<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period from to
---------- ----------
Commission file number 0-24787
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AFFILIATED COMPUTER SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0310342
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2828 North Haskell, Dallas, Texas 75204
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 841-6111
--------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Number of shares outstanding as of
Title of each class February 9, 1998
- --------------------------------------- -----------------------------------------
<S> <C>
Class A Common Stock, $.01 par value 44,484,179
Class B Common Stock, $.01 par value 3,299,686
----------
47,783,865
</TABLE>
<PAGE> 2
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1997
and June 30, 1997 1
Consolidated Statements of Income for the Three
Months and the Six Months Ended
December 31, 1997 and 1996 2
Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 1997 and 1996 3
Notes to Consolidated Financial Statements 4 - 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
<PAGE> 3
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,713 $ 18,997
ATM cash 10,000 6,650
Accounts receivable, net of allowance for doubtful
accounts of $2,543 and $1,964, respectively 211,188 199,302
Inventory 9,642 9,915
Prepaid expenses and other current assets 23,735 21,343
Deferred taxes 8,030 12,860
-------- --------
Total current assets 286,308 269,067
Property and equipment, net of accumulated depreciation and
amortization of $78,833 and $66,302, respectively 136,752 135,160
Purchased computer software, net of accumulated
amortization of $10,030 and $9,436, respectively 6,124 4,554
Goodwill, net of accumulated amortization of $20,288 and
$15,504, respectively 372,060 312,732
Other intangible assets, net of accumulated amortization
of $9,808 and $7,100, respectively 27,431 24,829
Long-term investments and other assets 9,508 15,135
-------- --------
Total assets $838,183 $761,477
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,616 $ 24,167
Accrued compensation and benefits 36,361 36,054
Other accrued liabilities 80,869 72,115
Notes payable and current portion of long-term debt 12,614 17,546
Current portion of unearned revenue 7,349 8,319
-------- --------
Total current liabilities 161,809 158,201
Long-term debt 179,888 130,680
Unearned revenue 1,164 1,191
Deferred taxes 16,570 14,089
Other long-term liabilities 23,390 29,835
-------- --------
Total liabilities 382,821 333,996
-------- --------
Stockholders' equity:
Class A common stock 442 405
Class B common stock 33 64
Additional paid-in capital 285,459 275,922
Retained earnings 169,428 151,090
-------- --------
Total stockholders' equity 455,362 427,481
-------- --------
Total liabilities and stockholders' equity $838,183 $761,477
======== ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- --------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 285,235 $ 225,159 $ 550,229 $ 439,565
--------- --------- --------- ---------
Expenses:
Wages and benefits 120,102 94,924 234,217 188,264
Services and supplies 90,163 64,434 168,136 122,315
Rent, lease and maintenance 33,859 33,221 74,792 66,063
Depreciation and amortization 11,302 8,088 21,833 15,620
Merger related costs 12,974 -- 12,974 --
Other operating expenses 2,355 3,431 4,889 5,864
--------- --------- --------- ---------
Total operating expenses 270,755 204,098 516,841 398,126
--------- --------- --------- ---------
Operating income 14,480 21,061 33,388 41,439
Interest expense 2,751 1,654 5,456 3,148
Other expenses (income), net 198 (214) (6,596) (365)
--------- --------- --------- ---------
Income before income taxes 11,531 19,621 34,528 38,656
Income tax expense 5,929 7,945 15,476 15,662
--------- --------- --------- ---------
Net income $ 5,602 $ 11,676 $ 19,052 $ 22,994
========= ========= ========= =========
Earnings per common share (basic) $ .12 $ .25 $ .40 $ .50
========= ========= ========= =========
Weighted average shares outstanding 47,383 46,004 47,167 45,904
========= ========= ========= =========
Earnings per common share assuming
dilution $ .12 $ .25 $ .39 $ .49
========= ========= ========= =========
Weighted average shares outstanding 48,584 47,395 48,453 47,315
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 19,052 $ 22,994
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 21,833 15,620
Noncash portion of merger related costs 1,762 --
Other -- 145
Gain on redemption of preferred stock (6,742) --
Changes in assets and liabilities, net of effects from acquisitions:
(Increase) decrease in ATM cash (3,350) 3,150
Increase in accounts receivable (4,308) (12,016)
Decrease in inventory 273 1,821
(Increase) decrease in prepaid expenses and
other current assets 327 (1,146)
Change in deferred taxes 8,524 2,983
Increase in other assets (616) (969)
