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Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period from to
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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
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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 5, 1997
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Class A Common Stock, $.01 par value 29,078,212
Class B Common Stock, $.01 par value 6,405,686
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35,483,898
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1996 and June 30, 1996 1
Consolidated Statements of Income for the Three Months and the Six Months
Ended December 31, 1996 and 1995 2
Consolidated Statements of Cash Flows for the Six Months Ended December 31,
1996 and 1995 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 5 - 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 6. Exhibits and Reports on Form 8-K 8
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(in thousands)
December 31, June 30,
1996 1996
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ASSETS
Current assets:
Cash and cash equivalents $ 16,398 $ 25,627
ATM cash 5,950 9,100
Accounts receivable, net of allowance for doubtful
accounts of $1,725 and $1,456, respectively 99,844 99,270
Inventory 8,917 10,938
Prepaid expenses and other current assets 16,452 16,099
Deferred taxes 9,136 7,790
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Total current assets 156,697 168,824
Property and equipment, net of accumulated depreciation and
amortization of $38,704 and $31,331, respectively 93,971 84,911
Purchased computer software, net of accumulated
amortization of $8,857 and $15,691, respectively 3,256 4,946
Goodwill, net of accumulated amortization of $11,705 and
$8,609, respectively 252,314 245,693
Other intangible assets, net of accumulated amortization
of $6,129 and $4,478, respectively 13,971 12,040
Long-term investments and other assets 10,937 11,495
Deferred taxes 1,968 5,696
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Total assets $ 533,114 $ 533,605
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LIABILITIES
Current liabilities:
Accounts payable $ 14,577 $ 15,976
Accrued compensation and benefits 12,601 19,815
Other accrued liabilities 54,318 58,466
Income taxes payable 3,970 3,340
Notes payable and current portion of long-term debt 9,995 11,609
Current portion of unearned revenue 7,182 9,657
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Total current liabilities 102,643 118,863
Long-term debt 59,522 57,208
Unearned revenue 1,248 2,053
Other long-term liabilities 48,078 51,427
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Total liabilities 211,491 229,551
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Cumulative redeemable preferred stock - 1,100
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STOCKHOLDERS' EQUITY
Class A common stock 290 145
Class B common stock 64 32
Additional paid-in capital 252,778 251,944
Retained earnings 68,491 50,833
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Total stockholders' equity 321,623 302,954
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Total liabilities and stockholders' equity $ 533,114 $ 533,605
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See notes to consolidated financial statements
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(in thousands except per share amounts)
Three Months Ended Six Months Ended
December 31, December 31,
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1996 1995 1996 1995
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Revenues $ 150,004 $ 91,352 $ 294,337 $ 180,646
Expenses:
Wages and benefits 56,827 35,986 113,187 68,727
Services and supplies 34,216 24,611 66,046 46,636
Rent, lease and maintenance 31,787 18,371 63,333 37,369
Depreciation and amortization 7,127 3,036 13,724 7,311
Other operating expenses 3,188 956 5,434 2,278
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Total operating expenses 133,145 82,960 261,724 162,321
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Operating income 16,859 8,392 32,613 18,325
Interest and other expenses (income), net 1,449 (111) 2,800 244
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Income before income taxes 15,410 8,503 29,813 18,081
Income tax expense 6,280 3,431 12,150 7,348
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Net income $ 9,130 $ 5,072 $ 17,663 $ 10,733
========== ========== ========== ==========
Earnings per common share $ .25 $ .18 $ .48 $ .39
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Weighted average shares outstanding 36,577 27,656 36,515 27,572
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See notes to consolidated financial statements
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six Months Ended
December 31,
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1996 1995
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Cash flows from operating activities:
Net income $ 17,663 $ 10,733
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Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 13,724 7,289
Other 18 245
Changes in assets and liabilities, net of effects
from acquisitions:
(Increase) decrease in ATM cash 3,150 (1,650)
Increase in accounts receivable (1,276) (9,826)
(Increase) decrease in inventory 1,821 (490)
Increase in prepaid expenses and other current
assets (519) (1,589)
Decrease in deferred taxes 2,731 1,059
(Increase) decrease in other assets (966) 248
Increase (decrease) in accounts payable (2,134) 1,270
Decrease in accrued compensation and benefits (3,488) (2,821)
Increase (decrease) in other accrued liabilities (2,622) 544
Increase in income taxes payable 194 543
Decrease in other long-term liabilities (4,087) (2,719)
Decrease in unearned revenue (2,870) (5,908)
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Total adjustments 3,676 (13,805)
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Net cash provided by (used in) operating activities 21,339 (3,072)
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Cash flows from investing activities:
Purchases of property, equipment and computer software (17,388) (22,762)
Payments for acquisitions, net of cash acquired (17,444) (10,557)
Proceeds from note receivable 4,611 --
Additions to other intangible assets and goodwill (2,141) (366)
Cash received from divestitures 2,704 --
Other -- 25
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Net cash used in investing activities (29,658) (33,660)
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Cash flows from financing activities:
Proceeds from issuance of long-term debt 13,175 41,500
Repayments of long-term debt (11,157) (34,727)
Net borrowings (repayments) of ATM debt (3,150) 1,650
Proceeds from stock options exercised and related tax
benefits 1,221 1,338
Redemption of preferred stock (607) --
Other (392) (106)
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Net cash provided by (used in) financing activities (910) 9,655
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Net decrease in cash and cash equivalents (9,229) (27,077)
Cash and cash equivalents at beginning of period 25,627 41,476
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Cash and cash equivalents at end of period $ 16,398 $ 14,399
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See notes to consolidated financial statements
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Affiliated
Computer Services, Inc. and its majority-owned subsidiaries (the "Company"
or "ACS"). All material intercompany profits, transactions and balances
have been eliminated. ACS is a nationwide provider of information
technology services and electronic funds transfer ("EFT") transaction
processing. The Company's information technology services include data
processing outsourcing, image management and professional services. The
Company provides its services to customers with time-critical, transaction-
intensive information processing needs.
