<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
----------------------------
FORM 8-K
CURRENT REPORT
----------------------------
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (February 19, 1998):
Commission file number 0-24787
AFFILIATED COMPUTER SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0310342
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
2828 NORTH HASKELL
DALLAS, TEXAS 75204
(Address of principal executive offices)
(Zip Code)
214-841-6111
(Registrant's telephone number, including area code)
<PAGE> 2
ITEM 5. OTHER EVENTS
On December 16, 1997, Affiliated Computer Services, Inc. ("ACS") merged
with Computer Data Systems, Inc. ("CDSI") in a stock-for-stock transaction
accounted for as a pooling of interests. This Report on Form 8-K contains
ACS's financial statements as restated to reflect the merger with CDSI as well
as Management's Discussion and Analysis on a combined basis. This report may
be incorporated by reference into other reports or registration statements to
be filed by ACS with the Securities and Exchange Commission.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<S> <C>
Index to Consolidated Financial Statements
Financial Statement:
Report of Independent Accountants 2
Consolidated Balance Sheets at June 30, 1997 and 1996 3
Consolidated Statements of Income for each of the three years in the
period ended June 30, 1997 4
Consolidated Statements of Changes in Stockholders' Equity for each of
the three years in the period ended June 30, 1997 5
Consolidated Statements of Cash Flows for each of the three years in
the period ended June 30, 1997 6
Notes to Consolidated Financial Statements 7 - 21
Financial Statement Schedule:
For the three years ended June 30, 1997
Schedule II - Valuation and Qualifying Accounts 23
Exhibits
27.1 Financial Data Schedule - June 30, 1997 25
27.2 Financial Data Schedule - June 30, 1996 26
27.3 Financial Data Schedule - June 30, 1995 27
99.1 Management's Discussion and Analysis of Financial
Condition and Results of Operations 28 - 32
99.2 Report of Independent Auditors 33
</TABLE>
1
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Affiliated Computer Services, Inc.
In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements listed in the index appearing under Item
7 on page 1, present fairly, in all material respects, the financial
position of Affiliated Computer Services, Inc. and its subsidiaries at June
30, 1997 and 1996, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of Computer Data
Systems, Inc., which statements reflect total assets of $187,450,000 and
$103,053,900 at June 30, 1997 and 1996, respectively, and total revenues of
$304,391,900, $251,098,700 and $220,667,000 for the three years in the
period ended June 30, 1997, respectively. Those statements were audited by
other auditors whose report thereon has been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for
Computer Data Systems, Inc., is based solely on the report of the other
auditors. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the
report of other auditors provide a reasonable basis for the opinion
expressed above.
/s/ Price Waterhouse LLP
Dallas, Texas
July 30, 1997, except as to Notes 5, 6, 9, 15 and 18,
which are as of February 13, 1998
2
<PAGE> 4
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS
June 30,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,997 $ 29,267
ATM cash 6,650 9,100
Accounts receivable, net 199,302 160,749
Inventory 9,915 10,938
Prepaid expenses and other current assets 19,351 17,355
Income taxes receivable 1,992 --
Deferred taxes 12,860 9,042
-------- --------
Total current assets 269,067 236,451
Property and equipment, net 135,160 115,340
Purchased computer software, net of accumulated
amortization of $9,436 and $19,438, respectively 4,554 5,750
Goodwill, net of accumulated amortization of
$15,504 and $8,609, respectively 312,732 245,693
Other intangible assets, net of accumulated amortization
of $7,100 and $4,478, respectively 24,829 13,210
Long-term investments and other assets 15,135 14,368
Deferred taxes -- 5,286
-------- --------
Total assets $761,477 $636,098
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,167 $ 23,504
Accrued compensation and benefits 36,054 34,477
Other accrued liabilities 72,115 73,300
Income taxes payable -- 3,975
Notes payable and current portion of long-term debt 17,546 11,609
Current portion of unearned revenue 8,319 9,657
-------- --------
Total current liabilities 158,201 156,522
Long-term debt 130,680 57,208
Unearned revenue 1,191 2,053
Deferred taxes 14,089 --
Other long-term liabilities 29,835 56,011
-------- --------
Total liabilities 333,996 271,794
-------- --------
Cumulative redeemable preferred stock -- 1,100
-------- --------
Stockholders' equity:
Class A common stock, $.01 par value,
75,000 shares authorized, 40,508 shares and
39,281 shares outstanding, respectively 405 393
Class B common stock, $.01 par value,
6,406 shares authorized and outstanding 64 64
Additional paid-in capital 275,922 259,877
Retained earnings 151,090 102,870
-------- --------
Total stockholders' equity 427,481 363,204
-------- --------
Commitments and contingencies (Notes 2, 6, 13, 15 and 16)
Total liabilities and stockholders' equity $761,477 $636,098
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 5
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 928,925 $ 647,608 $ 533,848
Operating expenses:
Wages and benefits 395,780 298,659 248,680
Services and supplies 264,104 185,550 132,737
Rent, lease and maintenance 132,837 82,314 87,661
Depreciation and amortization 35,510 18,450 14,784
Other operating expenses 10,428 6,052 5,608
----------- ----------- -----------
Total operating expenses 838,659 591,025 489,470
----------- ----------- -----------
Operating income 90,266 56,583 44,378
Interest expense 7,121 3,417 4,729
Other expenses (income), net (425) (2,751) (3,321)
----------- ----------- -----------
Pretax profit 83,570 55,917 42,970
Income tax expense 33,904 22,392 17,315
----------- ----------- -----------
Net income $ 49,666 $ 33,525 $ 25,655
=========== =========== ===========
Earnings per common share (basic) $ 1.08 $ .88 $ .74
=========== =========== ===========
Weighted average shares outstanding 46,136 38,228 34,625
=========== =========== ===========
Earnings per common share assuming dilution $ 1.05 $ .85 $ .71
=========== =========== ===========
Weighted average shares outstanding 47,452 39,320 35,998
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 6
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, 1994 15,604 $ 156 4,804 $ 48 $ 44,521 $ 45,715 $ 90,440
Net proceeds of initial
public offering 2,300 23 32,171 32,194
Issuance of compensatory
stock options 2,521 2,521
Exercise of stock options
and related tax benefits 664 6 5,264 (146) 5,124
Stock issued in connection
with acquisitions 13 1,323 1,323
Cash dividends (572) (572)
Net income 25,655 25,655
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 1995 18,581 185 4,804 48 85,800 70,652 156,685
Conversion of shares 1,829 18 (1,602) (16) 1,622 (572) 1,052
Net proceeds of secondary
stock offerings 4,072 41 169,740 169,781
Exercise of stock options
and related tax benefits 253 3 3,028 3,031
Cash dividends (633) (633)
Other, net 66 1 (136) (102) (237)
Net income 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
