<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
-------------------------
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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 841-6111
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
NUMBER OF SHARES OUTSTANDING AS OF
TITLE OF EACH CLASS NOVEMBER 10,1999
- ------------------------------------ ----------------------------------
<S> <C>
Class A Common Stock, $.01 par value 46,043,158
Class B Common Stock, $.01 par value 3,299,686
------------
49,342,844
</TABLE>
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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 September 30, 1999 and
June 30, 1999 1
Consolidated Statements of Income for the Three Months
Ended September 30, 1999 and 1998 2
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1999 and 1998 3
Notes to Consolidated Financial Statements 4 - 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6 - 10
PART II. OTHER INFORMATION
Item 3. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,999 $ 28,580
ATM cash 3,400 4,200
Accounts receivable 355,314 320,121
Inventory 15,538 13,778
Prepaid expenses and other current assets 49,244 41,473
Deferred taxes 6,459 7,795
------------ ------------
Total current assets 438,954 415,947
Property and equipment, net 170,097 163,240
Goodwill, software and other intangibles, net 700,050 613,272
Long-term investments and other assets 29,063 31,141
------------ ------------
Total assets $ 1,338,164 $ 1,223,600
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,805 $ 36,723
Accrued compensation and benefits 48,548 63,121
Other accrued liabilities 99,476 89,747
Income taxes payable 20,690 9,861
Current portion of long-term debt 21,600 6,882
Current portion of unearned revenue 16,487 15,387
------------ ------------
Total current liabilities 238,606 221,721
Convertible notes due 2005 230,000 230,000
Long-term debt 191,632 119,106
Deferred taxes 33,790 32,507
Other long-term liabilities 10,450 12,845
------------ ------------
Total liabilities 704,478 616,179
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Stockholders' equity:
Class A common stock 460 460
Class B common stock 33 33
Additional paid-in capital 317,137 315,899
Retained earnings 316,056 291,029
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Total stockholders' equity 633,686 607,421
------------ ------------
Total liabilities and stockholders' equity $ 1,338,164 $ 1,223,600
============ ============
</TABLE>
See notes to consolidated financial statements.
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues $ 447,686 $ 363,356
------------ ------------
Expenses:
Wages and benefits 194,732 154,127
Services and supplies 132,926 112,510
Rent, lease and maintenance 50,673 42,705
Depreciation and amortization 19,390 15,457
Other operating expenses 4,288 3,561
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Total operating expenses 402,009 328,360
------------ ------------
Operating income 45,677 34,996
Interest expense 4,828 3,359
Other non-operating income, net (1,141) (288)
------------ ------------
Pretax profit 41,990 31,925
Income tax expense 16,964 12,930
------------ ------------
Net income $ 25,026 $ 18,995
============ ============
Earnings per common share:
Basic $ .51 $ .39
============ ============
Diluted $ .47 $ .37
============ ============
Shares used in computing
earnings per common share:
Basic 49,261 48,269
Diluted 56,095 55,225
</TABLE>
See notes to consolidated financial statements.
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 25,026 $ 18,995
------------ ------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 19,390 15,457
Other (219) 1,057
Changes in assets and liabilities, net of effects from acquisitions:
Decrease in ATM cash 800 1,100
Increase in accounts receivable (6,044) (23,736)
Increase in inventory (1,760) (1,801)
Increase in prepaid expenses and other current assets (5,893) (2,498)
Change in deferred taxes 1,643 5,672
(Increase) decrease in other long-term assets 189 (99)
Increase (decrease) in accounts payable (6,183) 3,031
Decrease in accrued compensation and benefits (20,235) (7,407)
Decrease in other accrued liabilities (3,293) (3,500)
Change in income taxes receivable/payable 11,096 1,908
Increase (decrease) in unearned revenue 609 (2,709)
Decrease in other long-term liabilities (1,484) (1,709)
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Total adjustments (11,384) (15,234)
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Net cash provided by operating activities 13,642 3,761
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Cash flows from investing activities:
Purchases of property, equipment and software, net of sales (16,551) (18,136)
Payments for acquisitions, net of cash acquired (98,647) (48,931)
Additions to other intangible assets (2,779) (3,396)
Additions to notes receivable (202) --
Proceeds received on notes receivable 2,032 --
Other -- (12)
------------ ------------
Net cash used in investing activities (116,147) (70,475)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of issuance
costs 99,040 14,007
Repayments of long-term debt (16,554) (518)
Proceeds from stock options exercised and related tax
benefits 1,685 1,154
Net repayments of ATM debt (800) (1,100)
Other, net (447) (264)
------------ ------------
Net cash provided by financing activities 82,924 13,279
------------ ------------
Net decrease in cash and cash equivalents (19,581) (53,435)
Cash and cash equivalents at beginning of period 28,580 75,888
------------ ------------
Cash and cash equivalents at end of period $ 8,999 $ 22,453
============ ============
</TABLE>
See notes to consolidated financial statements.
