10-K405 1 d10k405.htm FORM 10-K FORM 10-K
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-K
 
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended March 30, 2001
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                           to                                          
 
Commission File No.: 1-4850
 
COMPUTER SCIENCES CORPORATION
(Exact name of Registrant as specified in its charter)
 
Nevada
(State of incorporation or organization)
 
2100 East Grand Avenue
El Segundo, California
(Address of principal executive offices)
95-2043126
(I.R.S. Employer Identification No.)
 
90245
(zip code)
 
Registrant’s telephone number, including area code: (310) 615-0311
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class:
      Name of each exchange on which registered
Common Stock, $1.00 par value per share      New York Stock Exchange
Preferred Stock Purchase Rights      Pacific 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, and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No ¨
 
        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
        As of June 8, 2001, the aggregate market value of stock held by non-affiliates of the Registrant was approximately $7,256,000,000. A total of 169,224,534 shares of common stock was outstanding as of such date.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
        Portions of the Registrant’s definitive Proxy Statement for its 2001 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after March 30, 2001, are incorporated by reference into Part III hereof.
 
TABLE OF CONTENTS
 
Item
            Page
 
Part I
 
  1.      Business      1
  2.      Properties      5
  3.      Legal Proceedings      5
  4.      Submission of Matters to a Vote of Security Holders      5
 
             
Part II
 
  5.      Market for the Registrant’s Common Equity and Related Stockholder Matters      8
  6.      Selected Financial Data      8
  7.      Management’s Discussion and Analysis of Financial Condition and Results of Operations      10
 7A.      Quantitative and Qualitative Disclosures About Market Risk      17
  8.      Financial Statements and Supplementary Data      18
  9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      42
 
             
Part III
 
 10.      Directors and Executive Officers of the Registrant      42
 11.      Executive Compensation      42
 12.      Security Ownership of Certain Beneficial Owners and Management      42
 13.      Certain Relationships and Related Transactions      42
 
             
Part IV
 
 14.      Exhibits, Financial Statement Schedule and Reports on Form 8-K      43
 
PART I
 
Item 1.    Business
 
INTRODUCTION AND HISTORY
 
General
 
        Computer Sciences Corporation (“CSC” or the “Company”) is one of the world leaders in the information technology (“I/T”) services industry. Since it was founded in 1959, the Company has helped clients use I/T more efficiently in order to improve their operations and profitability and to achieve business results.
 
        CSC offers a broad array of professional services to clients in the global commercial and government markets and specializes in the application of advanced and complex I/T to achieve its customers’ strategic objectives. Its service offerings include outsourcing, systems integration, and management consulting/professional services, including e-business solutions.
 
        Outsourcing involves operating all or a portion of a customer’s technology infrastructure, including systems analysis, applications development, network operations, desktop computing and data center management. CSC also provides business process outsourcing, which is the management of a client’s non-core business functions, such as claims processing, credit checking, or customer call centers.
 
        Systems integration encompasses designing, developing, implementing and integrating complete information systems.
 
        Management consulting/professional services include advising clients on the strategic acquisition and utilization of I/T and on business strategy, security, modeling, simulation, engineering, operations, change management and business process reengineering. During fiscal 2001, approximately 65% of the Company’s activities in management consulting/professional services were delivered by its U.S. federal sector.
 
        The Company also licenses sophisticated software systems for select vertical markets and provides a broad array of end-to-end e-business solutions that meet the needs of large commercial and government clients. The Company focuses on delivering business results by linking business innovation skills with seasoned delivery expertise to provide flexible and scalable solutions. To do so, CSC draws on its vast experience in designing, building and maintaining large, complex, mission-critical systems and applies this knowledge to today’s business challenges.
 
        In addition, CSC does not have exclusive agreements with hardware or software providers and believes that this “vendor neutrality” enables it to better identify and manage solutions specifically tailored to each client’s needs.
 
Major Markets
 
        CSC provides its services to clients in global commercial industries and to the U.S. federal government.
 
        Since starting with a small contract to the Jet Propulsion Laboratory in 1961, CSC has provided I/T services to the U.S. federal government. In fiscal 1986, when U.S. federal contracts represented 70% of the Company’s revenues, CSC decided to devote substantial resources to further develop global commercial business in order to accelerate its growth and take advantage of the competencies gained as a leader in the federal sector. Because of this strategy, CSC has increased its penetration of the global commercial market and has diversified its business.
 
        In the global commercial area, the Company’s service offerings are marketed to clients in a wide array of industries including aerospace/defense; automotive; chemical and energy; consumer goods; financial services; healthcare; manufacturing; media; public sector; retail/distribution; telecommunications; traffic and transportation; travel and hospitality; and utilities.
 
        Geographically, CSC has major operations throughout North America, Europe and Asia-Pacific.
 
        During the last three fiscal years, the Company’s revenue mix by major markets was as follows:
 
       2001
      2000
      1999
          U.S. Commercial      39 %      39 %      40 %
          Europe      25        27        28  
          Other International      11        10        6  
       
       
       
  
Global Commercial      75        76        74  
U.S. Federal Government      25        24        26  
       
       
       
  
Total Revenues      100 %      100 %      100 %
       
       
       
  
 
Fiscal Year 2001 Performance Overview
 
        During fiscal 2001, CSC announced awards valued at approximately $10.9 billion. Continuing with its strategy of growth through acquisitions, CSC also acquired additional I/T service providers during fiscal 2001, with two strategic acquisitions being the Mynd Corporation (“Mynd”) and InfoSer SpA (“InfoSer”).
 
Global Commercial Market—Highlights
 
        Within the global commercial market, there were several significant awards to CSC.
 
        One of the largest commercial awards during fiscal 2001 was the agreement with Nortel Networks, valued at $3 billion over 7 years, to outsource certain global I/T functions. CSC will deliver global desktop and helpline support, computer infrastructure management, legacy application development, and support data center management. The value of the original award was increased by a $339 million amendment to add support for additional desktops and servers.
 
        The Company strengthened and expanded its relationship with BAE SYSTEMS through a global $1.2 billion, 6 year outsourcing arrangement, adding scope and duration to an existing contract. CSC will now manage the I/T infrastructure in the U.S. and the United Kingdom for BAE SYSTEMS, which was formed last year from the merger of British Aerospace and Marconi Electronic Systems. CSC will manage the full range of I/T operations on a transatlantic basis, from mainframe and midrange computers, servers and desktops, to wide and local area networking, internet services, help-desk, and applications support.
 
        For AT&T’s Consumer Services organization, CSC signed a $1 billion, 7 year outsourcing agreement to manage the application development and maintenance work for various software applications addressing billing, credit and collections, ordering, provisioning and customer care.
 
        The Company increased its operations in Australia by an agreement with The Broken Hill Proprietary Company Limited (“BHP”) to acquire the assets of its I/T subsidiary and provide a full range of information technology services, including consulting, systems integration and outsourcing, to BHP under a 7 year contract valued at $470 million. In addition to providing services to BHP, a global natural resources company, the acquired company provides a full range of I/T services to the commercial and industrial markets in Australia.
 
        Building on an existing relationship with AMP Limited (“AMP”) in Australia, CSC entered a separate 5 year I/T outsourcing agreement valued at $290 million for AMP’s United Kingdom operations. Under the agreement, CSC will manage mainframe and midrange services, voice and data networks, service help desks, desktops, servers and high volume printing.
 
        Adding to the Company’s relationship with E.I. duPont de Nemours and Company (“DuPont”), CSC was awarded a 7 year contract with an expected value of $280 million to provide end-to-end I/T services to DuPont Pharmaceuticals Company, a wholly owned subsidiary of DuPont. The agreement covers U.S. locations and includes networks, messaging and groupware, midrange, mainframe, help desk, distributed systems, and engineering.
 
        The acquisition of Mynd strengthened CSC’s commitment to the global financial services industry. Combining the strengths of Mynd with CSC’s global financial services industry vertical offering presents CSC with the opportunity to provide expanded I/T solutions more cost effectively. Mynd’s portfolio of insurance-related products and service offerings, combined with CSC’s existing products and capabilities, provides significant opportunities to leverage CSC’s specialized industry and outsourcing expertise and complements the Company’s ability to deliver end-to-end solutions for insurers and other firms in the converging financial services industries around the world. CSC’s financial services industry offerings address approximately 1,200 clients in more than 60 countries.
 
        Adding to CSC’s growing presence in the Italian market, CSC acquired InfoSer of Milan, Italy. InfoSer specializes in providing systems integration, implementation and maintenance services, application consulting and software products to the Italian banking market. With the addition of InfoSer, CSC augments existing expertise in Italy in the insurance, telecommunications, public sector, and fashion markets.
 
U.S. Federal Government Market—Highlights
 
        The Company provides a broad array of services to the U.S. federal government, ranging from traditional systems integration and outsourcing to advanced technical undertakings and complex project management. CSC has extensive experience in the development of software for mission-critical systems for defense and civil agency applications, and also provides systems engineering and technical assistance in network management, satellite communications, intelligence, aerospace, logistics, and related high-technology fields.
 
