<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period from to
---------- -----------
Commission file number 0-24787
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AFFILIATED COMPUTER SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0310342
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2828 North Haskell, Dallas, Texas 75204
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 841-6111
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
NUMBER OF SHARES OUTSTANDING AS OF
TITLE OF EACH CLASS MAY 12, 2000
------------------------------------- --------------------------------
<S> <C>
Class A Common Stock, $.01 par value 46,213,404
Class B Common Stock, $.01 par value 3,299,686
----------
49,513,090
</TABLE>
<PAGE> 2
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 2000 and
June 30, 1999 1
Consolidated Statements of Income for the Three Months and Nine
Months Ended March 31, 2000 and 1999 2
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 2000 and 1999 3
Notes to Consolidated Financial Statements 4 - 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8 - 11
PART II. OTHER INFORMATION
Item 3. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
<PAGE> 3
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,486 $ 28,580
ATM cash 3,600 4,200
Accounts receivable, net 384,472 320,121
Inventory 14,924 13,778
Prepaid expenses and other current assets 57,271 41,473
Deferred taxes 7,044 7,795
------------ ------------
Total current assets 487,797 415,947
Property and equipment, net 180,896 163,240
Goodwill, software and other intangibles, net 749,753 613,272
Long-term investments and other assets 40,847 31,141
------------ ------------
Total assets $ 1,459,293 $ 1,223,600
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,047 $ 36,723
Accrued compensation and benefits 60,093 63,121
Other accrued liabilities 96,772 89,747
Income taxes payable 2,373 9,861
Short-term debt 90,547 6,882
Current portion of unearned revenue 17,602 15,387
------------ ------------
Total current liabilities 297,434 221,721
Convertible notes due 2005 230,000 230,000
Long-term debt 190,416 119,106
Deferred taxes 48,606 32,507
Other long-term liabilities 13,726 12,845
------------ ------------
Total liabilities 780,182 616,179
------------ ------------
Stockholders' equity:
Class A common stock 462 460
Class B common stock 33 33
Additional paid-in capital 320,481 316,202
Treasury stock (12,151) (303)
Retained earnings 370,286 291,029
------------ ------------
Total stockholders' equity 679,111 607,421
------------ ------------
Total liabilities and stockholders' equity $ 1,459,293 $ 1,223,600
============ ============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------- -------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 510,439 $ 435,884 $ 1,434,133 $ 1,190,874
----------- ----------- ----------- -----------
Expenses:
Wages and benefits 222,635 196,518 620,750 515,670
Services and supplies 155,933 125,783 439,453 360,734
Rent, lease and maintenance 52,807 50,014 154,152 137,909
Depreciation and amortization 23,286 17,732 63,845 49,079
Other operating expenses 5,774 4,828 14,842 13,563
----------- ----------- ----------- -----------
Total operating expenses 460,435 394,875 1,293,042 1,076,955
----------- ----------- ----------- -----------
Operating income 50,004 41,009 141,091 113,919
Interest expense 6,192 4,916 16,651 12,084
Other non-operating income, net (2,818) (1,916) (8,552) (3,080)
----------- ----------- ----------- -----------
Pretax profit 46,630 38,009 132,992 104,915
Income tax expense 18,794 15,584 53,684 42,856
----------- ----------- ----------- -----------
Net income $ 27,836 $ 22,425 $ 79,308 $ 62,059
=========== =========== =========== ===========
Earnings per common share:
Basic $ .57 $ .46 $ 1.61 $ 1.27
=========== =========== =========== ===========
Diluted $ .53 $ .43 $ 1.50 $ 1.20
=========== =========== =========== ===========
Shares used in computing earnings
per common share:
Basic 49,139 49,161 49,240 48,835
Diluted 55,658 56,047 55,873 55,674
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 79,308 $ 62,059
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 63,845 49,079
Gain on collection of note receivable (3,000) --
Gain on sale of investment (1,741) --
Other (1,307) 1,327
