<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, 1998
--------------------------
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 3, 1999
- -------------------------------------------- --------------------------------------
<S> <C>
Class A Common Stock, $.01 par value 45,842,672
Class B Common Stock, $.01 par value 3,299,686
----------
49,142,358
</TABLE>
<PAGE> 2
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1998 and June
30, 1998 1
Consolidated Statements of Income for the Three Months and
Six Months Ended December 31, 1998 and 1997 2
Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 1998 and 1997 3
Notes to Consolidated Financial Statements 4 - 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6 - 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
<PAGE> 3
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 146,254 $ 75,888
ATM cash 9,000 8,100
Accounts receivable, net of allowance for doubtful
accounts of $4,188 and $2,840, respectively 305,333 236,523
Inventory 15,984 9,911
Prepaid expenses and other current assets 45,273 24,455
Deferred taxes 12,902 10,210
---------- ----------
Total current assets 534,746 365,087
Property and equipment, net of accumulated depreciation and
amortization of $107,668 and $90,096, respectively 160,698 142,717
Software, net of accumulated amortization of $12,353 and
$11,029, respectively 16,998 9,947
Goodwill, net of accumulated amortization of $32,860 and
$25,846, respectively 545,001 373,236
Other intangible assets, net of accumulated amortization
of $19,596 and $14,414, respectively 39,107 38,073
Long-term investments and other assets 31,760 20,738
---------- ----------
Total assets $1,328,310 $ 949,798
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 41,728 $ 27,953
Accrued compensation and benefits 43,012 40,595
Other accrued liabilities 108,558 80,343
Due to BRC Holdings, Inc. shareholders 104,066 --
Notes payable and current portion of long-term debt 11,699 10,624
Current portion of unearned revenue 15,211 7,454
---------- ----------
Total current liabilities 324,274 166,969
Convertible notes due 2005 230,000 230,000
Long-term debt 178,964 4,848
Deferred taxes 19,712 24,103
Other long-term liabilities 15,949 20,208
---------- ----------
Total liabilities 768,899 446,128
---------- ----------
Stockholders' equity:
Class A common stock 459 449
Class B common stock 33 33
Additional paid-in capital 314,490 298,393
Retained earnings 244,429 204,795
---------- ----------
Total stockholders' equity 559,411 503,670
---------- ----------
Total liabilities and stockholders' equity $1,328,310 $ 949,798
========== ==========
</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,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 391,634 $ 285,235 $ 754,990 $ 550,229
--------- --------- --------- ---------
Expenses:
Wages and benefits 165,025 120,102 319,152 234,217
Services and supplies 122,441 90,163 234,951 168,136
Rent, lease and maintenance 45,190 33,859 87,895 74,792
Depreciation and amortization 15,890 11,302 31,347 21,833
Merger costs -- 12,974 -- 12,974
Other operating expenses 5,174 2,355 8,735 4,889
--------- --------- --------- ---------
Total operating expenses 353,720 270,755 682,080 516,841
--------- --------- --------- ---------
Operating income 37,914 14,480 72,910 33,388
Interest expense 3,809 2,751 7,168 5,456
Other non-operating income, net (876) 198 (1,164) (6,596)
--------- --------- --------- ---------
Pretax profit 34,981 11,531 66,906 34,528
Income tax expense 14,342 5,929 27,272 15,476
--------- --------- --------- ---------
Net income $ 20,639 $ 5,602 $ 39,634 $ 19,052
========= ========= ========= =========
Earnings per common share:
Basic $ .42 $ .12 $ .82 $ .40
========= ========= ========= =========
Diluted $ .40 $ .12 $ .77 $ .39
========= ========= ========= =========
Shares used in computing earnings per common share:
Basic 48,741 47,383 48,488 47,167
Diluted 55,416 48,584 55,304 48,453
</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,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 39,634 $ 19,052
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 31,347 21,833
Non-cash portion of merger costs -- 1,762
Gain on redemption of preferred stock -- (6,742)
Other 1,063 --
Changes in assets and liabilities, net of effects from acquisitions:
Increase in ATM cash (900) (3,350)
Increase in accounts receivable (26,102) (4,308)
(Increase) decrease in inventory (4,189) 273
(Increase) decrease in prepaid expenses and other
