----------- ----------- ----------- -----------
Total money market
securities and other
cash equivalents 4,276,175 4,276,175 4,118,456 4,118,456
----------- ----------- ----------- -----------
Available-for-sale
securities:
Corporate investments 917,026 934,125 1,916,896 1,950,773
Funds held for clients 8,582,958 8,941,792 7,730,724 7,905,625
----------- ----------- ----------- -----------
Total available-for-sale
securities 9,499,984 9,875,917 9,647,620 9,856,398
----------- ----------- ----------- -----------
Total corporate investments
and funds held for
clients $13,776,159 $14,152,092 $13,766,076 $13,974,854
=========== =========== =========== ===========
</TABLE>
All of the Company's marketable securities are considered to be
"available-for-sale" at June 30, 2003 and, accordingly, are carried on the
Consolidated Balance Sheets at fair value.
Expected maturities of available-for-sale securities for both corporate
investments and funds held for clients at June 30, 2003 are as follows:
Maturity Dates:
Due in one year or less $2,732,443
Due after one year through two years 3,402,876
Due after two years through three years 1,882,764
Due after three years through four years 779,654
Due after four years through ten years 1,078,180
---------
Total available-for-sale securities $9,875,917
==========
E. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is stated
at cost and depreciated over the estimated useful lives of the assets
using 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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F. GOODWILL AND INTANGIBLES. In July 2001, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other
Intangible Assets" (SFAS No. 142), which requires that goodwill no longer
be amortized, but instead tested for impairment at least annually at the
reporting unit level. If impairment is indicated, a write-down to fair
value (normally measured by discounting estimated future cash flows) is
recorded. Intangible assets with finite lives continue to be amortized
primarily on the straight-line basis over their estimated useful lives.
Prior to fiscal 2002, the Company amortized goodwill over periods from 10
to 40 years. Proforma net income and diluted earnings per share for the
year ended June 30, 2001, would have been $972 million and $1.51,
respectively, had the Company applied the non-amortization methodology of
SFAS No. 142.
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 revenues 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 in accumulated other
comprehensive income on the balance sheet.
H. EARNINGS PER SHARE (EPS). The calculations of basic and diluted EPS
are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Effect of
Zero Coupon Effect of
Subordinated Stock
Years ended June 30, Basic Notes Options Diluted
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2003
Net earnings $1,018,150 $ 1,207 $ -- $1,019,357
Average shares 600,071 1,693 4,153 605,917
EPS $ 1.70 $ 1.68
- --------------------------------------------------------------------------------
2002
Net earnings $1,100,770 $ 1,611 $ -- $1,102,381
Average shares 618,857 2,352 9,370 630,579
EPS $ 1.78 $ 1.75
- --------------------------------------------------------------------------------
2001
Net earnings $ 924,720 $ 2,340 $ -- $ 927,060
Average shares 629,035 3,472 13,482 645,989
EPS $ 1.47 $ 1.44
- --------------------------------------------------------------------------------
</TABLE>
I. INTERNAL USE SOFTWARE. The Company capitalizes certain costs
associated with computer software developed or obtained for internal use
in accordance with the provisions of Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The Company's policy provides for the capitalization of
external direct costs of materials and services associated with
developing or obtaining internal use computer software. In addition, ADP
also capitalizes certain payroll and payroll-related costs for employees
who are directly associated with internal use computer software
projects. The amount of capitalizable payroll costs with respect to
these employees is limited to the time directly spent on such projects.
Costs associated with preliminary project stage activities, training,
maintenance and all other post implementation stage activities are
expensed as incurred. The Company also expenses internal costs related
to minor upgrades and enhancements, as it is impractical to separate
these costs from normal maintenance activities. Capitalized costs
related to computer software developed or obtained for internal use are
amortized over a three- to five-year period on a straight-line basis.
J. COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. The
Company capitalizes certain costs of computer software to be sold, leased
or otherwise marketed in accordance with the provisions of SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." The Company's policy provides for the
capitalization of all software production costs upon reaching
technological feasibility for a specific product. Technological
feasibility is attained when software products have a completed working
model whose consistency with the overall product design has been
confirmed by testing. Costs incurred prior to the establishment of
technological feasibility are expensed as incurred. The establishment of
technological feasibility requires considerable judgment by management
and in many instances is only attained a short time prior to the general
release of the software. Upon the general release of the software
product to customers, capitalization ceases and such costs are amortized
over a three-year period on a straight-line basis. Maintenance-related
costs are expensed as incurred.
K. FAIR VALUE ACCOUNTING FOR STOCK PLANS. In December 2002, the
Financial Accounting Standards Board (FASB) issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure"(SFAS
No. 148) which amends SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 148 provides alternative methods
of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation and requires disclosures
in annual and interim financial statements of the effects of stock-based
compensation as reflected below.
The Company continues to account for its stock option and employee stock
purchase plans under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations. No stock-based
employee compensation expense related to the Company's stock option and
stock purchase plans is reflected in net earnings, as all options granted
under the stock option plans had an exercise price equal to the market
value of the underlying common stock on the date of grant, and for the
stock purchase plan the discount does not exceed fifteen percent.
The following table illustrates the effect on net earnings and earnings
per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation.
