1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
------------------
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
-------
AFFILIATED COMPUTER SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0310342
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2828 North Haskell, Dallas, Texas 75204
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 841-6111
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
NUMBER OF SHARES OUTSTANDING AS OF
TITLE OF EACH CLASS FEBRUARY 12, 2000
------------------------------------- ----------------------------------
Class A Common Stock, $.01 par value 46,659,526
Class B Common Stock, $.01 par value 3,299,686
----------
49,959,212
2
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2000 and
June 30, 2000 1
Consolidated Statements of Income for the Three Months and Six Months
Ended December 31, 2000 and 1999 2
Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 2000 and 1999 3
Notes to Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-10
PART II. OTHER INFORMATION
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
3
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, JUNE 30,
2000 2000
(UNAUDITED) (AUDITED)
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,234 $ 44,521
Accounts receivable, net 417,360 399,853
Receivable from divestitures -- 180,335
Inventory 8,980 7,324
Prepaid expenses and other current assets 74,023 71,290
Net assets held for sale -- 43,362
Deferred taxes 15,965 25,189
--------------- ---------------
Total current assets 530,562 771,874
Property, equipment and software, net 222,688 194,034
Goodwill and other intangibles, net 731,301 650,263
Long-term investments and other assets 41,785 40,275
--------------- ---------------
Total assets $ 1,526,336 $ 1,656,446
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,284 $ 47,901
Accrued compensation and benefits 57,638 69,208
Other accrued liabilities 145,459 156,720
Income taxes payable 9,165 60,671
Short-term debt 2,002 2,877
Current portion of unearned revenue 19,628 20,865
--------------- ---------------
Total current liabilities 261,176 358,242
Convertible notes due 2005 230,000 230,000
Long-term debt 178,101 295,619
Deferred taxes 41,999 35,316
Other long-term liabilities 23,808 25,892
--------------- ---------------
Total liabilities 735,084 945,069
--------------- ---------------
Stockholders' equity:
Class A common stock 467 463
Class B common stock 33 33
Additional paid-in capital 327,283 321,525
Retained earnings 462,714 400,200
Accumulated other comprehensive income (net of tax) 776 --
Treasury stock (21) (10,844)
--------------- ---------------
Total stockholders' equity 791,252 711,377
--------------- ---------------
Total liabilities and stockholders' equity $ 1,526,336 $ 1,656,446
=============== ===============
See notes to consolidated financial statements.
1
4
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,
------------------------------ -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
Revenues $ 500,882 $ 476,008 $ 979,508 $ 923,694
Expenses:
Wages and benefits 212,442 203,383 428,631 398,115
Services and supplies 151,477 150,594 280,982 283,520
Rent, lease and maintenance 52,683 50,672 115,389 101,345
Depreciation and amortization 22,576 21,169 43,668 40,559
Other operating expenses 4,977 4,780 11,938 9,068
------------- ------------- ------------- -------------
Total operating expenses 444,155 430,598 880,608 832,607
------------- ------------- ------------- -------------
Operating income 56,727 45,410 98,900 91,087
Interest expense 4,839 5,631 9,875 10,459
Other non-operating income, net (991) (4,593) (14,358) (5,734)
------------- ------------- ------------- -------------
Pretax profit 52,879 44,372 103,383 86,362
Income tax expense 20,887 17,926 40,836 34,890
------------- ------------- ------------- -------------
Net income $ 31,992 $ 26,446 $ 62,547 $ 51,472
============= ============= ============= =============
Earnings per common share:
Basic $ .64 $ .54 $ 1.26 $ 1.04
============= ============= ============= =============
Diluted $ .59 $ .50 $ 1.16 $ .97
============= ============= ============= =============
Shares used in computing earnings
per common share:
Basic 49,811 49,319 49,625 49,290
Diluted 56,881 55,866 56,545 55,980
See notes to consolidated financial statements.