current assets (7,909) 327
Change in deferred taxes 10,794 8,524
Increase in other long-term assets (94) (616)
Increase (decrease) in accounts payable 4,207 (874)
Decrease in accrued compensation and benefits (5,745) (4,474)
Increase in other accrued liabilities 9,679 5,844
Change in income taxes receivable/payable (2,750) 1,480
Increase (decrease) in unearned revenue 489 (997)
Decrease in other long-term liabilities (2,883) (6,175)
--------- ---------
Total adjustments 7,007 12,507
--------- ---------
Net cash provided by operating activities 46,641 31,559
--------- ---------
Cash flows from investing activities:
Purchases of property, equipment and software, net of sales (30,507) (17,083)
Payments for acquisitions, net of cash acquired (117,052) (63,554)
Proceeds from the redemption of long-term investments -- 12,596
Additions to other intangible assets (5,162) (3,077)
Other (1,664) (90)
--------- ---------
Net cash used in investing activities (154,385) (71,208)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of issuance 182,007 108,251
costs
Repayments of long-term debt (9,404) (67,351)
Proceeds from stock options exercised and related tax 5,068 590
benefits
Net borrowings of ATM debt 900 3,350
Other, net (461) (475)
--------- ---------
Net cash provided by financing activities 178,110 44,365
--------- ---------
Net increase in cash and cash equivalents 70,366 4,716
Cash and cash equivalents at beginning of period 75,888 18,997
--------- ---------
Cash and cash equivalents at end of period $ 146,254 $ 23,713
========= =========
</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 a full
range of information technology services including technology
outsourcing, business process outsourcing, electronic commerce and
professional services and systems integration primarily in North
America, as well as Central America, South America, Europe and the
Middle East.
The financial information presented should be read in conjunction with
the Company's consolidated financial statements for the year ended June
30, 1998. 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. BUSINESS COMBINATIONS
During the quarter ended December 31, 1998, the Company completed the
purchase of approximately 8.7 million shares (the "Shares") of the
common stock of BRC Holdings, Inc. ("BRC") at a purchase price of $19
per share, representing approximately 63% of the issued and outstanding
shares at the time of the purchase. The total amount of funds used to
acquire the Shares was approximately $165.4 million. The Company
anticipates completing the merger in February 1999 when it will
purchase the remaining 37% of outstanding shares for $19 per share.
Accordingly, the Company has recorded a liability for $104.1 million at
December 31, 1998 to purchase the remaining outstanding shares and
stock options. However, it is possible that some BRC stockholders will
exercise their dissenter's rights under Delaware law in connection with
the merger of BRC with and into a subsidiary of ACS. Such dissenter's
rights can be exercised only prior to the BRC stockholders meeting to
be held February 11, 1999.
The acquisition was accounted for under the purchase method of
accounting with assets acquired of $298.5 million (including cash and
other liquid investments of approximately $101.7 million) and
liabilities assumed of $25.0 million for a net purchase price of
$273.5 million. BRC's results have been included in the Company's
consolidated financial statements from the effective date of the
acquisition. The Company has identified certain operations of BRC
which will be divested, and has recorded the fair market value of
these businesses' net assets, $5.2 million, in other current assets at
December 31, 1998. On a pro forma basis, assuming BRC had been
acquired at the beginning of the six month period ending December 31,
1998, total revenue, net income and diluted earnings per share for the
Company would have been approximately $804 million, $41 million and
$0.80 per common share, respectively.
During the quarter ended December 31, 1998, the Company completed two
other acquisitions under the purchase method of accounting with an
aggregate net purchase price of $24.2 million. These acquisitions have
been included in the Company's consolidated financial statements from
the effective date of each acquisition.
4
<PAGE> 7
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. EARNINGS PER SHARE
In accordance with the Statement of Financial Accounting Standard No.
