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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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MARK ONE ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission file number 0-24787
AFFILIATED COMPUTER SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0310342
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
2828 NORTH HASKELL
DALLAS, TEXAS 75204
(Address of principal executive offices)
(Zip Code)
214-841-6111
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of exchange on
Title of each class which registered
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Class A common stock, par New York Stock Exchange
value $.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [X]
As of August 24, 2001, 47,592,056 shares of Class A common stock were
outstanding. The aggregate market value of the Class A common voting stock held
by nonaffiliates of Affiliated Computer Services, Inc. as of such date,
approximated $3,843,709,000.
DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for 2001 Annual Meeting -
Part III.
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AFFILIATED COMPUTER SERVICES, INC.
FORM 10-K
JUNE 30, 2001
PART I
Item 1. Business.................................................................................... 1
Item 2. Properties.................................................................................. 7
Item 3. Legal Proceedings........................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders......................................... 8
PART II
Item 5. Market for Our Common Equity and Related Stockholder Matters................................ 9
Item 6. Selected Consolidated Financial Data........................................................10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......11
Item 8. Financial Statements and Supplementary Data.................................................17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........43
PART III
Item 10. Directors and Executive Officers of the Registrant..........................................43
Item 11. Executive Compensation......................................................................43
Item 12. Security Ownership of Certain Beneficial Owners and Management..............................43
Item 13. Certain Relationships and Related Transactions..............................................43
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement Schedule and Reports
on Form 8-K............................................................................43
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PART I
ITEM 1. BUSINESS
GENERAL
We are a global, Fortune 1000 company delivering comprehensive business
process outsourcing and information technology outsourcing solutions, as well as
system integration services, to both commercial and federal government clients.
We are based in Dallas, Texas and have offices primarily in North America, as
well as Central America, South America, Europe, Africa and the Middle East. Our
clients have time-critical, transaction-intensive information processing needs
and we typically service these needs through long-term contracts. Approximately
89% of our revenues for the past three fiscal years were recurring revenues,
which are revenues derived from services that our clients use each year in
connection with their ongoing businesses.
We were formed in 1988 to participate in the trend to outsource information
processing requirements to third parties. This outsourcing enables businesses to
focus on core operations, respond to rapidly changing technologies and reduce
expenses associated with business processes and data processing. Our business
strategy is to expand our client base and enhance our service offerings through
both internal marketing and the acquisition of complementary companies. Our
marketing efforts focus on developing long-term relationships with clients that
choose to outsource mission critical business processes and information
technology requirements. Our focus over the last several years has been to
participate in the expanding business process outsourcing market. Our business
expansion has been accomplished both from internal growth as well as through
acquisition. Since inception through June 30, 2001, we have completed 53
acquisitions, which have resulted in geographic expansion, growth and
diversification of our customer base, expansion of services and products
offered, and increased economies of scale. Our revenues have increased from $534
million in fiscal year 1995 to $2.1 billion in fiscal year 2001, a compound
growth rate of 25%. Of this growth, approximately one-half resulted from
internal growth and the other half resulted from growth through acquisitions.
On August 24, 2001 we acquired 100% of the stock of Lockheed Martin IMS
Corporation ("IMS"), a wholly-owned subsidiary of Lockheed Martin Corporation
for $825 million in cash plus transaction costs. IMS, with its principal office
located in Washington D.C. and approximately 4,800 employees throughout the
country, primarily provides business process outsourcing services to state and
local government agencies focusing on health and human services, transportation,
public safety and child support. IMS' revenues for the twelve-month period
ending June 30, 2001 were approximately $620 million.
We serve two primary markets. Our largest market is the commercial sector,
which during fiscal year 2001 accounted for approximately 64% of our annual
revenues. After the IMS acquisition, we believe our commercial sector now
approximates 75% of our revenues. Within the commercial sector, which includes
state and local governments, we provide business process outsourcing, systems
integration services and technology outsourcing to a variety of clients
nationwide, including healthcare providers, retailers, local municipalities,
state agencies, wholesale distributors, manufacturers, utilities, financial
institutions and insurance companies.
We also serve the federal government market, which during fiscal year 2001
accounted for approximately 36% of our annual revenues. Following the IMS
acquisition, we believe our federal government market now approximates 25% of
our revenues. Our services in this market are comprised of business process
outsourcing, systems integration services and technology outsourcing. Within our
federal government business, approximately half of our revenues are derived from
civilian agencies, including the Department of Education, with the remaining
half from Department of Defense agencies.
MARKET OVERVIEW
The demand for our services has grown substantially in recent years, and we
believe that this will continue to increase in the future as a result of
financial, strategic and technological factors. These factors include:
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o the increasing desire by businesses and government to drive process
improvements and improve the speed of and reduce the cost of
execution;
o the increasing complexity of information technology systems and the
need to connect electronically with clients, suppliers, and other
internal systems;
o the increasing requirements for rapid processing of information and
the instantaneous communication of large amounts of data to multiple
locations;
o the desire of business and government organizations to focus on their
core competencies;
o the desire by businesses and government to take advantage of the
latest advances in technology without the cost and resource commitment
required to maintain an in-house system;
o the desire by business and government to have a workforce that is able
to expand and contract in relation to their business volumes; and
o the proliferation of web-based and wireless technologies.
BUSINESS STRATEGY
The key components of our business strategy include the following:
o Expand Client Base - We seek to develop long-term relationships with
new clients by leveraging our subject matter expertise, world-wide
data manufacturing capabilities and infrastructure of information
technology products and services. Our primary focus is to increase our
revenues by obtaining new clients with recurring requirements for
business process and information technology services.
o Expand Existing Client Relationships - We seek to expand existing
client relationships by increasing the scope and breadth of services
we provide.
o Build Recurring Revenues - We seek to enter into long-term
relationships with clients to provide services that meet their ongoing
business requirements while supporting their mission critical business
process or information technology needs.
o Invest in Technology - We respond to technological advances and the
rapid changes in the requirements of our clients by committing
substantial amounts of our resources to the operation of multiple
hardware platforms, the customization of products and services that
incorporate new technology on a timely basis and the continuous
training of our personnel.
o Provide Flexible Solutions - We offer custom-tailored business process
and information technology solutions using a variety of proprietary
and third-party licensed software on multiple hardware and systems
software platforms and domestic and international workforces that are
able to expand and contract in relation to clients' business volumes.
o Maximize Economies of Scale - Our strategy is to develop and maintain
a significant client and account/transaction base to create sufficient
economies of scale that enable us to achieve competitive costs.
o Complete Strategic and Tactical Acquisitions - Our acquisition
strategy is to acquire companies to expand our geographic presence, to
expand the products and services we offer to existing clients, and to
obtain a presence in new, complementary markets.
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o Attract, Train and Retain Employees - We believe that attracting,
training, and retaining high quality employees are essential to our
growth. We seek to hire motivated individuals with strong character
and leadership traits and provide them with ongoing technological and
leadership skills training. We emphasize retaining our employees with
challenging work assignments and incentive programs.
During the last three fiscal years, our revenues by market was as follows
(in thousands):
Year ended June 30,
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2001 2000 1999
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Commercial(1) $1,315,893 $1,344,671 $1,091,417
Federal Government 747,666 617,871 550,799
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Total Revenues $2,063,559 $1,962,542 $1,642,216
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(1) Includes $7,500, $298,600 and $315,180 of revenues from divested
companies for the fiscal years 2001, 2000 and 1999, respectively.
COMMERCIAL
In the commercial sector we provide our clients with business process
outsourcing, systems integration services and technology outsourcing.
Business Process Outsourcing
Business process outsourcing is defined as the delegation of one or more
information technology intensive business processes to an external provider who
owns and manages the selected processes based on measurable performance metrics.
Clients outsource business processes to gain efficiencies, increase productivity
and lower costs. More and more companies are concluding that it is more
efficient to focus on their core competencies and to outsource their non-core
but mission-critical business processes. We developed our business process
outsourcing services to capitalize on a growing trend by business to outsource
entire processes, including the technology requirements of the business
function.
The business process outsourcing market can generally be divided into four
different areas: business administration, customer care, manufacturing and
supply chain management. Today, we are primarily focused on business
administration and customer care. We provide several important services to our
clients, including healthcare claims processing for insurance companies,
accounts payable processing, document management, loan and mortgage processing,
billing, customer service, customer analysis and call centers. We receive client
information in all media formats such as over the web, EDI, fax, voice, paper,
microfilm, computer tape, optical disk or CD ROM. Information is typically
digitized upon receipt and sent through our proprietary workflow process, which
is tailored to our clients' requirements. Using image transmission, storage and
retrieval technology, we digitize, process and transmit millions of information
records daily for our clients utilizing variable workforces both domestically
and internationally. In many instances, we perform quality assurance functions
and store the information for our clients on a long-term basis.
We are also a leading provider of program management, back-office
processing services and consulting for state and local governments' health and
human services agencies. We design, develop, implement and operate large scale
health and human services programs and the information technology solutions that
support those programs. Today, we process over 234 million Medicaid healthcare
claims annually on behalf of eight states using our proprietary Medicaid
management information system. In addition, in July 2001, we were selected by
the state of Georgia to be the prime contractor for the development and
operation of the state's health insurance system and program. This five-year,
$350 million contract is unique because it combines the state's health insurance
programs for its public employees as well as its Medicaid and children's health
insurance program recipients.
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Our recent acquisition of Lockheed Martin IMS has significantly expanded
our business process outsourcing offerings, including the support of state and
local government in four key areas:
o Children and Family Services - We provide two principal offerings
including child support payment processing where we process over $7
billion annually, and electronic benefit payment processing for the
paperless distribution of government benefits, such as food stamps.
o Welfare and Workforce Services - We provide job-related services to
assist people in leaving and returning to work.
o Municipal Services - We process traffic and parking tickets collecting
over $500 million on behalf of our clients. In addition, we operate
traffic safety programs that use photographic functionality to
automate the enforcement of traffic violations.
o Transportation Systems and Services - We process more than 25% of the
state issued operating credentials and support the operation of over
30% of the motor carriers operating in the United States.
Additionally, we provide Electronic Toll Collection Services
processing over $1.2 billion in toll revenues annually on behalf of
our clients, which include E-Z Pass New York, the largest electronic
toll collection operation in the world. We also operate a nationwide
network that electronically checks safety credentials and weighs
trucks at highway speed, granting carriers authorization to bypass
weigh stations without stopping.
Pricing for business process outsourcing services is typically determined
on the basis of the number of accounts or transactions processed.
Technology Outsourcing
We offer a complete range of technology outsourcing solutions to commercial
businesses desiring to improve the performance of their information technology
organizations. Our technology outsourcing solutions include the delivery of
information processing services on a remote basis from host data centers with
tremendous processing capacity, network management and desktop support.
Information processing services include mainframe, mid-range, desktop, network
and web-hosting solutions.
We provide our technology outsourcing solutions through an extensive data
center network, which is comprised of five host data centers and six remote
data centers. Our data centers and clients are connected via an extensive
telecommunication network. We monitor and maintain local and wide area networks
on a seven-day, 24-hour basis and provide shared hub satellite transmission
service as an alternative to multi-drop and point-to-point hard line
telecommunications networks.
Our target market for technology outsourcing services consists of
medium-to-large-sized commercial organizations with time-critical,
transaction-intensive information processing needs. We typically provide our
technology outsourcing services pursuant to multi-year contracts, which are
typically priced on a resource utilization basis. Resources utilized include
processing time, the number of desktops managed, professional services, data
storage and retrieval utilization and output media utilized.
Systems Integration Services
Our systems integration services include application development and
implementation, applications outsourcing, technical support and training, as
well as network design and installation services. Our systems integration
services include the development of web-based applications and web-enablement of
information technology assets, allowing our clients to conduct business with
their customers and business partners via the Internet. We also provide systems
integration services to clients, who are deploying client/server architectures,
advanced networks and outsourcing legacy applications maintenance. We believe
our ability to deliver high-level skill sets and proven methodologies across a
variety of technologies enhances our ability to help clients and
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prospects deal with technological change. Due to the nature of the work, we
generally offer our systems integration services on a time and materials basis
to a changing client base under short-term contractual arrangements.
FEDERAL GOVERNMENT
Within the federal government sector, we also provide business process
outsourcing and systems integration services. Our civilian agency clients
account for about half of our federal government revenues and Department of
Defense agencies account for the remaining half.
Business Process Outsourcing
Our business process outsourcing services consist primarily of loan
servicing for federal agencies. Our services generally include billing, lock-box
payment processing, related accounting and reconciliation and client service
call center and web-site operations. Our largest contract for these services is
with the Department of Education, for which we service student loans under the
Department of Education's Direct Student Loan program. Under this contract, we
currently provide loan servicing to over 5.2 million borrowers, or over 19
million loans with an aggregate value of $79 billion. During fiscal year 2001,
revenue from this contract was approximately $148 million. This contract is
scheduled to expire in September 2003. We also have contracts with the Small
Business Administration, Housing and Urban Development, and Ginnie Mae. Pricing
is typically determined on the basis of the number of accounts and/or
transactions processed.
Systems Integration Services
We provide applications development, applications outsourcing, network
implementation and maintenance, desktop services, technical staff augmentation,
and training. We develop and outsource many applications including legacy, ERP,
and web-based systems. The Department of Defense and civilian agencies generally
either contract directly with us or through the General Services Administration
for these services. The General Services Administration performs the procurement
function for many civilian and Department of Defense agencies. Approximately 23%
of these services for fiscal year 2001 were provided pursuant to three contracts
with the General Services Administration. We also provide our services directly
to a variety of civilian agencies such as the Departments of Labor, NASA, FAA,
Treasury, Transportation, the U.S. Senate, the U.S. Postal Service, the Federal
Energy Regulatory Commission and the National Drug Intelligence Center. In
addition, we provide these services to a variety of Department of Defense
agencies such as Strategic Command, Air Combat Command, the National Security
Agency and the Defense Special Weapons Agency. We generally price these services
on a time and materials basis.