2
5
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
DECEMBER 31,
2000 1999
-------------- --------------
Cash flows from operating activities:
Net income $ 62,547 $ 51,472
-------------- --------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 43,668 40,559
Gain on sale of investment (12,785) --
Gain on collection of note receivable (1,713) (3,000)
Other 386 (839)
Changes in assets and liabilities, net of effects from acquisitions:
Increase in ATM cash -- (500)
(Increase) decrease in accounts receivable (13,687) 11,207
Increase in inventory (1,549) (1,022)
Increase in prepaid expenses and other current assets (6,503) (6,549)
Change in deferred taxes 16,098 7,521
Increase in other long-term assets (585) (2,791)
Decrease in accounts payable (22,826) (7,999)
Decrease in accrued compensation and benefits (11,215) (18,187)
Increase in other accrued liabilities 4,215 3,562
Increase (decrease) in income taxes payable (43,564) 6,943
Decrease in unearned revenue (5,163) (3,821)
Increase (decrease) in other long-term liabilities 98 (774)
-------------- --------------
Total adjustments (55,125) 24,310
-------------- --------------
Net cash provided by operating activities
7,422 75,782
-------------- --------------
Cash flows from investing activities:
Purchases of property, equipment and software, net of sales (51,679) (29,800)
Payments for acquisitions, net of cash acquired (86,264) (112,953)
Proceeds from divestitures, net of transaction costs 208,428 --
Purchase of investments (2,138) --
Proceeds from sale of investment 17,100 --
Additions to other intangible assets (13,794) (5,666)
Additions to notes receivable (819) (1,553)
Proceeds received on notes receivable 7,898 6,034
Other -- (987)
-------------- --------------
Net cash provided by (used in) investing activities 78,732 (144,925)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of debt, net of issuance costs 229,422 115,040
Repayments of debt (352,324) (48,484)
Proceeds from stock options exercised 6,756 1,120
Net repayment of ATM debt -- 500
Other, net (295) (690)
-------------- --------------
Net cash provided by (used in) financing activities (116,441) 67,486
-------------- --------------
Net decrease in cash and cash equivalents (30,287) (1,657)
Cash and cash equivalents at beginning of period 44,521 28,580
-------------- --------------
Cash and cash equivalents at end of period $ 14,234 $ 26,923
============== ==============
See notes to consolidated financial statements.
3
6
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Affiliated Computer Services, Inc. and its majority-owned subsidiaries.
All material intercompany profits, transactions and balances have been
eliminated. We are a Fortune 1000 Company based in Dallas, Texas with
operations primarily in North America, as well as Central America,
South America, Europe and the Middle East. We provide a full range of
information technology services, including technology outsourcing,
business process outsourcing and systems integration.
The financial information presented should be read in conjunction with
our consolidated financial statements for the year ended June 30, 2000.
The foregoing unaudited consolidated financial statements reflect all
adjustments (all of which are of a normal recurring nature) which are,
in the opinion of management, necessary for a fair presentation of the
results of the interim periods. The results for the interim periods are
not necessarily indicative of results to be expected for the year.
Certain financial statement items from the prior year have been
reclassified to conform with current presentation.
2. HEDGING ACTIVITIES AND COMPREHENSIVE INCOME
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivatives
and Hedging Activities". The statement requires us to record all
derivatives on the balance sheet at fair value. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value
of the derivatives are either recognized in earnings or are recognized
in other comprehensive income until the hedged item is recognized in
earnings. As of December 31, 2000, the fair market value of our
interest rate hedge was $1.3 million and was recorded in other current
assets.
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" establishes standards for reporting and display
of comprehensive income and its components in the financial statements.
The objective of SFAS 130 is to report a measure of all changes in
equity of an enterprise that result from transactions and other
economic events of the period other than transactions with owners.
Comprehensive income is the total of net income and all other non-owner
changes within a company's equity.
