e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the period from to
Commission file number 001-12665
AFFILIATED COMPUTER SERVICES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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51-0310342 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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2828 North Haskell, Dallas, Texas
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75204 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the registrants classes of common stock, as
of the latest practicable date.
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Title of each class
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Number of shares outstanding as of
January 29, 2009 |
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Class A Common Stock, $.01 par value
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90,958,872 |
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Class B Common Stock, $.01 par value
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6,599,372 |
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
INDEX
PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
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December 31, |
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June 30, |
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2008 |
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2008 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
567,217 |
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$ |
461,883 |
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Accounts receivable, net |
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1,493,314 |
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1,378,285 |
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Income taxes receivable |
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7,076 |
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Prepaid expenses and other current assets |
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259,557 |
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255,872 |
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Total current assets |
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2,320,088 |
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2,103,116 |
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Property, equipment and software, net |
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912,085 |
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920,637 |
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Goodwill |
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2,760,023 |
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2,785,164 |
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Other intangibles, net |
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414,983 |
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444,479 |
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Other assets |
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187,096 |
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216,003 |
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Total assets |
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$ |
6,594,275 |
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$ |
6,469,399 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
241,338 |
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$ |
198,191 |
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Accrued compensation and benefits |
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201,473 |
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244,888 |
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Other accrued liabilities |
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370,277 |
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338,861 |
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Income taxes payable |
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11,472 |
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Deferred taxes |
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81,070 |
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82,017 |
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Current portion of long-term debt |
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50,160 |
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47,373 |
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Current portion of unearned revenue |
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196,012 |
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173,809 |
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Total current liabilities |
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1,151,802 |
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1,085,139 |
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Senior Notes, net of unamortized discount |
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499,569 |
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499,529 |
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Other long-term debt |
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1,821,548 |
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1,858,012 |
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Deferred taxes |
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427,872 |
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411,836 |
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Other long-term liabilities |
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310,930 |
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306,509 |
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Total liabilities |
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4,211,721 |
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4,161,025 |
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Commitments and contingencies (See Note 14) |
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Stockholders equity: |
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Class A common stock, $.01 par value, 500,000 shares
authorized, 111,957 and 111,660 shares issued, respectively |
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1,119 |
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1,116 |
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Class B convertible common stock, $.01 par value, 14,000 shares
authorized, 6,600 shares issued and outstanding |
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66 |
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66 |
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Additional paid-in capital |
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1,721,657 |
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1,702,340 |
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Accumulated other comprehensive income (loss), net |
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(85,462 |
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18,830 |
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Retained earnings |
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1,801,142 |
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1,641,990 |
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Treasury stock at cost, 21,002 shares |
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(1,055,968 |
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(1,055,968 |
) |
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Total stockholders equity |
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2,382,554 |
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2,308,374 |
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Total liabilities and stockholders equity |
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$ |
6,594,275 |
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$ |
6,469,399 |
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The accompanying notes are an integral part of these consolidated financial statements.
1
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share amounts)
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Three Months Ended |
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Six Months Ended |
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December 31, |
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December 31, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenues |
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$ |
1,612,070 |
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$ |
1,511,442 |
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$ |
3,216,524 |
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$ |
3,004,525 |
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Operating expenses: |
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Cost of revenues: |
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Wages and benefits |
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731,948 |
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717,047 |
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1,465,964 |
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1,416,996 |
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Services and supplies |
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403,365 |
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326,457 |
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776,870 |
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668,223 |
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Rent, lease and maintenance |
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196,491 |
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185,203 |
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398,634 |
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370,121 |
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Depreciation and amortization |
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95,616 |
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94,358 |
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193,222 |
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185,182 |
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Other |
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9,686 |
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6,982 |
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20,034 |
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13,897 |
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Cost of revenues |
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1,437,106 |
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1,330,047 |
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2,854,724 |
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2,654,419 |
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Other operating expenses |
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6,425 |
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23,501 |
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20,513 |
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46,811 |
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Total operating expenses |
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1,443,531 |
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1,353,548 |
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2,875,237 |
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2,701,230 |
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Operating income |
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168,539 |
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157,894 |
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341,287 |
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303,295 |
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Interest expense |
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35,896 |
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43,049 |
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71,104 |
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87,019 |
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Other non-operating expense (income), net |
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3,200 |
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(5,509 |
) |
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6,900 |
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(6,189 |
) |
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Pretax profit |
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129,443 |
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120,354 |
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263,283 |
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222,465 |
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Income tax expense |
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53,926 |
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38,758 |
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104,131 |
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74,725 |
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Net income |
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$ |
75,517 |
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$ |
81,596 |
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$ |
159,152 |
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$ |
147,740 |
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Earnings per share: |
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Basic |
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$ |
0.77 |
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$ |
0.82 |
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$ |
1.63 |
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$ |
1.48 |
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Diluted |
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$ |
0.77 |
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$ |
0.81 |
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$ |
1.62 |
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$ |
1.47 |
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Shares used in computing earnings per share: |
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Basic |
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97,548 |
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|
99,505 |
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97,428 |
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99,613 |
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Diluted |
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97,811 |
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100,310 |
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97,951 |
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|
100,648 |
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The accompanying notes are an integral part of these consolidated financial statements.