REVENUES
Our revenues by service line are shown in the following table (in
thousands):
Year ended June 30,
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2001 2000 1999 1998 1997
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Business process outsourcing $ 974,244 $ 948,010 $ 696,976 $ 468,175 $ 385,937
Systems integration services 648,244 604,841 570,168 390,221 245,720
Technology outsourcing 441,071 409,691 375,072 330,727 297,268
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Total $2,063,559 $1,962,542 $1,642,216 $1,189,123 $ 928,925
========== ========== ========== ========== ==========
CLIENT BASE
We achieve growth in our client base through internal marketing and
acquisitions of other business process and information technology services
companies. We have a diverse client base. Within the commercial segment, we
serve all of the major vertical markets that spend heavily on technology
including the healthcare, retail, transportation and financial industries.
However, during fiscal year 2001, our largest commercial vertical market
accounted for only 20%
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of our consolidated revenues and no single commercial client accounts for more
than 2% of our consolidated revenues. Within the federal government segment, our
clients are evenly divided between the Department of Defense agencies and the
civilian agencies. Our largest federal government client represents 7% of our
consolidated revenues. In addition, over 99% of our consolidated revenues are
derived from domestic clients. Clients may be lost due to merger, business
failure or conversion to a competing processor or to an in-house system. Our
business with the federal government is subject to various risks, including the
reduction or modification of contracts due to changing government needs and
requirements. Government contracts, by their terms, generally can be terminated
for convenience by the government, which means that the government may terminate
the contract at any time, without cause, and in certain instances we would be
entitled to receive compensation only for the services provided or stranded
asset costs incurred at the time of termination.
Approximately 89%, 88% and 89% of our revenues for fiscal years 2001, 2000
and 1999, respectively, were recurring. We define recurring revenues as revenues
derived from services that are used by our clients each year in connection with
their ongoing businesses, and accordingly exclude conversion and deconversion
fees, software license fees, product installation fees and hardware sales.
Our five largest customers accounted for approximately 18%, 18% and 19% of
our fiscal years 2001, 2000 and 1999 revenues, respectively.
COMPETITION
The markets for our services are intensely competitive and highly
fragmented. The most significant competitive factors are reliability and quality
of services, technical competence and price of services.
We believe we compete successfully in the business process outsourcing
business by offering high quality services and favorable pricing by leveraging
our technical skills, process knowledge, and economics of scale. Competition is
highly fragmented and depends on the specific business process. Principal
competitors include Electronic Data Systems (EDS), IBM, Unisys, Maximus,
Transcore, FYI, Inc., National Processing Company, First Health, Lason, Inc. and
several other small-to-medium-sized local and regional competitors.
We compete successfully for technology outsourcing contracts by offering
high quality services and favorable pricing by leveraging our technical skills,
infrastructure, and achieving economics of scale. We may be required to purchase
technology assets from prospective clients or to provide financial assistance to
prospective clients in order to obtain their contracts. Many of our competitors
have substantially greater resources and thus, may have a greater ability to
obtain client contracts where sizable asset purchases or investments are
required. To maintain competitive prices, we operate with efficient and low
overhead and maintain a significant client base and account/transaction base to
achieve sufficient economies of scale. Our competition for technology
outsourcing contracts consists of:
o the first-tier outsourcers, including IBM, EDS and Computer Sciences
Corporation (CSC);
o mid-sized divisions of large corporations such as Siemens, Perot
Systems; and
o other smaller, regional competitors.
In the future, we expect competition to emerge from new players (e.g.
Hewlett Packard, Compaq) as they shift their business strategy from hardware to
both services and hardware.
In systems integration services markets, we actively compete with small
specialized firms as well as with large competitors with a wider range of
systems integration services. We believe that the key competitive factors in
obtaining and retaining clients include the ability to understand project
requirements, deliver appropriate skill sets in a timely manner and price
services effectively. We must also compete for qualified personnel through
competitive wages and by maintaining a consistent demand for the skills
recruited. Our competition in systems integration services includes EDS, CSC,
Science Applications International Corporation, and a wide variety of web
hosting and development companies.
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SALES AND MARKETING
We market our services through field sales forces located throughout the
United States. In order to enhance our sales and marketing efforts, we seek to
hire sales representatives who have significant technical and subject matter
expertise in the industries to which they will be marketing. Our sales forces
are focused on specific service offerings or vertical markets, allowing our
representatives to keep abreast of technology and industry developments.
EMPLOYEES
We believe that our success depends on our continuing ability to attract
and retain skilled technical, marketing and management personnel. As of June 30,
2001, we had approximately 21,000 full-time equivalent employees, including
approximately 17,000 employed domestically, with the balance employed in our
international operations. Of the domestic employees, approximately 200 are
represented by a union. Approximately 2,400 of our international full-time
equivalent employees are represented by unions, primarily in Mexico, and we have
had no work stoppages or strikes by these employees. Management considers its
relations with employees to be good.
As of June 30, 2001, approximately 15,200 full-time equivalent employees
provide business process, technology outsourcing and systems integration
services to our commercial clients and approximately 5,300 full-time equivalent
employees provide business process outsourcing and systems integration services
to our federal government clients, including approximately 1,800 employees who
have government security clearance. With the recent IMS acquisition, we have
increased our workforce to approximately 26,000 employees.
GOVERNMENT CONTRACTS AND REGULATION
After the IMS acquisition, approximately 25% of our revenues are derived
from contracts and subcontracts with federal government agencies. Our allowable
federal government contract costs and fees are subject to audit by the Defense
Contract Audit Agency ("DCAA"). These audits may result in non-reimbursement of
some contract costs and fees. To date, we have experienced no material
adjustments as a result of audits by the DCAA. The DCAA has completed audits of
the Company's federal contracts through fiscal year 1999 for a majority of the
federal government contracts.
We are not directly subject to federal or state regulations specifically
applicable to financial institutions. As a provider of services to financial
institutions, however, our technology outsourcing and business process
outsourcing solutions operations are examined periodically by various state and
federal regulatory agencies. These agencies make recommendations regarding
various aspects of our operations, and generally, we implement such
recommendations. We also arrange for annual independent examinations of our
major data processing facilities.
ITEM 2. PROPERTIES
As of June 30, 2001, we have approximately 182 locations in the United
States and 12 locations in 6 other countries. Approximately 1.1 million square
feet is owned and approximately 2.7 million square feet is leased. The leases
expire from 2001 to 2011 and we do not anticipate any significant difficulty in
obtaining lease renewals or alternate space. Our executive offices are located
in Dallas, Texas at a company-owned facility of approximately 621,000 square
feet, which also houses a host data center and other operations. Our federal
government sector executive offices are located in Rockville, Maryland in a
company-owned facility of approximately 130,000 square feet. We believe that our
current facilities are suitable and adequate for our business. With the IMS
acquisition we have added 120 locations in the United States and two locations
in other countries, which collectively encompass over 1.0 million square feet of
leased space.
ITEM 3. LEGAL PROCEEDINGS
On December 16, 1998, a state district court in Houston, Texas entered
final judgment against us in a lawsuit brought by twenty-one former employees of
Gibraltar Savings Association and/or First Texas Savings Association
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(collectively, "GSA/FTSA"). The GSA/FTSA employees alleged that they were
entitled to the value of 401,541 shares of our stock pursuant to options issued
to the GSA/FTSA employees in 1988 in connection with a former data processing
services agreement between GSA/FTSA and us. The judgment against us was for
approximately $17 million, which includes attorneys' fees and pre-judgment
interest, but excludes additional attorneys' fees of approximately $850,000 and
post-judgement interest at the statutorily mandated rate, 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 a brief in support of such appeal has been filed. We plan to
vigorously pursue the appeal. The plaintiffs also have filed a notice of appeal.
A hearing has been set for September 20, 2001 for oral arguments on the parties'
appeals. Should the proceedings not be favorably resolved on appeal, we would be
subject to a material charge.
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, in the aggregate, will have a material adverse
effect on our financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal fourth quarter covered by this report, no matter was
submitted to a vote of our security holders.
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PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "ACS." The following table sets forth the high and low sales
prices of our Class A common stock for the last two fiscal years as reported on
NYSE.
Fiscal year ended June 30, 2001 High Low
------------------------------- ------ ------
First Quarter $51.31 $32.63
Second Quarter 62.63 46.50
Third Quarter 68.60 53.63
Fourth Quarter 77.68 59.50
Fiscal year ended June 30, 2000 High Low
------------------------------- ------ ------
First Quarter $53.00 $38.50
Second Quarter 46.00 31.75
Third Quarter 49.00 31.00
Fourth Quarter 39.88 31.75
On August 24, 2001, the last reported sales price of our Class A common
stock as reported on the New York Stock Exchange was $85.25 per share.
Except for the dividends paid by ACS Government Solutions Group, Inc. prior
to its becoming part of our company by a December 1997 merger, we have not paid
any dividends to date on our common stock. We intend to continue to retain
earnings for use in the operation of our business and, therefore, do not
anticipate paying any dividends in the foreseeable future. Under the terms of
our unsecured revolving credit agreement we are prohibited from paying dividends
in any fiscal year in a total amount that would exceed 50% of our net income for
the preceding fiscal year. Any future determination to pay dividends will be at
the discretion of our Board of Directors and will be dependent upon our
financial condition, results of operations, contractual restrictions, capital
requirements, business prospects and such other factors as the Board of
Directors deems relevant.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are qualified by
reference to and should be read in conjunction with our Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
document.
(In thousands, except per share amounts)
As of and for the year ended June 30,
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2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
RESULTS OF OPERATIONS DATA:
Revenues $2,063,559 $1,962,542 $1,642,216 $1,189,123 $ 928,925
Net income $ 134,292 $ 109,312(1) $ 86,230 $ 54,422(3) $ 49,666
Earnings per common share - basic $ 2.69 $ 2.22(1) $ 1.77 $ 1.14(3) $ 1.08
Earnings per common share -
assuming dilution $ 2.46 $ 2.07(1) $ 1.66 $ 1.11(3) $ 1.05
Weighted average shares outstanding -
basic 49,879 49,244 48,839 47,599 46,136
Weighted average shares outstanding
assuming dilution 58,228 55,806 55,668 50,487 47,452
BALANCE SHEET DATA:
Working capital $ 528,563 $ 413,632(2) $ 194,226 $ 198,118 $ 110,866
Total assets $1,891,687 $1,656,446 $1,223,600 $ 949,798 $ 761,477
Total long-term debt
(less current portion) $ 649,313 $ 525,619 $ 349,106 $ 234,848 $ 130,680
Stockholders' equity $ 885,515 $ 711,377 $ 607,421 $ 503,670 $ 427,481
(1) Net income for fiscal year 2000 includes $1,055,000, or $.02 per
share, of net non-operating gains resulting from divestiture and
restructuring activities.
(2) Working capital includes $180,335,000 of receivables from the
divestiture of business units prior to June 30, 2000 and $43,362,000
of net assets held-for-sale from business units to be divested
subsequent to June 30, 2000.
(3) Net income for fiscal year 1998 includes $12,974,000 ($8,880,000 net
of tax) or $.19 and $.18 per basic and diluted share, respectively, of
merger costs we incurred in connection with the December 1997
Government Solutions Group merger.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts included in this MD&A regarding our financial
position, business strategy and plans and objectives of our management for
future operations, are forward-looking statements. These forward-looking
statements rely on a number of assumptions concerning future events and are
subject to a number of uncertainties and other factors, many of which are
outside of our control, that could cause actual results to materially differ
from such statements. While we believe that the assumptions concerning future
events are reasonable, we caution that there are inherent difficulties in
predicting certain important factors, especially the timing and magnitude of
technological advances; the performance of recently acquired businesses; the
prospects for future acquisitions; the possibility that a current customer could
be acquired or otherwise affected by a future event that would diminish its
information technology requirements; the competition in the information
technology industry and the impact of such competition on pricing, revenues and
margins; the degree to which business entities continue to outsource information
technology and business processes; uncertainties surrounding budget reductions
or changes in funding priorities for existing federal, state or local government
programs; and the cost of attracting and retaining highly skilled personnel.
GENERAL
We derive our revenues from delivering information technology services,
including technology outsourcing, business process outsourcing and systems
integration services, to the commercial sector and to the federal government. A
substantial portion of our revenues is derived from recurring monthly charges to
our customers under service contracts with initial terms that vary from one to
ten years. For the fiscal year ended June 30, 2001, approximately 89% of our
revenues were recurring. We define recurring revenues as revenues derived from
services that are used by our customers each year in connection with their
ongoing businesses, and accordingly exclude conversion and deconversion fees,
software license fees, short-term contract programming engagements, product
installation fees and hardware sales. Since the inception of our company through
June 30, 2001, we have purchased 53 information technology services companies,
resulting in geographic expansion, growth and diversification of our customer
base, expansion of services offered and increased economies of scale.
Approximately half of the increase in revenues since June 30, 1994 has been
attributable to these acquisitions.
RECENT EVENT
On August 24, 2001 we acquired Lockheed Martin IMS Corporation ("IMS") a
wholly-owned subsidiary of Lockheed Martin Corporation for approximately $825
million in cash plus transaction costs. The transaction was accounted for under
the purchase method of accounting, and therefore unless specifically stated, the
following Management's Discussion and Analysis does not include IMS operations.
SIGNIFICANT DEVELOPMENTS - FISCAL YEAR 2001
During fiscal year 2001, we acquired five companies, all of which serve our
commercial sector. We also signed contracts for a company record $345.0 million
of annual recurring new business during fiscal year 2001.
