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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
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FORM 10-K
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MARK ONE ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ X ] SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
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 number 0-24787
AFFILIATED COMPUTER SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0310342
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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)
214-841-6111
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of exchange on
Title of each class which registered
- ------------------------------------ ------------------------------------
Class A common stock, par
value $.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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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 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. [ X ]
As of September 24, 1998, 44,960,764 shares of Class A common stock were
outstanding. The aggregate market value of the Class A common voting stock held
by nonaffiliates of Affiliated Computer Services, Inc. as of such date,
approximated $1,506,186,000.
DOCUMENTS INCORPORATED BY REFERENCE: Fiscal 1998 Annual Report to Stockholders -
Parts I, II and IV; Proxy Statement for October 27, 1998 Annual Meeting - Part
III.
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AFFILIATED COMPUTER SERVICES, INC.
FORM 10-K
JUNE 30, 1998
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PART I
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 9
Item 3. Legal Proceedings.................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders..................................10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........... 10
Item 6. Selected Consolidated Financial Data................................................ 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ..................................................................... 11
Item 8. Financial Statements and Supplementary Data......................................... 11
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure......................................................................... 11
PART III
Item 10. Directors and Executive Officers of the Registrant...................................12
Item 11. Executive Compensation...............................................................12
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................12
Item 13. Certain Relationships and Related Transactions.......................................12
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement Schedule and Reports
on Form 8-K.....................................................................12
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Affiliated Computer Services, Inc. (the "Company" or "ACS") based in
Dallas, Texas and with offices primarily in North America, as well as Central
America, South America, Europe and the Middle East, provides a full range of
business services including business process outsourcing, electronic commerce,
technology outsourcing and professional and systems integration services. The
Company's services are provided to customers with time-critical,
transaction-intensive information processing needs.
ACS was formed in 1988 to participate in the trend to outsource information
processing to third parties to enable businesses to focus on core operations,
respond to rapidly changing technologies and reduce data processing expenses.
The Company's business strategy is to continue to lower its unit processing
costs by expanding its customer base through both internal marketing and the
acquisition of complementary companies. Since inception through June 30, 1998,
the Company has completed 38 acquisitions, which have resulted in geographic
expansion, growth and diversification of the Company's customer base, expansion
of services and products offered, and increased economies of scale.
Approximately half of the increase in the Company's revenues for the five years
ended June 30, 1998 has been attributable to acquisitions. The Company's
marketing efforts focus on developing long-term relationships with customers
that choose to outsource various information processing requirements, as well as
on expanding services offered to existing customers.
The Company's technology outsourcing services are provided to a variety of
customers nationwide, including retailers, government agencies, healthcare
providers, telecommunications companies, wholesale distributors, manufacturers,
utilities, financial institutions and insurance companies. The Company utilizes
a variety of third party industry-standard software packages that can be matched
with the appropriate hardware platform to provide flexible and cost-effective
solutions to meet customer requirements. ACS is capitalizing on the trend toward
client-server computing by providing consulting and transitional outsourcing
services, including network and desktop management, to companies that are
changing to these distributed platform environments. The Company offers business
process outsourcing services such as loan and mortgage processing, electronic
imaging, document imaging, record storage and retrieval services, micrographics
processing services and high speed data capture services. ACS' professional
services and system integration include contract programming, systems
engineering and technical assistance, as well as network design and systems
integration. The electronic commerce business consists primarily of the
operation of a proprietary automated teller machine ("ATM") network consisting
of Company owned ATMs as well as ATMs owned by third parties. According to an
industry publication, the Company's MoneyMaker(SM) ATM network is the second
largest non-bank ATM network in the United States. The Company operates a
national network of host and remote data centers that enables ACS to process
transactions for its outsourcing and EFT customers in a rapid, cost-effective
manner.
In December 1997, the Company acquired ACS Government Solutions Group, Inc.
("ACS Government Solutions"), formerly known as Computer Data Systems, Inc.,
through the merger of a wholly-owned subsidiary of the Company with and into ACS
Government Solutions, a provider of information technology solutions to
government and private industry customers in a transaction accounted for as a
pooling of interests (the "Merger"). As a result, the Company has restated its
historical financial statements to reflect the combined operations of both
companies. ACS' revenues from continuing operations increased from $477.0
million in fiscal 1994 to almost $1.2 billion in fiscal 1998, and income from
continuing operations, excluding merger costs, increased from $37.4 million to
$111.3 million during the same period.
MARKET OVERVIEW
The Company believes that the demand for third-party information processing
services has grown substantially in recent years and will continue to increase
in the future as a result of financial, strategic and technological factors.
These factors include: (i) the increasing complexity in the systems environment,
(ii) the desire by businesses to take advantage of the latest advances in
technology without the cost and time commitment required to maintain an in-house
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system, (iii) the increasing requirements for rapid processing and communication
of large amounts of data to multiple locations, (iv) the increasing attention by
businesses to control costs, causing them to compare the fully allocated cost of
in-house processing with the cost of outsourcing and (v) the desire of
organizations to focus on their primary competencies. According to an industry
trade association, the size of the global technology outsourcing market is
estimated to be $622 billion by the year 2002.
The Company participates in several segments of the business process
outsourcing market, such as loan processing, trade marketing and providing
micrographics and electronic imaging products and services. According to an
industry trade association, the market for global business process outsourcing
services is estimated to be $485 billion by the year 2003.
As a result of rapid technological change in the Company's markets, the
Company expects strong demand for third-party professional programming and
consulting services. Because ACS provides professional services to customers
with mainframe environments as well as with newer client-server and network
applications, the Company believes that it is well-positioned to expand its
services in current locations as well as in new geographic markets. As part of
its consulting services, the Company advises clients on the strategic
acquisition and utilization of information technology to achieve and improve
their competitive position.
Electronic commerce involves the on-line processing of transactions
initiated by a consumer at a terminal using a debit or credit card issued by the
consumer's financial institution. Various transactions, including cash
withdrawals, transfers and balance inquiries, are authorized and performed with
immediate posting to the consumer's accounts. According to an industry
publication, there were over 165,000 ATMs deployed in the United States as of
September 1997. Transaction volume has grown in recent years due to an increase
in the number of ATMs deployed, the number of cardholders and the frequency of
use by cardholders.
The Company's revenues from continuing operations derived from information
technology services are shown in the following table:
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Year ended June 30,
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1998 1997 1996 1995 1994
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(in thousands)
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Information Technology Services:
Technology outsourcing $ 330,727 $ 297,268 $ 185,945 $ 177,377 $ 154,867
Business process outsourcing 343,382 292,995 191,725 108,001 87,113
Professional services /
systems integration 390,221 245,720 201,443 184,025 179,018
Electronic commerce 124,793 92,942 68,495 64,445 55,980
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Total $1,189,123 $ 928,925 $ 647,608 $ 533,848 $ 476,978
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BUSINESS STRATEGY
The key components of the Company's business strategy include the
following:
o Expand Customer Base - The Company seeks to develop long-term
relationships with its customers by leveraging its expertise with
multiple services and product offerings to provide complete
information technology services. The Company's primary focus is on
increasing its revenues by adding large-volume transaction processing
customers.
o Grow Existing Customer Relationships - The Company actively pursues
offering existing clients its full range of services and product
offerings which, when combined, can create leverageable business
solutions for the clients.
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o Provide Flexible Information Processing Solutions - The Company
offers custom-tailored information processing solutions using a
variety of proprietary and third-party licensed software on multiple
hardware and systems software platforms. ACS is capitalizing on the
trend toward client-server computing by providing consulting and
transitional outsourcing services, including network and desktop
computer management, to companies that are changing to these
distributed platform environments.
o Maximize Economies of Scale - The Company's strategy is to develop
and maintain a significant customer and account/transaction base to
create sufficient economies of scale that enable the Company to
achieve competitive unit processing costs.
o Complete Strategic Acquisitions - The Company's acquisition strategy
is to acquire companies that enable the Company to expand its
geographic presence, to expand the products and services offered to
existing customers, and to obtain a presence in new, complementary
markets.
o Invest in Technology - The Company responds to technological advances
and the rapid changes in the requirements of its customers through the
commitment of substantial amounts of its resources to the operation of
multiple hardware platforms, customization of products and services
that incorporate new technology on a timely basis and the continuous
training of customer service personnel.
o Build Recurring Revenues - The Company seeks to enter into long-term
contracts with customers to provide services that meet their ongoing
information processing needs.
o Attract, Train, and Retain Associates with Strong Character - We
believe that attracting, training, and retaining high quality
associates is essential to our growth. We hire motivated individuals
with strong character and leadership traits and provide them with
ongoing technological and leadership skills training. We emphasize
retaining our associates with challenging work assignments and
incentive programs.
INFORMATION TECHNOLOGY SERVICES
Technology Outsourcing
The Company offers a diverse set of technology outsourcing solutions to
businesses desiring to achieve reductions in data processing costs and/or
improvements in the quality of data processing. The Company's principal
technology outsourcing service is the delivery of data processing services on a
remote basis from host data centers with sufficient computer processing
(mainframe and other) capacity to deliver significant cost savings and process
improvements to customers. The principal services provided include both on-line
and batch processing of data and network management assistance. The
mission-critical application systems processed by the Company for its customers
include financial, human resources, retail and wholesale inventory distribution,
manufacturing, healthcare management, transportation management, commercial and
residential telephone billing, mortgage portfolio information and software
development systems.
The Company's target market for technology outsourcing services consists of
medium- to large-sized commercial organizations with time-critical,
transaction-intensive information processing needs. The Company provides
technology outsourcing services to customers in the following industries:
telecommunications, wholesale distribution, manufacturing, utilities, financial
institutions and insurance. The primary geographic market for the Company's data
processing services is the United States, although the Company evaluates
international opportunities periodically. Because of the high-speed and
high-capacity capabilities of the telecommunications networks available to the
Company, its primary host data centers located in Dallas, Texas; Rancho Cordova,
California; Rockville, Maryland; Pittsburgh, Pennsylvania and Charlotte, North
Carolina are able to serve customers throughout the United States.
The Company typically outsources a customer's in-house data processing
operation by migrating the processing workload to one of the Company's data
centers over a period of three to six months, and in some instances the Company
acquires the customer's data processing assets and hires certain customer
personnel. In a facilities management arrangement, which is less common, Company
personnel manage and operate a data center on the
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customer's site. In most instances, the customer maintains and enhances its
application programs and schedules and initiates processing, using computer and
network resources provided by the Company. In other instances, the Company
maintains and enhances application programs for the customer. The Company owns
certain proprietary applications software which the Company uses to provide
services to customers, including telecommunications service providers. The
proprietary software is not licensed to customers or third parties. The Company
also licenses software provided by various software vendors under perpetual or
renewable term licenses. The Company does not believe it is significantly
dependent upon any proprietary software with respect to its outsourcing services
and believes that, as to software licensed to the Company, sufficient
alternative software products are generally available for licensing by the
Company. However, there can be no assurance that the Company will be able to
obtain such alternative software products on a timely basis or without incurring
additional expense. The Company's data center hardware and systems software
platforms are also made available to customers, such as software development
companies, which desire to purchase processing resources on an as-required
basis. The Company processes its customers' data on a variety of hardware
platforms.
The Company's technology outsourcing services are typically provided
pursuant to multi-year contracts and are typically priced on a resource
utilization basis rather than on the basis of accounts or transactions
processed. Resources utilized include processing time, professional services,
hardware, data storage and retrieval requirements and output volume required
for processing.
In recent years new client-server platforms (networks of personal computers
and workstations) have been developed that may, for some applications, provide
more flexibility to customers than is available from mainframe processing. To
the extent these new platforms are less costly than mainframe processing,
customers may choose to move portions of their processing requirements to their
own in-house client-server systems. However, the Company believes mainframe
processing services will continue to be important for many applications, and
that new opportunities will be presented for outsourcing both client-server and
mainframe platforms for complementary use. In addition, recent advances in
technology have made mainframe platforms, in the Company's view, more
cost-competitive with client-server systems.
Business Process Outsourcing
The Company began offering business process outsourcing services as a
result of the 1992 acquisition of ACS Integrated Document Solutions, Inc.
("IDS"), formerly known as Dataplex Corporation, which was a part of the
Company's strategy to offer complementary services to its outsourcing customers.
IDS offers services that convert customer data onto suitable media, store such
data in a secure environment and retrieve archived data. IDS also sells a
variety of imaging equipment and supplies to end users.
Customer information is received by IDS in a variety of media such as
paper, microfilm, computer tape, optical disk or CD ROM. Upon receipt, the
information is either duplicated, electronically scanned or converted into
another medium, and then the information is returned to the customer in the
desired medium. In many instances, a copy of the information is stored on
microfilm at the Company's 533-acre records storage and retrieval facility.
IDS uses several types of hardware and software to deliver its services,
including electronic subscription-based image processors, microfilm processors
and duplicators, rotary, planetary and step-and-repeat cameras, COM (computer
output to microfiche) recorders, optical scanning equipment and client-server
and personal computers. The Company delivers these services from 37 service
centers in 25 states.
Through its acquisition of Medianet, Inc. in August 1995 and Pinpoint
Marketing, Inc. in September 1996, the Company has built a leadership position
in the trade marketing service industry through the combination of such
companies into a division now known as ACS TradeOne Marketing. The Company's
proprietary software supports program planning and development and
administration of co-op advertising, incentive, fulfillment and other
promotional programs that build brand equity and increase market share to over
100 clients, including many Fortune 100 companies.
The Company provides financial systems and services including student loan
services, mortgage services, debt collection, loan processing, pension trust
fund support, cash management, and fulfillment system
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and services. The Company was the first Direct Student Loan Contractor at the
Department of Education, whose contract now exceeds 3 million borrowers and 8
million booked loans valued at approximately $30 billion.