        There were several significant awards to CSC during fiscal 2001 from within the U.S. federal government.
 
        CSC was selected as one of twelve prime contractors to participate in the $2.5 billion U.S. Army Aviation and Missile Command (AMCOM) OMNIBUS 2000 Support Services program. The program’s three major functional areas—technical, logistics and programmatics—will be supported by separate multi-award, task-order contracts. CSC, supported by fiscal 2000’s merger with Nichols Research Corporation, was selected as a prime contractor for the technical contract. CSC was also awarded two subcontracts, including one for the logistics area and a second for the programmatics area. The Company will provide a wide range of services, including modeling and simulation, systems engineering and integration, guidance and control, software support, logistics and management expertise.
 
        Reinforcing CSC’s long-standing commitment to serving the Federal Aviation Administration (“FAA”), the Company was awarded a contract to provide enroute software development support. The contract is valued at $329 million if all options are exercised during the 5 year period. CSC will provide engineering and analysis, open system conversion and rehost, software development, deployment and maintenance, and network system design, as well as a full range of system integration services.
 
        CSC was one of three companies awarded a contract by the U.S. Air Force Space and Missile Systems Center and will provide an array of services, including developmental engineering, systems engineering, systems integration, modeling, simulation and analysis, and acquisition security. The total value of the indefinite-delivery, indefinite-quantity contract to all three firms is $495 million if all options are exercised over a 5 year period.
 
        The General Services Administration’s Federal Systems Integration and Management Center awarded CSC a 10 year, task-order contract with a potential value of $183.7 million to provide I/T support to the Headquarters, United States European Command. The Company will provide technical support in areas of program management, systems engineering, systems administration, systems security, configuration management, training, maintenance and procurement.
 
        CSC was also among a group of contractors selected to support the Defense Information Systems Agency (“DISA”) by providing a full range of information technology solutions and professional services at DISA, Department of Defense and federal government locations worldwide. The total value of the indefinite-delivery, indefinite-quantity award to all contractors is $1.5 billion if all options are exercised over a 5 year period of performance. CSC will provide information assurance services ranging from policy development to full field installation and operations in support of DISA’s information assurance initiatives. Professional services include policy and planning; process and program management support; standards, architecture, engineering and integration support; solution fielding; installation/operations support; education, training and awareness; and certification and accreditation.
 
        The Company also won a contract to provide onsite technical support services to the U.S. Department of Transportation’s John A. Volpe National Transportation Systems Center. The contract is valued at $190.5 million if all options are exercised over a 5 year period. The Volpe Center, an internationally recognized center of transportation and logistics expertise, serves as a catalyst in achieving technical, operational and management advances in transportation. CSC will provide services such as detailed technology assessments; requirements analysis; concept development; architecture design and alternatives analysis; software development, testing and integration; system training and maintenance; and system operational support for both transportation and logistics management information systems.
 
COMPETITION
 
        The I/T market in which CSC competes is not dominated by a single company or a small number of companies. A substantial number of companies offer services that overlap and are competitive with those offered by CSC. Some of these are large industrial firms, including computer manufacturers and major aerospace/defense firms that have greater financial resources than CSC and, in some cases, may have greater capacity to perform services similar to those provided by CSC.
 
        The Company’s ability to obtain business is dependent upon its ability to offer better strategic concepts and technical solutions, better value, a quicker response, or a combination of these factors. In the opinion of the Company’s management, CSC is positioned to compete effectively in the global commercial and U.S. federal government markets based on its technology and systems expertise and large project management skills. It is also management’s opinion that CSC’s competitive position is enhanced by its recognized position as a leader in management consulting and the full spectrum of services that it provides.
 
EMPLOYEES
 
        The Company has offices worldwide, and as of March 30, 2001 employed approximately 68,000 persons. The services provided by CSC require proficiency in many fields, such as computer sciences, programming, mathematics, physics, engineering, astronomy, geology, operations, research, economics, statistics and business administration.
 
Item 2.    Properties
 
Owned properties as of March 30, 2001
      Approximate
Square Footage
      General Usage
Blythewood, South Carolina      861,000      Computer and General Office Facility
Copenhagen, Denmark      423,000      Computer and General Office Facility
Falls Church, Virginia      417,000      General Office
El Segundo, California      206,000      General Office
Newark, Delaware      183,000      Computer and General Office Facility
San Diego, California      175,500      Computer and General Office Facility
Wilmington, Delaware      175,000      Computer and General Office Facility
Norwich, Connecticut      147,000      Computer and General Office Facility
Meriden, Connecticut      119,000      Computer and General Office Facility
Moorestown, New Jersey      99,000      General Office
Herndon, Virginia      87,000      General Office
Aaurus, Denmark      85,000      General Office
Maidstone, United Kingdom      79,000      Computer and General Office Facility
Shatin, Hong Kong      72,000      General Office
Singapore      61,000      General Office
Sterling, Virginia      45,000      General Office
Various other U.S. and foreign locations      159,000      Primarily General Offices
 
Leased properties as of March 30, 2001
              
Washington, D.C. area      1,608,000      Computer and General Office Facility
Texas      1,022,000      Computer and General Office Facility
United Kingdom      717,000      General Office
Germany      682,000      General Office
Australia and other Pacific Rim locations      669,000      Computer and General Office Facility
New Jersey      631,000      General Office
New York      416,000      General Office
Connecticut      367,000      General Office
Alabama      362,000      General Office
France      351,000      General Office
Massachusetts      312,000      General Office
Denmark      220,000      General Office
California      200,000      General Office
Ohio      191,000      General Office
Michigan      134,000      General Office
Illinois      124,000      General Office
Various other U.S. and foreign locations      1,628,000      Computer and General Office Facilities
 
        Upon expiration of its leases, the Company does not anticipate any difficulty in obtaining renewals or alternative space. Lease expiration dates range from fiscal 2002 through 2019.
 
Item 3.    Legal Proceedings
 
        The Company is currently party to a number of disputes which involve or may involve litigation. After consultation with counsel, it is the opinion of Company management that the ultimate liability, if any, with respect to these disputes will not be material to the Company’s results of operations or financial position.
 
Item 4.    Submission of Matters to a Vote of Security Holders
 
        None.
 
Executive Officers of the Registrant
 
Name
      Age
      Year First
Elected as
an Officer
      Term as
Officer
      Position Held
with the Registrant
      Family
Relationship
Van B. Honeycutt*      56      1987      Indefinite      Chairman, President and Chief Executive
Officer		      None
Leon J. Level*      60      1989      Indefinite      Vice President and Chief Financial Officer      None
Harvey N. Bernstein      54      1988      Indefinite      Vice President      None
Edward P. Boykin      62      1995      Indefinite      Vice President      None
Bryan Brady      54      2000      Indefinite      Vice President and Controller      None
Milton E. Cooper      62      1992      **      Vice President      None
Hayward D. Fisk      58      1989      Indefinite      Vice President, General Counsel and Secretary      None
Paul T. Tucker      53      1997      Indefinite      Vice President      None
*
Director of the Company
**
Retired effective June 1, 2001
 
Business Experience of Officers
 
        Van B. Honeycutt was elected Chairman of the Board of Directors effective March 29, 1997. He was appointed Chief Executive Officer of the Company effective April 1, 1995. He joined the Company in 1975 and was elected President and Chief Operating Officer during 1993. Prior to his election he was a Vice President of CSC and President of the Industry Services Group. He was formerly President of CSC Credit Services, Inc. He has also held a variety of other positions with the Company. Effective July 1, 2001, Mr. Honeycutt will be Chairman and Chief Executive Officer of the Company.
 
        Leon J. Level joined the Company in 1989 as Corporate Vice President and Chief Financial Officer and as a member of CSC’s Board of Directors. Former positions include Vice President and Treasurer of Unisys Corporation and Chairman of Unisys Finance Corporation; Assistant Corporate Controller and Executive Director of The Bendix Corporation; and Principal with the public accounting firm of Deloitte & Touche LLP. He is a Certified Public Accountant.
 
        Harvey N. Bernstein joined the Company as Assistant General Counsel in 1983. He became Deputy General Counsel and was elected a Corporate Vice President in 1988. Prior to joining the Company, he specialized in government procurement law at the firm of Fried, Frank, Harris, Shriver & Jacobson in Washington, D.C.
 
        Edward P. Boykin joined the Company in 1966 and has held numerous positions with several divisions of the Company. He was elected a Corporate Vice President in 1995. Since May 1999, he has been President of the Financial Services Group. From 1998 to 1999, he was responsible for leveraging the capabilities that exist within the J.P. Morgan & Co. Incorporated (“J.P. Morgan”) and DuPont accounts. Previously, he was President of The Pinnacle Alliance, a CSC-managed organization providing information technology outsourcing and other services to J.P. Morgan, from 1996 to 1998, and President of the Technology Management Group from 1993 to 1996. Effective July 1, 2001, Mr. Boykin will be President and Chief Operating Officer.
 