128, "Earnings per Share", the following table (in thousands except per
share amounts) sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Numerator for earnings per share (basic) -
Income available to common stockholders $20,639 $ 5,602 $39,634 $19,052
Effect of dilutive securities:
Interest on 4% convertible debt 1,538 -- 3,075 --
------- ------- ------- -------
Numerator for earnings per share assuming
dilution - income available to common
stockholders $22,177 $ 5,602 $42,709 $19,052
======= ======= ======= =======
Denominator:
Weighted average shares outstanding (basic) 48,741 47,383 48,488 47,167
Effect of dilutive securities:
4% convertible debt 5,392 -- 5,392 --
Stock options 1,250 973 1,225 1,034
Warrants and other 33 228 199 252
------- ------- ------- -------
Total potential common shares 6,675 1,201 6,816 1,286
------- ------- ------- -------
Denominator for earnings per share
assuming dilution 55,416 48,584 55,304 48,453
======= ======= ======= =======
Earnings per common share (basic) $ .42 $ .12 $ .82 $ .40
======= ======= ======= =======
Earnings per common share assuming dilution $ .40 $ .12 $ .77 $ .39
======= ======= ======= =======
</TABLE>
5
<PAGE> 8
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 including statements regarding the
Company's Year 2000 exposure. These forward-looking statements rely on a number
of assumptions concerning future events and are subject to a number of
uncertainties and other factors, many of which are outside of the Company's
control, that could cause actual results to materially differ from such
statements. While the Company believes that the assumptions concerning future
events are reasonable, it cautions that there are inherent difficulties in
predicting certain important factors, especially the timing and magnitude of
technological advances; the performance of recently acquired businesses; the
prospects for future acquisitions; the possibility that a current customer could
be acquired or otherwise be affected by a future event that would diminish its
information technology requirements; Year 2000 problems affecting the Company's
and its clients' business; 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,
-------------------- -------------------
1998 1997 1998 1997
------- ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Expenses:
Wages and benefits 42.1 42.1 42.3 42.6
Services and supplies 31.3 31.6 31.1 30.5
Rent, lease and maintenance 11.5 11.9 11.6 13.6
Depreciation and amortization 4.1 4.0 4.1 4.0
Merger costs -- 4.5 -- 2.3
Other operating expenses 1.3 0.8 1.2 0.9
------- ------ ------ ------
Total operating expenses 90.3 94.9 90.3 93.9
------- ------ ------ ------
Operating income 9.7 5.1 9.7 6.1
Interest expense 1.0 1.0 .9 1.0
Other non-operating income, net (.2) -- (.1) (1.2)
------- ------ ------ ------
Pretax profit 8.9 4.1 8.9 6.3
Income tax expense 3.6 2.1 3.7 2.8
------- ------ ------ ------
Net income 5.3% 2.0% 5.2% 3.5%
======= ====== ====== ======
</TABLE>
COMPARISON OF THE QUARTER ENDED DECEMBER 31, 1998 TO THE QUARTER ENDED DECEMBER
31, 1997
Revenues increased $106.4 million, or 37%, to $391.6 million in the quarter
ended December 31, 1998 (the second quarter of the Company's 1999 fiscal year),
from $285.2 million in the second quarter of fiscal 1998 due to the signing of
new long-term contracts and acquisitions. Of the 37% increase in revenue,
approximately 21% was from internal growth and 16% was from acquisitions. During
the second quarter of fiscal 1999, the Company benefited from the signing of
large contracts in both the Company's
6
<PAGE> 9
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
commercial and government business lines subsequent to December 31, 1997. The
Company also acquired three businesses during the second quarter of fiscal 1999,
which had combined historical annual revenues, excluding operations of the
acquired companies to be divested by the Company, of approximately $128 million.
A total of seven business acquisitions have occurred since the second quarter of
fiscal 1998. Revenues from these acquisitions were approximately $37.4 million
for the quarter ended December 31, 1998.
Total operating expenses were $353.7 million in the second quarter of fiscal
1999, an increase of 37.2% from $257.8 million in the second quarter of fiscal
1998, excluding merger costs of $13.0 million. Operating expenses as a
percentage of revenues were 90.3% in the second quarter of fiscal 1999 as
compared to 90.4% in the second quarter of fiscal 1998, excluding merger costs.
Services and supplies were consistent at 31.3% of revenues in the second quarter
of fiscal 1999 compared to 31.6% of revenues in the second quarter of fiscal
1998. Rent, lease and maintenance expense decreased from 11.9% of revenues in
the second quarter of fiscal 1998 to 11.5% in the second quarter of fiscal 1999
primarily due to the change in business line mix with the professional services
acquisitions made during the last twelve months, which have a smaller component
of rent, lease and maintenance expense. Depreciation and amortization increased
from 4.0% as a percentage of revenues in the second quarter of fiscal 1998 to
4.1% in the second quarter of fiscal 1999, primarily due to capital expenditures
and acquisition cost amortization during the last twelve months.
Operating income increased $10.4 million, or 38%, to $37.9 million in the second
quarter of fiscal 1999, as compared to the second quarter of fiscal 1998,
excluding merger costs. The increase was due to internal revenue growth and
acquisitions since the second quarter of fiscal 1998 and economies of scale
being realized from the merger of ACS Government Solutions Group Inc., formerly
known as Computer Data Systems Inc., with the Company in December 1997 (the
"Merger").