In February 1996, the Company acquired a majority interest in ACS Business
Process Solutions, Inc. ("BPS"), formerly known as Unibase Technologies, Inc., a
Utah-based provider of high speed data capture services. In March 1998, the
Company acquired the remaining interest in BPS. Using state-of-the-art image
transmission, storage and retrieval technology, millions of information records
are digitized and transmitted daily from customer locations for high-speed
conversion and database update. As of June 30, 1998, BPS employed over 3,200
full-time equivalent employees and captured over 198 million characters of data
each day for approximately 67 customers at 21 service centers in 14 states and
in Mexico, Guatemala and Germany.
In November 1996, the Company combined its student loan guaranty agency
services business with that of InTuition, Inc. to form a new commercial company,
GuaranTec, LLP. GuaranTec's primary business is providing servicing for certain
student loan guaranty agencies. Such services include diligence, report filing,
collection efforts, maintaining loan data, as well as obtaining money from the
government and delivering guaranteed money to lenders in satisfaction of claims.
Professional Services
Through its purchase in January 1995 of a majority interest in The Systems
Group, Inc. ("TSG"), a Dallas-based professional services provider, the Company
enhanced its ability to offer its customers high quality professional services.
In October 1997, the Company purchased the remaining interest in TSG. Today, the
Company's professional services include contract programming, technical support,
marketing support and training, as well as network design and installation
services. These services are generally priced to customers on a time and
materials basis. The Company further expanded its geographic presence with the
acquisition of Technical Directions, Inc. in September 1995, Wesson, Taylor,
Wells & Associates, Inc. in March 1997 and CARA Corporation in December 1997.
TSG was renamed Technical Directions, Inc. ("TDI") in 1996 and currently has
approximately 1,130 employees in offices located in Dallas and Houston, Texas;
Atlanta, Georgia; Chicago, Illinois; San Diego, California; Charlotte and
Raleigh, North Carolina; Phoenix, Arizona; Philadelphia, Pennsylvania; Tulsa,
Oklahoma; Minneapolis, Minnesota; Portland, Oregon; Seattle, Washington and
Denver, Colorado.
TDI provides a variety of clients with professional services allowing such
clients the opportunity to use a planned, flexible workforce, either through
staff augmentation or by serving as a client's in-house development staff. Due
to the nature of the work performed, TDI's professional services are generally
offered on an hourly rate basis to a changing client base under short-term
contractual arrangements. TDI's ability to deliver high-level skill sets and
proven methodologies enhance ACS' ability to offer complementary services to
clients and prospects dealing with technological change.
In June 1997, the Company acquired Analytical Systems Engineering
Corporation ("ASEC"). ASEC, headquartered in Burlington, Massachusetts, serves
the Department of Defense and the intelligence community focusing on engineering
and technical services. ASEC's core competencies include systems engineering and
technical assistance, information systems and technology support, technology
transfer applications, engineering and installation and systems integration.
In July 1998, the Company acquired Betac International Corporation and its
subsidiaries ("BETAC"). BETAC is an advanced technology services company
providing information technology solutions to the Department of Defense,
government intelligence and defense contractors, other federal agencies and
commercial clients. Headquartered in Alexandria, Virginia, BETAC broadens the
range of skill sets within ACS' subsidiary, ASEC, in the areas of intelligence,
security and complex technology applications.
The Company provides client / server development, network engineering and
telecommunications integration, and desktop automation services to federal,
state and local government agencies with a strategic focus on providing high
tech solutions in such areas as Oracle expertise, geographic information systems
and Internet related services. The Company further expanded its professional
services offerings with the purchase of a majority interest in
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The LAN Company, in December 1995 and Intelligent Solutions, Inc., in March
1997. The Lan Company based in Philadelphia, is a provider of network design
and installation services and document management systems to law firms and
other commercial customers in the Northeast. Intelligent Solutions, Inc. is a
Washington, D.C.-based provider of client-server solutions, primarily to the
U.S. Congress, the White House and other Executive Branch agencies. These
acquisitions are part of the Company's strategy to bolster its presence in the
local area/wide area network market.
Electronic Commerce
The Company engages in the electronic commerce transaction processing
business both as a third-party processor for financial institutions and
retailers and on the Company's own behalf. The Company's electronic commerce
business is conducted primarily through its MoneyMaker(SM) ATM network, which
has been operated by the Company since its formation in 1988. Based on an
industry publication, the Company's MoneyMaker(SM) ATM network is the second
largest non-bank ATM network in the United States. Of the 13,204 ATMs in the
MoneyMaker(SM) ATM network as of June 30, 1998, 12,248 are processed by the
Company on behalf of other owners and 956 are owned by the Company.
Approximately 157 million ATM and point-of-sale transactions were processed in
the network during the year ended June 30, 1998 (up from 124 million during the
year ended June 30, 1997). The Company also provides ATM maintenance services to
its MoneyMaker(SM) ATM network customers, as well as to owners of ATMs in other
networks.
The Company deploys alternative ATM devices throughout the United States
that are capable of operating with a lower volume of transactions per machine
compared to traditional higher volume, full service machines. Utilizing
cost-saving features such as retailer cash loading and dial-up communications,
these devices make ATM services financially viable for retail locations
generating less than half the transaction volume of typical ATM installations.
The Company's retail customers own these devices, enabling them to receive the
associated fees, while paying the Company for terminal driving services. As of
June 30, 1998, approximately 10,500 low volume ATMs had been installed in all 50
states, primarily at retail sites.
Through arrangements with a number of independent sales organizations, ACS
continues to grow its electronic commerce network through the sale, placement
and processing of a variety of available ATMs.
MoneyMaker(SM) ATM network processing contracts generally provide for an
initial term of three to five years and automatically renew unless notice of
non-renewal is given prior to expiration. Charges for services are based
primarily on the volume of transactions processed and are collected daily.
Certain charges are paid monthly. The Company generally is permitted to raise
prices on an annual basis subject to limits based on a specified consumer price
index.
DATA AND SERVICE CENTERS
The Company's technology outsourcing, electronic commerce and business
process outsourcing services are provided through the Company's extensive
national data and service center network, which comprises 5 host data centers, 7
remote data centers, and 58 business process outsourcing service centers (in 29
states, Mexico, Guatemala and Germany), as well as an extensive
telecommunications network.
The Company's multi-platform host data centers have a combined processing
capacity of over 8,500 MIPS (millions of instructions per second). Hardware and
systems software platforms currently operated by the Company include a broad
range of on-line IBM-MVS, IBM-DOS, IBM-VM, IBM-AS400, IBM-RISC 6000, DEC,
Tandem/Guardian and UNIX processing environments. To compete effectively in the
rapidly changing technology market, it is critical that the Company implement
and maintain these multiple hardware and software platforms. The Company
continually plans for testing and implementation of new technology and
emphasizes flexibility in structuring the services it offers using new
technology. The Company commits substantial amounts of its resources to the
operation of multiple hardware platforms and the training of customer personnel
in the use of such hardware and software in order to stay current with rapid
technological changes and changes in customer requirements.
The Company enters into multi-year software license agreements with most of
its software providers. These agreements, which vary in term, generally provide
favorable pricing and added functionality.
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The host data centers, together with the remote data centers, are capable
of providing comprehensive data processing services required by ACS' customers.
The Company maintains a disaster recovery plan with certain vendors to provide
alternative data processing sites in the event the Company experiences a natural
disaster or other interruption at one or more of its data centers.
The Company also manages data communications and, in some instances, voice
communications for its customers, as well as various local and wide area
networks. The Company maintains a nationwide voice and data network to support
the complex telecommunications requirements of its customer base. The Company
monitors and maintains network lines and circuits on a seven-day, 24-hour basis
from its host data centers. The Company also provides shared hub satellite
transmission services as an alternative to multi-drop and point-to-point hard
line telecommunication networks.
CUSTOMER BASE
The Company achieves growth in its data processing revenues and customer
base through marketing and acquisitions of other information processing
companies. For fiscal 1998, approximately one-third of the Company's revenues
were derived from federal, state or local government agencies, while the
remaining two-thirds were derived from commercial customers. Customers may be
lost due to merger, business failure, conversion to a competing processor or to
an in-house system. The Company's business with the federal government is
subject to various risks, including the reduction or modification of contracts
due to changing government needs and requirements. Government contracts, by
their terms, generally can be terminated for convenience by the government,
which means that the government may terminate the contract at any time, without
cause, and in certain instances ACS would be entitled to receive compensation
only for the services provided or costs incurred at the time of termination.
As of June 30, 1998, the Company had over 24,000 customers including
approximately 500 technology outsourcing customers, 11,000 electronic commerce
customers, 11,500 business process outsourcing customers and 1,000 professional
services/system integration customers.
Approximately 89%, 90% and 90% of the Company's revenues for fiscal 1998,
1997 and 1996, respectively, were recurring. Recurring revenues are defined by
the Company as revenues derived from services that are used by the Company's
customers each year in connection with their ongoing businesses, and accordingly
exclude conversion and deconversion fees, software license fees, product
installation fees and hardware sales.
The Company's five largest customers accounted for approximately 25%, 26%
and 30% of the Company's fiscal 1998, 1997 and 1996 revenues, respectively.
SALES AND MARKETING
The Company markets its services and products primarily through separate
sales forces located throughout the United States. In order to enhance its sales
and marketing efforts, the Company hires sales representatives who have
significant experience in the industries to which they will be marketing.
Maintaining separate sales forces for its various service lines allows the
Company's sales representatives to concentrate on particular services, product
technology and customer markets, thereby staying abreast of developments in
these areas.
COMPETITION
The market for the Company's services are intensely competitive and highly
fragmented. The most significant competitive factors are reliability and quality
of services, technical competence and price of services. In connection with
certain large outsourcing contracts, the Company may be required to purchase
data processing assets from the prospective customer or to make an investment in
the securities issued by the prospective customer in order to obtain their
contracts. Many of the Company's competitors have substantially greater
resources and thus, may have a greater ability to obtain customer contracts
where sizable asset purchases or investments are required. To maintain
competitive prices, the Company is required to operate with efficient and low
overhead and maintain a significant customer base and account/transaction base
to achieve sufficient economies of scale. The Company's competition for
technology outsourcing contracts consists of (i) the first-tier outsourcers,
including Electronic Data Systems Corporation ("EDS")
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and Computer Sciences Corporation, (ii) mid-sized divisions of large
corporations, such as MCI, Lockheed-Martin and GE Capital and (iii) other
smaller, regional competitors.
Within its local markets, TDI actively competes with small specialized
firms as well as with large competitors with a wider range of staffing services.
The Company believes that the key competitive factors in obtaining and retaining
clients include the ability to understand job requirements, deliver appropriate
skill sets in a timely manner and price services effectively. The Company must
also compete for qualified personnel through competitive wages and by
maintaining a consistent demand for the skills recruited.
The Company competes successfully in the business process outsourcing
business by offering a wide range of services and achieving favorable pricing by
maintaining a significant volume of business with equipment and media suppliers.
Principal BPO competitors include numerous small- to medium-sized local and
regional competitors.
Competitive factors in the electronic commerce solutions business are
network availability and response time, terminal location and access to other
networks. With respect to off-premise ATMs, additional factors include
percentage and timing of revenue sharing with retailers providing ATM sites and
the ability to provide cost-efficient ATM cash replenishment and maintenance
services. Customer retention in the EFT services business is closely associated
with satisfactory location and performance of ATMs. Principal electronic
commerce solution competitors include EDS, Deluxe Data Corporation, large
financial institutions and several regional ATM networks and processors.
EMPLOYEES
The Company believes that its success, in part, depends on its continuing
ability to attract and retain skilled technical, marketing and management
personnel. While technology professionals are in high demand, the Company
believes that, to date, it has been able to attract and retain highly qualified
personnel. As of June 30, 1998, the Company and its subsidiaries had over 12,300
full-time equivalent employees. Other than approximately 200 IDS employees, none
of the Company's or its subsidiaries' employees are currently represented by a
union, and there have been no work stoppages or strikes. Management considers
its relations with employees to be good.
GOVERNMENT CONTRACTS AND REGULATION
One-third of the Company's revenues are derived from contracts and
subcontracts with federal government agencies. The Company's allowable federal
government contract costs and fees are subject to audit by the Defense Contract
Audit Agency ("DCAA"). These audits may result in non-reimbursement of some
contract costs and fees. To date, the Company has experienced no material
adjustments as a result of audits by the DCAA. The DCAA has completed audits of
the Company's federal contracts through fiscal 1996, with the exception of ASEC
operations, which have been audited through calendar year 1995.
The Company is not directly subject to federal or state regulations
specifically applicable to financial institutions. As a provider of services to
financial institutions, however, the Company's technology outsourcing and
electronic commerce solutions operations are examined periodically by various
state and federal regulatory agencies. These agencies make recommendations to
the Company regarding various aspects of its operations, and generally, the
Company implements such recommendations. The Company also arranges for an annual
independent examination of its major data processing facilities.
The Company's ATM network operations are subject to federal regulations
governing consumers' rights with respect to ATM transactions. Fees charged by
ATM owners are currently regulated, and additional legislation which would
regulate or eliminate certain ATM fees has been proposed by the federal
government and by several states. There can be no assurance whether such
regulations or legislation will be enacted in the future or that existing
consumer protection laws will not be expanded to apply to fees charged in
connection with ATM transactions. However, if such legislation were enacted, the
number of ATMs operated nationwide (or within the geographic areas affected by
the legislation) could be significantly reduced. This could adversely affect the
Company's revenues and income as they relate to the Company's electronic
commerce solutions business.
8
<PAGE> 11
ITEM 2. PROPERTIES
The Company's executive offices are located in Dallas, Texas at a company
owned facility of approximately 587,000 square feet, which also houses a host
data center and other operations. In connection with the Merger, the Company
also owns a facility in Rockville, Maryland which houses a host data center and
the operations of ACS Government Solutions. The Company also operates host data
centers in Rancho Cordova, California; Pittsburgh, Pennsylvania and Charlotte,
North Carolina which encompass an aggregate of 198,000 square feet of space.
