FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period from __________ to __________
Commission file number 0-24787
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AFFILIATED COMPUTER SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 51-0310342
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2828 NORTH HASKELL, DALLAS, TEXAS 75204
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 841-6111
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
NUMBER OF SHARES OUTSTANDING AS
TITLE OF EACH CLASS OF NOVEMBER 7, 2001
-------------------------------------- -------------------------------
Class A Common Stock, $.01 par value 56,909,056
Class B Common Stock, $.01 par value 3,299,686
-----------
60,208,742
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 2001 and
June 30, 2001 1
Consolidated Statements of Income for the Three Months
Ended September 30, 2001 and 2000 2
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 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 - 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 4. Submission of Matters to a Vote of Stockholders 14
Item 6. Exhibits and Reports on Form 8-K 15
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, JUNE 30,
2001 2001
(UNAUDITED) (AUDITED)
------------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 34,048 $ 242,458
Accounts receivable, net 630,345 472,042
Inventory 10,282 8,591
Prepaid expenses and other current assets 85,462 77,572
Deferred taxes 8,684 8,952
----------- -----------
Total current assets 768,821 809,615
Property, equipment and software, net 343,591 237,563
Intangibles, net 166,980 97,160
Goodwill, net 1,388,569 697,760
Long-term investments and other assets 52,969 49,589
----------- -----------
Total assets $ 2,720,930 $ 1,891,687
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 46,318 $ 40,265
Accrued compensation and benefits 75,842 82,043
Other accrued liabilities 191,872 126,875
Income taxes payable 20,873 7,742
Short-term debt 3,094 3,362
Current portion of unearned revenue 39,922 20,765
----------- -----------
Total current liabilities 377,921 281,052
Convertible notes 546,927 546,927
Long-term debt 772,136 102,386
Deferred taxes 60,948 55,601
Other long-term liabilities 19,486 20,206
----------- -----------
Total liabilities 1,777,418 1,006,172
----------- -----------
Stockholders' equity:
Class A common stock 476 473
Class B common stock 33 33
Additional paid-in capital 365,249 350,767
Retained earnings 577,971 534,374
Accumulated other comprehensive income (net of tax) (217) (132)
----------- -----------
Total stockholders' equity 943,512 885,515
----------- -----------
Total liabilities and stockholders' equity $ 2,720,930 $ 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
SEPTEMBER 30,
----------------------------
2001 2000
--------- --------
Revenues $ 655,019 $ 478,626
--------- ---------
Expenses:
Wages and benefits 296,873 216,189
Services and supplies 172,871 129,505
Rent, lease and maintenance 72,880 62,706
Depreciation and amortization 24,415 21,092
Other operating expenses 6,438 6,961
--------- ---------
Total operating expenses 573,477 436,453
--------- ---------
Operating income 81,542 42,173
Interest expense 12,599 5,035
Other non-operating income, net (1,316) (13,366)
--------- ---------
Pretax profit 70,259 50,504
Income tax expense 26,346 19,949
--------- ---------
Net income $ 43,913 $ 30,555
========= =========
Earnings per common share:
Basic $ .86 $ .62
========= =========
Diluted $ .77 $ .57
========= =========
Shares used in computing earnings per common share:
Basic 50,790 49,438
Diluted 61,672 56,207
See notes to consolidated financial statements.
2
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30,
2001 2000
--------- ---------
Cash flows from operating activities:
Net income $ 43,913 $ 30,555
--------- ---------
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation and amortization 24,415 21,092
Gain on sale of investment (274) (12,785)
Other 405 334
Changes in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable (44,661) (4,324)
Increase in inventory (1,312) (1,684)
(Increase) decrease in prepaid expenses and other current assets 3,478 (4,663)
Change in deferred taxes 5,635 8,869
Decrease in other long-term assets 1,740 711
Increase (decrease) in accounts payable 6,267 (27,288)
Decrease in accrued compensation and benefits (30,590) (17,400)
Increase (decrease) in other accrued liabilities 7,234 (4,766)
Change in income taxes payable 19,883 (43,197)
Increase (decrease) in unearned revenue 1,952 (2,930)
Increase in other long-term liabilities 356 22
--------- ---------
Total adjustments (5,472) (88,009)
--------- ---------
Net cash provided (used) by operating activities 38,441 (57,454)
--------- ---------
Cash flows from investing activities:
Purchases of property, equipment and software, net of sales (35,946) (24,803)
Payments for acquisitions, net of cash acquired (879,503) (11,463)
Proceeds from divestitures, net of transaction costs -- 209,835
Purchase of investments -- (1,535)
Proceeds from sale of investment -- 17,100
Additions to other intangible assets (5,812) (4,980)
Additions to notes receivable (2,687) (389)
Other (98) 1,641
--------- ---------
Net cash provided (used) by investing activities (924,046) 185,406
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt, net of issuance costs 756,710 80,182
Repayments of debt (87,248) (236,051)
Proceeds from stock options exercised 7,734 2,290
Other (1) --
--------- ---------
Net cash provided (used) by financing activities 677,195 (153,579)
--------- ---------
Net decrease in cash and cash equivalents (208,410) (25,627)
Cash and cash equivalents at beginning of period 242,458 44,521
--------- ---------
Cash and cash equivalents at end of period $ 34,048 $ 18,894
========= =========
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 nearly 32,000 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.