<TABLE>
<CAPTION>
Years ended June 30, 2003 2002 2001
- -------------------- ---- ---- ----
<S> <C> <C> <C>
Net earnings, as reported $1,018,150 $1,100,770 $924,720
Deduct: Total stock-based employee
compensation expense determined
using the fair value-based method
for all awards, net of related
tax effects (123,062) (120,010) (106,628)
---------- ---------- --------
Pro forma net earnings $895,088 $980,760 $818,092
======== ======== ========
Earnings per share:
Basic - as reported $1.70 $1.78 $1.47
===== ===== =====
Basic - pro forma $1.49 $1.58 $1.30
===== ===== =====
Diluted - as reported $1.68 $1.75 $1.44
===== ===== =====
Diluted - pro forma $1.48 $1.56 $1.27
===== ===== =====
</TABLE>
The fair value for these instruments was estimated at the date of grant
using a Black-Scholes valuation model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Years ended June 30, 2003 2002 2001
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate 3.2%-4.1% 4.3%-5.2% 5.3%-6.0%
Dividend yield .8%-.9% .7%-.8% .7%-.8%
Volatility factor 29.5%-31.7% 25.9%-27.9% 27.9%-28.2%
Expected life:
Options 6.4 6.3 6.3
Stock purchase plans 2.0 2.0 2.0
Weighted average fair value:
Options $12.85 $16.54 $21.31
Stock purchase plans $12.94 $21.55 $20.58
</TABLE>
See Note 9, Employee Benefit Plans, for additional information relating
to the Company's stock plans.
L. RECLASSIFICATION OF PRIOR FINANCIAL STATEMENTS. Certain
reclassifications have been made to previous years' financial statements
to conform to the 2003 presentation.
M. INCOME TAXES. The provisions for income taxes, income taxes payable
and deferred income taxes are determined using the liability method.
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities
and are measured by applying enacted tax rates and laws to taxable years
in which such differences are expected to reverse. A valuation allowance
is provided when the Company determines that it is more likely than not
that a portion of the deferred tax asset balance will not be realized.
N. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS. In November 2002, the FASB
issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," which elaborates on the disclosures to be made
by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the inception of
a guarantee, a liability for the fair value of the obligation undertaken
in issuing the guarantee. The initial recognition and measurement
provisions of this Interpretation are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002. The disclosure
requirements in this Interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002.
The Company has provided information regarding commitments and
contingencies relating to guarantees in Note 11. There have been no
material commitments and contingencies requiring recognition in the
Consolidated Financial Statements since December 31, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146), which
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3 (EITF 94-3),
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF 94-3, a liability for an exit cost as
defined in EITF 94-3 was recognized at the date of an entity's commitment
to an exit plan. The provisions of SFAS No. 146 are effective and are
being applied to all exit or disposal activities initiated since
December 31, 2002. These provisions affect the timing of the recognition
of the Company's exit and disposal costs.
On July 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" (SFAS No. 144). This standard
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 121), and
replaces the accounting and reporting provisions of APB Opinion No. 30,
"Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," as it relates to the disposal of a
segment of a business. SFAS No. 144 requires the use of a single
accounting model for long-lived assets to be disposed of by sale,
including discontinued operations, by requiring those long-lived assets
to be measured at the lower of carrying amount or fair value less cost to
sell. The impairment recognition and measurement provisions of SFAS No.
121 were retained for all long-lived assets to be held and used with the
exception of goodwill. Accordingly, the Company periodically evaluates
its long-lived assets for impairment by comparing the undiscounted cash
flows to the carrying value of the related long-lived asset. If the
undiscounted cash flows are less than the carrying value, the Company
will write down the asset to its fair value.
O. NEW ACCOUNTING PRONOUNCEMENTS. In March 2003, the EITF published Issue
No. 00-21 "Accounting for Revenue Arrangements with Multiple
Deliverables" (EITF 00-21). EITF 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which it performs multiple
revenue-generating activities and how to determine whether such an
arrangement involving multiple deliverables contains more than one unit
of accounting for purposes of revenue recognition. The guidance in this
Issue is effective for revenue arrangements entered in fiscal periods
beginning after June 15, 2003. Accordingly, the Company has adopted EITF
00-21 effective July 1, 2003. The Company does not expect EITF 00-21 to
have a material impact on the Consolidated Financial Statements.
NOTE 2. OTHER INCOME, NET CONSISTS OF THE FOLLOWING:
<TABLE>
<CAPTION>
Years ended June 30, 2003 2002 2001
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income on corporate funds $(119,413) $(118,672) $(163,918)
Interest expense 21,838 21,164 14,260
Realized gains on available-for-sale
securities (34,491) (22,657) (15,023)
Realized losses on available-for-sale
securities 4,937 6,203 92,617
--------- --------- ---------
Total other income, net $(127,129) $(113,962) $ (72,064)
========= ========= =========
</TABLE>
Proceeds from the sale of available-for-sale securities were $4.0
billion, $4.2 billion and $3.1 billion for the years-ended June 30, 2003,
2002 and 2001, respectively.
In fiscal 1999, the Company divested its Brokerage front-office business
to Bridge Information Systems, Inc. (Bridge), and received $90 million of
Bridge convertible preferred stock as part of the proceeds. In fiscal
2001, Bridge filed for bankruptcy and the Company recorded a $90 million
($54 million net of tax) write-off of its investment.