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 7
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 49,666 $ 33,525 $ 25,655
----------- ----------- -----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 35,510 18,450 14,784
Recognition of stock option compensation -- 45 680
Other 44 (7) (110)
Changes in assets and liabilities, net of effects from acquisitions:
(Increase) decrease in ATM cash 2,450 (850) 6,550
Increase in accounts receivable (16,150) (28,567) (17,611)
(Increase) decrease in inventory 4,220 (4,886) (889)
Increase in prepaid expenses and other current assets (1,875) (3,105) (1,818)
Change in deferred taxes 17,160 4,692 (5,476)
Increase in other long-term assets (1,376) (1,280) (1,100)
Increase (decrease) in accounts payable (7,827) 3,874 4,947
Increase (decrease) in accrued compensation and benefits (2,871) (511) 3,768
Increase (decrease) in other accrued liabilities (1,697) 6,042 2,377
Increase (decrease) in income taxes payable (3,315) 3,087 (2,940)
Increase (decrease) in other long-term liabilities (6,345) (4,814) 8,709
Decrease in unearned revenue (2,696) (7,324) (1,347)
----------- ----------- -----------
Total adjustments 15,232 (15,154) 10,524
----------- ----------- -----------
Net cash provided by operating activities 64,898 18,371 36,179
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property, equipment and computer software, net (42,978) (52,816) (17,956)
Payments for acquisitions, net of cash acquired (115,607) (162,630) (9,204)
Additions to other intangible assets (2,921) (6,629) (1,003)
Proceeds from sale of marketable securities -- -- 14,354
Proceeds from note receivable 4,611 -- --
Proceeds from sale of banking units 2,704 -- --
Other, net (194) (2,523) 7
----------- ----------- -----------
Net cash used in investing activities (154,385) (224,598) (13,802)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 109,211 197,800 1,500
Repayments of long-term debt (29,732) (178,973) (41,571)
Proceeds from issuance of common stock, net of issuance costs -- 170,228 33,310
Proceeds from the exercise of stock options and related tax benefits 4,008 4,198 5,628
Net borrowings (repayments) of ATM debt (2,450) 850 (6,550)
Dividends paid (717) (633) (572)
Other, net (1,103) (689) --
----------- ----------- -----------
Net cash provided by (used in) financing activities 79,217 192,781 (8,255)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (10,270) (13,446) 14,122
Cash and cash equivalents at beginning of year 29,267 42,713 28,591
----------- ----------- -----------
Cash and cash equivalents at end of year $ 18,997 $ 29,267 $ 42,713
=========== =========== ===========
</TABLE>
See supplemental cash flow information in Notes 2, 4, 6, 7 and 13.
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 8
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 providing information technology
services and electronic commerce solutions primarily in the United States.
Information technology services include data processing outsourcing, business
process outsourcing and professional services and systems integration.
On December 16, 1997, the Company acquired and merged with Computer Data
Systems, Inc. ("CDSI"), a provider of information technology solutions to
government and private industry customers. The transaction was accounted for
as a pooling of interests; therefore, the financial data included in these
financial statements has been restated to reflect the merger with CDSI.
Certain reclassifications were made to the CDSI financial statements to conform
to ACS's presentations (see Note 18).
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.
Purchased computer 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 software for its information processing services that
is not purchased through acquisitions, the Company's policy is to capitalize
such costs only after technological feasibility has been established. Such
amounts are not significant.
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 life of the asset provide for recovery of the
assets. In the event that assets are found to be carried at amounts which are
in 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 three to ten years.
7
<PAGE> 9
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term investments
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.
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. Services and supplies 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 and installed. Immediate recognition is made of any
anticipated losses.
Revenues earned from the five largest customers of ACS each year together
comprise 15%, 16% and 27% of ACS revenues for the years ended June 30, 1997,
1996 and 1995, respectively (10%, 10% and 16% of combined revenues). CDSI
derives its revenue primarily from contracts with federal government agencies.
The five largest federal government customers of CDSI for the fiscal years
ended June 30, 1997, 1996 and 1995 accounted for approximately 78%, 79% and
76%, respectively, of its revenues (26%, 31% and 31% of combined revenues).
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
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 and fiscal
1995 have been restated to reflect the stock split (see Note 9).
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 primarily 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 11 for the
computation of earnings per share.
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 ("APB
25") and apply
8
<PAGE> 10
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 10).
2. ACQUISITIONS
Since 1988, the Company has acquired 34 businesses in the information
technology services industry. The Company's recent acquisition activity is
summarized as follows:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Acquisitions completed:
Outsourcing services -- 1 3
Business process outsourcing 2 4 2
Professional services 5 3 1
---------- ---------- ----------
Total 7 8 6
========== ========== ==========
Purchase consideration (in thousands):
Cash paid $ 82,607 $ 153,849 $ 10,937
Amounts due sellers of acquired businesses 2,002 6,700 3,350
Stock issued 11,271 -- 1,324
Liabilities assumed 24,008 95,144 5,159
Other 559 1,800 748
---------- ---------- ----------
Fair value of assets acquired
(including intangibles) $ 120,447 $ 257,493 $ 21,518
========== ========== ==========
</TABLE>
In June 1997, CDSI 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 consideration paid
was $51 million, 90% in cash and 10% in common stock of CDSI. The cash portion
was financed and CDSI issued 185,455 shares of stock, valued for purposes of
this transaction at $27.50 per share. This transaction was accounted for under
the purchase method of accounting, wherein approximately $39.5 million in
goodwill was recognized by CDSI after recording approximately $5.4 million in
other intangibles (representing the estimated fair market value of certain
assets acquired) and other purchase adjustments necessary to allocate the
purchase price to the fair value of assets acquired and liabilities assumed.
Goodwill is being amortized on a straight-line basis over thirty years and the
other intangibles are being amortized over periods ranging from two to
seventeen years. The financial statements of ASEC have been included in the
consolidated financial statements since the date of acquisition.