2. ACQUISITIONS
In August 2001, we acquired 100% of the stock of Lockheed Martin IMS
Corporation ("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 $931.9 million and liabilities assumed of $106.9
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 $ 117,949
Property, equipment and software 80,021
Other long-term assets 2,826
Intangible assets 64,700
Goodwill 666,416
------------
Total assets acquired 931,912
Current liabilities 106,912
------------
Total liabilities assumed 106,912
------------
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 anticipated useful life ranging from 2 to 10 years. The
$64.7 million acquired intangible assets is attributable to customer
contracts with an aggregate anticipated useful life of approximately 8
years.
4
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. 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.
For the three months ended September 30,
----------------------------------------
2001 2000
------------------- -----------------
Revenue $ 706,672 $ 637,167
Net income 45,907 34,103
Earnings per common share:
Basic $ .90 $ .69
Diluted $ .80 $ .63
In August 2001, we acquired the business process outsourcing services unit
of National Processing Company (NPC) for approximately $43 million in cash.
NPC's results have been included in our consolidated financial statements
from the effective date of the acquisition, August 1, 2001. NPC's business
process outsourcing services unit specializes in healthcare claim
processing, credit card application processing and airline lift ticket
processing.
The acquisition was accounted for under the purchase method of accounting
with assets acquired of $50.3 million and liabilities assumed of $7.3
million. We recorded goodwill of $25.8 million (which is fully deductible
for tax purposes) and $2.8 million in intangible assets. The $2.8 million
acquired intangible assets are attributable to customer contracts with an
aggregate anticipated useful life of approximately 3 years. This
acquisition is not considered material to our results of operations;
therefore, no pro forma information is presented.
3. 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)
4. 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 SEPTEMBER 30,
------------------------------------------
2001 2000
---------------- ----------------
(in thousands except per share amounts)
Net income $ 43,913 $ 30,555
Add back goodwill amortization, net of related tax
benefit ($951) -- 4,758
---------------- ----------------
Adjusted net income $ 43,913 $ 35,313
================ ================
Basic earnings per share:
Reported net income $ .86 $ .62
Add back goodwill amortization (net of tax benefit) -- .09
---------------- ----------------
Adjusted net income $ .86 $ .71
================ ================
Diluted earnings per share:
Reported net income $ .77 $ .57
Add back goodwill amortization (net of tax benefit) -- .09
---------------- ----------------
Adjusted net income $ .77 $ .66
================ ================
5. DERIVATIVES AND HEDGING ACTIVITIES
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 million and the fair market value of the two hedges at
September 30, 2001 and June 30, 2001 was ($408,000) and ($355,000),
respectively. The fair value of each interest rate hedge reflects
termination cash value. The fair value of the interest rate hedges, net of
$159,000 and $139,000 tax benefit, respectively, is reflected in
"Accumulated other comprehensive income (net of tax)."
6. COMPREHENSIVE INCOME
We have adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." The objective of SFAS No. 130 is to
report a measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than
transactions with owners. Comprehensive income is the total of net income
and other non-owner charges in equity.
The components of comprehensive income are as follows (in the thousands):
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
-------- --------
Net income $ 43,913 $ 30,555
Change in fair value of derivatives (net of change in tax
effect of ($21) and $967, respectively) (85) 1,479
-------- --------
Comprehensive income $ 43,828 $ 32,034
======== ========
6
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. GOODWILL
The changes in the carrying amount of goodwill for the quarter ended
September 30, 2001 are as follows (in thousands):
FEDERAL
COMMERCIAL GOVERNMENT TOTAL
----------- ----------- -----------
Balance as of June 30, 2001 $ 574,887 $ 122,873 $ 697,760
Goodwill adjustments
during the quarter 690,809 -- 690,809
----------- ----------- -----------
Balance as of September 30, 2001 $ 1,265,696 $ 122,873 $ 1,388,569
=========== =========== ===========
The goodwill adjustments in the commercial segment are primarily the result
of the current quarter acquisitions of IMS and NPC (see Note 2).