The components of comprehensive income are as follows (in the
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net income $ 31,992 $ 26,446 $ 62,547 $ 51,472
Change in fair value of derivatives (net (703) -- 776 --
of tax effect of ($460) and $507,
respectively)
---------- ---------- ---------- ----------
Comprehensive income $ 31,289 $ 26,446 $ 63,323 $ 51,472
========== ========== ========== ==========
4
7
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. 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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Numerator:
Numerator for earnings per share (basic) -
Income available to common stockholders $ 31,992 $ 26,446 $ 62,547 $ 51,472
Effect of dilutive securities:
Interest on 4% convertible debt 1,540 1,538 3,080 3,078
------------- ------------- ------------- -------------
Numerator for earnings per share assuming
Dilution - income available to common stockholders $ 33,532 $ 27,984 $ 65,627 $ 54,550
============= ============= ============= =============
Denominator:
Weighted average shares outstanding (basic) 49,811 49,319 49,625 49,290
Effect of dilutive securities:
4% convertible debt 5,392 5,392 5,392 5,392
Stock options 1,678 1,155 1,528 1,298
------------- ------------- ------------- -------------
Total potential common shares 7,070 6,547 6,920 6,690
------------- ------------- ------------- -------------
Denominator for earnings per share assuming
Dilution 56,881 55,866 56,545 55,980
============= ============= ============= =============
Earnings per common share (basic) $ .64 $ .54 $ 1.26 $ 1.04
============= ============= ============= =============
Earnings per common share assuming dilution $ .59 $ .50 $ 1.16 $ .97
============= ============= ============= =============
4. NON-RECURRING ITEMS
In the first quarter of fiscal 2001, we recorded a $12.8 million gain in
other non-operating income related to the sale of a non-strategic minority
investment in ACS Merchant Services, Inc. Also during the quarter, we
recorded a $10.4 million charge in connection with the termination of
certain hardware leases and disaster recovery contracts (reflected in rent,
lease and maintenance expense) and a $2.1 million charge for non-recurring
litigation costs and the writedown of property held-for-sale (reflected in
other operating expense).
In the second quarter of fiscal 2000, we recorded $3.0 million of
accelerated expenses in connection with the consolidation of certain
business process outsourcing operations. These expenses include
approximately $2.6 million related to duplicate software and production
facilities (reflected in rent, lease and maintenance expense), $0.2 million
of unamortized leasehold improvements and write offs of excess equipment
(reflected in depreciation and amortization expense) and $0.2 million for
severance payments for reductions in staff (reflected in wages and benefits
expense).
In January 1999, we sold a business unit of an acquired company to
CyberPlus Corporation ("Cyberplus"). As part of the consideration, we
received a $3.2 million promissory note due March 2000 and 2.1 million
warrants to purchase CyberPlus common stock. Given the financial
uncertainty surrounding CyberPlus, the note receivable was fully reserved.
In November 1999, CyberPlus obtained financing and repaid $3.0 million on
the promissory note, resulting in a $3.0 million gain (reflected in other
non-operating income).
5. ACCUMULATED DEPRECIATION AND AMORTIZATION
Property, equipment and software are stated net of accumulated depreciation
of $186.2 million and $165.6 million at December 31, 2000 and June 30,
2000, respectively. Additionally, goodwill and other intangibles are stated
net of accumulated amortization of $96.6 million and $80.3 million at
December 31, 2000 and June 30, 2000, respectively.
5
8
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. ACQUISITIONS
During December 2000, we acquired Business Resources Corporation, ("BRC"),
a subsidiary of Tyler Technologies, Inc. for approximately $70 million in
cash, which was funded by our existing credit facility. The acquisition was
accounted for under the purchase method of accounting with assets acquired
of $76.2 million and liabilities assumed of $6.2 million. BRC's results
have been included in our consolidated financial statements from the
effective date of the acquisition. BRC is a provider of outsourced records
management, document workflow, imaging systems and services to state and
local governments. BRC also provides real estate title plant services to
title companies.
