<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
-----------------------
FORM 10-K
-----------------------
MARK ONE ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ X ] SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission file number 0-24787
AFFILIATED COMPUTER SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0310342
------------------------------------ ------------------------------------
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
2828 NORTH HASKELL
DALLAS, TEXAS 75204
(Address of principal executive offices)
(Zip Code)
214-841-6111
(Registrant's telephone number, including area code)
-----------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of exchange on
Title of each class which registered
------------------------------------ ------------------------------------
Class A common stock, par
value $.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements the past 90 days.
Yes X No
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [ X ]
As of September 24, 1999, 46,010,178 shares of Class A common stock
were outstanding. The aggregate market value of the Class A common voting stock
held by nonaffiliates of Affiliated Computer Services, Inc. as of such date,
approximated $1,860,537,000.
DOCUMENTS INCORPORATED BY REFERENCE: Fiscal 1999 Annual Report to Stockholders -
Parts I, II and IV; Proxy Statement for October 26, 1999 Annual Meeting - Part
III.
================================================================================
<PAGE> 2
AFFILIATED COMPUTER SERVICES, INC.
FORM 10-K
JUNE 30, 1999
<TABLE>
<S> <C> <C>
PART I
Item 1. Business................................................................................ 1
Item 2. Properties.............................................................................. 7
Item 3. Legal Proceedings....................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders..................................... 8
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............... 9
Item 6. Selected Consolidated Financial Data.................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 10
Item 8. Financial Statements and Supplementary Data............................................. 10
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 10
PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 11
Item 11. Executive Compensation.................................................................. 11
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 11
Item 13. Certain Relationships and Related Transactions.......................................... 11
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement Schedule and Reports on Form 8-K.... 11
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
We are based in Dallas, Texas and have offices primarily in North America,
as well as Central America, South America, Europe and the Middle East. We
provide a full range of information technology services to clients which have
time-critical, transaction-intensive information processing needs. Our services
include technology outsourcing, business process outsourcing and professional
services. Approximately 90% of our revenues for the past three fiscal years were
recurring revenues, which are revenues derived from services that our clients
use each year in connection with their ongoing businesses.
We were formed in 1988 to participate in the trend to outsource information
processing requirements to third parties which enables businesses to focus on
core operations, respond to rapidly changing technologies and reduce data
processing expenses. Our business strategy is to expand our client base and
enhance our service offerings through both internal marketing and the
acquisition of complementary companies. Our marketing efforts focus on
developing long-term relationships with clients that choose to outsource various
information processing requirements, as well as on expanding the services we
offer to existing clients. Since inception through June 30, 1999, we have
completed 45 acquisitions, which have resulted in geographic expansion, growth
and diversification of our customer base, expansion of services and products
offered, and increased economies of scale. Our revenues have increased from $534
million in fiscal year 1995 to $1.6 billion in fiscal year 1999, a compound
growth rate of 32%. Of this growth, approximately 15% resulted from internal
growth and 17% resulted from acquisitions.
Our largest transaction occurred in December 1997, when we acquired ACS
Government Solutions Group, Inc., formerly known as Computer Data Systems, Inc.,
a provider of information technology solutions to Federal government agencies.
We accounted for this transaction as a pooling of interests, and as a result, we
have restated our historical financial statements to reflect the combined
operations of both companies.
We serve two primary markets. Our largest market is the commercial sector,
which accounts for approximately two-thirds of our annual revenues. Within the
commercial sector, we provide business process outsourcing, professional
services and technology outsourcing to a variety of clients nationwide,
including retailers, local municipalities, healthcare providers,
telecommunications companies, wholesale distributors, manufacturers, utilities,
financial institutions and insurance companies.
We also serve the federal government market, which accounts for
approximately one-third of our annual revenues. Our services in this market are
comprised primarily of business process outsourcing, professional services and
technology outsourcing. Within our federal government business, approximately
half of our revenues are derived from civilian agencies with the remaining half
from the Department of Defense.
MARKET OVERVIEW
According to industry sources, the 1999 worldwide market for information
technology services and solutions was approximately $325 billion, with the
United States market accounting for $153 billion, or approximately half of the
total market. These sources estimate that approximately $57 billion, or
one-third of the U.S. market, has been outsourced to companies like ours, and
that the U.S. outsourced market is expected to grow to $76 billion in 2002,
representing a 10% compounded annual growth rate. However, in the particular
markets in which we compete, industry sources estimate that information
technology spending in the U.S. was approximately $74 billion in 1999, of which
approximately $25 billion was outsourced. This outsourced market is expected by
these industry sources to increase to $36 billion in 2002, representing a 13%
compounded annual growth rate.
1
<PAGE> 4
We believe that the demand for third-party information processing services
has grown substantially in recent years and will continue to increase in the
future as a result of financial, strategic and technological factors. These
factors include:
o the increasing complexity in the information technology systems
environment;
o the proliferation of the Internet and related web-based technologies;
o the desire by businesses to take advantage of the latest advances in
technology without the cost and time commitment required to maintain
an in-house system;
o the increasing requirements for rapid processing and communication of
large amounts of data to multiple locations;
o the increasing attention by businesses to control costs, causing
them to compare the fully allocated cost of in-house processing with
the cost of outsourcing; and
o the desire of organizations to focus on their core competencies.
As a result of rapid technological change in our markets, we expect strong
demand for third-party professional programming and consulting services. Because
we provide professional programming services to clients with mainframe
environments as well as with client-server and network applications, we believe
that we are well-positioned to expand our services in our current locations as
well as in new geographic markets. As part of our consulting services, we advise
clients on the strategic acquisition and utilization of information technology
to achieve and improve their competitive position.
BUSINESS STRATEGY
The key components of our business strategy include the following:
o Expand Client Base - We seek to develop long-term relationships with
new clients by leveraging our expertise and breadth of information
technology products and services. Our primary focus is to increase our
revenues by obtaining new clients with recurring requirements for
information technology services.
o Expand Existing Client Relationships - We seek to leverage existing
client relationships in which we are currently not providing a full
range of services in order to increase the information technology
services we provide to these clients.
o Build Recurring Revenues - We seek to enter into long-term contracts
with clients to provide services that meet their ongoing information
technology needs.
o Invest in Technology - We respond to technological advances and the
rapid changes in the requirements of our clients by committing
substantial amounts of our resources to the operation of multiple
hardware platforms, the customization of products and services that
incorporate new technology on a timely basis and the continuous
training of customer service personnel.
o Provide Flexible Solutions - We offer custom-tailored information
technology solutions using a variety of proprietary and third-party
licensed software on multiple hardware and systems software platforms.
o Maximize Economies of Scale - Our strategy is to develop and maintain
a significant client and account/transaction base to create sufficient
economies of scale that enable us to achieve competitive costs.
2
<PAGE> 5
o Complete Strategic and Tactical Acquisitions - Our acquisition
strategy is to acquire companies to expand our geographic presence, to
expand the products and services we offer to existing clients, and to
obtain a presence in new, complementary markets. Although we currently
generate virtually all of our revenue from domestic clients, we
believe we have significant international growth opportunities and
intend to pursue those opportunities in a disciplined manner.
o Attract, Train, and Retain Employees - We believe that attracting,
training, and retaining high quality employees are essential to our
growth. We hire motivated individuals with strong character and
leadership traits and provide them with ongoing technological and
leadership skills training. We emphasize retaining our associates with
challenging work assignments and incentive programs.
During the last three fiscal years, our revenue mix was as follows:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Commercial $ 1,087,210 $ 775,621 $ 624,245
Federal Government 569,681 413,784 304,392
Intercompany Eliminations/Other (14,675) (282) 288
----------- ----------- -----------
Total Revenue $ 1,642,216 $ 1,189,123 $ 928,925
=========== =========== ===========
</TABLE>
COMMERCIAL
In the commercial sector we provide our clients with business process
outsourcing, professional services and technology outsourcing.
Business Process Outsourcing
We participate in several segments of the business process outsourcing
market. We developed and acquired our business process outsourcing services to
capitalize on a growing trend in corporate America. More and more companies are
concluding that it is more efficient to focus on their core competencies and to
outsource their non-core but mission-critical processes. As a result, they turn
to companies such as ACS to manage their processes. We provide a variety of
services on behalf of our clients, including loan and mortgage processing,
claims processing, accounts payable processing, data capture, storage and
retrieval services and trade marketing. We typically receive client information
in a variety of media such as paper, microfilm, computer tape, optical disk or
CD ROM. Upon receipt, we either duplicate, electronically scan or convert the
information into another suitable medium for processing. Using state-of-the-art
image transmission, storage and retrieval technology, we digitize and transmit
millions of information records daily from client locations for high-speed
conversion and database update. In many instances, we store the information for
our clients on a long-term basis. Pricing is typically determined on the basis
of the number of accounts or transactions processed.
We also provide automated teller machine transaction processing services
primarily for financial institutions and retailers. We believe we are one of the
largest processors of retail automated teller machines in the United States.
Professional Services
Our professional services include technology consulting, Internet
development, contract programming, applications outsourcing and maintenance and
technical support and training, as well as network design and installation
services. We provide technology consulting services which consist of advising
clients on the strategic acquisition, integration and implementation of
information technology resources. Our Internet services include
3
<PAGE> 6
web-enablement of information technology assets allowing our clients to conduct
business with their customers and business partners via the Internet. We also
assist clients in the development of web-based applications and the hosting of
Internet, intranet and extranet sites. We provide a variety of clients with
professional services allowing such clients the opportunity to use a planned,
flexible workforce, either through staff augmentation or by serving as a
client's in-house development staff. Our ability to deliver high-level skill
sets and proven methodologies across a variety of technologies enhances our
ability to offer complementary services to clients and prospects dealing with
technological change.
We also provide systems integration services to clients in selected
industries who are deploying newer technology such as client/server
architectures, advanced networks and web-based systems. We use a combination of
third party and proprietary systems to offer packaged solutions to clients with
intensive document management needs. We currently have approximately 1,500
employees providing professional and systems integration services to commercial
clients. We provide these services in fifteen offices in major cities throughout
the United States. Due to the nature of the work, we generally offer our
professional services on a time and materials basis to a changing client base
under short-term contractual arrangements.
Technology Outsourcing
We offer a diverse set of technology outsourcing solutions to commercial
businesses desiring to achieve reductions in data processing costs and/or
improvements in the quality of data processing. Our technology outsourcing
solutions include the delivery of information processing services on a remote
basis from host data centers with sufficient computer processing capacity to
deliver significant cost savings and process improvements to our clients.
Information processing services include both on-line and batch processing of our
clients' mission-critical application systems and network management assistance.
We provide our technology outsourcing services through an extensive
national data and service center network, which comprises five host data center
and seven remote data centers, as well as an extensive telecommunication
network. We manage data communications and, in some instances, voice
communications for our clients, as well as various local and wide area networks.
We maintain a nationwide voice and data network to support the complex
telecommunications requirements of our client base. We monitor and maintain
network lines and circuits on a seven-day, 24-hour basis from our host data
centers. We also provide shared hub satellite transmission service as an
alternative to multi-drop and point-to-point hard line telecommunications
networks.
Our target market for technology outsourcing services consists of medium-
to large-sized commercial organizations with time-critical,
transaction-intensive information processing needs. We typically provide our
technology outsourcing services pursuant to multi-year contracts which are
typically priced on a resource utilization basis. Resources utilized include
processing time, professional services, hardware, data storage and retrieval
requirements and output volume required for processing.
FEDERAL GOVERNMENT
Within the federal government sector, we provide business process
outsourcing, professional services and technology outsourcing. Our civilian
agency clients account for about half of our federal government revenues and our
department of defense clients account for the remaining half.
Business Process Outsourcing
Our business process outsourcing services consist primarily of loan
servicing for federal agencies. Our services include billing, lockbox payment
processing, related accounting and reconciliation and client service call center
operations. Our largest contract for these services is with the Department of
Education, for which we service student loans under the Department of
Education's Direct Student Loan program. Under this contract, we currently
provide loan servicing to over four million borrowers, or over 12 million loans
with an aggregate value of $49 billion. During fiscal year 1999, revenue from
this contact was approximately $120 million. This contract is scheduled to
expire September 2003. We also have contracts with the Small Business
Administration and
4
<PAGE> 7
Department of Veterans Affairs. Pricing is typically determined on the basis of
the number of accounts or transactions processed. Our information technology
services are also provided to civilian agencies and Department of Defense
agencies.
Professional Services
We provide applications maintenance and development, network implementation
and maintenance, desktop services, technical staff augmentation, training and
Internet/intranet development. The Department of Defense and civilian agencies
generally either contract directly with us or through the General Services
Administration (GSA) for these services. The GSA performs the procurement
function for many civilian and Department of Defense agencies. Approximately 40%
of these services for fiscal 1999 were provided pursuant to three contracts with
the GSA. We also provide our services to a variety of civilian agencies such as
the Departments of Labor, Treasury and Transportation, the U.S. Senate, the U.S.
Postal Service, the Federal Energy Regulatory Commission and the National Drug
Intelligence Center. In addition, we also provide these services to a variety of
Department of Defense agencies such as Strategic Command, Air Combat Command,
The National Security Agency and the Defense Special Weapons Agency.
We currently have over 3,900 employees providing these services to our
government clients. Additionally, approximately 1,600 of these employees have
security clearance. We generally price these services on a time and materials
basis.
Technology Outsourcing
Our technology outsourcing services within the Federal government are
offered and provided in a manner similar to these services in the commercial
sector.
CLIENT BASE
We achieve growth in revenues and customer base through marketing and
acquisitions of other information processing companies. Clients may be lost due
to merger, business failure, conversion to a competing processor or to an
in-house system. Our business with the federal government is subject to various
risks, including the reduction or modification of contracts due to changing
government needs and requirements. Government contracts, by their terms,
generally can be terminated for convenience by the government, which means that
the government may terminate the contract at any time, without cause, and in
certain instances we would be entitled to receive compensation only for the
services provided or costs incurred at the time of termination.
Approximately 89%, 89% and 90% of our revenues for fiscal 1999, 1998 and
1997, respectively, were recurring. We define recurring revenues as revenues
derived from services that are used by our clients each year in connection with
their ongoing businesses, and accordingly exclude conversion and deconversion
fees, software license fees, product installation fees and hardware sales.
Our five largest customers accounted for approximately 19%, 25% and 26% of
our fiscal 1999, 1998 and 1997 revenues, respectively.
5
<PAGE> 8
Our revenues derived from information technology services described herein
are shown in the following table:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Business process outsourcing $ 696,976 $ 468,175 $ 385,937 $ 260,220 $ 172,446
Professional services 570,168 390,221 245,720 201,443 184,025
Technology outsourcing 375,072 330,727 297,268 185,945 177,377
---------- ---------- ---------- ---------- ----------
Total $1,642,216 $1,189,123 $ 928,925 $ 647,608 $ 533,848
========== ========== ========== ========== ==========
</TABLE>
COMPETITION
The markets for our services are intensely competitive and highly
fragmented. The most significant competitive factors are reliability and quality
of services, technical competence and price of services.
In connection with certain large technology outsourcing contracts, we may
be required to purchase technology assets from prospective clients or to provide
financial assistance to prospective clients in order to obtain their contracts.
Many of our competitors have substantially greater resources and thus, may have
a greater ability to obtain client contracts where sizable asset purchases or
investments are required. To maintain competitive prices, we operate with
efficient and low overhead and maintain a significant client base and
account/transaction base to achieve sufficient economies of scale. Our
competition for technology outsourcing contracts consists of:
o the first-tier outsourcers, including IBM, Electronic Data Systems
Corporation (EDS) and Computer Sciences Corporation (CSC);
o mid-sized divisions of large corporations, such as Lockheed-Martin;
and
o other smaller, regional competitors.
In professional services markets, we actively compete with small
specialized firms as well as with large competitors with a wider range of
professional services. We believe that the key competitive factors in obtaining
and retaining clients include the ability to understand project requirements,
deliver appropriate skill sets in a timely manner and price services
effectively. We must also compete for qualified personnel through competitive
wages and by maintaining a consistent demand for the skills recruited. Our
competition in professional services includes EDS, CSC, Science Applications
International Corporation and several other local and regional players.
We compete successfully in the business process outsourcing business by
offering a wide range of high quality services and achieving favorable pricing
by maintaining a significant volume of transactions to obtain economies of
scale. Competition is highly fragmented and depends on the specific business
process. Principal competitors for accounts payable, claims processing and
records storage and retrieval services include FYI, Inc., National Processing
Company, Lason, Inc. and several other small- to medium-sized local and regional
competitors. Principal electronic commerce solution competitors include EDS,
Deluxe Data Corporation, Concord EFS, Inc., large financial institutions and
several regional automated teller machine networks and processors.
SALES AND MARKETING
We market our services and products primarily through separate sales forces
located throughout the United States. In order to enhance our sales and
marketing efforts, we hire sales representatives who have significant experience
in the industries to which they will be marketing. Maintaining separate sales
forces for our various service lines allows our sales representatives to
concentrate on particular services, product technology and customer markets,
thereby staying abreast of developments in these areas. However, the sales
representatives are also kept abreast of our service offerings in order to
cross-sell these services to our entire client population.
6
<PAGE> 9
EMPLOYEES
We believe that our success, in part, depends on our continuing ability to
attract and retain skilled technical, marketing and management personnel. While
technology professionals are in high demand, we believe that, to date, we have
been able to attract and retain highly qualified personnel. As of June 30, 1999,
we had over 15,700 full-time equivalent employees. Other than approximately 200
employees located in one location in Mississippi, none of our employees are
currently represented by a union, and there have been no work stoppages or
strikes. Management considers its relations with employees to be good.
GOVERNMENT CONTRACTS AND REGULATION
Approximately one-third of our revenues are derived from contracts and
subcontracts with federal government agencies. Our allowable federal government
contract costs and fees are subject to audit by the Defense Contract Audit
Agency ("DCAA"). These audits may result in non-reimbursement of some contract
costs and fees. To date, we have experienced no material adjustments as a result
of audits by the DCAA. The DCAA has completed audits of the Company's federal
contracts through fiscal 1996, for a majority of the federal government
contracts.
We are not directly subject to federal or state regulations specifically
applicable to financial institutions. As a provider of services to financial
institutions, however, our technology outsourcing and electronic commerce
solutions operations are examined periodically by various state and federal
regulatory agencies. These agencies make recommendations regarding various
aspects of our operations, and generally, we implement such recommendations. We
also arrange for an annual independent examination of our major data processing
facilities.
Our ATM network operations are subject to federal and state regulations
governing consumers' rights with respect to ATM transactions. Fees charged by
ATM owners are currently regulated, and additional legislation which would
regulate or eliminate certain ATM fees has been proposed by the federal
government and by several states. There can be no assurance whether such
regulations or legislation will be enacted in the future or that existing
consumer protection laws will not be expanded to apply to fees charged in
connection with ATM transactions. However, if such legislation were enacted, the
number of ATMs operated nationwide (or within the geographic areas affected by
the legislation) could be significantly reduced. This could adversely affect our
revenues and income as they relate to our electronic commerce solutions
business.
ITEM 2. PROPERTIES
As of June 30, 1999, we had approximately 220 locations in the United
States in 36 states and also in 6 other countries. Approximately 1.0 million
square feet is owned and approximately 1.9 million square feet is leased. The
leases expire from 1999 to 2011 and we do not anticipate any significant
difficulty in obtaining lease renewals or alternative space. Our executive
offices are located in Dallas, Texas at a company owned facility of
approximately 612,000 square feet, which also houses a host data center and
other operations. Our federal government sector executive offices are located in
Rockville, Maryland in a company owned facility of approximately 130,000 square
feet. We believe that our current facilities are suitable and adequate for our
business.
7
<PAGE> 10
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal fourth quarter covered by this report, no matter was
submitted to a vote of our security holders.
8
<PAGE> 11
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "ACS." The following table sets forth the high and low sales
prices of our Class A common stock for the last two fiscal years as reported on
the NYSE, and have been retroactively adjusted for the two-for-one stock
split which occurred in November 1996.
<TABLE>
<CAPTION>
Fiscal year ended June 30, 1998 High Low
------------------------------- -------- --------
<S> <C> <C>
First Quarter 29 15/16 24 5/16
Second Quarter 26 1/2 21 1/2
Third Quarter 37 1/8 24 1/2
Fourth Quarter 39 3/4 30 5/8
<CAPTION>
Fiscal year ended June 30, 1999 High Low
------------------------------- -------- --------
<S> <C> <C>
First Quarter 38 3/4 29 3/4
Second Quarter 45 22 3/8
Third Quarter 51 3/4 34 1/2
Fourth Quarter 50 11/16 38 1/4
</TABLE>
On September 24, 1999, the last reported sales price of our Class A common
stock as reported on the New York Stock Exchange was $ 40 7/16 per share.
Except for the dividends paid by ACS Government Solutions Group, Inc. prior
to the Merger, we have not paid any dividends to date on our common stock. We
intend to continue to retain earnings for use in the operation of our business
and, therefore, do not anticipate paying any dividends in the foreseeable
future. Under the terms of our unsecured revolving credit agreement with Wells
Fargo Bank (Texas), National Association and Bank One, Texas N.A. as amended
(the "Credit Facility"), we are prohibited from paying dividends in any fiscal
year in a total amount that would exceed 50% of our net income for the preceding
fiscal year. Any future determination to pay dividends will be at the discretion
of our Board of Directors and will be dependent upon our financial condition,
results of operations, contractual restrictions, capital requirements, business
prospects and such other factors as the Board of Directors deems relevant.