The financial information presented should be read in conjunction with
the Company's annual consolidated financial statements for the year ended
June 30, 1996. 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 interim periods are
not necessarily indicative of results to be expected for the year.
2. ACQUISITIONS AND DIVESTITURES
During the first six months of fiscal 1997, the Company closed four
acquisitions which were accounted for as purchases. The fair value of the
assets acquired, liabilities assumed and net purchase price were $17.1
million, $4.5 million and $12.6 million, respectively.
During the first quarter of fiscal 1997, the Company sold its community
bank processing businesses within Texas and Louisiana which were a part of
the Company's outsourcing business services. The Company fully reserved
for the disposition of these businesses, which had historical annual
revenues of $18.0 million, with a $3.8 million pre-tax charge to earnings
in the fourth quarter of fiscal 1996. The divestitures netted the Company
$2.7 million of cash in the first six months of fiscal 1997.
3. STOCK DIVIDEND
On October 28, 1996, the Company's Board of Directors declared a
two-for-one stock split in the form of a 100 percent stock dividend on the
common stock for shareholders of record on November 11, 1996. A total of
17,741,949 shares of common stock were issued on November 22, 1996 in
connection with the split. The stated par value of each share was not
changed from $.01. A total of $177,000 was reclassified from the Company's
additional paid-in capital account to the Company's common stock accounts.
All share and per share amounts have been restated to reflect the stock
split.
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements, other than statements of historical facts, included in this MD&A
regarding the Company's financial position, business strategy and plans and
objectives of management of the Company for future operations are
forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will be realized.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statements of income as a percentage of revenues:
Percentage of Revenues Percentage of Revenues
Three Months Ended Six Months Ended
December 31, December 31,
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1996 1995 1996 1995
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Revenues 100.0% 100.0% 100.0% 100.0%
Expenses:
Wages and benefits 37.9 39.4 38.5 38.1
Services and supplies 22.8 26.9 22.4 25.8
Rent, lease and maintenance 21.2 20.1 21.5 20.7
Depreciation and amortization 4.8 3.3 4.7 4.0
Other operating expenses 2.1 1.0 1.8 1.3
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Total operating expenses 88.8 90.7 88.9 89.9
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Operating income 11.2 9.3 11.1 10.1
Interest and other expenses (income), net 1.0 (0.1) 1.0 0.1
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Income before income taxes 10.3 9.4 10.1 10.0
Income tax expense 4.2 3.8 4.1 4.1
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Net income 6.1% 5.6% 6.0% 5.9%
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COMPARISON OF THE QUARTER ENDED DECEMBER 31, 1996 TO THE QUARTER ENDED DECEMBER
31, 1995
Revenues increased $58.7 million, or 64.2%, to $150.0 million in the quarter
ended December 31, 1996 (the second quarter of the Company's 1997 fiscal year),
from $91.4 million in the second quarter of fiscal 1996, due to acquisitions,
internally generated sales and growth from existing customers. Of the 64.2%
increase in revenue, 17.7% was from internal growth and 46.5% was from
acquisitions. The Company acquired two businesses during the quarter, which
had historical annual revenues of approximately $4.0 million. A total of eight
business acquisitions have occurred since the second quarter of fiscal 1996.
Revenues from these acquisitions were approximately $47.2 million for the
quarter ended December 31, 1996.
Total operating expenses were $133.1 million in the second quarter of fiscal
1997, an increase of 60.5%, from $83.0 million in the second quarter of fiscal
1996. Operating expenses as a percentage of revenues decreased from 90.7% in
the second quarter of fiscal 1996 to 88.8% in the second quarter of fiscal
1997.
