<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period from __________ to __________
Commission file number 0-24787
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AFFILIATED COMPUTER SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0310342
- ------------------------------------ -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2828 North Haskell, Dallas, Texas 75204
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 841-6111
--------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Number of Shares Outstanding as of
Title of each class November 7, 1996
- ------------------------------------- -----------------------------------
<S> <C>
Class A Common Stock, $.01 par value 14,539,106
Class B Common Stock, $.01 par value 3,202,843
---------
17,741,949
</TABLE>
<PAGE> 2
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 1996 and June 30, 1996 1
Consolidated Statements of Income for the Three Months Ended September
30, 1996 and 1995 2
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1996 and 1995 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 5 - 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 6. Exhibits and Reports on Form 8-K 8
</TABLE>
<PAGE> 3
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,414 $ 25,627
ATM cash 4,550 9,100
Accounts receivable, net of allowance for doubtful
accounts of $1,556 and $1,456, respectively 100,513 99,270
Inventory 9,895 10,938
Prepaid expenses and other current assets 22,671 16,099
Deferred taxes 8,655 7,790
------------ ------------
Total current assets 163,698 168,824
Property and equipment, net 89,279 84,911
Purchased computer software, net of accumulated
amortization of $8,544 and $15,691, respectively 2,905 4,946
Goodwill, net of accumulated amortization of $9,997
and $8,609, respectively 253,330 245,693
Other intangible assets, net of accumulated
amortization of $4,910 and $4,478, respectively 12,911 12,040
Long-term investments and other assets 10,638 11,495
Deferred taxes 2,633 5,696
------------ ------------
Total assets $ 535,394 $ 533,605
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 11,012 $ 15,976
Accrued compensation and benefits 12,981 19,815
Other accrued liabilities 59,670 58,466
Income taxes payable 5,181 3,340
Notes payable and current portion of long-term debt 8,119 11,609
Current portion of unearned revenue 6,919 9,657
------------ ------------
Total current liabilities 103,882 118,863
Long-term debt 67,258 57,208
Unearned revenue 2,000 2,053
Other long-term liabilities 50,108 51,427
------------ ------------
Total liabilities 223,248 229,551
------------ ------------
Cumulative redeemable preferred stock - 1,100
------------ ------------
STOCKHOLDERS' EQUITY
Class A common stock 145 145
Class B common stock 32 32
Additional paid-in capital 252,610 251,944
Retained earnings 59,359 50,833
------------ ------------
Total stockholders' equity 312,146 302,954
------------ ------------
Total liabilities and stockholders' equity $ 535,394 $ 533,605
============ ============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues $ 144,332 $ 89,294
------------ ------------
Expenses:
Wages and benefits 56,361 32,741
Services and supplies 31,829 22,025
Rent, lease and maintenance 31,546 18,998
Depreciation and amortization 6,597 4,275
Other operating expenses 2,243 1,322
------------ ------------
Total operating expenses 128,576 79,361
------------ ------------
Operating income 15,756 9,933
Interest and other expenses, net 1,354 355
------------ ------------
Income before income taxes 14,402 9,578
Income tax expense 5,869 3,917
------------ ------------
Net income $ 8,533 $ 5,661
============ ============
Earnings per common share $ .47 $ .41
============ ============
Weighted average shares outstanding 18,231 13,752
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,533 $ 5,661
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,597 4,275
Other 18 -
Changes in assets and liabilities, net of
effects from acquisitions:
(Increase) decrease in ATM cash 4,550 (200)
Increase in accounts receivable (2,172) (5,073)
(Increase) decrease in inventory 814 (544)
(Increase) decrease in prepaid expenses and
other current assets (2,502) 345
(Increase) decrease in deferred taxes 2,654 (391)
(Increase) decrease in other assets (649) 622
Decrease in accounts payable (5,301) (314)
Decrease in accrued compensation and
benefits (3,204) (2,250)
Increase (decrease) in other accrued
liabilities 2,795 (295)
Increase in income taxes payable 1,405 3,298
Decrease in unearned revenue (2,380) (3,595)
Decrease in other long-term liabilities (2,058) (1,337)
------------ ------------
Total adjustments 567 (5,459)
------------ ------------
Net cash provided by operating activities 9,100 202
------------ ------------
Cash flows from investing activities:
Purchases of property, equipment and computer
software (9,122) (6,946)
Payments for acquisitions, net of cash acquired (15,504) (8,599)
Cash received from divestitures 2,174 -
Additions to other intangible assets and goodwill (1,180) (367)
Additions to long-term investments - (300)
------------ ------------
Net cash used in investing activities (23,632) (16,212)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 13,175 200
Repayments of long-term debt (2,126) (325)
Proceeds from stock options exercised and related
tax benefits 769 148
Net repayments of ATM debt (4,550) -
Redemption of cumulative redeemable preferred stock (607) -
Other, net (342) -
------------ ------------
Net cash provided by financing activities 6,319 23
------------ ------------
Net decrease in cash and cash equivalents (8,213) (15,987)
Cash and cash equivalents at beginning of period 25,627 41,476
------------ ------------
Cash and cash equivalents at end of period $ 17,414 $ 25,489
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Affiliated Computer Services, Inc. and its majority-owned subsidiaries
(the "Company" or "ACS"). All material intercompany profits,
transactions and balances have been eliminated. ACS is a nationwide
provider of information technology services and electronic funds
transfer ("EFT") transaction processing. The Company's information
technology services include data processing outsourcing, image
management and professional services. The Company provides its
services to customers with time-critical, transaction-intensive
information processing needs.
The financial information presented should be read in conjunction with
the Company's annual consolidated financial statements for the year
ended June 30, 1996. The foregoing unaudited consolidated financial
statements reflect all adjustments (all of which are of a normal
recurring nature) which are, in the opinion of management, necessary
for a fair presentation of the results of the interim periods. The
results for interim periods are not necessarily indicative of results
to be expected for the year.
2. ACQUISITIONS AND DIVESTITURES
During the first quarter of fiscal 1997, the Company closed two
acquisitions, which were accounted for as purchases. The fair value
of the assets acquired, liabilities assumed and net purchase price
were $14.7 million, $3.5 million and $11.2 million, respectively.
During the first quarter of fiscal 1997, the Company sold its
community bank processing businesses within Texas and Louisiana that
were a part of the Company's outsourcing business services. The
Company fully reserved for the disposition of these businesses, which
had historical annual revenues of $18 million, with a $3.8 million
pre-tax charge to earnings in the fourth quarter of fiscal 1996. The
divestitures netted the Company $2.2 million of cash in the first
quarter of fiscal 1997.
4
<PAGE> 7
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements, other than statements of historical facts, included in this MD&A
regarding the Company's financial position, business strategy and plans and
objectives of management of the Company for future operations are
forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statements of income as a percentage of revenues:
<TABLE>
<CAPTION>
Percentage of Revenues
Three Months Ended
September 30,
---------------------
1996 1995
------- --------
<S> <C> <C>
Revenues 100.0% 100.0%
Expenses:
Wages and benefits 39.0 36.7
Services and supplies 22.0 24.7
Rent, lease and maintenance 21.9 21.3
Depreciation and amortization 4.6 4.7
Other operating expenses 1.6 1.5
------- --------
Total operating expenses 89.1 88.9
------- --------
Operating income 10.9 11.1
Interest and other expenses, net 0.9 0.4
------- --------
Income before income taxes 10.0 10.7
Income tax expense 4.1 4.4
------- --------
Net income 5.9% 6.3%
======= ========
</TABLE>
COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 1996 TO THE QUARTER ENDED
SEPTEMBER 30, 1995
Revenues increased $55.0 million, or 62%, to $144.3 million in the quarter
ended September 30, 1996 (the first quarter of the Company's 1997 fiscal year)
from $89.3 million in the first quarter of fiscal 1996 due to acquisitions and
internally generated sales growth. Excluding revenues from the Bank of America
Texas, N.A. ("B of A Texas") contract, which expired August 31, 1995 ($4.6
million for the quarter ended September 30, 1995), the increase in revenues was
71%, of which 15% was internal growth and 56% was from the seven businesses
acquired since the first quarter of fiscal 1996. The largest of these
acquisitions was The Genix Group, Inc, ("Genix"), which was acquired in June
1996. Of the seven acquisitions mentioned above, two were completed during the
current quarter, which generated $1.2 million of revenues, or approximately
$14.4 million on an annualized basis.