NOTE 3. ACQUISITIONS
Assets acquired and liabilities assumed in business combinations were
recorded on the Company's Consolidated Balance Sheets as of the
respective acquisition dates based upon their estimated fair values at
such dates. The results of operations of businesses acquired by the
Company have been included in the Company's Statements of Consolidated
Earnings since their respective dates of acquisition. The excess of the
purchase price over the estimated fair values of the underlying assets
acquired and liabilities assumed was allocated to goodwill. In certain
circumstances, the allocations of the excess purchase price are based
upon preliminary estimates and assumptions. Accordingly, the allocations
are subject to revision when the Company receives final information,
including appraisals and other analyses. Revisions to the fair values,
which may be significant, will be recorded by the Company as further
adjustments to the purchase price allocations.
On June 20, 2003, the Company acquired all of the outstanding common and
preferred stock of ProBusiness Services, Inc. (ProBusiness) for $17 per
common share and $26 per preferred share. The transaction was
consummated in cash of approximately $517 million, net of cash acquired,
of which $351 million was paid as of June 30, 2003. The remaining $166
million will be paid to former ProBusiness shareholders as they tender
their shares. ProBusiness Services, Inc. is a leading provider of
comprehensive payroll and human resource processing solutions to larger
employers within the United States. The acquisition resulted in
approximately $417 million of goodwill. Intangible assets acquired of
approximately $79.8 million consist of software, customer contracts and
lists and other intangible assets which are being amortized over an
average life of 8 years.
The Company also acquired ten additional businesses in fiscal 2003 for
approximately $118 million, net of cash acquired. These acquisitions
resulted in approximately $90 million of goodwill. Intangible assets
acquired of approximately $27.9 million consist of software, customer
contracts and lists and other intangible assets which are being amortized
over an average life of 5 years.
In addition to goodwill recognized in these transactions noted above, ADP
made contingent payments totaling $28 million (including $12 million in
common stock), relating to previously consummated acquisitions. As of
June 30, 2003, the Company has contingent consideration remaining for all
transactions of approximately $138 million, which is payable over the
next three years, subject to the acquired entity's achievement of
specified revenue, earnings and/or development targets.
The Company purchased several businesses in fiscal 2002 and 2001 in the
amount of $232 million (including $12 million in common stock) and $75
million, respectively, net of cash acquired.
The acquisitions discussed above for fiscal 2003, 2002 and 2001 were not
material to the Company's operations, financial position or cash flows.
NOTE 4. RECEIVABLES
Accounts receivable is net of an allowance for doubtful accounts of $55
million and $53 million at June 30, 2003 and 2002, respectively.
The Company finances the sale of computer systems to certain of its
clients. These finance receivables, most of which are due from automobile
and truck dealerships, are reflected in the consolidated balance sheets
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
June 30, 2003 2002
----------------------- -----------------------
Current Long-term Current Long-term
----------------------- -----------------------
<S> <C> <C> <C> <C>
Receivables $167,328 $209,177 $181,609 $227,422
Less:
Allowance for
doubtful accounts (7,337) (11,103) (9,216) (16,020)
Unearned income (20,563) (17,720) (23,100) (18,633)
----------------------- -----------------------
$139,428 $180,354 $149,293 $192,769
----------------------- -----------------------
----------------------- -----------------------
- --------------------------------------------------------------------------------
</TABLE>
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 effective 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, 2003 mature as follows:
- --------------------------------------------------------------------------------
2005 $107,176
2006 61,061
2007 30,708
2008 9,842
2009 298
Thereafter 92
--------
$209,177
--------
--------
- --------------------------------------------------------------------------------
NOTE 5. GOODWILL AND INTANGIBLE ASSETS, NET
Changes in goodwill for the year ended June 30, 2003 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Employer Brokerage Dealer
Services Services Services Other Total
-------- --------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance as of June 30, 2002 $ 751,451 $348,960 $182,642 $ 92,601 $1,375,654
Additions 472,234 21,704 29,013 11,619 534,570
Other (5,221) (6,089) 2,434 - (8,876)
Sale of businesses (110) - - (537) (647)
Cumulative translation
adjustments 68,774 2,200 1,045 8,411 80,430
-------------------------------------------------------
Balance as of June 30, 2003 $1,287,128 $366,775 $215,134 $112,094 $1,981,131
=======================================================
- ------------------------------------------------------------------------------------
</TABLE>
No impairment losses were recognized during the year.
Components of intangible assets are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
June 30, 2003 2002
----------- -----------
<S> <C> <C>
Intangibles
Software licenses $ 578,261 $ 462,474
Customer contracts and lists 545,978 384,785
Other 405,860 373,978
----------- -----------
1,530,099 1,221,237
----------- -----------
Less accumulated amortization (860,208) (719,693)
----------- -----------
Intangible assets, net $ 669,891 $ 501,544
=========== ===========
- --------------------------------------------------------------------------------
</TABLE>
Other intangibles consist primarily of purchased rights, covenants,
patents and trademarks (acquired directly or through acquisitions). All
of the intangible assets have finite lives and as such are subject to
amortization. The weighted-average remaining useful life of the
intangible assets is 11 years (2 years for software licenses, 15 years
for customer contracts and lists and 14 years for other). Amortization
of intangibles totaled $114 million for fiscal 2003, $115 million for
2002 and $103 million for 2001. Estimated amortization expenses of the
Company's existing intangible assets for the next five years are as
follows:
- --------------------------------------------------------------------------------
2004 $122,675
2005 $103,026
2006 $ 73,177
2007 $ 56,196
2008 $ 48,599
- --------------------------------------------------------------------------------
NOTE 6. SHORT-TERM FINANCING
In October 2002, the Company entered into a new $4.0 billion, unsecured
revolving credit agreement with certain financial institutions, replacing
an existing $4.0 billion credit agreement. The interest rate applicable
to the borrowings is tied to LIBOR or prime rate depending on the
notification provided to the syndicated financial institutions prior to
borrowing. The Company is also required to pay a facility fee on the
credit agreement. The primary uses of the credit facility are to provide
liquidity to the unsecured commercial paper program and to fund normal
business operations, if necessary. The Company has had no borrowings
through June 30, 2003 under the credit agreement, which expires in
October 2003.