Changes in assets and liabilities, net of effects from acquisitions:
(Increase) decrease in ATM cash 600 (600)
Increase in accounts receivable (20,952) (45,901)
Increase in inventory (1,091) (1,999)
Increase in prepaid expenses and other current assets (9,305) (7,235)
Change in deferred taxes 16,857 24,857
(Increase) decrease in other long-term assets (6,441) 559
Decrease in accounts payable (10,505) (4,319)
Increase (decrease) in accrued compensation and benefits (14,046) 8,330
Increase (decrease) in other accrued liabilities (1,079) 10,147
Change in income taxes receivable/payable 2,967 (3,797)
Increase in unearned revenue 2,634 4,405
Increase (decrease) in other long-term liabilities 1,128 (5,284)
--------- ---------
Total adjustments 18,564 29,569
--------- ---------
Net cash provided by operating activities 97,872 91,628
--------- ---------
Cash flows from investing activities:
Purchases of property, equipment and software, net of sales (52,259) (47,896)
Payments for acquisitions, net of cash acquired (197,607) (225,135)
Purchase of investments (9,769) --
Proceeds from sale of investment 2,260 --
Additions to other intangible assets (7,542) (6,680)
Additions to notes receivable (1,553) (2,298)
Proceeds received on notes receivable 8,158 1,756
Other 41 1,000
--------- ---------
Net cash used in investing activities (258,271) (279,253)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt, net of issuance costs 225,840 183,003
Repayments of debt (76,873) (33,664)
Proceeds from stock options exercised and related tax benefits 4,727 6,872
Net borrowings (repayment) of ATM debt (600) 600
Other, net (789) (962)
--------- ---------
Net cash provided by financing activities 152,305 155,849
--------- ---------
Net decrease in cash and cash equivalents (8,094) (31,776)
Cash and cash equivalents at beginning of period 28,580 75,888
--------- ---------
Cash and cash equivalents at end of period $ 20,486 $ 44,112
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Affiliated
Computer Services, Inc. and its majority-owned subsidiaries. All material
intercompany profits, transactions and balances have been eliminated. We
are a Fortune 1000 Company providing technology solutions to commercial and
government clients worldwide. We deliver e-solutions; consulting and
systems integration services; and complete technology and business process
outsourcing solutions to a diverse base of clients and industries. Our
solutions are designed to promote value and enhance business performance
and are delivered by more than 17,000 people in 20 countries.
The financial information presented should be read in conjunction with our
consolidated financial statements for the year ended June 30, 1999. The
foregoing unaudited consolidated financial statements reflect all
adjustments (all of which are of a normal recurring nature) which are, in
the opinion of management, necessary for a fair presentation of the results
of the interim periods. The results for the interim periods are not
necessarily indicative of results to be expected for the year.
2. BUSINESS COMBINATIONS
During the quarter ended March 31, 2000, we acquired Birch and Davis
Holdings, Inc. The acquisition was accounted for under the purchase method
of accounting with assets acquired of $94.9 million and liabilities assumed
of $18.9 million for a net purchase price of $76.0 million. Birch and
Davis' results have been included in our consolidated financial statements
from the effective date of the purchase.
During the quarter ended December 31, 1999 we repurchased 273,000 shares of
our Class A Common Stock pursuant to a contractual right associated with
one of our fiscal year 1999 acquisitions. Those shares were purchased at an
average price of $44 per share and are accounted for as treasury shares.
During the quarter ended September 30, 1999, we acquired Consultec, LLC., a
subsidiary of General American Life Insurance Company. The acquisition was
accounted for under the purchase method of accounting with assets acquired
of $125.7 million (including cash and other liquid investments of $5.6
million) and liabilities assumed of $24.7 million for a net purchase price
of $101.0 million. Consultec's results have been included in our
consolidated financial statements from the effective date of the
acquisition.