5
<PAGE> 8
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Total operating expenses were $128.6 million in the first quarter of fiscal
1997, an increase of 62%, from $79.4 million in the first quarter of fiscal
1996. Operating expenses as a percentage of revenues were substantially
unchanged at 89.1% in the first quarter of fiscal 1997 compared to 88.9% in the
first quarter of fiscal 1996.
Wages and benefits increased as a percentage of revenues due to the growth
experienced in the Company's professional services business line and from the
acquisition of Unibase Technologies, Inc. in the third quarter of fiscal 1996.
Compared to the Company's other existing lines of business, these businesses
are more labor intensive, resulting in a higher percentage of wages and
benefits compared to revenues.
Services and supplies decreased to 22.0% of revenues in the first quarter of
fiscal 1997, compared to 24.7% of revenues in the first quarter of fiscal 1996.
This decrease is primarily attributable to the acquisitions of the labor
intensive businesses previously described and economies of scale derived from
the growth in the Company's outsourcing business.
Operating income increased $5.8 million, or 58.6%, to $15.8 million in the
first quarter of fiscal 1997, compared to $9.9 million in the first quarter of
fiscal 1996. Operating income in the first quarter of fiscal 1997 increased
due to economies of scale and profits generated from acquisitions made since
the first quarter of fiscal 1996 (primarily Genix) and internally generated
sales growth. The decrease in the operating income margin from 11.1% in the
first quarter of 1996 to 10.9% in the first quarter of 1997 was due primarily
to the expiration of the B of A Texas contract, which expired in August 1995.
Interest and other expenses increased from $0.4 million in the first quarter of
fiscal 1996 to $1.4 million in the first quarter of fiscal 1997. The increase
is primarily attributable to increased interest expense due to increased net
borrowings on the Company's revolving credit facility in connection with the
acquisition of Genix.
The Company's effective tax rate of approximately 41% exceeded the statutory
rate of 35%, due primarily to the net effect of state income taxes and the
amortization of certain acquisition-related costs that are non-deductible for
tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company's liquid assets, which consisted of cash and
cash equivalents, totaled $22.0 million compared to $34.7 million at June 30,
1996. These liquid assets included $4.6 million ($9.1 million at June 30,
1996) borrowed under a revolving credit facility ("ATM Cash Facility") for use
in the Company's automated teller machines ("ATMs"). Working capital was $59.8
million and $50.0 million at September 30, 1996 and June 30, 1996,
respectively, and increased due to acquisitions during the quarter and the
disposition of several financial services outsourcing businesses during the
quarter.
Net cash provided by operating activities was $9.1 million in the first quarter
of fiscal 1997, compared with $0.2 million generated in the first quarter of
fiscal 1996. The increase is primarily due to the decrease in ATM cash
balances combined with the increase in ATM settlement liabilities resulting
from the rapid growth of ATMs in which ACS serves only as the processor. Net
cash used in investing activities increased by $7.4 million for the quarter
ended September 30, 1996 compared to the corresponding prior year quarter. The
current period included $15.9 million paid for acquisitions, compared to $8.6
million in the prior year period. Additionally, cash used for the purchase of
property, equipment and software increased $2.2 million over the prior period
due to growth associated with new business.
The Company has available lines of credit of $125 million under an unsecured
revolving credit facility (the "Credit Facility") and $11 million under the ATM
Cash Facility. Borrowings as of September 30, 1996 were $59.8 million under
the Credit Facility (leaving approximately $54.1 million available for use, net
of outstanding letters of credit) and $4.6 million under the ATM Cash Facility.
The Company also has three
6
<PAGE> 9
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
vault cash custody agreements with financial institutions which provide the use
of up to $58 million in cash for use in Company-owned ATMs. The amount of cash
outstanding under the cash custody agreements at September 30, 1996 was
approximately $35.2 million and is not an asset or liability of the Company and
therefore not recorded on the accompanying balance sheets.