In April 2002, the Company initiated a short-term commercial paper
program providing for the issuance of up to $4.0 billion in aggregate
maturity value of commercial paper at the Company's discretion. The
Company's commercial paper program is rated A-l+ by Standard and Poor's
and Prime 1 by Moody's. These ratings denote the highest quality
investment grade securities. Maturities of commercial paper can range
from overnight to 270 days. The Company uses the commercial paper
issuances as a primary instrument to meet short-term funding requirements
related to client funds obligations. At June 30, 2003 and 2002, there
was no commercial paper outstanding. For the year ended June 30, 2003,
the Company had average borrowings of $879 million at an effective
weighted average interest rate of 1.5%. From the inception of the
commercial paper program in April 2002 through the fiscal year ended June
30, 2002, the Company had average borrowings of $667 million at an
effective weighted average interest rate of 1.8%.
The Company's short-term financing is sometimes obtained on a secured
basis through the use of repurchase agreements, which are collateralized
principally by U.S. government securities. These agreements generally
have terms ranging from overnight up to ten days. At June 30, 2003 and
2002, there were no outstanding repurchase agreements. For the fiscal
years ended June 30, 2003 and 2002, the Company had average outstanding
borrowings of $6 million and $361 million, respectively, at an average
interest rate of 3.0% and 2.6%, respectively.
NOTE 7. DEBT
Components of long-term debt are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
June 30, 2003 2002
--------- ---------
<S> <C> <C>
Zero coupon convertible subordinated
notes (5.25% yield) $ 39,661 $ 45,614
Industrial revenue bonds
(with variable interest rates from 1.25% to 1.53%) 36,500 36,474
Other 9,338 8,685
--------- ---------
85,499 90,773
Less current portion (825) (125)
--------- ---------
$ 84,674 $ 90,648
--------- ---------
--------- ---------
- --------------------------------------------------------------------------------
</TABLE>
The zero coupon convertible subordinated notes have a face value of
approximately $62 million at June 30, 2003 and mature February 20, 2012,
unless converted or redeemed earlier. At June 30, 2003, the notes were
convertible into approximately 1.6 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 fiscal 2007. During fiscal 2003 and 2002, approximately $18
million and $27 million face value of notes were converted,
respectively. As of June 30, 2003 and 2002, the quoted market prices for
the zero coupon notes were approximately $55 million and $90 million,
respectively. The fair value of the other debt, included above,
approximates its carrying value.
Long-term debt repayments at June 30, 2003 are due as follows:
- --------------------------------------------------------------------------------
2005 $ 417
2006 157
2007 163
2008 854
2009 16,365
Thereafter 66,718
--------
$ 84,674
========
- --------------------------------------------------------------------------------
Cash payments relating to interest were approximately $20 million
in fiscal 2003, $18 million in fiscal 2002 and $10 million in fiscal 2001.
NOTE 8. FUNDS HELD FOR CLIENTS AND CLIENT FUNDS OBLIGATIONS
As part of its integrated payroll and payroll tax filing services, the
Company impounds funds for federal, state and local employment taxes from
approximately 364,000 clients; handles all regulatory payroll tax
filings, 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 these funds by investing the funds primarily
in fixed-income instruments. The amount of collected but not yet remitted
funds for the Company's payroll and tax filing and certain other services
varies significantly during the year and averaged approximately $8.9
billion in fiscal 2003, $8.4 billion in fiscal 2002 and $8.2 billion in
fiscal 2001.
NOTE 9. 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 years from the date of grant, at
prices not less than the fair market value on the date of grant. At June
30, 2003, there were 11,293 participants in the plans. The aggregate
purchase price for options outstanding at June 30, 2003 was approximately
$2.5 billion. The options expire at various points between 2003 and 2013.
A summary of changes in the stock option plans for the three years ended
June 30, 2003, is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Number of Options Weighted Average Price
---------------------------------- ----------------------
Years ended June 30, 2003 2002 2001 2003 2002 2001
---------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 50,843 47,496 46,694 $41 $37 $29
Options granted 15,867 12,325 10,740 $37 $49 $57
Options exercised (2,588) (6,481) (7,956) $19 $22 $18
Options canceled (3,164) (2,497) (1,982) $48 $47 $38
----------------------------------
Options outstanding,
end of year 60,958 50,843 47,496 $41 $41 $37
----------------------------------
Options exercisable,
end of year 27,617 21,626 19,929 $36 $31 $25
----------------------------------
Shares available for
future grants,
end of year 1,189 13,892 1,720
----------------------------------
Shares reserved for
issuance under
stock option plans 62,147 64,735 49,216
----------------------------------
----------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
Summarized information about stock options outstanding as of June 30,
2003 is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Outstanding Exercisable
- ---------------------------------------------------------------------------------------------
Exercise Number Remaining Weighted Number Weighted
Price of Options Life Average of Options Average
Range (In thousands) (In years) Price (In thousands) Price
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Under $15 2,012 1.0 $13 1,994 $13
$15 to $25 5,451 3.0 $20 5,407 $20
$25 to $35 13,523 7.6 $32 4,857 $29
$35 to $45 18,840 7.3 $42 8,440 $41
$45 to $55 15,309 8.1 $50 4,620 $51
Over $55 5,823 7.2 $60 2,299 $60
- ---------------------------------------------------------------------------------------------
</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 as of
the end of the plans. Approximately 3.6 million and 2.2 million shares
are scheduled for issuance on December 31, 2004 and 2003, respectively.
