FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period from __________ to __________
Commission file number 0-24787
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AFFILIATED COMPUTER SERVICES, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0310342
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2828 North Haskell, Dallas, Texas 75204
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 841-6111
NOT APPLICABLE
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
NUMBER OF SHARES OUTSTANDING AS OF
TITLE OF EACH CLASS FEBRUARY 8, 2002
------------------------------------ ----------------------------------
Class A Common Stock, $.01 par value 56,939,056
Class B Common Stock, $.01 par value 3,299,686
----------
60,238,742
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2001 and
June 30, 2001 1
Consolidated Statements of Income for the Three and Six Months
Ended December 31, 2001 and 2000 2
Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 2001 and 2000 3
Notes to Consolidated Financial Statements 4 - 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11 - 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 17
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, JUNE 30,
2001 2001
(UNAUDITED) (AUDITED)
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 44,174 $ 242,458
Accounts receivable, net 623,121 472,042
Inventory 12,576 8,591
Prepaid expenses and other current assets 89,993 77,572
Deferred taxes 6,707 8,952
----------- -----------
Total current assets 776,571 809,615
Property, equipment and software, net 343,506 237,563
Intangibles, net 163,763 97,160
Goodwill, net 1,422,008 697,760
Long-term investments and other assets 53,402 49,589
----------- -----------
Total assets $ 2,759,250 $ 1,891,687
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 48,176 $ 40,265
Accrued compensation and benefits 82,839 82,043
Other accrued liabilities 209,591 126,875
Income taxes payable 15,922 7,742
Short-term debt 9,550 3,362
Current portion of unearned revenue 36,398 20,765
----------- -----------
Total current liabilities 402,476 281,052
Convertible notes 546,927 546,927
Long-term debt 308 102,386
Deferred taxes 74,241 55,601
Other long-term liabilities 17,689 20,206
----------- -----------
Total liabilities 1,041,641 1,006,172
----------- -----------
Stockholders' equity:
Class A common stock 569 473
Class B common stock 33 33
Additional paid-in capital 1,083,585 350,767
Retained earnings 633,390 534,374
Accumulated other comprehensive income (net of tax) 32 (132)
----------- -----------
Total stockholders' equity 1,717,609 885,515
----------- -----------
Total liabilities and stockholders' equity $ 2,759,250 $ 1,891,687
=========== ===========
See notes to consolidated financial statements.
1
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues $ 750,427 $ 500,882 $ 1,405,446 $ 979,508
Expenses:
Wages and benefits 327,417 212,442 624,290 428,631
Services and supplies 224,707 151,477 397,578 280,982
Rent, lease and maintenance 65,980 52,683 138,860 115,389
Depreciation and amortization 27,499 22,576 51,914 43,668
Other operating expenses 7,403 4,977 13,841 11,938
----------- ----------- ----------- -----------
Total operating expenses 653,006 444,155 1,226,483 880,608
----------- ----------- ----------- -----------
Operating income 97,421 56,727 178,963 98,900
Interest expense 7,583 4,839 20,182 9,875
Other non-operating (income) expense, net 942 (991) (374) (14,358)
----------- ----------- ----------- -----------
Pretax profit 88,896 52,879 159,155 103,383
Income tax expense 33,336 20,887 59,682 40,836
----------- ----------- ----------- -----------
Net income $ 55,560 $ 31,992 $ 99,473 $ 62,547
=========== =========== =========== ===========
Earnings per common share:
Basic $ .94 $ .64 $ 1.81 $ 1.26
=========== =========== =========== ===========
Diluted $ .84 $ .59 $ 1.62 $ 1.16
=========== =========== =========== ===========
Shares used in computing earnings per common share:
Basic 59,286 49,811 55,038 49,625
Diluted 70,346 56,881 66,009 56,545
See notes to consolidated financial statements.
2
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
DECEMBER 31,
----------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net income $ 99,473 $ 62,547
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 51,914 43,668
Gain on sale of investment -- (12,785)
Other 836 (1,327)
Changes in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable (42,443) (13,687)
Increase in inventory (3,606) (1,549)
Increase in prepaid expenses and other current assets (660) (6,503)
Change in deferred taxes 20,745 16,098
Increase in other long-term assets (1,069) (585)
Increase (decrease) in accounts payable 6,952 (22,826)
Decrease in accrued compensation and benefits (23,858) (11,215)
Increase in other accrued liabilities 25,065 4,215
Change in income taxes payable 17,869 (43,564)
Decrease in unearned revenue (2,393) (5,163)
Increase (decrease) in other long-term liabilities (615) 98
--------- ---------
Total adjustments 48,737 (55,125)
--------- ---------
Net cash provided by operating activities 148,210 7,422
--------- ---------
Cash flows from investing activities:
Purchases of property, equipment and software, net of sales (78,550) (51,679)
Payments for acquisitions, net of cash acquired (878,809) (86,264)
Proceeds from divestitures, net of transaction costs (3,401) 208,428
Purchase of investments -- (2,138)
Proceeds from sale of investment -- 17,100
Additions to other intangible assets (8,523) (13,794)
Additions to notes receivable (2,823) (819)
Proceeds received on notes receivable 2,395 7,898
--------- ---------
Net cash provided (used) by investing activities (969,711) 78,732
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt, net of issuance costs 810,360 229,422
Repayments of debt (911,468) (352,324)
Proceeds from equity offering 715,392 --
Proceeds from stock options exercised 9,733 6,756
Other (800) (295)
--------- ---------
Net cash provided (used) by financing activities 623,217 (116,441)
--------- ---------
Net decrease in cash and cash equivalents (198,284) (30,287)
Cash and cash equivalents at beginning of period 242,458 44,521
--------- ---------
Cash and cash equivalents at end of period $ 44,174 $ 14,234
========= =========
See notes to consolidated financial statements.