Interest expense increased $1.0 million to $3.8 million in the second quarter of
fiscal 1999, compared to $2.8 million in the second quarter of fiscal 1998
primarily due to increased borrowings under the Company's Credit Facility and
the issuance in March 1998 of 4% convertible notes to finance acquisitions.
The Company's effective tax rate of approximately 41% in the second quarter of
fiscal 1999 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. The Company's effective
tax rate exceeded 51% in the second quarter of fiscal 1998 due to certain
non-deductible merger costs.
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 1998 TO THE SIX MONTHS ENDED
DECEMBER 31, 1997
Revenues increased $204.8 million or 37%, to $755.0 million for the six months
ended December 31, 1998 from $550.2 million for the same period in fiscal 1998
due to the signing of new long-term contracts and acquisitions. Of the 37%
increase in revenue, approximately 22% was from internal growth and 15% was from
acquisitions. The Company acquired six businesses during the six months ended
December 31, 1998, which had historical annual revenues, excluding operations of
the acquired companies to be divested by the Company, of approximately $228
million. A total of seven business acquisitions have occurred since the second
quarter of fiscal 1998. Revenues from these acquisitions were approximately
$61.5 million for six months ended December 31, 1998.
Total operating expenses were $682.1 million in the first six months of fiscal
1999, an increase of 35% from $503.8 million, excluding $13.0 million of merger
costs, in the first six months of fiscal 1998. Excluding merger costs, operating
expenses decreased from 91.6% of revenues in the first six months of fiscal 1998
to 90.3% in the first six months of fiscal 1999, primarily due to a $6.0 million
non-recurring charge 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.
7
<PAGE> 10
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Service and supplies increased from 30.5% of revenues in the first six months of
fiscal 1998 to 31.1% in the first six months of fiscal 1999, primarily due to
subcontractor expenses in the government services business. 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 12.5% as a percentage
of revenues in the first six months of fiscal 1998 to 11.6% in the first six
months of fiscal 1999 primarily due to the change in business line mix that
resulted from the professional services acquisitions made during the last twelve
months, which have a smaller component of rent, lease and maintenance expense.
Depreciation and amortization increased to 4.1% in the first six months of
fiscal 1999 from 4.0% as a percentage of revenues in the first six months of
fiscal 1998, primarily due to capital expenditures and acquisition cost
amortization during the last twelve months.
After excluding the $13.0 million of merger costs in the first six months in
fiscal 1998, operating income increased $26.5 million or 57%, to $72.9 million
in the first six months of fiscal 1999. The increase was due to internal revenue
growth and acquisitions since the second quarter of fiscal 1998 and economies of
scale realized from the Merger.
Interest expense increased $1.7 million to $7.2 million in the first six months
of fiscal 1999, compared to $5.5 million in the first six months of fiscal 1998.
This increase in interest expense is due to increased borrowings on the Credit
Facility and the issuance in March 1998 of 4% convertible notes to finance
acquisitions.
Other non-operating income for the first six months of fiscal 1998 includes the
recognition of a $6.7 million gain upon the redemption of the Company's
investment in a customer's preferred stock.
The Company's effective tax rate of 41% in the first six months of fiscal 1999
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. The Company's effective rate for the first
six months of fiscal 1998 exceeded 44% primarily due to certain non-deductible
merger costs.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company's liquid assets, consisting of cash and cash
equivalents, totaled $155.3 million compared to $84.0 million at June 30, 1998.
The $71.3 million increase since June 30, 1998 is primarily due to approximately
$101.7 million of cash and cash equivalents acquired with the BRC acquisition;
however, the Company has recorded a liability for $104.1 million for the
remaining BRC outstanding shares and stock options which is expected to be paid
in February 1999. Working capital was $210.5 million and $198.1 million at
December 31, 1998 and June 30, 1998, respectively, an increase of $12.4 million
primarily due to the working capital of the companies acquired during the first
six months of fiscal 1999.
