<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1999
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period from __________ to __________
Commission file number 0-24787
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AFFILIATED COMPUTER SERVICES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0310342
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2828 North Haskell, Dallas, Texas 75204
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 841-6111
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
NUMBER OF SHARES OUTSTANDING AS OF
TITLE OF EACH CLASS FEBRUARY 10, 2000
------------------------------------ ----------------------------------
<S> <C>
Class A Common Stock, $.01 par value 46,126,538
Class B Common Stock, $.01 par value 3,299,686
----------
49,426,224
</TABLE>
<PAGE> 2
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C> <C> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1999 and
June 30, 1999 1
Consolidated Statements of Income for the Three Months and Six Months
Ended December 31, 1999 and 1998 2
Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 1999 and 1998 3
Notes to Consolidated Financial Statements 4 - 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7 - 10
PART II. OTHER INFORMATION
Item 3. Legal Proceeding 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
<PAGE> 3
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,923 $ 28,580
ATM cash 4,700 4,200
Accounts receivable, net 338,242 320,121
Inventory 14,800 13,778
Prepaid expenses and other current assets 50,245 41,473
Deferred taxes 5,879 7,795
--------------- ---------------
Total current assets 440,789 415,947
Property and equipment, net 169,839 163,240
Goodwill, software and other intangibles, net 694,992 613,272
Long-term investments and other assets 33,111 31,141
--------------- ---------------
Total assets $ 1,338,731 $ 1,223,600
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 29,980 $ 36,723
Accrued compensation and benefits 50,445 63,121
Other accrued liabilities 104,531 89,747
Income taxes payable 15,419 9,861
Current portion of long-term debt 11,693 6,882
Current portion of unearned revenue 14,569 15,387
--------------- ---------------
Total current liabilities 226,637 221,721
Convertible notes due 2005 230,000 230,000
Long-term debt 186,971 119,106
Deferred taxes 38,112 32,507
Other long-term liabilities 8,402 12,845
--------------- ---------------
Total liabilities 690,122 616,179
--------------- ---------------
Stockholders' equity:
Class A common stock 461 460
Class B common stock 33 33
Additional paid-in capital 317,987 316,202
Treasury stock (12,327) (303)
Retained earnings 342,455 291,029
--------------- ---------------
Total stockholders' equity 648,609 607,421
--------------- ---------------
Total liabilities and stockholders' equity $ 1,338,731 $ 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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 476,008 $ 391,634 $ 923,694 $ 754,990
------------ ------------ ------------ ------------
Expenses:
Wages and benefits 203,383 165,025 398,115 319,152
Services and supplies 150,594 122,441 283,520 234,951
Rent, lease and maintenance 50,672 45,190 101,345 87,895
Depreciation and amortization 21,169 15,890 40,559 31,347
Other operating expenses 4,780 5,174 9,068 8,735
------------ ------------ ------------ ------------
Total operating expenses 430,598 353,720 832,607 682,080
------------ ------------ ------------ ------------
Operating income 45,410 37,914 91,087 72,910
Interest expense 5,631 3,809 10,459 7,168
Other non-operating income, net (4,593) (876) (5,734) (1,164)
------------ ------------ ------------ ------------
Pretax profit 44,372 34,981 86,362 66,906
Income tax expense 17,926 14,342 34,890 27,272
------------ ------------ ------------ ------------
Net income $ 26,446 $ 20,639 $ 51,472 $ 39,634
============ ============ ============ ============
Earnings per common share:
Basic $ .54 $ .42 $ 1.04 $ .82
============ ============ ============ ============
Diluted $ .50 $ .40 $ .97 $ .77
============ ============ ============ ============
Shares used in computing earnings
per common share:
Basic 49,319 48,741 49,290 48,488
Diluted 55,866 55,416 55,980 55,304
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 51,472 $ 39,634
------------ ------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 40,559 31,347
Gain on collection of note receivable (3,000) --
Other (839) 1,063
Changes in assets and liabilities, net of effects from acquisitions:
Increase in ATM cash (500) (900)
(Increase) decrease in accounts receivable 11,207 (26,102)
Increase in inventory (1,022) (4,189)
Increase in prepaid expenses and other current assets (6,549) (7,909)
Change in deferred taxes 7,521 10,794
Increase in other long-term assets (2,791) (94)