These latter three data centers are leased and have terms that expire beginning
July 2001 and ending May 2018. The Company leases facilities for 7 remote
data centers with varying lease expiration terms. These remote data centers
range from approximately 4,000 square feet to 78,500 square feet and are located
in Boston, Massachusetts; New York (2), Woodbury and Utica, New York; Austin,
Texas and Salt Lake City, Utah. The Company leases 58 facilities for business
process outsourcing service centers located throughout the United States ranging
from 650 square feet to 27,700 square feet, also with varying lease expiration
terms. In connection with its business process outsourcing business, the Company
owns a records center on 334 acres of land with 38 underground storage bunkers
and leases another 199 acres of land with 23 underground storage bunkers in
Flora, Mississippi, which lease expires December 2010. The Company also leases
88 other facilities used for office or warehouse space ranging from 180 square
feet to 68,200 square feet with varying lease expiration terms. All properties
leased or owned by the Company are in good repair and in suitable condition for
the purposes for which they are used.
ITEM 3. LEGAL PROCEEDINGS
Twenty-one former employees of Gibraltar Savings Association and/or First
Texas Savings Association (collectively, "GSA/FTSA") have brought suit in Texas
state court alleging entitlement to 401,532 shares of the Company's Class A
common stock pursuant to options issued to GSA/FTSA employees in 1988 in
connection with a former data processing services agreement between GSA/FTSA and
the Company. The per share exercise price for each of these options, as adjusted
for the Company's 1994 reclassification and its 1996 two-for-one stock split, is
alleged to be $.38. On September 23, 1998, the court issued certain adverse
rulings in connection with this lawsuit and indicated that it intends to issue a
judgment reflecting such rulings in the near future. The court indicated that
the anticipated judgment will provide for damages in the amount of the value of
the Company's Class A common stock around September 23, 1998. Based upon the
value of the Company's Class A common stock at the close of the NYSE on such
date, the amount of the damages, including plaintiff's attorney fees, would be
approximately $16.5 million. The Company continues to believe that it has
meritorious defenses to all or substantial portions of these matters and plans
to immediately and vigorously appeal such judgment when entered. However, should
the proceedings not be favorably resolved upon appeal, the Company may be
subject to a material charge.
On October 10, 1995, the Company filed a counterclaim against National
Convenience Stores, Incorporated ("NCS") alleging that NCS had breached a
contract with the Company and seeking unspecified damages. This counterclaim was
filed in response to an action filed by NCS against the Company in the 101st
Judicial District Court in Dallas, Texas seeking a declaratory judgment that NCS
is not contractually obligated to allow the Company to review and match any
third party proposal to process automated teller machines in NCS stores upon
expiration of the contract with the Company, pursuant to its terms, on December
1, 1995. On March 12, 1997 the Company added NationsBank as a defendant in the
counterclaim. The Company intends to vigorously oppose this action and to pursue
the claims asserted in the counterclaim.
In addition to the foregoing, 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.
9
<PAGE> 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal fourth quarter covered by this report, no matter was
submitted to a vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Class A common stock is traded on the New York Stock Exchange
("NYSE") under the symbol "AFA." The following table sets forth the high and low
sales prices of the Company's Class A common stock for the last two fiscal years
as reported on the Nasdaq Stock Market's National Market through February 1997
and thereafter on the NYSE, and have been retroactively adjusted for the
two-for-one stock split which occurred in November 1996.
<TABLE>
<CAPTION>
Fiscal year ended June 30, 1998 High Low
-------------------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter 29 15/16 24 5/16
Second Quarter 26 1/2 21 1/2
Third Quarter 37 1/8 24 1/2
Fourth Quarter 39 3/4 30 5/8
<CAPTION>
Fiscal year ended June 30, 1997 High Low
-------------------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter 32 21 1/8
Second Quarter 32 24 3/4
Third Quarter 30 1/4 19 1/2
Fourth Quarter 28 5/8 20 3/4
</TABLE>
On September 24, 1998, the last reported sales price of the Company's Class
A common stock as reported on the New York Stock Exchange was $33 1/2 per share.
Except for the dividends paid by ACS Government Solutions prior to the
Merger, the Company has not paid any dividends to date on its common stock. The
Company intends to continue to retain earnings for use in the operation of its
business and, therefore, does not anticipate paying any dividends in the
foreseeable future. Under the terms of its unsecured revolving credit agreement
with Wells Fargo Bank (Texas), National Association and Bank One, Texas N.A. as
amended (the "Credit Facility"), the Company is prohibited from paying dividends
in any fiscal year in a total amount that would exceed 50% of the Company's net
income for the preceding fiscal year. Any future determination to pay dividends
will be at the discretion of the Company's Board of Directors and will be
dependent upon the Company's financial condition, results of operations,
contractual restrictions, capital requirements, business prospects and such
other factors as the Board of Directors deems relevant.
10
<PAGE> 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company are
qualified by reference to and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this document.
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
As of and for the year ended June 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS DATA:(1)
Revenues $1,189,123 $ 928,925 $ 647,608 $ 533,848 $ 476,978
Earnings from continuing operations $ 54,422(2) $ 49,666 $ 33,525 $ 25,655 $ 19,654
Earnings per common share - basic $ 1.14(2) $ 1.08 $ 0.88 $ 0.74 $ 0.64
Earnings per common share
assuming dilution $ 1.11(2) $ 1.05 $ 0.85 $ 0.71 $ 0.59
Weighted average shares outstanding
- basic 47,599 46,136 38,228 34,625 30,664
Weighted average shares outstanding
assuming dilution 50,487 47,452 39,320 35,998 33,233
BALANCE SHEET DATA:
Working capital $ 198,118 $ 110,866 $ 79,928 $ 77,615 $ 76,583
Total assets $ 949,798 $ 761,477 $ 636,098 $ 309,903 $ 266,734
Total long-term debt
(less current portion) $ 234,848 $ 130,680 $ 57,208 $ 37,940 $ 84,534
Cumulative redeemable
preferred stock $ -- $ -- $ 1,100 $ 1,100 $ 1,100
Stockholders' equity $ 503,670 $ 427,481 $ 363,204 $ 156,686 $ 90,439
</TABLE>
(1) At the end of fiscal 1994, the Company completed a reorganization and
spin-off of certain businesses unrelated to information processing,
which were accounted for as discontinued operations. The results
reflected herein are from continuing operations.
(2) Includes $12,974,000, $8,880,000 net of tax, or $.19 and $.18 per basic
and diluted share, respectively, of merger costs incurred by the
Company in connection with the Merger.
Pursuant to Instructions G(2) to Form 10-K, the information required in
Items 7 and 8 are incorporated by reference from pages 17 through 35 of the
Company's Fiscal 1998 Annual Report to Stockholders, included in this Form 10-K
Annual Report as Exhibit 13.1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
Pursuant to Instruction G(3) to Form 10-K, the information required in
ITEMS 10 THROUGH 13 is incorporated by reference from the Company's definitive
proxy statement, which is incorporated herein by reference.
11
<PAGE> 14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K
(a) (1) Financial Statements
The consolidated financial statements of the Company as of June 30, 1998
and 1997 and for each of the three years in the period ended June 30,
1998, together with the report of PricewaterhouseCoopers LLP dated July
28, 1998, except as to Note 15, which is as of August 10, 1998, appear on
pages 17 to 34 of the Company's Fiscal 1998 Annual Report to
Stockholders, Exhibit 13.1 to this Form 10-K Annual Report, and are
incorporated herein by reference.
(a) (2) Financial Statement Schedule
Schedule II- Valuation and Qualifying Accounts for the three years in
the period ended June 30, 1998, together with the report of
PricewaterhouseCoopers LLP dated July 28, 1998 appear on pages F-1 and
F-2 and are filed as part of this Form 10-K Annual Report.
All other financial statement schedules are omitted for the reason that
they are either not applicable or not required or because the
information required is contained in the consolidated financial
statements or notes thereto.
(b) Reports on Form 8-K
On April 3, 1998 the Company filed a Current Report on Form 8-K
reporting the sale of a new issue of $230,000,000 4% Convertible
Subordinated Notes due March 15, 2005.
On July 7, 1998 the Company filed a Current Report on Form 8-K reporting
the acquisition of Betac International Corporation.
(c) Exhibits
Reference is made to the Index to Exhibits beginning on page 19 for a
list of all exhibits filed as part of this report.
12
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed in
its behalf by the undersigned thereunto duly authorized.
Affiliated Computer Services, Inc.
Date: September 28, 1998
By: /s/ Mark A. King
--------------------------------
Mark A. King
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 28th day of September 1998.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Director, Chairman of the Board and
/s/ Darwin Deason Chief Executive Officer (Principal Executive Officer)
- --------------------------------------------
(Darwin Deason)
/s/ Jeffrey A. Rich Director, Chief Operating Officer and President
- --------------------------------------------
(Jeffrey A. Rich)
Director, Chief Financial Officer and
/s/ Mark A. King Executive Vice President
- --------------------------------------------
(Mark A. King)
/s/ Henry G. Hortenstine Director, Executive Vice President
- --------------------------------------------
(Henry G. Hortenstine)
/s/ Peter A. Bracken Director, Executive Vice President
- --------------------------------------------
(Peter A. Bracken)
Director, Executive Vice President, Secretary and
/s/ David W. Black General Counsel
- --------------------------------------------
(David W. Black)
/s/ Joseph P. O'Neill Director
- --------------------------------------------
(Joseph P. O'Neill)
/s/ Frank A. Rossi Director
- --------------------------------------------
(Frank A. Rossi)
/s/ Clifford M. Kendall Director
- --------------------------------------------
(Clifford M. Kendall)
</TABLE>
13
<PAGE> 16
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Affiliated Computer Services, Inc.
Our audits of the consolidated financial statements referred to in our
report dated July 28, 1998, except as to Note 15, which is as of August 10,
1998, appearing on page 34 of the 1998 Annual Report to Stockholders of
Affiliated Computer Services, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
July 28, 1998
F-1
<PAGE> 17
AFFILIATED COMPUTER SERVICES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(in thousands)
<TABLE>
<CAPTION>
Balance Balance
at Beginning Charged to Costs at End
Description of Period and Expenses Deductions of Period
- --------------------------------- ------------ ---------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1998
Deducted from asset accounts:
Accounts receivable $ 1,964 $ 998 $ 122 (1) $ 2,840
Property and equipment 66,302 25,493 1,699 (2) 90,096
Software 9,436 3,661 2,068 (2) 11,029
Goodwill 15,504 10,432 90 (2) 25,846
Other intangible assets 7,100 7,888 574 (2) 14,414
-------- -------- -------- --------
Total $100,306 $ 48,472 $ 4,553 $144,225
======== ======== ======== ========
Year ended June 30, 1997
Deducted from asset accounts:
Accounts receivable $ 1,457 $ 1,166 $ 659 (1) $ 1,964
Property and equipment 46,718 21,836 2,252 (2) 66,302
Software 19,438 2,717 12,719 (2) 9,436
Goodwill 8,609 7,232 337 (2) 15,504
Other intangible assets 4,478 2,826 204 (2) 7,100
-------- -------- -------- --------
Total $ 80,700 $ 35,777 $ 16,171 $100,306
======== ======== ======== ========
Year ended June 30, 1996
Deducted from asset accounts:
Accounts receivable $ 1,792 $ 465 $ 800 (1) $ 1,457
Property and equipment 39,278 10,807 3,367 (2) 46,718
Software 18,384 1,388 334 (2) 19,438
Goodwill 5,783 2,826 -- 8,609
Other intangible assets 3,039 1,439 -- 4,478
-------- -------- -------- --------
Total $ 68,276 $ 16,925 $ 4,501 $ 80,700
======== ======== ======== ========
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
(2) Retirements
F-2
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT NAME
------ ------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of September 20, 1997, by and among the Company, ACS
Acquisition Corp. and Computer Data Systems, Inc.
3.1 Charter of Incorporation of the Company, filed as Exhibit 3.1 to the Company's Form S-4
(Registration No. 333-40351) (the "Form S-4") and incorporated herein by reference.
3.2 Restated Bylaws of the Company, filed as Exhibit 3.2 to the Company's Form S-4 and incorporated
herein by reference.
4.1 Letter agreement, dated December 12, 1988, between the Company and The Southland Corporation,
filed as Exhibit 4.1 to the Company's Form S-1 and incorporated herein by reference.
4.2 Warrant to Purchase Shares of Class A Common Stock of the Company, dated January 3, 1989, issued
to The Southland Corporation, filed as Exhibit 4.2 to the Company's Form S-1 and incorporated
herein by reference.
4.3 Form of New Class A Common Stock Certificate, filed as Exhibit 4.3 to the Company's Form S-1 and
incorporated herein by reference.
4.4 Letter of Election and Transmittal of Sole Holder of Class C Common Stock of ACS Investors, Inc.,
filed as Exhibit 4.5 to the Company's Form S-1 and incorporated herein by reference.
4.5 Rights Agreement, dated August 11, 1997, between the Company and ChaseMellon Shareholder Services,
L.L.C, as Rights Agent, filed as Exhibit 4.1 to the Company's Report on Form 8-K dated
August 20, 1997 and incorporated herein by reference.
4.6 Indenture, dated as of March 20, 1998 between Affiliated Computer Services, Inc., as issuer and
U.S. Trust Company of Texas, N.A. as trustee, filed as Exhibit 4.1 to the Company's Report on Form
8-K dated March 20, 1998 and incorporated herein by reference.
4.7 Registration Rights Agreement, dated as of March 17, 1998 between Affiliated Computer Services,
Inc. and Goldman, Sachs & Co., Bear, Stearns & Co., Inc., Smith Barney Inc., Hambrecht & Quist
LLC, Donaldson, Lufkin & Jenrette Securities Corporation and Prudential Securities Incorporated,
filed as Exhibit 4.2 to the Company's Report on Form 8-K dated March 20, 1998 and incorporated
herein by reference.
