<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period from to
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Commission file number 0-24787
AFFILIATED COMPUTER SERVICES, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 51-0310342
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2828 North Haskell, Dallas, Texas 75204
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (214) 841-6111
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
NUMBER OF SHARES OUTSTANDING AS
TITLE OF EACH CLASS OF OCTOBER 9, 2000
------------------------------------- --------------------------------
<S> <C> <C>
Class A Common Stock, $.01 par value 49,825,732
Class B Common Stock, $.01 par value 3,299,686
----------
53,125,418
</TABLE>
<PAGE> 2
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
------- --------------------- ------
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 2000 and
June 30, 2000 1
Consolidated Statements of Income for the Three Months
Ended September 30, 2000 and 1999 2
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 2000 and 1999 3
Notes to Consolidated Financial Statements 4 - 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7 - 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 10
</TABLE>
<PAGE> 3
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
(UNAUDITED) (AUDITED)
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,894 $ 44,521
Accounts receivable, net 402,990 399,853
Receivable from divestitures -- 180,335
Inventory 9,008 7,324
Prepaid expenses and other current assets 73,714 71,290
Net assets held for sale 268 43,362
Deferred taxes 17,783 25,189
----------- -----------
Total current assets 522,657 771,874
Property and equipment, net 206,595 176,490
Goodwill, software and other intangibles, net 656,983 667,807
Long-term investments and other assets 42,870 40,275
----------- -----------
Total assets $ 1,429,105 $ 1,656,446
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,457 $ 47,901
Accrued compensation and benefits 52,041 69,208
Other accrued liabilities 137,745 156,720
Income taxes payable 14,710 60,671
Short-term debt 1,966 2,877
Current portion of unearned revenue 19,180 20,865
----------- -----------
Total current liabilities 248,099 358,242
Convertible notes due 2005 230,000 230,000
Long-term debt 140,779 295,619
Deferred taxes 37,048 35,316
Other long-term liabilities 24,599 25,892
----------- -----------
Total liabilities 680,525 945,069
----------- -----------
Stockholders' equity:
Class A common stock 471 463
Class B common stock 33 33
Additional paid-in capital 326,570 321,525
Retained earnings 430,704 400,200
Accumulated other comprehensive income (net of tax) 1,479 --
Treasury stock (10,677) (10,844)
----------- -----------
Total stockholders' equity 748,580 711,377
----------- -----------
Total liabilities and stockholders' equity $ 1,429,105 $ 1,656,446
=========== ===========
</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
SEPTEMBER 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Revenues $ 478,626 $ 447,686
--------- ---------
Expenses:
Wages and benefits 216,189 194,732
Services and supplies 129,505 132,926
Rent, lease and maintenance 62,706 50,673
Depreciation and amortization 21,092 19,390
Other operating expenses 6,961
4,288
--------- ---------
Total operating expenses 436,453 402,009
--------- ---------
Operating income 42,173 45,677
Interest expense 5,035 4,828
Other non-operating income, net (13,366) (1,141)
--------- ---------
Pretax profit 50,504 41,990
Income tax expense 19,949 16,964
--------- ---------
Net income $ 30,555 $ 25,026
========= =========
Earnings per common share:
Basic $ .62 $ .51
========= =========
Diluted $ .57 $ .47
========= =========
Shares used in computing earnings per common share:
Basic 49,438 49,261
Diluted 56,207 56,095
</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>
THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $30,555 $ 25,026
------- ---------
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation and amortization 21,092 19,390
Gain on sale of investment (12,785) --
Other 334 (219)
Changes in assets and liabilities, net of effects from acquisitions:
Decrease in ATM cash -- 800
Increase in accounts receivable (4,324) (6,044)
Increase in inventory (1,684) (1,760)
Increase in prepaid expenses and other current assets (4,663) (5,893)
Change in deferred taxes 8,869 1,643
Decrease in other long-term assets 711 189
Decrease in accounts payable (27,288) (6,183)
Decrease in accrued compensation and benefits (17,400) (20,235)
Decrease in other accrued liabilities (4,766) (3,293)
Change in income taxes payable (43,197) 11,876
Increase in unearned revenue (2,930) 609
Decrease in other long-term liabilities 22 (1,484)
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Total adjustments (88,009) (10,604)
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Net cash provided (used) by operating activities (57,454) 14,422
--------- ---------
Cash flows from investing activities:
Purchases of property, equipment and software, net of sales (24,803) (16,551)
Payments for acquisitions, net of cash acquired (11,463) (98,647)
Proceeds from divestitures, net of transaction costs 209,835 --
Purchase of investments (1,535) --
Proceeds from sale of investment 17,100 --
Additions to other intangible assets (4,980) (2,779)
Additions to notes receivable (389) (202)
Proceeds received on notes receivable 1,641 2,032
--------- ---------
Net cash provided (used) by investing activities 185,406 (116,147)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt, net of issuance costs 80,182 99,040
Repayments of debt (236,051) (16,554)
Proceeds from stock options exercised 2,290 905
Net repayment of ATM debt -- (800)
Other, net -- (447)
--------- ---------
Net cash provided (used) by financing activities (153,579) 82,144
--------- ---------
Net decrease in cash and cash equivalents (25,627) (19,581)
Cash and cash equivalents at beginning of period 44,521 28,580
--------- ---------
Cash and cash equivalents at end of period $ 18,894 $ 8,999
========= =========
</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 18,000 people in 20 countries.
The financial information presented should be read in conjunction with our
consolidated financial statements for the year ended June 30, 2000. 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. DERIVATIVES AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and
Hedging Activities". The statement requires us to record all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through earnings. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivatives are either recognized in earnings or are recognized in other
comprehensive income until the hedged item is recognized in earnings. In
June 1999, the Financial Accounting 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", which deferred the effective date of SFAS No. 133
to fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133
on July 1, 2000 resulted in our recording $2.4 million in "Long-term
investments and other assets" representing the fair market value of our
interest rate hedges that expire in December 2001. In addition, we
recognized $1.5 million, net of tax effect, in other comprehensive income,
which appears as a separate component of Stockholder's Equity as
"Accumulated other comprehensive income".
3. COMPREHENSIVE INCOME
We have adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." The objective of SFAS No. 130 is to report
a measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with owners. Comprehensive income is the total of net income and other
non-owner charges in equity.
The components of comprehensive income are as follows (in the thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
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<S> <C> <C>
Net income $30,555 $25,026
Change in fair value of derivatives 1,479 --
(net of tax effect of $967)
------- -------
Comprehensive income $32,034 $25,026
======= =======
</TABLE>
4
<PAGE> 7
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. 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
SEPTEMBER 30,
------------------
2000 1999
------- -------
<S> <C> <C>
Numerator:
Numerator for earnings per share (basic) -
Income available to common stockholders $30,555 $25,026
Effect of dilutive securities:
Interest on 4% convertible debt 1,540 1,540
------- -------
Numerator for earnings per share assuming
Dilution - income available to common stockholders $32,095 $26,566
======= =======
Denominator:
Weighted average shares outstanding (basic) 49,438 49,261
Effect of dilutive securities:
4% convertible debt 5,392 5,392
Stock options 1,377 1,442
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Total potential common shares 6,769 6,834
------- -------
Denominator for earnings per share assuming
Dilution 56,207 56,095
======= =======
Earnings per common share (basic) $ .62 $ .51
======= =======
Earnings per common share assuming dilution $ .57 $ .47
======= =======
</TABLE>
5. ACCUMULATED DEPRECIATION AND AMORTIZATION
Property and equipment are stated net of accumulated depreciation of $156.6
million and $148.6 million at September 30, 2000 and June 30, 2000,
respectively. Additionally, goodwill, software and other intangibles are
stated net of accumulated amortization of $106.4 million and $97.3 million
at September 30, 2000 and June 30, 2000, respectively.
6. NON-RECURRING ITEMS
In the first quarter of fiscal 2001, we recorded a $12.8 million gain in
"Other non-operating income, net" related to the sale of a non-strategic
minority investment in ACS Merchant Services, Inc.
In the first quarter of fiscal 2001, we recorded a $10.4 million charge in
connection with the termination of certain hardware leases and disaster
recovery contracts, which is included in "Rent, lease and maintenance"
expense. In addition, we recorded a $2.1 million charge for non-recurring
litigation costs and the writedown of property held-for-sale to market value
to "Other operating expense."
5
<PAGE> 8
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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):
FIRST QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Federal
Commercial Government Corporate Consolidated
---------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Revenue $301,015(a) $177,611 $ -- $478,626(a)
Operating expense 252,005(b) 160,417 2,939 415,361
-------- -------- -------- --------
EBITDA(c) 49,010 17,194 (2,939) 63,265
Depreciation & amortization expense
excluding goodwill amortization 12,238 2,732 336 15,306
Goodwill amortization 4,629 1,157 -- 5,786
-------- -------- -------- --------
Operating income $ 32,143 $ 13,305 $ (3,275) $ 42,173
======== ======== ======== ========
</TABLE>
FIRST QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Federal
Commercial Government Corporate Consolidated
---------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Revenue $307,241(a) $140,445 $ -- $447,686(a)
Operating expense 252,780 126,917 2,922 382,619
-------- -------- -------- --------
EBITDA(c) 54,461 13,528 (2,922) 65,067
Depreciation & amortization expense
excluding goodwill amortization 12,272 2,036 262 14,570
Goodwill amortization 4,239 581 -- 4,820
-------- -------- -------- --------
Operating income $ 37,950 $ 10,911 $ (3,184) $ 45,677
======== ======== ======== ========
</TABLE>
----------
(a) Revenue includes $79.7 million and $7.5 million at September 30, 1999 and
2000, respectively, related to the divestitures announced in June 2000.
(b) Operating expense includes $12.5 million of non-recurring charges related
to hardware lease buyouts and disaster recovery contracts, legal fees and a
writedown of property held-for-sale to market value (see Note 6).
(c) 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
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; 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.
SIGNIFICANT DEVELOPMENTS
During the fourth quarter of fiscal 2000, we entered into a formal plan to
divest certain business units consisting primarily of our ATM processing
business and our commercial staffing business due to the fact that these
businesses were no longer strategic to our long-term goal of providing
information technology and business process outsourcing services. At September
30, 2000, we had completed the sale of and received the proceeds from these
divestitures, except for the sale of one small business unit representing $0.3
million, which is presented on the balance sheet under the caption "Net assets
held for sale." This remaining transaction was completed in October 2000. As a
result of the proceeds from these divestitures, we paid down our debt by
approximately $155.0 million at September 30, 2000.
During the first quarter of fiscal 2001, we recorded a $12.8 million gain in
"Other non-operating income, net" associated with the sale of a non-strategic
minority investment in ACS Merchant Services, Inc. In addition, we recorded
non-recurring charges totaling $12.5 million during the first quarter of fiscal
2001 related to the termination of certain computer equipment leases and
consolidation of disaster recovery contracts ($10.4 million recorded in "Rent,
lease and maintenance") and litigation expense and the writedown of a facility
held-for-sale to market value ($2.1 million recorded in "Other operating
expense").
RESULTS OF OPERATIONS
The following table sets forth certain items from our consolidated statements of
income as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
---- ----
<S> <C> <C>
Revenues 100% 100%
Expenses:
Wages and benefits 45.2 43.5
Services and supplies 27.1 29.7
Rent, lease and maintenance 13.1 11.3
Depreciation and amortization 4.4 4.3
Other operating expenses 1.4 1.0
----- -----
Total operating expenses 91.2 89.8
----- -----
Operating income 8.8 10.2
Interest expense 1.0 1.1
Other non-operating income, net (2.8) (.3)
----- -----
Pretax profit 10.6 9.4
Income tax expense 4.2 3.8
----- -----
Net income 6.4% 5.6%
===== =====
</TABLE>
7
<PAGE> 10
COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 2000 TO THE QUARTER ENDED
SEPTEMBER 30, 1999
The recently divested business units contributed $7.5 million and $79.7 million
in revenue for the first quarter of fiscal 2001 and 2000, respectively.
Excluding these divested units, revenue increased 28% over the prior year to
$471.2 million with half of the increase, or 14%, derived from internal growth.
Excluding divested revenue, revenue from our commercial segment increased 29%
primarily due to signing new state Medicaid and Welfare benefit program
management contracts, as well as new information technology contract signings.
Revenue from our federal government segment increased 27% primarily due to the
acquisition of Intellisource in the fourth quarter of fiscal 2000.
Excluding the $12.5 million non-recurring charges (see "Significant
Developments"), operating margins increased 1.2% from 10.2% to 11.4% in the
first quarter of fiscal 2001 as a result of the recently completed divestiture
program announced in the fourth quarter of fiscal 2000. Wages and benefits as a
percentage of revenue increased from 43.5% to 45.2% in first quarter of fiscal
2001 due to the divestitures, which had a smaller component of wages and benefit
expense, and our continued focus on delivering business process outsourcing
services, which has a larger component of wages and benefits expense. Services
and supplies expense as a percentage of revenue decreased 2.6% , from 29.7% to
27.1% , in the first quarter of fiscal 2001 due to the divestiture of the ATM
processing business, which had a large component of interchange fees paid to ATM
distributors. After adjusting for the $10.4 million of non-recurring charges,
rent, lease and maintenance expense decreased from 11.3% to 10.9% in the first
quarter of fiscal 2001.