9
<PAGE> 12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are qualified by
reference to and should be read in conjunction with our Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
document.
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
As of and for the year ended June 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS DATA:
Revenues $1,642,216 $1,189,123 $ 928,925 $ 647,608 $ 533,848
Earnings from continuing operations $ 86,230 $ 54,422(1) $ 49,666 $ 33,525 $ 25,655
Earnings per common share-basic $ 1.77 $ 1.14(1) $ 1.08 $ 0.88 $ 0.74
Earnings per common share
assuming dilution $ 1.66 $ 1.11(1) $ 1.05 $ 0.85 $ 0.71
Weighted average shares outstanding -
basic 48,839 47,599 46,136 38,228 34,625
Weighted average shares outstanding
assuming dilution 55,668 50,487 47,452 39,320 35,998
BALANCE SHEET DATA:
Working capital $ 194,226 $ 198,118 $ 110,866 $ 79,928 $ 77,615
Total assets $1,223,600 $ 949,798 $ 761,477 $ 636,098 $ 309,903
Total long-term debt
(less current portion) $ 349,106 $ 234,848 $ 130,680 $ 57,208 $ 37,940
Cumulative redeemable
preferred stock $ -- $ -- $ -- $ 1,100 $ 1,100
Stockholders' equity $ 607,421 $ 503,670 $ 427,481 $ 363,204 $ 156,686
</TABLE>
(1) Includes $12,974,000, $8,880,000 net of tax, or $.19 and $.18 per
basic and diluted share, respectively, of merger costs we incurred in
connection with the Merger.
Pursuant to Instructions G(2) to Form 10-K, the information required in
Items 7 and 8 are incorporated by reference from pages 18 through 39 of our
Fiscal 1999 Annual Report to Stockholders, included in this Form 10-K Annual
Report as Exhibit 13.1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
10
<PAGE> 13
PART III
Pursuant to Instruction G(3) to Form 10-K, the information required in
ITEMS 10 THROUGH 13 is incorporated by reference from our definitive proxy
statement, which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K
(a) (1) Financial Statements
Our consolidated financial statements as of June 30, 1999 and 1998 and
for each of the three years in the period ended June 30, 1999,
together with the report of PricewaterhouseCoopers LLP dated July 27,
1999, appear on pages 18 to 39 of our Fiscal 1999 Annual Report to
Stockholders, Exhibit 13.1 to this Form 10-K Annual Report, and are
incorporated herein by reference.
(a) (2) Financial Statement Schedule
Schedule II- Valuation and Qualifying Accounts for the three years in
the period ended June 30, 1999, together with the report of
PricewaterhouseCoopers LLP dated July 27, 1999 appear on pages F-1 and
F-2 and are filed as part of this Form 10-K Annual Report.
All other financial statement schedules are omitted for the reason
that they are either not applicable or not required or because the
information required is contained in the consolidated financial
statements or notes thereto.
(b) Reports on Form 8-K
On May 19, 1999 we filed a Current Report on Form 8-K reporting the
amendment and restatement of our Rights Agreement.
(c) Exhibits
Reference is made to the Index to Exhibits beginning on page 17 for
a list of all exhibits filed as part of this report.
11
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this Report to be signed on our behalf
by the undersigned thereunto duly authorized representative.
Affiliated Computer Services, Inc.
Date: September 28, 1999
By: /s/ Mark A. King
--------------------------------
Mark A. King
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 28th day of September 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Darwin Deason Director, Chairman of the Board
- -------------------------------
(Darwin Deason)
/s/ Jeffrey A. Rich Director, President and Chief Executive Officer
- -------------------------------
(Jeffrey A. Rich)
Director, Executive Vice President and Chief Financial
/s/ Mark A. King Officer
- -------------------------------
(Mark A. King)
/s/ Henry G. Hortenstine Director, Executive Vice President
- -------------------------------
(Henry G. Hortenstine)
Director, Executive Vice President, Secretary and
/s/ David W. Black General Counsel
- -------------------------------
(David W. Black)
/s/ Peter A. Bracken Director and Vice-Chairman, ACS Government Solutions Group, Inc.
- -------------------------------
(Peter A. Bracken)
/s/ Joseph P. O'Neill Director
- -------------------------------
(Joseph P. O'Neill)
/s/ Frank A. Rossi Director
- -------------------------------
(Frank A. Rossi)
/s/ Clifford M. Kendall Director
- -------------------------------
(Clifford M. Kendall)
</TABLE>
12
<PAGE> 15
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Affiliated Computer Services, Inc.
Our audits of the consolidated financial statements referred to in our
report dated July 27, 1999, appearing in the 1999 Annual Report to
Stockholders of Affiliated Computer Services, Inc. (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the financial statement schedule
listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
July 27, 1999
F-1
<PAGE> 16
AFFILIATED COMPUTER SERVICES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(in thousands)
<TABLE>
<CAPTION>
Balance Balance
at Beginning Charged to Costs at End
Description of Period and Expenses Deductions of Period
- ------------------------------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Year ended June 30, 1999
Deducted from asset accounts:
Accounts receivable $ 2,840 $ 3,673 $ 1,880 (1) $ 4,633
Property and equipment 90,096 35,342 1,494 (2) 123,944
Software 11,029 5,093 1,066 (2) 15,056
Goodwill 25,846 15,664 (269) (2) 41,779
Other intangible assets 14,414 10,624 32 25,006
---------- --------- ---------- ---------
Total $ 144,225 $ 70,396 $ 4,203 $210,418
========== ========= ========== =========
Year ended June 30, 1998
Deducted from asset accounts:
Accounts receivable $ 1,964 $ 998 $ 122 (1) $ 2,840
Property and equipment 66,302 25,493 1,699 (2) 90,096
Software 9,436 3,661 2,068 (2) 11,029
Goodwill 15,504 10,432 90 (2) 25,846
Other intangible assets 7,100 7,888 574 (2) 14,414
---------- --------- ---------- ---------
Total $ 100,306 $ 48,472 $ 4,553 $ 144,225
========== ========= ========== =========
Year ended June 30, 1997
Deducted from asset accounts:
Accounts receivable $ 1,457 $ 1,166 $ 659 (1) $ 1,964
Property and equipment 46,718 21,836 2,252 (2) 66,302
Software 19,438 2,717 12,719 (2) 9,436
Goodwill 8,609 7,232 337 (2) 15,504
Other intangible assets 4,478 2,826 204 (2) 7,100
---------- --------- ---------- ---------
Total $ 80,700 $ 35,777 $ 16,171 $ 100,306
========== ========= ========== =========
</TABLE>
(1) Uncollectible accounts written off, net of recoveries and allowances
of acquired businesses.
(2) Retirements
F-2
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT NAME
------- ------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of September 20, 1997, by
and among the Company, ACS Acquisition Corp. and Computer Data
Systems, Inc., filed as Exhibit 2.1 to the Company's Form S-4
(Registration No. 333-40351) (the "Form S-4") and incorporated
herein by reference.
3.1 Charter of Incorporation of the Company, filed as Exhibit 3.1 to
the Company's Form S-4 and incorporated herein by reference.
3.2 Bylaws of the Company filed as Exhibit 3.(II) to the Company's
Third Quarter Report on Form 10-Q for the quarter ended
March 31, 1999 and incorporated herein by reference.
4.1 Form of New Class A Common Stock Certificate, filed as Exhibit 4.3
to the Company's Form S-1 (Registration No. 333-79394) (the
"Form S-1") and incorporated herein by reference.
4.2 First Amended and Restated Rights Agreement, dated April 2, 1999,
between the Company and First City Transfer Company, as Rights
Agent filed as Exhibit 4.1 to the Company's Report on Form 8-K
dated May 19, 1999 and incorporated herein by reference.
4.3 Indenture, dated as of March 20, 1998 between Affiliated Computer
Services, Inc., as issuer and U.S. Trust Company of Texas, N.A.
as trustee, filed as Exhibit 4.1 to the Company's Report on
Form 8-K dated March 20, 1998 and incorporated herein by
reference.
4.4 Registration Rights Agreement, dated as of March 17, 1998 between
Affiliated Computer Services, Inc. and Goldman, Sachs & Co.,
Bear, Stearns & Co., Inc., Smith Barney Inc., Hambrecht & Quist
LLC, Donaldson, Lufkin & Jenrette Securities Corporation and
Prudential Securities Incorporated, filed as Exhibit 4.2 to the
Company's Report on Form 8-K dated March 20, 1998 and
incorporated herein by reference.
10.1 Amended Stock Option Plan of the Company, filed as Exhibit 10.1 to
the Company's Form S-1 and incorporated herein by reference.
10.2 1997 Stock Incentive Plan of the Company, filed as Appendix D to
the Company's Joint Proxy Statement/Prospectus filed as Form
14A dated November 14, 1997 and incorporated herein by
reference.
10.3 Reciprocal Services Agreement, dated June 30, 1994, between the
Company and Precept, filed as Exhibit 10.15 to the Company's
Form S-1 and incorporated herein by reference.
</TABLE>
<PAGE> 18
<TABLE>
<S> <C>
10.4 Mutual Indemnification Agreement, dated June 30, 1994, between the
Company and Precept, filed as Exhibit 10.18 to the Company's
Form S-1 and incorporated herein by reference.
10.5 Stockholders Tax Indemnification Agreement, dated June 30, 1994,
between the Company and the Stockholders named therein, filed
as Exhibit 10.19 to the Company's Form S-1 and incorporated
herein by reference.
10.6 Form of Directors Indemnification Agreement, filed as Exhibit
10.20 to the Company's Form S-1 and incorporated herein by
reference.
10.7 Credit Agreement dated December 15, 1995 between the Company,
Bank One, Texas, N.A., as Documentation Agent and Co-Agent,
First Interstate Bank of Texas N.A., as Administrative Agent
and Co-Agent and Certain Lenders, filed as Exhibit 10.1 to the
Company's Third Quarter Report on Form 10-Q for the quarter
ended March 31, 1996 and incorporated herein by reference.
10.8 Restated Credit Agreement dated June 20, 1996 between the Company,
Wells Fargo Bank (Texas), N.A., Agent, Bank One, Texas, N.A.,
Co-Agent, and Certain Lenders for $160,000,000 Revolving
Facility filed as Exhibit 10.19 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1996 and incorporated
herein by reference.
10.9 First Amendment to Restated Credit Agreement dated July 29, 1997
between the Company, Wells Fargo Bank (Texas) N.A., Agent;
Bank One, Texas, N.A., Co-Agent; and Certain Lenders for
$200,000,000 Revolving Facility filed as Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1997 and incorporated herein by reference.
*10.10 Second Amendment to Restated Credit Agreement dated March 20, 1998
between the Company, Wells Fargo Bank (Texas) N.A., Agent;
Bank One, Texas, N.A., Co-Agent; and Certain Lenders for
$200,000,000 Revolving Facility.
10.11 Form of Severance Agreement by and between the Company and Certain
Executive Officers of the Company filed as Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the year ended
June 30, 1997 and incorporated herein by reference.
10.12 U.S. Department of Education Contract No. PM94017001 (portions of
which are subject to an Order for Confidential Treatment
pursuant to Rule 24b-2) included as an exhibit to the Form
10-Q/A filed August 24, 1994 by ACS Government Solutions, Inc.
(formerly known as Computer Data Systems, Inc.) and
incorporated herein by reference.
*10.13 Supplemental Executive Retirement Agreement by and between the
Company and the Company's Chairman of the Board.
10.14 Employment Agreement by and between the Company and the Company's
Chairman of the Board filed as Exhibit 10.(iii)(A) to the
Company's Third Quarter Report on Form 10-Q for the quarter
ended March 31, 1999 and incorporated herein by reference.
* 13.1 Excerpt of the Fiscal 1999 Annual Report to Stockholders,
pages 18 through 38.
* 21.1 Subsidiaries of the Company
* 23.1 Consent of PricewaterhouseCoopers LLP
* 23.2 Consent of Ernst & Young LLP
* 27.1 Financial Data Schedule
* 99.1 Report of Independent Auditors
</TABLE>
* Filed herewith
<PAGE> 1
EXHIBIT 10.10
SECOND AMENDMENT TO RESTATED CREDIT AGREEMENT
THIS AMENDMENT is entered into as of March 20, 1998, between AFFILIATED
COMPUTER SERVICES, INC., a Delaware corporation ("BORROWER"), certain Lenders,
WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, as Agent for Lenders ("AGENT"),
and BANK ONE, TEXAS, N.A., as Co-Agent for Lenders.
Borrower, Agent, Co-Agent, and certain Lenders are party to the
Restated Credit Agreement (as renewed, extended, and amended, the "CREDIT
AGREEMENT") dated as of June 20, 1996, providing for a $160,000,000 revolving
credit facility, which has subsequently been increased to $200,000,000.
Borrower, Agent, Co-Agent, and Lenders have agreed, subject to the
following terms and conditions, to amend the Credit Agreement to permit Borrower
to issue up to $230,000,000 in subordinated debt that will be convertible into
equity of Borrower and to provide for, among other things, (a) an increase in
the amount of advances that may be made by Borrower to Persons who have not
guaranteed the Obligation, (b) an increase the limit of the face amount of LC's
that may be outstanding under the LC Subfacility, (c) an increase the amount of
expenditures allowed to be made in connection with certain acquisitions, (d)
additional amounts and types of Permitted Debt, and (d) certain other amendments
and modifications as more particularly set forth herein.
Accordingly, for adequate and sufficient consideration, Borrower,
Agent, Co-Agent, and Lenders agree as follows:
1. TERMS AND REFERENCES. Unless otherwise stated in this amendment (a)
terms defined in the Credit Agreement have the same meanings when used in this
amendment and (b) references to "Sections," Schedules," and "Exhibits" are to
the Credit Agreement's sections, schedules, and exhibits.
2. AMENDMENT TO CREDIT AGREEMENT. The Credit Agreement is amended as
follows:
(A) SECTION 1.1 is amended by adding or entirely amending the
following definitions:
CARA ACQUISITION means Borrower's acquisition of CARA
Holdings, Inc., a Delaware corporation, and parent of CARA
Corporation, an Illinois corporation, pursuant to that certain
Stock Purchase Agreement dated as of December 5, 1997, by and
between Borrower, William Blair Capital Partners V, L.P., a
Delaware limited partnership, and each of the other
stockholders of CARA Holdings, Inc., a Delaware corporation;
with the rights, liabilities and obligations of Borrower under
that Stock Purchase Agreement having been assigned to
Technical Directions, Inc. by that certain Assignment dated as
of December 24, 1997.
LC SUBFACILITY means a subfacility of the Revolving
Facility for the issuance of LCs, as described in SECTION 2.3,
under which the LC Exposure may never (a) collectively exceed
$30,000,000 and (b) together with Principal Debt may never
exceed the Total Commitment.
SUBORDINATED NOTES means Borrower's 4% Convertible
Subordinated Notes Due March 15, 2005, in the principal amount
of $200,000,000 (which amount may be increased to a maximum
amount of $230,000,000), and any notes given by Borrower in
exchange
SECOND AMENDMENT TO
RESTATED CREDIT AGREEMENT
<PAGE> 2
those notes if the notes so given are subject to the same
terms as the original Subordinated Notes.
(B) SECTION 2.1(C) is entirely amended as follows:
(c) Borrower may advance all or part of the proceeds
of any Borrowing to only those Subsidiaries that have executed
a Guaranty, provided that Borrower may advance proceeds from
any Borrowing or LC to any Person (whether or not such Person
is a Subsidiary that has executed a Guaranty) so long as the
aggregate amount of such advances may never exceed $5,000,000
at anytime outstanding; and
(C) SECTION 5.1 is entirely amended as follows:
5.1 Guaranty. In consideration of the LCs which may
be issued by Issuing Lender under this agreement on behalf of
each Company, and in consideration of the intercompany
advances which may be made by Borrower to its Subsidiaries,
and by Borrower's direct Subsidiaries to Borrower's indirect
Subsidiaries, in accordance with SECTION 2.1(C), Borrower
shall cause all of its present and future direct and indirect
Subsidiaries (other than GuaranTec, L.L.P., a Florida limited
partnership), whether now existing or in the future formed or
acquired, to unconditionally guarantee the full payment and
performance of the Obligation by execution of a Guaranty.
(D) CLAUSE (y) of SECTION 6 is entirely amended as follows:
(y) none of the matters disclosed in any amendments
to SCHEDULES 7.8, 7.10, or 7.18 are objected to by Determining
Lenders; and
(E) The language immediately preceding CLAUSE (a) of SECTION
7.18 is entirely amended as follows:
To the best of Borrower's knowledge, after exercise
of due diligence, and except as disclosed on SCHEDULE 7.18,
(F) SECTION 8.2 is entirely amended as follows:
8.2 Use of Credit. Borrower shall, and shall cause
the Companies to, use LCs and the proceeds of Borrowings only
for the purposes represented in this agreement, provided that
notwithstanding anything herein to the contrary, Borrower may
also use the proceeds of the Revolving Facility (including the
Swing-Line Subfacility but excluding the LC Subfacility) for
the purpose of performing its payment obligations in
connection with ITEMS 8 and 13 on SCHEDULE 9.2.
(G) CLAUSE (xiv) to SECTION 9.3(b) and the table at the end of
that Section are entirely amended as follows:
(xiv) the CARA Acquisition and any other acquisitions of
stock, interests or assets, (or creation of new Subsidiaries),
so long as the aggregate amount of consideration paid (or
capital contributed) by the Companies during each fiscal year
set forth in the table below for such stock, other interests
or assets does not exceed the Maximum Amount for such fiscal
year. For purposes of this SECTION 9.3(b)(xiv), "MAXIMUM
AMOUNT" means the
SECOND AMENDMENT TO
RESTATED CREDIT AGREEMENT
2
<PAGE> 3
"Maximum Amount" set forth in the table below plus any portion
of the previous fiscal year's Maximum Amount not utilized
during that previous fiscal year.
<TABLE>
<CAPTION>
================================ =============================
FISCAL YEAR END MAXIMUM AMOUNT
================================ =============================
<S> <C>
6/30/97 $65,000,000
6/30/98 $75,000,000
6/30/99 and thereafter $120,000,000
================================ =============================
</TABLE>
(H) New SECTIONS 9.20 and 9.21 are added immediately following
SECTION 9.19, as follows:
9.20 Prepayments of Subordinated Notes. Borrower may
not prepay or cause to be prepaid any principal of, or any
interest on, any of the Subordinated Notes except (a)
exchanges of Subordinated Notes for other Subordinated Notes,
(b) conversions of Debt under the Subordinated Notes to equity
of Borrower that is not mandatorily redeemable, and (c) cash
redemptions of Subordinated Notes the aggregate amount of
which never exceeds $3,000,000.
9.21 Changes Relating to Subordinated Notes. Borrower
may not agree to any change or amendment to the terms of the
Subordinated Notes (or any indenture or agreement in
connection therewith) if the effect of such change or
amendment is to: (a) increase the interest rate on the
Subordinated Notes, (b) change the dates upon which payments
of principal or interest are due on the Subordinated Notes
other than to extend such dates, (c) change any default or
event of default or covenant other than to delete or make less
restrictive any default or covenant provision therein, or add
any covenant with respect to the Subordinated Notes, (d)
change the redemption or prepayment provisions of such the
Subordinated Notes other than to extend the dates therefor or
to reduce the premiums payable in connection therewith, (e)
grant any security, collateral or guaranty to secure payment
of the Subordinated Notes, or (f) change or amend any other
term if such change or amendment would materially increase the
obligations of the obligor or confer additional material
rights to the holder of the Subordinated Notes in a manner
adverse to Borrower, Agent, or any Lender.
(I) The introductory language immediately preceding CLAUSE (a)
of SECTION 11.10 is entirely amended as follows:
In respect of any Debt (other than the Obligation and the Debt
evidenced by the Subordinated Notes) individually or
collectively of at least $3,000,000
(J) The first sentence of SECTION 11.14(b) is entirely amended
as follows:
The occurrence of a default under any other Material Agreement
(other than any Material Agreement described in SECTION 11.16)
which results in the acceleration of payment of any amounts
payable by any Company in excess of $10,000,000.
(K) A new SECTION 11.16 is added immediately following SECTION
11.15, as follows:
SECOND AMENDMENT TO
RESTATED CREDIT AGREEMENT
3
<PAGE> 4
11.16 Subordinated Notes. The occurrence of a default
or event of default or Borrower's receipt of notice of a
default or event of default under any of the Subordinated
Notes or any Indenture or other agreement, document, or
instrument executed and delivered in connection with the
issuance of the Subordinated Notes.
(L) SCHEDULES 7.3, 7.3(1), 7.8, and 9.2 are entirely amended
in the form of, and all references to SCHEDULES 7.3, 7.3(1), 7.8, and
9.2 are changed to, the attached AMENDED SCHEDULES 7.3, 7.3(1), 7.8,
and 9.2, respectively.
(M) A new SCHEDULE 7.18 is added immediately following
SCHEDULE 7.14, in the form of the attached SCHEDULE 7.18.
3. CONDITIONS PRECEDENT. PARAGRAPH 2 above is not effective until the
date Agent receives (i) counterparts of this amendment executed by Borrower,
Agent, Co-Agent, and Determining Lenders and (ii) each document and other item
listed on the attached ANNEX A, each of which must be in form and substance
acceptable to Agent and its counsel.