        Bryan Brady joined the Company in 1997 and served as Vice President, Finance of European Business Development and then Vice President, Finance and Administration of the United Kingdom Division. In February 2000 he was elected Corporate Vice President and Controller. Prior to joining the Company, he worked for International Computers Ltd. from 1985-1997 and held various executive-level finance positions. Additionally, he also spent seven years in South Africa and Saudi Arabia as general manager of a joint ventures division.
 
        Milton E. Cooper, who retired effective June 1, 2001, joined the Company in 1984 as Group Vice President of program development. He was named President of the Federal Sector, formerly known as the Systems Group, in December 1991 and became a Corporate Vice President in January 1992. A veteran of 36 years in the information industry, he has held senior sales and marketing positions with IBM Corporation and Telex Corporation. He is a graduate of the United States Military Academy at West Point.
 
        Hayward D. Fisk joined the Company in 1989 as Corporate Vice President, General Counsel and Secretary. Prior to joining the Company, he was associated for 21 years with Sprint Corporation (formerly United Telecommunications, Inc.), in various legal and executive officer positions, most recently as Vice President and Associate General Counsel.
 
        Paul T. Tucker joined the Company in 1996 as a Corporate Development executive and in August 1997 was elected Corporate Vice President of Corporate Development. From 1990 to 1995 he was President and Chief Executive Officer of Knight-Ridder Financial, an electronic real-time financial market information company. Previously, he founded and served as President and Chief Technologist of HAL Communications Corp., a communications hardware and software company, and was an Associate Professor and Senior Research Engineer at the University of Illinois.
 
PART II
 
Item 5.    Market for the Registrant’s Common Equity and Related Stockholder Matters
 
        Common stock of Computer Sciences Corporation is listed and traded on the New York Stock Exchange under the ticker symbol “CSC.”
 
        As of June 14, 2001, the number of registered shareholders of Computer Sciences Corporation’s common stock was 9,998. The table shows the high and low intra-day prices of the Company’s common stock as reported on the composite tape of the New York Stock Exchange for each quarter during the last two calendar years and through June 14, 2001.
 
       2001
      2000
    1999
Calendar Quarter
      High
      Low
      High
      Low
      High
      Low
1st      66.71        29.50        94.94      72.00      74.38      54.94
2nd      46.00 *      28.99 *      99.88      69.50      69.88      52.38
3rd                              81.44      60.38      74.00      61.88
4th                              77.38      58.25      94.63      57.94
* Through June 14, 2001
 
Item 6.    Selected Financial Data
 
COMPUTER SCIENCES CORPORATION
 
       Five-Year Review
In millions except per-share amounts
      March 30,
2001
      March 31,
2000
      April 2,
1999
      April 3,
1998
      March 28,
1997
Total assets      $8,174.8        $5,874.1        $5,260.4        $4,274.1        $3,706.7  
Debt:                                                            
          Long-term      1,029.4        652.4        399.7        739.0        634.9  
          Short-term      1,195.7        238.1        436.4        12.1        30.8  
          Current maturities      158.9        11.1        167.5        22.8        10.4  
     
     
     
     
     
  
                    Total debt      2,384.0        901.6        1,003.6        773.9        676.1  
Stockholders’ equity      3,215.2        3,044.0        2,588.5        2,171.0        1,820.0  
Working capital      (384.9 )      782.4        661.5        845.8        602.7  
Property and equipment:                                                            
          At cost      3,507.4        2,744.2        2,368.8        1,992.2        1,707.3  
          Accumulated depreciation and amortization      1,649.0        1,469.3        1,256.6        1,012.6        800.0  
     
     
     
     
     
  
          Property and equipment, net      1,858.4        1,274.9        1,112.2        979.6        907.3  
Current assets to current liabilities      0.9:1        1.4:1        1.3:1        1.7:1        1.6:1  
Debt to total capitalization      42.6 %      22.9 %      27.9 %      26.3 %      27.1 %
Book value per share      $19.06        $18.17        $15.67        $13.33        $11.43  
Stock price range (high)      99.88        94.94        74.88        56.75        43.25  
                                (low)      29.50        52.38        46.25        28.94        30.81  
 
Five-Year Review (continued)
 
       Fiscal Year
In millions except per-share amounts
     2001
     2000
     1999
     1998
      1997
Revenues     
$
 10,524.0     
$
 9,370.7     
$
 8,111.4     
$
 7,027.9    $ 6,014.2
     
  
  
  
  
Costs of services        8,425.1        7,352.5        6,349.5        5,500.5        4,760.7
Selling, general and administrative        796.6        779.4        735.7        640.6        509.4
Depreciation and amortization        649.3        545.7        456.9        397.8        339.3
Interest, net        89.8        40.5        34.4        41.4        31.7
Special items        232.9        41.1                    233.2        57.4
     
  
  
  
     
Total costs and expenses        10,193.7        8,759.2        7,576.5        6,813.5        5,698.5
     
  
  
  
     
Income before taxes        330.3        611.5        534.9        214.4        315.7
Taxes on income        97.1        208.6        179.4        (60.2 )      118.6
     
  
  
  
  
Net income     
$
  233.2     
$
 402.9     
$
  355.5     
$
   274.6  
$  
 197.1
     
    
  
  
  
Basic earnings per common share     
$
 1.39     
$
     2.42     
$
 2.17     
$
     1.71   $ 1.26
     
  
  
  
  
Diluted earnings per common share     
$
  1.37     
$
      2.37     
$
 2.12     
$
     1.67   $ 1.22
     
  
  
  
  
Average common shares outstanding        168.260        166.311        164.124        160.881        157.009
Average common shares outstanding
     assuming dilution		        170.767        169.749        167.986        164.501        161.771
 
Notes:
 
        A discussion of “Income Before Taxes” and “Net Income and Earnings per Share” before and after special items is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). A discussion of “Special Items” for fiscal years ended 2001 and 2000 is also included in MD&A. The fiscal 1998 special items consist of (a) a net special credit of $1.7 (1 cent per share after tax) of costs, expenses and benefits associated with developments at CSC Enterprises that generated a pre-tax charge of $208.4 ($133.3 after tax) and a tax benefit of $135.0; (b) pre-tax charge of $20.7 (8 cents per share after tax) related to CSC’s response to a failed take-over attempt and (c) merger-related charges of $4.1 (2 cents per share after tax) associated with several acquisitions made by Nichols Research Corporation, which was subsequently acquired by CSC and accounted for as a pooling of interests. The fiscal 1997 special item of $57.4 (24 cents per share after tax) relates to costs and expenses associated with the acquisition of the Continuum Company, Inc. (“Continuum”) and to a write-off of acquired research and development related to an acquisition by a company subsequently acquired by CSC and accounted for as a pooling of interests.
 
        The selected financial data has been restated for fiscal 1997 through 1999 to include the results of business combinations accounted for as poolings of interests.
 
        No dividends were paid by CSC during the five years presented.
 
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Results of Operations
 
Revenues
 
        Revenues for the Global Commercial and U.S. Federal Sector segments (see note 11) for fiscal years 2001, 2000 and 1999 are as follows:
 
       Fiscal 2001
      Fiscal 2000
      Fiscal 1999
Dollars in millions
      Amount
      Percent
Change
      Amount
      Percent
Change
      Amount
          U. S. Commercial      $  4,124.4      13 %      $3,636.8      14 %      $3,202.0
          Europe      2,593.0      3        2,526.0      12        2,250.1
          Other International      1,216.2      35        902.8      81        499.4
     
           
           
Global Commercial      7,933.6      12        7,065.6      19        5,951.5
U. S. Federal Sector      2,590.3      13        2,301.9      7        2,159.4
Corporate      .1                  3.2                  .5
     
           
           
Total      $10,524.0      12        $9,370.7      16        $8,111.4
     
           
           
 
        The Company’s 12% overall revenue growth for fiscal 2001 over 2000 resulted principally from the successful expansion of its broad range of end-to-end I/T services across its geographic span and its global commercial and U.S. federal segments.
 
        Global commercial revenue grew 12%, or $868.0 million, during fiscal 2001. In constant currency, global commercial revenue grew approximately 18%. The Company announced over $8.2 billion in new global commercial business awards during fiscal 2001 compared with the $6.9 billion announced during fiscal 2000 and $2.2 billion announced during fiscal 1999.
 
        For fiscal 2001, U.S. commercial revenue grew 13%, or $487.6 million. This growth was principally generated by a significant increase in outsourcing revenue, fueled by major new contracts including AT&T and Nortel Networks, as well as increased revenue due to the Mynd Corporation (“Mynd”) acquisition. Increased revenues in these areas were offset by a decline in consulting and systems integration revenue due to the deterioration in demand for these services. For fiscal 2000, U.S. commercial revenue grew 14%, or $434.8 million. Almost two-thirds of the growth was generated by increases in outsourcing activities. Fiscal 2000 outsourcing revenue growth was fueled by major new contracts including United Technologies Corporation and Enron Energy Services. The remainder of the U.S. commercial growth was provided principally by consulting and systems integration services and increases from the Company’s financial services and healthcare vertical markets.
 