Approximately 1.5 million and 2.3 million shares were issued during the
years ended June 30, 2003 and 2002, respectively. At June 30, 2003 and
2002, there were approximately 0.6 million and 3.3 million shares,
respectively, reserved for purchase under the plans. Included in
liabilities as of June 30, 2003 and 2002 are employee stock purchase plan
withholdings of approximately $87 million and $93 million, respectively.
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, 2003, 2002 and 2001 the Company issued 221 thousand, 144
thousand and 173 thousand restricted shares, respectively.
B. PENSION PLANS. 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 plus interest. The plan interest
credit rate will vary from year-to-year based on the ten-year U.S.
Treasury rate. Employees are fully vested on completion of five years of
service. The Company's policy is to make contributions within the range
determined by generally accepted actuarial principles. In addition, the
Company has various retirement plans for its non-U.S. employees and
maintains a Supplemental Officer Retirement Plan ("SORP"). The SORP is a
defined benefit plan pursuant to which the Company will pay supplemental
pension benefits to certain key officers upon retirement based upon the
officer's years of service and compensation.
The plans' funded status as of June 30, 2003 and 2002 follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
June 30, 2003 2002
--------- ---------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year $ 444,500 $ 477,800
Actual return on plan assets 20,400 (55,200)
Employer contributions 99,700 33,800
Benefits paid (11,400) (11,900)
--------- ---------
Fair value of plan assets at end of year $ 553,200 $ 444,500
--------- ---------
--------- ---------
Change in benefit obligation:
Benefit obligation at beginning of year $ 484,600 $ 409,700
Service cost 25,600 17,400
Interest cost 31,200 29,100
Actuarial and other losses 63,400 40,300
Benefits paid (11,400) (11,900)
--------- ---------
Projected benefit obligation at end of year $ 593,400 $ 484,600
--------- ---------
--------- ---------
Projected benefits in excess of plan assets $ (40,200) $ (40,100)
Unrecognized net actuarial loss due to
different experience than assumed 279,800 183,500
--------- ---------
Prepaid pension cost $ 239,600 $ 143,400
--------- ---------
--------- ---------
- --------------------------------------------------------------------------------
</TABLE>
The components of net pension expense were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years ended June 30, 2003 2002 2001
-------- -------- --------
<S> <C> <C> <C>
Service cost - benefits earned
during the period $ 25,600 $ 17,400 $ 31,400
Interest cost on projected benefits 31,200 29,100 23,600
Expected return on plan assets (50,500) (46,300) (40,100)
Net amortization and deferral 1,100 (500) 200
-------- -------- --------
$ 7,400 $ (300) $ 15,100
======== ======== ========
- --------------------------------------------------------------------------------
</TABLE>
Assumptions used to develop the actuarial present value of benefit
obligations generally were:
- --------------------------------------------------------------------------------
Years ended June 30, 2003 2002
---- ----
Discount rate 5.75% 6.75%
Expected long-term rate on assets 7.25% 8.50%
Increase in compensation levels 6.0% 6.0%
- --------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for the Company's pension plans with
accumulated benefit obligations in excess of plan assets were $67
million, $59 million and $19 million, respectively, as of June 30, 2003,
and $69 million, $61 million and $26 million, respectively, as of June
30, 2002.
C. RETIREMENT AND SAVINGS PLAN. The Company has a 401(k) retirement and
savings plan, which allows eligible employees to contribute up to 20% of
their compensation annually and allows highly compensated employees to
contribute up to 10% of their compensation annually. The Company matches
a portion of employee contributions, which amounted to approximately $34
million, $35 million and $31 million for calendar years 2002, 2001 and
2000, respectively.