4. RATIFICATIONS. Borrower (a) ratifies and confirms all provisions of
the Loan Documents as amended by this amendment, (b) ratifies and confirms that
all guaranties, assurances, and Liens granted, conveyed, or assigned to Agent
under the Loan Documents are not released, reduced, or otherwise adversely
affected by this amendment and continue to guarantee, assure, and secure full
payment and performance of the present and future Obligation, and (c) agrees to
perform such acts and duly authorize, execute, acknowledge, deliver, file, and
record such additional documents and certificates as Agent may request in order
to create, perfect, preserve, and protect those guaranties, assurances, and
Liens.
5. REPRESENTATIONS. Borrower represents and warrants to Agent and
Lenders that as of the date of this amendment (a) all representations and
warranties in the Loan Documents are true and correct in all material respects
except to the extent that (i) any of them speak to a different specific date or
(ii) the facts on which any of them were based have been changed by transactions
contemplated or permitted by the Credit Agreement, and (b) no Material Adverse
Event, Default or Potential Default exists.
6. MISCELLANEOUS. All references in the Loan Documents to the "Credit
Agreement" refer to the Credit Agreement as amended by this amendment. This
amendment is a "Loan Document" referred to in the Credit Agreement, and the
provisions relating to Loan Documents in SECTIONS 1 and 14 of the Credit
Agreement are incorporated in this amendment by reference. Unless stated
otherwise (a) the singular number includes the plural and vice versa and words
of any gender include each other gender, in each case, as appropriate, (b)
headings and captions may not be construed in interpreting provisions, (c) this
amendment must be construed, and its performance enforced, under Texas law, (d)
if any part of this amendment is for any reason found to be unenforceable, all
other portions of it nevertheless remain enforceable, and (e) this amendment may
be executed in any number of counterparts with the same effect as if all
signatories had signed the same document, and all of those counterparts must be
construed together to constitute the same document.
SECOND AMENDMENT TO
RESTATED CREDIT AGREEMENT
4
<PAGE> 5
7. ENTIRETIES. THE CREDIT AGREEMENT AS AMENDED BY THIS AMENDMENT
REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES ABOUT THE SUBJECT MATTER OF
THE CREDIT AGREEMENT AS AMENDED BY THIS AMENDMENT AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
8. PARTIES. This amendment binds and inures to Borrower, Agent,
Lenders, and their respective successors and assigns.
SECOND AMENDMENT TO
RESTATED CREDIT AGREEMENT
5
<PAGE> 6
EXECUTED as of the date first stated above.
AFFILIATED COMPUTER SERVICES, INC., WELLS FARGO BANK (TEXAS), NATIONAL
as Borrower ASSOCIATION,
as Agent and a Lender
By By
-------------------------------- ------------------------------------
Nancy Vineyard, Treasurer Kyle G. Hranicky, Assistant Vice
President
BANK ONE, TEXAS, N.A.,
as Co-Agent and a Lender
By
-----------------------------------
Chris Holder, Vice President
SECOND AMENDMENT SIGNATURE PAGE
ONE OF THREE PAGES
<PAGE> 7
EXECUTED as of the date first stated above.
THE FIRST NATIONAL BANK OF BANK OF TOKYO - MITSUIBISHI, LTD.,
CHICAGO, as a Lender as a Lender
By By
---------------------------------- ----------------------------------
Cory Olson John Mearns, Vice President
Vice President
SUNTRUST BANK, ATLANTA, as a Lender THE SANWA BANK LIMITED., as a Lender
By By
---------------------------------- ----------------------------------
Name: Eric Reimer
--------------------------- Assistant Vice President
Title:
--------------------------
By CHASE BANK OF TEXAS, NATIONAL
----------------------------------- ASSOCIATION, formerly known as Texas
John Fields Commerce Bank National Association,
Vice President as a Lender
CREDIT LYONNAIS NEW YORK BRANCH, By
as a Lender ----------------------------------
By CRESTAR BANK, as a Lender
-----------------------------------
Robert Ivosevich, Senior Vice
President
By:
----------------------------------
Miriam Sadler
Vice President
SECOND AMENDMENT SIGNATURE PAGE
TWO OF THREE PAGES
<PAGE> 8
GUARANTOR CONSENT
To induce Agent, Co-Agent and Lenders to enter into this amendment, the
undersigned consent and agree (a) to its execution and delivery, (b) that this
amendment in no way releases, diminishes, impairs, reduces, or otherwise
adversely affects any guaranties, assurances, or other obligations or
undertakings of any of the undersigned under any Loan Documents, and (c) waive
notice of acceptance of this consent and agreement, which consent and agreement
binds the undersigned and its successors and permitted assigns and inures to
Agent, Co-Agent, and Lenders and their respective successors and permitted
assigns.
EXECUTED as of the date first stated above.
THE GENIX GROUP, INC., FCTC TRANSFER SERVICES, L.P.,
ACS EASTERN SERVICES, INC., as a Guarantor
SHARED AFFILIATED SERVICES, INC.,
GENIX CSI, INC.,
ACS HEALTHCARE SERVICES, INC.,
ACS NATIONAL SYSTEMS, INC., By
2828 NORTH HASKELL, INC., -------------------------------
DATAPLEX CORPORATION, Stuart Chagrin, General Partner
THE LAN COMPANY, INC.,
UNIBASE TECHNOLOGIES, INC.,
INTELLIGENT SOLUTIONS, INC.,
PINPOINT MARKETING, INC.,
UNIBASE DATA ENTRY, INC.,
ACS CLAIMS SERVICES, INC.,
MEDIANET, INC.,
ACS GOVERNMENT SERVICES, INC.,
COMPUTER DATA SYSTEMS, INC.,
COMPUTER DATA SYSTEMS SALES, INC.,
CDSI INTERNATIONAL, INC.,
CDSI EDUCATION SERVICES, INC.,
CDSI SOLUTIONS, INC.,
ANALYTICAL SYSTEMS ENGINEERING CORPORATION,
PUBLIC SYSTEMS CORPORATION,
ASEC LIMITED, INC.,
ASEC SYSTEMS, INC.,
ASEC INTERNATIONAL,
INCORPORATED,
ASEC SECURITY INTERNATIONAL, INC.,
TECHNICAL DIRECTIONS,
WESSON, TAYLOR, WELLS, &
ASSOCIATES, INC.,
CARA CORPORATION,
CARA HOLDINGS, INC.,
TRANSFIRST, INC.,
INTELLIFILE, INC.
as Guarantors
By
-------------------------------------
Nancy Vineyard, Treasurer
SECOND AMENDMENT SIGNATURE PAGE
THREE OF THREE PAGES
<PAGE> 9
ANNEX A
CLOSING DOCUMENTS*
Unless otherwise specified, all dated either March 20, 1998 (the "CLOSING
DATE") or a date no earlier than 30 days before the
Closing Date (a "CURRENT DATE").
H&B [1.] SECOND AMENDMENT TO RESTATED CREDIT AGREEMENT (the
"AMENDMENT") dated as of March ______, 1998, between
AFFILIATED COMPUTER SERVICES, INC., a Delaware
corporation ("BORROWER"), certain Lenders, WELLS
FARGO BANK (TEXAS), N.A., as Agent and BANK ONE,
TEXAS, NATIONAL ASSOCIATION, as Co-Agent, the defined
terms in which have the same meanings when used in
this annex, to which must be attached:
H&B Annex A - Closing Documents
ACS Amended Schedule 7.3 - Companies and Names
ACS Amended Schedule 7.3(1)- Current and Former Corporate
and/or Trade names
ACS Amended Schedule 7.8 - Litigation
ACS Amended Schedule 9.2 - Permitted Debt
ACS Schedule 7.18 - Intellectual Property
H&B [2.] GUARANTY dated as of March 19, 1998, in substantially
the form of EXHIBIT B to the Credit Agreement, and
executed by M/GA Fields Road Limited Partnership, a
Maryland limited partnership, Genesis Business
Solutions, Inc., CDSI Mortgage, and Artisys Corp., as
"Guarantors."
H&B [3.] UNIFORM COMMERCIAL CODE SEARCH REPORTS prepared as of
the dates indicated below, by reporting services
acceptable to Agent with respect to all financing
statements filed against the following Companies with
the following filing offices:
<TABLE>
<CAPTION>
================================================================================
COMPANY FILING OFFICE EFFECTIVE DATE
================================================================================
<S> <C> <C>
CDSI Education Services, Inc. Maryland
- --------------------------------------------------------------------------------
CDSI International, Inc. Delaware
- --------------------------------------------------------------------------------
CDSI Mortgage Services, Inc. Maryland
- --------------------------------------------------------------------------------
CDSI Solutions, Inc. Maryland
- --------------------------------------------------------------------------------
Computer Data Systems, Inc. Maryland
- --------------------------------------------------------------------------------
Computer Data Systems Sales, Inc. Maryland
- --------------------------------------------------------------------------------
CARA Holdings, Inc. Delaware
- --------------------------------------------------------------------------------
</TABLE>
- -------------------
* [ ] indicate items not complete at the time this version of this Annex was
prepared, along with the initials of the party or counsel responsible for
them.
ANNEX A
<PAGE> 10
<TABLE>
<CAPTION>
================================================================================
COMPANY FILING OFFICE EFFECTIVE DATE
================================================================================
<S> <C> <C>
CARA Corporation Illinois
Arizona
Indiana
Oregon
Texas
Washington
- --------------------------------------------------------------------------------
M/GA Fields Road Limited Partnership Maryland
- --------------------------------------------------------------------------------
Analytical Systems Engineering Corporation Massachusetts
Ohio
Texas
Maryland
Virginia
- --------------------------------------------------------------------------------
ASEC International Incorporated Delaware
- --------------------------------------------------------------------------------
ASEC Limited, Inc. Delaware
- --------------------------------------------------------------------------------
ASEC Security International Delaware
- --------------------------------------------------------------------------------
ASEC Systems, Inc. Delaware
- --------------------------------------------------------------------------------
Public Systems Corporation Massachusetts
- --------------------------------------------------------------------------------
Genesis Business Solutions, Inc. Illinois
- --------------------------------------------------------------------------------
Artisys Corp. Georgia
================================================================================
</TABLE>
ACS [4.] TERMINATIONS, AMENDMENTS, OR SUBORDINATIONS OF
FINANCING STATEMENTS (or other documentation
satisfactory to Agent and its special counsel with
respect to those Financing Statements) reflected in
the above Uniform Commercial Code Search Reports that
Agent and its special counsel determine do not
evidence Permitted Liens, including, without
limitation, the following):
<TABLE>
<CAPTION>
=======================================================================================================
DEBTOR FILING OFFICE SECURED PARTY FILE NO. FILE DATE
================== ======================= ====================== ================== ================
<S> <C> <C> <C> <C>
- ------------------ ----------------------- ---------------------- ------------------ ----------------
=======================================================================================================
</TABLE>
ACS [5.] EVIDENCE acceptable to Agent of the payment of a
$7,500 amendment fee by Borrower to each Lender.
WL [6.] CORPORATE CHARTER for each of the Subsidiaries
listed in ITEM 3 above, certified as of a Current
Date by the Secretary of State.
WL [7.] OFFICERS' CERTIFICATE for each of the Subsidiaries
listed in ITEM 3 above, dated as of the Closing Date,
executed by its President or Vice President and
Secretary or any Assistant Secretary as to
resolutions of its directors authorizing the Credit
Agreement and the transactions contemplated in it,
the incumbency of its officers, its bylaws, and its
corporate charter.
ACS [8.] CERTIFICATES OF EXISTENCE, AUTHORITY, AND GOOD
STANDING OR SIMILAR STATUS for each of the
Subsidiaries listed in ITEM 3 above, issued as of
ANNEX A
2
<PAGE> 11
a Current Date by the appropriate offices in the
jurisdiction of each of those Companies'
incorporation and all other jurisdictions in which
they are qualified to do business.
DWB [9.] OPINION dated the Closing Date, of David W. Black,
General Counsel to the Companies, addressed to Agent,
Co-Agent and Lenders, and in form and substance
satisfactory to Agent and its special counsel.
[10.] Such other documents and items as Agent may
reasonably request.
ANNEX A
3
<PAGE> 12
AMENDED SCHEDULE 7.3
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF COMPANY AND EXECUTIVE STATE OF STATES IN WHICH QUALIFIED TO DO
OFFICE INCORPORATION BUSINESS
- ---------------------------------- ------------- -------------------------------
<S> <C> <C>
2828 N. Haskell, Inc. Texas Texas
2828 N. Haskell
Dallas, Texas 75204
- ---------------------------------- ------------- -------------------------------
ACS Merchant Services, Inc. Delaware Colorado, Texas
5151 Arapahoe Ave.
Boulder, CO 80303
- ---------------------------------- ------------- -------------------------------
ACS Eastern Services, Inc. Delaware MA, NJ, NY, TX
2828 N. Haskell
Dallas, Texas 75204
- ---------------------------------- ------------- -------------------------------
ACS Government Services, Inc. Texas CA, MN
2828 N. Haskell
Dallas, Texas 75204
- ---------------------------------- ------------- -------------------------------
ACS National Systems, Inc. Delaware TX, VA
2828 N. Haskell
Dallas, Texas 75204
- ---------------------------------- ------------- -------------------------------
ACS Healthcare Services, Inc. California IL, ID, IN, MO, OH, TN, TX,
2828 N. Haskell UT
Dallas, Texas 75204
- ---------------------------------- ------------- -------------------------------
ACS Claims Services, Inc. Texas Texas
3960 N. Central Expwy
Dallas, Texas 75204
- ---------------------------------- ------------- -------------------------------
Affiliated Computer Services, Ltd. United Kingdom United Kingdom
Chelsea Manor Gardens
Chelsea, England SW3 5Pn
- ---------------------------------- ------------- -------------------------------
Affiliated Computer Services, Inc. Delaware AZ, AR, CA, CO, FL, GA, IL,
2828 N. Haskell KY, LA, MD, MA, MS, NE, NM,
Dallas, Texas 75204 NY, OK, TN, TX, VA
- ---------------------------------- ------------- -------------------------------
<CAPTION>
NAME CHANGES IN
NAME OF COMPANY AND EXECUTIVE OTHER NAMES USED IN PAST THE PAST FOUR
OFFICE SEVEN YEARS MONTHS % OWNERSHIP SHAREHOLDERS
- ---------------------------------- ----------------------------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
2828 N. Haskell, Inc. None None 100 None
2828 N. Haskell
Dallas, Texas 75204
- ---------------------------------- ----------------------------- --------------- ----------- ------------
ACS Merchant Services, Inc. None None Preferred T. Rouse
5151 Arapahoe Ave. Stock only
Boulder, CO 80303
- ---------------------------------- ----------------------------- --------------- ----------- ------------
ACS Eastern Services, Inc. None d/b/a TradeOne 100 None
2828 N. Haskell Marketing
Dallas, Texas 75204 11/3/97
- ---------------------------------- ----------------------------- --------------- ----------- ------------
ACS Government Services, Inc. TransFirst Corporation None 100 None
2828 N. Haskell
Dallas, Texas 75204
- ---------------------------------- ----------------------------- --------------- ----------- ------------
ACS National Systems, Inc. CSX National Systems, Inc. None 100 None
2828 N. Haskell
Dallas, Texas 75204
- ---------------------------------- ----------------------------- --------------- ----------- ------------
ACS Healthcare Services, Inc. National Healthtech Corp., None 100 None
2828 N. Haskell National Healthtech Holdings,
Dallas, Texas 75204 Inc.
- ---------------------------------- ----------------------------- --------------- ----------- ------------
ACS Claims Services, Inc. Wolf Benefits, Inc. Wolf Benefits, 100 None
3960 N. Central Expwy Inc.
Dallas, Texas 75204
- ---------------------------------- ----------------------------- --------------- ----------- ------------
Affiliated Computer Services, Ltd. Genix Ltd. None 100 None
Chelsea Manor Gardens
Chelsea, England SW3 5Pn
- ---------------------------------- ----------------------------- --------------- ----------- ------------
Affiliated Computer Services, Inc. None None 100 None
2828 N. Haskell
Dallas, Texas 75204
- ---------------------------------- ----------------------------- --------------- ----------- ------------
</TABLE>
1 AMENDED SCHEDULE 7.3
<PAGE> 13
<TABLE>
<CAPTION>
NAME OF COMPANY AND EXECUTIVE STATE OF STATES IN WHICH QUALIFIED TO DO
OFFICE INCORPORATION BUSINESS
- ---------------------------------- ------------- -------------------------------
<S> <C> <C>
Analytical Systems Engineering Massachusetts Maryland, Ohio, Texas,
Corporation Virginia
One Curie Court
Rockville, MD 20850-4389
- ---------------------------------- ------------- -------------------------------
Artisys Corporation Georgia None
3645 Autumn Ridge Parkway
Marietta, GA 30066
- ---------------------------------- ------------- -------------------------------
ASEC International, Incorporated Delaware None
One Curie Court
Rockville, MD 20850-4389
- ---------------------------------- ------------- -------------------------------
ASEC Limited, Inc. Delaware None
One Curie Court
Rockville, MD 20850-4389
- ---------------------------------- ------------- -------------------------------
ASEC Security International, Inc. Delaware Massachusetts
One Curie Court
Rockville, MD 20850-4389
- ---------------------------------- ------------- -------------------------------
ASEC Systems, Inc. Delaware Massachusetts
One Curie Court
Rockville, MD 20850-4389
- ---------------------------------- ------------- -------------------------------
Cara Holdings, Inc. Delaware None
1900 Spring Road, Suite 450
Oak Brook, IL 60521
- ---------------------------------- ------------- -------------------------------
Cara Corporation Illinois AZ, CA, IN, OR, TX, WA
1900 Spring Road, Suite 450
Oak Brook, IL 60521
- ---------------------------------- ------------- -------------------------------
CDSI Argentina, S.A. Argentina, S.A. None
One Curie Court
Rockville, MD 20850-4389
- ---------------------------------- ------------- -------------------------------
CDSI Education Services, Inc. Maryland None
One Curie Court
Rockville, MD 20850-4389
- ---------------------------------- ------------- -------------------------------
<CAPTION>
NAME CHANGES IN
NAME OF COMPANY AND EXECUTIVE OTHER NAMES USED IN PAST THE PAST FOUR
OFFICE SEVEN YEARS MONTHS % OWNERSHIP SHAREHOLDERS
- ---------------------------------- ----------------------------- --------------- ----------- ----------------
<S> <C> <C> <C> <C>
Analytical Systems Engineering ASEC, Inc. (changed name None 100 None
Corporation 7/1/76) d/b/a ASEC
One Curie Court International Inc. in Texas
Rockville, MD 20850-4389
- ---------------------------------- ----------------------------- --------------- ----------- ---------------
Artisys Corporation None Technical 100 100% owned
3645 Autumn Ridge Parkway Directions subsidiary of
Marietta, GA 30066 Emerging Technical
Technologies Directions,
Group (9/1/97) Inc.
- ---------------------------------- ----------------------------- --------------- ----------- ---------------
ASEC International, Incorporated None None 100 None
One Curie Court
Rockville, MD 20850-4389
- ---------------------------------- ----------------------------- --------------- ----------- ---------------
ASEC Limited, Inc. None None 100 None
One Curie Court
Rockville, MD 20850-4389
- ---------------------------------- ----------------------------- --------------- ----------- ---------------
ASEC Security International, Inc. None None 100 None
One Curie Court
Rockville, MD 20850-4389
- ---------------------------------- ----------------------------- --------------- ----------- ---------------
ASEC Systems, Inc. None None 100 None
One Curie Court
Rockville, MD 20850-4389
- ---------------------------------- ----------------------------- --------------- ----------- ---------------
Cara Holdings, Inc. None 100 None
1900 Spring Road, Suite 450
Oak Brook, IL 60521
- ---------------------------------- ----------------------------- --------------- ----------- ---------------
Cara Corporation d/b/a Cara Information Services None 100
1900 Spring Road, Suite 450 Corp in IN
Oak Brook, IL 60521
- ---------------------------------- ----------------------------- --------------- ----------- ---------------
CDSI Argentina, S.A. None None 99 Charles Cameron
One Curie Court (1%)
Rockville, MD 20850-4389
- ---------------------------------- ----------------------------- --------------- ----------- ---------------
CDSI Education Services, Inc. None None 100 None
One Curie Court
Rockville, MD 20850-4389
- ---------------------------------- ----------------------------- --------------- ----------- ---------------
</TABLE>
2 AMENDED SCHDDULE 7.3
<PAGE> 14
<TABLE>
<CAPTION>
NAME OF COMPANY AND EXECUTIVE STATE OF STATES IN WHICH QUALIFIED TO DO OTHER NAMES USED IN PAST
OFFICE INCORPORATION BUSINESS SEVEN YEARS
- ------------------------------------ --------------------- ------------------------------ -------------------------------
<S> <C> <C> <C>
CDSI International, Inc. Delaware DC None
One Curie Court
Rockville, MD 20850-4389
- ------------------------------------ --------------------- ------------------------------ -------------------------------
CDSI Mortgage Services, Inc. Maryland None None
One Curie Court
Rockville, MD 20850-4389
- ------------------------------------ --------------------- ------------------------------ -------------------------------
CDSI Solutions, Inc. Maryland None None
One Curie Court
Rockville, MD 20850-4389
- ------------------------------------ --------------------- ------------------------------ -------------------------------
Computer Data Systems, Inc. Maryland AL, CA, CO, DE, DC, FL, GA, None
One Curie Court HI, IL, OA, IN, KS, KY, LA,
Rockville, MD 20850-4389 MA, MI, MN, MS, MO, MT,
NE, NJ, NM, NY, NC, OH, OK,
PA, SC, TN, TX, UT, VA, WA,
WV, and WY
- ------------------------------------ --------------------- ------------------------------ -------------------------------
Computer Data Systems Sales, Inc. Maryland None None
One Curie Court
Rockville, MD 20850-4389
- ------------------------------------ --------------------- ------------------------------ -------------------------------
Dataplex Corporation Louisiana AL, AZ, CA, CO, IA, FL, GA, None
3988 N. Central Expway IL, KY, MI, NJ, MN, MI, MS,
Dallas, Texas 75204 NM, NC, OK, OR, PA, TN, TX,
WA
- ------------------------------------ --------------------- ------------------------------ -------------------------------
FCTC Transfer Services, LP Delaware New York None
915 Broadway, Fifth Floor
New York, New York 10010
- ------------------------------------ --------------------- ------------------------------ -------------------------------
Genesis Business Solutions, Inc. Illinois None Genesis International, Inc.