        The Company’s European operations generated growth of 3%, or $67 million. In constant currency, European revenue growth was approximately 14%. The growth was mainly attributable to outsourcing engagements, particularly in the United Kingdom and Scandinavia. European revenue growth also was affected by a decline in consulting and systems integration revenue. For fiscal 2000 compared to 1999, the Company’s European operations generated revenue growth of 12%, or $275.9 million. The growth was principally due to (a) expansion of outsourcing services provided in the United Kingdom, (b) the acquisition of two major Italian providers of information technology services and a partial year’s benefit associated with the fiscal 1999 acquisition of Paris-based KPMG Peat Marwick SA, a management consulting and information technology services firm, and (c) increased demand in Germany for consulting and systems integration activities and enterprise resource planning services.
 
        Other international operations provided revenue growth of 35%, or $313.4 million, during fiscal 2001. This was primarily attributable to the outsourcing agreement with BHP and acquisition of its I/T subsidiary and benefit associated with the fiscal 2000 acquisition of GE Capital Information Technology Solutions (“ITS”) in Australia. During fiscal 2000, other international operations increased 81%, or $403.4 million. The growth was primarily attributable to the partial year’s benefit associated with the acquisition of ITS, expansion of other business in Australia, and a partial year’s benefit associated with the fiscal 1999 acquisition of Singapore-based CSA Holdings, Ltd. (“CSA”).
 
        The Company’s U.S. federal sector segment revenues were derived from the following sources:
 
       Fiscal 2001
      Fiscal 2000
      Fiscal 1999
Dollars in millions
      Amount
      Percent
Change
      Amount
      Percent
Change
      Amount
Department of Defense      $1,610.7      10 %      $1,464.7      4 %      $1,410.6
Civil agencies      898.0      23        732.7      9        674.0
Other      81.6      (22 )      104.5      40        74.8
     
           
           
Total U. S. Federal      $2,590.3      13        $2,301.9      7        $2,159.4
     
           
           
 
        Revenue from the U.S. federal sector increased 13% during fiscal 2001 versus 2000. The increase was principally related to activity with the Internal Revenue Service (“IRS”) contract, the Army Logistics Modernization effort, other task order contracts and add-on business from existing awards. Revenue for fiscal 2000 compared to 1999 increased 7%. The increase was principally related to activity with the IRS contract, the National Aeronautics and Space Administration (“NASA”) Stennis Facilities Operations contract, and additional task orders on various Civil agency and Department of Defense (“DOD”) contracts.
 
        During fiscal 2001, CSC announced federal contract awards with a total value of $2.7 billion, compared with the $4.4 billion and $2.9 billion announced during fiscal 2000 and 1999, respectively.
 
Costs and Expenses
 
        The Company’s costs and expenses before special items were as follows:
 
       Dollar Amount
      Percentage of
Revenue
Dollars in millions
      2001
      2000
      1999
      2001
      2000
      1999
Costs of services      $8,425.1      $7,352.5      $6,349.5      80.0 %      78.5 %      78.3 %
Selling, general and administrative      796.6      779.4      735.7      7.6        8.3        9.1  
Depreciation and amortization      649.3      545.7      456.9      6.2        5.8        5.6  
Interest expense, net      89.8      40.5      34.4      .8        .4        .4  
     
  
  
  
     
     
  
          Total      $9,960.8      $8,718.1      $7,576.5      94.6 %      93.0 %      93.4 %
     
  
  
  
     
     
  
 
Costs of Services
 
        For fiscal 2001, the Company’s costs of services as a percentage of revenue increased to 80.0% from 78.5%. The change was driven principally by the deteriorating demand in the fourth quarter for global commercial consulting and systems integration services adversely impacting billing rates and utilization, particularly in North America and Europe. Higher labor costs experienced throughout the year within the U.S. and Australian consulting operations due principally to the above factors and severance costs for reductions in force also contributed to the increased cost of services. In addition, some profitability pressure on two recent outsourcing contracts, adjustments on a few fixed-price projects and an increase in allowance for doubtful accounts due to increased credit risk associated with certain receivables negatively affected the cost of services ratio. For fiscal 2000, the Company’s costs of services as a percentage of revenue increased slightly versus 1999 from 78.3% to 78.5%.
 
Selling, General and Administrative
 
        Selling, general and administrative (“SG&A”) expenses as a percentage of revenue decreased to 7.6% from 8.3% for fiscal 2001 versus 2000. The decrease was due to management’s tight focus regarding discretionary costs due to the increased costs of services noted above. In addition, this focus has enabled growth in revenue without a proportionate increase in SG&A expense.
 
        For fiscal 2000, SG&A as a percentage of revenue decreased to 8.3% from 9.1%. The decrease was due to a number of performance improvements and management’s cost controls owing to the uncertainty of the marketplace in large part caused by the transition to the year 2000.
 
Depreciation and Amortization
 
        The increase in depreciation and amortization expense as a percentage of revenue for fiscal 2001 was principally due to the capital intensive nature of the Company’s growing outsourcing business. As a result of this growth and increased amortization from recent acquisitions, depreciation and amortization expense is likely to increase as a percentage of revenue during fiscal 2002.
 
Interest Expense
 
        For fiscal 2001, the Company’s net interest expense as a percentage of revenue increased to .8%. The increase relates primarily to the increase in debt incurred to fund the Mynd acquisition, the capital investment to purchase assets due to the increased outsourcing activities, and increased working capital needs.
 
Special Items
 
        Special items of $232.9 million ($156.0 million after tax) were recorded during fiscal 2001, as detailed below.
 
        In response to a changing mix of information technology services, business conditions and overall demand for consulting and systems integration services, the Company reviewed its global operations. As a result of this review, a special item of $137.5 million ($91.3 million after tax) or 54 cents per share (diluted) was recorded during the fourth quarter ended March 30, 2001. Included in the charge are employee severance costs of $68.9 million, write-offs in connection with consolidation of facilities of $25.6 million, write-off of capitalized software and computer-related assets of $22.1 million and $20.9 million related to phased-out operations and other assets. The involuntary termination benefits accrued and expensed of $68.9 million related to 1,720 employees, of which 831 were U.S. employees and 889 were international employees; as of March 30, 2001, approximately $5.3 million had been paid and 511 of the 1,720 employees had been involuntarily terminated. The Company expects to pay substantially all of the remaining cash payments during fiscal 2002.
 
        In connection with the December 2000 acquisition of Mynd, the Company reviewed its global commercial financial services operations, product strategies and the carrying value of its assets. As a result, special items were recorded in the third and fourth quarters of fiscal 2001. During the third quarter ended December 29, 2000, special items of $84.2 million ($57.3 million after tax) or 34 cents per share (diluted) were recorded and included $58.2 million related to non-cash adjustments to the carrying value of capitalized software and the write-off of other assets and intangibles and $9.4 million related to a legal settlement and write-off of assets from operations previously sold or phased-out. The third quarter charge also included $16.6 million accrued for employee severance costs. In the fourth quarter, the amount for employee severance costs was adjusted to $14.5 million. The employee severance costs related to 628 global commercial financial services employees; as of March 30, 2001, approximately $13.7 million had been paid and 613 of the 628 employees had been involuntarily terminated. Upon completion of the integration of Mynd during the fourth quarter ended March 30, 2001, the Company recorded an additional special item of $11.2 million ($7.4 million after tax) or 4 cents per share (diluted) for the write-off of capitalized software and a provision for consolidation of facilities. The $11.2 million was the net special item after the severance adjustment described above.
 
        Special items of $41.1 million ($29.8 million after tax), or 18 cents per share (diluted), were recorded during fiscal 2000. The Company recorded a special item of $39.1 million ($28.5 million after tax) representing merger-related charges and other transaction costs associated with the November 16, 1999 acquisition of Nichols Research Corporation. Also during fiscal 2000, the Company recorded a special item of $2.0 million ($1.3 million after tax) for legal and other costs, net of recoveries, associated with the final resolution of the remaining issues relating to the Company’s fiscal 1998 response to a failed take-over attempt.
 
        There were no special items during fiscal 1999.
 
Income Before Taxes
 
        The Company’s income before taxes and margin for the most recent three fiscal years are as follows:
 
       Dollar Amount
      Margin
Dollars in millions
      2001
      2000
      1999
      2001
      2000
      1999
Before special items      $563.2      $652.6      $534.9      5.4 %      7.0 %      6.6 %
Income before taxes      330.3      611.5      534.9      3.1        6.5        6.6  
 
        Income before special items and taxes decreased during fiscal 2001 as a percentage of revenue. The 1.6 percentage point decrease to 5.4% relates to higher cost of services, higher depreciation and amortization and higher interest expense as detailed above.
 