NOTE 10. INCOME TAXES
Earnings before income taxes shown below are based on the geographic
location to which such earnings are attributable.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years ended June 30, 2003 2002 2001
---------- ---------- ----------
<S> <C> <C> <C>
Earnings before income taxes:
US $1,474,915 $1,618,885 $1,375,220
Non-US 170,285 168,085 149,790
---------- ---------- ----------
$1,645,200 $1,786,970 $1,525,010
- --------------------------------------------------------------------------------
</TABLE>
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years ended June 30, 2003 2002 2001
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ 496,920 $ 542,980 $ 439,745
Non-U.S. 84,180 67,380 77,435
State 61,725 67,160 53,660
--------- --------- ---------
Total current 642,825 677,520 570,840
Deferred:
Federal 430 6,525 24,895
Non-U.S. (16,350) (20) (3,743)
State 145 2,175 8,298
--------- --------- ---------
Total deferred (15,775) 8,680 29,450
--------- --------- ---------
Total provision $ 627,050 $ 686,200 $ 600,290
========= ========= =========
- --------------------------------------------------------------------------------
</TABLE>
A reconciliation between the Company's effective tax rate and the
U.S. federal statutory rate is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Years ended June 30, 2003 % 2002 % 2001 %
------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Provision for taxes
at U.S. statutory rate $ 575,820 35.0 $ 625,415 35.0 $ 533,800 35.0
Increase (decrease)
in provision from:
State taxes, net
of federal tax
benefit 40,215 2.4 45,070 2.5 40,270 2.6
Other 11,015 0.7 15,715 0.9 26,220 1.8
------------------ ------------------- ------------------
$ 627,050 38.1 $ 686,200 38.4 $ 600,290 39.4
------------------ ------------------- ------------------
------------------ ------------------- ------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
The significant components of deferred income tax assets and liabilities
and their balance sheet classifications are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
June 30, 2003 2002
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Accrued expenses not currently deductible $178,893 $135,604
Net operating losses 58,178 30,861
Other 29,023 18,320
-------- --------
266,094 184,785
Less: Valuation allowances (32,220) (40,140)
-------- --------
Deferred tax assets - net $233,874 $144,645
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Unrealized investment gains $ 142,102 $ 83,512
Accrued retirement benefits 90,730 81,883
Depreciation and amortization 188,943 164,160
Other 49,244 50,660
--------- --------
Deferred tax liabilities $ 471,019 $380,215
--------- --------
NET DEFERRED TAX LIABILITIES $ 237,145 $235,570
--------- --------
- --------------------------------------------------------------------------------
</TABLE>
There are $83.7 million and $2.1 million net current deferred tax assets
included in other current assets in the balance sheet at June 30, 2003
and June 30, 2002, respectively.
Income taxes have not been provided on undistributed earnings of foreign
subsidiaries as the Company considers such earnings to be permanently
reinvested as of June 30, 2003 and June 30, 2002.
The Company has estimated domestic and foreign net operating loss carry
forwards of approximately $103.2 million and $66.9 million, respectively,
at June 30, 2003 and approximately $0 and $85.2 million, respectively, at
June 30, 2002.
The Company has recorded valuation allowances of $32.2 million and $40.1
million at June 30, 2003 and June 30, 2002, respectively, to reflect the
estimated amount of foreign deferred tax assets that may not be
realized. A portion of the valuation allowances in the amounts of
approximately $11.6 million and $17.7 million at June 30, 2003 and June
30, 2002, respectively, relate to net deferred tax assets which were
recorded in purchase accounting. The recognition of such amounts in
future years will be allocated to reduce the excess purchase price over
the net assets acquired.
Income tax payments were approximately $686 million in 2003, $518 million
in 2002 and $437 million in 2001.
NOTE 11. CONTRACTUAL COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET
ARRANGEMENTS
The Company has obligations under various facilities and equipment leases
and software license agreements. Total expense under these agreements was
approximately $319 million in 2003, $272 million in 2002 and $269 million
in 2001, with minimum commitments at June 30, 2003 as follows:
- --------------------------------------------------------------------------------
Years ending June 30,
2004 296,258
2005 226,301
2006 139,741
2007 95,010
2008 73,288
Thereafter 99,057
--------
$929,655
========
- --------------------------------------------------------------------------------
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.
As of June 30, 2003, the Company has purchase commitments of
approximately $66 million relating to software and equipment maintenance
contracts, of which $40 million relates to fiscal 2004 and the remaining
$26 million relates to fiscal years 2005 through 2009.
The Company is subject to various claims and litigation in the
normal course of business. The Company does not believe that the
resolution of these matters will have a material impact on the
consolidated financial statements.
It is not our business practice to enter into off-balance sheet
arrangements. However, in the normal course of business, the Company
does enter into contracts in which it makes representations and
warranties that guarantee the performance of the Company's products and
services as well as other indemnifications entered into in the normal
course of business. Historically, there have been no material losses
related to such guarantees and indemnifications.