2401 Hassell Road, Suite 1560
Hoffman Estates, IL 60195
- ------------------------------------ --------------------- ------------------------------ -------------------------------
<CAPTION>
NAME CHANGES IN
THE PAST FOUR % OWNERSHIP SHAREHOLDERS
MONTHS
- -------------------- -------------------- -------------------
<S> <C> <C>
None 100 None
- -------------------- -------------------- -------------------
None 100 None
- -------------------- -------------------- -------------------
None 100 None
- -------------------- -------------------- -------------------
Maryland 100 None
Computer Data
Systems, Inc.;
CDSI, Inc.; CDSI;
Computer Data
Systems, Inc. of
Maryland;
Maryland
Computer Data
Systems
- -------------------- -------------------- -------------------
None 100 None
- -------------------- -------------------- -------------------
None 100 None
- -------------------- -------------------- -------------------
d/b/a First City 99% of Partnership Stuart Chagrin
Transfer Company Units (Limited owns 1%
Partner) (General Partner)
- -------------------- -------------------- -------------------
None 100 None
- -------------------- -------------------- -------------------
</TABLE>
3 AMENDED SCHEDULE 7.3
<PAGE> 15
<TABLE>
<CAPTION>
NAME OF COMPANY AND EXECUTIVE STATE OF STATES IN WHICH QUALIFIED TO DO OTHER NAMES USED IN PAST
OFFICE INCORPORATION BUSINESS SEVEN YEARS
- ------------------------------------ --------------------- ------------------------------ -------------------------------
<S> <C> <C> <C>
Genix CSI, Inc. Michigan None MCN Computer Corporation
5225 Auto Club Drive
Dearborn, MI 48126
- ------------------------------------ --------------------- ------------------------------ -------------------------------
Genix Group, Inc. (The) Michigan CT, KY, OH, NJ, SC, PA, WV None
5315 Campbell's Run Road
Pittsburgh, PA 15205
- ------------------------------------ --------------------- ------------------------------ -------------------------------
GuaranTec, L.L.P. Florida None None
One Curie Court
Rockville, MD 20850-4389
- ------------------------------------ --------------------- ------------------------------ -------------------------------
Harbor Point Apartments Massachusetts None None
One Curie Court
Rockville, MD 20850-4389
- ------------------------------------ --------------------- ------------------------------ -------------------------------
Intellifile, Inc. Nevada CA, TX None
2828 N. Haskell
Dallas, Texas 75204
- ------------------------------------ --------------------- ------------------------------ -------------------------------
Intelligent Solutions, Inc. Virginia District of Columbia None
2700 Prosperity Avenue
Fairfax, VA 22031
- ------------------------------------ --------------------- ------------------------------ -------------------------------
LAN Company, Inc. (The) Pennsylvania New York None
200 Chester Field Parkway Virginia
Suite 500 Delaware
Malvern, PA 19355
- ------------------------------------ --------------------- ------------------------------ -------------------------------
MG/A Field Road Ltd. Partnership Maryland None None
One Curie Court
Rockville, MD 20850-4389
- ------------------------------------ --------------------- ------------------------------ -------------------------------
Medianet, Inc. Delaware Texas Promotional Acquisition
11149 Research Blvd. Ste 400 Georgia Corporation
Austin, Texas 78759
- ------------------------------------ --------------------- ------------------------------ -------------------------------
Pinpoint Marketing, Inc. New York None None
915 Broadway, Fifth Floor
New York, New York 10010
- ------------------------------------ --------------------- ------------------------------ -------------------------------
<CAPTION>
NAME CHANGES IN
THE PAST FOUR % OWNERSHIP SHAREHOLDERS
MONTHS
- -------------------- -------------------- -------------------
<C> <C> <C>
None 100 None
- -------------------- -------------------- -------------------
None 100 None
- -------------------- -------------------- -------------------
None 51 InTuition
Guarantee
Services, Inc.
- -------------------- -------------------- -------------------
None 50 N/A
- -------------------- -------------------- -------------------
None 100 None
- -------------------- -------------------- -------------------
None 100 None
- -------------------- -------------------- -------------------
None 80 Mr. & Mrs.
Preston Young,
Dr. & Mrs. Allan
Shetzer
- -------------------- -------------------- -------------------
None 100 Partners: CDSI
and CSDI Sales,
Inc.
- -------------------- -------------------- -------------------
d/b/a TradeOne 100 None
Marketing
10/28/97
- -------------------- -------------------- -------------------
d/b/a TradeOne 100 None
Marketing
- -------------------- -------------------- -------------------
</TABLE>
4 AMENDED SCHEDULE 7.3
<PAGE> 16
<TABLE>
<CAPTION>
========================================================================================================================
NAME OF COMPANY AND EXECUTIVE STATE OF STATES IN WHICH QUALIFIED TO DO OTHER NAMES USED IN PAST
OFFICE INCORPORATION BUSINESS SEVEN YEARS
========================================================================================================================
<S> <C> <C> <C>
Public Systems Corporation Massachusetts None Transport Systems Associates,
One Curie Court Inc. (changed name 2/12/79)
Rockville, MD 20850-4389
- ------------------------------------------------------------------------------------------------------------------------
Saudi American Systems Engineering Saudi Arabia None None
Company
One Curie Court
Rockville, MD 20850-4389
- ------------------------------------------------------------------------------------------------------------------------
Shared Affiliated Services, Inc. Texas Texas None
2828 N. Haskell
Dallas, Texas 75204
- ------------------------------------------------------------------------------------------------------------------------
South Wildewood Partners Maryland None None
One Curie Court
Rockville, MD 20850-4389
- ------------------------------------------------------------------------------------------------------------------------
Technical Directions, Inc. (Texas) Texas AZ, CA, CO, FL, GA, IL, KS, The Systems Group, Inc.
3030 LBJ Freeway, Suite 910 MO, NC, OK, PA
Dallas, Texas 75234
- ------------------------------------------------------------------------------------------------------------------------
TransFirst, Inc. Texas MN, SC Patco Services of Texas, Inc.
3988 N. Central Expressway
Dallas, Texas 75204
- ------------------------------------------------------------------------------------------------------------------------
Unibase Data Entry, Inc. Nevada AZ, CA, CO, DE, FL, ID, IL, None
510 West Park Land Drive KY, NM, PA
Sandy, UT 84070
- ------------------------------------------------------------------------------------------------------------------------
Unibase Technologies S.A. de C.V. Mexico None None
Avenida Paseo de Los Leonies
No. 1910
Colonia Cumbras de Monterey
Monterey, Nuevo Leon
Mexico
- ------------------------------------------------------------------------------------------------------------------------
Unibase Technologies S.L. Spain None None
Calle Majorca 260-262
Barcelona, Spain
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
==============================================================
NAME CHANGES IN
THE PAST FOUR % OWNERSHIP SHAREHOLDERS
MONTHS
==============================================================
<C> <C> <C>
None 100 None
- --------------------------------------------------------------
None 49 Al-Khaleej
Computers and
Electronic
Systems Co., et al
- --------------------------------------------------------------
None 100 None
- --------------------------------------------------------------
None 50 Robert
Waldschmitt, et al
- --------------------------------------------------------------
San Diego Systems 100 None
Group (CA only)
8/1/97
- --------------------------------------------------------------
None 70 Unibase
Technologies, Inc.
- --------------------------------------------------------------
None 70 Unibase
Technologies, Inc.
- --------------------------------------------------------------
None 70 (subsidiary of Unibase
Unibase) Technologies, Inc
- --------------------------------------------------------------
None 70 (subsidiary of Unibase
Unibase) Technologies, Inc
- --------------------------------------------------------------
</TABLE>
D-SECOND AMD REST CRED AGMT.WPD 5 AMENDED SCHEDULE 7.3
<PAGE> 17
<TABLE>
<CAPTION>
======================================================================================================================
NAME OF COMPANY AND EXECUTIVE STATE OF STATES IN WHICH QUALIFIED TO DO OTHER NAMES USED IN PAST
OFFICE INCORPORATION BUSINESS SEVEN YEARS
======================================================================================================================
<S> <C> <C> <C>
Unibase Technologies, Inc. Nevada AZ, IL, KY, OH, UT, WA Network Data Entry, Inc.
510 West Park Land Drive (Changed in April 1995)
Sandy, UT 84070
- ----------------------------------------------------------------------------------------------------------------------
Wesson ,Taylor, Wells, & Associates, North Carolina AL, FL, MI, OK, PA, TN, TX, Professional Systems, Inc.
Inc. VA (Changed Name 12/27/95)
2300 Yorkmont Road
Suite 240
Charlotte, N.C. 28217
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
==============================================================
NAME CHANGES IN
THE PAST FOUR % OWNERSHIP SHAREHOLDERS
MONTHS
==============================================================
<C> <C> <C>
None 70 Tom Blodgett,
Lynn Blodgett,
- --------------------------------------------------------------
None 100 Technical
Directions, Inc.
Texas
- --------------------------------------------------------------
</TABLE>
6 AMENDED SCHEDULE 7.3
<PAGE> 18
AMENDED SCHEDULE 7.8
Litigation
1. Kasmir & Krage, L.L.P. v. Affiliated Computer Services, Inc. et al
In early 1992, Affiliated Computer Services, Inc. ("ACS") became
involved in a lawsuit with International Telecharge, Inc. ("ITI") arising out of
ITI's termination of a contract between ACT and ITI. Because of concerns about
the amount of fees being incurred by its counsel in this lawsuit, ACS solicited
proposals from other law firms to represent ACS on a contingent fee basis. After
negotiations with Kasmir & Krage, L.L.P. ("K & K") in September 1992, ACS
accepted K & K's proposal to pay a contingent fee based on amounts that were
actually collected.
Among other things, the proposal provided for a contingency fee after
deduction for litigation expenses paid by ACS, with the calculated contingency
to be offset by monthly fees received by K & K.
In early 1995, ACS and ITI reached settlement of the litigation. After
such time, K & K asserted a claim that the contingency fee should be based not
just upon the monies to be received by ACS, but upon cash to be received by ACS
and a $5 million note that was extinguished in a settlement with ITI. K & K
stated that claims released by ACS against ITI (including a $5 million licensing
fee and a $1.3 million account receivable) should not be included in the
calculation. K & K also claimed that it was entitled to its contingency fee
immediately, even though a settlement between ACS and ITI provided for a payment
of the settlement proceeds over a three-year period.
K & K resigned its representation of ACS in May 1995 due to this
dispute over legal fees and filed suit against ACS in July 1995 in the District
Court of Dallas County, Texas (the "Court") seeking to collect such fees. The
Court granted K & K an amended final judgment on November 14, 1997, awarding K &
K over $3,000,000 in fees, plus prejudgment interest. ACS intends to continue to
vigorously oppose this action and to pursue its appellate and other remedies.
2. National Convenience Stores, Incorporated, et. al, v. Affiliated
Computer Services, Inc.
On September 1, 1995, National Convenience Stores, Incorporated ("NCS")
filed an action against ACS in a Texas state district court seeking a
declaratory judgment that, contrary to the contentions of ACS, NCS is not
contractually obligated to let ACS review and match any third party proposal to
process automated teller machines in NCS stores upon expiration of the contract
with ACS, pursuant to its terms, on December 1, 1995. On October 10, 1995, ACS
filed a counterclaim against NCS alleging that NCS had breached this contract
and seeking unspecified damages. Further, on March 12, 1997 ACS added
NationsBank as a defendant in the counterclaim alleging, among other things,
tortious interference with contractual relations and breach of fiduciary duty.
ACS intends to vigorously oppose this action and to pursue the claims asserted
in the counterclaim.
3. Patrick A. Walden v. Affiliated Computer Services, Inc.
On May 22, 1996, a former employee of Gibraltar Savings Association
("GSA") filed suit in Texas state court alleging entitlement to 6,467 shares of
the ACS Class A common stock pursuant to options issued to certain GSA employees
in 1988 in connection with a former data processing services agreement between
GSA and ACS. Subsequently, twenty additional former GSA employees filed a
similar suit alleging
AMENDED SCHEDULE 7.8
<PAGE> 19
entitlement to 395,074 shares of the ACS' Class A common stock, which together
with the other shares represent less than 0.9% of the outstanding common stock
and common stock equivalents of the ACS. ACS believes that it has meritorious
defenses to all or substantial portions of the plaintiffs' claims and plans to
vigorously defend against these lawsuits.
2 AMENDED SCHEDULE 7.8
<PAGE> 20
SCHEDULE 7.18
INTELLECTUAL PROPERTY MATTERS
1. Advanced Computer Solutions, an Indianapolis based company, has advised
Affiliate Computer Services, Inc. by letter that it considers the use
of "ACS" to be in conflict with its right to use that same trademark in
the Indianapolis area. Affiliated Computer Services, Inc. is currently
negotiating with Advanced Computer Solutions to settle this dispute
with the proposed settlement requiring Affiliated Computer Services,
Inc. to use its full name in any literature or advertisements in the
Indianapolis area.
2. National Credit Management Corporation ("NCMC") filed suit (in June,
1996) against Western Union Financial Services ("Western Union")
alleging that the check processing product offered by Western Union to
its customers, known as Phone Pay(R)infringes on a patent owned by
NCMC. Development of the software for the Phone Pay system was started
by NYNEX Computer Services, Inc. ("NYNEX") under a Software Development
Agreement (the "Agreement") between NYNEX and Western Union. The
Agreement was subsequently assigned by NYNEX to ACS when ACS purchased
certain assets of NYNEX. ACS continued to perform work under the
Agreement after its assignment from NYNEX and still provides services
to Western Union under the Agreement. NCMC has named ACS as an
additional defendant in the suit alleging that ACS is also infringing
the patent as the result of its work under the Agreement.
1 SCHEDULE 7.18
<PAGE> 21
AMENDED SCHEDULE 9.2
PERMITTED DEBT
"Permitted Debt" includes the following,
both individually and collectively:
1. The following existing Debt of the Companies, together with all
renewals, extensions, amendments, modifications and refinancings of any
of the following to the extent that the total principal amount for the
following never exceeds the greater of either the total-principal for
the following as of the Closing Date or the total-maximum-principal
amount that may be borrowed under the following as of the Closing Date:
<TABLE>
<CAPTION>
Principal Balance
Debtor Creditor As of 12/31/97 Collateral
------ -------- -------------- ----------
<S> <C> <C> <C>
Affiliated Computer Bank One, Texas, N.A. $ [10,000,000] ** ATM cash, related
Services, Inc. contracts and accounts
Caremark (f/k/a Bender) 10% [2,588,415] None
Junior Subordinated American [183,673] None
Presidents Line Purchase of
assets and contracts
IIC [1,132,480]
[178,132] None
Unibase Data Entry, Inc. Capital Leases [235,611] Equipment
King Properties [157,196] Personal Guaranty -
Lynne Blodgett & James
E. Blodgett Living Trust
None
US Sprint [35,738]
DataPlex Corporation Capital Leases [104,000] Equipment
Mino Seller - Ralph Hassall
Non-Compete [30,000] None
United Micro Labs, Inc. [5,065] None
The LAN Company, Inc. A. Meyers-Non Compete [100,000] None
B. Adams-Non Compete [100,000] None
B. Adams-Ofc.Loan [27,378] None
Capital Leases [22,562] Equipment
Intelligent Solutions, Inc. S. Ristow-Non Compete [400,000] None
Capital Leases [0] Equipment
Genix CSI, Inc. Capital Leases [3,454,745] Equipment
EDMC [3,902]
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------
** Total-principal amount as of the Closing Date. Total-principal amount
available under the ATM Credit Agreement shall never exceed $11,000,000.
1 AMENDED SCHEDULE 9.2
<PAGE> 22
<TABLE>
<CAPTION>
Principal Balance
Debtor Creditor As of 12/31/97 Collateral
------ -------- -------------- ----------
<S> <C> <C> <C>
Wesson, Taylor, Wells & Capital Leases [0] Equipment
Assoc., Inc. Borrowings on Life Ins. Policies [43,508] None
ACS Government Services, Capital Leases [0] Equipment
Inc. ---------------
$[18,802,405]
===============
</TABLE>
2. Trade payables, secured taxes, and other liabilities that do not
constitute Funded Debt.
3. Endorsements of negotiable instruments in the ordinary course of
business.
4. Capital Leases.
5. Debt owed to, and contingent liabilities with respect to obligations
of, any Company.
6. Guarantees of obligations of Companies under equipment leasing
agreements entered into in the ordinary course of business.
7. Guarantee by Borrower of $1,000,000 credit agreement between
TransFirst, Inc. and NationsBank of Texas, N.A. There are currently no
outstanding draws on this facility.
8. Guarantee by Borrower of $2,500,000 credit agreement between ACS
Merchant Services, Inc. and First State Bank of Austin. Guarantee by
Borrower of $5,000,000 credit agreement between ACS Merchant Services,
Inc. and Bank One.
9. ACS indemnification of MCN guarantee provided to Chief Construction
Company to secure the real estate lease of the AC Pittsburgh, PA data
center.
10. Debt of the Companies owed to any Person other than a Company that
never at any time exceeds $30,000,000 aggregate principal amount.
11. Debt of the Companies owed to any Person other than a Company under
documentary letters of credit denominated in a currency other than that
of the United States that never at any time exceeds $11,000,000
aggregate face amount.
12. The Subordinated Notes.
13. Guarantee by Borrower of $7,500,000 of indebtedness of DDH Aviation,
Inc. ("DDH") in connection with a $15,000,000 credit agreement between
DDH and Wells Fargo Bank (Texas), N.A.
2 AMENDED SCHEDULE 9.2
<PAGE> 1
EXHIBIT 10.13
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
THIS AGREEMENT is made and entered into this 15th day of December, 1998 by and
between AFFILIATED COMPUTER SERVICES, INC. (the "Company") and DARWIN DEASON
(the "Executive"), effective as of the first day of December 1998.
The Company has determined that both the Executive's performance and the
Company's ability to retain the Executive will be significantly enhanced if the
Executive is provided retirement income to supplement compensation and employee
benefits otherwise provided to the Executive and fair and reasonable protection
of such supplemental retirement income from a Change of Control of the Company.
Accordingly, the Company and the Executive agree as follows:
1. Defined Terms. As used in this Agreement, and unless the context requires a
different meaning, the following terms, when capitalized, have the meaning
indicated:
(a) "Accrued Benefit" shall mean, as of any specified date, the amount,
if any, by which (i) the Actuarially Equivalent single lump sum value
of the Executive's monthly benefit determined by multiplying (A) the
percentage determined under Appendix A by (B) the Executive's Final
Average Monthly Compensation, exceeds (ii) the Executive's Stock
Option Offset Value, if any, determined as of such specified date.
For purposes of calculating the lump sum value described in the
preceding sentence, the Executive's monthly benefit is assumed to
commence at his Normal Retirement Date.
(b) "Actuarial Equivalent" shall mean the equality in value of the
aggregate amounts expected to be received under different forms of
payment, based on the following assumptions:
(i) The annual rate of interest published as Moody's AA rated
corporate bond yield as of the last day of the month immediately
preceding the date as of which Actuarial Equivalent benefits are
determined; and
(ii) Mortality based on the 1994 Group Annuity Mortality Static Table
for Males.
(c) "Beneficiary" shall mean the person or persons designated by the
Executive to receive benefits under this Agreement in the event of the
Executive's death. In the event of the Executive's death, the Company
shall make any benefit payment payable under this Agreement to the
Executive's Beneficiary. Any payment made by the Company in good faith
shall fully discharge the Company from its obligations with respect to
such payment, and the Company shall have no further obligation to see
to the application of any money so paid. No Beneficiary designation
shall be valid unless it is in writing, signed by the Executive, and
dated and filed with the Company prior to death. Any Beneficiary
designation may be revoked and a new designation may be made, as long
as the new
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Page 1
<PAGE> 2
designation is in writing, signed by the Executive, and dated and
filed with the Company prior to death. If no Beneficiary has been
designated under this Agreement, or there is no surviving designated
Beneficiary or contingent Beneficiary, any unpaid amounts will be paid
to Executive's surviving spouse; or if the Executive does not have a
surviving spouse, to the Executive's estate, as soon as
administratively possible. Notwithstanding the foregoing, in the event
and to the extent Executive's spouse is his Beneficiary, and the
spouse dies after the Executive, but before payment of benefits
hereunder, the spouse's estate shall be the Beneficiary of the
Executive's account, unless the Executive's Beneficiary designation
specifically provides otherwise.