3
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Affiliated
Computer Services, Inc. and its majority-owned subsidiaries. All material
intercompany profits, transactions and balances have been eliminated. We are
a Fortune 1000 company comprised of approximately 30,000 full-time
equivalent employees in 29 countries providing business process and
technology outsourcing solutions to world-class commercial and government
clients.
The financial information presented should be read in conjunction with our
consolidated financial statements for the year ended June 30, 2001. The
foregoing unaudited consolidated financial statements reflect all
adjustments (all of which are of a normal recurring nature) which are, in
the opinion of management, necessary for a fair presentation of the results
of the interim periods. The results for the interim periods are not
necessarily indicative of results to be expected for the year.
All share and per share information is presented without giving effect to
the two-for-one stock split of our Class A and Class B common shares
declared on January 22, 2002, payable on February 22, 2002 to shareholders
of record as of February 15, 2002 (see Note 13 for further discussion).
2. EQUITY OFFERING
On October 10, 2001, we completed our offering of 9.2 million shares of our
Class A common stock. The shares were issued at $81.00 per share. Net
proceeds of $714.5 million (net of underwriters' fees and other costs) were
used to repay the $550 million 18-month interim credit facility incurred to
fund the Lockheed Martin IMS Corporation ("IMS") acquisition and a portion
of the amount outstanding under our revolving credit facility.
3. ACQUISITIONS
In August 2001, we acquired 100% of the stock of IMS, a wholly owned
subsidiary of Lockheed Martin Corporation for approximately $825 million.
The acquisition was funded from a $550 million 18-month interim credit
facility, borrowings from our existing revolving credit facility, and
existing cash on hand. IMS' results have been included in our consolidated
financial statements from the effective date of the acquisition, August 1,
2001. IMS provides business process outsourcing services to more than 230
state and local government agencies in 45 U.S. states, the District of
Columbia, Canada, Australia, and Europe. IMS specializes in child support
enforcement, welfare and workforce services, child care management,
electronic toll collection, and other intelligent transportation services
involving the trucking industry, photo enforcement of red-light and speeding
violations, parking management, and information technology outsourcing. We
believe the acquisition of IMS solidifies ACS as a leader in technology
based outsourcing solutions to state and local government agencies.
The acquisition was accounted for under the purchase method of accounting
with assets acquired of $935.2 million and liabilities assumed of $110.2
million. The purchase price was allocated to assets acquired and liabilities
assumed based on the estimated fair value at July 31, 2001, subject to
finalization of third party valuation, as follows (in thousands):
Current Assets $120,604
Property, equipment and software 58,804
Other long-term assets 2,826
Intangible assets 64,501
Goodwill 688,512
--------
Total assets acquired 935,247
Current liabilities 110,247
--------
Total liabilities assumed 110,247
--------
Net assets acquired $825,000
========
The total amount of goodwill is expected to be fully deductible for tax
purposes. Software of $41.5 million is included in property, equipment and
software and has an anticipated useful life ranging from 2 to 10 years. The
$64.5 million acquired intangible assets is attributable to customer
contracts with an aggregate anticipated useful life of approximately 11
years.
4
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. ACQUISITIONS (CONTINUED)
Pro forma Financial Information
The following unaudited pro forma information presents a summary of our
consolidated results of operations as if the IMS acquisition had occurred
at the beginning of the periods presented and are not necessarily
indicative of future results or actual results that would have been
achieved had the acquisition occurred at the beginning of the periods
presented (in thousands, except per share amounts).
For the three months ended For the six months ended
December 31, December 31,
------------------------------- -------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenue $ 750,427 $ 659,292 $ 1,457,099 $ 1,296,459
Net income 55,560 41,346 101,467 75,449
Earnings per common share:
Basic $ .94 $ .83 $ 1.84 $ 1.52
Diluted $ .84 $ .75 $ 1.65 $ 1.39
4. NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, ("SFAS 141") "Business Combinations"
and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 141
requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. SFAS 142 requires
that ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. SFAS 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is
after June 30, 2001. We adopted the provisions of SFAS 141 and SFAS 142
effective July 1, 2001.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 144, ("SFAS 144") "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 retains the fundamental provisions
of existing generally accepted accounting principles with respect to the
recognition and measurement of long-lived asset impairment contained in
Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." However, SFAS No. 144 provides new guidance intended to
address certain significant implementation issues associated with SFAS 121,
including expanded guidance with respect to appropriate cash flows to be
used to determine whether recognition of any long-lived asset impairment is
required, and if required, how to measure the amount of the impairment. SFAS
144 also requires that any net assets to be disposed of by sale be reported
at the lower of carrying value or fair market value less cost to sell, and
expands the reporting of discontinued operations to include any component of
an entity with operations and cash flows that can be clearly distinguished
from the rest of the entity. SFAS 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years. We do not believe SFAS 144 will have a
material impact on our future earnings and financial position.