10.1 Amended Stock Option Plan of the Company, filed as Exhibit 10.1 to the Company's Form S-1 and
incorporated herein by reference.
10.2 Form of Dataplex Acquisition Corp. 10% Junior Subordinated Exchange Debenture due January 15,
2000, filed as Exhibit 10.2 to the Company's Form S-1 and incorporated herein by reference.
</TABLE>
<PAGE> 19
<TABLE>
<S> <C>
10.3 Master Equipment Lease Agreement, dated October 23, 1991, by and between Amdahl Capital Corporation,
as lessor, and the Company, as lessee, filed as Exhibit 10.14 to the Company's Form S-1 and
incorporated herein by reference.
10.4 Reciprocal Services Agreement, dated June 30, 1994, between the Company and Precept, filed as
Exhibit 10.15 to the Company's Form S-1 and incorporated herein by reference.
10.5 Tax Sharing Agreement, dated July 1, 1994, between the Company and Precept, filed as Exhibit
10.16 to the Company's Form S-1 and incorporated herein by reference.
10.6 Noncompetition Agreement, dated July 1, 1994, between the Company and Precept, filed as Exhibit
10.17 to the Company's Form S-1 and incorporated herein by reference.
10.7 Mutual Indemnification Agreement, dated June 30, 1994, between the Company and Precept, filed as
Exhibit 10.18 to the Company's Form S-1 and incorporated herein by reference.
10.8 Stockholders Tax Indemnification Agreement, dated June 30, 1994, between the Company and the
Stockholders named therein, filed as Exhibit 10.19 to the Company's Form S-1 and incorporated
herein by reference.
10.9 Form of Directors Indemnification Agreement, filed as Exhibit 10.20 to the Company's Form S-1 and
incorporated herein by reference.
10.10 Credit Agreement dated December 15, 1995 between Affiliated Computer Services, Inc., a Delaware
corporation, certain Lenders, Bank One, Texas, N.A., as Documentation Agent and Co-Agent and
First Interstate Bank of Texas N.A., as Administrative Agent and Co-Agent filed as Exhibit 10.1
to the Company's Third Quarter Report on Form 10-Q for the quarter ended March 31, 1996 and
incorporated herein by reference.
10.11 Restated Credit Agreement dated June 20, 1996 between Affiliated Computer Services, Inc., Borrower,
Wells Fargo Bank (Texas), N.A., Agent, Bank One, Texas, N.A., Co-Agent, and Certain Lenders for
$160,000,000 Revolving Facility filed as Exhibit 10.19 to the Company's Annual Report on Form
10-K for the year ended June 30, 1996 and incorporated herein by reference.
10.12 First Amendment to Restated Credit Agreement dated July 29, 1997 between Affiliated Computer
Services, Inc., Borrower; Wells Fargo Bank (Texas) N.A., Agent; Bank One, Texas, N.A., Co-Agent;
and Certain Lenders of $160,000,000 Revolving Facility filed as Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1997 and incorporated herein by reference.
10.13 Form of Severance Agreement by and between the Company and Certain Executive Officers of the
Company filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended
June 30, 1997 and incorporated herein by reference
10.14 U.S. Department of Education Contract No. PM 94017001 (portions of which are subject to an Order
for Confidential Treatment pursuant to Rule 24b-2) included as an exhibit to the Form 10-Q/A
filed August 24, 1994 by ACS Government Solutions, Inc. (formerly known as Computer Data
Systems, Inc.) and incorporated herein by reference.
* 13.1 Excerpt of the Fiscal 1998 Annual Report to Stockholders, pages 17 through 35.
* 21.1 Subsidiaries of the Company
* 23.1 Consent of PricewaterhouseCoopers LLP
* 23.2 Consent of Ernst & Young LLP
* 27.1 Financial Data Schedule
* 99.1 Report of Independent Auditors
* Filed herewith
</TABLE>
<PAGE> 1
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Affiliated Computer Services, Inc. (the "Company" or "ACS") derives its
revenues from information technology services including technology outsourcing,
business process outsourcing, professional services and electronic commerce. A
substantial portion of the Company's revenues is derived from recurring monthly
charges to its customers under service contracts with initial terms that vary
from one to ten years. For the year ended June 30, 1998, approximately 89% of
the Company's revenues were recurring. Recurring revenues are defined by the
Company as revenues derived from services that are used by the Company's
customers each year in connection with their ongoing businesses, and accordingly
exclude conversion and deconversion fees, software license fees, short-term
contract programming engagements, product installation fees and hardware sales.
From inception through June 30, 1998, the Company has purchased 38 information
processing companies, which has resulted in geographic expansion, growth and
diversification of the Company's customer base, expansion of services offered
and increased economies of scale. Approximately half of the increase in revenues
since June 30, 1993 has been attributable to these acquisitions.
In December 1997, the Company acquired ACS Government Solutions, formerly
known as Computer Data Systems, Inc., through the merger of a wholly-owned
subsidiary of the Company with and into ACS Government Solutions, a provider of
information technology solutions to government and private industry customers in
a transaction accounted for as a pooling of interests (the "Merger"). As a
result, the Company has restated its historical financial statements to reflect
the combined operations of the two companies.
FORWARD-LOOKING STATEMENTS
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 of 1933 and Section 21E of the Securities
Exchange Act of 1934. 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 including statements regarding the
Company's Year 2000 exposure. These forward-looking statements rely on a number
of assumptions concerning future events and are subject to a number of
uncertainties and other factors, many of which are outside of the Company's
control, that could cause actual results to materially differ from such
statements. While the Company believes that the assumptions concerning future
events are reasonable, it cautions that there are inherent difficulties in
predicting certain important factors, especially the timing and magnitude of
technological advances; the performance of recently acquired businesses; the
prospects for future acquisitions; the possibility that a current customer could
be acquired or otherwise be affected by a future event that would diminish its
information technology requirements; the competition in the information
technology industry and the impact of such competition on pricing, revenues and
margins; the degree to which business entities continue to outsource information
technology and business processes; uncertainties surrounding budget reductions
or changes in funding priorities or existing government programs; and the cost
of attracting and retaining highly skilled personnel.
1
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's Consolidated
Statements of Income expressed as a percentage of revenues:
<TABLE>
<CAPTION>
Percentage of Revenues
Year ended June 30,
--------------------------------------------
1998 1997 1996
-------- -------- --------
Revenues 100.0% 100.0% 100.0%
-------- -------- --------
<S> <C> <C> <C>
Operating expenses:
Wages and benefits 42.4 42.6 46.1
Services and supplies 30.6 28.5 28.7
Rent, lease and maintenance 12.6 14.3 12.7
Depreciation and amortization 4.0 3.8 2.9
Merger costs 1.1 -- --
Other operating expenses 1.0 1.1 0.9
-------- -------- --------
Total operating expenses 91.7 90.3 91.3
-------- -------- --------
Operating income 8.3 9.7 8.7
Interest expense 1.0 0.8 0.5
Other non-operating income, net (0.6) (0.1) (0.4)
-------- -------- --------
Pretax profit 7.9 9.0 8.6
Income tax expense 3.3 3.7 3.4
-------- -------- --------
Net income 4.6% 5.3% 5.2%
======== ======== ========
</TABLE>
COMPARISON OF FISCAL 1998 TO FISCAL 1997
Revenues increased $260.2 million, or 28%, to $1,189.1 million for fiscal
year 1998. Revenues from acquisitions contributed $132.2 million, while revenues
from internally generated sales contributed $128.0 million to the overall
increase. Technology outsourcing revenues increased 11% over fiscal 1997 to
$330.7 million which can be attributed primarily to new contracts signed in
fiscal 1998 and the effect of a full year's contribution from contracts signed
in fiscal 1997. Revenues from business process outsourcing increased 17% to
$343.4 million due primarily to an increase in volumes at Business Process
Solutions (formerly known as Unibase) and increased requirements from the
Department of Education contract. Revenues from professional services increased
59% to $390.2 million primarily as a result of the full year effect of the five
acquisitions completed in fiscal 1997 and four acquisitions completed in fiscal
1998. Revenues generated by the electronic commerce services increased 34% to
$124.8 million due primarily to a 27% increase in the number of transactions
processed.
During fiscal 1998, the Company recorded a non-recurring charge of $6.0
million to rent, lease and maintenance expense resulting from a binding
commitment to a hardware lessor to terminate a computer lease obligation prior
to the expiration of its term. Also during fiscal 1998 the Company recorded a
non-recurring charge of $13.0 million ($8.9 million, net of tax) related to
specific and identifiable costs associated with the Merger. Before these
non-recurring charges, total operating expenses increased $233.1 million, or
28%, to $1,071.8 million for fiscal 1998, as a result of the Company's higher
revenues, and as a percentage of revenue decreased from 90.3% in fiscal 1997 to
90.1% in fiscal 1998. This decrease is a result of the synergies realized from
the Merger, as well as the data center consolidations which were completed in
the second quarter of fiscal 1998. Wages and benefits expense, as a percentage
of revenues, decreased slightly from fiscal 1997. The decrease is primarily a
result of growth in the electronic commerce business line which offset the
growth in the Company's more labor intensive professional services business.
Services and supplies increased as a percentage of revenue from 28.5% in fiscal
1997 to 30.6% in fiscal 1998 due to growth in the electronic commerce business
unit and subcontractor expenses in the government service business unit. Rent,
lease and maintenance expense, as a percentage of revenues,
2
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
decreased from 14.3% in fiscal 1997 to 12.6% in fiscal 1998 despite the $6.0
million non-recurring lease termination charge. This decrease is due primarily
to the data center consolidations completed in fiscal 1998 and the growth in our
professional services business which contains a smaller component of rent, lease
and maintenance expense. Depreciation and amortization expense, as a percentage
of revenues, increased from 3.8% in fiscal 1997 to 4.0% in fiscal 1998 due
mainly to acquisition cost amortization.
Before the non-recurring charges mentioned previously, operating income for
fiscal 1998 increased $27.0 million, or 30%, to $117.3 million, and as a
percentage of revenues for fiscal 1998 was 9.9% compared with 9.7% for fiscal
1997. Interest expense increased as a percentage of revenues as a result of the
March 1998 issuance of $230 million of 4% Convertible Subordinated Notes due
March 15, 2005 (the "Notes") (see Note 6 to the Company's Consolidated Financial
Statements). Other non-operating income for fiscal 1998 includes the recognition
of a $6.7 million gain upon the redemption of the Company's investment in a
customer's preferred stock. The Company's effective tax rate increased to
approximately 42% for fiscal 1998 due in part to certain non-deductible merger
costs. Excluding merger costs and the related tax benefit, the effective tax
rate was approximately 41%, exceeding the federal statutory rate of 35% due
primarily to the amortization of certain acquisition-related costs that are
non-deductible for tax purposes, plus the net effect of state income taxes.
COMPARISON OF FISCAL 1997 TO FISCAL 1996
Revenues increased $281.3 million, or 43%, to $928.9 million for fiscal
1997. Revenues from acquisitions contributed $170.2 million, while revenues from
internally generated sales contributed $111.1 million to the overall increase.
Technology outsourcing revenues increased 60% over fiscal 1996 to $297.3
million, primarily as a result of the effect of a full year's contribution of
The Genix Group, Inc. ("Genix") which was acquired in June 1996. In addition, a
portion of the increase was attributable to new contracts signed in fiscal 1997
and the effect of a full year's contribution from contracts signed in fiscal
1996. Revenues from business process outsourcing increased 53% to $293.0
million, as a result of the effect of a full year's contribution of Business
Process Solutions which was acquired in February 1996, the subsequent revenue
growth in that business and increased requirements on the Department of
Education contract. Revenues from professional services increased 22% to $245.7
million primarily due to five acquisitions completed in fiscal 1997. Revenues
generated by electronic commerce services increased 36% to $92.9 million due to
a 22% increase in the number of transactions processed as well as an increase in
the average revenue per transaction.
Total operating expenses increased $247.6 million, or 42%, to $838.7 million
for fiscal 1997 as a result of the Company's higher revenues. The changes from
fiscal 1996 to fiscal 1997 in the various operating expense categories, as a
percentage of revenues, are primarily due to the mix of acquired companies
across the Company's four business lines. Acquisitions in the professional
services and business process outsourcing business lines are relatively more
labor intensive, such that wages and benefits as a percentage of revenues will
generally increase while the other operating expense categories will reflect a
corresponding decrease. Acquisitions in the outsourcing business line will have
a larger proportion of expenses related to computer hardware and software and,
therefore, rent, lease and maintenance as a percentage of revenues will
increase, while the other operating expense categories will reflect a
corresponding decrease. Wages and benefits expense, as a percentage of revenues,
decreased from fiscal 1996 due primarily to acquisitions. Rent, lease and
maintenance expense, as a percentage of revenues, increased due to acquisitions
and increased demand for data processing in the outsourcing services business
line. Depreciation and amortization expense, as a percentage of revenues,
increased due to the acquisition late in fiscal 1996 as well as the seven
acquisitions completed in fiscal 1997. During fiscal 1997, the Company recorded
a charge of $6.0 million ($4.6 million in other operating expenses and $1.4
million in depreciation and amortization) relating to the consolidation of two
of its mainframe data centers and the upgrading of certain computer hardware and
software to newer technology. Also, during fiscal 1997, the Texas Supreme Court,
in a unanimous decision, overturned a lower court's judgment against the Company
for which the Company had previously accrued approximately $6 million. During
the third quarter of fiscal 1997, the Company reversed this accrual to other
operating expenses.
3
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Operating income for fiscal 1997 increased $33.7 million, or 60%, to $90.3
million. Operating income as a percentage of revenues for fiscal 1997 was 9.7%
compared with 8.7% for fiscal 1996. Interest expense increased as a percentage
of revenues as a result of debt incurred to finance acquisitions. The effective
tax rates for fiscal 1997 and fiscal 1996 were 41% and 40%, respectively, and
exceeded the federal statutory rate of 35% due to certain non-deductible
acquisition-related costs and the net effect of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company's liquid assets, consisting of cash and cash
equivalents, totaled $84.0 million compared to $25.6 million at June 30, 1997.