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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. All material
intercompany profits, transactions and balances have been eliminated. We
provide a full range of information technology services including technology
outsourcing, business process outsourcing and professional services
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 our
consolidated financial statements for the year ended June 30, 1999. 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 September 30, 1999, we acquired Consultec, LLC., a
subsidiary of General American Life Insurance Company. The acquisition was
accounted for under the purchase method of accounting with assets acquired
of $125.7 million (including cash and other liquid investments of $5.6
million) and liabilities assumed of $24.7 million for a net purchase price
of $101.0 million. Consultec's results have been included in our
consolidated financial statements from the effective date of the
acquisition.
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
SEPTEMBER 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Numerator:
Numerator for earnings per share (basic) -
Income available to common stockholders $ 25,026 $ 18,995
Effect of dilutive securities:
Interest on 4% convertible debt 1,540 1,537
------------ ------------
Numerator for earnings per share assuming
dilution - income available to common stockholders $ 26,566 $ 20,532
============ ============
Denominator:
Weighted average shares outstanding (basic) 49,261 48,269
Effect of dilutive securities:
4% convertible debt 5,392 5,392
Stock options 1,442 1,200
Warrants and other -- 364
------------ ------------
Total potential common shares 6,834 6,956
------------ ------------
Denominator for earnings per share
assuming dilution 56,095 55,225
============ ============
Earnings per common share (basic) $ .51 $ .39
============ ============
Earnings per common share assuming dilution $ .47 $ .37
============ ============
</TABLE>
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4. ACCUMULATED DEPRECIATION AND AMORTIZATION
Property and equipment are stated net of accumulated depreciation of $130.7
million and $123.9 million at September 30, 1999 and June 30, 1999,
respectively. Additionally, goodwill, software and other intangibles are
stated net of accumulated amortization of $92.6 million and $81.8 million at
September 30, 1999 and June 30, 1999, respectively.
5. SEGMENT INFORMATION
Based on the criteria set forth in SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information", we have two reportable segments:
commercial and federal government. The following is a summary of certain
financial information by reportable segment (in thousands):
FIRST QUARTER ENDED SEPTEMBER 30, 1999
- --------------------------------------
<TABLE>
<CAPTION>
Federal Corporate &
Commercial Government Eliminations (a) Consolidated
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue $ 306,422 $ 144,344 $ (3,080) $ 447,686
Operating expense 252,108 130,669 (158) 382,619
---------------- ---------------- ---------------- ----------------
EBITDA(b) 54,314 13,675 (2,922) 65,067
Depreciation & amortization expense,
excluding goodwill amortization 12,096 2,212 262 14,570
Goodwill amortization expense 4,239 581 -- 4,820
---------------- ---------------- ---------------- ----------------
Operating Income $ 37,979 $ 10,882 $ (3,184) $ 45,677
================ ================ ================ ================
</TABLE>
FIRST QUARTER ENDED SEPTEMBER 30, 1998
- --------------------------------------
<TABLE>
<CAPTION>
Federal Corporate &
Commercial Government Eliminations (a) Consolidated
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue $ 230,985 $ 134,119 $ (1,748) $ 363,356
Operating expense 191,866 120,265 772 312,903
---------------- ---------------- ---------------- ----------------
EBITDA(b) 39,119 13,854 (2,520) 50,453
Depreciation & amortization expense,
excluding goodwill amortization 10,004 2,081 199 12,284
Goodwill amortization 2,606 567 -- 3,173
---------------- ---------------- ---------------- ----------------
Operating Income $ 26,509 $ 11,206 $ (2,719) $ 34,996
================ ================ ================ ================
</TABLE>
- --------------------------
(a) Included in revenue and operating expense are elimination entries related to
the sale of information technology service and computer hardware from the
commercial segment to the federal government segment.