4
<PAGE> 7
3. EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standard No. 128,
"Earnings per Share", the following table (in thousands except per share
amounts) sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Numerator for earnings per share (basic)-
Income available to common stockholders $ 27,836 $ 22,425 $ 79,308 $ 62,059
Effect of dilutive securities:
Interest on 4% convertible debt 1,538 1,536 4,616 4,609
---------- ---------- ---------- ----------
Numerator for earnings per share assuming
dilution - income available to common stockholders $ 29,374 $ 23,961 $ 83,924 $ 66,668
========== ========== ========== ==========
Denominator:
Weighted average shares outstanding (basic) 49,139 49,161 49,240 48,835
Effect of dilutive securities:
4% convertible debt 5,392 5,392 5,392 5,392
Stock options 1,127 1,494 1,241 1,315
Warrants and other -- -- -- 132
---------- ---------- ---------- ----------
Total potential common shares 6,519 6,886 6,633 6,839
---------- ---------- ---------- ----------
Denominator for earnings per share assuming
dilution 55,658 56,047 55,873 55,674
========== ========== ========== ==========
Earnings per common share (basic) $ .57 $ .46 $ 1.61 $ 1.27
========== ========== ========== ==========
Earnings per common share assuming dilution $ .53 $ .43 $ 1.50 $ 1.20
========== ========== ========== ==========
</TABLE>
4. ACCUMULATED DEPRECIATION AND AMORTIZATION
Property and equipment are stated net of accumulated depreciation of $149.4
million and $123.9 million at March 31, 2000 and June 30, 1999,
respectively. Additionally, goodwill, software and other intangibles are
stated net of accumulated amortization of $110.4 million and $81.8 million
at March 31, 2000 and June 30, 1999, respectively.
5. DEBT
Included in short-term and long-term debt at March 31, 2000 is $84 million
outstanding under a $100 million credit facility expiring in September 2000
and $186 million outstanding under a $200 million credit facility expiring
in July 2002. On May 12, 2000, we entered into a new $450 million credit
facility expiring December 31, 2004, which replaced these two existing
facilities.
6. NON-RECURRING ITEMS
In the third quarter of fiscal 2000, we recorded a $1.8 million net gain
related to the divestiture of a minority investment, which was recorded in
other non-operating income.
In the second quarter of fiscal 2000, we recorded $3.0 million of
accelerated expenses in connection with the consolidation of certain
business process outsourcing operations. These expenses include
approximately $2.6 million related to duplicate software and production
facilities (reflected in rent, lease and maintenance expense), $0.2 million
of unamortized leasehold improvements and write-offs of excess equipment
(reflected in depreciation and amortization expense) and $0.2 million for
severance payments for reductions in staff (reflected in wages and benefits
expense).
In January 1999, we sold a business unit of an acquired company to
CyberPlus Corporation ("Cyberplus"). As part of the consideration, we
received a $3.2 million promissory note due March 2000 and 2.1 million
warrants to purchase CyberPlus common stock. Given the financial
uncertainty surrounding CyberPlus, the note receivable was fully reserved.
In November 1999, CyberPlus obtained financing and repaid $3.0 million on
the promissory note in full, resulting in a $3.0 million gain recorded in
other non-operating income.
5
<PAGE> 8
7. SEGMENT INFORMATION
Based on the criteria set forth in Statement of Financial Accounting
Standard No. 131, "Disclosure about Segments of an Enterprise and Related
Information", we have two reportable segments: commercial and federal
government. Certain reclassifications have been made to the segment
disclosure as the result of changes to our reporting structure. Prior year
results have been restated for comparison purposes. The following is a
summary of certain financial information by reportable segment (in
thousands):
<TABLE>
<CAPTION>
THIRD QUARTER ENDED MARCH 31, 2000
- ----------------------------------
Federal
Commercial Government Corporate Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 351,739 $ 158,700 $ -- $ 510,439
Operating expense 287,542 145,244 4,363 437,149
------------ ------------ ------------ ------------
EBITDA(a) 64,197 13,456 (4,363) 73,290
Depreciation & amortization expense
excluding goodwill amortization 14,819 2,275 285 17,379
Goodwill amortization 5,311 596 -- 5,907
------------ ------------ ------------ ------------
Operating income $ 44,067 $ 10,585 $ (4,648) $ 50,004
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
THIRD QUARTER ENDED MARCH 31, 1999
- ----------------------------------
Federal
Commercial Government Corporate Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 299,827 $ 136,057 $ -- $ 435,884
Operating expense 246,735 124,288 6,120 377,143
------------ ------------ ------------ ------------
EBITDA(a) 53,092 11,769 (6,120) 58,741
Depreciation & amortization expense
excluding goodwill amortization 11,062 2,011 248 13,321
Goodwill amortization 3,843 568 -- 4,411
Operating income
------------ ------------ ------------ ------------
$ 38,187 $ 9,190 $ (6,368) $ 41,009
============ ============ ============ ============
</TABLE>
- ---------------------
(a) EBITDA consist of earnings before interest income, interest expense,
other non-operating income and expense, income taxes, depreciation and
amortization. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered
in isolation or as an alternative to net income as an indicator of a
company's performance or to cash flows from operating activities as a
measure of liquidity.