These liquid assets included $8.1 million and $6.7 million borrowed under a
revolving credit facility (the "ATM Cash Facility") for use in the Company's
automated teller machines ("ATMs") at June 30, 1998 and 1997, respectively.
Working capital increased from $110.9 million at June 30, 1997 to $198.1 million
at June 30, 1998 due primarily to the remaining proceeds from the sale of the
Notes after repayment of the outstanding credit facility.
Net cash provided by operating activities of $66.7 million for fiscal 1998
increased from $64.9 million in fiscal 1997 due primarily to increased earnings
and improved collections of accounts receivable. In addition, net cash provided
by operating activities in fiscal 1998 was negatively impacted by approximately
$14.3 million as a result of costs incurred with the Merger and data center
consolidations. Net cash used in investing activities decreased from $154.4
million in fiscal 1997 to $110.6 million in fiscal 1998 due primarily to less
cash expended for acquisitions. Also, in fiscal 1998 the Company received $12.6
million in proceeds from the redemption of a preferred stock investment. Net
cash from financing activities increased by $21.5 million from fiscal 1997 due
primarily to an increase in proceeds from stock option exercises and the related
tax benefit, as well as the remaining proceeds from the sale of the Notes after
repayment of the Company's revolving credit facility.
Net cash provided by operating activities of $64.9 million for fiscal 1997
increased from $18.4 million in fiscal 1996 due primarily to increased earnings,
improved collections of accounts receivable, reduction of inventory and tax
savings generated by the fiscal 1996 acquisitions. Net cash used in investing
activities decreased in fiscal 1997 by $70.2 million due primarily to $84.0
million paid for seven acquisitions, compared to $162.6 million paid for eight
acquisitions in fiscal 1996. Also in fiscal 1997, investing activities included
$31.6 million in payments relating to prior year acquisitions, including a
one-time cash settlement of $23 million to resolve a software license dispute.
In addition, capital expenditures decreased $9.8 million from the prior year
because fiscal 1996 capital expenditures included $20.0 million for the purchase
and renovation of the Company's headquarters. Net cash from financing activities
decreased by $113.6 million from fiscal 1996 as a result of the $170.2 million
in net proceeds received from the Company's secondary stock offerings in fiscal
1996, which offset the $50 million in debt incurred to acquire Analytical
Systems Engineering Corporation in June 1997.
In March 1998 the Company issued $230 million of Notes. The Notes are
convertible into the Company's common stock at a conversion rate of 23.4432
shares of Class A common stock for each $1,000 principal amount of Notes,
subject to adjustments in certain events. Interest on the Notes is payable
semi-annually on March 15 and September 15 of each year commencing on September
15, 1998. The Notes may be redeemed at the option of the Company on or after
March 15, 2002, in whole or in part, at the redemption prices set forth in the
Notes (see Note 6 to the Company's Consolidated Financial Statements).
During the first quarter of fiscal 1998, the Company expanded its unsecured
revolving credit agreement (the "Credit Facility") from $125 million to $200
million and amended the terms to extend through July 2002. The Company used
$173.7 million of the proceeds from the sale of the Notes to repay the Credit
Facility; therefore, there were no outstanding borrowings under the Credit
Facility as of June 30, 1998. After considering outstanding letters of credit,
the Company has approximately $197.7 million available for use under the Credit
Facility at June 30, 1998. The Company has an ATM Cash Facility of $11.0
million, of which $8.1 million was outstanding at June 30, 1998. This facility
expires December 1998. The
4
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Company also has two vault cash custody agreements with financial institutions
which provide up to $52.0 million in cash for use in the Company-owned ATMs. The
amount of cash outstanding under the cash custody agreements at June 30, 1998
was approximately $40.6 million and is not an asset or liability of the Company,
and therefore is not recorded on the accompanying consolidated balance sheet.
Recently enacted federal regulations governing financial institutions' cash
requirements have allowed financial institutions to significantly reduce their
vault cash reserves. Accordingly, this may limit the Company's ability to secure
similar cash custody agreements when its largest cash custody agreement for
$50.0 million expires in February 2001.
Subsequent to June 30, 1998, the Company acquired Betac International
Corporation and Document Acquisition Services for total cash consideration of
approximately $47.0 million which was funded with existing cash (see Note 15 to
the Company's Consolidated Financial Statements).
The Company's management believes that available cash and cash equivalents,
together with cash generated from operations and available borrowings under its
various credit facilities, will provide adequate funds for the Company's
anticipated needs, including working capital expenditures and ATM cash
requirements. Management also believes that cash provided by operations will be
sufficient to satisfy all existing debt obligations as they become due. The
Company intends to continue its growth through acquisitions and from time to
time to engage in discussions with potential acquisition candidates. 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.
YEAR 2000
The Year 2000 issue encompasses the cost to make the Company's internal
systems Year 2000 compliant as well as the cost to make the Company's clients
Year 2000 compliant, in the few instances where obligated. The Company has
assembled a team dedicated solely for the purpose of managing the Year 2000
project. The Year 2000 project of the Company is segregated in five phases:
awareness, assessment, renovation, validation and implementation. With respect
to its internal systems, the Company has begun the renovation phase. With
respect to the Company's obligation to ensure that its customers' applications
are Year 2000 compliant, the Company has not generally undertaken responsibility
for application systems maintenance and therefore, it is the customers'
responsibility to renovate these systems. However, in certain limited cases, ACS
is contractually responsible for renovating certain customer application
software and in these instances, the Company is in the renovation phase. The
Company projects that final implementation of all these changes will be
substantially complete by the end of fiscal year 1999. The Company estimates the
cost of Year 2000 remediation on its internal systems to be approximately $12.0
million.
The failure to successfully complete the Year 2000 conversion process on the
Company's internal systems as well as any client's systems, where obligated, or
for the Company's vendors and clients to successfully complete the Year 2000
conversion process where they are responsible could have a materially adverse
impact on the Company. However, ACS believes this project will be substantially
completed by the end of fiscal year 1999 and will not have a materially adverse
impact on the Company.
NEW ACCOUNTING STANDARDS
In April 1998, Statement of Position ("SOP") 98-5, "Reporting on the Costs
of Start-up Activities", was issued. This SOP provides guidance on the financial
reporting of start-up and organization costs and requires that these costs be
expensed as incurred. The provisions of SOP 98-5 are effective for financial
statements for fiscal years beginning after December 15, 1998, although early
adoption is allowed.
5
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Adoption of SOP 98-5 is not expected to have a material impact on the Company's
financial statements. The Company will adopt the provisions of this SOP on July
1, 1999.
In June 1997, Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", were issued. SFAS No. 130 establishes
standards for reporting comprehensive income and its components with the same
prominence as other financial statements. SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements, although this statement need not be applied to interim financial
statements in the initial year of its application. Both statements are effective
for fiscal years beginning after December 15, 1997 and, therefore, will be
adopted by the Company July 1, 1998.
6
<PAGE> 7
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS
June 30,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 75,888 $ 18,997
ATM cash 8,100 6,650
Accounts receivable, net of allowance for doubtful
accounts of $2,840 and $1,964, respectively 236,523 199,302
Inventory 9,911 9,915
Prepaid expenses and other current assets 24,455 21,343
Deferred taxes 10,210 12,860
---------- ----------
Total current assets 365,087 269,067
Property and equipment, net 142,717 135,160
Software, net of accumulated amortization of
$11,029 and $9,436, respectively 9,947 4,554
Goodwill, net of accumulated amortization of
$25,846 and $15,504, respectively 373,236 312,732
Other intangible assets, net of accumulated amortization of
$14,414 and $7,100, respectively 38,073 24,829
Long-term investments and other assets 20,738 15,135
---------- ----------
Total assets $ 949,798 $ 761,477
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,953 $ 24,167
Accrued compensation and benefits 40,595 36,054
Other accrued liabilities 74,789 72,115
Income taxes payable 5,554 --
Current portion of long-term debt 10,624 17,546
Current portion of unearned revenue 7,454 8,319
---------- ----------
Total current liabilities 166,969 158,201
Convertible notes due 2005 230,000 --
Long-term debt 4,848 130,680
Unearned revenue 707 1,191
Deferred taxes 24,103 14,089
Other long-term liabilities 19,501 29,835
---------- ----------
Total liabilities 446,128 333,996
---------- ----------
Stockholders' equity:
Class A common stock, $.01 par value,
500,000 shares authorized, 44,938 shares and
40,508 shares outstanding, respectively 449 405
Class B common stock, $.01 par value, 14,000 shares authorized,
3,300 shares and 6,406 shares outstanding, respectively 33 64
Additional paid-in capital 298,393 275,922
Retained earnings 204,795 151,090
---------- ----------
Total stockholders' equity 503,670 427,481
---------- ----------
Commitments and contingencies (Notes 2, 6, 12, 13 and 14)
Total liabilities and stockholders' equity $ 949,798 $ 761,477
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
<PAGE> 8
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 1,189,123 $ 928,925 $ 647,608
Operating expenses:
Wages and benefits 504,284 395,780 298,659
Services and supplies 364,285 264,104 185,550
Rent, lease and maintenance 150,253 132,837 82,314
Depreciation and amortization 47,475 35,510 18,450
Merger costs 12,974 -- --
Other operating expenses 11,533 10,428 6,052
----------- ----------- -----------
Total operating expenses 1,090,804 838,659 591,025
----------- ----------- -----------
Operating income 98,319 90,266 56,583
Interest expense 12,059 7,121 3,417
Other non-operating income, net (7,832) (425) (2,751)
----------- ----------- -----------
Pretax profit 94,092 83,570 55,917
Income tax expense 39,670 33,904 22,392
----------- ----------- -----------
Net income $ 54,422 $ 49,666 $ 33,525
=========== =========== ===========
Earnings per common share:
Basic $ 1.14 $ 1.08 $ .88
=========== =========== ===========
Diluted $ 1.11 $ 1.05 $ .85
=========== =========== ===========
Shares used in computing earnings per common share:
Basic 47,599 46,136 38,228
Diluted 50,487 47,452 39,320
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE> 9
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock
-------------------------------------------------------
Class A Class B
------------------------- ------------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 18,647 $ 186 4,804 $ 48 $ 85,800 $ 70,652 $ 156,686
Conversion of shares 1,602 16 (1,602) (16)
Net proceeds of secondary
stock offerings 4,072 41 169,740 169,781
Exercise of stock options
and related tax benefits 480 5 4,650 (572) 4,083
Cash dividends (735) (735)
Other, net (136)
Net income (136) 33,525 33,525
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1996 24,801 248 3,202 32 260,054 102,870 363,204
Stock split 14,538 145 3,204 32 (177)
Exercise of stock options
and related tax benefits 399 3 4,502 (722) 3,783
Stock issued in connection
with acquisitions 770 9 11,748 11,757
Cash dividends (717) (717)
Other, net (205) (7) (212)
Net income 49,666 49,666
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997 40,508 405 6,406 64 275,922 151,090 427,481
Conversion of shares 3,106 31 (3,106) (31)
Exercise of stock options
and related tax benefits 706 7 10,951 (340) 10,618
Stock issued in connection
with acquisitions 618 6 11,917 11,923
Cash dividends (377) (377)
Other, net (397) (397)
Net income 54,422 54,422
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1998 44,938 $ 449 3,300 $ 33 $ 298,393 $ 204,795 $ 503,670
========== ========== =========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 10
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 54,422 $ 49,666 $ 33,525
--------- --------- ---------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 47,475 35,510 18,450
Non-cash portion of merger costs 2,484 -- --
Gain on redemption of preferred stock (6,742) -- --
Other -- 44 38
Changes in assets and liabilities, net of effects from acquisitions:
(Increase) decrease in ATM cash (1,450) 2,450 (850)
Increase in accounts receivable (29,066) (16,150) (28,567)
(Increase) decrease in inventory 4 4,220 (4,886)
Increase in prepaid expenses and other current assets (4,995) (1,875) (3,105)
Change in deferred taxes 13,967 17,160 4,692
Increase in other long-term assets (5,521) (1,376) (1,280)
Increase (decrease) in accounts payable 2,605 (7,827) 3,874
Decrease in accrued compensation and benefits (397) (2,871) (511)
Increase (decrease) in other accrued liabilities (3,563) (1,697) 6,042
Increase (decrease) in income taxes payable 11,281 (3,315) 3,087
Decrease in other long-term liabilities (12,462) (6,345) (4,814)
Decrease in unearned revenue (1,349) (2,696) (7,324)
--------- --------- ---------
Total adjustments 12,271 15,232 (15,154)
--------- --------- ---------
Net cash provided by operating activities 66,693 64,898 18,371
--------- --------- ---------
Cash flows from investing activities:
Purchases of property, equipment and software, net (43,800) (42,978) (52,816)
Payments for acquisitions, net of cash acquired (69,928) (115,607) (162,630)
Proceeds from redemption of preferred stock 12,596 -- --
Additions to other intangible assets (9,121) (2,921) (6,629)
Proceeds from note receivable -- 4,611 --
Proceeds from sale of banking units -- 2,704 --
Other, net (303) (194) (2,523)
--------- --------- ---------
Net cash used in investing activities (110,556) (154,385) (224,598)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of debt issuance costs 329,926 109,211 197,800
Repayments of long-term debt (240,461) (29,732) (178,973)
Proceeds from issuance of common stock, net of issuance costs -- -- 170,228
Proceeds from the exercise of stock options and related tax benefits 10,611 4,008 4,198
Net borrowings (repayments) of ATM debt 1,450 (2,450) 850
Dividends paid (377) (717) (633)
Other, net (395) (1,103) (689)
--------- --------- ---------
Net cash provided by financing activities 100,754 79,217 192,781
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 56,891 (10,270) (13,446)
Cash and cash equivalents at beginning of year 18,997 29,267 42,713
--------- --------- ---------
Cash and cash equivalents at end of year $ 75,888 $ 18,997 $ 29,267
========= ========= =========
</TABLE>
See supplemental cash flow information in Notes 2, 4, 6, 7 and 12.