Net cash provided by operating activities was $46.6 million for the first six
months of fiscal 1999 compared with $31.6 million provided by operating
activities during the first six months of fiscal 1998. The increase in cash flow
was primarily due to an increase in net income in the first six months of fiscal
1999 as compared to the first six months of fiscal 1998. The Company used $154.4
million in investing activities for the six months ended December 31, 1998, due
to $117.1 million being used for acquisitions and $30.5 million being used for
capital expenditures. Net cash provided by investing activities in the first six
months of fiscal 1998 included $12.6 million received from the redemption of a
preferred stock investment. Cash flow from financing activities was $178.1
million in the first six months of fiscal 1999 as compared to $44.4 million
provided by financing activities for the first six months of fiscal 1998. This
8
<PAGE> 11
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
increase in financing activities was primarily due to borrowings on the Credit
Facility of $165 million for the acquisition of BRC during the first six months
of fiscal 1999.
As of December 31, 1998, the Company had $174.0 million in outstanding
borrowings under the Credit Facility. After considering outstanding letters of
credit, the Company has approximately $23.5 million available for use under the
Credit Facility at December 31, 1998.
The Company has an ATM Cash Facility of $11.0 million, of which $9.0 million was
outstanding as of December 31, 1998, which expires December 1999. The Company
also has two vault cash custody agreements with financial institutions which
provide the use of up to $52.0 million in cash in Company-owned ATMs. Cash
outstanding under the cash custody agreements at December 31, 1998 was
approximately $43.6 million, and is not an asset or liability of the Company and
is therefore not recorded on the accompanying consolidated balance sheets. The
larger custody agreement for $50 million expires February 2001. The remaining
cash custody agreement expires January 2001. Recently enacted federal
regulations governing financial institutions' cash requirements have allowed
financial institutions to significantly reduce their vault cash reserves, which
may limit ACS' ability to secure similar cash custody agreements when its
current arrangements expire.
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 potentially dilutive equity securities in the
future. However, no assurance can be given as to the Company's future
acquisition and expansion opportunities and how such opportunities would be
financed.
YEAR 2000
The following statements and all other statements made in this Quarterly Report
on Form 10-Q with respect to the Company's Year 2000 processing capabilities or
readiness are "Year 2000 Readiness Disclosures" in conformance with the Year
2000 Information and Readiness Disclosure Act of 1998 (Public Law 105-271, 112
Stat. 2386).
General
Some computers, software, and other equipment include computer code in which
calendar year data is abbreviated to only two digits. As a result of this design
decision, some of these systems could fail to operate or fail to produce correct
results if "00" is interpreted to mean 1900, rather than 2000. These problems
are widely expected to increase in frequency and severity as the year 2000
approaches, and are commonly referred to as the "Year 2000 Problem."
ACS acts as an intermediary for the transfer of data between its clients and
third parties. In this capacity, ACS supplies the operating and technical
resources to cause electronic data to be transmitted between ACS and third
parties. With regard to Year 2000 Problems affecting its or its clients
business, ACS generally undertakes to test and modify system software and
hardware platforms used in transmitting such data. In doing so, ACS relies on
representations from third party vendors of system software and hardware
platforms that such products are Year 2000 compliant. ACS' clients generally are
responsible for ensuring that their application software and data are Year 2000
compliant. Further, on a project-by-project basis ACS will assist clients in
testing their application software.
9
<PAGE> 12
The Company has instituted a Year 2000 Management Control System (MCS) to
monitor and track the progress toward meeting the requirements to remediate the
Year 2000 Problem. ACS has also hired a Year 2000 project manager who not only
manages the MCS, but also assists in identifying points of concern and providing
solutions. Additionally, ACS has designated one person from each business unit
as a single point of contact. This person coordinates all Year 2000 concerns and
issues with third parties within his particular area. Accordingly, under the
MCS, each business unit of ACS receives monthly reports from each of its
operating units. At least bi-monthly, each business unit prepares an executive
summary of its progress. The Year 2000 project manager uses these reports to
prepare a monthly summary of corporate Year 2000 activities for executive
management and for the Audit Committee of the Board of Directors.
Status of Year 2000 Readiness
The Company's Management Control System at each business unit consists of the
following five phases: awareness, assessment, renovation, validation and
implementation. The awareness phase consists of defining the scope of the Year
2000 Problem and establishing a corporate infrastructure and overall strategy to
perform compliance work. The assessment phase must identify all hardware,
software, networks, automatic teller machines, other various processing
platforms and customer and vendor interdependencies affected by the Year 2000
Problem. This assessment must go beyond information systems and include
environmental systems that are dependent on embedded microchips, such as
security systems elevators and vaults. Management also evaluates the Year 2000
effect on other strategic business initiatives. The assessment considers the
potential effect that mergers and acquisitions, major system development,
corporate alliances and system independences will have on existing systems
and/or potential Year 2000 issues that may arise from acquired systems. The
renovation phase includes code enhancements, hardware and software upgrades,
system replacements, vendor certification and other associated changes. The
validation process includes the testing of incremental changes to hardware and
software components. Finally, in the implementation phase, systems should be
certified as Year 2000 compliant and be accepted by the business users. For
those systems which are not compliant, the consequences will be assessed and any
contingency plans put into effect.