In the third quarter of fiscal year 2001, we sold a new issue of $317
million of 3.5% Convertible Subordinated Notes due February 15, 2006 (the "3.5%
Notes"). The 3.5% Notes are convertible at any time prior to the maturity date,
unless redeemed or repurchased, 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 3.5% Notes (equivalent to a conversion price of $86.87 per share of Class A
common stock), subject to adjustments in certain events. The 3.5% 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 3.5% Notes.
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During the first quarter of fiscal year 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).
SIGNIFICANT DEVELOPMENTS - FISCAL YEAR 2000
In May 2000, we entered into a formal plan to divest certain non-strategic
units consisting primarily of our ATM processing business and our commercial
staffing business. These business units, which were no longer considered
strategic to our long-term goal of providing information technology and business
process outsourcing services, along with other smaller divested business units,
accounted for approximately 15% of our fiscal year 2000 revenues. In June 2000,
we sold the ATM processing business for cash proceeds of approximately $179.8
million. The proceeds from this transaction were received in July 2000. In June
2000, we also completed the sale of two small professional services and systems
integration businesses resulting in cash proceeds of approximately $0.8 million.
As a result of these divestiture transactions, we recorded a net pretax gain of
$85.8 million during the fourth quarter of fiscal year 2000. The cash proceeds
from these divestitures were used to pay down amounts outstanding under our
existing credit facility.
During the fourth quarter of fiscal year 2000, we initiated a formal plan
to divest the commercial staffing business and two other smaller business units.
As a result, we recorded a $43.9 million pretax impairment charge for goodwill
associated with the commercial staffing business and the net assets were
reclassified into the balance sheet caption "Net Assets Held for Sale."
Subsequently, the sale of these units was completed in the first quarter of
fiscal year 2001 with proceeds of approximately $47.0 million.
At June 30, 2000, we recorded a $4.4 million pretax impairment charge for
software and other intangibles associated with two other smaller businesses.
During the fourth quarter of fiscal year 2000, we recorded other
non-recurring pretax charges of approximately $23.7 million related to the
impairment of certain other intangibles, primarily customer contracts, charges
associated with loss contracts, a contractual dispute with a client,
non-recurring litigation and severance.
During fiscal year 2000, we acquired three companies, two serving our
commercial segment and one serving the federal government segment. All of these
acquisition transactions expanded our existing market expertise. Also during
fiscal year 2000, we signed $232.0 million of annual recurring new business.
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RESULTS OF OPERATIONS
The following table sets forth certain items from our Consolidated
Statements of Income expressed as a percentage of revenues and includes the
non-recurring charges mentioned above in "Significant Developments":
Percentage of Revenues
Year ended June 30,
-----------------------------
2001 2000 1999
----- ----- -----
Revenues 100.0% 100.0% 100.0%
----- ----- -----
Operating expenses:
Wages and benefits 43.8 43.5 43.5
Services and supplies 29.0 31.0 30.5
Rent, lease and maintenance 10.8 10.5 11.1
Depreciation and amortization 4.5 4.3 4.0
Impairment charges -- 2.9 --
Other operating expenses 0.9 1.5 1.2
----- ----- -----
Total operating expenses 89.0 93.7 90.3
----- ----- -----
Operating income 11.0 6.3 9.7
Interest expense 1.2 1.2 1.1
Net gain from divestitures -- (4.4) --
Other non-operating income, net (1.0) (0.5) (0.3)
----- ----- -----
Pretax profit 10.8 10.0 8.9
Income tax expense 4.2 4.4 3.6
----- ----- -----
Net income 6.6% 5.6% 5.3%
===== ===== =====
COMPARISON OF FISCAL 2001 TO FISCAL 2000
Excluding revenues from divested units of $7.5 million and $298.6 million
in fiscal years 2001 and 2000, respectively, revenues increased $392.1 million,
or 24%, from $1.66 billion to $2.01 billion. Internal growth for fiscal year
2001 was 14%, while growth from acquisitions was 10%. Revenues in our commercial
segment, excluding the fiscal year 2000 divestitures, rose 25%, or $262.3
million, primarily due to new contracts in state Medicaid and Welfare benefit
program management, as well as growth from new and existing business process
outsourcing and technology outsourcing contracts. Revenues from our federal
segment increased $129.8 million, or 21%, due to the full year impact of the
acquisition of Intellisource in the fourth quarter of fiscal year 2000 and
growth in our Department of Education contract.
Excluding the non-recurring charges of $12.5 million (see Significant
Developments - Fiscal Year 2001) and $75.0 million (see Significant Developments
- Fiscal Year 2000) in fiscal years 2001 and 2000, respectively, total operating
expenses increased $63.2 million, or 3.6%, to $1.8 billion due to our growth in
new business. As a percentage of revenues, wages and benefits increased from
43.5% to 43.8% primarily as a result of the fiscal year 2000 divestitures, which
had a smaller component of wages and benefits. In addition, the growth of our
business process outsourcing services, which has a higher labor component, has
increased this percentage. Services and supplies decreased as a percentage of
revenues from 31.0% 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. Excluding the non-recurring items, rent, lease and maintenance
remained relatively constant as a percentage of revenues. Excluding
non-recurring items, other operating expenses decreased from 1.1% to 0.8% as a
percentage of revenues due to legal and other expenses recorded in June 2000.
Other non-operating income, net includes a non-recurring gain of $12.8
million in fiscal year 2001 related to the sale of an investment. Net gain from
divestitures represents an $85.8 million gain in fiscal year 2000 as a result of
the divestiture program completed in early fiscal year 2001 (see Significant
Developments - Fiscal Year 2000).
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Our effective tax rate of approximately 39.25% in fiscal year 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 FISCAL 2000 TO FISCAL 1999
Revenues increased $320.3 million, or 20%, for fiscal year 2000 to $1.96
billion from $1.64 billion for fiscal year 1999. Of the 20% increase in
revenues, approximately 10% was from internal growth and 10% from acquisitions.
Revenues from our commercial segment increased $253.3 million, or 23%, over
fiscal year 1999 primarily due to acquisitions and new business process
outsourcing and technology outsourcing contracts with customers in the
insurance, retail, healthcare and financial services industries. Revenues from
our federal government segment increased $67.0 million, or 12%, over fiscal year
1999 due primarily to increased requirements under the Department of Education's
contract, new task orders under civilian agency contracts and the Intellisource
acquisition.
Fiscal year 2000 results of operations include several non-recurring pretax
charges totaling $72.0 million and a non-operating net pretax gain from
divestitures of $85.8 million that are discussed above in Significant
Developments - Fiscal Year 2000 and for purposes of the following discussion
have been excluded. The net effect of these non-recurring transactions increased
our basic and diluted earnings per share by approximately $0.02 for fiscal year
2000.
Total operating expenses increased $283.5 million, or 19%, to $1.77 billion
for fiscal year 2000 as compared to fiscal year 1999, due to our increase in
revenues. As a percentage of revenues, operating expenses decreased slightly in
fiscal year 2000 to 90.0% from 90.3% in fiscal year 1999 as a result of
expansion through internal growth and acquisitions in our business process
outsourcing service lines. Service and supplies as a percentage of revenues
increased from 30.5% in fiscal year 1999 to 30.8% in fiscal year 2000 due to a
higher component of subcontractor costs on the Department of Education contract
and increased ATM transactions. Rent, lease and maintenance expense decreased as
a percentage of revenues to 10.5% in fiscal year 2000 from 11.1% in fiscal year
1999 due to current year acquisitions having a lower component of rent, lease
and maintenance expense. Depreciation and amortization increased as a percentage
of revenues to 4.3% in fiscal year 2000 compared to 4.0% in fiscal year 1999
primarily due to the amortization of current year acquisition costs.
Operating income increased $36.8 million, or 23%, for fiscal year 2000 as
compared to fiscal year 1999.
Interest expense increased $6.4 million to $24.0 million in fiscal year
2000, compared to $17.6 million in fiscal year 1999, primarily due to an
increase in interest rates and additional debt incurred for acquisitions.
Other non-operating income for fiscal year 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 year 1999 and the recognition of a $1.8
million net gain on the sale of a minority investment.
Excluding the non-recurring transactions discussed in Significant
Developments - Fiscal Year 2000, the effective tax rate for fiscal year 2000 was
approximately 40.3% and 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 June 30, 2001, we had cash and cash equivalents totaling $242.5 million
compared to $44.5 million at June 30, 2000. Included in the cash balances at
June 30, 2001 and 2000 are $4.9 million and $22.3 million, respectively, of
restricted cash held on behalf of governmental customers. Working capital
increased to $528.6 million at June 30, 2001 from $413.6 million at June 30,
2000 due primarily to the collection of proceeds from divestitures and the
issuance of our 3.5% Notes, partially offset by the subsequent repayment of
long-term debt under our credit facility.
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Net cash provided by operating activities for fiscal year 2001 decreased to
$141.9 million as compared with $157.8 million in fiscal year 2000. During the
first quarter of fiscal year 2001, we paid approximately $50.0 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 flow from operations. After adjusting for these items and divestiture
activity, our net cash flow from operating activities would have been $200.6
million for fiscal year 2001, an increase of $42.8 million over fiscal year
2000. Net cash flow used in investing activities decreased by $246.7 million in
fiscal year 2001 compared to fiscal year 2000 primarily due to the receipt of
proceeds from divestitures of $202.8 million and a decrease in acquisition
payments from $232.9 million to $173.4 million. Net cash provided by financing
activities in fiscal year 2001 was $125.1 million as compared to $173.9 million
in fiscal year 2000, and decreased due to repayments of our credit facility less
the issuance of our 3.5% Notes.
In the third quarter of fiscal year 2001, we sold a new issue of $317
million of 3.5% Notes, which allowed us to repay borrowings from our existing
credit facility and to fund current and future acquisitions. As of June 30,
2001, we had $340.8 million of availability under our $450 million credit
facility.
As discussed in Recent Events, we funded the purchase of IMS through a
combination of an 18-month $550 million interim facility lead by Bear, Stearns &
Co. Inc. and Wells Fargo, N.A., available cash on hand and borrowings under our
existing credit facility. We have announced plans to refinance the interim
facility by using proceeds we receive from the issuance of equity and long-term
debt. While the precise mix, size and timing are subject to market conditions,
we expect to offer $500 million of our Class A common stock and $300 million of
long-term debt. No assurance can be given to our refinancing plans and how or
when they will be completed. Absent a refinancing, we would be subject to
incremental interest on the interim facility and would most likely jeopardize
our investment grade ratings.
Excluding the item discussed above, our 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. In order to pursue such
opportunities, which could require significant commitments of capital, 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.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." SFAS 142 addresses the accounting and reporting of acquired
goodwill and other intangible assets. SFAS 142 discontinues amortization of
acquired goodwill and instead requires annual impairment testing of acquired
goodwill. Intangible assets will be amortized over their useful economic life
and tested for impairment in accordance with SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Intangible assets with an indefinite useful economic life should not be
amortized until the life of the asset is determined to be finite. We have
adopted SFAS 142 effective July 1, 2001. SFAS 142 will have a significant
favorable impact on our fiscal year 2002 financial results. See Note 1 of the
Notes to Consolidated Financial Statements for further discussion of the impact
of SFAS 142.
Also in June 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations." SFAS 141 requires that all business
combinations be accounted for under the purchase method and defines the criteria
for identifying intangible assets for recognition apart from goodwill. SFAS 141
applies to all business combinations initiated after June 30, 2001 and all
business combinations accounted for using the purchase method for which the
acquisition date is July 1, 2001 or later. We have adopted SFAS 141 effective
July 1, 2001. We are currently evaluating the impact of SFAS 141 on our future
earnings and financial position.
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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 year 2001. We have adopted the provisions of SAB 101 and do not believe
the adoption of SAB 101 has had a material impact on our earnings and financial
position.
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". SFAS 137 deferred the effective date of SFAS 133, "Accounting for
Derivatives and Hedging Activities" to fiscal years beginning after June 15,
2000. We adopted SFAS 133 on July 1, 2000. We do not believe the adoption of
SFAS 133 has had a material impact on our earnings and financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS
We have fixed rate and variable rate debt instruments. Our variable rate
debt instruments are subject to market risk from changes in interest rates. In
order to manage 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 designated a cash flow hedge and 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 June 30, 2001 is
($355,000). The fair value of each interest rate hedge reflects termination cash
value. The fair value of the interest rate hedges, net of $139,000 tax benefit,
is reflected in accumulated other comprehensive income.
To protect ourselves from the volatility of the value of our marketable
security investment, we entered into a no-cost collar agreement in June 2001,
which matures in March 2002. The collar, a fair value hedge, is structured so
that all fluctuations in the price of the marketable security above or below
100% or 102.5% of its value on the date the collar was entered into are hedged.
As of June 30, 2001, the collar had a fair market value of $27,000.
We do not hold or issue derivative financial instruments for trading
purposes and are not a party to any leveraged derivative transactions.
Sensitivity analysis is one technique used to measure the impact of changes in
the interest rates on the value of market-risk sensitive financial instruments.