6
<PAGE> 9
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 2000
- --------------------------------
Federal
Commercial Government Corporate Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 982,122 $ 452,011 -- $ 1,434,133
Operating expense 808,447(b) 410,779 9,971 1,229,197(b)
------------ ------------ ------------ ------------
EBITDA(a) 173,675 41,232 (9,971) 204,936
Depreciation & amortization expense
excluding goodwill amortization 40,406(b) 6,591 829 47,826(b)
Goodwill amortization 14,225 1,794 -- 16,019
------------ ------------ ------------ ------------
Operating income $ 119,044 $ 32,847 $ (10,800) $ 141,091
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 1999
- --------------------------------
Federal
Commercial Government Corporate Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 785,850 $ 405,024 -- $ 1,190,874
Operating expense 648,915 366,327 12,634 1,027,876
------------ ------------ ------------ ------------
EBITDA(a) 136,935 38,697 (12,634) 162,998
Depreciation & amortization expense
excluding goodwill amortization 31,356 5,916 688 37,960
Goodwill amortization 9,416 1,703 -- 11,119
------------ ------------ ------------ ------------
Operating income $ 96,163 $ 31,078 $ (13,322) $ 113,919
============ ============ ============ ============
</TABLE>
- -------------------
(a) EBITDA consist of earnings before interest income, interest expense,
other non-operating income and expense, income taxes, depreciation and
amortization. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered
in isolation or as an alternative to net income as an indicator of a
company's performance or to cash flows from operating activities as a
measure of liquidity.
(b) During the second quarter of fiscal year 2000 (See Note 6), we
recorded $3.0 million of accelerated expenses in connection with the
consolidation of certain business process outsourcing operations.
7
<PAGE> 10
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. All statements, other than statements of historical facts, included in
this MD&A regarding our financial position, business strategy and plans and
objectives of our management for future operations are forward-looking
statements. These forward-looking statements rely on a number of assumptions
concerning future events and are subject to a number of uncertainties and other
factors, many of which are outside of our control, that could cause actual
results to materially differ from such statements. While we believe that the
assumptions concerning future events are reasonable, we caution that there are
inherent difficulties in predicting certain important factors, especially the
timing and magnitude of technological advances; the performance of recently
acquired businesses; the prospects for future acquisitions; the possibility that
a current customer could be acquired or otherwise be affected by a future event
that would diminish its information technology requirements; Year 2000 issues
affecting our business and our clients' business; the competition in the
information technology industry and the impact of such competition on pricing,
revenues and margins; the degree to which business entities continue to
outsource information technology and business processes; uncertainties
surrounding budget reductions or changes in funding priorities or existing
government programs and the cost of attracting and retaining highly skilled
personnel.
RESULTS OF OPERATIONS
The following table sets forth certain items from our consolidated statements of
income as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Expenses:
Wages and benefits 43.6 45.1 43.3 43.3
Services and supplies 30.5 28.9 30.6 30.3
Rent, lease and maintenance 10.4 11.5 10.7 11.6
Depreciation and amortization 4.6 4.0 4.5 4.1
Other operating expenses 1.1 1.1 1.0 1.1
-------- -------- -------- --------
Total operating expenses 90.2 90.6 90.1 90.4
-------- -------- -------- --------
Operating income 9.8 9.4 9.9 9.6
Interest expense 1.2 1.1 1.2 1.0
Other non-operating income, net (0.6) (0.4) (0.6) (0.2)
-------- -------- -------- --------
Pretax profit 9.2 8.7 9.3 8.8
Income tax expense 3.7 3.6 3.7 3.6
-------- -------- -------- --------
Net income 5.5% 5.1% 5.6% 5.2%
======== ======== ======== ========
</TABLE>
COMPARISON OF THE QUARTER ENDED MARCH 31, 2000 TO THE QUARTER ENDED MARCH 31,
1999
Revenues increased $74.6 million, or 17%, to $510.4 million in the quarter
ending March 31, 2000 (the third quarter of our 2000 fiscal year) from $435.9
million in the third quarter of fiscal 1999. Of the 17% increase in revenue,
approximately 9% was from internal growth and 8% was from acquisitions. Revenues
from our commercial segment increased $51.9 million, or 17%, over the third
quarter of fiscal 1999 resulting from our acquisition activity and new business
process outsourcing contracts, as well as existing technology outsourcing
contracts. Revenues from our federal government segment increased $22.6 million,
or 17%, primarily due to increased requirements under the Department of
Education's contract and new task orders under civilian agency contracts.