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 11
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business and basis of presentation
Affiliated Computer Services, Inc. (the "Company" or "ACS"), which was
incorporated on June 8, 1988, is engaged in a full range of business services
including business process outsourcing, electronic commerce, technology
outsourcing, professional services and systems integration primarily in North
America, as well as Central America, South America, Europe and the Middle East.
In December 1997, the Company acquired ACS Government Solutions, formerly
known as Computer Data Systems, Inc. ("CDSI") through the merger of a
wholly-owned subsidiary of the Company with and into ACS Government Solutions, a
provider of information technology solutions primarily to government customers
(the "Merger"). The transaction was accounted for as a pooling of interests;
therefore, all periods presented have been restated to include the combined
operations of both companies. Certain reclassifications were made to the ACS
Government Solutions financial statements to conform to ACS presentations.
The consolidated financial statements are comprised of the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company's fiscal year
ends on June 30. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from these
estimates.
Cash, cash equivalents and ATM cash
Cash and cash equivalents consist primarily of short-term investments in
commercial paper, Eurodollars, securities purchased under agreements to resell
and short-term U.S. treasury bills. Such investments have an initial maturity of
three months or less. ATM cash represents cash borrowed under a revolving credit
agreement and restricted for use in Company-owned automated teller machines
("ATMs").
Inventory
Inventories consist primarily of micrographics supplies and equipment,
network computer hardware and ATM and computer maintenance parts, which are
generally recorded at the lower of cost or market (net realizable value) using
the first-in, first-out method.
Property and equipment
Property and equipment are recorded at cost. The cost of property and
equipment held under capital leases, primarily computer equipment, is equal to
the lower of the net present value of the minimum lease payments or the fair
value of the leased property at the inception of the lease. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, which for equipment range primarily from three to ten years and for
buildings and improvements up to forty years.
Software
Purchased computer software and internally developed computer software
purchased through acquisitions are amortized using the straight-line method over
expected useful lives which range from two to five years. With respect to costs
incurred to develop computer software to be sold as a separate product, the
Company's policy is to capitalize such costs only after technological
feasibility has been established.
In March 1998, Statement of Position ("SOP") 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use", was issued. This SOP
requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software. The provisions of SOP 98-1 are effective for financial
statements issued for fiscal years beginning after December 15, 1998, although
early adoption is allowed. The Company early adopted the provisions of this SOP
in fiscal 1998.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is amortized using the straight-line method over the
expected useful lives which range from ten to forty years. It is the Company's
policy to periodically review the net realizable value of its intangible assets,
including goodwill, through an assessment of the estimated future cash flows
related to such assets. Each business unit to which these intangible assets
relate is reviewed to determine whether future cash flows over the remaining
estimated useful lives of the assets provide for recovery of the assets. In the
event that assets are found to be carried at amounts which are in
5
<PAGE> 12
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
excess of estimated undiscounted future cash flows, then the intangible assets
are adjusted for impairment to a level commensurate with a discounted cash flow
analysis of the underlying assets.
Other intangible assets
Other intangible assets consist primarily of customer contracts, which are
recorded at cost and amortized using the straight-line method over the contract
terms, which range from two to ten years.
Long-term investments and other assets
Long-term investments consist primarily of equity investments and are
accounted for using either the cost or the equity method, as appropriate.
Deferred annuity contracts included in long-term investments are carried at cost
plus accrued interest, which approximates fair market value. It is the Company's
policy to periodically review the net realizable value of its long-term
investments through an assessment of the recoverability of the carrying amount
of each investment. Each investment is reviewed to determine if events or
changes in circumstances of the issuer have occurred which indicate that the
recoverability of the carrying amount may be uncertain. In the event that an
investment is found to be carried at an amount in excess of its recoverable
amount, the asset is adjusted for impairment to a level commensurate with the
recoverable amount of the underlying asset.
Other assets consist primarily of deferred debt costs and a long-term
software maintenance agreement. The deferred debt costs are being amortized over
the life of the related debt. The software maintenance agreement is being
amortized over the five year term of the related contract.
Revenue recognition
Information processing revenue is recorded as services are performed.
Revenue from annual maintenance contracts is deferred and recognized ratably
over the maintenance period. Revenues earned in excess of related billings are
accrued, whereas billings in excess of revenues earned are deferred until the
related services are provided.
Revenue on time and material contracts are recorded at the contractual rates
as the labor hours and direct expenses are incurred. Revenues on cost-type
contracts are recorded as reimbursable costs are incurred. Revenues on
fixed-price contracts are recorded on the percentage of completion basis,
determined by the ratio of total incurred costs to anticipated total costs of
the project. Revenues on unit-price contracts are recorded at the contractual
selling prices of work completed and accepted by the customer. Contract award
fees are recorded based on estimated current performance levels and historical
experience. Revenues on equipment and software sales are recorded when the units
are delivered. Immediate recognition is made of any anticipated losses.
Revenues earned from the five largest customers of ACS each year together
comprised 25%, 26% and 30% of ACS revenues for the years ended June 30, 1998,
1997 and 1996, respectively. Trade accounts receivable from these customers
aggregated $67,246,000 at June 30, 1998 and $54,577,000 at June 30, 1997.
Income taxes
Deferred income taxes provided in the accompanying financial statements are
determined based on the difference between financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the years in which
such differences are expected to reverse.
Earnings per common share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
The Statement specifies new standards for the computation and presentation of
earnings per share and has been adopted by the Company for the accompanying
financial statements. SFAS 128 replaces the previously reported primary and
fully diluted earnings per share with "basic" and "diluted" earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Earnings per share amounts for all periods presented have
been restated to conform to the requirements of SFAS 128. See Note 10 for the
computation of earnings per share.
During fiscal 1997, the Company issued additional Class A and Class B common
stock in connection with a two-for-one stock split in the form of a 100% stock
dividend. As a result, all references to the number of shares and per share
amounts in the accompanying financial statements for fiscal 1996 have been
restated to reflect the stock split (see Note 8).
6
<PAGE> 13
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-based compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which establishes accounting and reporting standards
for stock-based employee compensation plans. As permitted by the standard, the
Company has elected not to adopt the fair value based method of accounting for
stock-based employee compensation and will continue to account for such
arrangements under Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB 25") and apply SFAS 123 on a disclosure basis
only. Accordingly, adoption of the standard has not affected the Company's
results of operations or financial position (see Note 9).
2. BUSINESS COMBINATIONS
In December 1997, ACS completed the Merger by exchanging 11.1 million shares
of its common stock, excluding unexercised options, for all of the common stock
of ACS Government Solutions. Stockholders of ACS Government Solutions received
1.759 shares of ACS Class A common stock for each share of its common stock in
the Merger, which has been accounted for as a pooling of interests. All data
presented in the accompanying consolidated financial statements has been
restated to reflect the merger.
From inception through June 30, 1998, the Company has acquired 38 businesses
in the information technology services industry under the purchase accounting
method. The Company's recent acquisition activity is summarized as follows:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Acquisitions completed:
Technology outsourcing -- -- 1
Business process outsourcing -- 2 4
Professional services 4 5 3
-------- -------- --------
Total 4 7 8
======== ======== ========
Purchase consideration (in thousands):
Cash paid $ 64,918 $ 82,607 $153,849
Amounts due sellers of acquired businesses -- 2,002 6,700
Stock issued 1,180 11,270 --
Liabilities assumed 10,140 24,008 95,144
Other 745 560 1,800
-------- -------- --------
Fair value of assets acquired
(including intangibles) $ 76,983 $120,447 $257,493
======== ======== ========
</TABLE>
In December 1997, the Company acquired 100% of the stock of CARA Corporation
("CARA"), a professional services business. The Company made three other
acquisitions during fiscal 1998 which have also been included in the Company's
consolidated financial statements from the effective date of the acquisition.
Fiscal 1998 revenues and earnings of the acquirees prior to the effective dates
of the four acquisitions are not material to the financial results of ACS. As a
result, proforma disclosures related to the pre-acquisition operations are not
presented. The Company financed a portion of the aggregate purchase price for
these acquisitions through the issuance of 57,000 shares of unregistered Class A
common stock. All of the acquisitions made by the Company, excluding ACS
Government Solutions, have been accounted for using the purchase accounting
method.
In addition to these acquisitions, the Company also purchased the remaining
30% ownership in two existing subsidiaries, Technical Directions, Inc. and
Business Process Solutions, Inc (formerly known as Unibase Technologies, Inc).
The Company financed a portion of the aggregate purchase price for these
acquisitions through the issuance of 561,000 shares of unregistered Class A
common stock.
7
<PAGE> 14
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 1997, ACS Government Solutions acquired 100% of the stock of
Analytical Systems Engineering Corporation ("ASEC"), which provides systems
engineering and engineering services primarily to the Department of Defense and
certain intelligence agencies, both domestically and abroad. The purchase
consideration included approximately 185,000 shares of its common stock (326,000
shares of ACS Class A common stock adjusted for the Merger).
In November 1996, ACS Government Solutions combined its student loan
guaranty agency services business with that of InTuition, Inc. and formed a new
commercial company called GuaranTec, LLP, of which it is a 51% owner and
InTuition is a 49% owner. In connection with the formation of this company, ACS
Government Solutions contributed cash, 20,000 shares of its common stock (35,000
shares of ACS Class A common stock adjusted for the Merger) and assets to
InTuition and GuaranTec. ACS Government Solutions and InTuition also contributed
their interests in their licensing agreements and guaranty agency servicing
contracts and certain related assets and liabilities to GuaranTec.
The Company made six other acquisitions during fiscal 1997 which have also
been included in the Company's consolidated financial statements from the
effective date of the acquisition. The Company financed a portion of the
aggregate purchase price for these acquisitions through the issuance of
approximately 409,000 shares of unregistered Class A common stock.
The Company is obligated to make certain contingent payments to former
owners based on the achievement of specified profit levels in conjunction with
certain of its acquisitions. During fiscal 1998, the Company paid $846,000 in
contingent consideration related to acquisitions made in prior years. As of June
30, 1998, the maximum aggregate amount of the outstanding contingent obligations
is approximately $7,180,000, none of which has been earned to date. Any such
payments would result in a corresponding increase in goodwill.
3. ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
Amounts billed:
Commercial companies and state and local governments $ 82,305 $ 79,525
U.S. government 56,764 47,278
--------- ---------
139,069 126,803
--------- ---------
Amounts unbilled:
Amounts currently billable 98,927 69,903
Excess of actual indirect costs over amounts currently
billable under cost reimbursable contracts 989 1,663
Contract retainages not currently billable 378 364
Fixed price work not currently billable -- 2,533
--------- ---------
100,294 74,463
--------- ---------
Total accounts receivable 239,363 201,266
Allowance for doubtful accounts (2,840) (1,964)
--------- ---------
$ 236,523 $ 199,302
========= =========
</TABLE>
To the extent not currently billable at June 30, 1998 and 1997, unbilled
costs and accrued profits above are billable upon delivery or acceptance of
services, upon receipt of contract funding, or upon contract completion. Of the
above unbilled costs and accrued profits at June 30, 1998, approximately
$1,367,000 are not expected to be billed and collected within one year.
8
<PAGE> 15
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
Land $ 20,186 $ 20,456
Buildings and improvements 50,729 43,926
Computer equipment and software 112,498 93,750
Furniture and fixtures 45,107 38,119
Construction in progress 4,293 5,211
--------- ---------
232,813 201,462
Accumulated depreciation and amortization (90,096) (66,302)
--------- ---------
$ 142,717 $ 135,160
========= =========
</TABLE>
In connection with an outsourcing contract signed in December 1996, the
Company acquired assets with a fair market value of $1,433,000, including
property and equipment of $1,045,000, and assumed liabilities of the same
amount.
The Company acquired three host data centers in June 1996. Pursuant to a
consolidation plan, the Company closed one of these facilities, located in
Dearborn, Michigan in fiscal year 1998. This facility is held for sale and has a
net book value of $7,450,000, which approximates fair value.
5. LONG-TERM INVESTMENTS
Long-term investments consist primarily of investments in preferred stock
accounted for at cost, as these securities are not considered marketable equity
securities, and deferred annuity contracts carried at cost plus accrued interest
which approximates fair market value. The preferred stock investments accrue
cumulative dividends of approximately 5%. Dividend income recognized from such
securities, which is reflected in the consolidated financial statements as a
component of other non-operating income, was approximately $415,000, $1,285,000
and $1,513,000 during fiscal 1998, 1997 and 1996, respectively.
In September 1997, a customer of the Company redeemed their preferred stock,
including accumulated dividends, for $12,694,000 in cash. The redemption
resulted in a $6,742,000 gain which is reported as other non-operating income,
net in the accompanying consolidated statement of income for the year ended June
30, 1998.
