ADP 1998 Annual Report Download - page 25

and revenue and expenses are translated at average exchange
rates during the periods. Currency transaction gains or losses,
which are included in the results of operations, are immate-
rial for all periods presented. Gains or losses from balance
sheet translation are included as a separate component of
shareholders equity.
H. Earnings Per Share. The Company has implemented
FASB Statement No. 128, which requires the disclosure of
basic and diluted earnings per share. A reconciliation of the
income and weighted average shares used in both calcula-
tions for the three years ended June 30, 1998 follows:
(In thousands, except EPS)
Effect of
zero coupon Effect of
subordinated stock
Basic notes options Diluted
1998
Net earnings $605,300 $ 7,833 $  $613,133
Avg. shares 296,878 7,015 6,518 310,411
EPS $2.04 $1.98
1997
Net earnings $513,500 $11,302 $  $524,802
Avg. shares 290,990 9,686 5,983 306,659
EPS $1.76 $1.71
1996
Net earnings $454,700 $11,703 $  $466,403
Avg. shares 288,967 10,360 5,682 305,009
EPS $1.57 $1.53
I. Line of Business. The Company is engaged in the com-
puting services business.
J. Reclassification of Prior Financial Statements. Certain
reclassifications have been made to previous years financial
statements to conform to current classifications.
NOTE 2. ACQUISITIONS AND DISPOSITIONS
During fiscal 1998, 1997 and 1996, the Company purchased
several businesses for approximately $351 million (including
$13 million of common stock), $122 million (including $7
million in common stock) and $551 million (including $20
million in common stock), respectively, net of cash acquired.
The results of these acquired businesses are included from
the date of acquisition.
The Company also acquired several businesses in
fiscal 1997 and 1996 in pooling of interest transactions in
exchange for 2,827,000 and 969,000 shares of common
stock, respectively. The Companys consolidated financial
statements were not restated because in the aggregate
these transactions were not material.
Additionally, in fiscal 1998, the Company sold several
businesses with annual revenues of approximately $95 million.
NOTE 3. NON-RECURRING ITEMS
In the fourth quarter of fiscal 1997, the Company reached a
settlement with the Federal Trade Commission under which
the Company agreed to divest certain assets, the amount of
23
NOTE 1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
A. Consolidation and Basis of Preparation. The consolidated
financial statements include the accounts of Automatic
Data Processing, Inc. and its majority-owned subsidiaries.
Intercompany balances and transactions have been eliminated
in consolidation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompa-
nying notes. Actual results could differ from these estimates.
B. Cash and Cash Equivalents. Highly-liquid investments with
a maturity of ninety days or less at the time of purchase are
considered cash equivalents.
C. Marketable Securities. Marketable securities consist primarily
of high-grade fixed income investments. Most of the Companys
marketable securities are considered to be available-for-sale
and, accordingly, are carried on the balance sheet at fair market
value, which approximates cost. Gains/losses from the sale
of marketable securities have not been material. Approximately
$201 million of the Companys long-term marketable securities
mature in 12 years, $310 million in 23 years, $147 million
in 34 years, and the remainder in less than 7 years.
D. Property, Plant and Equipment. Property, plant and
equipment is depreciated over the estimated useful lives of
the assets by the straight-line method. Leasehold improve-
ments are amortized over the shorter of the term of the
lease or the estimated useful lives of the improvements.
The estimated useful lives of assets are primarily as follows:
Data processing equipment 2 to 3 years
Buildings 20 to 40 years
Furniture and fixtures 3 to 7 years
E. Intangibles. Intangible assets are recorded at cost and
are amortized primarily on a straight-line basis. Goodwill is
amortized over periods from 10 to 40 years, and is periodi-
cally reviewed for impairment by comparing carrying value
to undiscounted expected future cash flows. If impairment
is indicated, a write-down to fair value (normally measured
by discounting estimated future cash flows) is taken.
F. Revenue Recognition. Service revenue, including software
license fees, maintenance fees and other ancillary fees, is
recognized as services are provided. In those instances where
hardware is sold to clients as part of a bundled service
offering, the gross profit on the sale of hardware and prepaid
software license fees, less costs of selling and installation, is
deferred and recognized on a straight-line basis over the
initial contract period, which generally is from 5 to 7 years.
G. Foreign Currency Translation. The net assets of the
Companys foreign subsidiaries are translated into U.S. dollars
based on exchange rates in effect at the end of each period,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996