8. INTANGIBLE ASSETS
AS OF SEPTEMBER 30, 2001 (IN THOUSANDS)
---------------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
--------- ---------
Amortized intangible assets:
Customer related intangibles $ 152,461 $ (40,658)
All other 6,168 (2,791)
--------- ---------
Total $ 158,629 $ (43,449)
========= =========
Unamortized intangible asset:
Title plant 51,800
---------
Total $ 51,800
=========
Aggregate amortization expense:
For the quarter ended September 30, 2001 $ 4,965
Estimated amortization expense:
For the year ended June 30, 2002 $ 22,889
For the year ended June 30, 2003 $ 19,974
For the year ended June 30, 2004 $ 16,557
For the year ended June 30, 2005 $ 13,740
For the year ended June 30, 2006 $ 12,521
Customer related intangibles are amortized over a weighted average of
approximately 7 years. All other intangibles are amortized over a weighted
average of 5 years.
7
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standard No. 128,
"Earnings per Share," the following table (in thousands except per share
amounts) sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2001 2000
-------- --------
Numerator:
Numerator for earnings per share (basic)
Income available to common stockholders $ 43,913 $ 30,555
Effect of dilutive securities:
Interest on 4% convertible debt 1,537 1,540
Interest on 3.5% convertible debt 2,052 --
-------- --------
Numerator for earnings per share assuming
Dilution - income available to common stockholders $ 47,502 $ 32,095
======== ========
Denominator:
Weighted average shares outstanding (basic) 50,790 49,438
Effect of dilutive securities:
4% convertible debt 5,390 5,392
3.5% convertible debt 3,649 --
Stock options 1,843 1,377
-------- --------
Total potential common shares 10,882 6,769
-------- --------
Denominator for earnings per share assuming
Dilution 61,672 56,207
======== ========
Earnings per common share (basic) $ .86 $ .62
======== ========
Earnings per common share assuming dilution $ .77 $ .57
======== ========
10. ACCUMULATED DEPRECIATION AND AMORTIZATION
Property, equipment, and software are stated net of accumulated
depreciation of $235.6 million and $216.8 million at September 30, 2001 and
June 30, 2001, respectively.
11. NON-RECURRING ITEMS
In the first quarter of fiscal 2001, we recorded a $12.8 million gain in
"Other non-operating income, net" related to the sale of a non-strategic
minority investment in ACS Merchant Services, Inc.
In the first quarter of fiscal 2001, we recorded a $10.4 million charge in
connection with the termination of certain hardware leases and disaster
recovery contracts, which is included in "Rent, lease and maintenance"
expense. In addition, we recorded a $2.1 million charge for non-recurring
litigation costs and the writedown of property held-for-sale to market
value to "Other operating expense."
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. Prior year
results have been restated for comparison purposes. The following is a
summary of certain financial information by reportable segment (in
thousands):
QUARTER ENDED SEPTEMBER 30, 2001
-------------------------------------------------
Federal
Commercial Government Corporate Consolidated
---------- ---------- --------- ------------
Revenue $ 464,843 $ 190,176 $ -- $ 655,019
Operating expense 372,876 171,526 4,660 549,062
--------- --------- --------- ---------
EBITDA(a) 91,967 18,650 (4,660) 105,957
Depreciation & amortization expense 20,134 3,797 484 24,415
Goodwill amortization -- -- -- --
--------- --------- --------- ---------
Operating income $ 71,833 $ 14,853 $ (5,144) $ 81,542
========= ========= ========= =========
QUARTER ENDED SEPTEMBER 30, 2000
-------------------------------------------------
Federal
Commercial Government Corporate Consolidated
---------- ---------- --------- ------------
Revenue $ 301,016(b) $ 177,610 $ -- $ 478,626(b)
Operating expense 251,444(c) 160,416 3,501 415,361(c)
--------- --------- --------- ---------
EBITDA(a) 49,572 17,194 (3,501) 63,265
Depreciation & amortization expense
excluding goodwill amortization 12,253 2,809 321 15,383
Goodwill amortization 4,629 1,080 -- 5,709
--------- --------- --------- ---------
Operating income $ 32,690 $ 13,305 $ (3,822) $ 42,173
--------- --------- --------- ---------
---------
(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) Revenue includes $11.8 million for the quarter ended September 30,
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 October 10, 2001, we completed our offering of 9.2 million shares of our
Class A common stock (including the underwriters' over-allotment option of
1.2 million shares). 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.