NOTE 12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income is a measure of income which includes both net
income and other comprehensive income (loss). Other comprehensive income
(loss) results from items deferred on the balance sheet in shareholders'
equity. Other comprehensive income (loss) was $277 million, $115 million
and ($4) million in 2003, 2002 and 2001, respectively. The accumulated
balances for each component of other comprehensive income (loss) are as
follows:
<TABLE>
<CAPTION>
June 30, 2003 2002 2001
-------- --------- ---------
<S> <C> <C> <C>
Currency translation adjustments $(69,535) $(243,581) $(317,085)
Unrealized gain on
available-for-sale securities, net of tax 233,830 125,268 84,121
Minimum pension liability adjustment, net of tax (5,476) - -
-------- --------- ---------
Accumulated other comprehensive
income (loss) $158,819 $(118,313) $(232,964)
======== ========= =========
</TABLE>
NOTE 13. FINANCIAL DATA BY SEGMENT
Employer Services, Brokerage Services and Dealer Services are the
Company's largest business units. ADP evaluates performance of its
business units based on operating results before interest on corporate
funds, foreign currency gains and losses, and income taxes. 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. Prior years' business unit revenues and
earnings before income taxes have been adjusted to reflect updated fiscal
year 2003 budgeted foreign exchange rates. Business unit assets include
funds held for clients but exclude corporate cash, marketable securities
and goodwill. "Other" consists primarily of Claims Services,
miscellaneous processing services and corporate. Reconciling items for
revenues and earnings before income taxes include foreign exchange
differences between the actual foreign exchange rates and the fiscal year
2003 budgeted foreign exchange rates and the adjustment for the
difference between actual interest income earned on invested funds held
for clients and interest credited to Employer Services at a standard rate
of 6%. The business unit results also include an internal cost of
capital charge related to the funding of acquisitions and other
investments. This charge is eliminated in consolidation and as such
represents a reconciling item to earnings before income taxes.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Employer Brokerage Dealer Reconciling
(In millions) Services Services Services Other Items Total
-------- --------- -------- ------- ----------- -------
Year ended June 30, 2003
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 4,401 $ 1,593 $ 788 $ 420 $ (55) $ 7,147
Earnings before income taxes $ 1,193 $ 230 $ 132 $ 143 $ (53) $ 1,645
Assets $13,278 $ 556 $ 351 $ 5,649 - $19,834
Capital expenditures $ 66 $ 24 $ 26 $ 18 - $ 134
Depreciation and amortization $ 193 $ 95 $ 50 $ 46 $ (109) $ 275
------- ------- -------- ------- -------- -------
Year ended June 30, 2002
------- ------- -------- ------- -------- -------
Revenues $ 4,180 $ 1,758 $ 706 $ 425 $ (65) $ 7,004
Earnings before income taxes $ 1,110 $ 354 $ 116 $ 157 $ 50 $ 1,787
Assets $12,244 $ 566 $ 181 $ 5,286 - $18,277
Capital expenditures $ 71 $ 33 $ 21 $ 21 - $ 146
Depreciation and amortization $ 208 $ 108 $ 40 $ 45 $ (122) $ 279
------- ------- -------- ------- -------- -------
Year ended June 30, 2001
------- ------- -------- ------- -------- -------
Revenues $ 3,964 $ 1,742 $ 683 $ 412 $ 53 $ 6,854
Earnings before income taxes $ 937 $ 332 $ 99 $ 60 $ 97 $ 1,525
Assets $12,320 $ 523 $ 183 $ 4,863 - $17,889
Capital expenditures $ 106 $ 33 $ 23 $ 23 - $ 185
Depreciation and amortization $ 196 $ 109 $ 38 $ 42 $ (64) $ 321
------- ------- -------- ------- -------- -------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues and assets by geographic area are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
United
(In millions) States Europe Canada Other Total
------- ------ ------ ------ -------
Year ended June 30, 2003
<S> <C> <C> <C> <C> <C>
Revenues $ 6,016 $ 775 $ 292 $ 64 $ 7,147
Assets $16,841 $1,476 $1,391 $ 126 $19,834
Year ended June 30, 2002
Revenues $ 5,978 $ 673 $ 270 $ 83 $ 7,004
Assets $16,055 $1,214 $ 843 $ 165 $18,277
Year ended June 30, 2001
Revenues $ 5,827 $ 641 $ 279 $ 107 $ 6,854
Assets $15,799 $1,055 $ 910 $ 125 $17,889
- --------------------------------------------------------------------------------
</TABLE>
NOTE 14. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Summarized quarterly results of operations for the two years ended June 30,
2003 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
Year ended June 30, 2003
<S> <C> <C> <C> <C>
Revenues $1,646,685 $1,682,995 $1,905,778 $1,911,559
Net earnings $ 210,400 $ 261,690 $ 329,390 $ 216,670
Basic earnings per share $ .35 $ .44 $ .55 $ .36
Diluted earnings per share $ .34 $ .43 $ .54 $ .36
---------- ---------- ---------- ----------
Year ended June 30, 2002
Revenues $1,607,883 $1,681,028 $1,870,036 $1,845,316
Net earnings $ 196,600 $ 264,600 $ 352,260 $ 287,310
Basic earnings per share $ .32 $ .43 $ .57 $ .47
Diluted earnings per share $ .31 $ .42 $ .56 $ .46
---------- ---------- ---------- ----------
- ------------------------------------------------------------------------------------------
</TABLE>
<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, has 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 LLP.
The Board of Directors has an Audit Committee comprised of four
outside directors. The Audit Committee meets with both Deloitte & Touche
LLP 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
LLP's audits. Deloitte & Touche LLP and the internal auditors have free
access to the Audit Committee.
/s/ Arthur F. Weinbach
Arthur F. Weinbach
Chairman and Chief Executive
Officer
/s/ Karen E. Dykstra
Karen E. Dykstra
Chief Financial Officer
Roseland, New Jersey
July 28, 2003
<PAGE>
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 (the "Company") as of
June 30, 2003 and 2002, and the related consolidated statements of
earnings, shareholders' equity, and cash flows for each of the three
years in the period ended June 30, 2003. 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 auditing standards
generally accepted in the United States of America. 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 as of June 30, 2003 and 2002, and
the results of their operations and their cash flows for each of the
three years in the period ended June 30, 2003, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, on July
1, 2001, the Company adopted the non-amortization provisions of Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets."