A hypothetical 10% movement in interest rates would not have a material impact
on our future earnings, fair value or cash flows.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE
--------------------------------------------------- ----
Report of Independent Accountants 18
Consolidated Balance Sheets 19
Consolidated Statements of Income 20
Consolidated Statements of Changes in Stockholders' Equity 21
Consolidated Statements of Cash Flows 22
Notes to the Consolidated Financial Statements 23
Schedule II - Valuation and Qualifying Accounts 42
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Affiliated Computer Services, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Affiliated Computer Services, Inc. and its subsidiaries at June 30, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 2001 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
July 31, 2001 except for Note 19, as to which the date is August 24, 2001
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30,
----------------------------
2001 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 242,458 $ 44,521
Accounts receivable, net 472,042 399,853
Receivable from divestitures -- 180,335
Inventory 8,591 7,324
Prepaid expenses and other current assets 77,572 71,290
Net assets held for sale -- 43,362
Deferred taxes 8,952 25,189
----------- -----------
Total current assets 809,615 771,874
Property and equipment and software, net 237,563 194,034
Goodwill and other intangibles, net 794,920 650,263
Long-term investments and other assets 49,589 40,275
----------- -----------
Total assets $ 1,891,687 $ 1,656,446
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 40,265 $ 47,901
Accrued compensation and benefits 82,043 69,208
Other accrued liabilities 126,875 156,720
Income taxes payable 7,742 60,671
Current portion of long-term debt 3,362 2,877
Current portion of unearned revenue 20,765 20,865
----------- -----------
Total current liabilities 281,052 358,242
Convertible notes 546,927 230,000
Long-term debt 102,386 295,619
Deferred taxes 55,601 35,316
Other long-term liabilities 20,206 25,892
----------- -----------
Total liabilities 1,006,172 945,069
----------- -----------
Commitments and contingencies
Stockholders' equity:
Class A common stock, $.01 par value, 500,000 shares authorized,
47,282 and 46,281 shares outstanding, respectively 473 463
Class B common stock, $.01 par value, 14,000 shares authorized,
3,300 shares outstanding 33 33
Additional paid-in capital 350,767 321,525
Retained earnings 534,374 400,200
Accumulated other comprehensive income, net (132) --
Treasury stock, at cost (0 and 246 shares, respectively) -- (10,844)
----------- -----------
Total stockholders' equity 885,515 711,377
----------- -----------
Total liabilities and stockholders' equity $ 1,891,687 $ 1,656,446
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30,
---------------------------------------------
2001 2000 1999
----------- ----------- -----------
Revenues $ 2,063,559 $ 1,962,542 $ 1,642,216
Operating expenses:
Wages and benefits 904,684 854,162 713,984
Services and supplies 598,797 608,401 500,631
Rent, lease and maintenance 223,679 206,330 183,116
Depreciation and amortization 93,617 84,752 66,723
Impairment charges -- 56,571 --
Other operating expenses 19,056 28,918 19,178
----------- ----------- -----------
Total operating expenses 1,839,833 1,839,134 1,483,632
----------- ----------- -----------
Operating income 223,726 123,408 158,584
Interest expense 23,742 23,979 17,594
Net gain on divestitures -- (85,846) --
Other non-operating income (21,076) (9,995) (4,547)
----------- ----------- -----------
Pretax profit 221,060 195,270 145,537
----------- ----------- -----------
Income tax expense 86,768 85,958 59,307
----------- ----------- -----------
Net income $ 134,292 $ 109,312 $ 86,230
=========== =========== ===========
Earnings per common share:
Basic $ 2.69 $ 2.22 $ 1.77
=========== =========== ===========
Diluted $ 2.46 $ 2.07 $ 1.66
=========== =========== ===========
Shares used in computing earnings per common share:
Basic 49,879 49,244 48,839
Diluted 58,228 55,806 55,668
The accompanying notes are an integral part of these consolidated
financial statements.
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Common Stock
------------------------------------------------ Accumulated
Class A Class B Additional Other
-------------------- ------------------- Paid-in Retained Comprehensive
Shares Amount Shares Amount Capital Earnings Income
------ --------- ------ --------- --------- --------- -------------
Balance at June 30, 1998 44,938 $ 449 3,300 $ 33 $ 298,393 $ 204,795 $ --
Comprehensive income:
Net income 86,230
Total comprehensive income
Employee stock
transactions and
related tax benefits 387 4 -- -- 6,658 -- --
Stock issued in connection
with an acquisition 273 3 -- -- 11,197 -- --
Other, net 347 4 -- -- (46) 4 --
------ --------- ----- --------- --------- --------- ---------
Balance at June 30, 1999 45,945 460 3,300 33 316,202 291,029 --
Comprehensive income:
Net income 109,312
Total comprehensive income
Employee stock
transactions and
related tax benefits 332 3 -- -- 5,157 -- --
Stock purchased in
connection with an
acquisition -- -- -- -- -- -- --
Purchase of treasury shares -- -- -- -- (2) -- --
Other, net 4 -- -- -- 168 (141) --
------ --------- ----- --------- --------- --------- ---------
Balance at June 30, 2000 46,281 463 3,300 33 321,525 400,200 --
Comprehensive income:
Unrealized gains on
marketable securities -- -- -- -- -- -- 84
Interest rate hedge -- -- -- -- -- -- (216)
Net income 134,292
Total comprehensive income
Employee stock
transactions and
related tax benefits 1,000 10 -- -- 29,179 -- --
Conversion of 4%
Convertible
Subordinated Notes 1 -- -- -- 63 -- --
Other, net -- -- -- -- -- (118) --
------ --------- ----- --------- --------- --------- ---------
Balance at June 30, 2001 47,282 $ 473 3,300 $ 33 $ 350,767 $ 534,374 $ (132)
====== ========= ===== ========= ========= ========= =========
Treasury
Shares Amount Total
-------- --------- ---------
Balance at June 30, 1998 -- $ -- $ 503,670
Comprehensive income:
Net income 86,230
---------
Total comprehensive income 86,230
---------
Employee stock
transactions and
related tax benefits (8) (303) 6,359
Stock issued in connection
with an acquisition -- -- 11,200
Other, net -- -- (38)
------- --------- ---------
Balance at June 30, 1999 (8) (303) 607,421
Comprehensive income:
Net income 109,312
---------
Total comprehensive income 109,312
---------
Employee stock
transactions and
related tax benefits 38 1,576 6,736
Stock purchased in
connection with an
acquisition (273) (12,020) (12,020)
Purchase of treasury shares (3) (97) (99)
Other, net -- -- 27
------- --------- ---------
Balance at June 30, 2000 (246) (10,844) 711,377
Comprehensive income:
Unrealized gains on
marketable securities -- -- 84
Interest rate hedge -- -- (216)
Net income 134,292
---------
Total comprehensive income 134,160
---------
Employee stock
transactions and
related tax benefits 246 10,844 40,033
Conversion of 4%
Convertible
Subordinated Notes -- -- 63
Other, net -- -- (118)
------- --------- ---------
Balance at June 30, 2001 -- $ -- $ 885,515
======= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended June 30,
---------------------------------------
2001 2000 1999
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 134,292 $ 109,312 $ 86,230
--------- --------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 93,617 84,752 66,723
Impairment charges -- 56,571 --
Net gain on divestitures -- (85,846) --
Gain on collection of note receivable (1,713) (3,000) --
Gain on sale of investment (12,785) (1,892) --
Other 526 (1,483) 910
Changes in assets and liabilities, net of effects from acquisitions:
Decrease in ATM cash -- 100 3,900
Increase in accounts receivable (45,745) (49,436) (43,483)
(Increase) decrease in inventory (1,160) 3 (1,868)
Increase in prepaid expenses and other current assets (2,965) (28,747) (3,768)
Change in deferred taxes 37,359 (14,612) 28,667
(Increase) decrease in other long-term assets 3,449 (418) (3,494)
Increase (decrease) in accounts payable (11,273) 9,929 (882)
Increase (decrease) in accrued compensation and benefits 13,190 (4,018) 14,129
Increase (decrease) in other accrued liabilities (23,357) 22,565 (7,011)
Increase (decrease) in income taxes payable (32,258) 62,978 8,354
Decrease in other long-term liabilities (1,069) (54) (5,835)
Increase (decrease) in unearned revenue (8,194) 1,119 78
--------- --------- ---------
Total adjustments 7,622 48,511 56,420
--------- --------- ---------
Net cash provided by operating activities 141,914 157,823 142,650
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and software, net (99,070) (71,548) (61,141)
Additions to other intangible assets (21,695) (9,100) (11,962)
Payments for acquisitions, net of cash acquired (173,402) (232,888) (231,274)
Proceeds from divestitures, net of transaction costs 202,718 99 1,200
Payment for investments (500) (12,620) --
Proceeds from sale of investments 17,100 2,731 --
Additions to notes receivable (3,781) (2,038) --
Proceeds from notes receivable 9,492 9,586 2,822
--------- --------- ---------
Net cash used in investing activities (69,138) (315,778) (300,355)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt, net 674,893 657,040 206,052
Payments of long-term debt (566,912) (485,116) (93,284)
Employee stock transactions, net of related tax benefits 17,829 3,185 1,829
Net borrowings (payments) of ATM debt -- (100) (3,900)
Other, net (649) (1,113) (300)
--------- --------- ---------
Net cash provided by financing activities 125,161 173,896 110,397
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 197,937 15,941 (47,308)
Cash and cash equivalents at beginning of year 44,521 28,580 75,888
--------- --------- ---------
Cash and cash equivalents at end of year $ 242,458 $ 44,521 $ 28,580
========= ========= =========
See supplemental cash flow information in Notes 2, 6, 7, 8, 9 and 10.
The accompanying notes are an integral part of these consolidated
financial statements.
22
25
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business and basis of presentation
We are a Fortune 1000 company comprised of approximately 21,000 people in
23 countries providing business process and technology outsourcing solutions to
world-class commercial and government clients. We were incorporated on June 8,
1988.
The consolidated financial statements are comprised of our accounts and our
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Our fiscal year ends on June
30. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from these
estimates.
Cash and cash equivalents
Cash and cash equivalents consist primarily of short-term investments in
commercial paper. Such investments have an initial maturity of three months or
less. Included in cash and cash equivalents are $4,856,000 and $22,283,000 at
June 30, 2001 and 2000, respectively, of restricted cash held on behalf of
governmental customers.
Inventory
Inventories consist primarily of micrographics supplies and equipment,
network computer hardware, computer maintenance parts and bindery materials
which are generally recorded at the lower of cost or market (net realizable
value) using the first-in, first-out method.
Marketable Securities
Marketable securities are recorded in prepaid expenses and other current
assets at June 30, 2001 and consists of a single corporate equity security
investment which is classified as available-for-sale. The investment is recorded
at fair market value, and changes in unrealized holding gains or losses are
reported as a component of other comprehensive income in stockholders' equity
until realized.
Property and equipment, net
Property and equipment are recorded at cost. The cost of property and
equipment held under capital leases, primarily computer equipment, is equal to
the lower of the net present value of the minimum lease payments or the fair
value of the leased property at the inception of the lease. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, which for equipment ranges primarily from three to ten years and for
buildings and improvements up to forty years.
Software
Costs incurred to develop computer software to be sold as a separate
product are capitalized only after technological feasibility has been
established. Purchased computer software and internally developed computer
software purchased through acquisitions are amortized using the straight-line
method over expected useful lives which range from two to five years.
Amortization of computer software was $5,978,000, $6,489,000 and $5,094,000 in
fiscal 2001, 2000 and 1999, respectively.
In accordance with Statement of Position ("SOP") 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use", certain
costs related to the development or purchase of internal-use software are
capitalized and amortized over the estimated useful life of the software. During
fiscal 2001 and 2000, we capitalized approximately $7,726,000 and $1,179,000,
respectively, in software costs under SOP 98-1, which are being amortized over a
three-year life.
23
26
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is amortized using the straight-line method over the
expected useful lives which range from ten to forty years. It is our policy to
periodically review the net realizable value of our intangible assets, including
goodwill, through an assessment of the estimated future cash flows related to
such assets. Each business unit to which these intangible assets relate is
reviewed to determine whether future cash flows over the remaining estimated
useful lives of the long-lived assets provide for recovery of the carrying value
of the assets. In the event that assets are found to be carried at amounts which
are in excess of estimated undiscounted future cash flows, then the intangible
assets are adjusted for impairment to a level commensurate with a discounted
cash flow analysis of the underlying assets.
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." SFAS 142 addresses the accounting and reporting of acquired
goodwill and other intangible assets. SFAS 142 discontinues amortization of
acquired goodwill and instead requires annual impairment testing of acquired
goodwill. Intangible assets will be amortized over their useful economic life
and tested for impairment in accordance with SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Intangible assets with an indefinite useful economic life should not be
amortized until their life is determined to be finite.
The provisions of SFAS 142 will be effective for fiscal years beginning
after December 31, 2001. However, early adoption of SFAS 142 is permitted for
companies with a fiscal year beginning after March 15, 2001. We have adopted
SFAS 142 effective July 1, 2001. SFAS 142 will have a significant impact on our
financial results based on the historical amortization of goodwill. During
fiscal years 2001, 2000 and 1999, we had after-tax goodwill amortization expense
of $20,711,000, $18,824,000, and $10,776,000, respectively, which, beginning
July 1, 2001, will no longer be expensed under SFAS 142.
Other intangible assets
Other intangible assets consist primarily of customer contracts, which are
recorded at cost and amortized using the straight-line method over the contract
terms, which range from three to ten years.
Derivative financial instruments
We use derivative financial instruments for the purpose of hedging specific
exposures, and hold all derivatives for purposes other than trading. All
derivative financial instruments held reduce the risk of the underlying hedged
item and are designated at inception as hedges with respect to the underlying
hedged item. Such instruments to date have been limited to interest rate swap
contracts and a no-cost equity collar (see Note 14).
Long-term investments and other assets
Long-term investments consist primarily of equity investments accounted for
using the cost method. Deferred annuity contracts included in long-term
investments are carried at cost plus accrued interest, which approximates fair
market value. It is our policy to periodically review the net realizable value
of our long-term investments through an assessment of the recoverability of the
carrying amount of each investment. Each investment is reviewed to determine if
events or changes in circumstances of the issuer have occurred which indicate
that the recoverability of the carrying amount may be uncertain. In the event
that an investment is found to be carried at an amount in excess of its
recoverable amount, the asset is adjusted for impairment to a level commensurate
with the recoverable amount of the underlying asset.