(d) "Cause" shall mean (i) the willful and continued failure of the
Executive to perform substantially the Executive's duties with the
Company (other than any such failure resulting from incapacity due to
physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board of Directors
which specifically identifies the manner in which the Board of
Directors believes that the Executive has not substantially performed
the Executive's duties, or (ii) the willful engaging by the Executive
in illegal conduct or gross misconduct which is materially and
demonstrably injurious to the Company. For purpose of this Section, no
act or failure to act, on the part of the Executive, shall be
considered willful unless it is done, or omitted to be done, by the
Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the
Company. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the Board of Directors or
based upon the advice of counsel for the Company shall be conclusively
presumed to be done, or omitted to be done, by the Executive in good
faith and in the best interests of the Company. The termination of
employment of the Executive shall not be deemed to be for cause unless
and until there shall have been delivered to the Executive a copy of a
resolution duly adopted by the affirmative vote of not less than
three-quarters of the entire membership of the Board of Directors at a
meeting of the Board of Directors called and held for such purpose
(after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard
before the Board of Directors), finding that, in the good faith
opinion of the Board of Directors, the Executive is guilty of the
conduct described in provision (i) or (ii) above and specifying the
particulars thereof in detail.
(e) "Change in Control" shall mean the first to occur of any of the
following events:
(i) If the Board of Directors does not approve and recommend to the
stockholders a Corporate Event, the date such Corporate Event is
consummated;
(ii) If the Board of Directors does approve and recommend to the
stockholders a Corporate Event and such Corporate Event is
consummated, then the date the Executive's employment is
terminated without Cause or the date Constructive Termination
occurs if such termination occurs within three years of such
Corporate Event;
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Page 2
<PAGE> 3
(iii)The date that any person (as such term as used in Section 13(d)
of the Securities Exchange Act of 1934, hereinafter the "1934
Act"), other than one or more trusts established by the Company
for the benefit of employees of the Company or its subsidiaries,
shall become the beneficial owner (within the meaning of Rule
13d-3 under the 1934 Act) of fifteen percent (15%) or more of the
Company's outstanding common stock, other than holders of such
amounts as of the date hereof; or
(iv) The date, during any period of twenty-four (24) consecutive
months, on which individuals who at the beginning of such period
constitute the entire Board of Directors of the Company shall
cease for any reason to constitute a majority thereof unless the
election, or the nomination for election by the Company's
stockholders, of each new director comprising the majority was
approved by a vote of at least a majority of the Continuing
Directors in office on the date of such election or nomination
for election of the new director. For purposes hereof, a
"Continuing Director" shall mean:
(A) Any member of the Board of Directors at the close of
business on August 5, 1998;
(B) Any member of the Board of Directors who succeeds any
Continuing Director described in Subparagraph (A) above if
such successor was elected, or nominated for election by the
Company's stockholders, by a majority of the Continuing
Directors then still in office; or
(C) Any director elected, or nominated for election by the
Company's stockholders to fill any vacancy or newly created
directorship on the Board of Directors by a majority of the
Continuing Directors then still in office.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(g) "Compensation" shall mean the total cash remuneration paid to, or
contingently or irrevocably credited or set aside for, the Executive
by the Company for personal services rendered, including base salary
and bonuses, paid sick days and paid vacation days taken, but
excluding moving expenses, severance pay, accrued vacation paid upon
terminating employment, payments under long-term disability insurance
and the value of any fringe benefits such as life medical, disability,
or hospitalization insurance premiums and Company contributions
allocated to the Executive under any pension or profit sharing plan of
the Company which qualifies under Section 401(a) of the Code, and
payments under this Agreement, stock options and other retirement
programs.
(h) "Constructive Termination" shall mean:
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Page 3
<PAGE> 4
(i) The failure to elect, reelect or otherwise maintain the Executive
in the office or position in the Company which the Executive held
immediately prior to the Corporate Event, or the removal of the
Executive as a Director (or any successor thereto) if the
Executive shall have been a Director immediately prior to the
Corporate Event;
(ii) A significant adverse change in the nature or scope of the
authorities, powers, functions, responsibilities or duties
attached to the position with the Company which the Executive
held immediately prior to the Corporate Event or a reduction in
the aggregate of the Executive's base pay, incentive pay or
employee benefits to which the Executive is entitled to prior to
the Corporate Event;
(iii) A determination by the Executive made in good faith that as a
result of the Corporate Event and change in circumstances
thereafter significantly affecting the Executive's position, the
Executive has been rendered substantially unable to carry out,
has been substantially hindered in the performance of, or has
suffered a substantial reduction in, any of the authorities,
powers, functions, responsibilities or duties attached to the
position held by the Executive immediately prior to the Corporate
Event, which situation is not remedied within 10 calendar days
after written notice to the Company from the Executive of such
determination;
(iv) The Company shall relocate its principal executive offices, or
require the Executive to have the Executive's principal location
of work changed, to any location which is in excess of 50 miles
from the location thereof immediately prior to the Corporate
Event or the Company shall require the Executive to travel away
from the Executive's office in the course of discharging the
Executive's responsibilities or duties significantly more (in
terms of either consecutive days or aggregate days in any
calendar year) than was required of the Executive prior to the
Corporate Event; or
(v) Any material breach of an employment agreement or other agreement
between the Company and the Executive, as determined under such
agreement.
(i) "Corporate Event" shall mean any of the following:
(i) Any consolidation or merger of the Company in which the Company
is not the continuing or surviving corporation or pursuant to
which shares of the Company's common stock would be converted
into cash, securities or other property, other than any
consolidation or merger of the Company in which the holders of
the Company's common stock immediately prior to the consolidation
or merger have the same proportionate ownership of common stock
of the surviving corporation immediately after the consolidation
or merger;
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Page 4
<PAGE> 5
(ii) Any sale, lease, or other transfer of all, or
substantially all, of the assets of the Company, other
than any sale, lease, or other transfer to any
corporation where the Company owns, directly or
indirectly, at least eighty percent (80%) of the
outstanding voting securities of the corporation after
the transfer; or
(iii) Any plan or proposal for the liquidation or
dissolution of the Company.
(j) "Date of Termination" shall mean the date the Executive's employment
with the Company terminates for any reason.
(k) "Effective Date" shall mean December 1, 1998.
(l) "Final Average Monthly Compensation" shall mean the Executive's
average monthly Compensation received during the highest thirty six
(36) consecutive calendar months during the one hundred twenty (120)
consecutive calendar months which end on the earlier of (i) the
Executive's Date of Termination, or (ii) the Executive's Normal
Retirement Date.
(m) "Integrated Stock Options" shall mean the options granted by the
Company to the Executive to purchase common stock which the Company
and the Executive have agreed are to be integrated in calculating the
Executive's Accrued Benefit under this Agreement, including the
options granted to the Executive on the 8th day of October, 1998 and
any other options granted in the future and so designated.
(n) "Late Retirement" shall mean the termination of the Executive's
employment with the Company after the Executive's Normal Retirement
Date for any reason other than Cause.
(o) "Normal Retirement" shall mean the termination of the Executive's
employment with the Company on the Executive's Normal Retirement Date
for any reason other than Cause.
(p) "Normal Retirement Date" shall mean the first day of the first month
coinciding with or next following the Executive's sixty-fifth (65th)
birthday.
(q) "Stock Option Offset Value" shall mean the aggregate amount,
determined as of the earlier of (i) the Executive's Date of
Termination or (ii) the Executive's Normal Retirement Date, with
respect to the Executive's Integrated Stock Options which, for each
Integrated Stock Option, shall mean the excess, if any, of (i) the
closing price per share of common stock on a specified date, over (ii)
the exercise price of such Integrated Stock Option.
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Page 5
<PAGE> 6
(r) "Total and Permanent Disability" shall mean:
(i) The mental or physical disability, either occupational or
non-occupational in cause, which satisfies the definition of
"total disability" in the principal long-term disability policy
or plan provided by the Company covering the Executive; or
(ii) If no such policy is then covering the Executive, a physical or
mental infirmity which, as determined by the Company in good
faith, upon receipt of and in reliance on sufficient competent
medical advice from one or more individuals, selected by the
Company, who are qualified to give professional medical advice,
impairs or is expected to impair the Executive's ability to
substantially perform the Executive's duties for a period of at
least one hundred eighty (180) consecutive days.
2. Eligibility for Benefits. The Executive shall receive a supplemental
retirement benefit determined in accordance with Section 4 and payable in
accordance with Section 5 if the Executive's employment with the Company is
terminated due to:
(a) Normal Retirement;
(b) Late Retirement;
(c) Total and Permanent Disability;
(d) Death;
(e) Resignation for any reason not described in Subsections (a) through
(d); or
(f) Termination by the Company for any reason other than Cause.
3. No Benefits if Termination Is for Cause. The Executive shall not be
eligible to receive a supplemental retirement benefit under this Agreement if
the Executive's employment with the Company is terminated by the Company for
Cause.
4. Amount of Benefits. If the Executive is entitled in accordance with Section
2 to receive a supplemental retirement benefit under this Agreement, the
Executive's supplemental retirement benefit shall be determined as follows:
(a) Normal Retirement. If the Executive's employment with the Company is
terminated for Normal Retirement, the Executive shall receive a
supplemental retirement benefit under
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Page 6
<PAGE> 7
this Agreement which is equal to his Accrued Benefit determined as of
the Executive's Normal Retirement Date.
(b) Late Retirement. If the Executive's employment with the Company is
terminated for Late Retirement, the Executive shall receive a
supplemental retirement benefit under this Agreement which is equal to
the Actuarial Equivalent of his Accrued Benefit determined as of the
Executive's Normal Retirement Date.
(c) Disability Retirement. If the Executive's employment with the Company
is terminated prior to Normal Retirement Date by reason of Total and
Permanent Disability, the Executive shall receive a supplemental
retirement benefit under this Agreement which is equal to his Accrued
Benefit determined as of the Executive's Date of Termination, reduced
by the Actuarial Equivalent of 100% of any long-term disability
benefits the Executive receives or is to receive under the Company's
group long-term disability plan. The Executive's supplemental
retirement benefit shall be payable as of the Executive's Date of
Termination.
(d) Death, Resignation or Other Involuntary Dismissal. If the Executive's
employment with the Company is terminated for any reason other than
Cause and the Executive is not entitled to a supplemental retirement
benefit described in Subsection (a) through (c) or (e) hereof, the
Executive shall receive a supplemental retirement benefit under this
Agreement which is equal to his Accrued Benefit determined as of the
Executive's Date of Termination. The Executive's supplemental
retirement benefit shall be payable as of the Executive's Date of
Termination.
(e) Benefits Upon Change in Control. Notwithstanding any provision of this
Agreement to the contrary, if there is a Change in Control of the
Company, the Executive shall receive a supplemental retirement benefit
under this Agreement which is equal to the Accrued Benefit he would
have earned at Normal Retirement (using Final Average Monthly
Compensation as of his Date of Termination) without reduction for
early commencement. The Executive's supplemental retirement benefit
shall be payable as of the Executive's Date of Termination.
5. Payment of Benefits. Any supplemental retirement benefit payable under this
Agreement shall be paid to the Executive or to the Executive's Beneficiary in a
lump sum as soon as practicable on or immediately following the Executive's Date
of Termination with regard to the applicable event described in Section 4(a)
through (e) giving rise to such payment. In lieu of receiving the lump sum cash
payment pursuant to the provisions of the preceding sentence at the time
specified therein, Executive or a Beneficiary may elect to receive installment
payments by delivering to the Company at any time prior to December 31st of the
calendar year preceding the calendar year in which payment would otherwise occur
hereunder, written notice of the Executive's election to receive the lump sum
amount in such number of annual installments (not to exceed installments
extending over 10 years)
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Page 7
<PAGE> 8
and commencing on such date (which date shall be no earlier than the date on
which the lump sum would otherwise be paid to the Executive) as is specified in
the written notice. Executive may also elect, no later that December 31 of the
calendar year preceding the calendar year in which payment of his lump sum would
otherwise occur, to defer payment of his lump sum until a later date specified
in such election. In no event may Executive elect to have payment commence later
than April 1 of the year following the year in which Executive attains age
70-1/2, and in no event may a Beneficiary elect to have payments occur more than
five years after Executive's death. Executive may modify or rescind an
installment election or further defer the payment in its entirety, at any time
prior to the December 31st date referred to in this paragraph, but on such
December 31st the election shall become irrevocable.
The Executive and the Company may, however, mutually agree to the
payment of the Executive's supplemental retirement benefit in any form
commencing on any date which is the Actuarial Equivalent of the form of payment
described in the first sentence of this Section 5.
6. Gross-Up Payment Following a Change In Control.
(a) In the event it shall be determined that the payment of a benefit
under this Plan to the Executive (the "Payment") would be subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code
and any interest or penalties are incurred by the Executive with
respect to such excise tax (the excise tax, together with interest and
penalties thereon, hereinafter collectively referred to as the "Excise
Tax"), the Executive shall be entitled to receive an additional
payment (a "Gross-up Payment") in an amount such that after payment by
the Executive of all taxes, including, without limitation, any income
taxes and the Excise Tax imposed upon the Gross-up Payment, the
Executive retains an amount of the Gross-up Payment equal to the
Excise Tax imposed upon the Payment.
(b) Subject to the provisions of Section 6(c), all determinations required
to be made under this Section 6, including whether and when a Gross-up
Payment is required and the amount of such Gross-up Payment and the
assumptions to be utilized in arriving at such determination, shall be
made by a nationally recognized certified public accounting firm as
may be designated by the Executive (the "Accounting Firm"). All fees
and expenses of the Accounting Firm shall be paid solely by the
Company. Any Gross-up Payment, as determined pursuant to this Section
6, shall be paid by the Company to the Executive within five (5) days
after the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by the
Executive, it shall so indicate to the Executive in writing. Any
determination by the Accounting Firm shall be binding upon the Company
and the Executive.
(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-up Payment. Such notification shall
be given no later than ten (10) business days after the
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Page 8
<PAGE> 9
Executive is informed in writing of such claim and shall apprise the
Company of the nature of the claim and the date of requested payment.
The Executive shall not pay the claim prior to the expiration of the
thirty (30) day period following the date on which it gives notice to
the Company. If the Company notifies the Executive in writing prior to
the expiration of the period that it desires to contest such claim,
the Executive shall:
(i) Give the Company any information reasonably requested by the
Company relating to such claim;
(ii) Take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation
with respect to such claim by an attorney reasonably selected by
the Company;
(iii)Cooperate with the Company in good faith in order to effectively
contest such claim; and
(iv) Permit the Company to participate in any proceedings relating to
such claim.
Without limitation on the foregoing provisions of this Section 6(c),
the Company shall control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct the Executive
to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall determine
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of the contest; provided,
further, that if the Company directs the Executive to pay any claim and sue for
a refund, the Company shall advance the amount of the payment to the Executive,
on an interest-free basis, and shall indemnify and hold the Executive harmless,
on an after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to the advance or with
respect to any imputed income with respect to the advance.
(d) In the event that the Company exhausts its remedies pursuant to
Section 6(c) and the Executive thereafter is required to make a
payment of any Excise Tax, the Accounting Firm shall determine the
amount of the Gross-up Payment required and such payment shall be
promptly paid by the Company to or for the benefit of the Executive.
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Page 9
<PAGE> 10
(e) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 6(c), the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall
promptly pay to the Company the amount of such refund (together with
any interest paid or credited thereon after taxes applicable thereto).
If, after the receipt by the Executive of an amount advanced by the
Company pursuant to a determination is made that the Executive shall
not be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of thirty (30)
days after such determination, then such advance shall be forgiven and
shall not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of Gross-up Payment
required to be paid.
7. Unfunded Plan and Source of Payment of Benefits.
(a) This Agreement shall constitute an "unfunded plan" for purposes of the
Code and TitleI of the Employee Retirement Income Security Act of
1974, as amended ("ERISA").
(b) All benefits paid under this Agreement shall be paid in cash from the
general assets of the Company or from such other funding vehicle as
the Company may establish for the payment of benefits to the Executive
or his Beneficiary hereunder.
(c) The Executive, Beneficiaries and all other persons claiming an
interest under this Agreement shall, with respect to any benefit
payable under this Agreement, have the status of an unsecured general
creditor of the Company and shall not have any right, title, or
interest whatever in or to, or any preferred claim in or to, any
investment reserves, accounts, or funds that the Company may purchase,
establish, or accumulate to aid in providing the payments described in
this Agreement.
8. Payment Due an Incompetent. If the Company shall find that any person to
whom any payment is payable under this Agreement is unable to care for his
affairs because of mental or physical illness, accident, or death, or is a
minor, any payment due (unless a prior claim therefor shall have been made by a
duly appointed guardian, committee or other legal representative) may be paid to
the spouse, a child, a parent, a brother or sister or any person deemed by the
Company, in its sole discretion, to have incurred expenses for such person
otherwise entitled to payment, in such manner and proportions as the Company may
determine. Any such payment shall be a complete discharge of the liabilities of
the Company under this Plan, and the Company shall have no further obligation to
see to the application of any money so paid.
9. Severability. In the event any provision of this Agreement shall be held
invalid or illegal for any reason, any illegality or invalidity shall not affect
the remaining parts of this Agreement, but this Agreement shall be construed and
enforced as if the illegal or invalid provision had never been inserted.
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Page 10
<PAGE> 11
10. Executive Covenants. In the event the Executive's supplemental retirement
benefits hereunder become payable pursuant to Section 4(e), then during the
twelve (12) month period following the Change of Control, the Executive shall
not disclose to any person, or use to the significant disadvantage of any of the
Company, any non-public information relating to business plans, marketing plans,
customers or employees of the Company other than information the disclosure of
which cannot reasonably be expected to adversely affect the business of the
Company ("Confidential Information"), provided that nothing contained in this
Section 10 shall prevent the Executive from being employed by a competitor of
the Company or utilizing the Executive's general skills, experience, and
knowledge, including those developed while employed by the Company.
11. Disputes. Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration in Dallas, Texas, or,
at the option of the Executive, in the county where the Executive resides, in
accordance with the Rules of the American Arbitration Association then in
effect, to be completed within 45 days after notice of such dispute or
controversy is given pursuant to this Section 11. Judgment may be entered on an
arbitrator's award relating to this Agreement in any court having jurisdiction.
12. Costs of Proceedings. The Company shall pay all costs and expenses,
including attorneys' fees and disbursements, at least monthly, of the Executive
in connection with any legal proceeding (including arbitration), whether or not
instituted by the Company or the Executive, relating to the interpretation or
enforcement of any provision of this Agreement, except that if the Executive
instituted the proceeding and the judge, arbitrator or other individual
presiding over the proceeding affirmatively finds that the Executive instituted
the proceeding in bad faith, the Executive shall pay all costs and expenses,
including attorney's fees and disbursements, of the Executive.
13. Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder can be assigned or delegated by the Executive, without the
prior written consent of the Company. Except as otherwise provided herein, this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the Company and the Executive and their respective heirs, legal representatives,
successors, assigns and Beneficiaries. If the Company shall be merged into or
consolidated with another entity, the provision of this Agreement shall be
binding upon and inure to the benefit of the entity surviving such merger or
resulting from such consolidation. The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business or assets of the Company, by agreement
in form and substance satisfactory to the Executive, to expressly assume and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession has taken
place. The provisions of this Section 13 shall continue to apply to each
successive employer of the Executive hereunder in the event of any merger,
consolidation or transfer of assets of a successor employer.
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Page 11
<PAGE> 12
14. Withholding. Notwithstanding the provisions of Sections 4, 5 and 6 hereof,
the Company may, to the extent required by law, withhold applicable federal,
state and local income and other taxes from any payments due to the Executive
hereunder.
15. Notices. All notices and other communications hereunder must be in writing
and will be deemed to have been duly given if delivered personally, mailed by
certified mail (return receipt requested) or sent by overnight delivery service
or facsimile transmission to the Executive at the Executive's most recent
address in the records of the Company and to the Company at:
Affiliated Computer Services, Inc.
2828 North Haskell Avenue
Dallas, Texas 75204
Attention: President
Fax: 214-821-1014
with a copy to:
Affiliated Computer Services, Inc.
2828 North Haskell Avenue
Dallas, Texas 75204
Attention: General Counsel
Fax: 214-823-5746
16. Confidentiality. The parties agree to keep the terms and conditions of this
Agreement in strictest confidence, it being understood that this restriction
shall not prohibit disclosure required by applicable law, rule or regulation.
17. Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE AND
TO BE PERFORMED THEREIN.
18. Entire Agreement. This Agreement (along with the grant of the Integrated
Stock Options to the Executive pursuant to the Company's 1997 Stock Incentive
Plan, as amended) supersedes all other prior agreements concerning the Company's
payment of supplemental retirement income to the Executive. This Agreement may
be changed only by a written agreement executed by the Company and the
Executive.
19. Offset. Payments to be made by the Company for the Executive pursuant to
this Agreement may be offset by any debts owed to the Company by the Executive.
If the Executive receives a lump sum payment pursuant to this Agreement, such
lump sum will be offset by the amount of the Executive's debt owed to the
Company. If the Executive elects the installment option under Section
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Page 12
<PAGE> 13
5, the installment shall first be reduced by the amount of the Executive's debt
before calculating the amount of the installments.
20. Not an Employment Contract. This Agreement does not constitute a contract
of employment and shall not be construed to give Executive the right to be
retained in the Company's service.
EXECUTED this December 15th day of 1998.
AFFILIATED COMPUTER SERVICES, INC.
By: /s/ JEFFREY A. RICH /s/ DARWIN DEASON
_____________________________ ________________________________
Jeffrey A. Rich DARWIN DEASON
President and Chief Operating Officer
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Page 13
<PAGE> 14
APPENDIX A
Date of Determination Percentage
June 30, 1999 2%
June 30, 2000 6%
June 30, 2001 16%
June 30, 2002 26%
June 30, 2003 36%
June 30, 2004 46%
At age 65 and later 56%
For calculations on any date other than June 30, the percentage will be
determined by straight-line interpolation.