5
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS 142
The following table reflects the effect of SFAS 142 on net income and
earnings per share as if SFAS 142 had been in effect for all periods
presented:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- -------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
(in thousands except per share (in thousands except per share
amounts) amounts)
Net income $ 55,560 $ 31,992 $ 99,473 $ 62,547
Add back goodwill amortization, net of
related tax benefit ($809 and $1,760
respectively) -- 5,297 -- 10,055
------------- ------------- ------------- -------------
Adjusted net income $ 55,560 $ 37,289 $ 99,473 $ 72,602
============= ============= ============= =============
Basic earnings per share:
Reported net income $ .94 $ .64 $ 1.81 $ 1.26
Add back goodwill amortization (net of
tax benefit) -- .11 -- .20
------------- ------------- ------------- -------------
Adjusted net income $ .94 $ .75 $ 1.81 $ 1.46
============= ============= ============= =============
Diluted earnings per share:
Reported net income $ .84 $ .59 $ 1.62 $ 1.16
Add back goodwill amortization (net of
tax benefit) -- .09 -- .18
------------- ------------- ------------- -------------
Adjusted net income $ .84 $ .68 $ 1.62 $ 1.34
============= ============= ============= =============
6. DERIVATIVES AND HEDGING ACTIVITIES
In order to manage interest costs and exposure to changing interest rates,
we held two interest rate hedges, designated as cash flow hedges, which were
initiated in December 1998. Both interest rate hedges expired in December
2001. Each hedge was structured such that we paid a fixed rate of interest
of 4.54%, and received a floating rate of interest based on one month LIBOR.
The notional amount of the two hedges totaled $100 million and the fair
market value of the two hedges at December 31, 2001 and June 30, 2001 was $0
and ($355,000), respectively. The fair value of each interest rate hedge
reflected termination cash value. The fair value of the interest rate
hedges, net of $0 and $139,000 tax benefit, respectively, was reflected in
"Accumulated other comprehensive income (net of tax)."
In order to manage the volatility of the value of our marketable security
investment of $1.1 million, 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 December 31, 2001 and June 30, 2001, the
collar had fair market values of $11,000 and $27,000, respectively.
6
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. COMPREHENSIVE INCOME
We have adopted Statement of Financial Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income." 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 other
non-owner charges in equity.
The components of comprehensive income are as follow (in the thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net income $ 55,560 $ 31,992 $ 99,473 $ 62,547
Change in fair value of derivatives (net
of tax effect of $159, ($460), $158 and
$507 respectively) 249 (703) 164 776
---------- ---------- ---------- ----------
Comprehensive income $ 55,809 $ 31,289 $ 99,637 $ 63,323
========== ========== ========== ==========
8. GOODWILL
The changes in the carrying amount of goodwill for the quarter ended
December 31, 2001 are as follow (in thousands):
FEDERAL
COMMERCIAL GOVERNMENT TOTAL
----------- ----------- -----------
Balance as of September 30, 2001 $ 1,265,696 $ 122,873 $ 1,388,569
Goodwill activity
During the quarter 33,439 -- 33,439
----------- ----------- -----------
Balance as of December 31, 2001 $ 1,299,135 $ 122,873 $ 1,422,008
=========== =========== ===========
The goodwill activity in the commercial segment is primarily the result of
the refinement of the third-party valuation of the assets acquired in the
IMS acquisition during the current quarter.
9. INTANGIBLE ASSETS
AS OF DECEMBER 31, 2001 (IN THOUSANDS)
--------------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
--------------- ------------------
Amortized intangible assets:
Customer contract related intangibles $ 151,914 $ (43,190)
All other 6,865 (2,626)
--------------- ------------------
Total $ 158,779 $ (45,816)
=============== ==================
Unamortized intangible asset:
Title plant $ 50,800
---------------
Total $ 50,800
===============
7
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. INTANGIBLE ASSETS (CONTINUED)
Aggregate amortization expense:
For the quarter ended December 31, 2001 $ 5,643
Estimated amortization expense:
For the year ended June 30, 2002 $ 21,503
For the year ended June 30, 2003 $ 18,913
For the year ended June 30, 2004 $ 15,497
For the year ended June 30, 2005 $ 12,591
For the year ended June 30, 2006 $ 11,348
Customer contract related intangibles are amortized over a weighted average
of approximately 8 years. All other intangibles are amortized over a
weighted average of 14 years.
10. EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standard No. 128,
"Earnings per Share," the following table (in thousands except per share
amounts) sets forth the computation of basic and diluted earnings per share
before giving effect to the two-for-one stock split payable on February 22,
2002 (see Note 13):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Numerator:
Numerator for earnings per share (basic)
Income available to common stockholders $ 55,560 $ 31,992 $ 99,473 $ 62,547
Effect of dilutive securities:
Interest on 4% convertible debt, net of tax 1,548 1,540 3,085 3,080
Interest on 3.5% convertible debt, net of tax 2,066 -- 4,118 --
---------- ---------- ---------- ----------
Numerator for earnings per share assuming
Dilution - income available to common stockholders $ 59,174 $ 33,532 $ 106,676 $ 65,627
========== ========== ========== ==========
Denominator:
Weighted average shares outstanding (basic) 59,286 49,811 55,038 49,625
Effect of dilutive securities:
4% convertible debt 5,390 5,392 5,390 5,392
3.5% convertible debt 3,650 -- 3,650 --
Stock options 2,020 1,678 1,931 1,528
---------- ---------- ---------- ----------
Total potential common shares 11,060 7,070 10,971 6,920
---------- ---------- ---------- ----------
Denominator for earnings per share assuming dilution 70,346 56,881 66,009 56,545
========== ========== ========== ==========
Earnings per common share (basic) $ .94 $ .64 $ 1.81 $ 1.26
========== ========== ========== ==========
Earnings per common share assuming dilution $ .84 $ .59 $ 1.62 $ 1.16
========== ========== ========== ==========
11. NON-RECURRING ITEMS
In the first quarter of fiscal 2001, we recorded a $12.8 million gain in
"Other non-operating (income) expense, net" related to the sale of a
non-strategic minority investment in ACS Merchant Services, Inc.