Other assets consist primarily of deferred debt issuance costs and
long-term receivables. The deferred debt issuance costs are being amortized
using the straight-line method over the life of the related debt, which
approximates the effective interest method.
24
27
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue recognition
During fiscal year 2001, we adopted Staff Accounting Bulletin 101 "Revenue
Recognition in Financial Statements." SAB 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements. The
adoption of SAB 101 did not have a material impact on our financial statements.
We recognize revenues when persuasive evidence of an arrangement exists, the
product has been shipped or the services have been provided to the client, the
sales price is fixed or determinable and collectibility is reasonably assured.
Generally, information technology processing revenues are recognized as
services are provided to the client. Revenues from annual maintenance contracts
are deferred and recognized ratably over the maintenance period. Revenues from
hardware sales are recognized upon delivery to the client and uncertainties
regarding customer acceptance have expired.
In the federal government segment, our contracts are typically cost
reimbursable, fixed price, unit price or time and material contracts. Revenues
on cost reimbursable contracts are recognized by applying an estimated factor to
costs as incurred, such factor being determined by the contract provisions and
prior experience. Revenues on fixed price contracts are recognized over the
contract term based on the percentage of services that are provided during the
period compared with the total estimated services to be provided over the entire
contract. Revenues on unit-price contracts are recognized at the contractual
selling prices of work completed and accepted by the customer. Revenues on time
and material contracts are recognized at the contractual rates as the labor
hours and direct expenses are incurred.
Revenues earned in excess of related billings are accrued, whereas billings
in excess of revenues earned are deferred until the related services are
provided. Immediate recognition is made of any anticipated losses.
Revenues earned from our five largest customers each year together
comprised 18%, 18% and 19% of revenues for the years ended June 30, 2001, 2000
and 1999, respectively. Trade accounts receivable from these customers
aggregated $43,687,000 at June 30, 2001 and $44,642,000 at June 30, 2000.
Income taxes
Deferred income taxes provided in the accompanying financial statements are
determined based on the difference between financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the years in which
such differences are expected to reverse.
Earnings per common share
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the combination of dilutive common share equivalents and the
weighted average number of common shares outstanding during the period. See Note
13 for the computation of earnings per share.
Stock-based compensation
We adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), which establishes accounting and reporting standards for stock-based
employee compensation plans. As permitted by the standard, we have elected not
to adopt the fair value based method of accounting for stock-based employee
compensation and will continue to account for such arrangements under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and apply SFAS 123 on a disclosure basis only.
Reclassifications
Certain reclassifications have been made to prior period financial
statements to conform to current presentation.
25
28
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS
From our inception through June 30, 2001, we have acquired 53 businesses in
the information technology services industry that were accounted for under the
purchase accounting method. Our recent acquisition activity is summarized as
follows:
Year ended June 30, 2001 2000 1999
------------------- -------- -------- --------
Purchase consideration (in thousands):
Net cash paid $166,108 $211,355 $230,269
Amounts due to seller 1,536 708 --
Stock issued -- -- 11,500
Liabilities assumed 19,220 59,759 39,439
Other -- -- 575
-------- -------- --------
Fair value of assets acquired
(including intangibles) $186,864 $271,822 $281,783
======== ======== ========
During fiscal year 2001, we completed five acquisitions, all of which serve
our commercial segment. The most significant of these increased our presence in
the state and local government sector. We acquired the Global Government
Solutions division of Systems & Computer Technology Corporation, which delivers
state and local government outsourcing solutions. We also acquired Business
Resources Corporation, which provides outsourced records management, document
workflow imaging systems and services, and real estate title plant services to
state and local governments. We established goodwill lives of twenty to thirty
years on fiscal year 2001 acquisitions based on management's knowledge of these
types of businesses. These acquisitions are not considered material to our
results of operations; therefore, no proforma information is presented.
During fiscal year 2000, we acquired three companies, two serving our
commercial markets and one serving the federal government market. The
Intellisource Group, Inc. is a leading provider of information technology
solutions to the federal, state and local government and utility markets. Birch
& Davis Holdings, Inc. provides program management operations and consulting
services related to healthcare delivery and reform issues, primarily to federal
and state government agencies. Consultec, LLC provides design, development and
operation of decision support, claims administration and managed care support
systems to over twenty state Medicaid programs. We established goodwill lives of
twenty to thirty years on fiscal year 2000 acquisitions based on management's
knowledge of these types of businesses.
During fiscal year 2000 we purchased 273,000 shares of our Class A common
stock pursuant to a contractual right associated with the State Street
acquisition completed in fiscal year 1999. We purchased these shares, which are
accounted for as treasury shares, at an average price of $44 per share.
We are obligated to make certain contingent payments to former owners based
on the achievement of specified profit levels in conjunction with certain
acquisitions. During fiscal 2001, we paid $1,870,000 in contingent consideration
related to acquisitions made in prior years. As of June 30, 2001, the maximum
aggregate amount of the outstanding contingent obligations is approximately
$6,212,000, none of which has been earned to date. Any such payments result in a
corresponding increase in goodwill.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 "Business Combinations," which is effective July 1, 2001. SFAS 141
requires that all business combinations be accounted for under the purchase
method, and defines the criteria for identifying intangible assets for
recognition apart from goodwill. SFAS 141 applies to all business combinations
initiated after June 30, 2001 and all business combinations accounted for using
the purchase method for which the acquisition date is July 1, 2001 or later. We
26
29
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
have adopted SFAS 141 effective July 1, 2001. We are currently evaluating the
impact of SFAS 141 on our future earnings and financial position.
3. DIVESTITURES, ASSETS HELD FOR SALE AND ASSOCIATED IMPAIRMENTS
During the first quarter of fiscal 2001, we received proceeds of
$15,000,000 and recorded a $12,800,000 gain in other non-operating income
related to the sale of a non-strategic minority investment in ACS Merchant
Services, Inc.
In May 2000, we completed and executed a plan to divest certain
non-strategic operations in order to focus on our core information technology
outsourcing and business process outsourcing operations. When completed, this
plan resulted in divestitures comprising approximately 15% of fiscal year 2000
revenues.
In June 2000, we completed the sale of business units consisting primarily
of our ATM processing business and two other smaller professional services
businesses. The total cash proceeds from these transactions were $180,641,000
and resulted in a net pretax gain of $85,846,000. The proceeds from these
transactions were fully collected during July and August 2000. We also signed a
letter of intent to sell our commercial staffing business for cash proceeds of
approximately $46,000,000 and initiated plans to sell two other business units
with expected cash consideration of $1,318,000. In connection with the sale of
our commercial staffing business, we recorded a $43,899,000 pretax impairment
charge for goodwill. In addition, we recorded a $4,389,000 pretax impairment
charge for software and other intangibles associated with the other pending
divestitures. As these divestitures were not final at June 30, 2000, we
reclassified the net assets into the balance sheet caption "Net Assets Held for
Sale". The assets of these businesses were recorded at the expected proceeds
less costs associated with the transactions. The sale of the commercial staffing
business and two other business units were completed in the first quarter of
fiscal year 2001.
4. ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows (in thousands):
June 30,
------------------------
2001 2000
--------- ---------
Amounts Billed:
Commercial sector $ 180,973 $ 144,669
Federal government 98,796 95,771
--------- ---------
279,769 240,440
--------- ---------
Amounts Unbilled:
Amounts currently billable 192,277 162,005
Excess of actual indirect costs over amounts currently
billable under cost reimbursable contracts 4,912 1,743
Contract retainages not currently billable 704 311
--------- ---------
197,893 164,059
--------- ---------
Total accounts receivable 477,662 404,499
Allowances for doubtful accounts (5,620) (4,646)
--------- ---------
$ 472,042 $ 399,853
========= =========
To the extent not currently billable at June 30, 2001 and 2000, unbilled
costs and accrued profits above are billable upon delivery or acceptance of
services, upon receipt of contract funding or upon contract completion. Of
27
30
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the above unbilled costs and accrued profits at June 30, 2001, approximately
$5,616,000 are not expected to be billed and collected within one year.
5. MARKETABLE SECURITIES
Marketable securities consist of a single investment in a corporate equity
security. The security is classified as available for sale recorded at its fair
value as of June 30, 2001 of $1,320,000. At June 30, 2001, unrealized gains of
$84,000 were recorded as a component of accumulated other comprehensive income.
We have entered into a no-cost equity collar related to this equity
security to ensure protection from the volatility of its fair value. The collar
is accounted for as a fair value hedge, and all gains or losses of the hedge are
recognized in earnings in the period of change together with the offsetting
gains or losses on the equity security outside the collar. Unrealized gains or
losses on the equity security within the collar are recorded in accumulated
other comprehensive income.
6. PROPERTY, EQUIPMENT AND SOFTWARE
Property, equipment and software consists of the following (in thousands):
June 30,
------------------------
2001 2000
--------- ---------
Land $ 19,753 $ 21,211
Buildings and improvements 73,814 65,098
Computer equipment and software 268,899 200,701
Furniture and fixtures 89,455 70,805
Construction in progress 2,452 1,777
--------- ---------
454,373 359,592
Accumulated depreciation and amortization (216,810) (165,558)
--------- ---------
$ 237,563 $ 194,034
========= =========
In June 2001, we sold a facility in Dearborn, Michigan for $5,800,000. We
received cash consideration of $800,000 and a $5,000,000 note, which is due in
December 2002. We recorded a $241,000 loss on the sale of this facility at that
time.
7. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consist of the following (in thousands):
June 30,
------------------------
2001 2000
--------- ---------
Goodwill $ 773,587 $ 667,617
Other intangibles 136,555 62,984
--------- ---------
910,142 730,601
Accumulated amortization (115,222) (80,338)
--------- ---------
$ 794,920 $ 650,263
========= =========
28
31
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM INVESTMENTS
Long-term investments consist primarily of investments in preferred stock
accounted for at cost, as these securities are not considered marketable equity
securities. Also included in long-term investments are deferred annuity
contracts carried at cost plus accrued interest which approximates fair market
value and various bonds carried at cost. Dividend income recognized from such
securities, which is reflected in the consolidated financial statements as a
component of other non-operating income, was approximately $0, $110,000 and
$110,000 during fiscal 2001, 2000 and 1999, respectively.
9. NOTES PAYABLE AND LONG-TERM DEBT
A summary of notes payable and long-term debt follows (in thousands):
June 30,
------------------------
2001 2000
--------- ---------
3.5% Convertible Subordinated Notes due February 2006 ("3.5% Notes")(a) $ 316,990 $ --
4% Convertible Subordinated Notes due March 2005 ("4% Notes")(b) 229,937 230,000
Unsecured $450,000 revolving credit agreement ("Credit Facility")
payable to banks, due in December 2004(c) 100,000 294,190
Capitalized lease obligations at various interest rates,
payable through 2004 4,483 2,286
Other 1,265 2,020
--------- ---------
652,675 528,496
Less current portion (3,362) (2,877)
--------- ---------
$ 649,313 $ 525,619
========= =========
Maturities of notes payable and long-term debt at June 30, 2001 are as
follows (in thousands):
Year ending June 30,
--------------------
2002 $ 3,362
2003 1,835
2004 551
2005 329,937
2006 316,990
---------
Total $ 652,675
=========
(a) The 3.5% Notes are convertible at any time prior to the maturity date,
unless redeemed or repurchased, 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 3.5% 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 3.5% Notes is payable
semi-annually on February 15 and August 15 of each year commencing
August 15, 2001. The 3.5% 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 3.5% Notes. The redemption price set forth in the
3.5% Notes is 101.4% and 100.7% of the principal amount for the
twelve-month periods beginning February 15, 2004 and 2005,
respectively.
(b) The 4% Notes are convertible, at any time prior to the maturity date,
unless redeemed or repurchased, into Class A common stock at a
conversion rate of 23.4432 shares of Class A common stock for each
$1,000 principal amount of 4% Notes (equivalent to a conversion price
of $42.66 per share of Class A common stock), subject to adjustments
in certain events. Interest on the 4% Notes is payable semi-annually
on March 15 and September 15 of each year commencing on September 15,
1998. The 4% Notes may be redeemed at our option on or after March 15,
2002, in whole or in part, at the redemption prices set forth in the
4% Notes. The redemption price set forth in the 4% Notes is 101.71%,
101.14% and 100.57% of the principal amount for the twelve-month
periods beginning March 15, 2002, 2003 and 2004, respectively.
(c) Interest on the Credit Facility is payable monthly at LIBOR (3.86% at
June 30, 2001) plus a range of .625% to 1.125% depending on a defined
debt to EBITDA ratio. The Credit Facility contains covenants which
require that we comply with certain negative, affirmative and
financial covenants customary in facilities of this nature, including
but not limited to the maintenance of fixed charge ratios, limitations
on acquisitions and minimum net worth requirements. The agreement also
has provisions which would permit acceleration of the maturity of the
borrowings after the occurrence of certain defined events of default.
During fiscal 2000, we entered into this Credit Facility, which
increased the amount of availability from $200,000,000 to
$450,000,000.
29
32
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended June 30, 2001, $63,000 of the 4% Notes were redeemed
and converted into 1,476 shares of common stock.
Cash payments for interest for the years ended June 30, 2001, 2000 and 1999
were $19,258,000, $21,495,000 and $14,636,000, respectively. Interest income was
$8,745,000, $3,139,000 and $3,864,000 for the years ended June 30, 2001, 2000
and 1999, respectively.
At June 30, 2001, we have $340,800,000 available for use under the
$450,000,000 revolving credit agreement after considering outstanding letters of
credit.