(b) EBITDA consist of earnings before interest income, interest expense, other
non-operating income and expense, income taxes, depreciation and
amortization. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered in
isolation or as an alternative to net income as an indicator of a company's
performance or to cash flows from operating activities as a measure of
liquidity.
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 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 our financial position, business strategy and plans and
objectives of our management for future operations are forward-looking
statements, including statements regarding our 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 our control, that could cause actual results to materially
differ from such statements. While we believe that the assumptions concerning
future events are reasonable, we caution 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 our business
and our 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 our consolidated statements of
income as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues 100.0% 100.0%
Expenses:
Wages and benefits 43.5 42.4
Services and supplies 29.7 31.0
Rent, lease and maintenance 11.3 11.8
Depreciation and amortization 4.3 4.2
Other operating expenses 1.0 1.0
-------- --------
Total operating expenses 89.8 90.4
-------- --------
Operating income 10.2 9.6
Interest expense 1.1 0.9
Other non-operating income, net (0.3) (0.1)
-------- --------
Pretax profit 9.4 8.8
Income tax expense 3.8 3.6
-------- --------
Net income 5.6% 5.2%
======== ========
</TABLE>
COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 1999 TO THE QUARTER ENDED
SEPTEMBER 30, 1998
Revenues increased $84.3 million, or 23%, to $447.7 million in the quarter
ending September 30, 1999 (the first quarter of our 2000 fiscal year) from
$363.4 million in the first quarter of fiscal 1999. Of the 23% increase in
revenue, approximately 13% was from internal growth and 10% was from
acquisitions. Revenues from our commercial segment increased $75.4 million, or
33%, over the first quarter of fiscal 1999 resulting from our acquisition
activity and new contract signings from clients in the insurance and financial
services industries. Revenues from our federal government segment increased
$10.2 million, or 8%, primarily due to increased requirements under the
Department of Education's contract and new task orders under civilian agency
contracts.
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Total operating expenses were $402.0 million in the first quarter of fiscal
2000, an increase of 22% from $328.4 million in the first quarter of fiscal
1999. Operating expenses as a percentage of revenue were 89.8% in the first
quarter of fiscal 2000 as compared to 90.4% the first quarter of fiscal 1999.
Due to increased growth of our business process outsourcing service line through
both internal growth and recent acquisitions, our percentage component of wages
and benefits has increased while the percentage component of services and
supplies has decreased. Wages and benefits increased as a percentage of revenue
from 42.4% in the first quarter of fiscal 1999 to 43.5% in the first quarter of
fiscal 2000. Services and supplies as a percentage of revenue decreased from
31.0% in the first quarter of fiscal 1999 to 29.7% in the first quarter of
fiscal 2000. Rent, lease and maintenance expense decreased from 11.8% in the
first quarter of fiscal 1999 to 11.3% in the first quarter of fiscal 2000
primarily due to the change in business line mix from the acquisitions made
during the last twelve months, which have a smaller component of rent, lease and
maintenance expense.
Operating income increased $10.7 million, or 31% to $45.7 million in the first
quarter of fiscal 2000, as compared to the first quarter of fiscal 1999. The
increase was primarily due to acquisitions and internal growth in our business
process outsourcing service line. Operating income as a percentage of revenue
increased from 9.6% in the first quarter of 1999 to 10.2% in the first quarter
of fiscal 2000 primarily due to a combination of increased margins in our
business process outsourcing service line and a larger component of commercial
versus federal government business.
Interest expense increased $1.4 million to $4.8 million in the first quarter of
fiscal 2000, compared to $3.4 million in the first quarter of fiscal 1999,
primarily due to increased borrowings under our credit facility to finance
acquisitions.