If the acquisition of ASEC had occurred at the beginning of fiscal 1996,
revenues, net income and earnings per share (diluted) for fiscal 1997 would
have been $995,189,000, $50,987,000 and $1.07 respectively. Fiscal 1996
revenues, net income and earnings per share would have been $694,706,000,
$31,688,000 and $0.80, respectively. This pro forma information is provided
for information purposes only. The pro forma information does not purport to
be indicative of what would have occurred had the acquisition been made as of
that date or of results which might occur in the future.
In November 1996, CDSI combined its student loan guaranty agency services
business with that of InTuition, Inc. and formed a new commercial company
called GuaranTec, LLP, of which CDSI is a 51% owner and InTuition is a 49%
owner. In connection with the formation of this company, CDSI paid $1.9
million in cash, stock, and assets to InTuition and GuaranTec. Of this amount,
InTuition received CDSI's stock valued at $486,000, along with $300,000 in
cash, in return for certain InTuition assets, which were then contributed to
GuaranTec by CDSI. CDSI and InTuition also contributed their interests in
their licensing agreements and guaranty agency servicing contracts and certain
related assets and liabilities to GuaranTec. The assets acquired have been
accounted for under the purchase method of accounting, wherein approximately
$.8 million was recorded on the books of GuaranTec as an intangible asset for
the fair value of the acquired licensing agreements and servicing contracts.
9
<PAGE> 11
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This asset is being amortized over its estimated remaining component life,
which is two years for the licensing agreements and five years for the
contracts.
In September 1996, ACS acquired 100% of the stock of Pinpoint Marketing,
Inc., a marketing services company. In March 1997, the Company acquired 100% of
the stock of Wesson, Taylor, Wells & Associates, Inc., an information
technology professional services company and 100% of the stock of Intelligent
Solutions, Inc., a network integration services company. The Company made
three other acquisitions during fiscal 1997 which have also been included in
the Company's consolidated financial statements from the effective date of the
acquisition. Fiscal 1997 revenues and earnings of the acquirees prior to the
effective dates of the six acquisitions other than ASEC are not material to the
financial results of the Company. As a result, pro forma 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 408,567 shares of unregistered Class A common stock. All the
acquisitions made by the Company have been accounted for using the purchase
method of accounting.
In connection with the acquisition of The Genix Group, Inc. ("Genix") and the
related purchase price allocation, the Company recorded a $30,000,000 liability
as of June 30, 1996, related to software license issues with a software vendor.
During the third quarter of fiscal 1997, the Company agreed to a one-time cash
settlement with the vendor, resulting in the obligation being reduced to
$23,000,000, which was paid in April 1997. The Company also assessed and
adjusted other assets and liabilities recorded in connection with the Genix
acquisition, resulting in an immaterial adjustment of net assets, including
goodwill.
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 1997, the Company paid $4,685,000 in
contingent consideration related to acquisitions made in prior years. As of
June 30, 1997, the maximum aggregate amount of the outstanding contingent
obligations is approximately $7,811,000. 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,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Amounts billed:
Commercial and state and local governments $ 79,525 $ 75,291
U.S. government 47,278 34,009
----------- -----------
126,803 109,300
----------- -----------
Amounts unbilled:
Amounts currently billable 69,903 49,465
Excess of actual indirect costs over amounts currently
billable under cost reimbursable contracts 1,663 1,294
Contract retainages not currently billable 364 270
Fixed price work not currently billable 2,533 1,877
----------- -----------
74,463 52,906
----------- -----------
Total accounts receivable 201,266 162,206
Allowance for doubtful accounts (1,964) (1,457)
----------- -----------
$ 199,302 $ 160,749
=========== ===========
</TABLE>
To the extent not currently billable at June 30, 1997 and 1996, 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, 1997, approximately
$1,922,000 are not expected to be billed and collected within one year.
10
<PAGE> 12
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,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land $ 20,456 $ 20,523
Buildings and improvements 43,926 32,530
Computer equipment and software 93,750 70,533
Furniture and fixtures 38,119 34,879
Construction in progress 5,211 3,593
----------- -----------
201,462 162,058
Accumulated depreciation and amortization (66,302) (46,718)
----------- -----------
$ 135,160 $ 115,340
=========== ===========
</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. In connection with an outsourcing contract signed in March 1995, the
Company acquired assets with a fair market value of approximately $2,521,000,
including property, equipment and computer software of $2,237,000. Liabilities
assumed were $35,000, and unearned revenue of $2,486,000 was recorded which
will be recognized ratably over a three-year period.
The Company acquired three host data centers in connection with its purchase
of Genix in June 1996. Subsequent to June 30, 1997 the Company is closing one
of these facilities, located in Dearborn, Michigan, as a result of a
consolidation of the data center operations. This facility is held for sale
and has a net book value of $7,364,000 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. The preferred stock investments accrue cumulative dividends ranging
from 5% to 10%, which are generally paid through in-kind shares issued on a
quarterly basis. Dividend income recognized from such securities, which is
reflected in the financial statements as a component of interest and other
expenses, was approximately $1,285,000 and $1,513,000 during fiscal 1997 and
1996, respectively.
In January 1992, the Company paid $7,500,000 in connection with signing a
long-term data processing contract and the acquisition of 7,500 shares of the
customer's Class C preferred stock. Based on an independent appraisal, the
Company allocated a portion of the purchase price, $3,220,000, to the preferred
stock and the remainder to customer contracts. Since the purchase date, the
customer's quarterly dividends have generally been paid in-kind with additional
shares of preferred stock, resulting in a cost basis of $5,647,000 as of June
30, 1997. In September 1997, the customer redeemed the preferred stock,
including accumulated dividends, for $12,694,000 in cash.