Increase (decrease) in accounts payable (7,999) 4,207
Decrease in accrued compensation and benefits (18,187) (5,745)
Increase in other accrued liabilities 3,562 9,679
Change in income taxes receivable/payable 5,792 (2,750)
Increase (decrease) in unearned revenue (3,821) 489
Decrease in other long-term liabilities (774) (2,883)
------------ ------------
Total adjustments 23,159 7,007
------------ ------------
Net cash provided by operating activities 74,631 46,641
------------ ------------
Cash flows from investing activities:
Purchases of property, equipment and software, net of sales (29,800) (30,507)
Payments for acquisitions, net of cash acquired (112,953) (117,052)
Additions to other intangible assets (5,666) (5,162)
Additions to notes receivable (1,553) --
Proceeds received on notes receivable 6,034 --
Other (987) (1,664)
------------ ------------
Net cash used in investing activities (144,925) (154,385)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of issuance
costs 115,040 182,007
Repayments of long-term debt (48,484) (9,404)
Proceeds from stock options exercised and related tax
benefits 2,271 5,068
Net borrowings of ATM debt 500 900
Other, net (690) (461)
------------ ------------
Net cash provided by financing activities 68,637 178,110
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,657) 70,366
Cash and cash equivalents at beginning of period 28,580 75,888
------------ ------------
Cash and cash equivalents at end of period $ 26,923 $ 146,254
============ ============
</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
provide a full range of information technology services including technology
outsourcing, business process outsourcing and professional and systems
integration services primarily in North America, as well as Central America,
South America, Europe and the Middle East.
The financial information presented should be read in conjunction with our
consolidated financial statements for the year ended June 30, 1999. The
foregoing unaudited consolidated financial statements reflect all
adjustments (all of which are of a normal recurring nature) which are, in
the opinion of management, necessary for a fair presentation of the results
of the interim periods. The results for the interim periods are not
necessarily indicative of results to be expected for the year.
2. BUSINESS COMBINATIONS
During the quarter ended September 30, 1999, we acquired Consultec, LLC., a
subsidiary of General American Life Insurance Company. The acquisition was
accounted for under the purchase method of accounting with assets acquired
of $125.7 million (including cash and other liquid investments of $5.6
million) and liabilities assumed of $24.7 million for a net purchase price
of $101.0 million. Consultec's results have been included in our
consolidated financial statements from the effective date of the
acquisition.
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.
3. EARNINGS PER SHARE
In accordance with the Statement of Financial Accounting Standard No. 128,
"Earnings per Share", the following table (in thousands except per share
amounts) sets forth the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Numerator for earnings per share (basic) -
Income available to common stockholders $ 26,446 $ 20,639 $ 51,472 $ 39,634
Effect of dilutive securities:
Interest on 4% convertible debt 1,538 1,538 3,078 3,075
---------- ---------- ---------- ----------
Numerator for earnings per share assuming
dilution - income available to common stockholders $ 27,984 $ 22,177 $ 54,550 $ 42,709
========== ========== ========== ==========
Denominator:
Weighted average shares outstanding (basic) 49,319 48,741 49,290 48,488
Effect of dilutive securities:
4% convertible debt 5,392 5,392 5,392 5,392
Stock options 1,155 1,250 1,298 1,225
Warrants and other -- 33 -- 199
---------- ---------- ---------- ----------
Total potential common shares 6,547 6,675 6,690 6,816
---------- ---------- ---------- ----------
Denominator for earnings per share assuming
dilution 55,866 55,416 55,980 55,304
========== ========== ========== ==========
Earnings per common share (basic) $ .54 $ .42 $ 1.04 $ .82
========== ========== ========== ==========
Earnings per common share assuming dilution $ .50 $ .40 $ .97 $ .77
========== ========== ========== ==========
</TABLE>
4
<PAGE> 7
4. ACCUMULATED DEPRECIATION AND AMORTIZATION
Property and equipment are stated net of accumulated depreciation of $139.2
million and $123.9 million at December 31, 1999 and June 30, 1999,
respectively. Additionally, goodwill, software and other intangibles are
stated net of accumulated amortization of $101.7 million and $81.8 million
at December 31, 1999 and June 30, 1999, respectively.
5. NON-RECURRING ITEMS
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.
6. SEGMENT INFORMATION
Based on the criteria set forth in SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information", we have two reportable segments:
commercial and federal government. The following is a summary of certain
financial information by reportable segment (in thousands):
SECOND QUARTER ENDED DECEMBER 31, 1999
--------------------------------------
<TABLE>
<CAPTION>
Federal Corporate &
Commercial Government Eliminations(a) Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 321,731 $ 157,593 $ (3,316) $ 476,008
Operating expense 267,344(c) 142,715 (630) 409,429(c)
---------- ---------- ---------- ----------
EBITDA(b) 54,387 14,878 (2,686) 66,579
Depreciation & amortization expense
excluding goodwill amortization 13,032(c) 2,563 282 15,877(c)
Goodwill amortization expense 4,675 617 -- 5,292
---------- ---------- ---------- ----------
Operating Income $ 36,680 $ 11,698 $ (2,968) $ 45,410
========== ========== ========== ==========
</TABLE>
- -----------------------
(a) Included in revenue and operating expense are elimination entries related
to the sale of information technology service and computer hardware from
the commercial segment to the federal government segment.
(b) EBITDA consist of earnings before interest income, interest expense, other
non-operating income and expense, income taxes, depreciation and
amortization. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered in
isolation or as an alternative to net income as an indicator of a company's
performance or to cash flows from operating activities as a measure of
liquidity.
(c) During the second quarter of fiscal year 2000 (See Note 5), we recorded
$3.0 million of accelerated expenses in connection with the consolidation
of certain business process outsourcing operations.
5
<PAGE> 8
SECOND QUARTER ENDED DECEMBER 31, 1998
-------------------------------------------------
<TABLE>
<CAPTION>
Federal Corporate &
Commercial Government Eliminations(a) Consolidated
---------- ---------- --------------- ------------
<S> <C> <C> <C> <C>
Revenue $ 252,583 $ 142,697 $ (3,646) $ 391,634
Operating expense 209,259 129,236 (665) 337,830
---------- ---------- ---------- ----------
EBITDA (b) 43,324 13,461 (2,981) 53,804
Depreciation & amortization expense
excluding goodwill amortization 10,100 2,014 241 12,355
Goodwill amortization 2,967 568 -- 3,535
---------- ---------- ---------- ----------
Operating Income $ 30,257 $ 10,879 $ (3,222) $ 37,914
========== ========== ========== ==========
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1999
-------------------------------------------------
<TABLE>
<CAPTION>
Federal Corporate &
Commercial Government Eliminations(a) Consolidated
---------- ---------- --------------- ------------
<S> <C> <C> <C> <C>
Revenue $ 628,238 $ 301,937 $ (6,481) $ 923,694
Operating expense 519,537(c) 273,384 (873) 792,048(c)
---------- ---------- ---------- ----------
EBITDA (b) 108,701 28,553 (5,608) 131,646
Depreciation & amortization expense
excluding goodwill amortization 25,128(c) 4,775 544 30,447(c)
Goodwill amortization expense 8,914 1,198 -- 10,112
---------- ---------- ---------- ----------
Operating Income $ 74,659 $ 22,580 $ (6,152) $ 91,087
========== ========== ========== ==========
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1998
-------------------------------------------------
<TABLE>
<CAPTION>
Federal Corporate &
Commercial Government Eliminations(a) Consolidated
---------- ---------- --------------- ------------
<S> <C> <C> <C> <C>
Revenue $ 483,824 $ 276,816 $ (5,650) $ 754,990
Operating expense 400,368 249,501 864 650,733
---------- ---------- ---------- ----------
EBITDA (b) 83,456 27,315 (6,514) 104,257
Depreciation & amortization expense
excluding goodwill amortization 20,104 4,095 440 24,639
Goodwill amortization 5,573 1,135 _ 6,708
---------- ---------- ---------- ----------
Operating Income $ 57,779 $ 22,085 $ (6,954) $ 72,910
========== ========== ========== ==========
</TABLE>
- ------------------
(a) Included in revenue and operating expense are elimination entries related
to the sale of information technology service and computer hardware from
the commercial segment to the federal government segment.
(b) EBITDA consist of earnings before interest income, interest expense, other
non-operating income and expense, income taxes, depreciation and
amortization. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered in
isolation or as an alternative to net income as an indicator of a company's
performance or to cash flows from operating activities as a measure of
liquidity.
(c) During the second quarter of fiscal year 2000 (See Note 5), we recorded
$3.0 million of accelerated expenses in connection with the consolidation
of certain business process outsourcing operations.
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, including statements regarding our Year 2000 exposure. These
forward-looking statements rely on a number of assumptions concerning future
events and are subject to a number of uncertainties and other factors, many of
which are outside of our control, that could cause actual results to materially
differ from such statements. While we believe that the assumptions concerning
future events are reasonable, we caution that there are inherent difficulties in
predicting certain important factors, especially the timing and magnitude of
technological advances; the performance of recently acquired businesses; the
prospects for future acquisitions; the possibility that a current customer could
be acquired or otherwise be affected by a future event that would diminish its
information technology requirements; Year 2000 problems affecting our business
and our clients' business; the competition in the information technology
industry and the impact of such competition on pricing, revenues and margins;
the degree to which business entities continue to outsource information
technology and business processes; uncertainties surrounding budget reductions
or changes in funding priorities or existing government programs and the cost of
attracting and retaining highly skilled personnel.
RESULTS OF OPERATIONS
The following table sets forth certain items from our consolidated statements of
income as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Expenses:
Wages and benefits 42.7 42.1 43.1 42.3
Services and supplies 31.6 31.3 30.7 31.1
Rent, lease and maintenance 10.7 11.5 11.0 11.6
Depreciation and amortization 4.5 4.1 4.3 4.1
Other operating expenses 1.0 1.3 1.0 1.2
------- ------- ------- -------
Total operating expenses 90.5 90.3 90.1 90.3
------- ------- ------- -------
Operating income 9.5 9.7 9.9 9.7
Interest expense 1.2 1.0 1.1 0.9
Other non-operating income, net (1.0) (0.2) (0.6) (0.1)
------- ------- ------- -------
Pretax profit 9.3 8.9 9.4 8.9
Income tax expense 3.8 3.6 3.8 3.7
------- ------- ------- -------
Net income 5.5% 5.3% 5.6% 5.2%
======= ======= ======= =======
</TABLE>
COMPARISON OF THE QUARTER ENDED DECEMBER 31, 1999 TO THE QUARTER ENDED DECEMBER
31, 1998
Revenues increased $84.4 million, or 22%, to $476.0 million in the quarter
ending December 31, 1999 (the second quarter of our 2000 fiscal year) from
$391.6 million in the second quarter of fiscal 1999. Of the 22% increase in
revenue, approximately 11% was from internal growth and 11% was from
acquisitions. Revenues from our commercial segment increased $69.1 million, or
27%, over the second quarter of fiscal 1999 resulting from our acquisition
activity and new contract signings from clients in the financial services,
retail and healthcare industries. Revenues from our federal government segment
increased $14.9 million, or 10%, primarily due to increased requirements under
the Department of Education's contract and new task orders under civilian agency
contracts.
7
<PAGE> 10
Total operating expenses increased $76.9 million, or 22%, to $430.6 million for
the second quarter of fiscal 2000 as compared to the second quarter of fiscal
1999. Included in operating expenses during the second quarter of fiscal 2000
was $3.0 million of accelerated expenses related to the consolidation of certain
business process outsourcing operations (see Note 5). Excluding this
non-recurring charge, total operating expense as a percentage of revenue would
have declined to 89.8% in the second quarter of fiscal 2000 compared to 90.3% in
the second quarter of fiscal 1999 as a result of internal growth in our business
process outsourcing service line and acquisition activity occurring since the
prior year quarter. Wages and benefits increased as a percentage of revenue from
42.1% in the second quarter of fiscal 1999 to 42.7% in the second quarter of
fiscal 2000 due to growth in our business process outsourcing service line.
Services and supplies as a percentage of revenue increased from 31.3% in the
second quarter of fiscal 1999 to 31.6% in the second quarter of fiscal 2000.
Excluding the $2.6 million of the $3.0 million accelerated expenses recorded in
the second quarter of fiscal 2000 (see Note 5), rent, lease and maintenance
expense decreased from 11.5% in the second quarter of fiscal 1999 to 10.1% in
the second quarter of fiscal 2000 as a result 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 4.1% in the second quarter of fiscal 1999 to 4.5% in the second
quarter of fiscal 2000 primarily as a result of current year acquisitions that
have a higher component of depreciation costs and also due to the amortization
of the acquisition costs. Other operating expenses decreased from 1.3% in the
second quarter of fiscal 1999 to 1.0% in the second quarter of fiscal 2000 due
to lower bad debt expense.
Excluding the $3.0 million of accelerated expenses mentioned above, operating
income increased $10.5 million, or 28%, to $48.4 million in the second quarter
of fiscal 2000, as compared to the second quarter of fiscal 1999. Operating
income as a percentage of revenue increased from 9.7% in the second quarter of
1999 to 10.2% in the second quarter of fiscal 2000.