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Wages and benefits decreased from 39.4% of revenues in the second quarter of
fiscal 1996 to 37.9% of revenues in the second quarter of fiscal 1997.
Additionally, services and supplies decreased to 22.8% of revenues in the
second quarter of fiscal 1997, compared to 26.9% of revenues in the second
quarter of fiscal 1996. The decreases as a percentage of revenues are
primarily due to the acquisition of The Genix Group, Inc. ("Genix") during June
1996 and economies of scale related to growth in the Company's outsourcing
business line, which offsets the growth in the Company's more labor intensive
professional services businesses.
Depreciation and amortization increased to 4.8% of revenues in the second
quarter of fiscal 1997, compared to 3.3% of revenues in the second quarter of
fiscal 1996. This increase is primarily attributable to increased capital
expenditures for computer hardware and software and goodwill recorded in
connection with the Genix acquisition.
Operating income increased $8.5 million, or 100.9%, to $16.9 million in the
second quarter of fiscal 1997, compared to $8.4 million in the second quarter
of fiscal 1996. The increase was due to internally generated sales and growth
from existing customers generated by the Company and due to acquisitions since
the second quarter of fiscal 1996 (primarily Genix). The increase in operating
income margin to 11.2% in the second quarter of fiscal 1997, from 9.3% in the
second quarter of fiscal 1996, was due primarily to the acquisitions subsequent
to the second quarter of fiscal 1996 and realization of economies of scale in
the outsourcing business line.
Interest and other expenses increased from a net interest benefit of $0.1
million in the second quarter of fiscal 1996 to net interest expense of $1.4
million in the second quarter of fiscal 1997. The increase is primarily
attributable to increased interest expense due to increased net borrowings on
the Company's revolving credit facility resulting primarily from the Genix
acquisition.
The Company's effective tax rate of approximately 41% 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, 1996 TO THE SIX MONTHS ENDED
DECEMBER 31, 1995
Revenues increased $113.7 million, or 62.9%, to $294.3 million in the six
months ended December 31, 1996, from $180.6 million for the same period in
fiscal 1996 due to acquisitions, internally generated sales and growth from
existing customers. Excluding revenues from the Bank of America Texas, N.A.
("B of A Texas") contract, which expired August 31, 1995 ($4.6 million for the
six months ended December 31, 1995), the increase in revenues was 67.2%. The
Company acquired four businesses during the six months ended December 31, 1996,
which had historical annual revenues of approximately $19.0 million and
generated $5.0 million of revenues for the six months ended December 31, 1996.
Revenues from the eight entities acquired during calendar year 1996 were $91.2
million for the six months ended December 31, 1996.
Total operating expenses were $261.7 million for the six months ended December
31, 1996, an increase of 61.2%, from $162.3 million for the same period in
fiscal 1996. Operating expenses as a percentage of revenue decreased slightly
from 89.9% in fiscal 1996 to 88.9% in fiscal 1997.
Wages and benefits increased slightly as a percentage of revenues due to the
growth in the Company's professional services line of business. Services and
supplies decreased as a percentage of revenues from 25.8% for the first six
months of fiscal 1996 to 22.4% for the first six months of fiscal 1997 due to
the acquisition of Genix, acquisitions of several labor intensive businesses
during the preceding twelve months and economies of scale as mentioned above.
Depreciation and amortization increased to 4.7% of revenues in the first six
months of fiscal 1997, compared to 4.0% of revenues in fiscal 1996. This
increase is due primarily to capital expenditures for computer hardware and
software and goodwill recorded in connection with the Genix acquisition.
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Operating income increased $14.3 million, or 78%, to $32.6 million for the
first six months of fiscal 1997, compared to $18.3 million in fiscal 1996. The
increase was due to the growth in new business generated by the Company and
acquisitions since the second quarter of fiscal 1996. The operating income
margin also increased to 11.1% for the first six months of fiscal 1997, from
10.1% for the first six months of fiscal 1996 due to the success of recent
acquisitions and increased realization of economies of scale.
Interest and other expenses increased from $0.2 million in the first six months
of fiscal 1996 to $2.8 million in fiscal 1997. The increase is attributable to
an increase in long-term debt related primarily to the Genix acquisition.
The Company's effective tax rate of approximately 41% exceeded the federal
statutory rate of 35%, due primarily to the amortization of certain
acquisition-related costs that are non-deductible for tax purposes, plus the
net effect of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company's liquid assets, consisting of cash and cash
equivalents, totaled $22.3 million compared to $34.7 million at June 30, 1996.