9
<PAGE> 16
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NOTES PAYABLE AND LONG-TERM DEBT
A summary of notes payable and long-term debt follows (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------
1998 1997
--------- ---------
<C> <C> <C>
4% convertible subordinated notes due March 2005 (A) $ 230,000 $ --
Unsecured $125,000 revolving credit agreement, payable to banks,
due in June 1999 (B) -- 82,700
Unsecured $50,000 term loan, payable to a bank, due in quarterly
installments through June 2002 (C) -- 48,000
Secured $11,000 ATM cash credit agreement ("ATM Cash Facility")
payable to a bank, due in December 1998 (D) 8,100 6,650
10% junior subordinated debentures, payable to former shareholders
of a subsidiary, due January 2000 184 507
Other notes payable to individuals and corporations, interest rates
ranging from 6% to 10%, due through 2002 3,979 5,978
Capitalized lease obligations at various interest rates, payable
through 2001 3,209 4,391
--------- ---------
245,472 148,226
Less current portion (10,624) (17,546)
--------- ---------
$ 234,848 $ 130,680
========= =========
</TABLE>
Maturities of notes payable and long-term debt at June 30, 1998 follows (in
thousands):
<TABLE>
Year ending June 30:
<S> <C>
1999 $ 10,624
2000 2,259
2001 1,782
2002 714
2003 93
Thereafter 230,000
----------
$ 245,472
==========
</TABLE>
(A) On March 20, 1998 the Company sold $230 million of 4% Convertible
Subordinated Notes due March 15, 2005 (the "Notes"). The Notes are
convertible into the Company's Class A common stock at a conversion rate
of 23.4432 shares of Class A common stock for each $1,000 principal
amount of Notes (equivalent to a conversion price of $42.66 per share of
Class A common stock), subject to adjustments in certain events. Interest
on the Notes is payable semi-annually on March 15 and September 15 of
each year commencing on September 15, 1998. The Notes may be redeemed at
the option of the Company on or after March 15, 2002, in whole or in
part, at the redemption prices set forth in the Notes.
(B) The Company amended its revolving credit agreement ("Credit Facility") in
July 1997 to increase available commitments from $125 million to $200
million, extend the due date from June 1999 to July 2002 and lower the
interest rate. Interest on the Credit Facility is payable monthly at
LIBOR (5.66% at June 30, 1998) plus 0.3% to 0.875%, or the bank's base
rate, as elected by the Company. In March 1998, the Company used
$173,700,000 of the proceeds from the sale of the Notes to repay the
Credit Facility; therefore, there were no outstanding borrowings under
the Credit Facility as of June 30, 1998.
The Credit Facility contains covenants which require that the Company
comply with certain negative, affirmative, and financial covenants
customary in notes of this nature, including but not limited to the
10
<PAGE> 17
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
maintenance of fixed charge ratios, limitations on acquisitions and
minimum net worth requirements. The agreement also has provisions which
would permit acceleration of the maturity of the borrowings after the
occurrence of certain defined events of default. At June 30, 1998, the
Company had outstanding letters of credit of approximately $2,279,000.
(C) In June 1997, ACS Government Solutions borrowed $50 million under a term
loan to finance the ASEC acquisition (see Note 2). Upon consummation of
the Merger with ACS in December 1997, the ACS Government Solutions term
loan was repaid and the revolving line of credit was canceled. The
Company utilized borrowing availability under the Credit Facility to fund
the paydown of the debt.
(D) Interest on the ATM cash facility is due quarterly at prime less 2.35%
(6.15% at June 30, 1998), collateralized by cash restricted for use in
Company-owned ATMs. On December 10, 1997, the term of the ATM Cash
Facility was extended to December 1998.
Cash payments for interest for the years ended June 30, 1998, 1997 and 1996
were $9,813,000, $7,045,000, and $3,617,000, respectively. Interest income was
$2,404,000, $1,459,000 and $2,349,000 for the years ended June 30, 1998, 1997
and 1996, respectively.
The Company's cash custody agreements with two financial institutions
provide the Company with up to $52,000,000 of the financial institutions' vault
cash for use in Company-owned ATMs. At June 30, 1998, approximately $40,590,000
was in use under the agreements. The cash is owned by the financial institutions
and is consequently not recorded on the Company's accompanying balance sheets.
The cash custody agreement in the amount of $50,000,000 expires in February 2001
and the cash custody agreement in the amount of $2,000,000 expires in January
1999.
11
<PAGE> 18
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES
Income tax expense is comprised of the following (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
U.S. Federal $15,598 $13,160 $11,925
Foreign 248 39 --
State 2,296 2,749 2,133
Tax reduction credited to paid-in capital
from exercise of stock options 5,647 2,893 3,101
------- ------- -------
Total current expense 23,789 18,841 17,159
------- ------- -------
Deferred:
U.S. Federal 14,001 13,299 4,441
Foreign -- -- --
State 1,880 1,764 792
------- ------- -------
Total deferred expense 15,881 15,063 5,233
------- ------- -------
Total expense for income taxes $39,670 $33,904 $22,392
======= ======= =======
</TABLE>
At June 30, 1998, the Company had available unused domestic net operating
loss carryforwards ("NOLs"), net of Internal Revenue Code Section 382
limitations, of approximately $7,229,000, which expire in years 2002 through
2017. In addition, the Company had foreign NOLs of $2,765,000, which will expire
in years 2000 through 2003. The Company had an unused capital loss carryforward,
net of Section 382 limitations, of approximately $842,000, which expired as of
June 30, 1998. The capital loss carryforward was fully reserved due to Section
382 and capital loss restrictions.
The Company's deferred tax assets (liabilities) consist of the following (in
thousands):
<TABLE>
<CAPTION>
June 30,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued expenses not yet deductible for tax purposes $ 9,732 $ 10,235
Loss carryforwards 3,974 6,008
Deferred compensation 915 1,836
Stock option compensation expense 558 767
Investment basis differences -- 532
Other 13 453
-------- --------
Total deferred tax assets 15,192 19,831
-------- --------
Deferred tax liabilities:
Depreciation and amortization (27,346) (18,773)
Interest in partnership (1,049) (909)
Annuity interest (458) (432)
Other -- (433)
-------- --------
Total deferred tax liabilities (28,853) (20,547)
Deferred tax assets valuation allowance (232) (513)
-------- --------
Net deferred tax liabilities $(13,893) $ (1,229)
======== ========
</TABLE>
The significant increase in the deferred tax liability for depreciation and
amortization is due to the Genix acquisition in June 1996. For tax purposes,
both parties elected to treat the sale as if it were a sale of assets under
Internal Revenue Code Section 338(h)(10). As a result, ACS is able to amortize
the intangible assets over substantially shorter lives for tax than for book
purposes.
12
<PAGE> 19
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The valuation allowance at June 30, 1998 exists principally due to tax
benefits of acquired corporations for which realization of any future benefit is
uncertain due to Section 382 limitations. The valuation allowance for deferred
tax assets decreased by $281,000 and $150,000 during the years ended June 30,
1998 and 1997, respectively. The decrease was due to the utilization of
previously reserved NOLs, expiration of the capital loss carryforward which was
fully reserved and changes in facts and circumstances with respect to the
realization of future tax benefits of certain investments which caused such
realizations to be more likely than not.
Income tax expense varies from the amount computed by applying the statutory
federal income tax rate to income before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Income tax expense at the U.S. Federal statutory rate $32,932 $29,250 $19,572
Increase resulting from:
Excess of book basis over tax basis of
companies 1,887 864 711
State income taxes (net of federal benefit) 3,110 3,130 1,953
Merger costs 912 -- --
Other 829 660 156
------- ------- -------
Total expense for income taxes $39,670 $33,904 $22,392
======= ======= =======
</TABLE>
Current year undistributed earnings of non-U.S. subsidiaries for which U.S.
taxes have not been provided are included in consolidated retained earnings in
the amount of $544,000 at June 30, 1998. If such earnings were distributed, U.S.
income taxes would be partially reduced by available credits for taxes paid to
the jurisdictions in which the income was earned.
Federal and state income tax payments during the years ended June 30, 1998,
1997, and 1996 were approximately $12,426,000, $18,534,000, and $10,595,000,
respectively.
8. COMMON STOCK
The Company's Class B common stock is entitled to ten votes per share. Class
B shares are convertible, at the holder's option, into Class A shares, but until
converted carry significant transfer restrictions.
In January 1989, the Company issued warrants to purchase 793,188 additional
shares of Class A common stock to a data processing customer. The warrants are
exercisable at an aggregate price of $4,700,000 plus $230,000 for each year that
elapses after December 31, 1988, plus interest at 10% per annum. At June 30,
1998, the exercise price was $15.34 per share. Shares may be purchased in
increments through January 1999, the date on which the warrant agreement
expires. However, there have been no shares purchased to date.
In November 1996, the Company issued additional Class A and Class B common
stock in connection with a two-for-one stock split in the form of a 100% stock
dividend. The stated par value of each share was not changed from $.01. All
references in the accompanying financial statements to the number of shares and
per share amounts for fiscal 1996 have been restated to reflect the stock split.
On March 20, 1998 the Company completed the sale of a new issue of $230
million aggregate principal amount of Notes due March 15, 2005 (See Note 6). The
Notes are convertible into the Company's Class A common stock at a conversion
rate of 23.4432 shares of Class A common stock for each $1,000 principal amount
of Notes (equivalent to a conversion price of $42.66 per share of Class A common
stock), subject to adjustments in certain events, none of which have occurred as
of June 30, 1998.
13
<PAGE> 20
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EMPLOYEE BENEFIT PLANS
Under the Company's 1997 employee stock option plan, the Company has
reserved 3,675,000 shares of Class A common stock for issuance to key employees
at exercise prices determined by the Board of Directors. The company's 1988
employee stock option plan, which originally reserved 6,000,000 shares of Class
A common stock for issuance, was discontinued for new grants during fiscal 1998
and terminated (except for the exercise of then existing option grants in
September 1997) and subsequently, 1,593,231 unissued shares expired. Generally,
the options under each plan vest in varying increments over a five year period,
expire ten years from the date of grant and are issued at exercise prices no
less than 100% of the fair market value of the Company's Class A common stock at
the time of the grant. As reported in Note 1, the Company has elected to adopt
the disclosure-only provisions of SFAS 123 and will continue to account for
stock-based employee compensation plans in accordance with APB 25. As a result,
no compensation cost has been recognized in fiscal 1998 for its stock option or
employee stock purchase plans.
The Long-term Incentive Plan approved in 1991 (the "1991 Plan") provides for
the granting of options to various employees, officers and directors of ACS
Government Solutions. This plan was discontinued for new grants effective with
the Merger. All options issued under the 1991 Plan were fully vested as of the
Merger date. Exercise prices of options awarded in all years were equal to the
market price of the stock on the date of the grant; therefore, no compensation
costs have been recognized for awards under this plan.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if the Company had accounted for
its stock-based compensation plans under the fair value method. The fair value
of each option grant was estimated at the date of grant using a separate
Black-Scholes option pricing model for each plan. The following weighted average
assumptions were used for grants in fiscal 1998, 1997 and 1996: dividend yield
of 0% in all years for the 1997 and 1988 plans and .40% for the 1991 plan
applicable to fiscal 1997 and 1996; volatility of 30.95% for fiscal 1998 for all
plans and 37.6% for the 1988 plan in fiscal 1997 and fiscal 1996 and 50% for the
1991 plan in fiscal 1997 and fiscal 1996; risk-free interest rates of 5.64%,
6.42% and 6.07% for 1998, 1997 and 1996, respectively, in the 1997 and 1988
plans and 6.14% for fiscal 1997 and fiscal 1996 years in the 1991 plan; and
weighted average expected option life of 5.5 years for the 1997 and 1988 plans
and three years for the 1991 plan for all years presented. The average fair
values of the options granted during fiscal 1998, 1997 and 1996 are estimated at
$9.48, $9.47 and $7.93, respectively for the combined plans.
Had compensation cost for the Company's stock-based compensation plans been
determined in accordance with SFAS 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income
As reported $ 54,422 $ 49,666 $ 33,525
Pro forma 50,718 47,803 32,343
Basic earnings per common share
As reported $ 1.14 $ 1.08 $ .88
Pro forma 1.07 1.04 .85
Diluted earnings per common and common equivalent share
As reported $ 1.11 $ 1.05 $ .85
Pro forma 1.05 1.01 .82
</TABLE>
Since stock-based compensation issued prior to fiscal 1996 is not included
in the pro forma calculation, the effects of applying SFAS 123 in this pro forma
disclosure will not be comparable with those in subsequent years.
14
<PAGE> 21
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The pro forma impact on earnings can be expected to increase as a greater
percentage of outstanding stock options represent awards made after fiscal 1995.
Option activity for the years ended June 30, 1996, 1997 and 1998 is
summarized as follows:
<TABLE>
<CAPTION>
Option Price
Options per Share
------- ------------------
<S> <C> <C>
Outstanding at June 30, 1995 2,708,379 $ .01 -- $11.25
Granted 1,559,228 5.97 -- 23.13
Exercised (767,006) .01 -- 8.03
Canceled (77,242) 2.38 -- 14.75
---------
Outstanding at June 30, 1996 3,423,359 .01 -- 23.13
Granted 935,014 12.51 -- 26.87
Exercised (522,560) .01 -- 12.36
Canceled (323,204) 4.97 -- 20.62
---------
Outstanding at June 30, 1997 3,512,609 .07 -- 26.87
Granted 1,933,117 17.77 -- 32.63
Exercised (796,370) .07 -- 17.77
Canceled (249,172) 6.40 -- 31.88
---------
Outstanding at June 30, 1998 4,400,184 .07 -- 32.63
=========
Exercisable at June 30, 1998 749,819 .07 -- 20.18
=========
</TABLE>
Further information regarding the Company's outstanding and exercisable
stock options by exercise price range as of June 30, 1998 is disclosed below:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ------------------ ----------- ---------- --------- ----------- ------
<C> <C> <C> <C> <C> <C>
$ .07 - $ .72 235,430 1.84 $ .62 235,430 $ .62
4.97 - 11.25 756,934 6.18 9.69 63,593 6.67
12.15 - 21.50 1,625,320 6.86 17.76 450,796 16.73
23.13 - 32.63 1,782,500 9.26 26.54 -- --
- ------------------ ----------- ---------- --------- ----------- -------
$ .07 - $ 32.63 4,400,184 7.45 $ 19.01 749,819 $ 10.82
================== =========== ========== ========= =========== =======
</TABLE>
Under the Company's 1995 Employee Stock Purchase Plan, a maximum of
1,000,000 shares of Class A common stock can be issued to substantially all
full-time employees. Through payroll deductions, eligible participants may
purchase Company stock at a 15% discount to market value. The stock is purchased
by the plan in the open market, and Company contributions for the years ended
June 30, 1998, 1997 and 1996, which were charged to additional paid-in capital,
were $395,000, $205,000 and $135,000, respectively.