Increase (decrease) in accounts payable (874) 5,951
Decrease in accrued compensation and benefits (4,474) (6,792)
Increase (decrease) in other accrued liabilities 5,844 (3,109)
Increase (decrease) in income taxes payable 1,480 (1,427)
Decrease in unearned revenue (997) (2,870)
Decrease in other long-term liabilities (6,175) (4,443)
--------- ---------
Total adjustments 12,507 (3,102)
--------- ---------
Net cash provided by operating activities 31,559 19,892
--------- ---------
Cash flows from investing activities:
Purchases of property, equipment and computer software (17,083) (19,021)
Payments for acquisitions, net of cash acquired (63,554) (17,444)
Proceeds from the redemption of long-term investments 12,596 4,611
Cash received from divestitures -- 2,704
Additions to other intangible assets and goodwill (3,077) (2,687)
Other (90) 42
--------- ---------
Net cash used in investing activities (71,208) (31,795)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 108,251 13,175
Repayments of long-term debt (67,351) (11,157)
Proceeds from stock options exercised and related tax
benefits 590 3,281
Net borrowings (repayments) of ATM debt 3,350 (3,150)
Redemption of cumulative redeemable preferred stock -- (607)
Other, net (475) (748)
--------- ---------
Net cash provided by financing activities 44,365 794
--------- ---------
Net increase (decrease) in cash and cash equivalents 4,716 (11,109)
Cash and cash equivalents at beginning of period 18,997 29,267
--------- ---------
Cash and cash equivalents at end of period $ 23,713 $ 18,158
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Affiliated Computer Services, Inc. and its majority-owned subsidiaries
(the "Company" or "ACS"). All material intercompany profits,
transactions and balances have been eliminated. ACS provides
information technology services and electronic commerce solutions
primarily in the United States. The Company's information technology
services include data processing outsourcing, business process
outsourcing and professional services and systems integration.
In December 1997, the Company acquired Computer Data Systems, Inc.
("CDSI"), through the merger of a wholly-owned subsidiary of the
Company with and into CDSI, a provider of information technology
solutions to government and private industry customers. The transaction
was accounted for as a pooling of interests; therefore, all periods
presented have been restated to include the combined operations of ACS
and CDSI.
The financial information presented should be read in conjunction with
the Company's annual consolidated financial statements for the year
ended June 30, 1997. The foregoing unaudited consolidated financial
statements reflect all adjustments (all of which are of a normal
recurring nature) which are, in the opinion of management, necessary
for a fair presentation of the results of the interim periods. The
results for the interim periods are not necessarily indicative of
results to be expected for the year.
2. COMPLETION OF MERGER
On December 16, 1997 the CDSI merger was both approved and consummated
by the stockholders of each company. The stockholders of CDSI received
1.759 shares of ACS Class A common stock for each share of CDSI common
stock, resulting in the issuance of 11.1 million shares of ACS Class A
common stock, excluding unexercised options. The transaction was
structured to be tax free to CDSI stockholders and was accounted for as
a pooling of interests. There were no material transactions between ACS
and CDSI prior to the combination. Certain reclassifications and
immaterial adjustments were necessary to conform the CDSI financial
statement presentations and accounting policies to those of ACS.
The following table presents the revenues and net income of the
separate companies for the financial statement periods preceding the
merger (in thousands):
<TABLE>
<CAPTION>
Three Months Three Months Six Months
Ended Ended Ended
Sept. 30, 1997 Dec. 31, 1996 Dec. 31, 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
ACS $172,475 $150,004 $294,337
CDSI 92,519 75,155 145,228
-------- -------- --------
Combined $264,994 $225,159 $439,565
======== ======== ========
Net income:
ACS $ 11,009 $ 9,130 $ 17,663
CDSI 2,441 2,546 5,331
-------- -------- --------
Combined $ 13,450 $ 11,676 $ 22,994
======== ======== ========
</TABLE>
4
<PAGE> 7
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the second quarter of fiscal 1998, the Company recorded
operating expenses of $13.0 million ($8.9 million net of related tax
benefits or $.18 per common share assuming dilution), for specific and
identifiable costs related to the CDSI merger, including direct
transaction costs, integration costs, consolidation expenses, and the
write-off of certain assets. At December 31, 1997, $9.2 million of
these charges were reported as current liabilities in the Company's
balance sheet.