        During fiscal 2000, income before taxes increased as a percentage of revenue. The .4 percentage point margin improvement to 7% principally relates to lower SG&A expenses as a percentage of revenue in the Company’s U.S. federal sector and U.S. commercial operations.
 
Taxes
 
        The provision for income taxes as a percentage of pre-tax earnings was 29.4%, 34.1% and 33.5% for the three years ended March 30, 2001. The tax rates used for the special items were 33.0% and 27.3% for fiscal 2001 and 2000, respectively. Before special items, the tax rate was 30.9% and 33.7% for fiscal 2001 and 2000, respectively. The decrease in the fiscal 2001 tax rate from 33.7% to 30.9% is principally the result of favorable permanent tax benefits which relate to the amortization of assets with a higher tax basis than book basis.
 
Net Income and Earnings per Share
 
        The Company’s net income and diluted earnings per share for fiscal years 2001, 2000 and 1999 are as follows:
 
       Dollar Amount
      Margin
Dollars in millions, except EPS
      2001
      2000
      1999
      2001
      2000
      1999
Net income:                                                                  
          Before special items      $389.2      $432.7      $355.5      3.7 %      4.6 %      4.4 %
          As reported      233.2      402.9      355.5      2.2        4.3        4.4  
Diluted earnings per share:                                                                  
          Before special items      2.28      2.55      2.12
          As reported      1.37      2.37      2.12
 
        During fiscal 2001, the Company’s net income margin decreased from 4.3% to 2.2%. The decrease is principally related to the special items incurred during fiscal 2001, which reduced net income by $156.0 million or 1.5% of revenue. For fiscal 2000, the Company’s net income margin decreased to 4.3% from 4.4%. The decrease is related to the special items incurred during fiscal 2000, which reduced net income by $29.8 million or .3% of revenue.
 
        Before special items, the net earnings margin was 3.7% for fiscal 2001, 4.6% for fiscal 2000 and 4.4% for fiscal 1999. The decline for fiscal 2001 was attributable to higher costs of services, depreciation and amortization and interest expense as detailed above.
 
Cash Flows
 
       Fiscal 2001
      Fiscal 2000
      Fiscal 1999
Dollars in millions
      Amount
      Percent
Change
      Amount
      Percent
Change
      Amount
Net cash from operations      $    854.2        (10 %)      $    946.3        12 %      $  847.3  
Net cash used in investing       (2,243.4 )      91         (1,176.6 )      58         (742.8 )
Net cash provided by (used in) financing      1,321.5                    (111.4 )                  227.7  
Effect of exchange rate changes on cash and cash
     equivalents		      (8.0 )                  (3.7 )                  (.3 )
     
              
              
  
Net (decrease) increase in cash and cash equivalents      (75.7 )                  (345.4 )                  331.9  
Cash and cash equivalents at beginning of year      260.4                    617.9                    286.0  
Effect of pooling restatement                              (12.1 )                        
     
              
              
  
          Cash and cash equivalents at end of year      $    184.7                    $    260.4                    $  617.9  
     
              
              
  
 
        Historically, the majority of the Company’s cash and cash equivalents has been provided from operating activities. During fiscal 2001, net cash provided by financing activities exceeded net cash from operations principally as a result of additional borrowings associated with the acquisition of Mynd and the ramp up of recent outsourcing awards. The decrease in cash from operations during fiscal 2001 is mainly the result of lower earnings and increased working capital requirements partially offset by higher non-cash charges (depreciation and amortization and special items). The increase in cash from operations during fiscal 2000 was principally the result of higher earnings and non-cash charges (depreciation and amortization) partially offset by increased working capital requirements.
 
        The Company’s investments principally relate to purchases of computer equipment and software that support the Company’s expanding global commercial operations. Investments include computer equipment purchased at the inception of outsourcing contracts as well as subsequent upgrades, expansion or replacement of these client-supporting assets. The Company’s investments also include several acquisitions accounted for under the purchase method of accounting during fiscal 1999 through 2001, most notably the fiscal 2001 acquisition of Mynd.
 
        As described above, historically a majority of the Company’s capital investments have been funded by cash from operations. In connection with the Mynd acquisition, the Company borrowed $800 million of commercial paper during fiscal 2001. Also, during fiscal 2001, the Company issued $500 million of 7.50% notes due in 2005 and used the proceeds for general corporate purposes.
 
Liquidity and Capital Resources
 
        The balance of cash and cash equivalents was $184.7 million at March 30, 2001, $260.4 million at March 31, 2000 and $617.9 million at April 2, 1999. During this period, the Company’s earnings have added to equity. At the end of fiscal 2001, CSC’s ratio of debt to total capitalization was 42.6%.
 
Dollars in millions
      2001
      2000
      1999
Debt      $2,384.0        $   901.6        $1,003.6  
Equity      3,215.2        3,044.0        2,588.5  
     
     
     
  
Total capitalization      $5,599.2        $3,945.6        $3,592.1  
     
     
     
  
Debt to total capitalization      42.6 %      22.9 %      27.9 %
 
        During fiscal 2001, the Company increased its two credit facilities of $250 million each to $321 million each (one short-term and one long-term). At the end of fiscal 2001, approximately $185 million was available for borrowing under this program compared to $84 million at the end of fiscal 2000. In addition, the Company had uncommitted lines of credit of $228 million available with certain foreign banks. During fiscal 2001, the Company filed a shelf registration statement on Form S-3 for up to $1 billion of debt and/or equity securities. During June 2001, the Company issued $500 million of 6.75% notes due June 2006 and $500 million of 7.375% notes due June 2011. The net proceeds from the sale of the notes will be used for general corporate purposes, including the reduction of outstanding commercial paper.
 
        In the opinion of management, CSC will be able to meet its liquidity and cash needs for the foreseeable future through the combination of cash flows from operating activities, cash balances, unused borrowing capacity and other financing activities. If these resources need to be augmented, major additional cash requirements would likely be financed by the issuance of debt and/or equity securities and/or the exercise of the put option (as described in Note 12 to the Company’s consolidated financial statements).
 
Dividends and Redemption
 
        It has been the Company’s policy to invest earnings in the growth of the Company rather than distribute earnings as dividends. This policy, under which dividends have not been paid since fiscal 1969, is expected to continue, but is subject to regular review by the Board of Directors.
 
Euro Introduction
 
        On January 1, 1999 the euro currency was introduced in 11 of the 15 member countries in the European Union. Although euro notes and coins will not be available until the latter part of the transition period in 2002, the euro is traded on the currency exchanges and is available for non-cash transactions.
 
        The Company established a European steering group during 1997 to determine the Company’s approach to the euro and to develop plans to ensure that customer expectations and statutory requirements are met. The Company was ready by January 1, 1999 to deal with any customer or supplier who wished to transact in euros, and all European intercompany transactions since January 1, 1999 have been invoiced and settled in euros in the participating countries. The Company’s European operations have completed the development of the infrastructure that provides all the internal systems functionality required to deal with the euro during the transition period and thereafter. The transition period lasts until July 2002, when the national currencies will no longer be legal tender. The incremental system cost to CSC of introducing the euro will not be material.
 
        As of March 30, 2001, the transition to the euro has not resulted in any material adverse impact on CSC’s financial position or results of operations. Furthermore, CSC will continue to review the impact of the euro conversion during the remaining transition period, but does not expect it to have a material impact on its overall financial position or results of operations.
 
Recent Accounting Pronouncements
 
        In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement, as amended by SFAS No. 137 and SFAS No. 138, is effective for all fiscal years beginning after June 15, 2000. As amended, this statement requires all derivatives to be recorded on the balance sheet at fair value and establishes accounting standards for hedging activities. The Company adopted this standard at the beginning of its fiscal year 2002. Adoption of this standard will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
 
        In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements.” The Company has reviewed SAB No. 101 and found that its revenue recognition practices were consistent with the SAB and as a result the implementation had no impact on the Company’s consolidated financial position or results of operations.
 
Forward-Looking Statements
 
        All statements contained in this annual report, or in any document filed by the Company with the Securities and Exchange Commission, or in any press release or other written or oral communication by or on behalf of the Company, that do not directly and exclusively relate to historical facts constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent the Company’s expectations and beliefs, and no assurance can be given that the results described in such statements will be achieved.
 
        These statements are subject to risks, uncertainties and other factors, many of which are outside of the Company’s control, that could cause actual results to differ materially from the results described in such statements. These factors include, without limitation, the following: (i) competitive pressures; (ii) the Company’s ability to consummate strategic acquisitions and form alliances; (iii) the Company’s ability to attract and retain key personnel; (iv) changes in the demand for information technology outsourcing and business process outsourcing; (v) changes in U.S. federal government spending levels for information technology services; (vi) the Company’s ability to continue to develop and expand its service offerings to address emerging business demands and technological trends; (vii) changes in the financial condition of the Company’s commercial customers; (viii) the future profitability of the Company’s customer contracts, and (ix) general economic conditions and fluctuations in currency exchange rates in countries in which we do business.
 