Interest expense increased $1.8 million to $5.6 million in the second quarter of
fiscal 2000, compared to $3.8 million in the second quarter of fiscal 1999,
primarily due to increased borrowings under our credit facility to finance
acquisitions.
Other non-operating income for the second quarter 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 (see Note 5).
Excluding this non-recurring gain, other non-operating income increased by $0.7
million primarily due to a gain on sale of imaging equipment in December 1999.
Our effective tax rate of approximately 40% in the second 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 SIX MONTHS ENDED DECEMBER 31, 1999 TO THE SIX MONTHS ENDED
DECEMBER 31, 1998
Revenues increased $168.7 million, or 22%, for the six months ended December 31,
1999 to $923.7 million for the same period in fiscal 1999. Of the 22% increase
in revenue, approximately 11% was from internal growth and 11% from
acquisitions. Revenues from our commercial segment increased $144.4 million, or
30%, over fiscal 1999 primarily due to acquisitions and new contract signings
with customers in the retail, healthcare and financial services industries.
Revenues from our federal government segment increased $25.1 million, or 9%,
over fiscal 1999 due to increased requirements under the Department of
Education's contract and new task orders under civilian agency contracts.
Excluding the accelerated expenses mentioned above, total operating expenses
increased $147.5 million, or 22%, to $829.6 million for the first six months of
fiscal 2000 as compared to the first six months of fiscal 1999, as a result of
our increase in revenues. As a percentage of revenue, operating expenses
decreased slightly to 89.8% from 90.3% in the same period in fiscal 1999 as a
result of expansion through internal growth and acquisitions in our business
process outsourcing service lines. Wages and benefits expense, as a percentage
of revenue, increased slightly from 42.3% in the first six months of fiscal 1999
compared to 43.1% in the first six months of fiscal 2000 as a result of growth
in our business process outsourcing service line. Service and supplies as a
percentage of revenue, decreased from 31.1% in the first six months of fiscal
1999 to 30.7% in the first six months of fiscal 2000 due to current year
acquisitions having a lower component of services and supplies. Excluding $2.6
million of accelerated expenses, rent, lease and maintenance expense decreased
as a percentage of revenue to 10.7% in the first six months of fiscal 2000 from
11.6% in the first six 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 4.3% in the first six
months of fiscal 2000 compared to 4.1% primarily due to current year
acquisitions. Other operating expense as a percentage of revenue decreased to
1.0% from 1.2% in the same period in fiscal 1999 primarily as a result of lower
bad debt expense.
Excluding the accelerated expenses, operating income increased $21.2 million, or
29%, to $94.1 million for the first six months of fiscal 2000 as compared to the
first six months of fiscal 1999. Operating income as a percentage of revenue
increased from 9.7% in the first six months of fiscal 1999 to 10.2% in the first
six months of fiscal 2000.
8
<PAGE> 11
Interest expense increased $3.3 million to $10.5 million in the first six months
of fiscal 2000, compared to $7.2 million in the first six months of fiscal 1999,
primarily due to additional debt incurred for acquisitions.
Other non-operating income for the first six 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. Excluding this
non-recurring gain, other non-operating income increased to $2.7 million in the
first six months of fiscal 2000 from $1.2 million in the same period in fiscal
1999 due to higher investment income and a gain on the sale of imaging equipment
in December 1999.
The effective tax rate of approximately 40% in the first six 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. The effective rate for
the first six months of fiscal 1999 was approximately 41%.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, our liquid assets, consisting of cash and cash
equivalents, totaled $31.6 million compared to $32.8 million at June 30, 1999.
These liquid assets included $4.7 million and $4.2 million borrowed under a
revolving credit facility for use in our automated teller machines at December
31, 1999 and June 30, 1999, respectively. Working capital increased to $214.2
million at December 31, 1999 from $194.2 million at June 30, 1999 due to the net
working capital added with the acquisition of Consultec, LLC. in September 1999.
Net cash provided by operating activities for the first six months of fiscal
2000 increased to $74.6 million as compared with $46.6 million in the first six
months of fiscal 1999 due primarily to the increase in net income from the prior
period and collections on accounts receivable in fiscal 2000. Net cash flow used
in investing activities decreased by $9.5 million in the first six months of
fiscal 2000 compared to the first six 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 six months of fiscal 2000 was
$68.6 million as compared to $178.1 million in the first six months of fiscal
1999, and decreased due to a lower level of borrowings required for
acquisitions. Included in net cash used in investing activities 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 new $100 million credit facility,
our existing $200 million credit facility, and after considering outstanding
letters of credit, we have approximately $104 million available for use under
the credit facilities at December 31, 1999.
