ADP 1998 Annual Report Download - page 26

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which was not material. A pretax loss of $17.8 million was
recorded in connection with the settlement.
In the fourth quarter of fiscal 1997, a major Brokerage
Services client canceled its services contract with the
Company, and, as a result, a client contract deposit was
returned to the Company resulting in a non-taxable gain to
net earnings of approximately $19 million. The Company
began the process of restructuring the internal operations
of the Brokerage front-office business to better align the
business cost structure with the lower revenue which would
result as this client reduces its use of ADP services. During
fiscal 1997, a provision of approximately $31 million ($19
million after-tax) was recorded in order to reduce product
lines and platforms and consolidate data centers. In fiscal 98,
the Company reached agreement, subject to regulatory
approvals, to divest the $190 million revenue front-office
business. As part of the agreement, the Company will take
a minority investment in the acquiring entity.
NOTE 4. RECEIVABLES
Accounts receivable is net of an allowance for doubtful
accounts of $43 million and $40 million at June 30, 1998
and 1997, respectively.
The Company finances the sale of computer systems to
certain of its clients. These finance receivables, substantially
all of which are due from automobile and truck dealerships,
are reflected in the consolidated balance sheets as follows:
(In thousands)
June 30, 1998 1997
Current Long-Term Current Long-Term
Receivables $135,265 $217,644 $134,506 $221,783
Less:
Allowance for
doubtful accounts (15,738) (14,432) (13,401) (20,370)
Unearned income (24,072) (25,266) (24,048) (24,642)
$ 95,455 $177,946 $ 97,057 $176,771
Unearned income from finance receivables represents
the excess of gross receivables over the sales price of the
computer systems financed. Unearned income is amortized
using the interest method to maintain a constant rate of
return on the net investment over the term of each contract.
Long-term receivables at June 30, 1998 mature as follows:
(In thousands)
2000 $ 98,720
2001 64,392
2002 37,488
2003 15,084
2004 1,504
Thereafter 456
$217,644
NOTE 5. INTANGIBLE ASSETS
Components of intangible assets are as follows:
(In thousands)
June 30, 1998 1997
Goodwill $ 1,278,511 $ 1,062,193
Other 938,893 739,323
2,217,404 1,801,516
Less accumulated amortization (564,356) (486,729)
$1,653,048 $ 1,314,787
Other intangibles consist primarily of purchased rights
(acquired directly or through acquisitions) to provide data
processing services to various groups of clients (amortized
over periods from 5 to 36 years) and purchased software
(amortized over periods from 3 to 10 years). Amortization
of intangibles totaled $102 million for fiscal 1998, $92 million
for 1997 and $81 million for 1996.
NOTE 6. DEBT
A portion of the purchase price of certain international
acquisitions has been funded by borrowing in local currency
(equivalent to $240 million as of June 30, 1998 and $129
million as of June 30, 1997) on a short-term basis at an average
interest rate of 3.8% in fiscal 1998 and 3.3% in fiscal 1997.
These borrowings have been designated as hedges against
the Companys net investment in the businesses acquired.
Components of long-term debt are as follows:
(In thousands)
June 30, 1998 1997
Zero coupon convertible subordinated
notes (5 1/4% yield) $142,953 $350,897
Industrial revenue bonds
(with fixed and variable interest rates
from 3.5% to 5.8%) 38,040 38,690
Other 12,453 12,666
193,446 402,253
Less current portion (1,383) (1,091)
$192,063 $401,162
The zero coupon convertible subordinated notes have a
face value of approximately $291 million at June 30, 1998,
and mature February 20, 2012, unless converted or redeemed
earlier. At June 30, 1998, the notes are convertible into
approximately 3.8 million shares of the Companys common
stock. The notes are callable at the option of the Company,
and the holders of the notes can convert into common
stock at any time or require redemption in 2002 and 2007.
During fiscal 1998 and 1997, approximately $458 million and
$52 million face value of notes were converted or redeemed.
As of June 30, 1998 and 1997, the quoted market prices for
the zero coupon notes were approximately $267 million and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES