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, 2001
--------------
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.
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(Exact name of registrant as specified in its charter)
Delaware 51-0310342
------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2828 North Haskell, Dallas, Texas 75204
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 841-6111
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
NUMBER OF SHARES OUTSTANDING AS OF
TITLE OF EACH CLASS APRIL 10, 2001
-------------------------------------- ------------------------------------
Class A Common Stock, $.01 par value 46,957,148
Class B Common Stock, $.01 par value 3,299,686
-----------------
50,256,834
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 2001 and
June 30, 2000 1
Consolidated Statements of Income for the Three and Nine Months
Ended March 31, 2001 and 2000 2
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 2001 and 2000 3
Notes to Consolidated Financial Statements 4 - 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8 - 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 6. Exhibits and Reports on Form 8-K 11
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, JUNE 30,
2001 2000
(UNAUDITED) (AUDITED)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 276,214 $ 44,521
Accounts receivable, net 456,307 399,853
Receivable from divestitures -- 180,335
Inventory 8,540 7,324
Prepaid expenses and other current assets 58,233 71,290
Net assets held for sale -- 43,362
Deferred taxes 9,283 25,189
----------- -----------
Total current assets 808,577 771,874
Property, equipment and software, net 226,799 194,034
Goodwill and other intangibles, net 729,610 650,263
Long-term investments and other assets 47,145 40,275
----------- -----------
Total assets $ 1,812,131 $ 1,656,446
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 28,788 $ 47,901
Accrued compensation and benefits 66,191 69,208
Other accrued liabilities 128,432 156,720
Income taxes payable 12,974 60,671
Short-term debt 2,990 2,877
Current portion of unearned revenue 20,487 20,865
----------- -----------
Total current liabilities 259,862 358,242
Convertible notes 546,990 230,000
Long-term debt 103,389 295,619
Deferred taxes 49,902 35,316
Other long-term liabilities 22,964 25,892
----------- -----------
Total liabilities 983,107 945,069
----------- -----------
Stockholders' equity:
Class A common stock 468 463
Class B common stock 33 33
Additional paid-in capital 330,866 321,525
Retained earnings 497,655 400,200
Accumulated other comprehensive income (net of tax) 23 --
(21) (10,844)
----------- -----------
Total stockholders' equity 829,024 711,377
----------- -----------
Total liabilities and stockholders' equity $ 1,812,131 $ 1,656,446
=========== ===========
See notes to consolidated financial statements.
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues $ 533,574 $ 510,439 $ 1,513,082 $ 1,434,133
Expenses:
Wages and benefits 232,220 222,635 660,851 620,750
Services and supplies 157,796 155,933 438,778 439,453
Rent, lease and maintenance 53,621 52,807 169,010 154,152
Depreciation and amortization 24,586 23,286 68,254 63,845
Other operating expenses 3,584 5,774 15,522 14,842
----------- ----------- ----------- -----------
Total operating expenses 471,807 460,435 1,352,415 1,293,042
----------- ----------- ----------- -----------
Operating income 61,767 50,004 160,667 141,091
Interest expense 6,375 6,192 16,250 16,651
Other non-operating income, net (2,301) (2,818) (16,659) (8,552)
----------- ----------- ----------- -----------
Pretax profit 57,693 46,630 161,076 132,992
Income tax expense 22,500 18,794 63,336 53,684
----------- ----------- ----------- -----------
Net income $ 35,193 $ 27,836 $ 97,740 $ 79,308
=========== =========== =========== ===========
Earnings per common share:
Basic $ .70 $ .57 $ 1.97 $ 1.61
=========== =========== =========== ===========
Diluted $ .64 $ .53 $ 1.80 $ 1.50
=========== =========== =========== ===========
Shares used in computing earnings
per common share:
Basic 49,964 49,139 49,736 49,240
Diluted 58,673 55,658 57,245 55,873
See notes to consolidated financial statements.