Our management believes that available cash and cash equivalents, together with
cash generated from operations and available borrowings under various credit
facilities, will provide adequate funds for our anticipated 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 its 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 such as
leap year-related problems 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 second quarter of
fiscal 2000 and is expected to continue into the next quarter.
9
<PAGE> 12
NEW ACCOUNTING STANDARDS
In June 1999, the Financial Accountings Standards Board issued Statement of
Financial Accounting Standards ( "SFAS") No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the effective date of the FASB
Statement No. 133". SFAS 137 defers the effective date of SFAS 133 "Accounting
for Derivatives and Hedging Activities" to fiscal years beginning after June 15,
2000. We currently plan to early adopt the provisions of SFAS 133 during the
third quarter of fiscal 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 ("SOP") 98-5, "Reporting on the Costs of
Start-up Activities", was issued. This SOP provides guidance on the financial
reporting of start-up and organization costs and requires that these costs be
expensed as incurred. The provisions of SOP 98-5 are effective for financial
statements for fiscal years beginning after December 15, 1998. The adoption of
SOP 98-5 has not had a material impact on our financial statements. We adopted
the provisions of this SOP on July 1, 1999.
10
<PAGE> 13
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 issued
to the GSA/FTSA and us. The judgment against us was for approximately $17
million, which includes attorneys' fees and pre-judgement 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.
11
<PAGE> 14
Item 4: Submission of Matters to a Vote of Security Holders
On October 26, 1999, the Company held its 1999 annual meeting of stockholders,
at which meeting the Company's stockholders were asked to vote on the following
proposals to: (i) elect four directors to the Board ("Proposal 1"), (ii) approve
an amendement to the ACS Restated Certificate of Incorporation to authorize the
current Chairman of the Board to fill any future vacancies on the ACS Board of
Directors resulting from the removal of, or a resignation by, a director or
directors for the remaining portion of the term of the former Director.
("Proposal 2"), and (iii) vote upon performance-based incentive compensation to
ACS's executive officers ("Proposal 3"). The results of the votes on such
proposals were as follows:
<TABLE>
<CAPTION>
Proposal 1: Votes
--------------------------------
For Withheld
------------- -------------
<S> <C> <C>
Henry Hortenstine 74,313,211 544,829
Joseph P. O'Neill 74,319,065 538,975
Frank A. Rossi 74,319,654 538,386
Clifford M. Kendall 74,374,037 484,003
</TABLE>
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions
------------- ---------------- ---------------
<S> <C> <C> <C>
Proposal 2: 48,078,729 26,589,147 190,164
Proposal 3: 73,587,211 1,180,664 90,165
</TABLE>
The following individuals continued their respective terms of service of
directors of the Company following the meeting:
Darwin Deason
Jeffrey A. Rich
Mark A. King
David W. Black
Peter A. Bracken
Item 6: Exhibits and Reports on Form 8-K
a.) Exhibits (exhibits reference numbers refer to Item 601 of Regulation S-K)
* 27. Financial Data Schedule
b.) Reports on Form 8-K
On October 12, 1999, we filed a current report on Form 8-K announcing the
purchase of 100% of the outstanding common shares Consultec, LLC.
-------------------------------------
* Filed herewith
12
<PAGE> 15
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 February 2000.
AFFILIATED COMPUTER SERVICES, INC.
By: /s/ Mark A. King
-----------------------------
Mark A. King
Executive Vice President and
Chief Financial Officer
13
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
* 27. Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 26,923
<SECURITIES> 0
<RECEIVABLES> 343,132
<ALLOWANCES> 4,890
<INVENTORY> 14,800
<CURRENT-ASSETS> 440,789
<PP&E> 329,881
<DEPRECIATION> 160,042
<TOTAL-ASSETS> 1,338,731
<CURRENT-LIABILITIES> 226,637
<BONDS> 416,971
0
0
<COMMON> 494
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,338,731
<SALES> 476,008
<TOTAL-REVENUES> 476,008
<CGS> 0
<TOTAL-COSTS> 430,598
<OTHER-EXPENSES> (4,593)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,631
<INCOME-PRETAX> 44,372
<INCOME-TAX> 17,926
<INCOME-CONTINUING> 26,446
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,446
<EPS-BASIC> .54
<EPS-DILUTED> .50
</TABLE>