2
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
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Six Months Ended |
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December 31, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net income |
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$ |
159,152 |
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$ |
147,740 |
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Adjustments to reconcile net income to net cash provided by operating
activities: |
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Depreciation and amortization |
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|
193,222 |
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|
185,182 |
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Stock-based compensation expense |
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|
12,389 |
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|
14,316 |
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Excess tax benefit on stock-based compensation |
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(1,447 |
) |
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(2,026 |
) |
Deferred income tax expense |
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|
28,003 |
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|
61,472 |
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Impairment charges |
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|
1,560 |
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(Gain) loss on long-term investments |
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18,945 |
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(367 |
) |
Gain on sale of business units |
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(1,849 |
) |
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(2,430 |
) |
Other non-cash activities |
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|
22,151 |
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|
11,879 |
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Changes in assets and liabilities, net of effects from acquisitions: |
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Accounts receivable |
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(103,015 |
) |
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|
(85,004 |
) |
Prepaid expenses and other current assets |
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(9,600 |
) |
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|
(1,899 |
) |
Other assets |
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(4,112 |
) |
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|
(135 |
) |
Accounts payable |
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|
31,937 |
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|
60,130 |
|
Accrued compensation and benefits |
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(47,676 |
) |
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|
(60,948 |
) |
Other accrued liabilities |
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|
(8,034 |
) |
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(33,025 |
) |
Income taxes receivable/payable |
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|
16,570 |
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|
4,929 |
|
Other long-term liabilities |
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(15,118 |
) |
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|
10,565 |
|
Unearned revenue |
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17,207 |
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|
18,682 |
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Total adjustments |
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|
149,573 |
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|
182,881 |
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Net cash provided by operating activities |
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|
308,725 |
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|
330,621 |
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Cash flows from investing activities: |
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Purchases of property, equipment and software, net |
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(148,596 |
) |
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|
(132,402 |
) |
Additions to other intangible assets |
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(17,818 |
) |
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(17,416 |
) |
Payments for acquisitions, net of cash acquired |
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(18,960 |
) |
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(23,832 |
) |
Proceeds from divestitures, net of transaction costs |
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|
10,338 |
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|
4,035 |
|
Purchases of investments |
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(7,596 |
) |
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Proceeds from sale of investments |
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|
12,603 |
|
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|
961 |
|
Other |
|
|
|
|
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|
(6,500 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(170,029 |
) |
|
|
(175,154 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt, net |
|
|
30,687 |
|
|
|
197,077 |
|
Payments of long-term debt |
|
|
(72,764 |
) |
|
|
(193,229 |
) |
Purchase of treasury shares |
|
|
|
|
|
|
(200,000 |
) |
Excess tax benefit on stock-based compensation |
|
|
1,447 |
|
|
|
2,026 |
|
Proceeds from stock options exercised |
|
|
7,406 |
|
|
|
29,337 |
|
Other, net |
|
|
(138 |
) |
|
|
(173 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(33,362 |
) |
|
|
(164,962 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
105,334 |
|
|
|
(9,495 |
) |
Cash and cash equivalents at beginning of period |
|
|
461,883 |
|
|
|
307,286 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
567,217 |
|
|
$ |
297,791 |
|
|
|
|
|
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|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
We are a Fortune 500 and S&P 500 company with more than 70,000 employees providing business process
outsourcing and information technology services to commercial and government clients. We were
incorporated in Delaware on June 8, 1988, and our corporate headquarters is located in Dallas,
Texas. Our clients have time-critical, transaction-intensive business and information processing
needs, and we typically service these needs through long-term contracts.
The consolidated financial statements are comprised of our accounts and the accounts of our
controlled subsidiaries. All significant inter-company accounts and transactions have been
eliminated in consolidation. The year-end condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by accounting principles
generally accepted in the United States of America. The financial information presented should be
read in conjunction with our consolidated financial statements for the year ended June 30, 2008.
The foregoing unaudited consolidated financial statements reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results of the interim period. The
results for the interim period are not necessarily indicative of results to be expected for the
year.