7. 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 DECEMBER 31, 2000
FEDERAL
COMMERCIAL GOVERNMENT CORPORATE CONSOLIDATED
------------- ------------- ------------- -------------
Revenue $ 314,728(a) $ 186,154 $ -- $ 500,882
Operating expense 249,468 168,000 4,111 421,579
------------- ------------- ------------- -------------
EBITDA(c) 65,260 18,154 (4,111) 79,303
Depreciation & amortization expense
excluding goodwill amortization 13,419 2,751 392 16,562
Goodwill amortization 4,857 1,157 -- 6,014
------------- ------------- ------------- -------------
Operating income (loss) $ 46,984 $ 14,246 ($ 4,503) $ 56,727
============= ============= ============= =============
QUARTER ENDED DECEMBER 31, 1999
FEDERAL
COMMERCIAL GOVERNMENT CORPORATE CONSOLIDATED
------------- ------------- ------------- -------------
Revenue $ 323,142(a) $ 152,866 $ -- $ 476,008
Operating expense 268,165(d) 138,617 2,647 409,429
------------- ------------- ------------- -------------
EBITDA(c) 54,977 14,249 (2,647) 66,579
Depreciation & amortization expense
excluding goodwill amortization 13,315 2,280 282 15,877
Goodwill amortization 4,675 617 -- 5,292
------------- ------------- ------------- -------------
Operating income (loss) $ 36,987 $ 11,352 ($ 2,929) $ 45,410
============= ============= ============= =============
----------
(a) Revenue includes $0 and $74.6 million for the three months ended
December 2000 and 1999, respectively, and $7.5 million and $154.3
million for the six months ended December 31, 2000 and 1999, related to
the divestitures announced in June 2000.
(b) Operating expense includes $12.5 million of non-recurring charges
related to hardware lease buyouts and disaster recovery contracts,
legal fees and a writedown of property held-for-sale to market value
(see Note 4).
(c) EBITDA consist of earnings before interest income, interest
expense, other non-operating income and expense, income taxes,
depreciation and amortization. EBITDA is not a measure of financial
performance under generally accepted accounting principles and should
not be considered in isolation or as an alternative to net income as an
indicator of a company's performance or to cash flows from operating
activities as a measure of liquidity.
(d) Operating expense for quarter ended December 31, 1999 included $3.0
million of accelerated expenses in connection with the consolidation of
certain business process outsourcing operations (see Note 4).
6
9
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SEGMENT INFORMATION (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 2000
FEDERAL
COMMERCIAL GOVERNMENT CORPORATE CONSOLIDATED
------------- ------------- ------------- -------------
Revenue $ 615,744(a) $ 363,764 $ -- $ 979,508
Operating expense 500,974(b) 328,418 7,548 836,940
------------- ------------- ------------- -------------
EBITDA(c) 114,770 35,346 (7,548) 142,568
Depreciation & amortization expense
excluding goodwill amortization 25,672 5,482 713 31,867
Goodwill amortization 9,486 2,315 -- 11,801
------------- ------------- ------------- -------------
Operating income (loss) $ 79,612 $ 27,549 ($ 8,261) $ 98,900
============= ============= ============= =============
SIX MONTHS ENDED DECEMBER 31, 1999
FEDERAL
COMMERCIAL GOVERNMENT CORPORATE CONSOLIDATED
------------- ------------- ------------- -------------
Revenue $ 630,383(a) $ 293,311 $ -- $ 923,694
Operating expense 520,984(d) 265,534 5,530 792,048
------------- ------------- ------------- -------------
EBITDA(c) 109,399 27,777 (5,530) 131,646
Depreciation & amortization expense
excluding goodwill amortization 25,587 4,316 544 30,447
Goodwill amortization 8,914 1,198 -- 10,112
------------- ------------- ------------- -------------
Operating income (loss) $ 74,898 $ 22,263 ($ 6,074) $ 91,087
============= ============= ============= =============
----------
(a) Revenue includes $0 and $74.6 million for the three months ended
December 2000 and 1999, respectively, and $7.5 million and $154.3 million
for the six months ended December 31, 2000 and 1999, related to the
divestitures announced in June 2000.
(b) Operating expense includes $12.5 million of non-recurring charges
related to hardware lease buyouts and disaster recovery contracts, legal
fees and a writedown of property held-for-sale to market value (see Note
4).
(c) EBITDA consist of earnings before interest income, interest expense,
other non-operating income and expense, income taxes, depreciation and
amortization. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered in
isolation or as an alternative to net income as an indicator of a company's
performance or to cash flows from operating activities as a measure of
liquidity.
(d) Operating expense for quarter ended December 31, 1999 included $3.0
million of accelerated expenses in connection with the consolidation of
certain business process outsourcing operations (see Note 4).