In the first quarter of fiscal 2001, we recorded a $10.4 million charge in
connection with the termination of certain hardware leases and disaster
recovery contracts, which is included in "Rent, lease and maintenance"
expense. In addition, we recorded a $2.1 million charge for non-recurring
litigation costs and the writedown of property held-for-sale to market value
to "Other operating expenses."
8
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. SEGMENT INFORMATION
Based on the criteria set forth in Statement of Financial Accounting
Standard No. 131, "Disclosure about Segments of an Enterprise and Related
Information," we have two reportable segments: commercial and federal
government. Certain reclassifications have been made to the segment
disclosure as the result of changes to our reporting structure. The
following is a summary of certain financial information by reportable
segment (in thousands):
Quarter Ended December 31, 2001
------------------------------- Federal
Commercial Government Corporate Consolidated
---------- ---------- ---------- ------------
Revenue $ 559,286 $ 191,141 $ -- $ 750,427
Operating expense 446,820 170,671 8,016 625,507
---------- ---------- ---------- ------------
EBITDA(a) 112,466 20,470 (8,016) 124,920
Depreciation & amortization expense 22,308 4,662 529 27,499
Goodwill amortization -- -- -- --
---------- ---------- ---------- ------------
Operating income $ 90,158 $ 15,808 $ (8,545) $ 97,421
========== ========== ========== ============
Quarter Ended December 31, 2000
------------------------------- Federal
Commercial Government Corporate Consolidated
---------- ---------- ---------- -------------
Revenue $ 314,728(b) $ 186,154 $ -- $ 500,882(b)
Operating expense 249,426 168,000 4,153 421,579
---------- ---------- ---------- -------------
EBITDA(a) 65,302 18,154 (4,153) 79,303
Depreciation & amortization expense 13,419 2,660 391 16,470
Goodwill amortization 4,858 1,248 -- 6,106
---------- ---------- ---------- -------------
Operating income $ 47,025 $ 14,246 $ (4,544) $ 56,727
========== ========== ========== =============
Six Months Ended December 31, 2001
----------------------------------- Federal
Commercial Government Corporate Consolidated
---------- ---------- ---------- -------------
Revenue $1,024,129 $ 381,317 $ -- $ 1,405,446
Operating expense 819,695 342,197 12,677 1,174,569
---------- ---------- ---------- -------------
EBITDA(a) 204,434 39,120 (12,677) 230,877
Depreciation & amortization expense 42,442 8,459 1,013 51,914
Goodwill amortization -- -- -- --
---------- ---------- ---------- -------------
Operating income $ 161,992 $ 30,661 $ (13,690) $ 178,963
========== ========== ========== =============
Six Months Ended December 31, 2000
---------------------------------- Federal
Commercial Government Corporate Consolidated
---------- ---------- ---------- -------------
Revenue $ 615,743(b) $ 363,765 $ -- $ 979,508(b)
Operating expense 500,869(c) 328,417 7,654 836,940(c)
---------- ---------- ---------- -------------
EBITDA(a) 114,874 35,348 (7,654) 142,568
Depreciation & amortization expense 25,672 5,469 712 31,853
Goodwill amortization 9,486 2,329 -- 11,815
---------- ---------- ---------- -------------
Operating income $ 79,716 $ 27,550 $ (8,366) $ 98,900
========== ========== ========== =============
----------
(a) EBITDA consist of earnings before interest income, interest expense,
other non-operating income and expense, income taxes, depreciation and
amortization. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered
in isolation or as an alternative to net income as an indicator of a
company's performance or to cash flows from operating activities as a
measure of liquidity.
(b) Includes revenue of $4.3 million for the quarter ended December 31,
2000 and $16.2 million for the six months ended December 31, 2000
related to the divestitures announced in June 2000.
(c) Operating expense includes $12.5 million of non-recurring charges
related to hardware lease buyouts and disaster recovery contracts,
legal fees and a writedown of property held-for sale to market value
(see Note 11).
9
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. SUBSEQUENT EVENTS
On January 22, 2002, we announced that our Board of Directors approved a
two-for-one stock split of our outstanding Class A Common Stock and Class B
Common Stock to be implemented in the form of a 100% stock dividend ("Stock
Split"). Each holder of record of our Class A Common Stock and Class B
Common Stock as of the close of business on February 15, 2002 will receive
one additional share of such stock held by them at that time. We will issue
the additional shares resulting from the Stock Split on February 22, 2002.
In connection with the Stock Split, the number of shares of Class A Common
Stock reserved for issuance or subject to outstanding options granted under
our employee stock option or other benefit plans, as well as the number of
shares reserved for issuance under our 4% Convertible Subordinated Notes due
March 15, 2005 and 3.5% Convertible Subordinated Notes due February 15,
2006, will be proportionately increased in accordance with the terms of such
options, plans and other instruments.