8
<PAGE> 11
Total operating expenses increased $65.6 million, or 17%, to $460.4 million for
the third quarter of fiscal 2000 as compared to the third quarter of fiscal
1999. Total operating expense as a percentage of revenue decreased from 90.6% in
the third quarter of fiscal 1999 to 90.2% in the third quarter of fiscal 2000.
Wages and benefits decreased as a percentage of revenue from 45.1% in the third
quarter of fiscal 1999 to 43.6% in the third quarter of fiscal 2000 due to a
change in revenue mix that included equipment sales and subcontracted work.
Wages and benefits in the third quarter of fiscal 2000 included $1.2 million of
severance related to the downsizing of workforce primarily within our business
process outsourcing group. Services and supplies as a percentage of revenue
increased from 28.9% in the third quarter of fiscal 1999 to 30.5% in the third
quarter of fiscal 2000 due to a higher component of subcontractor costs on the
Department of Education contract and equipment sales in the commercial segment.
Rent, lease and maintenance expense decreased from 11.5% in the third quarter of
fiscal 1999 to 10.4% in the third quarter of fiscal year 2000 as a result of the
change in business line mix from the acquisitions made during the last twelve
months, which have a smaller component of rent, lease and maintenance expense.
Depreciation and amortization increased from 4.0% in the third quarter of fiscal
1999 to 4.6% in the third quarter of fiscal 2000 primarily as a result of the
amortization of acquisition costs on recent acquisitions.
Operating income increased $9.0 million, or 22%, to $50.0 million in the third
quarter of fiscal 2000, as compared to the third quarter of fiscal 1999.
Operating income as a percentage of revenue increased to 9.8% in the third
quarter of 2000 from 9.4% in the third quarter of fiscal 1999.
Interest expense increased $1.3 million to $6.2 million in the third quarter of
fiscal 2000, compared to $4.9 million in the third quarter of fiscal 1999,
primarily due to an increase in interest rates and increased borrowings under
our credit facility to finance acquisitions.
Other non-operating income for the third quarter of fiscal 2000 includes the
recognition of a $1.8 million net gain on the sale of a minority investment (see
Note 6).
Our effective tax rate of approximately 40.3% in the third quarter of fiscal
2000 exceeded the federal statutory rate of 35%, due primarily to the
amortization of certain acquisition-related costs that are non-deductible for
tax purposes, plus the net effect of state income taxes.
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2000 TO THE NINE MONTHS ENDED
MARCH 31, 1999
Revenues increased $243.3 million, or 20%, for the nine months ended March 31,
2000 to $1.43 billion from $1.19 billion for the first nine months of 1999. Of
the 20% increase in revenue, approximately 10% was from internal growth and 10%
from acquisitions. Revenues from our commercial segment increased $196.3
million, or 25%, over fiscal 1999 primarily due to acquisitions and new business
process outsourcing contracts with customers in the retail, healthcare and
financial services industries. Revenues from our federal government segment
increased $47.0 million, or 12%, over fiscal 1999 due to increased requirements
under the Department of Education's contract and new task orders under civilian
agency contracts.