In conjunction with the CDSI merger, options outstanding under the CDSI
1991 Long-Term Incentive Plan (the "1991 Plan") became fully vested and
exercisable as a result of certain change of control provisions
contained in the 1991 Plan. As of December 31, 1997, 1,103,343 options
granted under the 1991 Plan were vested and exercisable. In connection
with the CDSI merger, 3,106,000 shares of ACS Class B common stock were
converted to Class A common stock.
3. BUSINESS COMBINATIONS
During the six months ended December 31, 1997, the Company completed
three acquisitions of professional services businesses, which were
accounted for as purchases. Assets acquired, liabilities assumed and
net purchase price of the acquisitions were $75.9 million, $9.8
million, and $66.1 million, respectively. 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.
4. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). This statement replaced 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 have been presented to conform to the
requirements of SFAS 128.
5
<PAGE> 8
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table (in thousands except per share amounts) sets forth
the computation of basic and diluted earnings per share. Outstanding
options which were not included in the computation of diluted EPS
because the exercise prices exceeded the average market price of the
common stock totaled less than 25,000 shares for each period presented.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- ---------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 5,602 $11,676 $19,052 $22,994
------- ------- ------- -------
Denominator:
Weighted average shares outstanding (basic) 47,383 46,004 47,167 45,904
Potential common shares:
Stock options 973 1,028 1,034 1,067
Warrants and other 228 363 252 344
------- ------- ------- -------
Total potential common shares 1,201 1,391 1,286 1,411
------- ------- ------- -------
Denominator for earnings per share
assuming dilution 48,584 47,395 48,453 47,315
------- ------- ------- -------
Earnings per common share (basic) $ .12 $ .25 $ .40 $ .50
======= ======= ======= =======
Earnings per common share assuming dilution $ .12 $ .25 $ .39 $ .49
======= ======= ======= =======
</TABLE>
5. NON-RECURRING CHARGE
During the first quarter of 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 in December 1999. This computer will be replaced with state of the
art technology and will provide better service to the Company's
clients.
6. REDEMPTION OF INVESTMENT IN PREFERRED STOCK
In September 1997, a long-term investment in the preferred stock of one
of the Company's customers was redeemed for $12.7 million. The
redemption resulted in a $6.7 million gain which is reported as
non-operating income in the accompanying statement of income for the
six months ended December 31, 1997.
6
<PAGE> 9
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act 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.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statements of income as a percentage of revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Expenses:
Wages and benefits 42.1 42.2 42.6 42.8
Services and supplies 31.6 28.6 30.5 27.8
Rent, lease and maintenance 11.9 14.7 13.6 15.0
Depreciation and amortization 4.0 3.6 4.0 3.6
Merger related costs 4.5 -- 2.3 --
Other operating expenses 0.8 1.5 0.9 1.4
----- ----- ----- -----
Total operating expenses 94.9 90.6 93.9 90.6
----- ----- ----- -----
Operating income 5.1 9.4 6.1 9.4
Interest expense 1.0 0.7 1.0 0.7
Other expense (income), net -- -- (1.2) (0.1)
----- ----- ----- -----
Income before income taxes 4.1 8.7 6.3 8.8
Income tax expense 2.1 3.5 2.8 3.6
----- ----- ----- -----
Net income 2.0% 5.2% 3.5% 5.2%
===== ===== ===== =====
</TABLE>
COMPARISON OF THE QUARTER ENDED DECEMBER 31, 1997 TO THE QUARTER ENDED
DECEMBER 31, 1996
Revenues increased $60.0 million, or 27%, to $285.2 million in the quarter ended
December 31, 1997 (the second quarter of the Company's 1998 fiscal year), from
$225.2 million in the second quarter of fiscal 1997, due to acquisitions,
internally generated sales and growth from existing customers. Of the 27%
increase in revenue, 11% was from internal growth and 16% was from acquisitions.
The Company
7
<PAGE> 10
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
acquired two businesses during the quarter, which had historical annual revenues
of approximately $51.2 million. A total of six business acquisitions have
occurred since the second quarter of fiscal 1997. Revenues from these
acquisitions were approximately $35.1 million for the quarter ended December 31,
1997, including $17.9 million from Analytical Systems Engineering Corporation
("ASEC"), a wholly-owned subsidiary of CDSI.