The Company has contributory retirement and savings plans which cover all
employees and meet the requirements of Section 401(k) of the Internal Revenue
Code. The plans also allow for discretionary matching contributions by the
Company as determined by the Company's Board of Directors. Contributions made by
the Company to certain plans during the years ended June 30, 1998, 1997 and 1996
were $2,524,000, $2,286,000 and $2,079,000, respectively.
15
<PAGE> 22
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EARNINGS PER SHARE
Earnings per share amounts for all periods presented have been restated to
conform to the requirements of SFAS 128. The following table sets forth the
computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Numerator:
Numerator for earnings per share (basic) -
income available to common stockholders $54,422 $49,666 $33,525
Effect of dilutive securities:
Interest on 4% convertible debt 1,714 -- --
------- ------- -------
Numerator for earnings per share assuming dilution -
income available to common stockholders $56,136 $49,666 33,525
------- ------- -------
Denominator:
Weighted average shares outstanding (basic) 47,599 46,136 38,228
Effect of dilutive securities:
4% convertible debt 1,528 -- --
Stock options 1,062 1,028 938
Warrants and other 298 288 154
------- ------- -------
Total potential common shares 2,888 1,316 1,092
------- ------- -------
Denominator for earnings per share assuming dilution 50,487 47,452 39,320
------- ------- -------
Earnings per common share (basic) $ 1.14 $ 1.08 $ .88
======= ======= =======
Earnings per common share assuming dilution $ 1.11 $ 1.05 $ .85
======= ======= =======
</TABLE>
11. FINANCIAL INSTRUMENTS
As of June 30, 1998 and 1997, the fair values of the Company's revolving
credit balances and other variable-rate debt instruments approximated the
related carrying values. The fair values of the Company's fixed-rate debt
instruments also approximated the related carrying values, as determined based
upon relative changes in the Company's variable borrowing rates, whether the
borrowings occurred recently or if the borrowings were repaid after the fiscal
year ended. The Company estimated the fair value of the 4% convertible debt as
of June 30, 1998 at approximately $251,850,000 based on the trading price on
that day.
12. RELATED PARTY TRANSACTIONS
In July 1994, the Company completed the spin-off of Precept Business
Products, Inc. ("Precept") to the Company's stockholders on a pro-rata basis.
The businesses distributed consisted of various business support services
unrelated to information processing and were accounted for as discontinued
operations. Precept continues to sell business forms and supplies and provide
courier and other services to the Company. Trade accounts between the Company
and Precept were immaterial for all years presented.
Effective April 1996, the Company sold ACS Merchant Services, Inc.
("Merchant Services"), a start-up operation of the electronic commerce business
line, to a former officer and director of the Company for consideration in the
form of a note receivable of $500,000. There was no gain or loss recognized on
the sale. Simultaneous with the sale, the Company contributed an additional
$1,500,000 and the unpaid balance of an intercompany note due from Merchant
Services of approximately $712,000 in exchange for 1,000 shares of Merchant
Services 5% cumulative convertible preferred stock, which is convertible after 5
years into approximately
16
<PAGE> 23
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
55% of Merchant Services common stock on a fully diluted basis. The Company
provides guarantees to two banks on Merchant Services debt up to $7,500,000.
In December 1997, the Company purchased $100,000 of the preferred stock in
DDH Aviation ("DDH"), a start-up corporate airplane brokerage firm, which
represents less than 5% ownership. The Company also acts as a guarantor for up
to $7,000,000 of DDH's $15,000,000 line of credit in exchange for warrants
convertible into 1,500 shares of DDH Class A common stock.
13. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease agreements for information
technology equipment and facilities. A summary of the lease commitments under
noncancelable operating leases at June 30, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Year ending June 30,
<S> <C>
1999 $ 62,520
2000 42,936
2001 24,632
2002 10,263
2003 5,400
Thereafter 36,078
----------
$ 181,829
==========
</TABLE>
Lease expense for information technology equipment and facilities was
$78,712,000, $61,176,000 and $46,481,000 for the years ended June 30, 1998, 1997
and 1996, respectively.
In connection with an outsourcing agreement signed in May 1997, the Company
assumed operating leases totaling $3,541,000 for equipment and computer
software.
During fiscal 1997 the Texas Supreme Court, in a unanimous decision,
overturned a lower court's judgment against the Company for which the Company
had previously accrued approximately $6 million. During the third quarter of
fiscal 1997, the Company reversed this accrual to other operating expenses.
Twenty-one former employees of Gibraltar Savings Association and/or First
Texas Savings Association (collectively, "GSA/FTSA") have brought suit in Texas
state court alleging entitlement to 401,532 shares of the Company's Class A
common stock pursuant to options issued to GSA/FTSA employees in 1988 in
connection with a former data processing services agreement between GSA/FTSA and
the Company. The per share exercise price for each of these options, as adjusted
for the Company's 1994 reclassification and its 1996 two-for-one stock split, is
alleged to be $.38. The Company believes that it has meritorious defenses to all
or substantial portions of these matters and plans to vigorously defend against
them. However, should the proceedings not be favorably resolved, the Company may
be subject to a material charge. The case is currently set for trial in late
September 1998.
Government contracts are subject to review and audit by various governmental
authorities in the normal course of the Company's business. Cost audits have
been completed through fiscal 1996, with the exception of ASEC operations, which
have been audited through calendar year 1995. In management's opinion, any such
reviews and the results of cost audits for subsequent fiscal years will not have
a material effect on the Company's financial position or results of operations.
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.
17
<PAGE> 24
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. MERGER EXPENSES AND OTHER CHARGES
During the first quarter of fiscal 1998, the Company recorded a
non-recurring charge of $6,040,000 to rent, lease and maintenance expense
resulting from a binding commitment to a hardware lessor to terminate a computer
lease obligation prior to the expiration of its term in December 1999. The
payment to the lessor was made during the fourth quarter of fiscal 1998. This
computer was replaced with newer technology which will provide better service to
the Company's clients.
During the second quarter of fiscal 1998, the Company recorded a
non-recurring charge of $12,974,000 ($8,880,000 net of taxes) related to
specific and identifiable costs associated with the Merger. These costs included
direct transaction expenses such as investment banking, legal, accounting,
financial printing and related fees as well as integration expenses such as
severance and costs associated with operating redundant facilities and
equipment.
During the third quarter of fiscal 1997, the Company recorded a charge of
$6,019,000 ($4,577,000 in other operating expenses and $1,442,000 in
depreciation and amortization) relating to the consolidation of two of its
mainframe data centers and the upgrading of certain computer hardware and
software to newer technology. The charge included the write-down of related
assets and the recognition of obligations for which the Company would derive no
future benefit.
In fiscal 1996, the Company recorded a charge of $3,800,000 relating to
planned divestitures of certain community bank processing groups within Texas
and Louisiana. These groups were part of the Company's financial services
outsourcing business and had historical annual revenues of approximately
$18,000,000. These divestitures were substantially completed in fiscal 1997 and
resulted in net cash proceeds of approximately $2,704,000. An additional charge
of $250,000 was included in other non-operating income, net in fiscal 1997 to
complete the dispositions.
15. SUBSEQUENT EVENTS
In July 1998, the Company acquired 100% of the outstanding stock of Betac
International Corporation ("Betac") of Alexandria, Virginia. Betac, founded in
1977, is an advanced technology services company providing solutions primarily
to the Department of Defense, government intelligence and defense contractors
and other federal agencies. Betac, with trailing twelve months revenue of
approximately $49,000,000, employs 400 information technology professionals
across the United States and Europe.
In July 1998, the Company also acquired substantially all of the Document
Acquisition Services ("DAS") unit of First Image Management Company, a division
of First Financial Management Corporation. DAS, with trailing twelve months
revenue of approximately $35,000,000, is based in London, Kentucky and provides
data capture, imaging and retrieval services to customers in the healthcare,
financial institution and insurance industries.
18
<PAGE> 25
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (in thousands, except per share
amounts)
<TABLE>
<CAPTION>
Quarter ended Quarter ended
---------------------------------------------- ------------------------------------------
Fiscal 1998 Fiscal 1997
---------------------------------------------- ------------------------------------------
June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1998 1998 1997 1997 1997 1997 1996 1996
-------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $333,949 $304,945 $285,235 $264,994 $257,140 $232,221 $225,159 $214,405
Operating income 33,601 31,333 14,480 18,905 25,611 23,214 21,061 20,380
Net income 18,520 16,850 5,602 13,450 13,934 12,738 11,676 11,318
Earnings per common share
(basic) $ .38 $ .35 $ .12(a) $ .29 $ .30 $ .28 $ .25 $ .25
Weighted average shares
outstanding 48,221 47,858 47,383 46,947 46,611 46,133 46,004 45,835
Earnings per common share
assuming dilution $ .36 $ .34 $ .12(a) $ .28 $ .29 $ .27 $ .25 $ .24
Weighted average shares
outstanding assuming
dilution 55,184 50,011 48,584 48,247 47,898 47,222 47,395 47,223
</TABLE>
(a) Includes merger costs associated with the Merger of approximately $.18
per share
19
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF
AFFILIATED COMPUTER SERVICES, INC.
<TABLE>
<CAPTION>
Subsidiary State of Incorporation
- ---------- ----------------------
<S> <C>
2828 N. Haskell, Inc. Texas
ACS Claims Services, Inc. Texas
ACS Government Services, Inc. Texas
ACS Healthcare Services, Inc. California
ACS National Systems, Inc. Delaware
ACS Government Solutions Group, Inc. Maryland
Analytical Systems Engineering, Inc. Massachusetts
ASEC International Inc. Delaware
ASEC Limited, Inc. Delaware
Harbor Point Apartments, L.P. Massachusetts
ASEC Security International Delaware
ASEC Systems, Inc. Delaware
Betac International Corporation Delaware
Betac Corporation Virginia
Betac Technologies, LTD Delaware
Technology Recognition Systems, Inc. Delaware
Public Systems Corporation Massachusetts
CDSI Argentina S.A. Argentina
CDSI Education Services, Inc. Maryland
Guarantec, LLP Florida
CDSI International, Inc. Maryland
CDSI Mortgage Services, Inc. Delaware
CDSI Solutions, Inc. Maryland
Computer Data Systems Sales, Inc. Maryland
M-GA Fields Road Ltd. Partnership Maryland
ACS Integrated Document Solutions, Inc. Louisiana
Intellifile, Inc. Nevada
ACS Retail Services, Inc. Texas
ACS TradeOne Marketing, Inc. Delaware
First City Transfer Services, L.P. Delaware
ACS Communications Industry Services, Inc. Illinois
ACS Outsourcing Solutions, Inc. Michigan
Genix CSI, Inc. Delaware
Affiliated Computer Services, Ltd. United Kingdom
Intelligent Solutions, Inc. Virginia
The LAN Company, Inc. Pennsylvania
Medianet, Inc. Delaware
Micah TechnologyServices,Inc. Texas
ACS Shared Services, Inc. Texas
ACS Technology Solutions, Inc. Texas
Artisys Corporation Georgia
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Cara Holdings, Inc. Delaware
Cara Corporation Illinois
Wesson Taylor Wells & Associates, Inc. North Carolina
TransFirst, Inc. Texas
ACS Business Process Solutions, Inc. Nevada
ACS Data Entry Delaware
ACS Business Process Solutions de Mexico Mexico
ACS Business Process Solutions Guatemala Guatemala
ACS Business Process Solutions S.L. Spain
ACS Merchant Services, Inc. Delaware
Integrated Delivery Technologies, Inc. New York
South Wildewood Partners, L.P. Maryland
Harbor Points Apartments, LP Massachusetts
Saudi American Systems Engineering Company L.P. Saudi Arabia
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-86426) of Affiliated Computer Services, Inc. of
our report dated July 28, 1998, except as to Note 15, which is as of August 10,
1998, appearing on page 34 of the Annual Report to Stockholders which is
incorporated by reference in this Annual Report on Form 10-K. We also consent to
the incorporation by reference of our report on the Financial Statement
Schedule, which appears on page F-1 of this Form 10-K.
PricewaterhouseCoopers LLP
Dallas, Texas
September 28, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-86426) of Affiliated Computer Services, Inc. (ACS) of our report
dated July 28, 1997, with respect to the consolidated financial statements of
Computer Data Systems, Inc., included in ACS' Annual Report (Form 10-K) for the
year ended June 30, 1998.
/s/ Ernst & Young LLP
Washington D.C.
September 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 75,888
<SECURITIES> 0
<RECEIVABLES> 236,523
<ALLOWANCES> 2,840
<INVENTORY> 9,911
<CURRENT-ASSETS> 365,087
<PP&E> 142,717
<DEPRECIATION> 90,096
<TOTAL-ASSETS> 949,798
<CURRENT-LIABILITIES> 166,969
<BONDS> 234,848
0
0
<COMMON> 482
<OTHER-SE> 503,188
<TOTAL-LIABILITY-AND-EQUITY> 949,798
<SALES> 0
<TOTAL-REVENUES> 1,189,123
<CGS> 0
<TOTAL-COSTS> 1,090,804
<OTHER-EXPENSES> (7,832)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,059
<INCOME-PRETAX> 94,092
<INCOME-TAX> 39,670
<INCOME-CONTINUING> 54,422
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,422
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.11
</TABLE>
<PAGE> 1
EXHIBIT 99.1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Computer Data Systems, Inc.
We have audited the consolidated balance sheets of Computer Data Systems, Inc.
as of June 30, 1997 and 1996, and the related consolidated statements on income,
changes in stockholders' equity, and cash flows for each of the two years in the
period ended June 30, 1997. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of computer Data
Systems, Inc. at June 30, 1997 and 1996 (not presented separately herein), and
the consolidated results of its operations and its cash flows for each of the
two years in the period ended June 30, 1997 (not presented separately herein),
in conformity with generally accepted accounting principles.
Washington, D.C.
July 28, 1997