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net income $ 97,740 $ 79,308
--------- ---------
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 68,254 63,845
Gain on sale of investment (12,785) (1,741)
Gain on collection of note receivable (1,713) (3,000)
Other 239 (1,307)
Changes in assets and liabilities, net of effects from acquisitions:
Decrease in ATM cash -- 600
Increase in accounts receivable (52,729) (20,952)
Increase in inventory (1,109) (1,091)
(Increase) decrease in prepaid expenses and other current assets 7,972 (9,305)
Change in deferred taxes 31,175 16,857
(Increase) decrease in other long-term assets 2,186 (6,441)
Decrease in accounts payable (21,322) (10,505)
Decrease in accrued compensation and benefits (2,662) (14,046)
Decrease in other accrued liabilities (9,962) (1,079)
Increase (decrease) in income taxes payable (37,815) 5,625
Increase (decrease) in unearned revenue (5,476) 2,634
Increase in other long-term liabilities 713 1,128
--------- ---------
Total adjustments (35,034) 21,222
--------- ---------
Net cash provided by operating activities 62,706 100,530
--------- ---------
Cash flows from investing activities:
Purchases of property, equipment and software, net of sales (68,740) (52,259)
Payments for acquisitions, net of cash acquired (87,047) (197,607)
Proceeds from divestitures, net of transaction costs 206,235 --
Purchase of investments (500) (9,769)
Proceeds from sale of investment 17,100 2,260
Additions to other intangible assets (20,743) (7,542)
Additions to notes receivable (3,229) (1,553)
Proceeds received on notes receivable 8,913 8,158
Other -- 41
--------- ---------
Net cash provided by (used in) investing activities 51,989 (258,271)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt, net of issuance costs 674,983 225,840
Repayments of debt (566,089) (76,873)
Proceeds from stock options exercised 8,400 2,069
Net repayment of ATM debt -- (600)
Other, net (296) (789)
--------- ---------
Net cash provided by financing activities 116,998 149,647
--------- ---------
Net increase (decrease) in cash and cash equivalents 231,693 (8,094)
Cash and cash equivalents at beginning of period 44,521 28,580
--------- ---------
Cash and cash equivalents at end of period $ 276,214 $ 20,486
========= =========
See notes to consolidated financial statements.
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Affiliated
Computer Services, Inc. and its majority-owned subsidiaries. All material
intercompany profits, transactions and balances have been eliminated. We are
a Fortune 1000 Company based in Dallas, Texas with operations primarily in
North America, as well as Central America, Africa, South America, Europe and
the Middle East. We provide business process and technology outsourcing to
world class commercial and government clients.
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. Certain
financial statement items from the prior year have been reclassified to
conform with current presentation.
2. CONVERTIBLE DEBT OFFERING
On February 21, 2001, we completed the sale of a new issue of $300 million
of 3.5% Convertible Subordinated Notes due February 15, 2006 (the "Notes").
The sale of an additional $17 million aggregate Notes pursuant to an
overallotment option was completed on March 22, 2001. The Notes are
convertible into our Class A common stock at a conversion rate of 11.5117
shares of Class A common stock for each $1,000 principal amount of Notes
(equivalent to a conversion price of $86.87 per share of Class A common
stock), subject to adjustments in certain events. Interest on the Notes is
payable semi-annually on February 15 and August 15 of each year commencing
on August 15, 2001. The Notes may be redeemed at our option on or after
February 18, 2004, in whole or in part, at the redemption prices set forth
in the Notes.
3. HEDGING ACTIVITIES AND COMPREHENSIVE INCOME
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. 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. As of March 31,
2001, the fair market value of our interest rate hedge was $37,000 and was
recorded in other current assets.
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" establishes standards for reporting and display of comprehensive
income and its components in the financial statements. The objective of SFAS
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 all other non-owner changes within a company's equity.
The components of comprehensive income are as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- -----------------------
2001 2000 2001 2000
----------------------- -----------------------
Net income $ 35,193 $ 27,836 $ 97,740 $ 79,308
Change in fair value of derivatives (net of tax (754) -- 23 --
effect of ($492) and $15, respectively)
-------- -------- -------- --------
Comprehensive income $ 34,439 $ 27,836 $ 97,763 $ 79,308
======== ======== ======== ========
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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:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2001 2000 2001 2000
-------- -------- -------- --------
Numerator:
Numerator for earnings per share (basic) -
Income available to common stockholders $ 35,193 $ 27,836 $ 97,740 $ 79,308
Effect of dilutive securities:
Interest on convertible debt 2,374 1,538 5,449 4,616
-------- -------- -------- --------
Numerator for earnings per share assuming
Dilution - income available to common stockholders $ 37,567 $ 29,374 $103,189 $ 83,924
======== ======== ======== ========
Denominator:
Weighted average shares outstanding (basic) 49,964 49,139 49,736 49,240
Effect of dilutive securities:
Convertible debt 6,915 5,392 5,892 5,392
Stock options 1,794 1,127 1,617 1,241
-------- -------- -------- --------
Total potential common shares 8,709 6,519 7,509 6,633
-------- -------- -------- --------
Denominator for earnings per share assuming
Dilution 58,673 55,658 57,245 55,873
======== ======== ======== ========
Earnings per common share (basic) $ .70 $ .57 $ 1.97 $ 1.61
======== ======== ======== ========
Earnings per common share assuming dilution $ .64 $ .53 $ 1.80 $ 1.50
======== ======== ======== ========
5. NON-RECURRING ITEMS
In the first quarter of fiscal 2001, we recorded a $12.8 million gain in
other non-operating income related to the sale of a non-strategic minority
investment in ACS Merchant Services, Inc. Also during the quarter, we
recorded a $10.4 million charge in connection with the termination of
certain hardware leases and disaster recovery contracts (reflected in rent,
lease and maintenance expense) and a $2.1 million charge for non-recurring
litigation costs and the writedown of property held-for-sale (reflected in
other operating expense).