Item 7A.    Quantitative and Qualitative Disclosures about Market Risk
 
Interest Rates
 
        The Company has fixed-rate long-term debt obligations, short-term commercial paper and other borrowings subject to market risk from changes in interest rates. Sensitivity analysis is one technique used to measure the impact of changes in interest rates on the value of market-risk sensitive financial instruments. A hypothetical 10% movement in interest rates would not have a material impact on the Company’s future earnings or cash flows.
 
Foreign Currency
 
        During the ordinary course of business, the Company enters into certain contracts denominated in foreign currency. Potential foreign currency exposures arising from these contracts are analyzed during the contract bidding process. The Company generally manages these transactions by ensuring costs to service contracts are incurred in the same currency in which revenue is received. Short-term contract financing requirements are met by borrowing in the same currency. By matching revenues, costs and borrowings to the same currency, the Company has been able to substantially mitigate foreign currency risk to earnings. If necessary, the Company may also use foreign currency forward contracts or options to hedge exposures arising from these transactions. The Company does not foresee changing its foreign currency exposure management strategy.
 
        During fiscal 2001, 36% of the Company’s revenue was generated outside of the United States. Using sensitivity analysis, a hypothetical 10% increase in the value of the U.S. dollar against all currencies would decrease revenue by 3.6% or $381 million, while a hypothetical 10% decrease in the value of the U.S. dollar against all currencies would increase revenue by 3.6% or $381 million. In the opinion of management, a substantial portion of this fluctuation would be offset by expenses incurred in local currency. As a result, a hypothetical 10% movement of the value of the U.S. dollar against all currencies in either direction would impact the Company’s earnings before interest and taxes by $13 million. This amount would be offset, in part, from the impacts of local income taxes and local currency interest expense.
 
        At March 30, 2001, the Company had approximately $108 million of non-U.S. dollar denominated cash and cash equivalents, and approximately $148 million of non-U.S. dollar borrowings.
 
Item 8.    Financial Statements and Supplementary Data
 
        Index to Consolidated Financial Statements and Financial Statement Schedule
 
Financial Statements
 
       Page
Independent Auditors’ Report      19
Consolidated Balance Sheets as of March 30, 2001 and March 31, 2000      20
Consolidated Statements of Income for the fiscal years ended March 30, 2001, March 31, 2000 and
     April 2, 1999		      22
Consolidated Statements of Cash Flows for the fiscal years ended March 30, 2001, March 31, 2000 and
     April 2, 1999		      23
Consolidated Statements of Stockholders’ Equity for the fiscal years ended March 30, 2001, March 31,
     2000 and April 2, 1999		      24
Notes to Consolidated Financial Statements      25
Quarterly Financial Information (Unaudited)      41
 
Schedule
 
Schedule II—Valuation and Qualifying Accounts for the fiscal years ended March 30, 2001, March 31,
     2000 and April 2, 1999		      48
 
        Schedules other than that listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements or related notes.
 
INDEPENDENT AUDITORS’ REPORT
 
To the Board of Directors and Stockholders
Computer Sciences Corporation
El Segundo, California
 
        We have audited the accompanying consolidated balance sheets of Computer Sciences Corporation and Subsidiaries (the Company) as of March 30, 2001 and March 31, 2000, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended March 30, 2001. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule 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 Computer Sciences Corporation and Subsidiaries as of March 30, 2001 and March 31, 2000, and the results of their operations and their cash flows for each of the three years in the period ended March 30, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, 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.
 
DELOITTE & TOUCHE LLP
 
Los Angeles, California
May 25, 2001
 
COMPUTER SCIENCES CORPORATION
 
CONSOLIDATED BALANCE SHEETS
 
ASSETS
 
In millions
     March 30,
2001
      March 31,
2000
Current assets:          
          Cash and cash equivalents      $    184.7      $    260.4
          Receivables, net of allowance for doubtful accounts of $86.6 (2001) and $73.0
               (2000) (note 5)		      2,620.8      2,191.5
          Prepaid expenses and other current assets      398.5      314.4
     
  
                    Total current assets      3,204.0      2,766.3
     
  
 
Investments and other assets:          
          Software, net of accumulated amortization of $227.6 (2001) and $199.1 (2000)      299.6      267.6
          Outsourcing contract costs, net of accumulated amortization of $259.6 (2001) and
               $189.3 (2000)		      633.8      374.6
          Excess of cost of businesses acquired over related net assets, net of accumulated
               amortization of $206.9 (2001) and $155.3 (2000)		      1,653.6      903.2
          Other assets (note 4)      525.4      287.5
     
  
                    Total investments and other assets      3,112.4      1,832.9
     
  
 
Property and equipment—at cost (note 6):          
          Land, buildings and leasehold improvements      567.1      413.7
          Computers and related equipment      2,644.2      2,068.0
          Furniture and other equipment      296.1      262.5
     
  
                    3,507.4      2,744.2
          Less accumulated depreciation and amortization      1,649.0      1,469.3
     
  
                    Property and equipment, net      1,858.4      1,274.9
     
  
                    $ 8,174.8      $ 5,874.1
     
  
 
(See notes to consolidated financial statements)
 
COMPUTER SCIENCES CORPORATION
 
CONSOLIDATED BALANCE SHEETS (Continued)
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
In millions except shares
     March 30,
2001
      March 31,
2000
Current liabilities:          
          Short-term debt and current maturities of long-term debt (note 6)      $1,354.6        $    249.2  
          Accounts payable      502.5        406.9  
          Accrued payroll and related costs      538.4        485.8  
          Other accrued expenses      833.7        598.5  
          Deferred revenue      198.9        137.1  
          Federal, state and foreign income taxes (note 4)      160.8        106.4  
     
     
  
                    Total current liabilities      3,588.9        1,983.9  
     
     
  
Long-term debt, net of current maturities (note 6)      1,029.4        652.4  
     
     
  
Deferred income taxes (note 4)                  83.8  
     
     
  
Other long-term liabilities (note 7)      341.3        110.0  
     
     
  
Commitments and contingencies (note 8)          
 
Stockholders’ equity (notes 6, 9 and 10):          
          Preferred stock, par value $1 per share; authorized 1,000,000 shares; none issued                        
          Common stock, par value $1 per share; authorized 750,000,000 shares; issued
               169,127,404 (2001) and 167,903,047 (2000)		      169.1        167.9  
          Additional paid-in capital      965.2        907.1  
          Earnings retained for use in business      2,294.2        2,061.0  
          Accumulated other comprehensive loss      (195.8 )      (75.8 )
     
     
  
                    3,232.7        3,060.2  
          Less common stock in treasury, at cost, 413,457 shares (2001) and 394,915 shares
               (2000)		      (17.5 )      (16.1 )
          Unearned restricted stock and other (note 9)                  (.1 )
     
     
  
                    Stockholders’ equity, net      3,215.2        3,044.0  
     
     
  
                               $8,174.8        $5,874.1  
     
     
  
 
(See notes to consolidated financial statements)
 
COMPUTER SCIENCES CORPORATION
 
CONSOLIDATED STATEMENTS OF INCOME
 
       Fiscal Year Ended
In millions except per-share amounts
     March 30,
2001
       March 31,
2000
       April 2,
1999
 
Revenues     
$
 10,524.0       
$
 9,370.7       
$
  8,111.4  
     
     
     
  
Costs of services        8,425.1          7,352.5          6,349.5  
Selling, general and administrative        796.6          779.4          735.7  
Depreciation and amortization        649.3          545.7          456.9  
Interest expense        106.1          58.1          49.4  
Interest income        (16.3
)
        (17.6
)
        (15.0
)
Special items (note 3)        232.9          41.1                
     
     
     
  
Total costs and expenses        10,193.7          8,759.2          7,576.5  
     
     
     
  
Income before taxes        330.3          611.5          534.9  
Taxes on income (note 4)        97.1          208.6          179.4  
     
     
     
  
Net income     
$
  233.2       
$
 402.9        $ 355.5  
     
     
     
  
Earnings per common share:               
          Basic     
$
 1.39       
$
 2.42        $ 2.17  
     
     
     
  
          Diluted     
$
 1.37       
$
 2.37        $ 2.12  
     
     
     
  
 
(See notes to consolidated financial statements)
 