Excluding $13.0 million of merger costs, total operating expenses were $257.8
million in the second quarter of fiscal 1998, an increase of 26.3%, from $204.1
million in the second quarter of fiscal 1997. Operating expenses, excluding
merger costs, decreased from 90.6% as a percentage of revenues in the second
quarter of fiscal 1997 to 90.4% in the second quarter of fiscal 1998.
Services and supplies increased from 28.6% of revenues in the second quarter of
fiscal 1998, to 31.6% of revenues in the second quarter of fiscal 1997 primarily
due to unusually high rebillable expenses during the second quarter on a loan
processing government contract. Rent, lease and maintenance decreased from 14.7%
as a percentage of revenues in the second quarter of fiscal 1997 to 11.9% in the
second quarter of fiscal 1998, due primarily to increases in other expense
categories resulting from recent acquisitions of professional services
businesses (primarily ASEC) and economies of scale related to growth in the
Company's outsourcing business line.
Depreciation and amortization increased to 4.0% of revenues in the second
quarter of fiscal 1998, compared to 3.6% of revenues in the second quarter of
fiscal 1997. This increase is primarily attributable to capital expenditures
during the last twelve months and goodwill recorded in connection with the
acquisition of ASEC in June 1997.
Operating income, excluding merger costs, increased $6.4 million, or 30.3%, to
$27.5 million in the second quarter of fiscal 1998, compared to $21.1 million in
the second quarter of fiscal 1997. The increase was due to internally generated
sales and acquisitions since the second quarter of fiscal 1997 (primarily ASEC).
Operating income margin, excluding merger costs, improved to 9.6% in the second
quarter of fiscal 1998, from 9.4% in the second quarter of fiscal 1997, due
primarily to the continued realization of economies of scale in the outsourcing
business line.
Interest expense increased $1.1 million to $2.8 million in the second quarter of
fiscal 1998, compared to $1.7 million in the second quarter of fiscal 1997 due
primarily to debt incurred to fund the ASEC acquisition.
The Company's effective tax rate exceeded 51% for the second quarter of fiscal
1998 due to certain non-deductible merger costs. Excluding merger costs and the
related tax benefit, the effective tax rate was 41%, which exceeded 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 THE SIX MONTHS ENDED DECEMBER 31, 1997 TO THE SIX MONTHS ENDED
DECEMBER 31, 1996
Revenues increased $110.6 million, or 25%, to $550.2 million in the six months
ended December 31, 1997, from $439.6 million for the same period in fiscal 1997
due to acquisitions, internally generated sales and growth from existing
customers. The Company acquired three businesses during the six months ended
December 31, 1997, which had historical annual revenues of approximately $52.8
million and generated $5.8 million of revenues for the six months ended December
31, 1997. Revenues from the six businesses acquired since the second quarter of
fiscal 1997 were $61.7 million for the six months ended December 31, 1997.
Excluding merger costs of $13.0 million, total operating expenses were $503.9
million for the six months ended December 31, 1997, an increase of 26.6%, from
$398.1 million for the same period in fiscal 1997. Operating expenses, excluding
merger costs, as a percentage of revenues increased slightly from 90.6% in
fiscal 1997 to 91.6% in fiscal 1998 due primarily to a non-recurring $6.0
million charge to rent, lease and
8
<PAGE> 11
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
maintenance expense in the first quarter of fiscal 1998 for a binding commitment
to a hardware lessor to terminate a computer lease obligation prior to its
expiration.
Services and supplies increased as a percentage of revenues from 27.8% for the
first six months of fiscal 1997 to 30.5% for the first six months of fiscal 1998
due to the unusually high rebillable expenses during the second quarter of
fiscal 1998 on a government contract. Rent, lease and maintenance expense for
the first six months of fiscal 1998 contains the $6.0 million non-recurring
charge mentioned above. Excluding this $6.0 million charge, rent, lease and
maintenance expense decreased from 15.0% as a percentage of revenues in the
first six months of fiscal 1997 to 12.5% in the first six months of fiscal 1998,
due primarily to increases in other expense categories resulting from recent
acquisitions of professional services businesses (primarily ASEC) and economies
of scale related to growth in the Company's outsourcing business line.
Depreciation and amortization increased to 4.0% of revenues in the first six
months of fiscal 1998, compared to 3.6% of revenues in fiscal 1997, primarily
due to capital expenditures during the last twelve months and goodwill recorded
in connection with the ASEC acquisition.