These liquid assets included $5.9 million ($9.1 million at June 30, 1996)
borrowed under a revolving credit facility ("ATM Cash Facility") for use in the
Company's automated teller machines ("ATMs"). Working capital was $54.1
million and $50.0 million at December 31, 1996 and June 30, 1996, respectively,
and increased due to acquisitions during the first six months of fiscal 1997
and disposition of several financial services outsourcing businesses during the
same period.
Net cash provided by operating activities was $21.3 million for the first six
months of fiscal 1997, compared with $3.1 million used by operating activities
during the first six months of fiscal 1996. The improvement is primarily due
to increased earnings, reduction in ATM cash and improved accounts receivable
collections. Net cash used in investing activities decreased by $4.0 million
over the prior year six month period primarily due to proceeds from a note
receivable of $4.6 million. The current period included $17.4 million paid for
acquisitions and $17.4 million paid for capital expenditures. Net cash flow
from financing activities decreased $10.6 million due to a decline in net
proceeds from issuance of long-term debt, a net repayment of ATM debt and
redemption of preferred stock.
The Company has an available line of credit of $125 million under an unsecured
revolving credit facility (the "Credit Facility"). Borrowings under the Credit
Facility as of December 31, 1996 were $51.7 million (leaving approximately
$62.2 million available for use, net of outstanding letters of credit). The
Company has an ATM Cash Facility of $11 million of which $5.1 million was
outstanding as of December 31, 1996. The Company renewed this facility through
December 1997 under the same terms of the existing agreement. The Company also
has three vault cash custody agreements with financial institutions which
provide the use of up to $58.0 million in cash for use in Company-owned ATMs.
The amount of cash outstanding under the cash custody agreements at December
31, 1996 was approximately $43.0 million and is not an asset or liability of
the Company and therefore not recorded on the accompanying consolidated balance
sheets.
The Company's management believes that available cash and cash equivalents,
together with cash generated from operations and available borrowings under its
credit facilities, will provide adequate funds for the Company's anticipated
needs, including working capital, capital expenditures and ATM vault cash
requirements. Management also believes that cash provided from operations will
be sufficient to satisfy all existing debt obligations as they come due. As
the size and financial resources of the Company increase, however, additional
acquisition opportunities requiring significant commitments of capital may
arise. In order to pursue such opportunities, the Company may be required to
incur debt or to issue additional potentially dilutive securities in the
future. No assurance can be given as to the Company's future acquisition and
expansion opportunities and how such opportunities would be financed.
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 31, 1995, the Fifth District Court of Appeals in Dallas,
Texas (the "Court of Appeals") affirmed the judgment of the trial
court in the matter styled ACS Investors, Inc., et. al. v. Thomas
McLaughlin and John Lazovich. The trial court had rendered a verdict
in favor of Messrs. McLaughlin and Lazovich on causes of action for
tortious interference with an acquisition agreement entered into by
Messrs. McLaughlin and Lazovich and First Texas Savings Association in
1986 related to the acquisition of an electronic benefit transfer
business. The total amount of the judgment against the Company, ACS
Government Services, Inc., Darwin Deason and J. Livingston Kosberg, a
former director of the Company, including interest, is approximately
$9.5 million, which includes $3 million in actual damages and $1.5
million in exemplary damages. The Company has indemnified Mr. Deason
and Mr. Kosberg from any liability arising from the suit. The Company
pursued its appeal of the judgment before the Texas Supreme Court in
October 1996. The Texas Supreme Court has not yet issued its opinion
on this appeal.
On May 22, 1996, a former employee of Gibraltar Savings Association
("GSA") filed suit in Texas state court alleging entitlement to 6,467
shares of the Company's Class A common stock pursuant to options
issued to certain GSA employees in 1988 in connection with a former
data processing services agreement between GSA and the Company. On
October 6, 1996, twelve additional former GSA employees filed a
similar suit alleging entitlement to 106,996 shares of the Company's
Class A common stock, which together with the other shares represent
less than 0.6% of the outstanding common stock and common stock
equivalents of the Company. The Company believes that is has
meritorious defenses to all or substantial portions of plaintiffs'
claims and plans to vigorously defend against these lawsuits.
The Company is subject to certain legal proceedings, claims and
disputes which arise in the ordinary course of its business. Although
the Company cannot predict the outcomes of these legal proceedings,
the Company's management does not believe these actions will have a
material adverse effect on the Company's financial position, results
of operations or liquidity. However, if unfavorably resolved, these
proceedings could have a material adverse effect on the Company's
financial position, results of operations and liquidity.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11.1 Earnings per Share.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any current report on Form 8-K during
the quarter ended December 31, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 13th day of February, 1997.
AFFILIATED COMPUTER SERVICES, INC.
By:/s/ Mark A. King
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Mark A. King
Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
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11.1 EARNINGS PER SHARE
27 FINANCIAL DATA SCHEDULE