Total operating expenses increased $216.1 million, or 20%, to $1.29 billion for
the first nine months of fiscal 2000 as compared to the first nine months of
fiscal 1999, as a result of our increase in revenues. As a percentage of
revenue, operating expenses decreased slightly to 90.1% from 90.4% in the same
period in fiscal 1999 as a result of expansion through internal growth and
acquisitions in our business process outsourcing service lines. Service and
supplies as a percentage of revenue, increased from 30.3% in the first nine
months of fiscal 1999 to 30.6% in the first nine months of fiscal 2000 due to a
higher component of subcontractor cost on the Department of Education contract
and higher ATM transactions. Excluding $2.6 million of accelerated expenses
recorded in the second quarter of fiscal 2000 (see note 6), rent, lease and
maintenance expense decreased as a percentage of revenue to 10.6% in the first
nine months of fiscal 2000 from 11.6% in the first nine months of fiscal 1999
due to current year acquisitions having a lower component of rent, lease and
maintenance. Depreciation and amortization increased as a percentage of revenue
to 4.5% in the first nine months of fiscal 2000 compared to 4.1% primarily due
to the amortization of current year acquisitions costs.
Operating income increased $27.2 million, or 24%, to $141.1 million for the
first nine months of fiscal 2000 as compared to the first nine months of fiscal
1999. Operating income as a percentage of revenue increased from 9.6% in the
first nine months of fiscal 1999 to 9.9% in the first nine months of fiscal
2000.
Interest expense increased $4.6 million to $16.7 million in the first nine
months of fiscal 2000, compared to $12.1 million in the first nine months of
fiscal 1999, primarily due to an increase in interest rates and additional debt
incurred for acquisitions.
Other non-operating income for the first nine months of fiscal 2000 includes the
recognition of a $3.0 million gain on the collection of a fully reserved note
receivable from the sale of a business unit in fiscal 1999 and the recognition
of a $1.8 million net gain on the sale of a minority investment.
9
<PAGE> 12
The effective tax rate of approximately 40.4% in the first nine months of fiscal
2000 exceeded the federal statutory rate of 35% due primarily to the
amortization of certain acquisition-related costs that are non-deductible for
tax purposes, plus the net effect of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, our liquid assets, consisting of cash and cash equivalents,
totaled $24.1 million compared to $32.8 million at June 30, 1999. These liquid
assets included $3.6 million and $4.2 million borrowed under a revolving credit
facility for use in our automated teller machines at March 31, 2000 and June 30,
1999, respectively. Working capital decreased to $188.1 million at March 31,
2000 from $194.2 million at June 30, 1999 due to the use of short-term financing
for the acquisition of Birch & Davis.
Net cash provided by operating activities for the first nine months of fiscal
2000, increased to $97.9 million as compared with $91.6 million in the first
nine months of fiscal 1999 due primarily to the increase in net income from the
prior period and better collections on accounts receivable. Net cash flow used
in investing activities decreased by $21.0 million in the first nine months of
fiscal 2000 compared to the first nine months of fiscal 1999 primarily due to a
decrease in payments for acquisitions and collections on notes receivable. Net
cash provided by financing activities in the first nine months of fiscal 2000
was $152.3 million as compared to $155.9 million in the first nine months of
fiscal 1999, and decreased due to decreased proceeds from stock option exercises
in the first nine months of fiscal 2000 as compared to the prior period.
Included in net cash used in investing activities during the nine months ended
March 31, 2000 is $12.0 million used to repurchase 273,000 Class A Common shares
related to a fiscal 1999 acquisition (see Note 2).
In September 1999, we entered into a new $100 million credit facility agreement,
which matures on September 30, 2000. With this $100 million credit facility, our
existing $200 million credit facility, and after considering outstanding letters
of credit, we had approximately $22 million available for use under the credit
facilities at March 31, 2000. On May 12, 2000, we entered into a new $450
million credit facility agreements, expiring December 31, 2004, which replaced
our two existing facilities. As of this date, we had approximately $178 million
available for use under this credit facility.
Our management believes that available cash and cash equivalents, together with
cash generated from operations and available borrowings under various credit
facilities, will provide adequate funds for our anticipated internal growth
needs, including working capital expenditures. Our management also believes that
cash provided by operations will be sufficient to satisfy all existing debt
obligations as they become due. However, we intend to continue our growth
through acquisitions and from time to time to engage in discussions with
potential acquisition candidates, which could require significant commitments of
capital. In order to pursue such opportunities, we may be required to incur debt
or to issue additional potentially dilutive securities in the future. No
assurance can be given as to our future acquisition and expansion opportunities
and how such opportunities will be financed.