10. INCOME TAXES
Income tax expense (benefit) is comprised of the following (in thousands):
Year ended June 30,
-----------------------------------
2001 2000 1999
-------- -------- --------
Current:
U.S. Federal $ 50,022 $ 88,439 $ 27,344
Foreign 1,689 1,480 1,039
State 6,131 6,913 3,763
-------- -------- --------
Total current expense 57,842 96,832 32,146
-------- -------- --------
Deferred:
U.S. Federal 27,417 (11,210) 23,328
Foreign 24 151 700
State 1,485 185 3,133
-------- -------- --------
Total deferred expense (benefit) 28,926 (10,874) 27,161
-------- -------- --------
Total expense for income taxes $ 86,768 $ 85,958 $ 59,307
======== ======== ========
In fiscal years 2001 and 2000, the deferred state tax expense was
significantly impacted by the fiscal year 2000 divestiture accruals.
Deferred tax assets (liabilities) consist of the following (in thousands):
June 30,
----------------------
2001 2000
-------- --------
Deferred tax assets:
Accrued expenses not yet deductible for tax purposes $ 4,878 $ 7,916
Loss carrybacks 6,596 --
Loss carry-forwards 1,468 2,282
Basis differences in capital assets -- 14,402
Divestiture-related accruals 5,078 8,344
Unearned revenue -- 5,871
-------- --------
Total deferred tax assets 18,020 38,815
-------- --------
Deferred tax liabilities:
Depreciation and amortization (62,050) (46,665)
Section 481 Adjustment (603) (919)
Unearned revenue (204) --
Other (1,678) (659)
-------- --------
Total deferred tax liabilities (64,535) (48,243)
Deferred tax assets valuation allowance (135) (699)
-------- --------
Net deferred tax liabilities $(46,650) $(10,127)
======== ========
30
33
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At June 30, 2001, the Company had available unused domestic net operating
loss carry-forwards ("NOLs"), net of Internal Revenue Code Section 382
limitations, of approximately $3,697,000, which will expire in years 2002
through 2010. The valuation allowance at June 30, 2001 exists principally due to
tax benefits of acquired corporations for which realization of any future
benefit is uncertain due to taxable income limitations. The valuation allowance
for deferred tax assets decreased by $564,000 during the year ended June 30,
2001 due to the disposition of the stock of a subsidiary.
Income tax expense varies from the amount computed by applying the
statutory federal income tax rate to income before income taxes as follows (in
thousands):
Year ended June 30,
-------------------------------
2001 2000 1999
------- ------- -------
Statutory U.S. Federal income tax $77,371 $68,345 $50,938
Goodwill amortization 4,305 12,405 3,443
State income taxes, net 4,950 4,614 4,482
Other 142 594 444
------- ------- -------
Total expense for income taxes $86,768 $85,958 $59,307
======= ======= =======
Cumulative undistributed earnings of non-U.S. subsidiaries for which U.S.
taxes have not been provided are included in consolidated retained earnings in
the amount of $6,105,000 as of June 30, 2001. If such earnings were distributed,
U.S. income taxes would be partially reduced by available credits for taxes paid
to the jurisdictions in which the income was earned.
Federal, state and foreign income tax payments during the years ended June
30, 2001, 2000 and 1999 were approximately $80,960,000, $37,197,000 and
$23,854,000, respectively.
11. COMMON STOCK
Our Class B common stock is entitled to ten votes per share. Class B shares
are convertible, at the holder's option, into Class A shares, but until
converted carry significant transfer restrictions.
In February 2001, we completed the sale of a new issue of $316,990,000
aggregate principal amount of our 3.5% Notes due February 15, 2006 (see Note 9).
The 3.5% Notes are convertible into Class A common stock at a conversion rate of
11.5117 shares for each $1,000 principal amount of the 3.5% Notes (equivalent to
a conversion price of $86.87 per share of Class A common stock), subject to
adjustments in certain events, none of which have occurred as of June 30, 2001.
In fiscal 2001, $63,000 of our 4% Notes were converted into 1,476 shares of
Class A common stock. The 4% Notes, issued in fiscal year 1998, are convertible
into Class A common stock at a conversion rate of 23.4432 shares for each $1,000
principal amount of the 4% Notes (equivalent to a conversion price of $42.66 per
share of Class A common stock), subject to certain events, none of which have
occurred as of June 30, 2001.
In January 1989, we issued warrants to purchase 793,188 additional shares
of Class A common stock to a data processing customer. The warrants were
exercisable at an aggregate price of $4,700,000 plus $230,000 for each year that
elapses after December 31, 1988, plus interest at 10% per annum. The warrants
were exercised during fiscal year 1999 by the issuance of 380,000 shares of
Class A common stock, representing the net value to the warrant holder.
31
34
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS
Under our 1997 Employee Stock Option Plan (the "1997 Plan"), we have
reserved 3,675,000 shares of Class A common stock for issuance to key employees
at exercise prices determined by the Board of Directors. In May 2000 and
February 2001, the Board of Directors approved the additional allotment of
865,749 and 804,313 shares, respectively, to the 1997 Plan in accordance with
the terms and conditions of the November 14, 1997 Proxy Statement under which
the 1997 Plan was authorized. Our 1988 Employee Stock Option Plan (the "1988
Plan"), which originally reserved 6,000,000 shares of Class A common stock for
issuance, was discontinued for new grants during fiscal 1998 and terminated
(except for the exercise of then existing option grants in September 1997) and
subsequently, 1,593,231 unissued shares expired. Generally, the options under
each plan vest in varying increments over a five-year period, expire ten years
from the date of grant and are issued at exercise prices no less than 100% of
the fair market value of Class A common stock at the time of the grant. As
reported in Note 1, we have elected to adopt the disclosure-only provisions of
SFAS 123 and will continue to account for stock-based employee compensation
plans in accordance with APB 25. As a result, no compensation cost has been
recognized in the periods presented for stock option or employee stock purchase
plans.
The Long-term Incentive Plan approved in 1991 (the "1991 Plan") provides
for the granting of options to various employees, officers and directors of ACS
Government Solutions. This plan was discontinued for new grants effective with
the December 1997 Government Solutions merger. All options issued under the 1991
Plan were fully vested as of the effective date of the merger. Exercise prices
of options awarded in all years were equal to the market price of the stock on
the date of the grant; therefore, no compensation costs have been recognized for
awards under this plan.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if we had accounted for our
stock-based compensation plans under the fair value method. The fair value of
each option grant was estimated at the date of grant using a separate
Black-Scholes option pricing calculation for each grant. The following weighted
average assumptions were used for grants in fiscal 2001, 2000 and 1999: dividend
yield of 0% in all years for the 1997 and 1988 Plans; volatility of 35.84%,
36.11% and 33.18% for fiscal 2001, 2000 and 1999, respectively, for all Plans;
risk-free interest rates of 4.76%, 6.25% and 5.07% for fiscal 2001, 2000 and
1999, respectively, in the 1997 and 1988 Plans; and weighted average expected
option life of 5.5 years for the 1997 and 1988 Plans and 3 years for the 1991
Plan for all years presented. The average fair values of the options granted
during fiscal 2001, 2000 and 1999 are estimated at $19.86, $15.16 and $14.01,
respectively, for the combined Plans.
Had compensation cost for our stock-based compensation plans been
determined in accordance with SFAS 123, our net income and earnings per share
would have been reduced to the pro forma amounts indicated below (in thousands,
except per share amounts):
Year ended June 30,
-------------------------------------------
2001 2000 1999
----------- ----------- -----------
Net income:
As reported $ 134,292 $ 109,312 $ 86,230
Pro forma 127,257 102,566 80,591
Basic earnings per common share:
As reported $ 2.69 $ 2.22 $ 1.77
Pro forma 2.55 2.08 1.65
Diluted earnings per common and common equivalent shares:
As reported $ 2.46 $ 2.07 $ 1.66
Pro forma 2.35 1.96 1.57
32
35
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Option activity for the years ended June 30, 1999, 2000 and 2001 is
summarized as follows:
Weighted Average
Options Option Price
--------- ----------------
Outstanding at June 30, 1998: 4,400,184 19.01
Granted 1,674,000 34.72
Exercised (412,409) 9.93
Canceled (404,900) 26.03
---------
Outstanding at June 30, 1999: 5,256,875 24.18
=========
Granted 1,182,962 33.92
Exercised (332,460) 9.58
Canceled (501,707) 29.77
---------
Outstanding at June 30, 2000 5,605,670 26.61
=========
Granted 1,324,000 47.70
Exercised (1,194,008) 14.91
Canceled (379,617) 36.35
---------
Outstanding at June 30, 2001 5,356,045 33.74
=========
Exercisable at June 30, 2001 647,945 18.13
Further information regarding outstanding and exercisable stock options by
exercise price range as of June 30, 2001 is disclosed below:
Options Outstanding Options Exercisable
---------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- --------- ----------- ---------
$ 8.00-17.76 393,945 4.29 $ 15.00 393,945 $ 15.00
19.63-26.88 1,533,500 6.30 22.82 254,000 22.98
31.31-41.88 2,720,100 8.09 35.75 -- --
55.13-69.20 708,500 9.69 60.05 -- --
--------- ------- ---------
5,356,045 7.51 33.74 647,945 $ 18.13
========= ======= =========
Under our 1995 Employee Stock Purchase Plan, a maximum of 1,000,000 shares
of Class A common stock can be issued to substantially all full-time employees.
Through payroll deductions, eligible participants may purchase our stock at a
15% discount to market value. The stock is purchased by the Plan in the open
market, and our contributions for the years ended June 30, 2001, 2000 and 1999
which were charged to additional paid-in capital, were $1,268,000, $1,372,000
and $1,045,000, respectively.
We have contributory retirement and savings plans which cover all employees
and allow for discretionary matching contributions by us as determined by our
Board of Directors. Contributions made by us to certain plans during the years
ended June 30, 2001, 2000 and 1999 were $10,498,000, $10,043,000 and $6,465,000,
respectively.
13. EARNINGS PER SHARE
Basic earnings per share of common stock is computed using the weighted
average number of our common shares outstanding during the period. Diluted
earnings per share is adjusted for the after-tax impact of interest on the 3.5%
Notes and the 4% Notes and reflects the incremental shares available for issue
upon the assumed exercise of stock options and conversion of the 3.5% Notes and
the 4% Notes.
33
36
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
Year ended June 30,
----------------------------------
2001 2000 1999
-------- -------- --------
Numerator:
Numerator for earnings per share (basic) -
income available to common stockholders $134,292 $109,312 $ 86,230
Effect of dilutive securities:
Interest on Convertible debt 9,036 6,155 6,149
-------- -------- --------
Numerator for earnings per share assuming dilution -
Income available to common stockholders $143,328 $115,467 $ 92,379
-------- -------- --------
Denominator:
Weighted average shares outstanding (basic) 49,879 49,244 48,839
Effect of dilutive securities:
Convertible debt 6,677 5,392 5,392
Stock options 1,672 1,170 1,341
Warrants and other -- -- 96
-------- -------- --------
Total potential common shares 8,349 6,562 6,829
-------- -------- --------
Denominator for earnings per share assuming dilution 58,228 55,806 55,668
-------- -------- --------
Earnings per common share (basic) $ 2.69 $ 2.22 $ 1.77
======== ======== ========
Earnings per common share assuming dilution $ 2.46 $ 2.07 $ 1.66
======== ======== ========
14. FINANCIAL INSTRUMENTS
As of June 30, 2001 and 2000, the fair values of our revolving credit
balances and other variable-rate debt instruments approximated the related
carrying values. The fair values of our fixed-rate debt instruments also
approximated the related carrying values, as determined based upon relative
changes in our variable borrowing rates, whether the borrowings occurred
recently or if the borrowings were repaid after the fiscal year ended. As of
June 30, 2001, we estimated the fair value of our 4% Notes at approximately
$399,832,000 and the fair value of the 3.5% Notes at approximately $340,954,000,
based on the trading price on that day.
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. We adopted SFAS 133 effective July 1, 2000.
In order to manage interest costs and exposure to changing interest rates,
we hold two interest rate hedges, designated as cash flow 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 June 30, 2001 is
($355,000). The fair value of each interest rate hedge reflects termination cash
value. The fair value of the interest rate hedges, net of $139,000 tax benefit,
is reflected in accumulated other comprehensive income.
In order to manage the volatility of the value of our marketable security
investment, we entered into a no-cost collar agreement in June 2001 which
matures in March 2002. The collar, a fair value hedge, is structured so that all
fluctuations in the price of the marketable security above or below 100% or
102.5% of its value on the date the collar was entered into are hedged. As of
June 30, 2001, the collar had a fair market value of $27,000.
34
37
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTY TRANSACTIONS
Effective April 1996, we sold ACS Merchant Services, Inc. ("Merchant
Services"), a start-up operation of the electronic commerce business line, to a
former officer and director for consideration in the form of a note receivable
of $500,000. There was no gain or loss recognized on the sale. Simultaneous with
the sale, we contributed an additional $1,500,000 and the unpaid balance of an
intercompany note due from Merchant Services of approximately $712,000 in
exchange for 1,000 shares of Merchant Services' 5% cumulative convertible
preferred stock, which is convertible after five years into approximately 55% of
the ownership of Merchant Services on a fully diluted basis, with 44% of the
voting common stock and 100% of the non-voting common stock. During fiscal year
2000, we provided guarantees to two banks on Merchant Services' debt up to
$9,000,000. In July 2000, we completed the sale of our convertible preferred
stock investment in Merchant Services for $15,000,000, resulting in a
non-operating pretax gain of approximately $12,800,000.