COMPUTER SCIENCES CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
       Fiscal Year Ended
In millions
     March 30,
2001
      March 31,
2000
      April 2,
1999
Cash flows from operating activities:               
          Net income      $    233.2        $    402.9        $  355.5  
          Adjustments to reconcile net income to net cash provided:               
                    Depreciation and amortization      649.3        545.7        456.9  
                    Deferred taxes      42.3        68.8        89.4  
                    Special items, net of tax      125.7        17.0              
                    Provision for losses on accounts receivable      18.3        6.1        9.2  
                    Changes in assets and liabilities, net of effects of acquisitions:               
                               Increase in receivables      (446.8 )      (278.7 )      (243.2 )
                               Increase in prepaid expenses and other current assets      (51.7 )      (9.0 )      (8.7 )
                               Increase in accounts payable and accruals      90.4        159.5        72.9  
                               Increase in income taxes payable      170.1        44.4        98.4  
                               Increase (decrease) in deferred revenue      15.0        (4.0 )      10.0  
                               Other operating activities, net      8.4        (6.4 )      6.9  
     
     
     
  
          Net cash provided by operating activities      854.2        946.3        847.3  
     
     
     
  
Cash flows from investing activities:               
          Purchases of property and equipment      (897.2 )      (585.6 )      (438.9 )
          Outsourcing contracts      (535.9 )      (218.7 )      (85.3 )
          Acquisitions, net of cash acquired      (695.0 )      (294.2 )      (184.3 )
          Dispositions                  29.9        37.9  
          Software      (141.3 )      (127.1 )      (87.6 )
          Other investing activities, net      26.0        19.1        15.4  
     
     
     
  
          Net cash used in investing activities       (2,243.4 )       (1,176.6 )       (742.8 )
     
     
     
  
Cash flows from financing activities:               
          Net borrowing of commercial paper      968.7        40.5              
          Borrowings under lines of credit      164.9        76.0        70.4  
          Repayment of borrowings under lines of credit      (99.3 )      (89.7 )      (59.7 )
          Proceeds from term debt issuance      500.0                    200.0  
          Principal payments on long-term debt      (24.8 )      (179.5 )      (35.9 )
          Repayment of Mynd Corporation debt      (242.9 )                        
          Proceeds from stock option transactions      36.4        57.1        49.7  
          Other financing activities, net      18.5        (15.8 )      3.2  
     
     
     
  
          Net cash provided by (used in) financing activities      1,321.5        (111.4 )      227.7  
     
     
     
  
Effect of exchange rate changes on cash and cash equivalents      (8.0 )      (3.7 )      (.3 )
     
     
     
  
Net (decrease) increase in cash and cash equivalents      (75.7 )      (345.4 )      331.9  
Cash and cash equivalents at beginning of year      260.4        617.9        286.0  
Effect of pooling restatement                  (12.1 )            
     
     
     
  
Cash and cash equivalents at end of year      $    184.7        $    260.4        $  617.9  
     
     
     
  
 
(See notes to consolidated financial statements)
 
COMPUTER SCIENCES CORPORATION
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
       Common Stock
      Additional
Paid-In
Capital
      Earnings
Retained
for Use
in Business
      Accumulated
Other
Comprehensive
Income (Loss)
      Common
Stock in
Treasury
      Unearned
Restricted
Stock and
Other
      Total
In millions except shares
in thousands
      Shares
      Amount
Balance at April 3, 1998      163,174.2      $163.2      $749.6      $1,312.2        $  (39.7 )      $(13.0 )      $  (1.3 )      $2,171.0  
     
  
  
  
     
     
     
     
  
Comprehensive income:                                        
Net income                                    355.5                                            355.5  
Currency translation
    adjustment		                                                (12.8 )                              (12.8 )
Unfunded pension
    obligation		                                                (.7 )                              (.7 )
                                                           
  
    Comprehensive income                                                                                    342.0  
                                                           
  
Stock option transactions      2,346.3      2.3      73.7                              (1.4 )                  74.6  
Amortization and forfeitures
    of restricted stock and
    repayment of notes		                                                                        .9        .9  
     
  
  
  
     
     
     
     
  
Balance at April 2, 1999      165,520.5      165.5      823.3      1,667.7        (53.2 )      (14.4 )      (.4 )      2,588.5  
     
  
  
  
     
     
     
     
  
Comprehensive income:                                        
Net income                                    402.9                                            402.9  
Currency translation
    adjustment		                                                (30.6 )                              (30.6 )
Unfunded pension
    obligation		                                                1.1                                1.1  
Unrealized gain on available
    for sale securities		                                                6.9                                6.9  
                                                           
  
    Comprehensive income                                                                                    380.3  
                                                           
  
Stock option transactions      2,382.5      2.4      83.8                              (1.7 )                  84.5  
Amortization and forfeitures
    of restricted stock and
    repayment of notes		                                                                        .3        .3  
Adjustments for pooling of
    interests		                                    (9.6 )                                          (9.6 )
     
  
  
  
     
     
     
     
  
Balance at March 31, 2000      167,903.0      167.9      907.1      2,061.0        (75.8 )      (16.1 )      (.1 )      3,044.0  
     
  
  
  
     
     
     
     
  
Comprehensive income:                                        
Net income                                    233.2                                            233.2  
Currency translation
    adjustment		                                                (111.7 )                              (111.7 )
Unfunded pension
    obligation		                                                (.2 )                              (.2 )
Unrealized loss on available
    for sale securities		                                                (8.1 )                              (8.1 )
                                                           
  
    Comprehensive income                                                                                    113.2  
                                                           
  
Stock option transactions      1,224.4      1.2      58.1                              (1.4 )                  57.9  
Amortization and forfeitures
    of restricted stock		                                                                        .1        .1  
     
  
  
  
     
     
     
     
  
Balance at March 30, 2001      169,127.4      $169.1      $965.2      $2,294.2        $(195.8 )      $(17.5 )      $ —          $3,215.2  
     
  
  
  
     
     
     
     
  
 
(See notes to consolidated financial statements)
 
COMPUTER SCIENCES CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per-share amounts)
 
Note 1—Summary of Significant Accounting Policies
 
Principles of Consolidation
 
        The accompanying consolidated financial statements include those of Computer Sciences Corporation, its subsidiaries and those joint ventures and partnerships over which it exercises control, hereafter collectively referred to as “CSC” or the “Company.” All material intercompany transactions and balances have been eliminated.
 
Income Recognition
 
        The Company provides services under time and materials, level of effort, cost-based and fixed-price contracts. For time and materials and level of effort types of contracts, income is recorded as the costs are incurred, income being the difference between such costs and the agreed-upon billing amounts. For cost-based contracts, income is recorded by applying an estimated factor to costs as incurred, such factor being determined by the contract provisions and prior experience. For fixed-price contracts, income is recorded on the basis of the estimated percentage of completion of services rendered. Losses, if any, on long-term contracts are recognized during the period in which the loss is determined.
 
        Revenues from certain information processing services are recorded at the time the service is utilized by the customer. Revenues from sales of proprietary software are recognized upon receipt of a signed contract documenting customer commitment, delivery of the software and determination of the fee amount and its probable collection. However, if significant customization is part of the transaction, such revenues are recognized over the period of delivery.
 
Depreciation and Amortization
 
        The Company’s depreciation and amortization policies are as follows:
 
Property and Equipment:
          Buildings      10 to 40 years
          Computers and related equipment      3 to 10 years
          Furniture and other equipment      2 to 10 years
          Leasehold improvements      Shorter of lease term or useful life
Investments and Other Assets:
          Software      2 to 10 years
          Credit information files      10 to 20 years
          Employee workforce acquired from Mynd      7 years
          Excess of cost of businesses acquired over related
               net assets		      Up to 40 years
          Outsourcing contract costs      Contract life
 
        For financial reporting purposes, computer equipment is depreciated using either the straight-line or sum-of-the-years’-digits method, depending on the nature of the equipment’s use. The cost of other property and equipment, less applicable residual values, is depreciated on the straight-line method. Depreciation commences when the specific asset is complete, installed and ready for normal use. Investments and other assets are amortized on a straight-line basis over the years indicated above.
 
        Included in software are unamortized capitalized software development costs of $217.7 and $168.7 as of March 30, 2001 and March 31, 2000, respectively. The related amortization expense was $37.6, $34.3 and $22.4 for the three fiscal years ended March 30, 2001.
COMPUTER SCIENCES CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Dollars in millions except per-share amounts)
 
 
Note 1—Summary of Significant Accounting Policies (continued)
 
        The Company evaluates at least annually the recoverability of its excess cost of businesses acquired over related net assets. In assessing recoverability, the current and future profitability of the related operations are considered, along with management’s plans with respect to the operations and the projected undiscounted cash flows.
 
Cash Flows
 
        Cash payments for interest on indebtedness and cash payments (refunds) for taxes on income are as follows:
 
       Fiscal Year
       2001
      2000
      1999
Interest      $101.7      $59.4      $46.2  
Taxes on income      35.3      97.6      (20.5 )
 
        For purposes of reporting cash and cash equivalents, the Company considers all investments purchased with an original maturity of three months or less to be cash equivalents. The Company’s investments consist of high quality securities issued by a number of institutions having high credit ratings, thereby limiting the Company’s exposure to concentrations of credit risk. With respect to financial instruments, the Company’s carrying amounts of its other current assets and liabilities were deemed to approximate their market values due to their short maturity. The Company has no material hedge contracts with respect to its foreign exchange or interest rate positions.
 