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 included
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 off 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 the second quarter of
fiscal 2000, CyberPlus obtained financing and repaid $3.0 million on the
promissory note, resulting in a $3.0 million gain (reflected in other
non-operating income).
6. ACCUMULATED DEPRECIATION AND AMORTIZATION
Property, equipment and software are stated net of accumulated depreciation
of $202.1 million and $165.6 million at March 31, 2001 and June 30, 2000,
respectively. Additionally, goodwill and other intangibles are stated net of
accumulated amortization of $105.6 million and $80.3 million at March 31,
2001 and June 30, 2000, respectively.
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. ACQUISITIONS
During December 2000, we acquired Business Resources Corporation, ("BRC"), a
subsidiary of Tyler Technologies, Inc. for approximately $70 million in
cash, which was funded by our existing credit facility. The acquisition was
accounted for under the purchase method of accounting with assets acquired
of $76.2 million and liabilities assumed of $6.2 million. BRC's results have
been included in our consolidated financial statements from the effective
date of the acquisition. BRC is a provider of outsourced records management,
document workflow, imaging systems and services to state and local
governments. BRC also provides real estate title plant services to title
companies.
8. 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):
QUARTER ENDED MARCH 31, 2001
----------------------------
FEDERAL
COMMERCIAL GOVERNMENT CORPORATE CONSOLIDATED
---------- ---------- --------- ------------
Revenue $343,427 $190,147 $ -- $533,574
Operating expense 272,347 170,627 4,247 447,221
-------- -------- -------- --------
EBITDA(b) 71,080 19,520 (4,247) 86,353
Depreciation & amortization expense
excluding goodwill amortization 15,020 2,871 483 18,374
Goodwill amortization 5,019 1,193 -- 6,212
-------- -------- -------- --------
Operating income (loss) $ 51,041 $ 15,456 ($ 4,730) $ 61,767
======== ======== ======== ========
QUARTER ENDED MARCH 31, 2000
----------------------------
FEDERAL
COMMERCIAL GOVERNMENT CORPORATE CONSOLIDATED
---------- ---------- --------- ------------
Revenue $351,739(a) $158,700 $ -- $510,439
Operating expense 287,647 145,244 4,258 437,149
-------- -------- -------- --------
EBITDA(b) 64,092 13,456 (4,258) 73,290
Depreciation & amortization expense
excluding goodwill amortization 14,818 2,275 286 17,379
Goodwill amortization 5,311 596 -- 5,907
-------- -------- -------- --------
Operating income (loss) $ 43,963 $ 10,585 ($ 4,544) $ 50,004
======== ======== ======== ========
----------
(a) Revenue includes $74.7 million for the three months ended March
2000 related to the divestitures announced in June 2000.
(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.
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. SEGMENT INFORMATION (CONTINUED)
NINE MONTHS ENDED MARCH 31, 2001
--------------------------------
FEDERAL
COMMERCIAL GOVERNMENT CORPORATE CONSOLIDATED
---------- ---------- ---------- ------------
Revenue $ 959,170(a) $ 553,912 $ -- $1,513,082
Operating expense 773,215(b) 499,045 11,901 1,284,161
---------- ---------- ---------- ----------
EBITDA(c) 185,955 54,867 (11,901) 228,921
Depreciation & amortization expense
excluding goodwill amortization 40,692 8,353 1,196 50,241
Goodwill amortization 14,505 3,508 -- 18,013
---------- ---------- ---------- ----------
Operating income (loss) $ 130,758 $ 43,006 ($ 13,097) $ 160,667
========== ========== ========== ==========
NINE MONTHS ENDED MARCH 31, 2000
--------------------------------
FEDERAL
COMMERCIAL GOVERNMENT CORPORATE CONSOLIDATED
---------- ---------- ---------- ------------
Revenue $ 982,122(a) $ 452,011 $ -- $1,434,133
Operating expense 808,298(d) 410,778 10,121 1,229,197
---------- ---------- ---------- ----------
EBITDA(c) 173,824 41,233 (10,121) 204,936
Depreciation & amortization expense
excluding goodwill amortization 40,406 6,591 829 47,826
Goodwill amortization 14,225 1,794 -- 16,019
---------- ---------- ---------- ----------
Operating income (loss) $ 119,193 $ 32,848 ($ 10,950) $ 141,091
========== ========== ========== ==========
(a) Revenue includes $7.5 million and $229.0 million for the nine months ended
March 31, 2001 and 2000, 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 5).