YEAR 2000
We did not experience any significant malfunctions or errors in our operating or
business systems when the date changed from 1999 to 2000. Based on operations
since January 1, 2000, we do not expect any significant impact to ongoing
business as a result of the "Year 2000 issue." However, it is possible that the
full impact of the date change, which was of concern due to computer programs
that use two digits instead of four digits to define years, has not been fully
recognized. For example, it is possible that Year 2000 or similar issues may
occur with billing, payroll, financial closings at month, quarterly, or year
end. We believe that any such problems are likely to be minor and correctable.
In addition, we could still be negatively affected if our customers or suppliers
are adversely affected by the Year 2000 or similar issues. We currently are not
aware of any significant Year 2000 or similar problems that have arisen for our
customers and suppliers.
We expended $15 million on Year 2000 readiness efforts from 1997 to 1999. These
efforts included replacing some outdated, noncompliant hardware and noncompliant
software as well as identifying and remediating Year 2000 problems.
Only an immaterial amount of our revenues were earned from providing Year 2000
services; however as a result of our customers preparing for Year 2000, large
outsourcing contract awards were delayed during calendar year 1999. This delay
had a major impact on our internal revenue growth for the third quarter of
fiscal 2000 and is expected to continue into our fourth fiscal quarter.
10
<PAGE> 13
NEW ACCOUNTING STANDARDS
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an
interpretation of APB Opinion No. 25. This interpretation clarifies the
definition of employee for purposes of applying APB No. 25, the criteria for
determining whether a plan qualifies as a non-compensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. This interpretation is effective July 1, 2000. We
apply the provisions of APB Opinion 25 in accounting for our stock based
compensation and will apply the guidance in Interpretation No. 44 following its
effective date.
In June 1999, the Financial Accountings Standards Board issued Statement of
Financial Accounting Standards No. 137 "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the effective date of the FASB Statement
No. 133". SFAS 137 defers the effective date of SFAS 133 "Accounting for
Derivatives and Hedging Activities" to fiscal years beginning after June 15,
2000. We believe the adoption of SFAS 133 will not have a material impact on our
future earnings and financial position.
In April 1998, Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities", was issued. This SOP provides guidance on the financial reporting
of start-up and organization costs and requires that these costs be expensed as
incurred. The provisions of SOP 98-5 are effective for financial statements for
fiscal years beginning after December 15, 1998. The adoption of SOP 98-5 has not
had a material impact on our financial statements. We adopted the provisions of
this SOP on July 1, 1999.
11
<PAGE> 14
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
Gibralter 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 we
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 1997 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.
12
<PAGE> 15
Item 6: Exhibits and Reports on Form 8-K
a.) Exhibits (exhibits reference numbers refer to Item 601 of Regulation S-K)
* 27. Financial Data Schedule
b.) Reports on Form 8-K
None
-------------------------------------
* Filed herewith
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 15th day of May 2000.
AFFILIATED COMPUTER SERVICES, INC.
By: /s/ Mark A. King
-----------------------------
Mark A. King
Executive Vice President and
Chief Financial Officer
14
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 FINANCIAL DATA SCHEDULE
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> JUN-30-2000
<CASH> 20,486
<SECURITIES> 0
<RECEIVABLES> 389,127
<ALLOWANCES> 4,655
<INVENTORY> 14,924
<CURRENT-ASSETS> 487,797
<PP&E> 377,341
<DEPRECIATION> 169,397
<TOTAL-ASSETS> 1,459,293
<CURRENT-LIABILITIES> 297,434
<BONDS> 420,416
0
0
<COMMON> 495
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,495,293
<SALES> 510,439
<TOTAL-REVENUES> 510,439
<CGS> 0
<TOTAL-COSTS> 460,435
<OTHER-EXPENSES> (2,818)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,192
<INCOME-PRETAX> 46,630
<INCOME-TAX> 18,794
<INCOME-CONTINUING> 27,836
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,836
<EPS-BASIC> .57
<EPS-DILUTED> .53
</TABLE>