The Company's management believes that available cash and cash equivalents,
together with cash generated from operations and available borrowings under its
credit facilities, will provide adequate funds for the Company's anticipated
needs, including working capital, capital expenditures and ATM vault cash
requirements. Management also believes that cash provided from operations will
be sufficient to satisfy all existing debt obligations as they come due. As
the size and financial resources of the Company increase, however, additional
acquisition opportunities requiring significant commitments of capital may
arise. In order to pursue such opportunities, the Company may be required to
incur debt or to issue additional potentially dilutive securities in the
future. No assurance can be given as to the Company's future acquisition and
expansion opportunities and how such opportunities would be financed.
7
<PAGE> 10
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 31, 1995, the Fifth District Court of Appeals in Dallas,
Texas (the "Court of Appeals") affirmed the judgment of the trial
court in the matter styled ACS Investors, Inc., et. al. v. Thomas
McLaughlin and John Lazovich. The trial court had rendered a verdict
in favor of Messrs. McLaughlin and Lazovich on causes of action for
tortious interference with an acquisition agreement entered into by
Messrs. McLaughlin and Lazovich and First Texas Savings Association in
1986 related to the acquisition of an electronic benefit transfer
business. The total amount of the judgment against the Company, ACS
Government Services, Inc., Darwin Deason and J. Livingston Kosberg, a
former director of the Company, including interest, is approximately
$9.5 million, which includes $3 million in actual damages and $1.5
million in exemplary damages. The Company has indemnified Mr. Deason
and Mr. Kosberg from any liability arising from the suit. The Company
pursued its appeal of the judgment before the Texas Supreme Court in
October 1996. The Texas Supreme Court has not yet issued its opinion
on this appeal.
On May 22, 1996, a former employee of Gibraltar Savings Association
("GSA") filed suit in Texas state court alleging entitlement to 6,467
shares of the Company's Class A common stock pursuant to options
issued to certain GSA employees in 1988 in connection with a former
data processing services agreement between GSA and the Company. On
October 6, 1996, twelve additional former GSA employees filed a
similar suit alleging entitlement to 106,996 shares of the Company's
Class A common stock, which together with the other shares represent
less than 0.6% of the outstanding common stock and common stock
equivalents of the Company. The Company believes that is has
meritorious defenses to all or substantial portions of plaintiffs'
claims and plans to vigorously defend against these lawsuits.
The Company is subject to certain other legal proceedings, claims and
disputes which arise in the ordinary course of its business. Although
the Company cannot predict the outcomes of these legal proceedings,
the Company's management does not believe these actions will have a
material adverse effect on the Company's financial position, results
of operations or liquidity. However, if unfavorably resolved, these
proceedings could have a material adverse effect on the Company's
financial position, results of operations and liquidity.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11.1 Earnings per Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on July 8, 1996 for the
acquisition of The Genix Group, Inc. on June 21, 1996.
8
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 14th day of November, 1996.
AFFILIATED COMPUTER SERVICES, INC.
By: /s/ Mark A. King
---------------------------------
Mark A. King
Executive Vice President and
Chief Financial Officer
9
<PAGE> 12
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
11.1 Earnings Per Share
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 17,414
<SECURITIES> 0
<RECEIVABLES> 100,513
<ALLOWANCES> 1,556
<INVENTORY> 9,895
<CURRENT-ASSETS> 163,698
<PP&E> 89,279
<DEPRECIATION> 34,766
<TOTAL-ASSETS> 535,394
<CURRENT-LIABILITIES> 103,882
<BONDS> 67,258
0
0
<COMMON> 177
<OTHER-SE> 311,969
<TOTAL-LIABILITY-AND-EQUITY> 535,394
<SALES> 0
<TOTAL-REVENUES> 144,332
<CGS> 0
<TOTAL-COSTS> 128,576
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,354
<INCOME-PRETAX> 14,402
<INCOME-TAX> 5,869
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,533
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
</TABLE>