Our effective tax rate of approximately 40% in the first quarter of fiscal 2000
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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, our liquid assets consisting of cash and cash
equivalents totaled $12.4 million compared to $32.8 million at June 30, 1999.
These liquid assets included $3.4 million and $4.2 million borrowed under a
revolving credit facility for use in our automated teller machines at September
30, 1999 and June 30, 1999, respectively. Working capital increased to $200.3
million at September 30, 1999 from $194.2 million at June 30, 1999 due to the
net working capital added with the acquisition of Consultec LLC in September
1999.
Net cash provided by operating activities increased to $13.6 million in the
first quarter of fiscal 2000 from $3.8 million in the first quarter of fiscal
1999 due primarily to the increase in net income from the prior period. Net cash
flow used in investing activities increased by $45.7 million in the first
quarter of fiscal 2000 compared to the first quarter of fiscal 1999 due to an
increase in payments for acquisitions of $49.7 million. Net cash provided by
financing activities in the first quarter of fiscal 2000 was $82.9 million as
compared to $13.3 million in the first quarter of fiscal 1999 and increased due
to the net borrowings on our credit facilities of $83.0 million primarily for
the acquisition of Consultec LLC.
In September 1999, we entered into a new $100 million credit facility agreement,
which matures on September 30, 2000. With this new $100 million credit facility,
our existing $200 million credit facility and after considering outstanding
letters of credit, we have approximately $89.2 million available for use under
the credit facilities at September 30, 1999.
Our management believes that available cash and cash equivalents, together with
cash generated from operations and available borrowings under various credit
facilities, will provide adequate funds for our anticipated needs, including
working capital expenditures and ATM cash requirements. Our management also
believes that cash provided by operations will be sufficient to satisfy all
existing debt obligations as they become due. We intend to continue our growth
through acquisitions and from time to time to engage in discussions with
potential acquisition candidates, which could require significant commitments of
capital. In order to pursue such opportunities, we may be required to incur debt
or to issue additional potentially dilutive securities in the future. No
assurance can be given as to our future acquisition and expansion opportunities
and how such opportunities will be financed.
YEAR 2000
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 expected to increase in frequency and severity, not only as the year 2000
approaches, but continuing into the year 2000 and are commonly referred to as
the "Year 2000 Problem." We frequently act as an intermediary for the transfer
of data between our clients and third parties. In this capacity, we supply the
operating and technical resources to cause electronic data to be transmitted
between ourselves and third parties. With regard to potential Year 2000 Problems
which may affect us or our clients' businesses, we generally undertake to test
and modify system software and hardware platforms,
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which we use in preparing, storing and transmitting such data. In doing so, we
rely on representations, services and products from third-party vendors of
system software and hardware platforms.
We have a Year 2000 Management Control System (MCS) to monitor and track the
progress toward meeting the requirements to remediate potential Year 2000
Problems. We also have a Year 2000 project manager who not only manages the MCS,
but also assists in identifying points of concern and providing solutions.
Additionally, we have designated one person from each business unit as a single
point of contact for Year 2000 issues. This person coordinates all Year 2000
concerns and issues with third parties within their particular business unit.
Accordingly, under the MCS, each business unit 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 report of corporate Year 2000 activities
for executive management and for the Audit Committee of the Board of Directors.
Status of Year 2000 Readiness
Our MCS 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 potential Year 2000 Problems and establishing
a corporate infrastructure and overall strategy to perform compliance work. The
assessment phase is intended to 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 is
intended to 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
interdependencies 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
testing incremental changes to hardware and software components. Finally, in the
implementation phase, systems are generally certified as Year 2000 compliant and
thereafter accepted by the business users. For those systems that are not
certified as compliant, the consequences are generally assessed and any
contingency plans put into effect.
For our mission critical projects, we have generally completed all phases of the
MCS. In some cases, the final implementation of renovated systems is dependent
upon our client's own internal renovation projects and schedules.