The following table (in thousands except per share amounts) sets forth the
pro forma computation of basic and diluted earnings per share as if the
two-for-one stock split payable on February 22, 2002 had been effective for
all periods presented:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net Income $ 55,560 $ 31,992 $ 99,473 $ 62,547
========== ========== ========== ==========
Weighted average shares outstanding (basic) 118,572 99,622 110,076 99,250
Weighted average shares outstanding (diluted) 140,692 113,762 132,018 113,090
Earnings per common share (basic) $ .47 $ .32 $ .90 $ .63
========== ========== ========== ==========
Earnings per common share assuming dilution $ .42 $ .29 $ .81 $ .58
========== ========== ========== ==========
On February 12, 2002, we announced that our Board of Directors had approved
the redemption of our 4% Convertible Subordinated Notes due March 15, 2005
(the "Notes"). As of February 12, 2002, the outstanding principal amount of
the Notes was $229.9 million. The redemption will occur on March 15, 2002,
for holders of record on that date at a redemption price equal to 101.71% of
the principal amount of Notes held. Holders of the Notes may elect to
convert the Notes to our Class A Common Stock on or before the day prior to
redemption. The conversion rate is 23.4432 shares of Class A Common Stock
for each $1,000 principal amount of the Notes (equivalent to a conversion
price of $42.66 per share of Class A Common Stock before giving effect to
our previously announced two-for-one stock split, to be implemented in the
form of a stock dividend payable on February 22, 2002 to stockholders of
record as of the close of business on February 15, 2002). In accordance with
the terms of the Notes, we will be required to make payment for fractional
shares in cash, based on the closing price of our stock on the date of
conversion, and all accrued interest due through the date of conversion.
The notice is irrevocable.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. All statements, other than statements of historical facts, included in
this MD&A regarding our financial position, business strategy and plans and
objectives of our management for future operations are forward-looking
statements. While management has based any forward looking statements contained
herein on its current expectations, the information on which such expectations
were based may change. These forward-looking statements rely on a number of
assumptions concerning future events and are subject to a number of risks,
uncertainties and other factors, many of which are outside of our control, that
could cause actual results to materially differ from such statements. Such
events include, but are not necessarily limited to: (i) uncertainties caused by
terrorist attacks on September 11, 2001 and the threat of other attacks, acts of
war or other related events that may disrupt the markets in which we operate,
our customers, our operations and our profitability; (ii) the loss of business
from significant customers; (iii) the impairment of our capital investments as
the result of the deterioration of the financial condition of our customers in
whom we have made a significant capital investment; (iv) the competition in the
information technology industry and the impact of such competition on pricing,
revenues and margins; (v) difficulty or inability to execute our acquisition
strategy; (vi) timing and magnitude of technological advances; (vii) loss of
significant vendor(s) resulting in increased expense or inability to serve our
customers; (viii) provisions in our contracts permitting termination for
convenience, permitting termination of or subjecting us to penalties under
certain contracts, if specified service levels are not maintained, and/or
permitting audits of our pricing and compliance; (ix) changes in federal, state
or local government requirements imposing additional burdens and subjecting us
to additional expenditures and increased compliance risk; and (x) the cost of
attracting and retaining highly skilled personnel. These risks and uncertainties
and other risks and uncertainties are discussed in more detail in the "Risk
Factors" section of our Prospectus Supplement dated October 3, 2001, which has
been filed with the Securities and Exchange Commission. In addition, we operate
in a highly and rapidly changing environment and new risks may arise.
Accordingly, investors should not place any reliance on forward looking
statements as a prediction of actual results. We undertake no obligation to
update any forward looking statements.
SIGNIFICANT DEVELOPMENTS
SIX MONTHS ENDED DECEMBER 31, 2001
On October 10, 2001, we completed our offering of 9.2 million shares of our
Class A common stock. The shares were issued at $81.00 per share. Net proceeds
of $714.5 million (net of underwriters' fees and other costs) were used to repay
the $550 million 18-month interim credit facility incurred to fund the IMS
acquisition and a portion of the amount outstanding under our revolving credit
facility.
In August 2001, we acquired IMS, a wholly-owned subsidiary of Lockheed Martin
Corporation. IMS, with its principal offices located in Washington D.C. and
approximately 4,800 employees primarily throughout the United States, 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 $550 million, 18-month interim credit facility, borrowings on
our existing credit facility and existing cash on hand. IMS' operating results
are included in our financial statements from the effective date of the
acquisition, August 1, 2001.
Also in August 2001, we acquired the business process outsourcing services unit
of National Processing Company ("NPC"). NPC provides healthcare claims
processing, credit card application processing and airline lift ticket
processing. As part of the transaction, we acquired all of NPC's offshore
operations in Jamaica, the Dominican Republic, Barbados and a majority of NPC's
Mexican operations. The transaction value was $43 million plus related
transaction costs. NPC's operating results are included in our financial
statements from the effective date of the acquisition, August 1, 2001.
On January 22, 2002, we announced that our Board of Directors approved a
two-for-one stock split of our outstanding Class A Common Stock and Class B
Common Stock to be implemented in the form of a 100% stock dividend ("Stock
Split"). Each holder of record of our Class A Common Stock and Class B Common
Stock as of the close of business on February 15, 2002 will receive one
additional share of such stock held by them at that time. We will issue the
additional shares resulting from the Stock Split on February 22, 2002. In
connection with the Stock Split, the number of shares of Class A Common Stock
reserved for issuance or subject to outstanding options granted under our
employee stock option or other benefit plans, as well as the number of shares
reserved for issuance under our 4% Convertible Subordinated Notes due March 15,
2005 and 3.5% Convertible Subordinated Notes due February 15, 2006, will be
proportionately increased in accordance with the terms of such options, plans
and other instruments.
11
On February 12, 2002, we announced that our Board of Directors had approved the
redemption of our 4% Convertible Subordinated Notes due March 15, 2005 (the
"Notes"). As of February 12, 2002, the outstanding principal amount of the Notes
was $229.9 million. The redemption will occur on March 15, 2002, for holders of
record on that date at a redemption price equal to 101.71% of the principal
amount of Notes held. Holders of the Notes may elect to convert the Notes to our
Class A Common Stock on or before the day prior to redemption. The conversion
rate is 23.4432 shares of Class A Common Stock for each $1,000 principal amount
of the Notes (equivalent to a conversion price of $42.66 per share of Class A
Common Stock before giving effect to our previously announced two-for-one stock
split, to be implemented in the form of a stock dividend payable on February
22, 2002 to stockholders of record as of the close of business on February 15,
2002). In accordance with the terms of the Notes, we will be required to make
payment for fractional shares in cash, based on the closing price of our stock
on the date of conversion, and all accrued interest due through the date of
conversion. The notice is irrevocable.