Use of Estimates
 
        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions, in particular estimates of anticipated contract costs utilized in the revenue recognition process, that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
 
Earnings per Share
 
        Basic earnings per common share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the incremental shares issuable upon the assumed exercise of stock options.
 
        Basic and diluted earnings per share are calculated as follows:
 
       Fiscal Year
       2001
      2000
      1999
Net income for basic and diluted EPS      $233.2      $402.9      $355.5
     
  
  
Common share information (in millions)               
          Average common shares outstanding for basic EPS      168.3      166.3      164.1
          Dilutive effect of stock options      2.5      3.4      3.9
     
  
  
          Shares for diluted EPS      170.8      169.7      168.0
     
  
  
Basic EPS      $  1.39      $  2.42      $  2.17
Diluted EPS      1.37      2.37      2.12
 
        The computation of diluted EPS did not include stock options which were antidilutive, as their exercise price was greater than the average market price of the Company’s common stock during the year. The number of such options was 2,607,464, 135,797 and 88,451 for the years ended March 30, 2001, March 31, 2000 and April 2, 1999, respectively.
COMPUTER SCIENCES CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Dollars in millions except per-share amounts)
 
 
Note 1—Summary of Significant Accounting Policies (continued)
 
Recent Accounting Pronouncements
 
        In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement, as amended by SFAS No. 137 and SFAS No. 138, is effective for all fiscal years beginning after June 15, 2000. As amended, this statement requires all derivatives to be recorded on the balance sheet at fair value and establishes accounting standards for hedging activities. The Company adopted this standard at the beginning of its fiscal year 2002. Adoption of this standard will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
 
        In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements.” The Company has reviewed SAB No. 101 and found that its revenue recognition practices were consistent with the SAB and as a result the implementation had no impact on the Company’s consolidated financial position or results of operations.
 
Reclassifications
 
        Certain reclassifications have been made to the prior years’ financial statements in order to conform to the current presentation.
 
Note 2—Acquisitions
 
        During December 2000, CSC completed the acquisition of all of the outstanding equity securities of Mynd Corporation (“Mynd”), formerly known as Policy Management Systems Corporation, for a purchase price of $572.7. In addition, CSC assumed $243 of outstanding Mynd debt. Mynd is a provider of systems, services and business solutions to the global insurance and related financial services industries. The acquisition was accounted for under the purchase method, and accordingly, Mynd’s results of operations have been included with the Company’s from the date of acquisition. Pro forma information is not provided, as the impact of the transaction did not have a material impact on the Company’s results of operations for fiscal 2001.
 
        The purchase price of the acquisition was allocated to the net assets acquired based on estimates of their fair values at the date of the acquisition and are subject to future adjustments. In addition, the Company obtained an independent appraisal of the fair values for certain tangible and intangible assets. The excess of the purchase price over the fair values of the net tangible assets, identified intangible assets and liabilities acquired was allocated to goodwill.
 
        A summary of the assets acquired and liabilities assumed in the acquisition is as follows:
 
       Estimated
Fair Values
Assets acquired      $405.0  
Liabilities assumed      (536.8 )
Goodwill      704.5  
     
  
Purchase price      572.7  
          Less cash acquired      31.9  
     
  
Net cash paid      $540.8  
     
  
 
        As a result of the acquisition of Mynd, the Company incurred costs to exit and consolidate activities, involuntarily terminate employees, and other costs to integrate Mynd into the Company. Generally accepted Note 2—Acquisitions (continued)
 
accounting principles require that these costs, which are not associated with the generation of future revenues and have no future economic benefit, be reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired. The involuntary termination related to 518 Mynd employees, of which 306 were U.S. employees and 212 were international employees; as of March 30, 2001, 453 of the 518 employees had been involuntarily terminated. The components of the acquisition integration liabilities included in the purchase price allocation for Mynd are as follows:
 
       Acquisition
Integration
Liabilities
      Paid as of
March 30, 2001
      Balance
Remaining at
March 30, 2001
Severance payments      $  77.6      $30.4      $  47.2
Facility & data center consolidations      69.4      4.1      65.3
Other      29.2      22.2      7.0
     
  
  
          $176.2      $56.7      $119.5
     
  
  
 
        CSC acquired Nichols Research Corporation (“Nichols”) on November 16, 1999. Upon consummation of the merger, Nichols became a wholly owned subsidiary of the Company. Each outstanding share of Nichols common stock was converted into .423 shares of common stock of the Company and each outstanding option to purchase shares of common stock was converted into an option to purchase .423 shares of CSC common stock. The acquisition has been accounted for under the pooling of interests method, and previously reported consolidated financial statements of the Company for periods ended prior to November 16, 1999 have been restated.
 
Other Acquisitions
 
        During the three fiscal years ended March 30, 2001, the Company made a number of acquisitions in addition to the ones described above, which, either individually or collectively, are not material. In conjunction with business combinations accounted for as purchases, the Company acquired assets with an estimated fair value of $94.8, $146.0 and $239.0; and assumed liabilities of $76.4, $89.0 and $195.0 for fiscal 2001, 2000 and 1999, respectively. The excess of cost of businesses acquired over related net assets was $136.2, $262.0 and $175.0 for the three fiscal years ended 2001.
 
Note 3—Special Items
 
        Special items of $232.9 ($156.0 after tax) were recorded during fiscal 2001, as detailed below.
 
        In response to a changing mix of information technology services, business conditions and overall demand for consulting and systems integration services, the Company reviewed its global operations. As a result of this review, a special item of $137.5 ($91.3 after tax) or 54 cents per share (diluted) was recorded during the fourth quarter ended March 30, 2001. Included in the charge are employee severance costs of $68.9, write-offs in connection with consolidation of facilities of $25.6, write-off of capitalized software and computer-related assets of $22.1 and $20.9 related to phased-out operations and other assets. The involuntary termination benefits accrued and expensed of $68.9 related to 1,720 employees, of which 831 were U.S. employees and 889 were international employees; as of March 30, 2001, approximately $5.3 had been paid and 511 of the 1,720 employees had been involuntarily terminated. The Company expects to pay substantially all of the remaining cash payments during fiscal 2002.
 
        In connection with the December 2000 acquisition of Mynd, the Company reviewed its global commercial financial services operations, product strategies and the carrying value of its assets. As a result, special items Note 3—Special Items (continued)
 
were recorded in the third and fourth quarters of fiscal 2001. During the third quarter ended December 29, 2000, special items of $84.2 ($57.3 after tax) or 34 cents per share (diluted) were recorded and included $58.2 related to non-cash adjustments to the carrying value of capitalized software and the write-off of other assets and intangibles and $9.4 related to a legal settlement and write-off of assets from operations previously sold or phased-out. The third quarter charge also included $16.6 accrued for employee severance costs. In the fourth quarter, the amount for employee severance costs was adjusted to $14.5. The employee severance costs related to 628 global commercial financial services employees; as of March 30, 2001, approximately $13.7 had been paid and 613 of the 628 employees had been involuntarily terminated. Upon completion of the integration of Mynd during the fourth quarter ended March 30, 2001, the Company recorded an additional special item of $11.2 ($7.4 after tax) or 4 cents per share (diluted) for the write-off of capitalized software and a provision for consolidation of facilities. The $11.2 was the net special item after the severance adjustment described above.
 
        Special items of $41.1 ($29.8 after tax), or 18 cents per share (diluted), were recorded during fiscal 2000. The Company recorded a special item of $39.1 ($28.5 after tax) representing merger-related charges and other transaction costs associated with the November 16, 1999 acquisition of Nichols Research Corporation. Also during fiscal 2000, the Company recorded a special item of $2.0 ($1.3 after tax) for legal and other costs, net of recoveries, associated with the final resolution of the remaining issues relating to the Company’s fiscal 1998 response to a failed take-over attempt.
 
        There were no special items during fiscal 1999.
 
Note 4—Income Taxes
 
        The sources of income before taxes, classified as between domestic entities and those entities domiciled outside of the United States, are as follows:
 
       Fiscal Year
       2001
      2000
      1999
Domestic entities      $336.9        $404.6      $380.6
Entities outside the United States      (6.6 )      206.9      154.3
     
     
  
          $330.3        $611.5      $534.9
     
     
  
 
        The provisions for taxes on income, classified as between current and deferred and as between taxing jurisdictions, consist of the following:
 
       Fiscal Year
       2001
      2000
      1999
Current portion:
          Federal      $39.6        $  40.4      $  39.1
          State      1.7        5.5      6.5
          Foreign      13.5        93.9      44.4
     
     
  
          54.8        139.8      90.0
     
     
  
Deferred portion:
          Federal      39.8        50.8      77.4
          State      (9.0 )      12.7      10.5
          Foreign      11.5        5.3      1.5
     
     
  
          42.3