The following pro forma September 30, 2001 information is adjusted for the
issuance of 9.2 million shares and the subsequent paydown of debt from the
net proceeds of the equity offering (in thousands):
Total Assets $ 2,720,930
Total Liabilities 1,062,876
Total Stockholders' Equity 1,658,054
Total debt /total capitalization ratio 26.8%
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. We undertake no obligation to update any
forward looking information.
SIGNIFICANT DEVELOPMENTS
QUARTER ENDED SEPTEMBER 30, 2001
In August 2001, we acquired Lockheed Martin IMS Corporation ("IMS"), a
wholly-owned subsidiary of Lockheed Martin Corporation. IMS, with its principal
offices located in Washington D.C. and approximately 4,800 employees throughout
the United States, Canada, Australia, and Europe, 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.
QUARTER ENDED SEPTEMBER 30, 2000
During the first quarter of fiscal 2001, we recorded a $12.8 million gain in
"Other non-operating income, net" associated with the sale of a 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 expense").
11
RESULTS OF OPERATIONS
The following table sets forth certain items from our consolidated statements of
income as a percentage of revenues:
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
---- ----
Revenues 100% 100%
Expenses:
Wages and benefits 45.3 45.2
Services and supplies 26.4 27.1
Rent, lease and maintenance 11.2 13.1
Depreciation and amortization 3.7 4.4
Other operating expenses 1.0 1.4
----- -----
Total operating expenses 87.6 91.2
----- -----
Operating income 12.4 8.8
Interest expense 1.9 1.0
Other non-operating income, net (0.2) (2.8)
----- -----
Pretax profit 10.7 10.6
Income tax expense 4.0 4.2
----- -----
Net income 6.7% 6.4%
===== =====
COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 2001 TO THE QUARTER ENDED
SEPTEMBER 30, 2000
Revenues for the first quarter of fiscal 2002 increased 37% to $655.0 million,
compared to $478.6 million for the same period last year. Included in the
revenues for the first quarter of fiscal 2001 was $11.8 million related to
business units which were divested in fiscal 2001. Excluding these revenues,
revenues increased $188.2 million, or 40%, to $655.0 million from the first
quarter of fiscal 2001. Of this increase 10% was from internal growth and 30%
was revenue from the IMS and NPC acquisitions in the first quarter of fiscal
year 2002 and the acquisitions of Business Resources Corporation and the Global
Government Solutions division of Systems & Computer Technology Corporation
during fiscal year 2001. Revenue growth in our commercial segment, excluding the
revenues from divested units, was 61%, 49% from acquisitions and 12% from
internal growth. The internal growth in our commercial segment was primarily the
result of growth in new and existing state Medicaid and Welfare benefit program
management contracts and business process outsourcing contracts. Our federal
government revenue growth was 7%, all internal growth. The federal government
increases were primarily in our defense and education contracts.
When adjusting for the application of SFAS 142 (see Note 3) and non-recurring
charges (see "Significant Developments"), our operating margins decreased
slightly from 12.6% in the first quarter of fiscal 2001 to 12.4% in the first
quarter of fiscal 2002. Services and supplies decreased 0.7% as a percentage of
revenue due to the fourth quarter fiscal 2001 acquisition of SCT and the first
quarter fiscal 2002 acquisition of NPC, which have a lower component of services
and supplies. Depreciation and amortization expense increased 0.5% as a
percentage of revenue due to increased capital expenditures during fiscal year
2001.
Interest expense increased $7.6 million, or 0.9% as a percentage of revenue, due
to the February 2001 convertible debt offering as well as the interest expense
and financing costs on the $550 million interim credit facility we entered into
in connection with the IMS acquisition.
Our effective tax rate of approximately 37.5% in the first quarter of fiscal
2001 exceeded the federal statutory rate of 35%, due primarily to the net effect
of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, we had cash and cash equivalents totaling $34.0 million
compared to $242.5 million at June 30, 2001. Included in the cash balances at
September 30, 2001 and June 30, 2001 were $3.2 million and $4.9 million,
respectively, of restricted cash held on behalf of governmental customers.
Working capital decreased to $390.9 million at September 30, 2001 from $528.6
million at June 30, 2001 primarily due to cash paid for the IMS and NPC
acquisitions closed during the quarter, partially offset by the net current
assets purchased in the acquisitions.