Operating income before merger costs increased $5.0 million, or 12.1%, to $46.4
million for the first six months of fiscal 1998, compared to $41.4 million in
fiscal 1997. The increase was due to the growth in new business generated by the
Company and to acquisitions since the second quarter of fiscal 1997. The
operating income margin, before merger costs and the $6.0 million non-recurring
charge mentioned above, remained consistent from the first six months of fiscal
1997 to the first six months of fiscal 1998.
Interest expense increased from $3.1 million in the first six months of fiscal
1997 to $5.5 million in fiscal 1998, primarily due to an increase in long-term
debt incurred to fund the ASEC acquisition. Other income for the first six
months of fiscal 1998 contains 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 exceeded 44% for the first six months of 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company's liquid assets, consisting of cash and cash
equivalents, totaled $33.7 million compared to $25.6 million at June 30, 1997.
These liquid assets included $10.0 million ($6.7 million at June 30, 1997)
borrowed under a revolving credit facility ("ATM Cash Facility") for use in the
Company's automated teller machines ("ATMs"). Working capital was $124.5 million
and $110.9 million at December 31, 1997 and June 30, 1997, respectively, an
increase of $13.6 million primarily due to an increase in accounts receivable
balances from acquisitions and internal revenue growth.
Net cash provided by operating activities was $31.6 million for the first six
months of fiscal 1998, compared with $19.9 million provided by operating
activities during the first six months of fiscal 1997. The increase is primarily
due to changes in accounts receivable and other accrued liabilities balances
during the two periods. The Company used $71.2 million in cash from investing
activities for the six months ended December 31, 1997, due to $63.6 million used
for acquisitions and $17.1 million used for capital expenditures, offset by
$12.6 million received from the redemption of a preferred stock investment. Cash
flow from financing activities increased $43.6 million in the first six months
of fiscal 1998 as compared to the first six months of fiscal 1997, due primarily
to borrowings of long-term debt in the current period to finance the acquisition
of CARA Holdings, Inc., the parent of CARA Corporation ("CARA"). CARA was
acquired in December 1997 and provides technical staff augmentation, project
management, systems development services and end-user performance support,
training and documentation and Year 2000 consulting to approximately 130
clients.
9
<PAGE> 12
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During the first quarter of fiscal 1998, the Company increased its available
line of credit from $125 million to $200 million under the Credit Facility.
Borrowings under the Credit Facility as of December 31, 1997 were $173.7
million. After considering outstanding letters of credit, the Company has
approximately $23.7 million available for use under the Credit Facility. The
Company has an ATM Cash Facility of $11 million, of which $10.0 million was
outstanding as of December 31, 1997. In December 1997, the term of this facility
was extended through December 1998. The Company also has two vault cash custody
agreements with financial institutions which provide the use of up to $52.0
million in cash for use in Company-owned ATMs. Cash outstanding under the cash
custody agreements, approximately $37.0 million at December 31, 1997, is not an
asset or liability of the Company and is not recorded on the accompanying
consolidated balance sheets. Recently enacted federal regulations governing
financial institutions' cash requirements have allowed financial institutions to
significantly reduce their vault cash reserves. Accordingly, this may limit ACS'
ability to secure similar cash custody agreements when its current arrangements
expire in July 1998 and January 1999.
The Company's management believes that available cash and cash equivalents,
together with cash generated from operations and available borrowings under its
credit facilities, will provide adequate funds for the Company's anticipated
needs, including working capital, capital expenditures and ATM cash
requirements. Management also believes that cash provided by operations will be
sufficient to satisfy all existing debt obligations as they become due.
Additional acquisition opportunities, however, 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.
10
<PAGE> 13
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceeding
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 noncash charge.
The Company is subject to certain legal proceedings, claims and disputes which
arise in the ordinary course of its business. Although the Company cannot
predict the outcomes of these legal proceedings, the Company's management does
not believe these actions will have a material adverse effect on the Company's
financial position, results of operations or liquidity. However, if unfavorably
resolved, these proceedings could have a material adverse effect on the
Company's financial position, results of operations and liquidity.
Item 2. Changes in Securities
On October 7, 1997, the Company issued 402,000 shares of Class A common stock to
certain selling stockholders in connection with the Company's acquisition of the
remaining 30% interest in the outstanding capital stock of Technical Directions,
Inc. On December 31, 1997, the Company issued 41,110 shares of Class A common
stock to certain selling stockholders in connection with the Company's
acquisition of all of the outstanding capital stock of CARA Holdings, Inc., the
parent of CARA Corporation. The issuances of ACS Class A common stock in
connection with the foregoing transactions were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended. No
underwriters participated in these transactions.