SIX MONTHS ENDED DECEMBER 31, 2000
During the first quarter of fiscal 2001, we recorded a $12.8 million gain in
"Other non-operating (income) expense, net" associated with the sale of a
certain non-strategic minority investment in ACS Merchant Services, Inc. In
addition, we recorded non-recurring charges totaling $12.5 million related to
the termination of certain computer equipment leases and consolidation of
disaster recovery contracts ($10.4 million recorded in "Rent, lease and
maintenance") and litigation expense and the writedown of a facility
held-for-sale to market value ($2.1 million recorded in "Other operating
expenses").
RESULTS OF OPERATIONS
The following table sets forth certain items from our consolidated statements of
income as a percentage of revenues:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues 100% 100% 100% 100%
Expenses:
Wages and benefits 43.6 42.4 44.4 43.8
Services and supplies 29.9 30.3 28.3 28.7
Rent, lease and maintenance 8.8 10.5 9.9 11.8
Depreciation and amortization 3.7 4.5 3.7 4.5
Other operating expenses 1.0 1.0 1.0 1.1
--------- --------- --------- ---------
Total operating expenses 87.0 88.7 87.3 89.9
--------- --------- --------- ---------
Operating income 13.0 11.3 12.7 10.1
Interest expense 1.0 1.0 1.4 1.0
Other non-operating income, net 0.1 (0.2) (0.0) (1.5)
--------- --------- --------- ---------
Pretax profit 11.9 10.5 11.3 10.6
Income tax expense 4.5 4.1 4.2 4.2
--------- --------- --------- ---------
Net income 7.4% 6.4% 7.1% 6.4%
========= ========= ========= =========
COMPARISON OF THE QUARTER ENDED DECEMBER 31, 2001 TO THE QUARTER ENDED DECEMBER
31, 2000
Revenues increased to $750.4 million, or 50%, in the second quarter of fiscal
year 2002 from $500.9 million in the second quarter of fiscal year 2001.
Included in the revenues for the second quarter fiscal 2001 was $4.3 million
related to business units which were divested in fiscal 2001. Internal revenue
growth was 12% and revenue growth from acquisitions was 38%, primarily due to
the IMS and NPC acquisitions in the first quarter of fiscal year 2002. Excluding
revenues from the divested units, our commercial revenues increased $248.9
million, or 80%, to $559.3 million in the second quarter of fiscal 2002, of
which 63% related to acquisitions completed in the last twelve months and 17%
due primarily to strong revenue increases in our business process outsourcing
and state healthcare businesses. Our federal government revenues increased 3%,
or $5.0 million, to $191.1 million.
After adjusting for the application of SFAS 142 (see Note 5), our operating
income increased to $97.4 million, or 55%, in the second quarter of fiscal year
2002 as compared to $62.8 million for the second quarter of fiscal year 2001,
primarily due to the full quarter impact of the IMS and NPC acquisitions in the
first quarter of fiscal year 2002, as well as the internal growth discussed
above.
12
After adjusting for the application of SFAS 142 (see Note 5), our operating
margins increased slightly to 13.0% from 12.5% in the second quarter of fiscal
2001. Wages and benefits increased 1.2%, rent, lease and maintenance decreased
1.7%, and services and supplies decreased 0.4% as a percentage of revenue due to
our increased focus in business process outsourcing, which has a larger
component of salaries and wages and a lower component of rent, lease and
maintenance than traditional technology outsourcing. When adjusting for SFAS
142, depreciation and amortization increased 0.4% as a percentage of revenue
primarily due to capital expenditures and additions to intangible assets from
acquisition related activity.
Interest expense increased $2.7 million from $4.8 million in the second quarter
of fiscal year 2001 to $7.6 million in the second quarter of fiscal year 2002.
The increase was primarily due to interest expense incurred on the 3.5%
Convertible Subordinated Notes which were issued in February 2001 and the
interim credit facility which funded the IMS acquisition.
Other non-operating expense in fiscal year 2002 consisted primarily of a loss of
$1.0 million on a long-term investment, which we received in the December 1998
acquisition of BRC Holdings, Inc., recorded in the second quarter of fiscal year
2002. The other non-operating income in fiscal year 2001 primarily consisted of
a gain on a note receivable recorded in the second quarter of fiscal 2001.
Our effective tax rate of approximately 37.5% in the second quarter of fiscal
2002 exceeded the federal statutory rate of 35% due primarily to the net effect
of state income taxes. Our effective tax rate decreased 2.0% from 39.5% for the
second quarter of fiscal year 2001 due to the application of SFAS 142 (see Note
5).
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2001 TO THE SIX MONTHS ENDED
DECEMBER 31, 2000
Revenues increased to $1.4 billion, or 46%, for the six months ended December
31, 2001 as compared to the same period last year when excluding the fiscal year
2001 revenues from divested units of $16.2 million. Internal growth was 11% and
growth through acquisitions was 35%. Our commercial revenues increased $424.5
million, or 72%, to $1.0 billion when excluding revenues from our divested
units, with 15% internal growth and 57% from acquisitions. Internal growth was
due to growth in our state healthcare, state and local governments and business
process outsourcing businesses. Our federal government revenues increased 5% to
$381.3 million for the six months ended December 31, 2001 as a result of
continued growth in our defense and education contracts.