<PAGE> 1
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Affiliated Computer Services, Inc. derives its revenues from delivering
information technology services, including technology outsourcing, business
process outsourcing and professional services, to the commercial sector and to
the federal government. A substantial portion of ACS' revenues is derived from
recurring monthly charges to our customers under service contracts with initial
terms that vary from one to ten years. For the year ended June 30, 1999,
approximately 89% of our revenues were recurring. We define recurring revenues
as revenues derived from services that are used by our customers each year in
connection with their ongoing businesses, and accordingly exclude conversion and
deconversion fees, software license fees, short-term contract programming
engagements, product installation fees and hardware sales. Since the inception
of our company through June 30, 1999, we have purchased 45 information
technology services companies, resulting in geographic expansion, growth and
diversification of our customer base, expansion of services offered and
increased economies of scale. Approximately half of the increase in revenues
since June 30, 1994 has been attributable to these acquisitions.
In December 1997, we acquired ACS Government Solutions Group, Inc. ("ACS
GSG"), formerly known as Computer Data Systems, Inc., through the merger of one
of our wholly-owned subsidiaries with and into ACS GSG, a provider of
information technology services primarily to the federal government in a
transaction accounted for as a pooling of interests (the "Merger"). As a result,
we have restated our historical financial statements to reflect the combined
operations of the two companies.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. 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 affected by a
future event that would diminish its information technology requirements; the
competition in the information technology industry and the impact of such
competition on pricing, revenues and margins; the degree to which business
entities continue to outsource information technology and business processes;
uncertainties surrounding budget reductions or changes in funding priorities or
existing federal, state or local government programs; and the cost of attracting
and retaining highly skilled personnel.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain items from our Consolidated
Statements of Income expressed as a percentage of revenues:
<TABLE>
<CAPTION>
Percentage of Revenues
Year ended June 30,
----------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
------ ------ ------
Operating expenses:
Wages and benefits 43.5 42.4 42.6
Services and supplies 30.5 30.6 28.5
Rent, lease and maintenance 11.1 12.6 14.3
Depreciation and amortization 4.0 4.0 3.8
Merger costs -- 1.1 --
Other operating expenses 1.2 1.0 1.1
------ ------ ------
Total operating expenses 90.3 91.7 90.3
------ ------ ------
Operating income 9.7 8.3 9.7
Interest expense 1.1 1.0 0.8
Other non-operating income, net (0.3) (0.6) (0.1)
------ ------ ------
Pretax profit 8.9 7.9 9.0
Income tax expense 3.6 3.3 3.7
------ ------ ------
Net income 5.3% 4.6% 5.3%
====== ====== ======
</TABLE>
COMPARISON OF FISCAL 1999 TO FISCAL 1998
Revenues increased $453.1 million, or 38%, to $1,642.2 million for fiscal
year 1999. Revenues from acquisitions contributed $227.1 million while revenues
from internally generated sales contributed $226.0 million to the overall
increase. Excluding intersegment sales, revenues from our commercial segment
increased $297.2 million, or 38%, over fiscal 1998 due to acquisitions and due
to new contract signings with customers in the transportation industry and
financial industry markets. Revenues from our federal government segment
increased $155.9 million, or 38%, over fiscal 1998 due to increased requirements
under the Department of Education and Veterans Affairs contracts, new task
orders under civilian agency contracts, the full year effect of the U.S. Senate
contract signed in the third quarter of fiscal 1998 and the acquisition of Betac
International Corporation in July 1998.
During fiscal 1998, we recorded a non-recurring charge of $6.0 million to
rent, lease and maintenance expense resulting from a binding commitment to a
hardware lessor to terminate a computer lease obligation prior to the expiration
of its term. Also during fiscal 1998 we recorded a non-recurring charge of $13.0
million ($8.9 million, net of tax) related to specific and identifiable costs
associated with the Merger. Excluding these non-recurring charges, total
operating expense increased $411.8 million, or 38%, to $1,483.6 million for
fiscal 1999, as a result of our increase in revenues, and as a percentage of
revenue increased slightly from 90.1% in fiscal 1998 to 90.3% in fiscal 1999.
Wages and benefits expense, as a percentage of revenue, increased slightly from
42.4% in fiscal 1998 to 43.5% in fiscal 1999 as a result of our current year
acquisitions having a higher component of labor. Excluding the $6.0 million
non-recurring charge to rent, lease and maintenance expense in fiscal 1998,
rent, lease and maintenance expense decreased from 12.1% to 11.1% in fiscal 1999
as a result of realizing economies of scale from the Merger, specifically in
personnel costs, telecommunications and software expense, and growth in our
professional services which contains a smaller component of rent, lease and
maintenance expense. Other operating expense as a percentage of revenue
increased from 1.0% in fiscal 1998 to 1.2% in fiscal 1999 primarily as a result
of non-recurring items including an anticipated legal settlement in connection
with a fiscal 1996 acquisition and the costs associated with a secondary equity
offering that was cancelled in the fourth quarter of fiscal 1999.
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Excluding the non-recurring merger and lease termination charges mentioned
previously, operating income for fiscal 1999 increased $41.3 million, or 35%, to
$158.6 million. Interest expense increased $5.5 million, or 45%, to $17.6
million in fiscal 1999 as a result of a full year effect of the March 1998
issuance of $230 million of 4% Convertible Subordinated Notes due March 15, 2005
(see Note 7 to our Consolidated Financial Statements). Other non-operating
income for fiscal 1998 includes the recognition of a $6.7 million gain upon
redemption of an investment in a customer's preferred stock. Excluding this
non-recurring gain, other non-operating income increased $3.4 million to $4.5
million in fiscal 1999 primarily due to higher investment income and the
reduction of minority interest expense as a result of acquiring the remaining
equity interest in three of our subsidiaries. Our effective tax rate decreased
to approximately 41% for fiscal 1999 due in part to certain non-deductible
merger costs in fiscal 1998 and exceeds the federal statutory rate of 35% due
primarily to the amortization of certain acquisition-related costs that are
non-deductible for tax purposes, and due to the net effect of state income
taxes.
COMPARISON OF FISCAL 1998 TO FISCAL 1997
Revenues increased $260.2 million, or 28%, to $1,189.1 million for fiscal
year 1998. Revenues from acquisitions contributed $132.2 million, while revenues
from internally generated sales contributed $128.0 million to the overall
increase. Excluding intersegment sales, revenues from our commercial segment
increased $150.8 million, or 24%, over fiscal 1997 primarily due to
acquisitions, new contract signings with customers in the insurance industry, an
increase in volumes at ACS Business Process Solutions (formerly known as
Unibase) and an increase in the number of transactions processed through our
electronic commerce services. Revenues from our federal government segment
increased $109.4 million, or 36%, over fiscal 1997 primarily as a result of the
full year effect of the acquisition of Analytical Systems Engineering
Corporation in June 1997 and increased requirements under civilian agency
contracts.
As previously mentioned, we recorded two non-recurring charges to operating
expenses in fiscal 1998. Before these non-recurring charges, total operating
expenses increased $233.1 million, or 28%, to $1,071.8 million for fiscal 1998,
as a result of our increase in revenues, and as a percentage of revenue
decreased from 90.3% in fiscal 1997 to 90.1% in fiscal 1998. This decrease was a
result of the synergies realized from the Merger, as well as the data center
consolidations within our commercial segment which were completed in the second
quarter of fiscal 1998. Wages and benefits expense, as a percentage of revenues,
decreased slightly from fiscal 1997. The decrease was primarily a result of
growth in electronic commerce services, which outpaced growth in our more
labor-intensive professional services. Services and supplies increased as a
percentage of revenue from 28.5% in fiscal 1997 to 30.6% in fiscal 1998 due to
growth in electronic commerce services and subcontractor expenses in the federal
government segment. Rent, lease and maintenance expense, as a percentage of
revenues, decreased from 14.3% in fiscal 1997 to 12.6% in fiscal 1998 despite
the $6.0 million non-recurring lease termination charge previously mentioned.
This decrease was due primarily to the commercial data center consolidations
completed in fiscal 1998 and the growth in our professional services, which
contained a smaller component of rent, lease and maintenance expense.
Depreciation and amortization expense, as a percentage of revenues, increased
from 3.8% in fiscal 1997 to 4.0% in fiscal 1998 due mainly to acquisition cost
amortization.
Before the non-recurring charges mentioned previously, operating income for
fiscal 1998 increased $27.0 million, or 30%, to $117.3 million, and as a
percentage of revenues for fiscal 1998 was 9.9% compared with 9.7% for fiscal
1997. Interest expense increased as a percentage of revenues as a result of the
March 1998 issuance of $230 million of 4% Convertible Subordinated Notes due
March 15, 2005 (see Note 7 to our Consolidated Financial Statements). Other
non-operating income for fiscal 1998 includes the recognition of a $6.7 million
gain upon the redemption of our investment in a customer's preferred stock. Our
effective tax rate increased to approximately 42% for fiscal 1998 due in part to
certain non-deductible Merger costs. Excluding Merger costs and the related tax
benefit, the effective tax rate was approximately 41%, exceeding the federal
statutory rate of 35% due primarily to the amortization of certain
acquisition-related costs that are non-deductible for tax purposes, and due to
the net effect of state income taxes.
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999 our liquid assets, consisting of cash and cash
equivalents, totaled $32.8 million compared to $84.0 million at June 30, 1998.
These liquid assets included $4.2 million and $8.1 million borrowed under a
revolving credit facility for use in our automated teller machines ("ATM") at
June 30, 1999 and 1998, respectively. Working capital decreased slightly from
$198.1 million at June 30, 1998 to $194.2 million at June 30, 1999 due to the
use of cash to partially fund the current year acquisitions.
Net cash provided by operating activities increased significantly from $66.7
million for fiscal 1998 to $138.1 million for fiscal 1999 due primarily to
increased earnings and the fact that cash flow from operations in fiscal 1998
was negatively impacted by approximately $14.3 million as a result of costs
incurred with the Merger and commercial data center consolidations. Net cash
used in investing activities increased from $110.6 million in fiscal 1998 to
$300.4 million in fiscal 1999 due primarily to the seven acquisitions completed
during fiscal 1999. Also, in fiscal 1998 we received $12.6 million in proceeds
from the redemption of a preferred stock investment. Net cash from financing
activities increased by $14.2 million from fiscal 1998 to fiscal 1999 due
primarily to an increase in borrowings under our revolving line of credit.
Net cash provided by operating activities of $66.7 million for fiscal 1998
increased from $64.9 million in fiscal 1997 due primarily to increased earnings
and improved collections of accounts receivable. In addition, net cash provided
by operating activities in fiscal 1998 was negatively impacted by approximately
$14.3 million as a result of costs incurred with the Merger and data center
consolidations. Net cash used in investing activities decreased from $154.4
million in fiscal 1997 to $110.6 million in fiscal 1998 due primarily to less
cash expended for acquisitions. Also, in fiscal 1998 we received $12.6 million
in proceeds from the redemption of a preferred stock investment. Net cash from
financing activities increased by $21.5 million from fiscal 1997 due primarily
to an increase in proceeds from stock option exercises and the related tax
benefit, as well as the remaining proceeds from the sale of 4% Convertible
Subordinated Notes due March 15, 2005 (the "Notes") after repayment of our
revolving credit facility.
In March 1998 we issued $230 million in Notes. The Notes are convertible
into our common stock at a conversion rate of 23.4432 shares of Class A common
stock for each $1,000 principal amount of notes, subject to adjustments in
certain events. Interest on the Notes is payable semi-annually on March 15 and
September 15 of each year commencing on September 15, 1998. The Notes may be
redeemed at our option on or after March 15, 2002, in whole or in part, at the
redemption prices set forth in the Notes (see Note 7 to our Consolidated
Financial Statements).
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. 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. As our size and financial resources increase, however,
additional acquisition opportunities requiring significant commitments of
capital may arise. 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."
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 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 should generally be
certified as Year 2000 compliant and be accepted by the business users. For
those systems that are not certified as compliant, the consequences will be
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 program 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
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, 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
vendors' products and services and on vendor web sites and are 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 complete and we believe that all major 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 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.
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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, management
believes that it is not possible to determine with complete certainty that all
Year 2000 Problems affecting us or our 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 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
50% 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 October
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 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.
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 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative and Hedging Activities", was issued. SFAS 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, 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, although early
adoption is allowed. The
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
adoption of SOP 98-5 is not expected to have a material impact on our financial
statements. We will adopt the provisions of this SOP on July 1, 1999.
DERIVATIVE FINANCIAL INSTRUMENTS
We have fixed rate and variable rate debt instruments. Our variable rate
debt instruments are subject to market risk from changes in interest rates. In
order to manage this risk, we have entered into interest rate hedges. We do not
hold or issue derivative financial instruments for trading purposes and are not
a party to any leveraged derivative transactions. Sensitivity analysis is one
technique used to measure the impact of changes in the interest rates on the
value of market-risk sensitive financial instruments. A hypothetical 10%
movement in interest rates would not have a material impact on our future
earnings, fair value or cash flows. For more information on the interest rate
hedges see Note 12 to our Consolidated Financial Statements.
<PAGE> 9
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS
June 30,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 28,580 $ 75,888
ATM cash 4,200 8,100
Accounts receivable, net 320,121 236,523
Inventory 13,778 9,911
Prepaid expenses and other current assets 41,473 24,455
Deferred taxes 7,795 10,210
---------- ----------
Total current assets 415,947 365,087
Property and equipment, net 163,240 142,717
Software, goodwill and other intangibles, net 613,272 421,256
Long-term investments and other assets 31,141 20,738
---------- ----------
Total assets $1,223,600 $ 949,798
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 36,723 27,953
Accrued compensation and benefits 63,121 40,595
Other accrued liabilities 89,747 74,789
Income taxes payable 9,861 5,554
Current portion of long-term debt 6,882 10,624
Current portion of unearned revenue 15,387 7,454
---------- ----------
Total current liabilities 221,721 166,969
Convertible notes due 2005 230,000 230,000
Long-term debt 119,106 4,848
Deferred taxes 32,507 24,103
Other long-term liabilities 12,845 20,208
---------- ----------
Total liabilities 616,179 446,128
---------- ----------
Stockholders' equity:
Class A common stock, $.01 par value, 500,000 shares authorized,
45,945 shares and 44,938 shares outstanding, respectively 460 449
Class B common stock, $.01 par value, 14,000 shares authorized,
3,300 shares outstanding 33 33
Additional paid-in capital 315,899 298,393
Retained earnings 291,029 204,795
---------- ----------
Total stockholders' equity 607,421 503,670
---------- ----------
Commitments and contingencies (Notes 2, 7, 10, 12, 13, 14 and 15)
Total liabilities and stockholders' equity $1,223,600 $ 949,798
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 10
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 1,642,216 $ 1,189,123 $ 928,925
Operating expenses:
Wages and benefits 713,984 504,284 395,780
Services and supplies 500,631 364,285 264,104
Rent, lease and maintenance 183,116 150,253 132,837
Depreciation and amortization 66,723 47,475 35,510
Merger costs -- 12,974 --
Other operating expenses 19,178 11,533 10,428
----------- ----------- -----------
Total operating expenses 1,483,632 1,090,804 838,659
----------- ----------- -----------
Operating income 158,584 98,319 90,266
Interest expense 17,594 12,059 7,121
Other non-operating income, net (4,547) (7,832) (425)
----------- ----------- -----------
Pretax profit 145,537 94,092 83,570
Income tax expense 59,307 39,670 33,904
----------- ----------- -----------
Net income $ 86,230 $ 54,422 $ 49,666
=========== =========== ===========
Earnings per common share:
Basic $ 1.77 $ 1.14 $ 1.08
=========== =========== ===========
Diluted $ 1.66 $ 1.11 $ 1.05
=========== =========== ===========
Shares used in computing earnings per common share:
Basic 48,839 47,599 46,136
Diluted 55,668 50,487 47,452
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 11
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock
------------------------------------------------
Class A Class B
------------------------------------------------ Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 24,801 $ 248 3,202 $ 32 $ 260,054 $ 102,870 $ 363,204
Stock split 14,538 145 3,204 32 (177)
Employee stock transactions
and related tax benefits 399 3 4,297 (722) 3,578
Stock issued in connection
with acquisitions 770 9 11,748 11,757
Cash dividends (717) (717)
Other, net (7) (7)
Net income 49,666 49,666
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 1997 40,508 405 6,406 64 275,922 151,090 427,481
Conversion of shares 3,106 31 (3,106) (31)
Employee stock transactions
and related tax benefits 706 7 10,556 (340) 10,223
Stock issued in connection
with acquisitions 618 6 11,917 11,923
Cash dividends (377) (377)
Other, net (2) (2)
Net income 54,422 54,422
--------- --------- --------- --------- --------- --------- ---------
44,938 449 3,300 33 298,393 204,795 503,670
Balance at June 30, 1998
Employee stock transactions
and related tax benefits 387 4 6,355 6,359
Stock issued in connection
with acquisitions 273 3 11,197 11,200
Other, net 347 4 (46) 4 (38)
Net income 86,230 86,230
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 1999 45,945 $ 460 3,300 $ 33 $ 315,899 $ 291,029 $ 607,421
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 12
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 86,230 $ 54,422 $ 49,666
--------- --------- ---------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 66,723 47,475 35,510
Non-cash portion of merger costs -- 2,484 --
Gain on redemption of preferred stock -- (6,742) --
Other 910 -- 44
Changes in assets and liabilities, net of effects from acquisitions:
(Increase) decrease in ATM cash 3,900 (1,450) 2,450
Increase in accounts receivable (43,483) (29,066) (16,150)
(Increase) decrease in inventory (1,868) 4 4,220
Increase in prepaid expenses and other current assets (3,768) (4,995) (1,875)
Change in deferred taxes 28,667 13,967 17,160
Increase in other long-term assets (3,494) (5,521) (1,376)
Increase (decrease) in accounts payable (882) 2,605 (7,827)
Increase (decrease) in accrued compensation and benefits 14,129 (397) (2,871)
Decrease in other accrued liabilities (7,011) (3,563) (1,697)
Increase (decrease) in income taxes payable 3,824 11,281 (3,315)
Decrease in other long-term liabilities (5,835) (12,462) (6,345)
Increase (decrease) in unearned revenue 78 (1,349) (2,696)
--------- --------- ---------
Total adjustments 51,890 12,271 15,232
--------- --------- ---------
Net cash provided by operating activities 138,120 66,693 64,898
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and software, net (61,141) (43,800) (42,978)
Payments for acquisitions, net of cash acquired (231,274) (69,928) (115,607)
Proceeds from divestitures 1,200 -- 2,704
Proceeds from redemption of preferred stock -- 12,596 --
Additions to other intangible assets (11,962) (9,121) (2,921)
Proceeds from note receivable 2,822 -- 4,611
Other, net -- (303) (194)
--------- --------- ---------
Net cash used in investing activities (300,355) (110,556) (154,385)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 206,052 329,926 109,211
Payments of long-term debt (93,284) (240,461) (29,732)
Employee stock transactions and related tax benefits 6,359 10,216 3,803
Net borrowings (payments) of ATM debt (3,900) 1,450 (2,450)
Dividends paid -- (377) (717)
Other, net (300) -- (898)
--------- --------- ---------
Net cash provided by financing activities 114,927 100,754 79,217
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (47,308) 56,891 (10,270)
Cash and cash equivalents at beginning of year 75,888 18,997 29,267
--------- --------- ---------
Cash and cash equivalents at end of year $ 28,580 $ 75,888 $ 18,997
========= ========= =========
</TABLE>
See supplemental cash flow information in Notes 2, 4, 5, 6, 7 and 8.
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE> 13
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business and basis of presentation
Affiliated Computer Services, Inc. (the "Company" or "ACS"), which was
incorporated on June 8, 1988, provides a full range of information technology
services to the commercial sector and federal government including business
process outsourcing, technology outsourcing, and professional services primarily
in North America, as well as Central America, South America, Europe and the
Middle East.
The consolidated financial statements are comprised of the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company's fiscal year
ends on June 30. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from these
estimates.
Cash, cash equivalents and ATM cash
Cash and cash equivalents consist primarily of short-term investments in
commercial paper and Eurodollars. Such investments have an initial maturity of
three months or less. Included in cash and cash equivalents are $3,563,000 and
$350,000 for fiscal 1999 and fiscal 1998, respectively, of restricted cash held
on behalf of governmental customers. ATM cash represents cash borrowed under a
revolving credit agreement and restricted for use in Company-owned automated
teller machines ("ATMs").
Inventory
Inventories consist primarily of micrographics supplies and equipment,
network computer hardware, ATM and computer maintenance parts, and bindery
materials which are generally recorded at the lower of cost or market (net
realizable value) using the first-in, first-out method.
Property and equipment, net
Property and equipment are recorded at cost. The cost of property and
equipment held under capital leases, primarily computer equipment, is equal to
the lower of the net present value of the minimum lease payments or the fair
value of the leased property at the inception of the lease. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, which for equipment range primarily from three to ten years and for
buildings and improvements up to forty years.
Software
Costs incurred to develop computer software to be sold as a separate
product are capitalized only after technological feasibility has been
established. Purchased computer software and internally developed computer
software purchased through acquisitions are amortized using the straight-line
method over expected useful lives which range from two to five years.