Other non-operating income for the first quarter of fiscal 2001 includes the
recognition of a $12.8 million gain associated with the sale of a non-strategic
minority investment in ACS Merchant Services, Inc.
The effective tax rate of approximately 39.5% in the first three months of
fiscal 2001 exceeded the federal statutory rate of 35% due primarily to the
amortization of certain acquisition-related costs that are non-deductible for
tax purposes, plus the net effect of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had cash and cash equivalents totaling $18.9 million
compared to $44.5 million at June 30, 2000. Included in the cash balances at
September 30, 2000 and June 30, 2000 are $21.2 million and $22.3 million,
respectively, of restricted cash held on behalf of governmental customers.
Working capital decreased to $274.6 million at September 30, 2000 from $413.6
million at June 30, 2000 due primarily to the collection of proceeds from
divestitures and the subsequent paydown of long-term debt.
During the first quarter of fiscal 2001, we paid approximately $50.0 million in
incomes taxes related to our net gain from our divestiture activity, which is
reflected in cash flows from operations. In addition, we paid approximately
$10.4 million of non-recurring lease termination charges during the quarter (see
Note 6). After adjusting for these items, our net cash provided by operating
activities would have been approximately $3.0 million for the first quarter of
fiscal 2001. Historically, our operating cash flow during the first quarter of
our fiscal year has been low due to the timing of annual bonus payments,
interest payments and income tax payments. Cash flow from investing activities
increased $301.6 million due to the collection of proceeds from divestitures and
the first quarter fiscal 2000 acquisition of Consultec, LLC. The proceeds from
the divestitures were used to pay down debt, resulting in a $236.5 million
increase in net cash used by financing activities.
In order to manage interest costs and exposure to changing interest rates, we
hold two interest rate hedges initiated in December 1998, and expiring in
December 2001. Each hedge is structured such that we pay a fixed rate of
interest of 4.54% and receive a floating rate of interest based on one month
LIBOR. The notional amount of the two hedges totals $100,000,000 and the fair
market value of the two hedges at September 30, 2000 is $2,446,000, which is
recorded in "Long-term investments and other assets". The fair value of each
interest rate hedge reflects termination cash value.
Management believes that available cash and cash equivalents, together with cash
generated from operations and available borrowings under our credit facility,
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 acquisitions and expansion opportunities and how such
opportunities will be financed.
8
<PAGE> 11
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 We apply the provisions of APB Opinion 25 in
accounting for our stock-based compensation and effective July 1, 2000 we began
applying the guidance in Interpretation No. 44. We do not believe the
application of this interpretation will have a material impact on our future
earnings and financial position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements". SAB 101 provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements and required adoption no later than the fourth quarter of fiscal
2001. We do not believe the adoption of SAB 101 will have a material impact on
our future earnings and financial position.
PART II
Item 1. 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 $17,000,000, 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 meritorious defense to
all or a substantial portion of the plaintiffs' claims. We filed our appeal of
the judgment on March 15, 1999 and are vigorously pursuing the appeal. The
plaintiffs also filed a notice of appeal and are pursuing their 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
large outsourcing clients, filed lawsuits alleging that we had breached certain
contractual obligations. On February 25, 1999, we filed a lawsuit against
Caremark and its parent, Caremark Rx, Inc., alleging that Caremark had no basis
for its allegations and that Caremark Rx had tortiously interfered with the
Caremark contract. On September 13, 2000, these lawsuits were settled by
agreements of the parties, which resulted in a contract extension through August
31, 2006, and a dismissal of all claims.
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 1998 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 our
financial position or results of operations.
We are subject to certain other legal proceedings, claims and disputes which
arise in the ordinary course of business. Although we cannot predict the
outcomes of these legal proceedings, management does not believe these actions,
in the aggregate, will have a material adverse effect on our financial position,
results of operations or liquidity.
9
<PAGE> 12
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits (exhibits reference numbers refer to Item 601 of Regulation
S-K)
* 27. Financial Data Schedule
b.) Reports on Form 8-K
On September 30, 2000, we filed a current report on Form 8-K
announcing the settlement of our lawsuit with Caremark.
On July 24, 2000, we filed a current report on Form 8-K announcing the
sale of the ATM business.
-------------------------------------
* Filed herewith
10
<PAGE> 13
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 14th day of November 2000.
AFFILIATED COMPUTER SERVICES, INC.
By: /s/ Mark A. King
----------------------
Mark A. King
Executive Vice President and
Chief Financial Officer
11
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