(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.
(d) Operating expense for the nine months ended March 31, 2000 included $3.0
million of accelerated expenses in connection with the consolidation of certain
business process outsourcing operations (see Note 5).
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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 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. By October 31, 2000, we had completed the
sale of and received the proceeds from these divestitures. During the first
quarter of fiscal 2001, we recorded a $12.8 million gain in other non-operating
income associated with the sale of a non-strategic minority investment in ACS
Merchant Services, Inc.
RESULTS OF OPERATIONS
The following table sets forth certain items from our consolidated statements of
income as a percentage of revenues:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2001 2000 2001 2000
------ ------ ------ ------
Revenues 100% 100% 100% 100%
Expenses:
Wages and benefits 43.5 43.6 43.7 43.3
Services and supplies 29.6 30.5 29.0 30.6
Rent, lease and maintenance 10.0 10.4 11.2 10.7
Depreciation and amortization 4.6 4.6 4.5 4.5
Other operating expenses 0.7 1.1 1.0 1.0
------ ------ ------ ------
Total operating expenses 88.4 90.2 89.4 90.1
------ ------ ------ ------
Operating income 11.6 9.8 10.6 9.9
Interest expense 1.2 1.2 1.1 1.2
Other non-operating income, net (0.4) (0.6) (1.1) (0.6)
------ ------ ------ ------
Pretax profit 10.8 9.2 10.6 9.3
Income tax expense 4.2 3.7 4.2 3.7
------ ------ ------ ------
Net income 6.6% 5.5% 6.4% 5.6%
====== ====== ====== ======
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COMPARISON OF THE QUARTER ENDED MARCH 31, 2001 TO THE QUARTER ENDED MARCH 31,
2000
Excluding the third quarter fiscal year 2000 revenue related to the divested
units of $74.7 million, revenues increased 22% from $435.7 million to $533.6
million for the third quarter of fiscal 2001. More than two-thirds of the
revenue increase, or 15%, was derived from internal growth. Excluding the
revenues from the divested units, revenues from our commercial segment increased
$66.4 million, or 24%. Internal revenue growth of 20% in the commercial segment
was primarily due to growth in new and existing business process outsourcing,
technology outsourcing contracts and state Medicaid and Welfare benefit program
management contracts. Revenues from our federal government segment increased
$31.4 million, or 20%, over the prior year quarter. This growth was comprised of
5% internal growth and 15% from the Intellisource acquisition in the fourth
quarter of fiscal 2000.
Operating income increased $11.8 million, or 24% to $61.8 million in the third
quarter of fiscal 2001 as compared to the third quarter of fiscal 2000.
Operating margins increased to 11.6% in the third quarter of fiscal 2001 from
9.8 % in the third quarter of fiscal 2000 as a result of the divestitures
program that was completed in the first quarter of fiscal year 2001. Services
and supplies as a percentage of revenue decreased from 30.5% in the third
quarter of fiscal year 2000 to 29.6% in the third 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.
Our effective tax rate of approximately 39.0% in the third quarter 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.
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2001 TO THE NINE MONTHS ENDED
MARCH 31, 2000
Excluding revenues related to the divested units ($7.5 million and $229.0
million for the nine months ended March 31, 2001 and 2000 respectively), revenue
increased $300.5 million, or 25% over the prior year from $1.21 billion to $1.51
billion. Revenues from our commercial segment increased, excluding the divested
units, $198.6 million, or 26% as a result of new customer contracts in state
Medicaid and Welfare benefit program management and growth from new and existing
business process outsourcing and technology outsourcing contracts. Revenues in
our federal government segment increased $101.9 million, or 23%, primarily as a
result of the acquisition of Intellisource in the fourth quarter of fiscal year
2000 and growth in tasks performed under Department of Education contracts.
Excluding the $12.5 million and $3.0 million in non-recurring charges in the
first nine months of fiscal years 2001 and 2000, respectively (see Note 5),
operating margins increased 1.4% from 10.0% to 11.4% in fiscal 2001 as a result
of the completed divestiture program completed in the first quarter of fiscal
year 2001. Wages and benefits as a percentage of revenue increased from 43.3% to
43.7% as a result of 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.