In accordance with Statement of Position ("SOP") 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use", certain
costs related to the development or purchase of internal-use software are
capitalized and amortized over the estimated useful life of the software. During
fiscal 1999 and 1998, the Company capitalized approximately $7,400,000 and
$3,200,000, respectively, in software costs under SOP 98-1.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is amortized using the straight-line method over the
expected useful lives which range from ten to forty years. It is the Company's
policy to periodically review the net realizable value of its intangible assets,
including goodwill, through an assessment of the estimated future cash flows
related to such assets. Each business unit to which these intangible assets
relate is reviewed to determine whether future cash flows over the remaining
estimated useful lives of the assets provide for recovery of the assets. In the
event that assets are found to be carried at amounts which are in excess of
estimated undiscounted future cash flows, then the intangible assets are
adjusted for impairment to a level commensurate with a discounted cash flow
analysis of the underlying assets.
Other intangible assets
Other intangible assets consist primarily of customer contracts, which are
recorded at cost and amortized using the straight-line method over the contract
terms, which range from two to ten years.
<PAGE> 14
Financial Instruments
The Company uses derivative financial instruments for the purpose of
hedging specific exposures, and holds all derivatives for purposes other than
trading. All derivative financial instruments held by the Company reduce the
risk of the underlying hedged item, and are designated at inception as hedges
with respect to the underlying hedged item. Such instruments to date have been
limited to interest rate swap contracts (see Note 12).
Long-term investments and other assets
Long-term investments consist primarily of equity investments and are
accounted for using either the cost or the equity method, as appropriate.
Deferred annuity contracts included in long-term investments are carried at cost
plus accrued interest, which approximates fair market value. It is the Company's
policy to periodically review the net realizable value of its long-term
investments through an assessment of the recoverability of the carrying amount
of each investment. Each investment is reviewed to determine if events or
changes in circumstances of the issuer have occurred which indicate that the
recoverability of the carrying amount may be uncertain. In the event that an
investment is found to be carried at an amount in excess of its recoverable
amount, the asset is adjusted for impairment to a level commensurate with the
recoverable amount of the underlying asset.
Other assets consist primarily of deferred debt costs and a long-term
software maintenance agreement. The deferred debt costs are being amortized over
the life of the related debt. The software maintenance agreement is being
amortized over the five-year term of the related contract.
Revenue recognition
Information technology processing revenue is recorded as services are
performed. Revenue from annual maintenance contracts is deferred and recognized
ratably over the maintenance period. Revenues earned in excess of related
billings are accrued, whereas billings in excess of revenues earned are deferred
until the related services are provided.
Revenues on time and material contracts are recorded at the contractual
rates as the labor hours and direct expenses are incurred. Revenues on
cost-based contracts are recorded by applying an estimated factor to costs as
incurred, such factor being determined by the contract provisions and prior
experience. Revenues on unit-price contracts are recorded at the contractual
selling prices of work completed and accepted by the customer. Revenues on
equipment and software sales are recorded when the units are delivered.
Immediate recognition is made of any anticipated losses.
Revenues earned from the five largest customers of ACS each year together
comprised 19%, 25% and 26% of ACS revenues for the years ended June 30, 1999,
1998 and 1997, respectively. Trade accounts receivable from these customers
aggregated $43,742,000 at June 30, 1999 and $67,246,000 at June 30, 1998.
Income taxes
Deferred income taxes provided in the accompanying financial statements are
determined based on the difference between financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the years in which
such differences are expected to reverse.
Earnings per common share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share", which requires the presentation of two amounts, basic
earnings per share and diluted earnings per share. Basic earnings per share is
computed using the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed using the combination of
dilutive common share equivalents and the weighted average number of common
shares outstanding during the period. See Note 11 for the computation of
earnings per share.
Stock-based compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which establishes accounting and reporting standards
for stock-based employee compensation plans. As permitted by the standard, the
Company has elected not to adopt the fair value based method of accounting for
stock-based employee compensation and will continue to account for such
arrangements under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and apply SFAS 123 on a disclosure basis
only. Accordingly, adoption of the standard has not affected the Company's
results of operations or financial position (see Note 10).
<PAGE> 15
Segment Information
During the fiscal year ended June 30, 1999, the Company adopted Statement
of Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 prescribes the use of
the management approach whereby the Company's reportable segments are
established based on the internal reporting that is used by management for
making operating decisions and assessing performance. The adoption of SFAS 131
did not affect the results of operations or the financial position of the
Company (see Note 16).
2. BUSINESS COMBINATIONS
During fiscal year 1999, the Company acquired seven information technology
services companies, which have been included in the accompanying consolidated
statements of income from the respective acquisition dates. The unaudited pro
forma condensed consolidated statements of income for the years ended June 30,
1999 and 1998 set forth below present the results of operations of ACS as if the
fiscal year 1999 acquisitions had occurred at the beginning of each period and
are not necessarily indicative of future results or the actual results that
would have been achieved had these acquisitions occurred as of the dates noted
above.
<TABLE>
<CAPTION>
Year ended June 30, (in thousands, except per share amounts)
(unaudited) 1999 1998
---------- ----------
<S> <C> <C>
Revenues $1,707,696 $1,440,802
Operating income 168,868 127,255
Income from continuing operations 89,058 54,154
Earnings per common share:
Basic $ 1.81 $ 1.13
Diluted $ 1.70 $ 1.10
Shares used in computing earnings per
common share:
Basic 49,109 47,913
Diluted 55,941 50,801
</TABLE>
From inception through June 30, 1999, the Company has acquired 45
businesses in the information technology services industry under the purchase
accounting method. The Company's recent acquisition activity is summarized as
follows:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Purchase consideration (in thousands):
Net cash paid $ 230,269 $ 64,918 $ 82,607
Amounts due sellers of acquired businesses -- -- 2,002
Stock issued 11,500 1,180 11,270
Liabilities assumed 39,439 10,140 24,008
Other 575 745 560
---------- ---------- ----------
Fair value of assets acquired
(including intangibles) $ 281,783 $ 76,983 $ 120,447
========== ========== ==========
</TABLE>
In December 1998, ACS purchased 8.7 million 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. In February 1999, ACS completed the purchase of the remaining 37% of
the outstanding shares of BRC. The acquisition was accounted for under the
purchase method of accounting with assets acquired of $298,500,000 (including
cash and other liquid investments of approximately $101,700,000) and liabilities
assumed of $25,000,000, for a net purchase price of $273,500,000.
In addition to this acquisition, during fiscal year 1999 the Company
purchased six other companies under the purchase method of accounting, which
have been included in the Company's consolidated financial statements from the
effective date of the acquisition. The Company financed a minor portion of the
aggregate purchase price of these
<PAGE> 16
acquisitions through the issuance of 273,000 shares of unregistered Class A
common stock. Also, the Company purchased the remaining 20% ownership in an
existing subsidiary.
In December 1997, ACS acquired ACS Government Solutions Group, Inc. ("ACS
GSG"), formerly known as Computer Data Systems, Inc., by exchanging 11.1 million
shares of its common stock, excluding unexercised options, for all of the common
stock of ACS GSG. Stockholders of ACS GSG received 1.759 shares of ACS Class A
common stock for each share of its common stock in the merger, which has been
accounted for as a pooling of interests (the "Merger"). All data presented in
the accompanying consolidated financial statements has been restated to reflect
the Merger.
In December 1997, the Company acquired 100% of the stock of CARA
Corporation, a professional services business. The Company made three other
acquisitions during fiscal 1998 which have also been included in the Company's
consolidated financial statements from the effective date of the acquisition.
The Company financed a portion of the aggregate purchase price for these
acquisitions through the issuance of 57,000 shares of unregistered Class A
common stock. All of the acquisitions made by the Company, excluding ACS GSG,
have been accounted for using the purchase accounting method.
In addition to these acquisitions, the Company also purchased during fiscal
1998 the remaining 30% ownership in two existing subsidiaries, ACS Technology
Solutions, Inc. (formerly known as Technical Directions, Inc.) and ACS Business
Process Solutions, Inc. (formerly known as Unibase Technologies, Inc.). The
Company financed a portion of the aggregate purchase price for these
acquisitions through the issuance of 561,000 shares of unregistered Class A
common stock.
The Company is obligated to make certain contingent payments to former
owners based on the achievement of specified profit levels in conjunction with
certain of its acquisitions. During fiscal 1999, the Company paid $1,612,000 in
contingent consideration related to acquisitions made in prior years. As of June
30, 1999, the maximum aggregate amount of the outstanding contingent obligations
is approximately $9,193,000, none of which has been earned to date. Any such
payments would result in a corresponding increase in goodwill.
3. ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Amounts billed:
Commercial sector $ 121,092 $ 82,305
Federal government 80,815 56,764
--------- ---------
201,907 139,069
Amounts unbilled:
Amounts currently billable 120,672 98,927
Excess of actual indirect costs over amounts currently
billable under cost reimbursable contracts 1,352 989
Contract retainages not currently billable 823 378
--------- ---------
122,847 100,294
Total accounts receivable 324,754 239,363
Allowance for doubtful accounts (4,633) (2,840)
--------- ---------
$ 320,121 $ 236,523
========= =========
</TABLE>
To the extent not currently billable at June 30, 1999 and 1998, unbilled
costs and accrued profits above are billable upon delivery or acceptance of
services, upon receipt of contract funding or upon contract completion. Of the
above unbilled costs and accrued profits at June 30, 1999, approximately
$2,175,000 are not expected to be billed and collected within one year.
<PAGE> 17
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Land $ 21,133 $ 20,186
Buildings and improvements 61,254 50,729
Computer equipment and software 128,093 112,498
Furniture and fixtures 73,146 45,107
Construction in progress 3,558 4,293
--------- ---------
287,184 232,813
Accumulated depreciation and amortization (123,944) (90,096)
--------- ---------
$ 163,240 $ 142,717
========= =========
</TABLE>
Pursuant to a data center consolidation plan, the Company closed one of its
facilities, located in Dearborn, Michigan, in fiscal year 1998. This facility is
held for sale and has a net book value of $6,390,000, which approximates fair
value.
5. SOFTWARE, GOODWILL AND OTHER INTANGIBLES
Software, goodwill and other intangibles consist of the following (in
thousands):
<TABLE>
<CAPTION>
June 30,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Software $ 38,104 $ 20,976
Goodwill 589,087 399,082
Other intangibles 67,922 52,487
--------- ---------
695,113 472,545
Accumulated amortization (81,841) (51,289)
--------- ---------
$ 613,272 $ 421,256
========= =========
</TABLE>
6. LONG-TERM INVESTMENTS
Long-term investments consist primarily of investments in preferred stock
accounted for at cost, as these securities are not considered marketable equity
securities, deferred annuity contracts carried at cost plus accrued interest
which approximates fair market value and various bonds carried at cost. The
preferred stock investments accrue cumulative dividends of approximately 5%.
Dividend income recognized from such securities, which is reflected in the
consolidated financial statements as a component of other non-operating income,
was approximately $110,000 $415,000 and $1,285,000 during fiscal 1999, 1998 and
1997, respectively.
In September 1997, a customer of the Company redeemed their preferred
stock, including accumulated dividends, for $12,694,000 in cash. The redemption
resulted in a $6,742,000 gain which is reported as other non-operating income,
net in the accompanying consolidated statement of income for the year ended June
30, 1998.
<PAGE> 18
7. NOTES PAYABLE AND LONG-TERM DEBT
A summary of notes payable and long-term debt follows (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
4% convertible subordinated notes due March 2005 ("Notes") (A) $ 230,000 $ 230,000
Unsecured $200,000 revolving credit agreement ("Credit Facility")
payable to banks, due in July 2002 (B) 115,000 --
Secured $11,000 ATM cash credit agreement ("ATM Cash Facility")
payable to a bank, due in December 1999 (C) 4,200 8,100
10% junior subordinated debentures, payable to former shareholders
of a subsidiary, due January 2000 184 184
Other notes payable to individuals and corporations, interest rates
ranging from 6% to 10%, due through 2002 3,969 3,979
Capitalized lease obligations at various interest rates, payable
through 2002 2,635 3,209
--------- ---------
355,988 245,472
Less current portion (6,882) (10,624)
--------- ---------
$ 349,106 $ 234,848
========= =========
</TABLE>
Maturities of notes payable and long-term debt at June 30, 1999 follows (in
thousands):
<TABLE>
<S> <C>
Year ending June 30,
2000 $ 6,882
2001 3,287
2002 115,727
2003 92
2004 --
Thereafter 230,000
----------
$ 355,988
==========
</TABLE>
(A) The Notes are convertible into the Company's Class A common stock at a
conversion rate of 23.4432 shares of Class A common stock for each $1,000
principal amount of Notes (equivalent to a conversion price of $42.66 per
share of Class A common stock), subject to adjustments in certain events.
Interest on the Notes is payable semi-annually on March 15 and September 15
of each year commencing on September 15, 1998. The Notes may be redeemed at
the option of the Company on or after March 15, 2002, in whole or in part,
at the redemption prices set forth in the Notes.
(B) Interest on the Credit Facility is payable monthly at LIBOR (5.22% at June
30, 1999) plus 0.3% to 0.875%, or the bank's base rate, as elected by the
Company. The Credit Facility contains covenants which require that the
Company comply with certain negative, affirmative and financial covenants
customary in notes of this nature, including but not limited to the
maintenance of fixed charge ratios, limitations on acquisitions and minimum
net worth requirements. The agreement also has provisions which would
permit acceleration of the maturity of the borrowings after the occurrence
of certain defined events of default. At June 30, 1999, the Company had
outstanding letters of credit of approximately $12,826,000.
(C) Interest on the ATM Cash Facility is due quarterly at prime less 2.35%
(5.40% at June 30, 1999), collateralized by cash restricted for use in
Company-owned ATMs.
Cash payments for interest for the years ended June 30, 1999, 1998 and 1997
were $14,636,000, $9,813,000 and $7,045,000, respectively. Interest income was
$3,864,000, $2,404,000 and $1,459,000 for the years ended June 30, 1999, 1998
and 1997, respectively.
<PAGE> 19
The Company's cash custody agreements with two financial institutions
provide the Company with up to $52,000,000 of the financial institutions' vault
cash for use in Company-owned ATMs. At June 30, 1999, approximately $31,962,000
was in use under the agreements. The cash is owned by the financial institutions
and is consequently not recorded on the Company's accompanying balance sheets.
The cash custody agreement in the amount of $50,000,000 expires in February 2001
and the cash custody agreement in the amount of $2,000,000 expires in January
2001.
8. INCOME TAXES
Income tax expense is comprised of the following (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
U.S. Federal $27,344 $20,636 $15,817
Foreign 1,039 248 39
State 3,763 2,905 2,985
------- ------- -------
Total current expense 32,146 23,789 18,841
------- ------- -------
Deferred:
U.S. Federal 23,328 14,001 13,299
Foreign 700 -- --
State 3,133 1,880 1,764
------- ------- -------
Total deferred expense 27,161 15,881 15,063
------- ------- -------
Total expense for income taxes $59,307 $39,670 $33,904
======= ======= =======
</TABLE>
At June 30, 1999 the Company had available unused domestic net operating
loss carryforwards ("NOLs"), net of Internal Revenue Code Section 382
limitations, of approximately $5,949,000, which will expire in years 2002
through 2010. In addition, the Company had foreign NOLs of $97,000, which will
expire in year 2005, and $1,558,000 which will not expire or be limited unless a
future significant change in stock ownership or business operations occurs.
The Company's deferred tax assets (liabilities) consist of the following
(in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued expenses not yet deductible for tax purposes $ 9,675 $ 9,732
Loss carryforwards 3,019 3,974
Deferred compensation 374 915
Stock option compensation expense 282 558
Basis differences in capital assets 1,930 --
Other -- 13
-------- --------
Total deferred tax assets 15,280 15,192
-------- --------
Deferred tax liabilities:
Depreciation and amortization (38,714) (27,346)
Interest in partnership -- (1,049)
Annuity interest (478) (458)
Other (100) --
Total deferred tax liabilities (39,292) (28,853)
Deferred tax assets valuation allowance (700) (232)
-------- --------
Net deferred tax liabilities $(24,712) $(13,893)
======== ========
</TABLE>
The valuation allowance at June 30, 1999 exists principally due to tax
benefits of acquired corporations for which realization of any future benefit is
uncertain due to taxable income limitations. The valuation allowance for
deferred tax
<PAGE> 20
assets increased by $468,000 and decreased by $281,000 during the years ended
June 30, 1999 and 1998, respectively. The increase in the current year was due
to the identification of certain foreign country NOLs and changes in facts and
circumstances with respect to the realization of future tax benefits of certain
investments which caused such realizations to be less likely than not.
Income tax expense varies from the amount computed by applying the
statutory federal income tax rate to income before income taxes as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Statutory U.S. Federal income tax $50,938 $32,932 $29,250
Goodwill amortization 3,443 1,887 864
State income taxes, net 4,482 3,110 3,130
Merger costs -- 912 --
Other 444 829 660
------- ------- -------
Total expense for income taxes $59,307 $39,670 $33,904
======= ======= =======
</TABLE>
Current year undistributed earnings of non-U.S. subsidiaries for which U.S.
taxes have not been provided are included in consolidated retained earnings in
the amount of $2,908,000 at June 30, 1999. If such earnings were distributed,
U.S. income taxes would be partially reduced by available credits for taxes paid
to the jurisdictions in which the income was earned.
Federal and state income tax payments during the years ended June 30, 1999,
1998 and 1997 were approximately $23,854,000, $12,426,000 and $18,534,000,
respectively.
9. COMMON STOCK
The Company's Class B common stock is entitled to ten votes per share.
Class B shares are convertible, at the holder's option, into Class A shares, but
until converted carry significant transfer restrictions.
In January 1989, the Company issued warrants to purchase 793,188 additional
shares of Class A common stock to a data processing customer. The warrants were
exercisable at an aggregate price of $4,700,000 plus $230,000 for each year that
elapses after December 31, 1988, plus interest at 10% per annum. The warrants
were exercised during fiscal year 1999 by the issuance of 380,000 shares of
Class A common stock, representing the net value to the warrant holder.
On March 20, 1998 the Company completed the sale of a new issue of
$230,000,000 aggregate principal amount of Notes due March 15, 2005 (see Note
7). The Notes are convertible into the Company's Class A common stock at a
conversion rate of 23.4432 shares of Class A common stock for each $1,000
principal amount of Notes (equivalent to a conversion price of $42.66 per share
of Class A common stock), subject to adjustments in certain events, none of
which have occurred as of June 30, 1999.
10. EMPLOYEE BENEFIT PLANS
Under the Company's 1997 Employee Stock Option Plan (the "1997 Plan"), the
Company has reserved 3,675,000 shares of Class A common stock for issuance to
key employees at exercise prices determined by the Board of Directors. The
Company's 1988 Employee Stock Option Plan (the "1988 Plan"), which originally
reserved 6,000,000 shares of Class A common stock for issuance, was discontinued
for new grants during fiscal 1998 and terminated (except for the exercise of
then existing option grants in September 1997) and subsequently, 1,593,231
unissued shares expired. Generally, the options under each plan vest in varying
increments over a five year period, expire ten years from the date of grant and
are issued at exercise prices no less than 100% of the fair market value of the
Company's Class A common stock at the time of the grant. As reported in Note 1,
the Company has elected to adopt the disclosure-only provisions of SFAS 123 and
will continue to account for stock-based employee compensation plans in
accordance with APB 25. As a result, no compensation cost has been recognized in
the periods presented for its stock option or employee stock purchase plans.
The Long-term Incentive Plan approved in 1991 (the "1991 Plan") provides
for the granting of options to various employees, officers and directors of ACS
GSG. This plan was discontinued for new grants effective with the Merger. All
options issued under the 1991 Plan were fully vested as of the Merger date.
Exercise prices of options awarded in
<PAGE> 21
all years were equal to the market price of the stock on the date of the grant;
therefore, no compensation costs have been recognized for awards under this
plan.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if the Company had accounted for
its stock-based compensation plans under the fair value method. The fair value
of each option grant was estimated at the date of grant using a separate
Black-Scholes option pricing model for each Plan. The following weighted average
assumptions were used for grants in fiscal 1999, 1998 and 1997: dividend yield
of 0% in all years for the 1997 and 1988 Plans and .40% for the 1991 Plan
applicable to fiscal 1997; volatility of 33.18% and 30.95% for fiscal 1999 and
1998, respectively, for all plans and 37.6% for the 1988 Plan in fiscal 1997 and
50% for the 1991 Plan in fiscal 1997; risk-free interest rates of 5.07%, 5.64%
and 6.42% for 1999, 1998 and 1997, respectively, in the 1997 and 1988 Plans and
6.14% for fiscal 1997 in the 1991 Plan; and weighted average expected option
life of 5.5 years for the 1997 and 1988 Plans and 3 years for the 1991 Plan for
all years presented. The average fair values of the options granted during
fiscal 1999, 1998 and 1997 are estimated at $14.01, $9.48 and $9.47,
respectively, for the combined Plans.