Significant accounting policies are detailed in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2008.
We present cost of revenues in our Consolidated Statements of Income based on the nature of the
costs incurred. Substantially all these costs are incurred in the provision of services to our
customers. The selling, general and administrative costs included in cost of revenues are not
material and are not separately presented in the Consolidated Statements of Income.
2. BUSINESS COMBINATIONS
In December 2008, we completed the acquisition of a South American-based customer care services
provider. The transaction was valued at approximately $19.1 million plus related transaction
costs, excluding contingent consideration of approximately $18.0 million based on future financial
performance and assumed liabilities of $27.0 million. The acquisition was funded from cash on hand. The purchase price was allocated to
assets acquired and liabilities assumed based on the estimated fair value as of the date of
acquisition. We acquired assets of $46.1 million. We
recorded goodwill of $19.8 million, which is not deductible for income tax purposes, and intangible
assets of $3.1 million. The $3.1 million of intangible assets is attributable to customer
contracts, non-compete agreements and trade names with useful lives of approximately 4 years. Our
Consolidated Balance Sheet as of December 31, 2008 reflects the preliminary allocation of the
purchase price to the assets acquired and liabilities assumed based on their estimated fair values
at the date of acquisition and is expected to be finalized upon receipt of the final third party
valuation. We believe this acquisition will expand our customer care offering and will help us
provide customers throughout the Americas and Europe a suite of cost competitive bilingual services
in English and Spanish for their business process outsourcing solutions. The operating results of
the acquired business are included in our financial statements in the Commercial segment from the
effective date of the acquisition, December 9, 2008.
This acquisition is not considered material to our results of operations, either individually or in
the aggregate; therefore, no pro forma information is presented.
4
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. GLOBAL PRODUCTION INITIATIVE
In October 2008, we announced plans to implement a global production initiative to lower future
labor costs. Under this initiative, we intend to hire approximately 4,200 full-time employees in
locations outside of the United States and reduce corresponding positions within the United States
and Europe by the end of the first quarter of fiscal year 2010. The total pre-tax cost to reduce
these employee positions under this initiative is estimated to be approximately $38.0 million to
$42.0 million, of which severance costs are estimated to be approximately $14.0 million to $16.0
million and transition and other expenses are estimated to be approximately $24.0 million to $26.0
million. The transition costs consist primarily of duplicate labor costs as a result of job
training and work shadowing, as well as related travel, retention and facility costs during the
transition. We expect that substantially all of these expenses will be cash expenditures. The
following table reflects the estimated charges over the term of the initiative for each of our
segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Government |
|
|
Corporate |
|
|
Total |
|
Severance costs |
|
$ |
12,000 - $13,000 |
|
|
$ |
2,000 - $3,000 |
|
|
$ |
|
|
|
$ |
14,000 - $16,000 |
|
Transition and other expenses |
|
|
18,000 - 19,000 |
|
|
|
4,000 - 5,000 |
|
|
|
2,000 - 2,000 |
|
|
|
24,000 - 26,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs |
|
$ |
30,000 - $32,000 |
|
|
$ |
6,000 - $8,000 |
|
|
$ |
2,000 - $2,000 |
|
|
$ |
38,000 - $42,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, we have added approximately 2,000 positions outside the United States and
reduced corresponding positions in the United States and Europe as a result of this initiative. We
accrued severance costs of $12.9 million ($8.0 million, net of income tax) and incurred $3.8
million ($2.3 million, net of income tax) for transition and other expenses in cost of revenues in
our Consolidated Statement of Income during the three months ended December 31, 2008. The
following table reflects charges recorded during the period in each of our segments (in thousands): |
|
|
|
|
Three Months Ended December 31, 2008 |
|
|
|
Commercial |
|
|
Government |
|
|
Corporate |
|
|
Total |
|
Accrued severance costs |
|
$ |
10,849 |
|
|
$ |
2,043 |
|
|
$ |
|
|
|
$ |
12,892 |
|
Transition and other expenses |
|
|
3,180 |
|
|
|
540 |
|
|
|
62 |
|
|
|
3,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs |
|
$ |
14,029 |
|
|
$ |
2,583 |
|
|
$ |
62 |
|
|
$ |
16,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally, we anticipate opening new facility sites and expanding current facilities globally in
order to accommodate the increased offshore headcount. Capital expenditures related to these
facilities are currently estimated at $15 million to $20 million over the next three quarters.
During the three months ended December 31, 2008, we incurred $0.7 million in capital expenditures
related to these facilities.