7
10
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. All statements, other than statements of historical facts, included in
this MD&A regarding our financial position, business strategy and plans and
objectives of our management for future operations are forward-looking
statements. These forward-looking statements rely on a number of assumptions
concerning future events and are subject to a number of uncertainties and other
factors, many of which are outside of our control, that could cause actual
results to materially differ from such statements. While we believe that the
assumptions concerning future events are reasonable, we caution that there are
inherent difficulties in predicting certain important factors, especially the
timing and magnitude of technological advances; the performance of recently
acquired businesses; the prospects for future acquisitions; the possibility that
a current customer could be acquired or otherwise be affected by a future event
that would diminish its information technology requirements; the competition in
the information technology industry and the impact of such competition on
pricing, revenues and margins; the degree to which business entities continue to
outsource information technology and business processes; uncertainties
surrounding budget reductions or changes in funding priorities or existing
government programs; and our ability, and the related cost of attracting and
retaining highly skilled personnel.
SIGNIFICANT DEVELOPMENTS
During the fourth quarter of fiscal 2000, we entered into a formal plan to
divest certain business units consisting of our ATM processing business and our
commercial staffing business due to the fact that these businesses were no
longer strategic to our long-term goal of providing information technology and
business process outsourcing services. By October 31, 2000, we had completed the
sale of and received the proceeds from these divestitures. During the first
quarter of fiscal 2001, we recorded a $12.8 million gain in other non-operating
income associated with the sale of a non-strategic minority investment in ACS
Merchant Services, Inc.
RESULTS OF OPERATIONS
The following table sets forth certain items from our consolidated statements of
income as a percentage of revenues:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
Revenues 100% 100% 100% 100%
Expenses:
Wages and benefits 42.4 42.7 43.8 43.1
Services and supplies 30.3 31.6 28.7 30.7
Rent, lease and maintenance 10.5 10.7 11.8 11.0
Depreciation and amortization 4.5 4.5 4.5 4.3
Other operating expenses 1.0 1.0 1.1 1.0
------------- ------------- ------------- -------------
Total operating expenses 88.7 90.5 89.9 90.1
------------- ------------- ------------- -------------
Operating income 11.3 9.5 10.1 9.9
Interest expense 1.0 1.2 1.0 1.1
Other non-operating income, net (0.2) (1.0) (1.5) (0.6)
------------- ------------- ------------- -------------
Pretax profit 10.5 9.3 10.6 9.4
Income tax expense 4.1 3.8 4.2 3.8
------------- ------------- ------------- -------------
Net income 6.4% 5.5% 6.4% 5.6%
============= ============= ============= =============
8
11
COMPARISON OF THE QUARTER ENDED DECEMBER 31, 2000 TO THE QUARTER ENDED
DECEMBER 31, 1999
The divested units contributed $74.6 million in revenue in the second quarter of
fiscal 2000. Excluding the divested units, revenues increased 25% from $401.4
million to $500.9 million for the second quarter of fiscal 2001. More than half
of the increase, or 14%, was derived from internal growth. Excluding the
revenues from the divested units, revenues from our commercial segment increased
$66.2 million, or 27%. Revenue growth in the commercial segment was primarily
due to new signings in state Medicaid and welfare benefit program management, as
well as information technology contract signings. Revenues from our federal
government segment increased $33.3 million, or 22%, over the prior year quarter
primarily due to the acquisition of Intellisource in the fourth quarter of
fiscal 2000.
Included in the operating expenses in the second quarter of fiscal 2000 was $3.0
million of accelerated expenses related to the consolidation of certain business
process outsourcing operations (see Note 4). Excluding this non-recurring
charge, operating margins increased 1.1% from 10.2% to 11.3% as a result of the
divestiture program completed in the first quarter. Services and supplies
decreased as a percentage of revenue from 31.6% to 30.3% due to the divestiture
of the ATM processing business, which had a large component of interchange fees
paid to ATM distributors.
Other non-operating income for the second quarter of fiscal 2000 included the
recognition of a $3.0 million gain on the collection of a fully reserved note
receivable from the sale of a business unit in fiscal 1999 (see Note 4).
Excluding this non-recurring gain, other non-operating income decreased by $0.6
million.