11
<PAGE> 14
Item 4. Submission of Matters to a Vote of Security Holders
On December 16, 1997, the Company held its 1997 annual meeting of stockholders,
at which meeting the Company's stockholders were asked to vote on the following
proposals to: (i) approve the issuance of shares of ACS Class A common stock in
connection with the combination of ACS with CDSI ("Proposal 1"); (ii) approve an
amendment to the Company's charter classifying the ACS board of directors into
three classes ("Proposal 2"); (iii) elect the board of directors ("Proposal 3");
(iv) approve an amendment to the Company's bylaws requiring advance notice by
ACS stockholders for proposals and nominations for director to be included for
consideration at a meeting of stockholders ("Proposal 4"); (v) approve an
amendment to the Company's charter to increase the number of authorized shares
of ACS Class A common stock from 75,000,000 to 500,000,000 and of ACS Class B
common stock from 6,405,686 to 14,000,000 ("Proposal 5"); (vi) vote upon
performance-based incentive compensation to ACS's executive officers ("Proposal
6"); and (vii) approve the ACS 1997 Stock Incentive Plan ("Proposal 7"). The
tabulated results of votes cast at the meeting were as follows:
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions
---------------- ---------------- ----------------
<S> <C> <C> <C>
Proposal 1: 85,573,479 7,087 2,290
Proposal 2: 72,303,709 13,280,790 4,531
Proposal 4: 76,082,252 9,982,663 12,460
Proposal 5: 77,277,983 9,938,391 3,178
Proposal 6: 86,664,160 62,787 4,260
Proposal 7: 75,534,470 10,535,840 7,065
</TABLE>
<TABLE>
<CAPTION>
Proposal 3: Votes
--------------------------------
For Withheld
------------- --------------
<S> <C> <C>
Darwin Deason 86,666,337 553,125
Jeffrey A. Rich 86,666,337 553,125
Henry G. Hortenstine 86,665,737 553,815
Joseph P. O'Neill 86,666,337 553,215
Frank A. Rossi 86,666,137 553,415
Clifford M. Kendall 86,666,292 553,260
Mark A King 86,666,447 553,105
David W. Black 86,666,013 553,539
Peter A. Bracken 86,666,137 553,415
</TABLE>
12
<PAGE> 15
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
2.1 Agreement and Plan of Merger, dated as of September 20, 1997, by
and among the Company, ACS Acquisition Corp. and CDSI, filed as
Exhibit 2.1 to the Company's Registration Statement on Form S-4
(Registration No. 333-40351) and incorporated herein by reference.
27. Financial Data Schedule
b) Reports on Form 8-K
1. On December 23, 1997, the Company filed a Current Report on
Form 8-K reporting the closing of the CDSI merger.
2. On January 6, 1998, the Company filed a Current Report on Form
8-K reporting the acquisition by a wholly owned subsidiary of
the Company of CARA Holdings Inc., parent of CARA Corporation.
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 13th day of February, 1998.
AFFILIATED COMPUTER SERVICES, INC.
By: /s/ Mark A. King
--------------------------------------
Mark A. King
Executive Vice President and
Chief Financial Officer
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of September 20, 1997, by
and among the Company, ACS Acquisition Corp. and CDSI, filed as
Exhibit 2.1 to the Company's Registration Statement on Form S-4
(Registration No. 333-40351) and incorporated herein by reference.
27. Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 23,713
<SECURITIES> 0
<RECEIVABLES> 211,188
<ALLOWANCES> 2,543
<INVENTORY> 9,642
<CURRENT-ASSETS> 286,308
<PP&E> 136,752
<DEPRECIATION> 78,833
<TOTAL-ASSETS> 838,183
<CURRENT-LIABILITIES> 161,809
<BONDS> 179,888
0
0
<COMMON> 475
<OTHER-SE> 454,887
<TOTAL-LIABILITY-AND-EQUITY> 838,183
<SALES> 0
<TOTAL-REVENUES> 550,229
<CGS> 0
<TOTAL-COSTS> 516,841
<OTHER-EXPENSES> (6,596)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,456
<INCOME-PRETAX> 34,528
<INCOME-TAX> 15,476
<INCOME-CONTINUING> 19,052
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> .40
<EPS-DILUTED> .39
</TABLE>