11
<PAGE> 13
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,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Unsecured $125,000 revolving credit agreement, payable
to banks, due in June 1999 (A) $ 82,700 $ 46,800
Unsecured $50 million term loan, payable to a bank, due in
quarterly installments through June 2002 (B) 48,000 --
Secured $11,000 ATM cash credit agreement
("ATM Cash Facility"), payable to a bank, due
in December 1997 (C) 6,650 9,100
10% junior subordinated debentures, payable to former shareholders
of a subsidiary, due January 2000 (D) 507 826
Other notes payable to individuals and corporations, interest rates
ranging from 6% to 10%, due through 2002 5,978 6,394
Capitalized lease obligations at various interest rates, payable through 2001 4,391 5,697
----------- -----------
148,226 68,817
Less current portion (17,546) (11,609)
----------- -----------
$ 130,680 $ 57,208
=========== ===========
</TABLE>
Maturities of notes payable and long-term debt at June 30, 1997 follows (in
thousands):
<TABLE>
<CAPTION>
Year ending June 30:
- --------------------
<S> <C>
1998 $ 17,546
1999 9,027
2000 50,187
2001 50,084
2002 21,289
Thereafter 93
------------
$ 148,226
============
</TABLE>
(A) 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 for fiscal 1998 will be
payable monthly at LIBOR (5.72% at June 30, 1997) plus 0.3% to 0.875%, or
the bank's base rate, as elected by the Company. Prior to amendment,
interest on the Credit Facility was payable monthly at LIBOR plus 0.5% to
1.25%
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
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.
(B) On June 18, 1997, CDSI borrowed $50 million under a term loan to finance
the ASEC acquisition (see Note 2). Additionally, CDSI entered into a $25
million, three-year revolving line of credit available at June 30, 1997
for working capital, future acquisition, and general corporate needs.
Both credit facilities bear interest at the Company's option of prime
rate, floating rate, or a variable rate based on LIBOR for 30, 60, 90,
180, or 360 days, plus a margin that can vary from 62.5 basis points to
115 basis points. The applicable margin is determined by the ratio of
outstanding debt to CDSI's earnings before interest, taxes, depreciation,
and amoritization (EBITDA), calculated on a quarterly basis. The
weighted average interest rate in effect for the period June 18, 1997 to
June 30, 1997 was 6.52%. There are unused commitment fees on the
available revolving line ranging from 9 to 23 basis points per year, also
depending on the ratio of debt to EBITDA.
12
<PAGE> 14
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The term loan is repayable quarterly, for a five-year period, based on a
seven-year straight-line amortization schedule, with the remaining
balance due in June 2002. The revolving line matures in June 2000. The
term loan and any revolving loans are unsecured, except that 65% of the
stock of CDSI Argentina, S.A., a wholly-owned foreign subsidiary, is
pledged as collateral.
Prior to closing on the three-year revolving line of credit in June 1997,
CDSI had an $8 million revolving line of credit and a $14 million demand
facility, both of which were replaced by the three-year revolving line of
credit. Interest rates on these unsecured facilities were at LIBOR plus
110 to 120 basis points.
Upon consummation of the merger in December 1997, the CDSI 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 CDSI debt.
(C) Interest on the ATM cash facility is due quarterly at the bank's
overnight interest rate (6.25% at June 30, 1997) plus 0.5%,
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.
(D) In January 1994, a subsidiary of the Company issued 10% junior
subordinated debentures in the principal amount of $6,344,000 in exchange
for all outstanding shares of 12% cumulative Series A preferred stock
with equal redemption value. Interest on the debentures was payable
semiannually in cash, or by issuing additional debentures (this option
expired June 1995). The Company elected to pay interest for the year
ended June 30, 1995 and for the six months ended June 30, 1994 by issuing
additional debentures in the principal amount of $681,000 and $317,000,
respectively. The debentures were called for redemption on March 15, 1996
at their face value plus accrued and unpaid interest. As of June 30,
1997, $6,835,000 in principal amount had been redeemed.
Cash payments for interest for the years ended June 30, 1997, 1996 and 1995
were $7,045,000, $3,617,000 and $3,135,000 respectively. Interest income was
$1,210,000, $2,106,000 and $2,682,000 for the years ended June 30, 1997, 1996
and 1995, respectively.
At June 30, 1997, the Company had outstanding letters of credit of
approximately $11,144,000 of which $9,006,000 was being maintained as
collateral for an appeal bond related to a judgment which has been recently
overturned (see Note 15). Subsequent to June 30, 1997, this letter of credit
was released by the financial institution upon receiving the appropriate order
from the Court.
The Company's cash custody agreements with two financial institutions provide
the Company with up to $52 million of the financial institutions' vault cash
for use in Company-owned ATMs. At June 30, 1997, approximately $28,216,000 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 agreements expire July 31, 1998 and January 12, 1999.
13
<PAGE> 15
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES
Income tax expense (benefit) is comprised of the following (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current:
U.S. Federal $ 13,160 $ 11,925 $ 15,217
Foreign 39 -- --
State 2,749 2,133 3,370
Tax reduction credited to paid-in capital
from exercise of stock options 2,893 3,101 5,438
----------- ----------- -----------
Total current expense 18,841 17,159 24,025
----------- ----------- -----------
Deferred:
U.S. Federal 13,299 4,441 (5,670)
Foreign -- -- --
State 1,764 792 (1,040)
----------- ----------- -----------
Total deferred expense (benefit) 15,063 5,233 (6,710)
----------- ----------- -----------
Total expense for income taxes $ 33,904 $ 22,392 $ 17,315
=========== =========== ===========
</TABLE>
At June 30, 1997, the Company had available unused domestic net operating
loss carryforwards ("NOLs"), net of Internal Revenue Code Section 382
limitations, of approximately $9,296,000, which expire in years 2002 through
2011. In addition, the Company had $2,863,000 of foreign NOLs which will not
expire or be limited unless a future significant change in stock ownership or
business operations occurs. At June 30, 1997, the Company had an unused capital
loss carryforward, net of Section 382 limitations, of approximately $842,000,
which will expire in 1998. The loss carryforward has been fully reserved due to
capital loss restrictions.
The Company's deferred tax assets (liabilities) consist of the following (in
thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued expenses not yet deductible for tax purposes $ 10,235 $ 14,045
Stock option compensation expense 767 1,196
Loss carryforwards 4,923 2,460
Deferred compensation 1,836 1,760
Argentina operations 1,085 340
Investment basis differences 532 648
Other 453 213
--------- ---------
Total deferred tax assets 19,831 20,662
--------- ---------
Deferred tax liabilities:
Depreciation and amortization (18,773) (4,981)
Annuity interest (432) (401)
Interest in partnership (909) --
Other (433) (289)
--------- ---------
Total deferred tax liabilities (20,547) (5,671)
Deferred tax assets valuation allowance (513) (663)
--------- ---------
Net deferred tax assets (liabilities) $ (1,229) $ 14,328
========= =========
</TABLE>
The significant increase in the deferred tax liability for depreciation and
amortization is due to the Genix acquisition which was effective June 21, 1996.