Had compensation cost for the Company's stock-based compensation plans been
determined in accordance with SFAS 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income:
As reported $ 86,230 $ 54,422 $ 49,666
Pro forma 80,591 50,718 47,803
Basic earnings per common share:
As reported $ 1.77 $ 1.14 $ 1.08
Pro forma 1.65 1.07 1.04
Diluted earnings per common and common equivalent share:
As reported $ 1.66 $ 1.11 $ 1.05
Pro forma 1.57 1.05 1.01
</TABLE>
Option activity for the years ended June 30, 1997, 1998 and 1999 is
summarized as follows:
<TABLE>
<CAPTION>
Option Price
Options per Share
------- ---------
<S> <C> <C>
Outstanding at June 30, 1996: 3,423,359 $ .01 - $23.13
Granted 935,014 12.51 - 26.87
Exercised (522,560) .01 - 12.36
Canceled (323,204) 4.97 - 20.62
-----------
Outstanding at June 30, 1997: 3,512,609 .07 - 26.87
Granted 1,933,117 17.77 - 32.63
Exercised (796,370) .07 - 17.77
Canceled (249,172) 6.40 - 31.88
-----------
Outstanding at June 30, 1998: 4,400,184 .07 - 32.63
Granted 1,674,000 23.06 - 41.88
Exercised (412,409) .41 - 17.76
Canceled (404,900) 8.00 - 38.50
-----------
Outstanding at June 30, 1999 5,256,875 .07 - 41.88
===========
Exercisable at June 30, 1999 377,410 .07 - 24.00
===========
</TABLE>
<PAGE> 22
Further information regarding the Company's outstanding and exercisable
stock options by exercise price range as of June 30, 1999 is disclosed below:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ------------------ ----------- ---------- --------- ----------- -------
<S> <C> <C> <C> <C> <C>
$ .07 - .72 101,246 1.13 $ .68 101,246 $ .68
6.39 - 11.25 702,255 5.53 9.92 12,314 6.47
12.15 - 18.26 937,874 5.71 16.63 223,850 17.27
19.63 - 26.88 1,852,500 8.23 22.95 40,000 24.00
30.13 - 41.88 1,663,000 9.41 37.28 - -
----------- ----------
5,256,875 7.66 24.18 377,410 13.18
=========== ==========
</TABLE>
Under the Company's 1995 Employee Stock Purchase Plan, a maximum of
1,000,000 shares of Class A common stock can be issued to substantially all
full-time employees. Through payroll deductions, eligible participants may
purchase Company stock at a 15% discount to market value. The stock is purchased
by the plan in the open market, and Company contributions for the years ended
June 30, 1999, 1998 and 1997, which were charged to additional paid-in capital,
were $1,045,000, $395,000 and $205,000, respectively.
The Company has contributory retirement and savings plans which cover all
employees and allow for discretionary matching contributions by the Company as
determined by the Company's Board of Directors. Contributions made by the
Company to certain plans during the years ended June 30, 1999, 1998 and 1997
were $6,465,000, $2,524,000 and $2,286,000, respectively.
11. EARNINGS PER SHARE
Basic earnings per share of common stock is computed using the weighted
average number of ACS common shares outstanding during the period. Diluted
earnings per share is adjusted for the after-tax impact of interest on the 4%
convertible debt and reflects the incremental shares available for issue upon
the assumed exercise of stock options and conversion of the 4% convertible debt.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Numerator:
Numerator for earnings per share (basic) -
income available to common stockholders $86,230 $54,422 $49,666
Effect of dilutive securities:
Interest on 4% convertible debt 6,149 1,714 --
------- ------- -------
Numerator for earnings per share assuming dilution -
income available to common stockholders $92,379 $56,136 $49,666
------- ------- -------
Denominator:
Weighted average shares outstanding (basic) 48,839 47,599 46,136
Effect of dilutive securities:
4% convertible debt 5,392 1,528 --
Stock options 1,341 1,062 1,028
Warrants and other 96 298 288
------- ------- -------
Total potential common shares 6,829 2,888 1,316
------- ------- -------
Denominator for earnings per share assuming dilution 55,668 50,487 47,452
------- ------- -------
Earnings per common share (basic) $ 1.77 $ 1.14 $ 1.08
======= ======= =======
Earnings per common share assuming dilution $ 1.66 $ 1.11 $ 1.05
======= ======= =======
</TABLE>
<PAGE> 23
12. FINANCIAL INSTRUMENTS
As of June 30, 1999 and 1998, the fair values of the Company's revolving
credit balances and other variable-rate debt instruments approximated the
related carrying values. The fair values of the Company's fixed-rate debt
instruments also approximated the related carrying values, as determined based
upon relative changes in the Company's variable borrowing rates, whether the
borrowings occurred recently or if the borrowings were repaid after the fiscal
year ended. The Company estimated the fair value of the 4% convertible debt as
of June 30, 1999 at approximately $308,200,000 based on the trading price on
that day.
In order to manage interest costs and exposure to changing interest rates,
the Company holds two interest rate hedges initiated in December 1998, and
expiring in December 2001. Each hedge is structured such that the Company pays a
fixed rate of interest of 4.54%, and receives a floating rate of interest based
on one month LIBOR. The notional amount of the two hedges total $100,000,000 and
the fair market value of the two hedges at June 30, 1999 is $3,234,000. The fair
value of each interest rate hedge reflects termination cash value.
13. RELATED PARTY TRANSACTIONS
Effective April 1996, the Company sold ACS Merchant Services, Inc.
("Merchant Services"), a start-up operation of the electronic commerce business
line, to a former officer and director of the Company for consideration in the
form of a note receivable of $500,000. There was no gain or loss recognized on
the sale. Simultaneous with the sale, the Company contributed an additional
$1,500,000 and the unpaid balance of an intercompany note due from Merchant
Services of approximately $712,000 in exchange for 1,000 shares of Merchant
Services' 5% cumulative convertible preferred stock, which is convertible after
five years into approximately 55% of the ownership of Merchant Services on a
fully diluted basis, with 44% of the voting common stock and 100% of the
non-voting common stock. The Company provides guarantees to two banks on
Merchant Services' debt up to $9,000,000.
In December 1997, the Company purchased $100,000 of the preferred stock in
DDH Aviation ("DDH"), a start-up corporate airplane brokerage firm, which
represents less than 5% ownership. The Company also acts as a guarantor for up
to $11,500,000 of DDH's $30,000,000 line of credit in exchange for warrants
convertible into 1,500 shares of DDH Class A common stock.
14. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease agreements for information
technology equipment and facilities. A summary of the lease commitments under
noncancelable operating leases at June 30, 1999 is as follows (in thousands):
<TABLE>
<S> <C>
Year ending June 30,
2000 $ 75,712
2001 51,556
2002 23,570
2003 11,078
2004 7,093
Thereafter 33,773
---------
$ 202,782
=========
</TABLE>
Lease expense for information technology equipment and facilities was
$78,709,000, $78,712,000 and $61,176,000 for the years ended June 30, 1999, 1998
and 1997, respectively.
During fiscal 1997 the Texas Supreme Court, in a unanimous decision,
overturned a lower court's judgment against the Company for which the Company
had previously accrued approximately $6 million. During the third quarter of
fiscal 1997, the Company reversed this accrual to other operating expenses.
On December 16, 1998, a state district court in Houston, Texas entered
final judgment against the Company 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 the Company's stock pursuant to
options issued to the GSA/FTSA employees in 1988 in connection with a former
data
<PAGE> 24
processing services agreement between GSA/FTSA and the Company. The judgment
against the Company 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. The Company continues to believe that
it has a meritorious defense to all or a substantial portion of the plaintiffs'
claims. The Company filed its appeal of the judgment on March 15, 1999 and plans
to vigorously pursue the appeal. The plaintiffs also have filed a notice of
appeal. Should the proceedings not be favorably resolved on appeal, the Company
would be subject to a material charge.
On February 11, 1999, and on or about April 16, 1999, Caremark, Inc., one
of the Company's significant outsourcing clients, filed separate lawsuits in
Federal District Court in Illinois alleging that the Company 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 the Company's revenues for
the year ended June 30, 1999. Caremark's pleadings also request damages in the
millions of dollars, without further specificity. The Company feels that it has
complied with all contractual obligations, provided the required information and
is not contractually obligated to provide the price reduction alleged by
Caremark to be required. On February 25, 1999, the Company filed a lawsuit in
County Court in Dallas, Texas against Caremark and its parent, MedPartners,
Inc., alleging that Caremark and MedPartners, Inc. have caused significant
injury to the Company by trying to manufacture a basis to repudiate this
contract and to avoid payment and other obligations. The Company is asking for
actual, consequential and punitive damages. Although the Company cannot predict
the outcome of either of these lawsuits, if the Company is unsuccessful, the
resulting losses could negatively impact the Company's revenues and
profitability.
Government contracts are subject to review and audit by various
governmental authorities in the normal course of the Company's business. Cost
audits have been completed through fiscal 1996 for a majority of the federal
government business operations. In management's opinion, any such reviews and
the results of cost audits for subsequent fiscal years will not have a material
effect on the Company's financial position or results of operations.
The Company is subject to certain other legal proceedings, claims and
disputes which arise in the ordinary course of its business. Although the
Company cannot predict the outcomes of these legal proceedings, the Company's
management does not believe these actions will have a material adverse effect on
the Company's financial position, results of operations or liquidity. However,
if unfavorably resolved, these proceedings could have a material adverse effect
on the Company's financial position, results of operations and liquidity.
15. MERGER EXPENSES AND OTHER CHARGES
During the second quarter of fiscal 1998, the Company recorded a
non-recurring charge of $12,974,000 ($8,880,000 net of taxes) related to
specific and identifiable costs associated with the Merger. These costs included
direct transaction expenses such as investment banking, legal, accounting,
financial printing and related fees as well as integration expenses such as
severance and costs associated with operating redundant facilities and
equipment.
During the first quarter of fiscal 1998, the Company recorded a
non-recurring charge of $6,040,000 to rent, lease and maintenance expense
resulting from a binding commitment to a hardware lessor to terminate a computer
lease obligation prior to the expiration of its term in December 1999. The
payment to the lessor was made during the fourth quarter of fiscal 1998. This
computer was replaced with newer technology which provides better service to the
Company's clients.
During the third quarter of fiscal 1997, the Company recorded a charge of
$6,019,000 ($4,577,000 in other operating expenses and $1,442,000 in
depreciation and amortization) relating to the consolidation of two of its
mainframe data centers and the upgrading of certain computer hardware and
software to newer technology. The charge included the write-down of related
assets and the recognition of obligations for which the Company would derive no
future benefit.
<PAGE> 25
16. SEGMENT INFORMATION
During fiscal year 1999 the Company adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information", which establishes standards
for companies to report information about operating segments, geographic areas
and major customers. The adoption of SFAS 131 has no effect on the Company's
consolidated financial position, consolidated results of operations or
liquidity.
The Company is organized into the commercial and the federal government segments
due to the different operating environments, in part caused by the different
types of customers, differing economic characteristics and the nature of
regulatory environments. Within the commercial segment, the Company provides
technology outsourcing, business process outsourcing and professional services
to clients in such industries as insurance, utilities, manufacturing, financial
institutions, telecommunication, healthcare, retail and transportation. In the
federal government segment, the Company provides professional services, business
process outsourcing and technology outsourcing to federal agencies.
The accounting policies of each segment are the same as those described in the
summary of significant accounting policies (see Note 1). Intersegment sales and
transfers are priced as if the sales or transfers were to third parties.
However, these amounts during the three years presented were immaterial to the
individual segments.
The Company uses earnings before interest and taxes (operating income) to
measure segment profit. Segment operating income includes selling, general and
administrative expenses directly attributable to that segment. Corporate and
Eliminations includes general and administrative services shared by all of the
Company's segments such as treasury, legal, corporate accounting, human
resources and facilities. Where practical, shared expenses are allocated based
on measurable drivers of expense (e.g., human resource costs are allocated on
headcount).
<PAGE> 26
The following tables reflect the results of the segments consistent with the
Company's management system (in thousands):
<TABLE>
<CAPTION>
Federal Corporate &
Commercial Government Eliminations (a) Consolidated
---------- ---------- ---------------- ------------
<S> <C> <C> <C> <C>
FISCAL 1999
Revenue $1,087,210 $ 569,681 $ (14,675) $1,642,216
Operating expenses 901,018 515,940 (49) 1,416,909
---------- ---------- ---------- ----------
EBITDA (b) 186,192 53,741 (14,626) 225,307
Depreciation and amortization expense
(excluding goodwill amortization) 41,830 8,278 951 51,059
Goodwill amortization expense 13,393 2,271 -- 15,664
---------- ---------- ---------- ----------
Operating income $ 130,969 $ 43,192 $ (15,577) $ 158,584
========== ========== ========== ==========
Total assets $ 920,522 $ 264,806 $ 38,272 $1,223,600
========== ========== ========== ==========
Capital expenditures $ 44,441 $ 13,689 $ 3,011 $ 61,141
========== ========== ========== ==========
FISCAL 1998
Revenue $ 775,621 $ 413,784 $ (282) $1,189,123
Operating expenses (excluding merger
costs) (c) 642,475 376,029 11,851 1,030,355
Merger costs -- -- 12,974 12,974
---------- ---------- ---------- ----------
EBITDA (b) 133,146 37,755 (25,107) 145,794
Depreciation and amortization expense
(excluding goodwill amortization) 29,399 6,900 684 36,983
Goodwill amortization expense 9,153 1,339 -- 10,492
---------- ---------- ---------- ----------
Operating income $ 94,594 $ 29,516 $ (25,791) $ 98,319
========== ========== ========== ==========
Total assets $ 688,795 $ 198,506 $ 62,497 $ 949,798
========== ========== ========== ==========
Capital expenditures $ 32,780 $ 9,934 $ 1,086 $ 43,800
========== ========== ========== ==========
FISCAL 1997
Revenue $ 624,245 $ 304,392 $ 288 $ 928,925
Operating expenses 510,878 281,291 10,980 803,149
---------- ---------- ---------- ----------
EBITDA (b) 113,367 23,101 (10,692) 125,776
Depreciation and amortization expense
(excluding goodwill amortization) 23,608 4,207 463 28,278
Goodwill amortization expense 7,195 37 -- 7,232
---------- ---------- ---------- ----------
Operating income $ 82,564 $ 18,857 $ (11,155) $ 90,266
========== ========== ========== ==========
Total assets $ 574,784 $ 184,483 $ 2,210 $ 761,477
========== ========== ========== ==========
Capital expenditures $ 34,856 $ 4,736 $ 3,386 $ 42,978
========== ========== ========== ==========
</TABLE>
(a) Included in revenue and operating expense are elimination entries related
to the sale of information technology services and computer hardware from
the commercial segment to the federal government segment.
(b) EBITDA consists 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.
(c) Operating expenses during fiscal 1998 in the commercial segment includes a
non-recurring charge of $6 million resulting from a binding commitment to a
hardware lessor to terminate a computer lease obligation prior to the
expiration of the term.
<PAGE> 27
The following reconciles consolidated operating income to the Company's pretax
profit (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Consolidated operating income $ 158,584 $ 98,319 $ 90,266
Interest expense (17,594) (12,059) (7,121)
Other non-operating income, net 4,547 7,832 425
--------- --------- ---------
Consolidated pretax profit $ 145,537 $ 94,092 $ 83,570
--------- --------- ---------
</TABLE>
The Company derives a substantial majority of its revenue from companies
headquartered in the United States. In fiscal 1997, the Company had one customer
which accounted for 11% of the Company's consolidated revenue. In fiscal 1998
and fiscal 1999, no single customer exceeded 10% of the Company's revenue.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter ended
----------------------------------------------------------------------------------------
Fiscal 1999 Fiscal 1998
------------------------------------------ --------------------------------------------
June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1999 1999 1998 1998 1998 1998 1997 1997
-------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $451,342 $435,884 $391,634 $363,356 $333,949 $304,945 $285,235 $264,994
Operating income 44,665 41,009 37,914 34,996 33,601 31,333 14,480 18,905
Net income 24,171 22,425 20,639 18,995 18,520 16,850 5,602 13,450
Earnings per common share
(basic) $ .49 $ .46 $ .42 $ .39 $ .38 $ .35 $ .12 (a) $ .29
Weighted average shares
outstanding 49,217 49,161 48,741 48,269 48,221 47,858 47,383 46,947
Earnings per common share
assuming dilution $ .46 $ .43 $ .40 $ .37 $ .36 $ .34 $ .12 (a) $ .28
Weighted average shares
outstanding assuming
dilution 56,027 56,047 55,416 55,225 55,184 50,011 48,584 48,247
</TABLE>
(a) Includes merger costs associated with the Merger of approximately $.18 per
share.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF
AFFILIATED COMPUTER SERVICES, INC.
<TABLE>
<CAPTION>
Subsidiary Jurisdiction of Organization
- ---------- ----------------------------
<S> <C>
2828 N. Haskell, Inc. Texas
ACS Claims Services, Inc. Texas
ACS Government Services, Inc. Texas
ACS Healthcare Services, Inc. California
ACS National Systems, Inc. Delaware
ACS Government Solutions Group, Inc. Maryland
ACS Defense, Inc. Massachusetts
ASEC International Inc. Delaware
Saudi American Systems Engineering Company Saudi Arabia
ASEC Limited, Inc. Delaware
Harbor Point Apartments, L.P. Massachusetts
ASEC Security International Delaware
ASEC Systems, Inc. Delaware
Betac International Corporation Delaware
Betac Corporation Virginia
Betac Technologies, LTD Delaware
Technology Recognition Systems, Inc. Delaware
Public Systems Corporation Massachusetts
CDSI Education Services, Inc. Maryland
Guarantec, LLP Florida
CDSI International, Inc. Delaware
CDSI Argentina S.A. Argentina
CDSI Guatemala S.A. Guatemala
CDSI Mortgage Services, Inc. Maryland
Computer Data Systems Sales, Inc. Maryland
M-GA Fields Road Ltd. Partnership Maryland
South Wildewood Partners, LLP Maryland
ACS Image Solutions, Inc. Louisiana
Intellifile, Inc. Nevada
Employee Benefit Plans, Inc. Delaware
ACS Retail Solutions, Inc. Texas
ACS TradeOne Marketing, Inc. Delaware
ACS Securities Services, Inc. Texas
First City Transfer Services, L.P. Delaware
ACS Communications Industry Services, Inc. Illinois
Datex Communications Corporation Canada
ACS Outsourcing Solutions, Inc. Michigan
Genix CSI, Inc. Michigan
Affiliated Computer Services, Ltd. United Kingdom
ACS Desktop Solutions, Inc. Virginia
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
The Legal Solutions, Inc. Pennsylvania
Medianet, Inc. Delaware
Micah Technology Services,Inc. Texas
ACS Shared Services, Inc. Texas
Appalachian Computer Services, LLC Delaware
ACS Technology Solutions, Inc. Texas
Cara Holdings, Inc. Delaware
Cara Corporation Illinois
TransFirst, Inc. Texas
ACS Business Process Solutions, Inc. Nevada
ACS Data Entry Delaware
ACS Business Process Solutions de Mexico Mexico
ACS Business Process Solutions Guatemala S.A. Guatemala
ACS Business Process Solutions, S.L.R.L. France
ACS Merchant Services, Inc. Delaware
Integrated Delivery Technologies, Inc. New York
Harbor Point Apartments, LP Massachusetts
ACS Lending, Inc. Delaware
ACS BRC Holdings, Inc. Delaware
Clinisys, Inc. Texas
BRC Technology Services, Inc. Delaware
Coding Systems, Inc. Delaware
Logan Services, Inc. Delaware
ACS Enterprise Solutions, Inc. Delaware
Tenacity Manufacturing, Inc. Delaware
The Pace Group Texas
MIDS, Inc. Arizona
Pace Services Group Texas
ACS Healthcare, Inc. Oregon
Latron Holdings Oregon
Latron Computer Systems, Inc. New Jersey
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-86426) of Affiliated Computer Services, Inc. of
our report dated July 27, 1999 relating to the financial statements, which
appears in the Annual Report to Stockholders, which is incorporated in this
Annual Report on Form 10-K. We also consent to the incorporation by reference of
our report dated July 27, 1999 on the financial statement schedule, which
appears in this Form 10-K.
PricewaterhouseCoopers LLP
Dallas, Texas
September 28, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-86426) of Affiliated Computer Services, Inc. (ACS) of our report
dated July 28, 1997, with respect to the consolidated financial statements of
ACS Government Solutions Group, Inc. (formerly Computer Data Systems, Inc.),
included in the Annual Report (Form 10-K) for the year ended June 30, 1999.
/s/ Ernst & Young LLP
Washington D.C.
September 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 28,580
<SECURITIES> 0
<RECEIVABLES> 324,754
<ALLOWANCES> 4,633
<INVENTORY> 13,778
<CURRENT-ASSETS> 415,947
<PP&E> 287,184
<DEPRECIATION> 123,944
<TOTAL-ASSETS> 1,223,600
<CURRENT-LIABILITIES> 221,721
<BONDS> 349,106
0
0
<COMMON> 493
<OTHER-SE> 606,928
<TOTAL-LIABILITY-AND-EQUITY> 1,223,600
<SALES> 0
<TOTAL-REVENUES> 1,642,216
<CGS> 0
<TOTAL-COSTS> 1,483,632
<OTHER-EXPENSES> (4,547)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,594
<INCOME-PRETAX> 145,537
<INCOME-TAX> 59,307
<INCOME-CONTINUING> 86,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,230
<EPS-BASIC> 1.77
<EPS-DILUTED> 1.66
</TABLE>
<PAGE> 1
EXHIBIT 99.1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Computer Data Systems, Inc.
We have audited the consolidated balance sheets of Computer Data Systems, Inc.
as of June 30, 1997 and 1996, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the two years in the
period ended June 30, 1997. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Computer Data
Systems, Inc. at June 30, 1997 and 1996 (not presented separately herein), and
the consolidated results of its operations and its cash flows for each of the
two years in the period ended June 30, 1997 (not presented separately herein),
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Washington, D.C.
July 28, 1997