/s/ Deloitte & Touche LLP
New York, New York
July 28, 2003
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>5
<FILENAME>exhibit21.txt
<DESCRIPTION>EXHIBIT 21 LIST OF SUBSIDIARIES
<TEXT>
<TABLE>
<CAPTION>
EXHIBIT 21
<S> <C> <C>
Jurisdiction of
Name of Subsidiary Incorporation
------------------ ---------------
ADP Atlantic, Inc. Delaware
ADP Belgium CVA Belgium
ADP Brasil Ltda. Brazil
ADP Broker-Dealer, Inc. New Jersey
ADP Brokerage International Limited United Kingdom
ADP Central, Inc. Delaware
ADP Claims Solutions Group, Inc. Delaware
ADP Canada Co. Canada
ADP Credit Corp. Delaware
ADP Dealer Services Deutschland GmbH Germany
ADP Dealer Services France SAS France
ADP Dealer Services Italia s.r.l. Italy
ADP East, Inc. Delaware
ADP Employer Services GmbH Germany
ADP Europe S.A. France
ADP France S.A. France
ADP Financial Information Services, Inc. Delaware
ADP Graphic Communications, Inc. New Jersey
ADP GSI Espana S.A. Spain
ADP GSI France SAS France
ADP Hollander, Inc. Delaware
ADP, Inc. Delaware
ADP Indemnity, Inc. Vermont
ADP Integrated Medical Solutions, Inc. Delaware
ADP Investor Communication Services, Inc. Delaware
ADP Investor Communications Corporation Canada
ADP Nederland B.V. The Netherlands
ADP Network Services International, Inc. Delaware
ADP Network Services Limited United Kingdom
ADP of North America, Inc. Delaware
ADP Output Services, Inc. Delaware
ADP of Roseland, Inc. Delaware
ADP Pacific, Inc. Delaware
ADP Payroll Services, Inc. Delaware
ADP Screening and Selection Services, Inc. Colorado
ADP South, Inc. Delaware
ADP Tax Services, Inc. Delaware
ADP TotalSource Group, Inc. Florida
ADP Wilco Ltd. United Kingdom
Audatex GmbH Switzerland
Audatex Holding GmbH Switzerland
Audatex Deutschland Datenverarbeitungs GmbH Germany
Automatic Data Processing Limited Australia
Automatic Data Processing Limited United Kingdom
Automatic Data Processing SPRL Belgium
Automotive Directions, Inc. Wisconsin
Business Management Software Limited United Kingdom
Cunningham Graphics International, Inc. New Jersey
21
<PAGE>
Jurisdiction of
Name of Subsidiary Incorporation
------------------ ---------------
Cunningham Graphics International, S.A. British Virgin Islands
Digital Motorworks Holdings, Inc. Texas
GSI Transport Tourisme S.A. France
Informex S.A. Belgium
OMR Systems Corporation New Jersey
ProBusiness Holding Company, Inc. Delaware
ProBusiness Services, Inc. Delaware
</TABLE>
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, 2003.
22
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>6
<FILENAME>exhibit23.txt
<DESCRIPTION>EXHIBIT 23 AUDITOR'S CONSENT
<TEXT>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-45150, 33-52876, 33-55909, 33-57207, 33-58165, 33-61629, 333-01839,
333-02331, 333-12767, 333-15103, 333-29713, 333-48493, 333-57075, 333-80237,
333-79749, 333-72497, 333-31058, 333-42294 and 333-68030 on Form S-3,
Registration Statement No. 333-72023 on Form S-4, and Registration Statement
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, 333-13945, 333-50123, 333-84647, 333-81725, 333-74265, 333-33258,
333-69020, 333-75468, 333-90540, 333-103426 and 333-103935 on Form S-8 of
Automatic Data Processing, Inc. of our reports dated July 28, 2003,
appearing in and incorporated by reference in this Annual Report on Form
10-K of Automatic Data Processing, Inc. for the year ended June 30, 2003.
/s/ Deloitte & Touche LLP
-------------------------
New York, New York
September 11, 2003
23
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>7
<FILENAME>exhibit311.txt
<DESCRIPTION>EXHIBIT 31.1 CERTIFICATION OF CHAIRMAN AND CEO
<TEXT>
EXHIBIT 31.1
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
I, Arthur F. Weinbach, certify that:
1. I have reviewed this annual report on Form 10-K of Automatic Data Processing,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: September 12, 2003
/s/ Arthur F. Weinbach
-----------------------
Arthur F. Weinbach
Chairman and
Chief Executive Officer
24
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>8
<FILENAME>exhibit312.txt
<DESCRIPTION>CERTIFICATION OF CFO
<TEXT>
EXHIBIT 31.2
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
I, Karen E. Dykstra, certify that:
1. I have reviewed this annual report on Form 10-K of Automatic Data
Processing, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: September 12, 2003
/s/ Karen E. Dykstra
---------------------------
Karen E. Dykstra
Chief Financial Officer
25
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>9
<FILENAME>exhibit321.txt
<DESCRIPTION>EXHIBIT 32.1 CERTIFICATION OF CHAIRMAN AND CEO
<TEXT>
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Automatic Data Processing, Inc.
(the "Company") on Form 10-K for the fiscal year ending June 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Arthur F. Weinbach, Chairman and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
/s/ Arthur F. Weinbach
- ------------------------------------
Arthur F. Weinbach
Chairman and Chief Executive Officer
September 12, 2003
26
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>10
<FILENAME>exhibit322.txt
<DESCRIPTION>EXHIBIT 32.2 CERTIFICATION OF CFO
<TEXT>
EXHIBIT 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Automatic Data Processing, Inc.
(the "Company") on Form 10-K for the fiscal year ending June 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Karen E. Dykstra, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
/s/ Karen E. Dykstra
- ------------------------
Karen E. Dykstra
Chief Financial Officer
September 12, 2003
27
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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