The seller of Genix and ACS elected to treat the sale of Genix stock as a
transaction taxed as if it were a sale of assets under Internal Revenue Code
Section 338(h)(10). As a
14
<PAGE> 16
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
result, ACS is able to amortize the intangible assets acquired over
substantially shorter lives for tax than for book purposes.
The valuation allowance at June 30, 1997 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 $150,000 and $116,000 during the years ended
June 30, 1997 and 1996, respectively, due to the utilization of previously
reserved NOLs 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,
------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income tax expense at the U.S. Federal statutory rate $ 29,250 $ 19,572 $ 15,035
Increase (decrease) resulting from:
Excess of book basis over tax basis of
companies 864 711 553
State income taxes (net of federal benefit) 3,130 1,953 1,797
Other 661 156 (70)
Lower rates on earnings of foreign operations (1) -- --
----------- ----------- -----------
Total expense for income taxes $ 33,904 $ 22,392 17,315
=========== =========== ===========
</TABLE>
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
$491,000 at June 30, 1997. 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,
1997, 1996 and 1995 were approximately $18,534,000, $10,595,000, and
$20,210,000, respectively.
8. CUMULATIVE REDEEMABLE PREFERRED STOCK
The Company's Series A preferred stock, which consisted of 1,000 issued and
outstanding shares with a par value of $1,100 per share and accrued cumulative
dividends of 9%, was redeemed for cash in July 1996 at par value plus accrued
and unpaid dividends.
9. 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 connection with
the merger with CDSI completed in December 1997, 3,106,000 Class B shares were
converted to Class A common shares.
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, 1997, the exercise price was $16.81 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 and fiscal 1995 have been restated to reflect
the stock split.
15
<PAGE> 17
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EMPLOYEE BENEFIT PLANS
Under the 1988 Employee Stock Option Plan ( the "1988 Plan"), ACS has
reserved 6,000,000 shares of Class A common stock for issuance to key employees
at exercise prices determined by the Board of Directors. Generally, the options
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 1997 for its stock option or employee stock
purchase plans.
The Long-Term Incentive Plan adopted by CDSI in 1991 (the "1991 Plan")
provides for the granting of options to various employees, officers and
directors of CDSI. The employee options are exercisable in cumulative annual
installments after one year and before the end of the fifth year. The
non-employee director's options are fully exercisable one year after grant and
before the end of the fifth year. 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. In conjunction with the merger, unexercised options to purchase CDSI
common stock were assumed by ACS, with the substitution of 1.759 shares of ACS
stock for each share of CDSI stock purchasable under the assumed options. As a
result, all CDSI options and option prices appearing in this note have been
converted to ACS share equivalents. See Note 18 for the effect of the merger
on employee benefit plans.
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 1997 and 1996: Dividend
yield of 0% in both years for the 1988 Plan and .40% for the 1991 Plan in both
years; volatility of 37.6% for the 1988 Plan and 50% for the 1991 Plan in both
years; risk-free interest rates of 6.42% and 6.07% for 1997 and 1996,
respectively, in the 1988 Plan and 6.14% for both years in the 1991 Plan; and
weighted average expected option life of 5.5 years for the 1988 Plan and 3
years for the 1991 Plan for both years presented. The average fair values of
the options granted during fiscal 1997 and 1996 are estimated at $9.60 and
$8.46, respectively for the 1988 Plan and $5.16 and $2.90 (after conversion of
CDSI shares for the merger), respectively for the 1991 Plan.
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,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
Net income
As reported $ 49,666 $ 33,525
Pro forma 47,803 32,343
Earnings per common share (basic)
As reported $ 1.08 $ .88
Pro forma 1.04 .85
Earnings per common share assuming dilution
As reported $ 1.05 $ .85
Pro forma 1.01 .82
</TABLE>
16
<PAGE> 18
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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, 1995, 1996 and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
Option Price
Options per Share
----------- ------------------
<S> <C> <C> <C>
Outstanding at June 30, 1994 2,954,412 $.01 - $4.97
Granted 1,087,247 $6.54 - $11.25
Exercised (1,210,188) $.01 - $4.97
Canceled (123,092) $.01 - $8.03
----------
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
==========
Exercisable at June 30, 1997 509,258 $.07 - $8.03
==========
</TABLE>
Further information regarding the Company's outstanding and exercisable stock
options by exercise price range as of June 30, 1997 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
--------------- ----------- ---------- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
$ .07 - $ .72 339,504 3.01 $ .64 339,504 $ .64
$ 3.20 - $ 11.25 1,156,936 5.67 $ 8.67 169,754 5.96
$12.15 - $ 21.13 1,606,169 8.00 $ 17.22 -- --
$23.13 - $ 26.87 410,000 8.99 $ 23.22 -- --
- ----------------- ----------- -------- --------- --------- ---------
$ .07 - $ 26.87 3,512,609 6.87 $ 13.50 509,258 $ 2.41
================= =========== ======== ========= ========= =========
</TABLE>
Under the 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 the 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, 1997 and 1996,
which were charged to additional paid-in capital, were $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 the plans during the years ended June 30, 1997, 1996 and 1995
were $2,286,000, $2,079,000 and $1,975,000, respectively.
17
<PAGE> 19
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. 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,
--------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Net income $ 49,666 $ 33,525 $ 25,655
Denominator:
Weighted average shares outstanding (basic) 46,136 38,228 34,625
---------- ---------- ----------
Potential common shares:
Stock options 1,028 938 1,373
Warrants and other 288 154 --
---------- ---------- ----------
Total potential common shares 1,316 1,092 1,373
---------- ---------- ----------
Denominator for earnings per share assuming dilution 47,452 39,320 35,998
---------- ---------- ----------
Earnings per common share (basic) $ 1.08 $ .88 $ .74
========== ========== ==========
Earnings per common share assuming dilution $ 1.05 $ .85 $ .71
========== ========== ==========
</TABLE>
12. FINANCIAL INSTRUMENTS
As of June 30, 1997 and 1996, 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.
13. 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 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 EFT 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 55% of Merchant Services common stock on a diluted basis. The
Company provides guarantees to two banks on Merchant Services debt up to
$7,500,000.