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Cash flow from operations was $38.4 million for the quarter ended September 30,
2001, compared to ($57.4 million) in the same period last year. In the first
quarter of fiscal year 2001, we paid approximately $50.0 million in income taxes
related to 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, cash flow from operating activities
would have been $3.0 million for the quarter ended September 30, 2000. Cash used
in investing activities was $924.0 million primarily due to the IMS and NPC
acquisitions and capital expenditures during the quarter. Cash flow from
financing activities was $677.2 million as a result of borrowings on the $550
million interim credit facility incurred to fund the IMS acquisition as well as
other net borrowings on our existing credit facility.
On October 10, 2001, we completed our offering of 9.2 million shares of our
Class A common stock (including the underwriters' over-allotment option of 1.2
million shares). 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.
Management believes that available cash and cash equivalents, together with cash
generated from operations and available borrowings under our credit facility,
will provide adequate funds for our anticipated internal growth needs, including
working capital expenditures. Our management also believes that cash provided by
operations will be sufficient to satisfy all existing debt obligations as they
become due. However, we intend to continue our growth through acquisitions and
from time to time to engage in discussions with potential acquisition
candidates, which could require significant commitments of capital. In order to
pursue such opportunities we may be required to incur debt or to issue
additional potentially dilutive securities in the future. No assurance can be
given as to our future acquisitions and expansion opportunities and how such
opportunities will be financed.
NEW ACCOUNTING STANDARDS
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.
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PART II
Item 1. Legal Proceedings
On December 16, 1998, a state district court in Houston, Texas entered final
judgment against us in a lawsuit brought by twenty-one former employees of
Gibraltar Savings Association and/or First Texas Savings Association
(collectively, "GSA/FTSA"). The GSA/FTSA employees alleged that they were
entitled to the value of 401,541 shares of our stock pursuant to options issued
to the GSA/FTSA employees in 1988 in connection with a former data processing
services agreement between GSA/FTSA and us. The judgment against us was for
approximately $17 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 (including the underwriters' over-allotment option of 1.2
million shares). 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.
Item 4. Submission of Matters to a Vote of Stockholders
At our 2001 Annual Meeting of Stockholders held on October 25, 2001, the
following actions were taken:
1. The following Directors were elected for terms of office expiring
in 2002:
Name For Withheld
---- ---- --------
Darwin Deason 73,256,249 1,709,992
Jeffrey A. Rich 73,625,057 1,341,184
Mark A. King 73,625,546 1,340,965
William L. Deckelman, Jr. 73,617,567 1,348,674
Henry G. Hortenstine 73,620,187 1,346,054
Peter A. Bracken 73,619,620 1,346,621
Joseph P. O'Neill 73,439,232 1,527,009
Frank A. Rossi 73,439,115 1,527,126
Clifford M. Kendall 73,448,396 1,517,845
Pursuant to the terms of our Notice of Annual Meeting and Proxy
Statement, proxies received were voted, unless authority was withheld,
in favor of the election of the nine nominees named.
2. A proposal by the Board of Directors to approve Performance Based
Incentive Compensation for our executive officers was approved by the
stockholders. The stockholders cast 71,437,080 votes in favor of this
proposal; 3,399,481 votes against this proposal and there were 129,680
abstentions.
3. A stockholder resolution regarding diversity of the board of directors
proposed by Calvert Asset Management Company, Inc. was defeated by the
stockholders. The stockholders cast 19,809,854 votes in favor of the
resolution and 50,529,227 votes against the proposal and there were
861,993 abstentions.
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Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits
None.
b.) Reports on Form 8-K
1. On July 19, 2001, the Company filed a Current Report on Form
8-K announcing the signing of a definitive agreement to
acquire the stock of Lockheed Martin IMS Corporation for cash
consideration of $825 million.
2. On August 24, 2001, the Company filed a Current Report on Form
8-K announcing the acquisition of 100% of the stock of
Lockheed Martin IMS Corporation, a subsidiary of Lockheed
Martin Corporate, for $825 million.
3. On October 16, 2001, the Company filed a Current Report on
Form 8-K reporting the sale of 9.2 million shares of the
Company's Class A common stock for net proceeds of
approximately $715 million.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 14th day of November, 2001.
AFFILIATED COMPUTER SERVICES, INC.
By: /s/ Warren D. Edwards
---------------------
Warren D. Edwards
Executive Vice President and
Chief Financial Officer
16