Our effective tax rate of approximately 39.5% in the second quarter of fiscal
2001 exceeded the federal statutory rate of 35%, due primarily to the
amortization of certain acquisition-related costs that are non-deductible for
tax purposes, plus the net effect of state income taxes.
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2000 TO THE SIX MONTHS ENDED
DECEMBER 31, 1999
Excluding revenues related to the divested units ($7.5 million and $154.3
million for the six months ended December 31, 2000 and 1999 respectively),
revenue increased $202.6 million, or 26% over the prior year from $769.4 million
to $972.0 million. Revenues from our commercial segment increased, excluding the
divested units, $132.1 million, or 28%, due to acquisitions as well as signings
of new customer contracts in state Medicaid and Welfare benefit program
management and information technology. Revenues in our federal government
segment increased $70.5 million, or 24%, primarily as a result of the
acquisition of Intellisource in the fourth quarter of fiscal year 2000.
Excluding the $12.5 million and $3.0 million in non-recurring charges in the
first six months of fiscal years 2001 and 2000, respectively (see Note 4),
operating margins increased 1.2% from 10.2% to 11.4% in fiscal 2001 as a result
of the completed divestiture program announced in the fourth quarter of fiscal
2000. Wages and benefits as a percentage of revenue increased from 43.1% to
43.8% as a result of the divestitures, which had a smaller component of wages
and benefit expense, and our continued focus on delivering business process
outsourcing services, which has a larger component of wages and benefits.
Services and supplies as a percentage of revenue decreased from 30.7% to 28.7%
as a result of the divestiture of the ATM processing business, which had a large
component of interchange fees paid to ATM distributors. After adjusting for the
non-recurring charges of $10.4 million in fiscal 2001 and $2.6 million in fiscal
2000, rent, lease and maintenance expense remained relatively constant.
Other non-operating income includes non-recurring gains of $12.8 million and
$3.0 million in the six months ended December 31, 2000 and 1999, respectively
(see Note 4). Excluding these gains, other non-operating income decreased as a
percentage of revenue from 0.3% to 0.2%.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had cash and cash equivalents totaling $14.2 million
compared to $44.5 million at June 30, 2000. Included in the cash balances at
December 31, 2000 and June 30, 2000 were $12.8 million and $22.3 million,
respectively, of restricted cash held on behalf of governmental customers.
Working capital decreased to $269.4 million at December 31, 2000 from $413.6
million at June 30, 2000 due primarily to the collection of proceeds from
divestitures and the subsequent paydown of long-term debt.
Cash flow from operations was $7.4 million for the six months ended December 31,
2000. However, during the first quarter of fiscal 2001, we paid approximately
$48.7 million in income taxes related to the net gain from our divestiture
activity and approximately $10.4 million of non-recurring lease termination
charges, which are included in cash flows from operations. After adjusting for
these items, our net cash provided by operating activities would have been
approximately $66.5 million for the six months ended December 31, 2000. Cash
flow from investing activities was $78.7 million primarily due to the collection
of proceeds from divestitures offset by the acquisition of BRC in the second
quarter of fiscal 2001. Net cash used in financing activities was $116.4
million, which was the result of credit facility paydowns from the divestiture
proceeds less the borrowing for the BRC acquisition.
9
12
In order to manage interest costs and exposure to changing interest rates, we
hold two interest rate hedges initiated in December 1998 and expiring in
December 2001. Each hedge is structured such that we pay a fixed rate of
interest of 4.54% and receive a floating rate of interest based on one month
LIBOR. The notional amount of the two hedges totals $100,000,000 and the fair
market value of the two hedges at December 31, 2000 was approximately $1.3
million, which is recorded in other current assets (see Note 2). The fair value
of each interest rate hedge reflects termination cash value.
Management believes that available cash and cash equivalents, together with cash
generated from operations and available borrowings under our credit facility,
will provide adequate funds for our anticipated internal growth needs, including
working capital expenditures. Our management also believes that cash provided by
operations will be sufficient to satisfy all existing debt obligations as they
become due. However, we intend to continue our growth through acquisitions and
we regularly evaluate potential acquisition candidates, which acquisitions could
require significant commitments of capital. In order to pursue such
opportunities, we may be required to incur debt or to issue additional
potentially dilutive securities in the future. No assurance can be given as to
our future acquisitions and expansion opportunities and how such opportunities
will be financed.