18
<PAGE> 20
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. NON-RENEWAL OF CUSTOMER CONTRACT
In January 1994, Bank of America Texas, N.A. ("B of A Texas"), the Company's
largest commercial customer at that time, informed the Company that it would
not renew its data processing services agreement with the Company at the end of
the contract term on August 31, 1995. In conjunction with the contract
expiration, the Company expected to incur various non-recurring expenses
primarily associated with the termination or renegotiation of a computer lease.
Such costs were estimated to aggregate $16.1 million, of which $13.3 million
had been accrued through May 1995, when the Company determined that the
computer lease would not need to be terminated or renegotiated, as a new
customer contract was signed which replaced computer capacity previously
utilized for the B of A Texas contract. Accordingly, the Company ceased
recording any additional accrual. Services to the new customer began in
September 1995, at which point the existing accrual began to amortize over the
remaining term of the computer lease, which expires February 1999. For the year
ended June 30, 1997, $3.8 million of such accrual was amortized (reduction to
expenses) to rent, lease and maintenance, compared to $3.2 million amortized
and $8.5 million expensed in the years ended June 30, 1996 and 1995,
respectively.
15. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease agreements for data processing
equipment and facilities. A summary of the lease commitments under
noncancelable operating leases at June 30, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Year ending June 30:
- --------------------
<S> <C>
1998 $ 60,145
1999 46,613
2000 27,840
2001 13,495
2002 5,345
Thereafter 12,206
-----------
$ 165,644
===========
</TABLE>
Lease expense for data processing equipment and facilities was $61,176,000,
$46,481,000 and $42,913,000 for the years ended June 30, 1997, 1996 and 1995,
respectively. Certain office space leases provide for the escalation and pass
through of increases in operating expenses and renewal options.
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 401,541 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. There are seven other former GSA/FTSA employees who were
issued similarly situated options allegedly covering 129,631 shares of the
Company's Class A common stock. 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 non-cash
charge.
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 1995, with the exception of ASEC operations,
which have been audited through calendar year 1993. In management's opinion,
any such reviews and
19
<PAGE> 21
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
16. OTHER CHARGES
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 interest and other expenses in fiscal 1997
to complete the dispositions.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------------------------------------------
Fiscal 1997 Fiscal 1996
----------------------------------------- ------------------------------------------
June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1997 1997 1996 1996 1996 1996 1995 1995
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $257,138 $232,221 $225,159 $214,406 $182,644 $163,261 $152,535 $149,167
Operating income 25,612 23,214 21,061 20,378 17,055 14,363 11,512 13,653
Net income 13,934 12,738 11,676 11,319 10,045 8,384 7,184 7,912
Earnings per common share $ .30 $ .28 $ .25 $ .25 $ .24 $ .22 $ .20 $ .21
Weighted average shares
outstanding 46,611 46,133 46,004 45,835 41,662 37,343 37,060 36,876
Earnings per common share
assuming dilution $ .29 $ .27 $ .25 $ .24 $ .23 $ .22 $ .19 $ .21
Weighted average shares
outstanding 47,898 47,222 47,395 47,223 42,777 38,429 38,054 37,862
</TABLE>
18. SUBSEQUENT EVENTS
In December 1997, ACS merged with CDSI by exchanging 11.1 million shares of
its common stock, excluding unexercised options, for all of the common stock of
CDSI. Stockholders of CDSI received 1.759 shares of ACS Class A common stock
for each share of CDSI common stock in the merger, which has been accounted for
as a pooling of interests. All data presented in the accompanying financial
statements has been restated to reflect the merger.
There were no material transactions between ACS and CDSI prior to the
combination, and immaterial adjustments were recorded to conform CDSI's
accounting policies to those of the Company. Certain reclassifications were
made to the CDSI financial statements to conform to ACS's presentations.
Merger related costs of $12,974,000 million were recorded as a result of the
transaction. These costs were incurred during fiscal 1998 and are not
reflected in the accompanying financial statements.
20
<PAGE> 22
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following information presents certain income statement data of the
separate companies for the periods preceding the merger (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
ACS $ 624,533 $ 396,509 $ 313,181
CDSI 304,392 251,099 220,667
----------- ----------- -----------
Combined $ 928,925 $ 647,608 $ 533,848
=========== =========== ===========
Net income
ACS $ 38,510 $ 23,756 $ 17,604
CDSI 11,156 9,769 8,051
----------- ----------- -----------
Combined $ 49,666 $ 33,525 $ 25,655
=========== =========== ===========
</TABLE>
As a result of the merger, unexercised options to purchase CDSI common stock
were assumed by ACS, with the substitution of 1.759 shares of ACS Class A
common stock for each share of CDSI common stock purchasable under each assumed
option. The exercise price for each assumed option was also adjusted to
reflect the exchange ratio. In accordance with the terms of the 1991 Plan, the
merger constituted a change of control, which resulted in the accelerated
vesting of outstanding options under the plan. As a result, on December 16,
1997 an additional 590,145 options outstanding as of June 30, 1997 became
exercisable.
Also in December, ACS stockholders approved the 1997 Stock Incentive Plan
(the "1997 Plan") due to the imminent expiration of the 1988 Plan. This plan
was approved by the Board of Directors of ACS on August 5, 1997, at which time
the Board also amended the 1988 Plan to provide that no new options be granted
under the plan. As a result, all stock option grants awarded by the Company
subsequent to the merger will be pursuant to the 1997 Plan.
During the six months ended December 31, 1997, the Company completed three
acquisitions of professional services businesses, which were accounted for as
purchases. The Company financed a portion of the aggregate purchase price for
these acquisitions through the issuance of approximately 41,000 shares of
unregistered Class A common stock. In addition, the remaining minority
interest in one of the Company's professional services subsidiaries was
purchased through the issuance of approximately 402,000 shares of unregistered
Class A common stock.
21
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
Affiliated Computer Services, Inc.