For mission critical projects, the Company has generally completed the awareness
and assessment phases and will substantially complete the remaining phases
before June 30, 1999.
In addition to developing an internal risk assessment methodology with respect
to the Year 2000 Problem, ACS is subject to external examinations and project
reviews by regulatory agencies and governmental bodies of the federal
government. To date, these examinations have not identified any material issues
regarding our remediation efforts. The Company has not generally obtained
verification or validation by independent third parties of its processes to
assess Year 2000 Problems, its corrections of Year 2000 Problems or the costs
associated with these activities. However, the Company's Year 2000 program team
is reviewing the project plans prepared by each of the Company's business units
and monitoring their methods and progress against those plans.
10
<PAGE> 13
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Internal Infrastructure
The Company believes that it has identified most of the major computers,
software applications, and related equipment used in connection with its
internal operations that must be modified, upgraded, or replaced to minimize the
possibility of a material disruption to its business. The Company has commenced
the process of modifying, upgrading, and replacing major systems that have been
assessed as adversely affected, and expects to complete this process before the
occurrence of any material disruption of its business.
Client Systems
We are attempting to coordinate with our clients regarding their activities
related to the Year 2000 Problem. Most of our clients maintain their own
application programs, although they use our computer and network resources. We
generally do not have any contractual responsibility to ensure that our
clients' application programs are compliant. However, our business could be
adversely affected if our clients experience Year 2000 problems with such
applications, causing them to use less of our computing resources, alter their
pattern of usage of resources or dedicate less of their information processing
budgets to projects we conduct. We do undertake to test and modify system
software and hardware platforms that are represented by the vendors thereof as
being Year 2000 compliant. If our vendors fail to provide Year 2000 compliant
versions of their system software, our business could be materially affected.
Vendors
The Company has mailed questionnaires to substantially all third party vendors
and suppliers of the major computers, software, and other equipment used,
operated, or maintained by the Company for itself or its clients to identify
and, to the extent possible, to resolve issues involving the Year 2000 Problem.
Responses to these questionnaires are verified against information included with
current releases of vendors' products and services and on vendor web sites and
are shared with ACS' clients. In addition, operating units are instructed not to
acquire hardware, software or other technology that is not contractually
represented by the vendor as Year 2000 compliant. However, the Company has
limited or no control over the actions of these third party vendors. Thus, while
the Company expects that it will be able to resolve any significant issues with
these systems related to the Year 2000 Problem, there can be no assurance that
the Company's vendors will resolve any or all issues with these systems related
to the Year 2000 Problem, before the occurrence of a material disruption to the
business of the Company or any of its clients. Any failure of these third
parties to timely resolve Year 2000 Problems with their systems could have a
material adverse effect on the Company's business, financial condition, and
results of operation.
Systems Other than Information Technology Systems.
In addition to computers and related systems, the operation of office and
facilities equipment, such as fax machines, photocopiers, telephone switches,
security systems, elevators, air conditioning, fire systems and other common
devices may be affected by the Year 2000 Problem. The Company is currently
assessing the potential effect of, and costs of remediating, the Year 2000
Problem on its office and facilities equipment. In addition, the Company has
initiated a project to assess whether all major leased facilities are Year 2000
compliant.
Costs
Of the approximately $15 million of estimated expenditures for Year 2000
remediation projects, $4 million is incremental costs. Of the $15 million,
approximately $7 million has been incurred through December 31, 1998 and a
majority of the remainder is expected to be incurred by June 30, 1999. This
estimate is being monitored and will be revised as additional information
becomes available. The costs required to achieve substantial Year 2000
compliance or failure to do so could have a material adverse impact on our
business, financial condition or results of operations.