We, our Chairman of the Board, and three other investors (who are also key
employees), are the stockholders in DDH Aviation, Inc. ("DDH"), a corporate
airplane brokerage firm organized in late 1997. DDH has a $47 million line of
credit with Citicorp USA, Inc., for which we and our Chairman of the Board, in
exchange for warrants to acquire additional voting stock, act as guarantors with
our guaranty making us liable for up to approximately $11.5 million of the line
of credit. Assuming that all warrants are exercised and all shares to be issued
to certain key employees of DDH (upon the attainment of certain performance
goals) have been issued, our Chairman owns approximately 44% of the equity
interests in DDH and we own approximately 6%. Our Chairman, along with two of
our officers are also directors of DDH. Our Chairman also serves as the Chairman
of the Board of DDH. We have access to aircraft from DDH. On August 21, 2001, we
entered into an Agreement for Purchase with DDH Aviation, Inc. for the purchase
of a Challenger 600 aircraft. The purchase price of the aircraft is $8.5
million, which includes refurbishment of the interior and exterior of the
aircraft. A deposit of $1.7 million was made with DDH Aviation when we executed
the agreement and an additional deposit of $2.5 million will be due on October
1, 2001, with the balance due when the aircraft is delivered to us on November
24, 2001.
16. COMMITMENTS AND CONTINGENCIES
We have various operating lease agreements for information technology
equipment and facilities. A summary of the lease commitments under noncancelable
operating leases at June 30, 2001 is as follows (in thousands):
Year ending June 30,
2002 $ 66,792
2003 43,024
2004 26,202
2005 18,023
2006 11,193
Thereafter 44,896
---------
$ 210,130
=========
Lease expense for information technology equipment and facilities was
$81,215,000, $80,813,000 and $78,709,000 for the years ended June 30, 2001, 2000
and 1999, respectively.
On December 16, 1998, a state district court in Houston, Texas entered
final judgment against us in a lawsuit brought by twenty-one former employees of
Gibraltar Savings Association and/or First Texas Savings Association
(collectively, "GSA/FTSA"). The GSA/FTSA employees alleged that they were
entitled to the value of 401,541 shares of our stock pursuant to options issued
to the GSA/FTSA employees in 1988 in connection with a former data processing
services agreement between GSA/FTSA and us. The judgment against us was for
approximately $17 million, which includes attorneys' fees and pre-judgment
interest, but excludes additional attorneys' fees of approximately $850,000 and
post-judgement interest at the statutorily mandated rate, 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 a brief in support of such appeal has been filed.
35
38
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We 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.
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 1999 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
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.
17. IMPAIRMENT, MERGER EXPENSES AND OTHER CHARGES
During the first quarter of fiscal 2001, we recorded a $12,800,000 gain in
other non-operating income related to the sale of a non-strategic minority
investment in ACS Merchant Services, Inc. (see Note 15). Also, during the
quarter, we recorded a $10,400,000 charge in connection with the termination of
certain hardware leases and disaster recovery contracts (reflected in rent,
lease and maintenance expense) and a $2,100,000 charge for non-recurring
litigation and the writedown of property held-for-sale (reflected in other
operating expenses).
During the fourth quarter of fiscal 2000 and as a result of our periodic
review of the net realizable value of intangible assets, we recorded a pretax
impairment charge for $8,283,000 for certain intangible assets, primarily
customer contracts. The impairment charge was calculated based on discounted net
cash flows.
During the fourth quarter of fiscal 2000, we recorded a pretax charge of
approximately $15,395,000 for estimated losses on contracts, a non-recurring
charge related to a contractual dispute with a client, non-recurring litigation
and severance. These losses were recorded in the following income statement
categories: Wages and benefits - $4,991,000; Services and supplies - $2,987,000;
Rent, lease and maintenance - $100,000; Depreciation and amortization -
$265,000; and Other operating expenses - $7,052,000.
In the third quarter of fiscal 2000, we recorded a $1,800,000 net gain
related to the divestiture of a minority investment, which was recorded in other
non-operating income.
In the second quarter of fiscal 2000, we recorded a $3,000,000 pretax
charge in connection with the consolidation of certain business process
outsourcing operations. These expenses include approximately $2,600,000 related
to duplicate software and production facilities (reflected in rent, lease and
maintenance expense), $200,000 of unamortized leasehold improvements and
write-offs of excess equipment (reflected in depreciation and amortization
expense) and $200,000 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
$3,200,000 promissory note due March 2000 and 2,100,000 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 $3,000,000 on the promissory note in full, resulting in a
$3,000,000 gain recorded in Other non-operating income.
36
39
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" establishes standards for reporting and display of
comprehensive income and its components in 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.
In order to manage interest costs and exposure to changing interest rates,
we hold two interest rate hedges, designated as cash flow 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 June 30, 2001 is
($355,000). The fair value of each interest rate hedge reflects termination cash
value. The fair value of the interest rate hedges, net of $139,000 tax benefit,
is reflected in accumulated other comprehensive income.
We entered into a no-cost collar agreement in relation to our investment in
a marketable security in June 2001, which matures in March 2002. The collar, a
fair value hedge, is structured so that all fluctuations in the price of the
marketable security above or below 100% or 102.5% of its value on the date the
collar was entered into are hedged. As of June 30, 2001, the collar had a fair
market value of $27,000 and is recorded in other current assets.
Our marketable security investment had a fair market value of $1,320,000.
Unrealized gains of $84,000 are recorded as a component of accumulated other
comprehensive income.
The components of comprehensive income are as follows (in thousands):
Year ended June 30,
--------------------------------------
2001 2000 1999
--------- --------- ---------
Net income $ 134,292 $ 109,312 $ 86,230
Change in fair value of derivatives (net of $139 tax) (216) -- --
Unrealized gain on marketable security 84 -- --
--------- --------- ---------
Comprehensive income $ 134,160 $ 109,312 $ 86,230
========= ========= =========
19. SUBSEQUENT EVENTS
In the first quarter of fiscal 2002, we acquired Lockheed Martin IMS
Corporation ("IMS"), a wholly-owned subsidiary of Lockheed Martin Corporation.
IMS, located in Washington D.C., provides services to state and local government
agencies in health and human services, transportation, public safety and child
support. The transaction, valued at $825 million plus related transaction costs,
was funded initially through a combination of a new $550 million, 18-month
credit facility from Bear, Stearns & Co. Inc. and Wells Fargo N.A., borrowings
on our existing credit facility and existing cash on hand. We have announced
plans to refinance the interim facility by using proceeds we receive from
issuance of equity and long-term debt. While the precise mix, size and timing
are subject to market conditions, we expect to offer $500 million of our Class A
common stock and $300 million of long-term debt. No assurance can be given to
our refinancing plans and how or when they will be completed. Absent a
refinancing, we would be subject to incremental interest on the interim facility
and would most likely jeopardize our investment grade ratings.
Also in the first quarter of fiscal 2002, we announced a definitive
agreement to acquire the Business Process Outsourcing services unit of National
Processing Company. NPC's BPO unit provides healthcare claims
37
40
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
processing, credit card application processing and airline lift ticket
processing. As part of the transaction, we will acquire all of NPC's offshore
operations in Jamaica, the Dominican Republic and Barbados and a majority of
NPC's Mexican operations. The transaction, valued at $43 million, is expected to
close in the first quarter of fiscal 2002.
20. SEGMENT INFORMATION
We are organized into the commercial and the federal government segments
due to the different operating environments, in part caused by the different
types of customers, differing economic characteristics and the nature of
regulatory environments. Within the commercial segment, we provide technology
outsourcing, business process outsourcing and systems integration services to
clients in such industries as insurance, utilities, manufacturing, financial
institutions, telecommunications, healthcare, retail and transportation. In the
federal government segment, we provide systems integration services, business
process outsourcing and technology outsourcing to federal agencies.
The accounting policies of each segment are the same as those described in
the summary of significant accounting policies (see Note 1). Intersegment sales
and transfers are priced as if the sales or transfers were to third parties.
However, these amounts during the three years presented were immaterial to the
individual segments.
We use earnings before interest and taxes (operating income) to measure
segment profit. Segment operating income includes selling, general and
administrative expenses directly attributable to that segment. Corporate
includes general and administrative services shared by all of our segments such
as treasury, legal, corporate accounting, human resources and facilities. Where
practical, shared expenses are allocated based on measurable drivers of expense
(e.g., human resource costs are allocated on headcount).
Certain reclassifications have been made to the segment disclosures as the
result of changes to our operating structure. Prior years' results have been
restated for comparison purposes. The following tables reflect the results of
the segments consistent with our management system (in thousands):
38
41
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Federal
Commercial Government Corporate Consolidated
----------- ----------- ----------- ------------
FISCAL 2001
Revenues $ 1,315,893 $ 747,666 $ -- $ 2,063,559
Operating expenses(a) 1,049,117 676,728 20,371 1,746,216
----------- ----------- ----------- -----------
EBITDA(c) 266,776 70,938 (20,371) 317,343
Depreciation and amortization expense
(excluding goodwill amortization) 55,654 11,809 1,700 69,163
Goodwill amortization expense 19,750 4,704 -- 24,454
----------- ----------- ----------- -----------
Operating income $ 191,372 $ 54,425 $ (22,071) $ 223,726
=========== =========== =========== ===========
Total assets $ 1,171,051 $ 392,391 $ 328,245 $ 1,891,687
=========== =========== =========== ===========
Capital expenditures $ 79,552 $ 15,268 $ 4,250 $ 99,070
=========== =========== =========== ===========
FISCAL 2000
Revenues $ 1,344,671 $ 617,871 $ -- $ 1,962,542
Operating expenses (excluding
impairment charges)(a) 1,113,778 568,252 15,781 1,697,811
Impairment charges(b) 56,571 -- -- 56,571
----------- ----------- ----------- -----------
EBITDA(c) 174,322 49,619 (15,781) 208,160
Depreciation and amortization expense
(excluding goodwill amortization) 52,722 9,342 1,115 63,179
Goodwill amortization expense 19,035 2,538 -- 21,573
----------- ----------- ----------- -----------
Operating income $ 102,565 $ 37,739 $ (16,896) $ 123,408
=========== =========== =========== ===========
Total assets $ 1,221,205 $ 357,836 $ 77,405 $ 1,656,446
=========== =========== =========== ===========
Capital expenditures $ 63,104 $ 6,778 $ 1,666 $ 71,548
=========== =========== =========== ===========
FISCAL 1999
Revenues $ 1,091,417 $ 550,799 $ -- $ 1,642,216
Operating expenses 904,095 498,041 14,773 1,416,909
----------- ----------- ----------- -----------
EBITDA(c) 187,322 52,758 (14,773) 225,307
Depreciation and amortization expense
(excluding goodwill amortization) 42,244 7,863 952 51,059
Goodwill amortization expense 13,393 2,271 -- 15,664
----------- ----------- ----------- -----------
Operating income $ 131,685 $ 42,624 $ (15,725) $ 158,584
=========== =========== =========== ===========
Total assets $ 920,522 $ 264,806 $ 38,272 $ 1,223,600
=========== =========== =========== ===========
Capital expenditures $ 44,441 $ 13,689 $ 3,011 $ 61,141
=========== =========== =========== ===========
(a) Operating expenses during fiscal 2001 include a $10,400,000 charge in
connection with the termination of certain hardware leases and
disaster recovery contracts and a $2,100,000 charge for non-recurring
litigation costs and the writedown of property held-for-sale.
Operating expenses during fiscal year 2000 include a $15,395,000
charge ($7,078,000 relates to the federal government segment),
associated with loss contracts, a non-recurring charge related to a
contractual dispute with a client, non-recurring litigation and
severance (see Note 17). Operating expenses during fiscal year 2000 in
the commercial segment also include a $3,000,000 charge in connection
with the consolidation of certain business process outsourcing
operations (see Note 17).
(b) Impairment charges of $48,288,000 during fiscal year 2000 result from
the writedown of goodwill and other intangibles to estimated market
value associated with divestitures not completed at June 30, 2000 (see
Note 3). In addition, certain other intangibles, primarily customer
contracts, were written down based on discounted net cash flows in the
amount of $8,283,000 (see Note 17).
39
42
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(c) EBITDA consists of earnings before interest income, interest expense,
other non-operating income and expense, income taxes, depreciation and
amortization. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered
in isolation or as an alternative to net income as an indicator of a
company's performance or to cash flows from operating activities as a
measure of liquidity.
The following reconciles consolidated operating income to pretax profit (in
thousands):
Year ended June 30,
---------------------------------------
2001 2000 1999
--------- --------- ---------
Consolidated operating income $ 223,726 $ 123,408 $ 158,584
Interest expense (23,742) (23,979) (17,594)
Net gain on divestitures -- 85,846 --
Other non-operating income, net 21,076 9,995 4,547
--------- --------- ---------
Consolidated pretax profit $ 221,060 $ 195,270 $ 145,537
========= ========= =========
We derive a substantial majority of our revenues from companies
headquartered in the United States. In fiscal years 2001, 2000 and 1999, no
single customer exceeded 10% of our revenues.
40
43
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
Quarter ended
------------------------------------------------------------------------------------------------------------
Fiscal 2001 Fiscal 2000
--------------------------------------------------- ----------------------------------------------------
June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
2001 2001 2001 2001 2000 2000 2000 2000
--------- --------- --------- --------- --------- --------- --------- ---------
Revenues $ 550,477 $ 533,574 $ 500,882 $ 478,626 $ 528,409 $ 510,439 $ 476,008 $ 447,686
Operating income 63,059 61,767 56,727 42,173(a) (17,683)(b) 50,004 45,410(c) 45,677
Net income 36,552 35,193 31,992 30,555(a) 30,004(d) 27,836 26,446 25,026
Earnings per common
share (basic) $ .73 $ .70 $ .64 $ .62 $ .61 $ .57 $ .54 $ .51
Weighted average
shares outstanding 50,307 49,964 49,811 49,438 49,255 49,319 49,319 49,261
Earnings per common
share assuming dilution $ .66 $ .64 $ .59 $ .57 $ .57 $ .53 $ .50 $ .47
Weighted average
shares outstanding
assuming dilution 61,189 58,673 56,881 56,207 55,606 55,658 55,866 56,095
(a) The first quarter of fiscal 2001 includes a $12,800,000 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 $10,400,000 charge in connection with the termination of
certain hardware leases and disaster recovery contracts and a
$2,100,000 charge for non-recurring litigation costs and the writedown
of property held-for-sale.