After adjusting for the application of SFAS 142 (see Note 5), our operating
income increased to $179.0 million, or 62%, for the six months ended December
31, 2002 as compared to $110.7 million for the same period last year, primarily
due to the impact of the first quarter fiscal year 2002 acquisitions of IMS and
NPC, as well as the internal growth discussed above.
Operating margins increased 0.1% to 12.7% for the six months ended December 31,
2001 after adjusting for the application of SFAS 142 (see Note 5) and the
non-recurring items recorded in the first quarter of fiscal year 2001 (see Note
11). Excluding these items, wages and benefits increased 0.6%, rent, lease and
maintenance decreased 0.8%, and services and supplies decreased 0.4% as a
percentage of revenue due to our increased focus in business process outsourcing
which has a larger component of salaries and wages and a lower component of
rent, lease and maintenance than traditional technology outsourcing.
Depreciation and amortization increased 0.4% as a percentage of revenue when
adjusting for SFAS 142 due to capital expenditures and additions to intangible
assets during the last year.
Interest expense increased $10.3 million from $9.9 million to $20.2 million for
the six months ended December 31, 2001 compared to the six months ended December
31, 2000. The increase was due to interest expense on the 3.5% Convertible
Subordinated Notes which were issued in February 2001 and the interim credit
facility which funded the IMS acquisition.
Other non-operating expense in fiscal year 2002 consisted primarily of a loss of
$1.0 million on a long-term investment, which we received in the December 1998
acquisition of BRC Holdings, Inc. recorded in the second quarter of fiscal year
2002. Other non-operating income in fiscal year 2001 consisted of a
non-recurring gain on sale of an investment (see Note 11) and a gain on a note
receivable.
Our effective tax rate of approximately 37.5% in the first six months of fiscal
2002 exceeded the federal statutory rate of 35% due primarily to the net effect
of state income taxes. Our effective tax rate decreased 2.0% from 39.5% for the
six months ended December 31, 2001 due to the application of SFAS 142 (see Note
5).
13
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, we had cash and cash equivalents of $44.2 million compared
to $242.5 million at June 30, 2001. Included in these cash balances was $5.0
million and $4.9 million, respectively as of December 31, 2001 and June 30,
2001, of restricted cash held on behalf of our governmental customers. Working
capital decreased to $374.1 million at December 31, 2001 from $528.6 million at
June 30, 2001 due to cash paid for the IMS and NPC acquisitions during the first
quarter of $225 million and $43 million, respectively, offset by proceeds from
the second quarter fiscal 2002 equity offering, net of repayments of outstanding
balances on our revolving credit facility and interim credit facility.
Excluding the $50.0 million in taxes related to our divestiture activity and
$10.4 million of non-recurring items in fiscal year 2001, cash provided by
operating activities increased to $148.2 million for the six months ended
December 31, 2001, as compared to $67.8 million in the same period last year.
The increase in operating cash flow is primarily due to increased net income and
our continued focus on our working capital requirements, including improvement
in our days sales outstanding on our accounts receivable. Cash used in investing
activities was $969.7 million, primarily due to the IMS and NPC acquisitions
during the first quarter of fiscal year 2002. Cash provided by financing
activities was $623.2 million due to proceeds received from the equity offering
(see Note 2) offset by net repayments of our credit facilities.
On October 10, 2001, we completed our offering of 9.2 million shares of our
Class A common stock. The shares were issued at $81.00 per share. Net proceeds
of $714.5 million (net of underwriters' fees and other costs) were used to repay
the $550 million 18-month interim credit facility incurred to fund the IMS
acquisition and a portion of the amount outstanding under our revolving credit
facility.
At December 31, 2001, we had $434.4 million available on our $450 million
revolving credit facility and outstanding letters of credit of $15.6 million. In
January 2002, we issued an additional $89 million of letters of credit to secure
our performance on our Georgia Healthcare Partnership contract. These letters of
credit reduce the availability of our revolving credit facility.
Due to the terrorist attacks on September 11, 2001 and the Enron Corporation
bankruptcy, the surety bond market has substantially changed, resulting in
reduced availability of bonds and increased premiums. Some of our state and
local government contracts require either a bond or a letter of credit and
future requests for proposal may require a surety bond or letter of credit.
Notwithstanding the existing condition of the surety bond market, management
believes that it has sufficient liquidity from its cash flow and under its
revolving credit facility to meet ongoing business needs and to respond to
future requests for proposals from state and local governments.
On January 22, 2002, we announced that our Board of Directors approved a
two-for-one stock split of our outstanding Class A Common Stock and Class B
Common Stock to be implemented in the form of a 100% stock dividend ("Stock
Split"). Each holder of record of our Class A Common Stock and Class B Common
Stock as of the close of business on February 15, 2002 will receive one
additional share of such stock held by them at that time. We will issue the
additional shares resulting from the Stock Split on February 22, 2002. In
connection with the Stock Split, the number of shares of Class A Common Stock
reserved for issuance or subject to outstanding options granted under our
employee stock option or other benefit plans, as well as the number of shares
reserved for issuance under our 4% Convertible Subordinated Notes due March 15,
2005 and 3.5% Convertible Subordinated Notes due February 15, 2006, will be
proportionately increased in accordance with the terms of such options, plans
and other instruments.