NEW ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements". SAB 101 provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements and required adoption no later than the fourth quarter of fiscal
2001. We do not believe the adoption of SAB 101 will have a material impact on
our future earnings and financial position.
PART II
ITEM 1. LEGAL PROCEEDINGS
On December 16, 1998, a state district court in Houston, Texas entered final
judgment against us in a lawsuit brought by twenty-one former employees of
Gibraltar Savings Association and/or First Texas Savings Association
(collectively, "GSA/FTSA"). The GSA/FTSA employees alleged that they were
entitled to the value of 401,541 shares of our stock pursuant to options issued
to the GSA/FTSA employees in 1988 in connection with a former data processing
services agreement between GSA/FTSA and us. The judgment against us was for
approximately $17,000,000, which includes attorneys' fees and pre-judgment
interest, but excludes additional attorneys' fees of approximately $850,000
which could be awarded in the event the plaintiffs are successful upon appeal
and final judgment. We continue to believe that we have a meritorious defense to
all or a substantial portion of the plaintiffs' claims. We filed our appeal of
the judgment on March 15, 1999 and are vigorously pursuing the appeal. The
plaintiffs also filed a notice of appeal and are pursuing their appeal. Should
the proceedings not be favorably resolved on appeal, we would be subject to a
charge equal to the amount of any final judgment, fees and interest awarded in
favor of the plaintiffs.
Government contracts are subject to review and audit by various governmental
authorities in the normal course of our business. Cost audits have been
completed through fiscal 1998 for a majority of the federal government business
operations. In management's opinion, any such reviews and the results of cost
audits for subsequent fiscal years will not have a material effect on our
financial position or results of operations.
We are subject to certain other legal proceedings, claims and disputes which
arise in the ordinary course of business. Although we cannot predict the
outcomes of these legal proceedings, management does not believe these actions,
in the aggregate, will have a material adverse effect on our financial position,
results of operations or liquidity.
10
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 26, 2000, we held our 2000 annual meeting of stockholders, at which
meeting our stockholders were asked to vote on the following proposals: (i)
elect two directors to the Board ("Proposal 1") and (ii) approve the
performance-based incentive compensation for our executive officers ("Proposal
2"). The results of the votes on such proposals were as follows:
Proposal 1: Votes
--------------------------------
For Withheld
------------- -------------
Darwin Deason 68,325,867 7,179,368
Jeffrey A. Rich 74,584,312 920,923
Votes For Votes Against Abstentions
------------- ---------------- ----------------
Proposal 2: 74,580,693 760,703 163,839
The following individuals continued their respective terms of service as
directors of Affiliated Computer Services, Inc. following the meeting:
Mark A. King
William L. Deckelman, Jr.
Peter A. Bracken
Henry Hortenstine
Joseph P. O'Neill
Frank A. Rossi
Clifford M. Kendall
ITEM 5. OTHER INFORMATION
On February 14, 2001, we filed a Certificate of Correction of our Second Amended
and Restated Certificate of Incorporation to remove a provision establishing a
classified Board of Directors. The provision had been the subject of a vote at
a stockholders meeting held on December 16, 1997, after which the amendment was
filed with the Delaware Secretary of State. While the proposed amendment
received the approval of more than 80% of the voting shares present and voting
on the measure, it failed to receive the required approval of 80% of our total
outstanding voting stock. We filed the Certificate of Correction promptly upon
determining that the required approval was not obtained. Our current directors,
who with one exception were directors at the time of the prior amendment,
have served and will continue to serve until their successors are duly elected
or appointed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits
10.1 Guaranty of Affiliated Computer Services, Inc. of Citibank
loan to DDH Aviation.
b.) Reports on Form 8-K
None.
11
14
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 2001.
AFFILIATED COMPUTER SERVICES, INC.
By: /s/ Mark A. King
---------------------------------
Mark A. King
Executive Vice President and
Chief Financial Officer
15
EXHIBIT INDEX
Exhibit
Number Description
----------- -----------
10.1 Guaranty of Affiliated Computer Services, Inc. of Citibank
loan to DDH Aviation.