Date: February 19, 1998
By: /s/ Mark A. King
-----------------------------
Mark A. King
Executive Vice President and
Chief Financial Officer
22
<PAGE> 24
AFFILIATED COMPUTER SERVICES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(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>
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
Computer 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
Computer 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
========== ========== ========== ==========
Year ended June 30, 1995
Deducted from asset accounts:
Accounts receivable $ 1,551 $ 442 $ 201(1) $ 1,792
Property and equipment 31,910 7,928 560(2) 39,278
Computer software 19,536 3,102 4,254(2) 18,384
Goodwill 3,942 1,841 -- 5,783
Other intangible assets 1,995 1,044 -- 3,039
---------- ---------- ---------- ----------
Total $ 58,934 $ 14,357 $ 5,015 $ 68,276
========== ========== ========== ==========
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
(2) Retirements
23
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION
------ -----------
<S> <C>
27.1 Financial Data Schedule - June 30, 1997
27.2 Financial Data Schedule - June 30, 1996
27.3 Financial Data Schedule - June 30, 1995
99.1 Management's Discussion and Analysis of Financial Condition and Results of Operations
99.2 Report of Independent Auditors
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 18,997
<SECURITIES> 0
<RECEIVABLES> 199,302
<ALLOWANCES> 1,964
<INVENTORY> 9,915
<CURRENT-ASSETS> 269,067
<PP&E> 135,160
<DEPRECIATION> 66,302
<TOTAL-ASSETS> 761,477
<CURRENT-LIABILITIES> 158,201
<BONDS> 130,680
0
0
<COMMON> 469
<OTHER-SE> 427,012
<TOTAL-LIABILITY-AND-EQUITY> 761,477
<SALES> 0
<TOTAL-REVENUES> 928,925
<CGS> 0
<TOTAL-COSTS> 838,659
<OTHER-EXPENSES> (425)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,121
<INCOME-PRETAX> 83,570
<INCOME-TAX> 33,904
<INCOME-CONTINUING> 49,666
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,666
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.05
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 29,267
<SECURITIES> 0
<RECEIVABLES> 160,749
<ALLOWANCES> 1,457
<INVENTORY> 10,938
<CURRENT-ASSETS> 236,451
<PP&E> 115,340
<DEPRECIATION> 46,718
<TOTAL-ASSETS> 636,098
<CURRENT-LIABILITIES> 156,522
<BONDS> 57,208
0
0
<COMMON> 457
<OTHER-SE> 362,747
<TOTAL-LIABILITY-AND-EQUITY> 636,098
<SALES> 0
<TOTAL-REVENUES> 647,608
<CGS> 0
<TOTAL-COSTS> 591,025
<OTHER-EXPENSES> (2,751)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,417
<INCOME-PRETAX> 55,917
<INCOME-TAX> 22,392
<INCOME-CONTINUING> 33,525
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,525
<EPS-PRIMARY> .88
<EPS-DILUTED> .85
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 42,713
<SECURITIES> 0
<RECEIVABLES> 94,562
<ALLOWANCES> 1,792
<INVENTORY> 6,294
<CURRENT-ASSETS> 170,258
<PP&E> 48,303
<DEPRECIATION> 39,278
<TOTAL-ASSETS> 309,903
<CURRENT-LIABILITIES> 92,642
<BONDS> 37,940
0
0
<COMMON> 366
<OTHER-SE> 156,320
<TOTAL-LIABILITY-AND-EQUITY> 309,903
<SALES> 0
<TOTAL-REVENUES> 533,848
<CGS> 0
<TOTAL-COSTS> 489,470
<OTHER-EXPENSES> (3,321)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,729
<INCOME-PRETAX> 42,970
<INCOME-TAX> 17,315
<INCOME-CONTINUING> 25,655
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,655
<EPS-PRIMARY> .74
<EPS-DILUTED> .71
</TABLE>
<PAGE> 1
EXHIBIT 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
On December 16, 1997, the Company acquired and merged with Computer Data
Systems, Inc. ("CDSI"), a provider of information technology solutions to
government and private industry customers in a transaction accounted for as a
pooling of interests. As a result, the Company has restated its historical
financial statements to reflect the merger with CDSI. The following discussion
includes the combined operations of ACS and CDSI.
The Company derives its revenues from information technology services and
electronic funds transfer ("EFT") transaction processing services primarily in
the United States. The Company's information technology services include data
processing outsourcing, business process outsourcing and professional services.
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, 1997,
approximately 90% 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, product installation fees and hardware sales. From inception through June
30, 1997, the Company has purchased 34 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 52% of the increase in revenues since June 30, 1992
has been attributable to these acquisitions.
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. 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 their 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.
28
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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,
---------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
--------- --------- ---------
Operating expenses:
Wages and benefits 42.6 46.1 46.6
Services and supplies 28.5 28.7 24.9
Rent, lease and maintenance 14.3 12.7 16.4
Depreciation and amortization 3.8 2.9 2.8
Other operating expenses 1.1 0.9 1.0
--------- --------- ---------
Total operating expenses 90.3 91.3 91.7
--------- --------- ---------
Operating income 9.7 8.7 8.3
Interest expense 0.8 0.5 0.9
Other expenses (income), net (0.1) (0.4) (0.6)
--------- --------- ---------
Pretax profit 9.0 8.6 8.0
Income tax expense 3.7 3.4 3.2
--------- --------- ---------
Net income 5.3% 5.2% 4.8%
========= ========= =========
</TABLE>
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 $173.9 million, while revenues from
internally generated sales contributed $107.4 million to the overall increase.
Outsourcing services revenues increased 60% over fiscal 1996, 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 Unibase Technologies, Inc.
("Unibase") which was acquired in February 1996, the subsequent revenue growth
in that subsidiary and increased requirements on CDSI's Department of Education
contract. Revenues from professional services increased 22% to $245.7 million
primarily due to four acquisitions completed in fiscal 1997. Revenues
generated by EFT services increased 36% to $92.9 million due to an 82% increase
in the number of automated teller machines ("ATMs") processed, primarily low
volume ATMs located in retail establishments.
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
year to year 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, such as
Genix, 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 the Genix acquisition.
Rent, lease and maintenance expense, as a percentage of revenues, increased due
to the Genix acquisition 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 Genix acquisition and 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
29
<PAGE> 3
MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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.
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 the Genix acquisition as
well as the acquisitions completed in fiscal 1997. 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.
COMPARISON OF FISCAL 1996 TO FISCAL 1995
In August 1995, the Company ceased providing services to its largest
commercial customer at that time, Bank of America Texas, N.A. ("B of A Texas")
at the expiration of their contract, due to their migration of data processing
and EFT transaction processing from the Company to their parent's systems. For
the years ended June 30, 1996 and 1995, revenues from B of A Texas accounted
for approximately 1% and 7% of the Company's consolidated revenues,
respectively. In connection with the contract expiration, management of the
Company successfully completed a cost reduction program and eliminated
approximately $24 million of direct and indirect costs of the Company (see Note
14 to the Company's Consolidated Financial Statements).