Services and supplies as a percentage of revenue decreased from 30.6% to 29.0%
as a result of the divestiture of the ATM processing business, which had a large
component of interchange fees paid to ATM distributors. After adjusting for the
non-recurring charges of $10.4 million in fiscal 2001 and $2.6 million in fiscal
2000, rent, lease and maintenance expense remained relatively constant.
Other non-operating income includes non-recurring gains of $12.8 million and
$3.0 million in the nine months ended March 31, 2001 and 2000, respectively (see
Note 5). Excluding these gains, other non-operating income decreased as a
percentage of revenue from 0.4% to 0.3% primarily due to income earned on the
excess cash from the issuance of the February 2001 Convertible Subordinated
Notes.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, we had cash and cash equivalents totaling $276.2 million
compared to $44.5 million at June 30, 2000. Included in the cash balances at
March 31, 2001 and June 30, 2000 were $5.6 million and $22.3 million,
respectively, of restricted cash held on behalf of governmental customers.
Working capital increased to $548.7 million at March 31, 2001 from $413.7
million at June 30, 2000 due primarily to the collection of proceeds from
divestitures and the February 2001 convertible notes (see Note 2) offset by the
subsequent paydown of long-term debt. We had approximately $341 million
available under our credit facility as of March 31, 2001.
Cash flow from operations was $62.7 million for the nine months ended March 31,
2001. However, during the first quarter of fiscal 2001, we paid approximately
$49.7 million in income taxes related to the net gain from our divestiture
activity and approximately $10.4 million of non-recurring lease termination
charges, which are included in cash flows from operations. After adjusting for
these items, our net cash provided by operating activities would have been
approximately $122.8 million for the nine months ended March 31, 2001. Cash flow
from investing activities was $52.0 million primarily due to the collection of
proceeds from divestitures offset by the acquisition of BRC in the second
quarter of fiscal 2001 (see Note 7). Net cash provided by financing activities
was $117.0 million, which was the result of proceeds from issuances of debt,
including the February 2001 Convertible Subordinated Notes offering, less
paydowns of our credit facility.
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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 March 31, 2001 was approximately $37,000,
which is recorded in other current assets (see Note 3). 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.
NEW ACCOUNTING STANDARDS
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 requires 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 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 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.
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 outcome
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 21, 2001, we completed the sale of a new issue of $300 million
aggregate principal amount with the option to purchase an additional $50 million
aggregate principal amount ("Overallotment Option") of 3.5% Convertible
Subordinate Notes due February 15, 2006 (the "Notes"). The sale of an additional
$17 million aggregate Notes pursuant to the Overallotment Option was completed
on March 22, 2001. The Notes are convertible into Class A common stock at a
conversion rate of 11.5117 shares of class A common stock for each $1,000
principal amount of Notes (equivalent to a conversion price of $86.87 per share
of Class A common stock), subject to adjustments in certain events. The Notes
were sold to Goldman, Sachs & Co. and Bear Stearns & Co. (collectively, the
"Purchasers") in a unregistered private placement. The discount to the
Purchasers was 2.5% of the $317 million principal amount of the Notes purchased
(or an aggregated amount of $7.9 million). We used $65 million of the proceeds
from the Notes to pay down our credit facility and we intend to use the
remainder for working capital and general corporate purposes, which may include
acquisitions.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits.
4.1 Indenture, dated as of February 21, 2001, between Affiliated
Computer Service, Inc and U.S. Trust Company of Texas, N.A.
relating to the Notes (filed as exhibit 4.1 to the Company's
Registration Statement and is incorporated herein by reference).
4.2 Registration Rights Agreement between Affiliated Computer
Services, Inc. and Goldman, Sachs, and Co. as representative of
the several Purchasers named therein (filed as Exhibit 4.4 to
the Company's Form S-3 on March 30, 2001 and incorporated herein
by reference).
b.) Reports on Form 8-K.
1. On March 8, 2001, the Company filed a Current Report on Form 8-K
announcing executive management changes.
2. On April 4, 2001, the Company filed a Current Report on Form 8-K
reporting the sale of a new issue of $317 million aggregate
principal amount of 3.5% Convertible Subordinate Notes due
February 15, 2006.
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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 2001.
AFFILIATED COMPUTER SERVICES, INC.
By: /s/ Warren D. Edwards
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Warren D. Edwards
Executive Vice President and
Chief Financial Officer
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