In addition to developing an internal risk assessment methodology with respect
to the Year 2000 Problem, part of our business 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. We have not generally
obtained verification or validation by independent third parties of our
processes to assess Year 2000 Problems, our corrections of Year 2000 Problems or
the costs associated with these activities. However, our Year 2000 problem team
is reviewing the project plans prepared by each of our business units and
monitoring their methods and progress against those plans.
Internal Infrastructure
We believe that we have identified substantially all of the major computers,
software applications and related equipment used in connection with our internal
operations that must be modified, upgraded or replaced to minimize the
possibility of a material disruption to our business. We have generally
completed the process of modifying, upgrading and replacing major systems that
have been identified as potentially being adversely affected.
Client Systems
We are generally coordinating with our clients regarding their activities
related to the Year 2000 Problem. Most of our clients maintain their own
software application programs, although they use our computer and network
resources. We generally do not have 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, generally
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
We have mailed questionnaires to substantially all third-party vendors and
suppliers of the major computers, software and other equipment used, operated or
maintained by us for ourselves or our clients to identify and, to the extent
possible, to resolve issues involving the Year 2000 Problem. Responses to these
questionnaires are compared with information included with current releases of
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<PAGE> 11
vendors' products and services and on vendor web sites and are generally shared
with our clients. In addition, our operating units have been instructed not to
acquire hardware, software or other technology that is not contractually
represented by the vendor as Year 2000 compliant. However, we have limited or no
control over the actions of these third party vendors. Thus, while we expect
that we will be able to resolve any significant issues with these systems
related to the Year 2000 Problem, there can be no assurance that our vendors
will resolve any or all issues with these systems related to the Year 2000
Problem before the occurrence of a material disruption to either our business or
any of our clients. Any failure of these third parties to timely resolve Year
2000 Problems with their systems could have a material adverse effect on our
business, financial condition and results of operations.
Systems Other than Information Technology Systems
In addition to computers and related systems and software, 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. We believe that the
remediation of these systems is materially complete and we believe that all
major owned and leased facilities are Year 2000 compliant.
Costs
Of the approximately $15 million of estimated expenditures for Year 2000
remediation projects, approximately $11 million related to costs incurred in the
ordinary course of business and $4 million related to incremental costs solely
attributable to Year 2000 related problems. Substantially all of the
expenditures for our Year 2000 remediation projects had been incurred at June
30, 1999. Although we are generally not contractually responsible to ensure our
clients' application programs are compliant, we will generally continue to
allocate certain resources in fiscal year 2000 to assist some of our clients in
completing their remediation projects and validating their compliance and to
modify our contingency plans based on the results of their projects. The future
costs required to achieve substantial Year 2000 compliance, or our failure to do
so, could have a material adverse impact on our business, financial condition
and results of operations.
Most Likely Consequences of Year 2000 Problems
We expect to identify and resolve all Year 2000 Problems that could materially
adversely affect our business operations. However, we believe that it is not
possible to determine with complete certainty that all Year 2000 Problems
affecting our clients or us 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, we believe
numerous consequences are possible, including the following:
o a significant number of operational inconveniences and inefficiencies for
us and our clients that will divert management's time and attention and
financial and human resources from ordinary business activities;
o a lesser number of serious system failures that will require significant
efforts by us or our 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 we 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
We are currently developing contingency plans to be implemented if our efforts
to identify and correct Year 2000 Problems affecting our internal systems are
not effective. At this time, business units comprising approximately 80% of
fiscal 1999 revenues have completed formal contingency plans for mission
critical projects. We expect to complete our contingency plans for mission
critical projects of most of our remaining business groups by the end of
November 1999. Depending on the systems affected, these plans include
accelerated replacement of affected equipment or software; short- to medium-term
use of backup sites, equipment and software; increased work hours for our
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 we are required to implement any of these
contingency plans, it could have a material adverse effect on our financial
condition and results of operations.
9
<PAGE> 12
Disclaimer
The discussion of our efforts, and management's expectations, relating to Year
2000 compliance are forward-looking statements. Our 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 or not identified in
the ongoing compliance review.
NEW ACCOUNTING STANDARDS
In June 1999, the Financial Accountings Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the effective date of the FASB
Statement No. 133". SFAS 137 defers the effective date of SFAS 133 "Accounting
for Derivatives and Hedging Activities" fiscal years beginning after June 15,
2000. We have not determined the impact of SFAS 133 on our future earnings and
financial position.