Most Likely Consequences of Year 2000 Problems
The Company expects to identify and resolve all Year 2000 Problems that could
materially adversely affect its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Year 2000 Problems affecting the Company or its clients have been identified or
corrected. The number of devices that could be affected and the interactions
among these devices are simply too numerous. In addition, no one can accurately
predict how many Year 2000 Problem-related failures will occur or the severity,
duration, or financial consequences of these perhaps inevitable failures. As a
result, management believes that the following consequences are possible:
o a significant number of operational inconveniences and inefficiencies for
the Company and its clients that will divert management's time and
attention and financial and human resources from ordinary business
activities;
11
<PAGE> 14
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
o a lesser number of serious system failures that will require significant
efforts by the Company or its clients to prevent or alleviate material
business disruptions;
o several routine business disputes and claims for pricing adjustments or
penalties due to Year 2000 Problems incurred by clients, which will be
resolved in the ordinary course of business; and
o a few serious business disputes alleging that the Company failed to comply
with the terms of contracts or industry standards of performance, some of
which could result in litigation or contract termination.
Contingency Plans
The Company is currently developing contingency plans to be implemented if its
efforts to identify and correct Year 2000 Problems affecting its internal
systems are not effective. At this time, business units comprising approximately
20% of fiscal 1998 revenues have completed formal contingency plans. The Company
expects to complete its contingency plans for its remaining business groups by
the end of June 1999. Depending on the systems affected, these plans could
include accelerated replacement of affected equipment or software; short- to
medium-term use of backup sites, equipment, and software, increased work hours
for Company personnel; use of contract personnel to correct on an accelerated
schedule any Year 2000 Problems that arise or to provide manual workarounds for
information systems; and similar approaches. If the Company is required to
implement any of these contingency plans, it could have a material adverse
effect on the Company's financial condition and results of operations.
Disclaimer
The discussion of the Company's efforts, and management's expectations, relating
to Year 2000 compliance are forward-looking statements. The Company's ability to
achieve Year 2000 compliance and the level of incremental costs associated
therewith, could be adversely affected by, among other things, the availability
and cost of programming and testing resources, third party suppliers' ability to
modify proprietary software, and unanticipated problems identified in the
ongoing compliance review.
NEW ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative and Hedging Activities", was issued. SFAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities at fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company is evaluating the impact
of SFAS 133 on the Company's future earnings and financial position, but does
not expect it to be material.
In April 1998, Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-up Activities", was issued. This SOP provides guidance on the financial
reporting of start-up and organization costs and requires that these costs be
expensed as incurred. The provisions of SOP 98-5 are effective for financial
statements for fiscal years beginning after December 15, 1998, although early
adoption is allowed. The adoption of SOP 98-5 is not expected to have a material
impact on the Company's financial statements. The Company will adopt the
provisions of this SOP on July 1, 1999.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", were
issued. SFAS No. 130 establishes standards for reporting comprehensive income
and its components with the same prominence as other financial statements. The
Company adopted SFAS No. 130 on July 1, 1998; however, the Company does not have
any items of comprehensive income in the periods presented. SFAS No. 131
establishes standards for reporting information about operating segments in
annual and interim financial statements, although this statement need not be
applied to interim financial statements in the initial year of its application.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997,
and therefore the Company will adopt its requirements in connection with its
annual reporting for the year ending June 30, 1999.
12
<PAGE> 15
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On December 16, 1998, a state district court in Houston, Texas entered a
judgment against ACS in a lawsuit brought by twenty-one former employees of
Gibraltar Savings Association and/or First Texas Savings Association
(collectively, "GSA/FTSA"). The GSA/FTSA employees alleged that they were
entitled to the value of 401,541 shares of ACS stock pursuant to options issued
to the GSA/FTSA employees in 1988 in connection with a former data processing
services agreement between GSA/FTSA and ACS. The judgment against ACS was for
approximately $17 million (which includes attorneys' fees and prejudgment
interest, but excludes additional attorneys' fees of approximately $850,000
which could be awarded in the event the plaintiffs are successful upon appeal
and final judgment). The Company continues to believe that it has a meritorious
defense to all or a substantial portion of the Plaintiffs' claims. ACS has filed
a motion for new trial, and if that motion is denied, ACS plans to immediately
and vigorously appeal the judgment. The Plaintiffs also have filed a notice of
appeal. Should the proceedings not be favorably resolved in the trial court or
on appeal, the Company may be subject to a material charge against earnings.