Revenues increased $113.8 million, or 21%, to $647.6 million for fiscal 1996,
due primarily to internally generated sales growth and acquisitions. Excluding
revenues from B of A Texas, fiscal 1996 revenues increased 29% over fiscal
1995.
Outsourcing services revenues, excluding B of A Texas, increased 21% due to
an increase in new accounts processed and higher volumes processed for existing
significant commercial outsourcing customers. Fiscal 1996 revenues for
outsourcing services were $185.9 million, which included $3.8 million in
revenues from B of A Texas. Revenues earned from business process outsourcing
increased 78% to $191.7 million, including $42 million in growth in the
Department of Education contract, the acquisition of Unibase in February 1996
and three acquisitions consummated by Dataplex Corporation, a wholly-owned
subsidiary of the Company. Professional services revenues grew by 9%, to $201.4
million during the year. Revenue increases of $30 million resulting from the
January 1995 acquisition of The Systems Group, Inc. ("TSG", later named
Technical Directions, Inc.) and two other ACS acquisitions in fiscal 1996 were
partially offset by the expiration of a larger CDSI ITS contract during 1995
and a reduction in scope on CDSI's Department of Energy contract. Revenues
earned from EFT transaction processing, excluding B of A Texas, increased by
22% due primarily to an increase in the number of ATMs processed, primarily low
volume ATMs. Fiscal 1996 revenues for EFT transaction processing were $68.5
million, which included $0.9 million in revenues from B of A Texas.
Total operating expenses were $591.0 million in fiscal 1996, an increase of
21% over fiscal 1995, which is consistent with the increase in revenues. Wages
and benefits as a percentage of revenues was relatively unchanged due to the
increases in ACS' labor intensive businesses being partially offset by
reductions in the volume of professional services revenues at CDSI. Services
and supplies increased as a percentage of revenues due primarily to the
Department of Education contract where there were significant increases in
subcontractor costs. The net decrease in rent, lease and maintenance as a
percentage of revenues was due primarily to economies of scale within
commercial outsourcing services. In addition, fiscal 1996 rent, lease and
maintenance expense was reduced by $3.0 million of amortization of the B of A
Texas accrual compared to $8.5 million of additional expenses accrued in fiscal
1995 (see Note 14 to the Company's Consolidated Financial Statements).
Operating income increased $12.2 million, or 28%, in fiscal 1996 compared to
fiscal 1995 due to internal growth and acquisitions. Interest expense decreased
slightly as a percentage of revenues due to a decrease in average debt
outstanding in fiscal 1996 as a result of the stock offerings completed by the
Company in fiscal 1996
30
<PAGE> 4
MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
and 1995, offset by an increase in minority interest expense resulting from
certain fiscal 1996 and 1995 acquisitions. The effective tax rate was
approximately 40% for fiscal 1996 and fiscal 1995, which exceeded the 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, 1997, the Company's liquid assets, consisting of cash and cash
equivalents, totaled $25.6 million compared to $38.4 million at June 30, 1996.
These liquid assets included $6.7 million and $9.1 million borrowed under a
revolving credit facility (the "ATM Cash Facility") for use in the Company's
owned ATMs at June 30, 1997 and 1996, respectively. Working capital of $110.9
million at June 30, 1997 increased by $30.9 million from the prior year due
primarily to fiscal 1997 net cash flows from operating activities, increased
accounts receivable from government agencies and the acquisitions completed
during fiscal 1997 which were partially funded by debt.
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 acquisition of Genix. 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 in the amount of $23 million
to resolve a software license dispute with a software vendor that resulted from
the Genix acquisition. 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 ASEC in June 1997.
Net cash provided by operating activities of $18.4 million for fiscal 1996
decreased from $36.2 million in fiscal 1995 due primarily to the growth in
accounts receivable resulting from new and existing customers, a $7.4 million
reduction in changes in ATM cash balances, and $5.0 million from the purchase
of a one-year supply of imaging film on favorable price terms. Net cash used in
investing activities increased in fiscal 1996 by $210.8 million due primarily
to $162.6 million paid for eight acquisitions, including $137.5 million for the
purchase of Genix, which was effective June 21, 1996, compared to $9.2 million
paid for six smaller acquisitions in fiscal 1995. Also, investing activities
included an increase of $34.9 million used for the purchase of property,
equipment and software. Property and equipment purchases increased with the
purchase of the Company's headquarters and the purchase and renovation of an
adjacent building (an aggregate of approximately $20 million) and growth
associated with outsourcing services customers. Net cash provided by financing
activities increased $201.0 million due primarily to $170.2 million in net
proceeds received from the Company's secondary stock offerings completed in
March and June 1996, which proceeds were used to pay down debt incurred to fund
fiscal 1996 acquisitions, including debt from the Genix acquisition. Net
long-term debt at June 30, 1996, which increased by almost $20 million over
June 30, 1995, also contributed to the increase in cash provided by financing
activities.
In July 1997, 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. Borrowings under the Credit Facility as of June
30, 1997 were $82.7 million. After giving effect to the expanded Credit
Facility and outstanding letters of credit, the Company , as of June 30, 1997,
would have had approximately $106.2 million available for use under the Credit
Facility. In connection with the acquisition of ASEC in June 1997, CDSI
entered into a bank credit facility which included a $50 million term loan for
the purchase, and $25 million of additional availability. The term loan was
repaid upon consummation of the merger and the CDSI credit facility was
canceled. The Company has an ATM Cash Facility of $11 million, of which $6.7
million was outstanding at June 30, 1997. This facility expires December 1997.
The Company also has two vault cash custody agreements with financial
institutions which provide up to $52 million in cash for use in the
Company-owned ATMs. The amount of cash outstanding under the cash custody
agreements at June 30, 1997 was approximately $28 million and is not an asset
or liability
31
<PAGE> 5
MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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
current arrangements expire in July 1998 and January 1999. In September 1997,
the Company redeemed its preferred stock investment in a customer, resulting in
cash proceeds of $12.7 million which were used to pay down long-term debt (see
Note 5 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.
32
<PAGE> 1
EXHIBIT 99.2
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Computer Data Systems, Inc.
We have audited the accompanying consolidated balance sheets of Computer Data
Systems, Inc. as of June 30, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended June 30, 1997 (not presented separately
herein). 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, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Washington, D.C.
July 28, 1997
33