(b) The fourth quarter of fiscal 2000 includes impairment charges of
$48,288,000, or $0.64 per diluted share, resulting from the writedown
of goodwill and other intangibles (see Note 3), impairment charges of
$8,283,000, or $0.09 per diluted share, related to certain other
intangibles, primarily customer contracts (see Note 17) and a
$15,395,000, or $0.18 per diluted share, charge associated with loss
contracts, a non-recurring charge related to a contractual dispute
with a client, non-recurring litigation and severance (See Note 17).
(c) The second quarter of fiscal 2000 includes a $3,000,000 charge in
connection with the consolidation of certain business process
outsourcing operations.
(d) Net income for the fourth quarter of fiscal 2000 includes the
$71,966,000 of charges described in (a) above, $50,479,000 after tax,
offset by a net pretax gain on divestitures of $85,846,000,
$51,534,000 after tax. This impacted basic and diluted earnings per
share for the fourth quarter of fiscal 2000 by $0.02.
41
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AFFILIATED COMPUTER SERVICES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(in thousands)
Balance Balances of Balance
at Beginning Charged to Costs Divested at End
Description of Period and Expenses Businesses(1) Deductions of Period
----------- ------------ ---------------- ------------- ---------- ---------
Year ended June 30, 2001 Deducted from asset accounts:
Accounts receivable $ 4,646 $ 2,062 $ -- $ 1,088(2) $ 5,620
Property and equipment, software 165,558 56,628 -- 5,376(3) 216,810
Goodwill 51,771 24,468 -- 412(3) 75,827
Other intangible assets 28,568 12,521 -- 1,694(3) 39,395
-------- -------- -------- -------- --------
Total $250,543 $ 95,679 $ -- $ 8,570 $337,652
======== ======== ======== ======== ========
Year ended June 30, 2000 Deducted from asset accounts:
Accounts receivable $ 4,633 $ 7,295 $ 794 $ 6,488(2) $ 4,646
Property and equipment, software 139,000 49,975 14,523 8,894(3) 165,558
Goodwill 41,779 21,573 11,581 --(3) 51,771
Other intangible assets 25,006 13,204 2,351 7,291(3) 28,568
-------- -------- -------- -------- --------
Total $210,418 $ 92,047 $ 29,249 $ 22,673 $250,543
======== ======== ======== ======== ========
Year ended June 30, 1999 Deducted from asset accounts:
Accounts receivable $ 2,840 $ 3,673 -- $ 1,880(2) $ 4,633
Property and equipment, software 101,125 40,435 -- 2,560(3) 139,000
Goodwill 25,846 15,664 -- (269)(3) 41,779
Other intangible assets 14,414 10,624 -- 32 25,006
-------- -------- -------- -------- --------
Total $144,225 $ 70,396 $ -- $ 4,203 $210,418
======== ======== ======== ======== ========
(1) Allowances associated with divested and held-for-sale business units
at June 30, 2000.
(2) Uncollectible accounts written off, net of recoveries and allowances
of acquired businesses.
(3) Retirements.
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45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Pursuant to Instruction G(3) to Form 10-K, the information required in
ITEMS 10 THROUGH 13 is incorporated by reference from our definitive proxy
statement, which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL SCHEDULES AND REPORTS ON FORM
8-K
(a) Financial Statements and Financial Schedules
The following consolidated financial statements of Affiliated Computer
Services, Inc. and Subsidiaries are included in Part II, Item 8:
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
(b) The following financial schedule of Affiliated Computer Services, Inc.
and Subsidiaries is included in Part II, Item 8:
Schedule II - Valuation and Qualifying Accounts
(c) Reports on Form 8-K
Current Report on Form 8-K dated February 15, 2001 related to the
Company's registration of approximately $317 million of 3.5%
Convertible Subordinated Notes due February 15, 2006 and 3,649,094
shares of Class A common stock.
(d) Exhibits
Reference is made to the Index to Exhibits beginning on page 45 for a
list of all exhibits filed as part of this report.
43
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this Report to be signed on our behalf
by the undersigned thereunto duly authorized representative.
Affiliated Computer Services, Inc.
Date: August 27, 2001
By: /s/ Warren D. Edwards
------------------------------------
Warren D. Edwards
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 27th day of August, 2001.
Signature Title
--------- -----
/s/ Darwin Deason Director, Chairman of the Board
------------------------------------
(Darwin Deason)
/s/ Jeffrey A. Rich Director, President and Chief Executive Officer
------------------------------------
(Jeffrey A. Rich)
/s/ Mark A. King Director, Chief Operating Officer
------------------------------------
(Mark A. King)
/s/ Warren D. Edwards Executive Vice President and Chief Financial Officer
------------------------------------
(Warren D. Edwards)
/s/ Henry G. Hortenstine Director, Executive Vice President
------------------------------------
(Henry G. Hortenstine)
/s/ William L. Deckelman, Jr. Director, Executive Vice President, Corporate Secretary and
------------------------------------ General Counsel
(William L. Deckelman, Jr.)
/s/ Peter A. Bracken Director
------------------------------------
(Peter A. Bracken)
/s/ Joseph P. O'Neill Director
------------------------------------
(Joseph P. O'Neill)
/s/ Frank A. Rossi Director
------------------------------------
(Frank A. Rossi)
/s/ Clifford M. Kendall Director
------------------------------------
(Clifford M. Kendall)
44
47
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT NAME
------ ------------
2.1 Agreement and Plan of Merger, dated as of September 20, 1997, by
and among the Company, ACS Acquisition Corp. and Computer Data
Systems, Inc., filed as Exhibit 2.1 to the Company's Form S-4
(Registration No. 333-40351) ("Form S-4") and incorporated
herein by reference.
3.1 Certificate of Incorporation of the Company, filed as Exhibit
3.1 to the Company's Registration Statement on Form S-3 dated
March 30, 2001 (Registration No. 333-58038) ("Form S-3")and
incorporated herein by reference.
3.2 Bylaws of the Company, as amended and in effect on May 3, 2000,
filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the year ended June 30, 2000 and incorporated herein by
reference.
4.1 Form of New Class A Common Stock Certificate, filed as Exhibit
4.3 to the Company's Form S-1 (Registration No. 333-79394)
("Form S-1") and incorporated herein by reference.
4.2 Rights Agreement, dated April 2, 1999, between the Company and
First City Transfer Company, as Rights Agent, filed as Exhibit
4.1 to the Company's Report on Form 8-K dated May 19, 1999 and
incorporated herein by reference.
4.3 Indenture, dated as of March 20, 1998, between Affiliated
Computer Services, Inc., as issuer and U.S. Trust Company of
Texas, N.A. as trustee, filed as Exhibit 4.1 to the Company's
Report on Form 8-K dated March 20, 1998 and incorporated herein
by reference.
4.4 Registration Rights Agreement, dated as of March 17, 1998,
between Affiliated Computer Services, Inc. and Goldman, Sachs &
Co., Bear, Stearns & Co. Inc., Smith Barney Inc., Hambrecht &
Quist LLC, Donaldson, Lufkin & Jenrette Securities Corporation
and Prudential Securities Incorporated, filed as Exhibit 4.2 to
the Company's Report on Form 8-K dated March 20, 1998 and
incorporated herein by reference.
4.5 Indenture dated as of February 21, 2001, by and between the
Company, as Issuer, and U.S. Trust Company of Texas, N.A., as
Trustee, relating to the Company's 3.5% Convertible Subordinated
Notes due February 15, 2006, filed as Exhibit 4.1 to the
Company's Form S-3 and incorporated herein by reference.
4.6 Registration Rights Agreement, dated February 21,2001, by and
between the Company and Goldman, Sachs & Co., as representative
of the several purchasers named therein relating to the
Company's 3.5% Convertible Subordinated Notes due February 15,
2006, filed as Exhibit 4.4 to the Company's Form S-3 and
incorporated herein by reference.
4.7 Specimen Note for the Company's 3.5% Convertible Subordinated
Notes due February 15, 2006, filed as Exhibit 4.2 to the
Company's Form S-3 and incorporated herein by reference.
10.1 Amended Stock Option Plan of the Company, filed as Exhibit 10.1
to the Company's Form S-1 and incorporated herein by reference.
10.2 1997 Stock Incentive Plan of the Company, filed as Appendix to
the Company's Joint Proxy Statement / Prospectus filed as Form
14A dated November 14, 1997 and incorporated herein by
reference.
10.3 Reciprocal Services Agreement, dated June 30, 1994, between the
Company and Precept, filed as Exhibit 10.15 to the Company's
Form S-1 and incorporated herein by reference.
45
48
10.4 Mutual Indemnification Agreement, dated June 30, 1994, between
the Company and Precept, filed as Exhibit 10.18 to the Company's
Form S-1 and incorporated herein by reference.
10.5 Stockholders Tax Indemnification Agreement, dated June 30, 1994,
between the Company and the Stockholders named therein, filed as
Exhibit 10.19 to the Company's Form S-1 and incorporated herein
by reference.
10.6 Form of Directors Indemnification Agreement, filed as Exhibit
10.20 to the Company's Form S-1 and incorporated herein by
reference.
10.7 Credit Agreement dated December 15, 1995 the Company, Bank One,
Texas, N.A., as Documentation Agent and Co-Agent, First
Interstate Bank of Texas N.A., as Administrative Agent and
Co-Agent and Certain Lenders filed as Exhibit 10.1 to the
Company's Third Quarter Report on Form 10-Q for the quarter
ended March 31, 1996 and incorporated herein by reference.
10.8 Restated Credit Agreement dated June 20, 1996 between the
Company, Borrower, Wells Fargo Bank (Texas), N.A., Agent, Bank
One, Texas, N.A., Co-Agent, and Certain Lenders for $160,000,000
Revolving Facility filed as Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996 and
incorporated herein by reference.
10.9 First Amendment to Restated Credit Agreement dated July 29, 1997
the Company, Wells Fargo Bank (Texas) N.A., Agent; Bank One,
Texas, N.A., Co-Agent; and Certain Lenders for $200,000,000
Revolving Facility filed as Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1997 and
incorporated herein by reference.
10.10 Second Amendment to Restated Credit Agreement dated March 20,
1998 between the Company, Wells Fargo Bank (Texas) N.A., Agent;
Bank One, Texas, N.A., Co-Agent; and Certain Lenders for
$200,000,000 Revolving Credit Facility filed as Exhibit 10.10 to
the Company's Annual Report on Form 10-K for the year ended June
30, 1999 and incorporated herein by reference.
10.11 Third Amendment to Restated Credit Agreement dated September 24,
1999 between the Company; Wells Fargo Bank (Texas), N.A., Agent;
Bank One, Texas, N.A., Co-Agent; and certain Lenders for
$200,000,000 Revolving Credit Facility filed as Exhibit 10.11 to
the Company's Annual Report on Form 10-K for the year ended June
30, 2000 and incorporated herein by reference.
10.12 Credit Agreement dated September 27, 1999 between the Company;
Wells Fargo Bank (Texas), N.A., Agent and Arranger; and certain
Lenders for $50,000,000 Revolving Credit Facility filed as
Exhibit 10.12 to the company's Annual Report on Form 10-K for
the year ended June 30, 2000 and incorporated herein by
reference.
10.13 First Amendment to Credit Agreement dated February 24, 2000
between the Company; Wells Fargo Bank (Texas), N.A., Agent and
Arranger; and certain lenders for $50,000,000 Revolving Credit
Facility filed as Exhibit 10.13 to the Company's Annual Report
on Form 10-K for the year ended June 30,2000 and incorporated
herein by reference.
10.14 Credit Agreement dated May 12, 2000 between the Company; Wells
Fargo Bank Texas, National Association, Administrative Agent and
Co-Lead Arranging Agent; Bank One, N.A., Syndication Agent and
Co-Lead Arranging Agent; SunTrust Bank, Documentation Agent: The
Bank of Tokyo-Mitsubishi, Ltd., Co-Agent; and certain Lenders
and certain Subsidiary Guarantors for $450,000,000 Revolving
Credit Facility filed as Exhibit 10.14 to the Company's Annual
Report on form 10-K for the year ended June 30, 2000 and
incorporated herein by reference.
10.15 Form of Severance Agreement by and between the Company and
Certain Executive Officers of the Company filed as Exhibit 10.15
to the Company's Annual Report on Form 10-K for the year ended
June 30, 1997 and incorporated herein by reference.
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49
10.16 U.S. Department of Education Contract No. PM94017001 (portions
of which are subject to an Order for Confidential Treatment
pursuant to Rule 24b-2) included as an exhibit to the Form
10-Q/A filed August 24, 1994 by ACS Government Solutions, Inc.
(formerly known as Computer Data Systems, Inc.) and incorporated
herein by reference.
10.17 Supplemental Executive Retirement Agreement by and between the
Company and the Company's Chairman of the Board filed as Exhibit
10.13 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1999 and incorporated herein by reference.
10.18 Employment Agreement by and between the Company and the
Company's Chairman of the Board filed as Exhibit 10.(iii)(A) to
the Company's Third Quarter Report on Form 10-Q for the quarter
ended March 31, 1999 and incorporated herein by reference.
10.19 Guaranty of Affiliated Computer Services, Inc. of Citibank loan
to DDH Aviation filed as Exhibit 1.0.1 to the Company's Form
10-Q for the period ended December 31, 2000 and incorporated
herein by reference.
o 21.1 Subsidiaries of the Company
o 23.1 Consent of PricewaterhouseCoopers LLP
o Filed herewith
47