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. The adoption of
SOP 98-5 has not had a material impact on our financial statements. We adopted
the provisions of this SOP on July 1, 1999.
Item 3. Legal Proceedings
On December 16, 1998, a state district court in Houston, Texas entered final
judgment against us 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 our 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 us. The judgment against us was for
approximately $17 million, which includes attorneys' fees and pre-judgment
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. We continue to believe that we have a meritorious defense to
all or a substantial portion of the plaintiffs' claims. We filed our appeal of
the judgment on March 15, 1999 and plan to vigorously pursue the appeal. The
plaintiffs also have filed a notice of appeal. Should the proceedings not be
favorably resolved on appeal, we would be subject to a material charge.
On February 11, 1999, and on or about April 16, 1999, Caremark, Inc. one of our
significant outsourcing clients, filed separate lawsuits in Federal District
Court in Illinois alleging that we had breached contractual obligations to
provide certain information and pricing reductions and a price quote for cost
plus pricing to Caremark. Caremark seeks to terminate the contract, which
comprised approximately 1.5% of our revenues for the year ended June 30, 1999,
Caremark's pleadings also request damages in the millions of dollars, without
further specificity. We believe that we have complied with all contractual
obligations, provided the required information and are not contractually
obligated to provide the price reduction alleged by Caremark to be required. On
February 25, 1999, we filed a lawsuit in County Court in Dallas, Texas against
Caremark and its parent, Caremark RX (formerly known as MedPartners, Inc.),
alleging that Caremark has caused us significant injury by trying to manufacture
a basis to repudiate this contract and to avoid payment and other obligations.
We are asking for actual, consequential and punitive damages. Although we cannot
predict the outcome of either of these lawsuits, if we are unsuccessful, the
resulting losses could negatively impact our revenues and profitability.
Government contracts are subject to review and audit by various governmental
authorities in the normal course of our business. Cost audits have been
completed through fiscal 1996 for a majority of our federal government business
operations. In our opinion, any such reviews and the results of cost audits for
subsequent fiscal years will not have a material effect on our financial
position or results of operations.
In addition to the foregoing, we are subject to certain other legal proceedings,
claims and disputes which arise in the ordinary course of our business. Although
we cannot predict the outcomes of these legal proceedings, we do not believe
these actions will have a material adverse effect on our financial position,
results of operations or liquidity. However, if unfavorably resolved, these
proceedings could have a material adverse effect on our financial position,
results of operations and liquidity.
10
<PAGE> 13
Item 6: Exhibits and Reports on Form 8-K
a.) Exhibits (exhibits reference numbers refer to Item 601 of
Regulation S-K)
* 27. Financial Data Schedule
b.) Reports on Form 8-K
On October 12, 1999, we filed a current report on Form 8-K announcing
the purchase of 100% of the outstanding common shares of Consultec,
LLC.
- -------------
* Filed herewith
11
<PAGE> 14
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 12th day of November 1999.
AFFILIATED COMPUTER SERVICES, INC.
By: /s/ Mark A. King
-------------------------------
Mark A. King
Executive Vice President and
Chief Financial Officer
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27. 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> SEP-30-1999
<CASH> 8,999
<SECURITIES> 0
<RECEIVABLES> 359,964
<ALLOWANCES> 4,650
<INVENTORY> 15,538
<CURRENT-ASSETS> 438,954
<PP&E> 300,814
<DEPRECIATION> 130,718
<TOTAL-ASSETS> 1,338,164
<CURRENT-LIABILITIES> 238,606
<BONDS> 421,632
0
0
<COMMON> 493
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,338,164
<SALES> 447,686
<TOTAL-REVENUES> 447,686
<CGS> 0
<TOTAL-COSTS> 402,009
<OTHER-EXPENSES> (1,141)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,828
<INCOME-PRETAX> 41,990
<INCOME-TAX> 16,964
<INCOME-CONTINUING> 25,056
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,026
<EPS-BASIC> .51
<EPS-DILUTED> .47
</TABLE>