On February 12, 2002, we announced that our Board of Directors had approved the
redemption of our 4% Convertible Subordinated Notes due March 15, 2005 (the
"Notes"). As of February 12, 2002, the outstanding principal amount of the Notes
was $229.9 million. The redemption will occur on March 15, 2002, for holders of
record on that date at a redemption price equal to 101.71% of the principal
amount of Notes held. Holders of the Notes may elect to convert the Notes to our
Class A Common Stock on or before the day prior to redemption. The conversion
rate is 23.4432 shares of Class A Common Stock for each $1,000 principal amount
of the Notes (equivalent to a conversion price of $42.66 per share of Class A
Common Stock before giving effect to our previously announced two-for-one stock
split, to be implemented in the form of a stock dividend payable on February
22, 2002 to stockholders of record as of the close of business on February 15,
2002). In accordance with the terms of the Notes, we will be required to make
payment for fractional shares in cash, based on the closing price of our stock
on the date of conversion, and all accrued interest due through the date of
conversion. The notice is irrevocable.
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
capital expenditures. Our management also believes that cash provided by
operations will be sufficient to satisfy all existing debt obligations as they
become due. However, we intend to continue our growth through acquisitions and
from time to time to engage in discussions with potential acquisition
candidates, which could require significant commitments of capital. In order to
pursue such opportunities we may be required to incur debt or to issue
additional potentially dilutive securities in the future. No assurance can be
given as to our future acquisitions and expansion opportunities and how such
opportunities will be financed.
14
NEW ACCOUNTING STANDARDS
On July 1, 2001, we adopted Statements Financial Accounting Standards No. 141,
"Business Combinations," and No. 142 "Goodwill and Other Intangible Assets."
SFAS 141 requires that all business combinations be accounted for under the
purchase method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. SFAS 142 requires that
ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. SFAS 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is after
June 30, 2001.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 144, ("SFAS 144") "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 retains the fundamental provisions of
existing generally accepted accounting principles with respect to the
recognition and measurement of long-lived asset impairment contained in
Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." However, SFAS No. 144 provides new guidance intended to address certain
significant implementation issues associated with SFAS 121, including expanded
guidance with respect to appropriate cash flows to be used to determine whether
recognition of any long-lived asset impairment is required, and if required, how
to measure the amount of the impairment. SFAS 144 also requires that any net
assets to be disposed of by sale be reported at the lower of carrying value or
fair market value less cost to sell, and expands the reporting of discontinued
operations to include any component of an entity with operations and cash flows
that can be clearly distinguished from the rest of the entity. SFAS 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. We do not
believe SFAS 144 will have a material impact on our future earnings and
financial position.
15
PART II
ITEM 1. LEGAL PROCEEDINGS
On December 16, 1998, a state district court in Houston, Texas entered final
judgment against us in a lawsuit brought by twenty-one former employees of
Gibraltar Savings Association and/or First Texas Savings Association
(collectively, "GSA/FTSA"). The GSA/FTSA employees alleged that they were
entitled to the value of 401,541 shares of our stock pursuant to options issued
to the GSA/FTSA employees in 1988 in connection with a former technology
outsourcing 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, and accordingly, have not
accrued any amount on our balance sheet related to the lawsuit. 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 for oral arguments on the parties'
appeals occurred on September 20, 2001. Should the proceedings not be favorably
resolved on appeal, we would be subject to a material charge. The court of
appeals has given no indication of when it will issue its decision.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 10, 2001, we completed our offering of 9.2 million shares of our
Class A common stock. The shares were issued at $81.00 per share. Net proceeds
of $714.5 million (net of underwriters' fees and other costs) were used to repay
the $550 million 18-month interim credit facility we obtained in connection with
the IMS acquisition and a portion of the amount outstanding under our revolving
credit facility.
On January 22, 2002, we announced that our Board of Directors approved a
two-for-one stock split of our outstanding Class A Common Stock and Class B
Common Stock to be implemented in the form of a 100% stock dividend ("Stock
Split"). Each holder of record of our Class A Common Stock and Class B Common
Stock as of the close of business on February 15, 2002 will receive one
additional share of such stock held by them at that time. We will issue the
additional shares resulting from the Stock Split on February 22, 2002. In
connection with the Stock Split, the number of shares of Class A Common Stock
reserved for issuance or subject to outstanding options granted under our
employee stock option or other benefit plans, as well as the number of shares
reserved for issuance under our 4% Convertible Subordinated Notes due March 15,
2005 and 3.5% Convertible Subordinated Notes due February 15, 2006, will be
proportionately increased in accordance with the terms of such options, plans
and other instruments.
On February 12, 2002, we announced that our Board of Directors had approved the
redemption of our 4% Convertible Subordinated Notes due March 15, 2005 (the
"Notes"). As of February 12, 2002, the outstanding principal amount of the Notes
was $229.9 million. The redemption will occur on March 15, 2002, for holders of
record on that date at a redemption price equal to 101.71% of the principal
amount of Notes held. Holders of the Notes may elect to convert the Notes to our
Class A Common Stock on or before the day prior to redemption. The conversion
rate is 23.4432 shares of Class A Common Stock for each $1,000 principal amount
of the Notes (equivalent to a conversion price of $42.66 per share of Class A
Common Stock before giving effect to our previously announced two-for-one stock
split, to be implemented in the form of a stock dividend payable on February
22, 2002 to stockholders of record as of the close of business on February 15,
2002). In accordance with the terms of the Notes, we will be required to make
payment for fractional shares in cash, based on the closing price of our stock
on the date of conversion, and all accrued interest due through the date of
conversion. The notice is irrevocable.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits
None.
b.) Reports on Form 8-K
None.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 14th day of February, 2002.
AFFILIATED COMPUTER SERVICES, INC.
By: /s/ Warren D. Edwards
----------------------------------
Warren D. Edwards
Executive Vice President and
Chief Financial Officer
18