A putative class action complaint by Matador Capital Management Corporation,
among other plaintiffs, against BRC, the Company and the directors of BRC at
that time, was filed on October 30, 1998 in the court of Chancery of the State
of Delaware seeking, among other things, to enjoin the tender offer and proposed
merger involving BRC. The complaint alleged, among other things, certain
misstatements and omissions by BRC in certain documents mailed to the
stockholders of BRC in connection with the tender offer, certain breaches of the
fiduciary duties of the board of directors of BRC and the aiding and abetting of
such alleged breaches of fiduciary duties by ACS. On November 25, 1998, the
Court of Chancery issued an opinion and related order denying Matador's motion
for a preliminary injunction except insofar as it sought to require the
disclosure and dissemination of certain additional information outlined in the
opinion to the Company's stockholders by BRC. On December 2, 1998, the Court of
Chancery entered a further order permitting the tender offer to be consummated
on December 14, 1998, following dissemination by BRC to its stockholders of a
disclosure reviewed by the Court of Chancery. BRC mailed such disclosure to its
stockholders on December 2, 1998.
It is possible that some BRC stockholders will exercise their dissenter's rights
under Delaware law in connection with the merger of BRC with and into a
subsidiary of ACS. BRC stockholders can exercise such dissenter's rights only
prior to the BRC Stockholders Meeting to be held February 11, 1999. Upon the
exercise of such rights, such stockholders may be entitled to an appraisal by
the Delaware Court of Chancery of the fair value of their shares of Class A
Common Stock.
On October 10, 1995, the Company filed a counterclaim against National
Convenience Stores, Incorporated ("NCS") alleging that NCS had breached a
contract with the Company and seeking unspecified damages. This counterclaim was
filed in response to an action filed by NCS against the Company in the 101st
Judicial District Court in Dallas, Texas seeking a declaratory judgment that NCS
is not contractually obligated to allow the Company to review and match any
third party proposal to process automated teller machines in NCS stores upon
expiration of the contract with the Company, pursuant to its terms, on December
1, 1995. On March 12, 1997 the Company added NationsBank as a defendant in the
counterclaim. This litigation has now been settled, pursuant to terms which are
confidential, involving certain payments to the Company.
The Company is subject to certain other legal proceedings, claims and disputes
which arise in the ordinary course of the Company's 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.
13
<PAGE> 16
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security Holders
On October 27, 1998, the Company held its 1998 annual meeting of stockholders,
at which meeting the Company's stockholders were asked to vote on the following
proposals to: (i) vote upon performance-based incentive compensation to ACS's
executive officers ("Proposal 1") and (ii) elect three directors to the Board
("Proposal 2"). The results of the votes on such proposals were as follows:
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions
-------------------- ------------------- --------------------
<S> <C> <C> <C>
Proposal 1: 69,299,168 704,511 124,712
</TABLE>
Proposal 2:
<TABLE>
<CAPTION>
Votes
--------------------------------------------------------
For Withheld
-------------------------- -----------------------
<S> <C> <C>
Mark A. King 69,286,764 841,627
David W. Black 69,286,789 841,602
Peter A. Bracken 69,286,837 841,554
</TABLE>
The following individuals continued their respective terms of service as
directors of the Company following the meeting:
Darwin Deason
Jeffrey A. Rich
Henry Hortenstine
Joseph P. O'Neill
Frank A. Rossi
Clifford M. Kendall
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
* 27. Financial Data Schedule
b) Reports on Form 8-K
On December 30, 1998 the Company filed a current Report on
Form 8-K announcing the purchase of 8,704,238 shares of the
common stock of BRC Holdings, Inc. pursuant to a tender offer
at $19.00 per share.
* Filed herewith
14
<PAGE> 17
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 5th day of February 1999.
AFFILIATED COMPUTER SERVICES, INC.
By: /s/ Mark A. King
--------------------------------------
Mark A. King
Executive Vice President and
Chief Financial Officer
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 146,254
<SECURITIES> 0
<RECEIVABLES> 305,333
<ALLOWANCES> 4,188
<INVENTORY> 15,984
<CURRENT-ASSETS> 534,746
<PP&E> 177,696
<DEPRECIATION> 120,021
<TOTAL-ASSETS> 1,328,310
<CURRENT-LIABILITIES> 324,274
<BONDS> 408,964
0
0
<COMMON> 492
<OTHER-SE> 558,919
<TOTAL-LIABILITY-AND-EQUITY> 1,328,310
<SALES> 0
<TOTAL-REVENUES> 391,634
<CGS> 0
<TOTAL-COSTS> 353,720
<OTHER-EXPENSES> (876)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,809
<INCOME-PRETAX> 34,981
<INCOME-TAX> 14,342
<INCOME-CONTINUING> 20,639
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> .42
<EPS-DILUTED> .40
</TABLE>