The following table reflects the activity for the accruals for involuntary termination of employees
related to this initiative (in thousands):
|
|
|
|
|
Balance at September 30, 2008 |
|
$ |
|
|
Accruals |
|
|
12,892 |
|
Payments |
|
|
(1,189 |
) |
|
|
|
|
Balance at December 31, 2008 |
|
$ |
11,703 |
|
|
|
|
|
5
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
The changes in the carrying amount of goodwill for the six months ended December 31, 2008 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Government |
|
|
Total |
|
Balance as of June 30, 2008 |
|
$ |
1,546,870 |
|
|
$ |
1,238,294 |
|
|
$ |
2,785,164 |
|
Acquisition activity during the period |
|
|
19,799 |
|
|
|
2,891 |
|
|
|
22,690 |
|
Divestiture activity during the period |
|
|
|
|
|
|
(2,834 |
) |
|
|
(2,834 |
) |
Foreign currency translation adjustments |
|
|
(37,491 |
) |
|
|
(7,506 |
) |
|
|
(44,997 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
$ |
1,529,178 |
|
|
$ |
1,230,845 |
|
|
$ |
2,760,023 |
|
|
|
|
|
|
|
|
|
|
|
The acquisition activity during the six months ended December 31, 2008 is primarily related to the
purchase of a South American-based customer care services provider (see Note 2) and the payment of
contingent consideration earned during the period on a prior year acquisition. The divestiture
activity during the six months ended December 31, 2008 is due to the sale of the bindery business
as discussed in Note 13. Approximately $2.2 billion, or 78%, of the original gross amount of
goodwill recorded is deductible for income tax purposes.
The following information relates to our other intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
As of June 30, 2008 |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired customer-related intangibles |
|
$ |
419,310 |
|
|
$ |
(186,399 |
) |
|
$ |
445,753 |
|
|
$ |
(184,400 |
) |
Customer contract costs |
|
|
256,818 |
|
|
|
(136,675 |
) |
|
|
251,837 |
|
|
|
(130,319 |
) |
All other |
|
|
17,868 |
|
|
|
(10,827 |
) |
|
|
19,121 |
|
|
|
(12,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
693,996 |
|
|
$ |
(333,901 |
) |
|
$ |
716,711 |
|
|
$ |
(327,120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title plant |
|
$ |
51,045 |
|
|
|
|
|
|
$ |
51,045 |
|
|
|
|
|
Tradename |
|
|
3,843 |
|
|
|
|
|
|
|
3,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
54,888 |
|
|
|
|
|
|
$ |
54,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract inducements |
|
$ |
3,790 |
|
|
$ |
3,381 |
|
|
$ |
7,662 |
|
|
$ |
7,109 |
|
Acquired customer-related intangibles |
|
|
10,655 |
|
|
|
10,945 |
|
|
|
21,860 |
|
|
|
21,979 |
|
All other intangibles |
|
|
7,640 |
|
|
|
6,975 |
|
|
|
15,853 |
|
|
|
13,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization |
|
$ |
22,085 |
|
|
$ |
21,301 |
|
|
$ |
45,375 |
|
|
$ |
42,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization includes amounts charged to amortization expense for customer-related
intangibles and other intangibles, other than contract inducements. Amortization of contract inducements is recorded as a
reduction of related contract revenue. Amortizable intangible assets are amortized over the
related contract term. The amortization period of customer-related intangible assets ranges from 1
to 17 years, with a weighted average of approximately 9 years. The amortization period for all
other intangible assets, including trademarks, ranges from 3 to 20 years, with a weighted average
of approximately 5 years.
6
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Estimated amortization for the years ending June 30, (in thousands):
|
|
|
|
|
2009 |
|
$ |
88,923 |
|
2010 |
|
|
75,039 |
|
2011 |
|
|
63,727 |
|
2012 |
|
|
44,374 |
|
2013 |
|
|
30,296 |
|
5. TRADING SECURITIES
At December 31, 2008, we held equity investments classified as trading securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115).
Trading securities are bought and held principally for the purpose of selling them in the near
term with the objective of generating profits on short term differences in price. At December 31,
2008, we had $9.7 million of trading securities consisting of shares of common stock with an
unrealized gain of $1.0 million related to shares still held on that date. Gains and losses
related to trading securities are included in other non-operating expense (income) in our
Consolidated Statements of Income.
We hold mutual fund investments related to our deferred compensation plans which are classified as
trading securities under SFAS 115. As of December 31, 2008, we had an unrealized trading loss of $(4.8 million) related to $24.2 million of mutual fund investments held on that date. As
of December 31, 2007, we had an unrealized trading gain of $0.8 million related to $29.0
million of mutual fund investments held on that date.
6. PENSION AND OTHER POST-EMPLOYMENT PLANS
Net periodic benefit cost
The following table provides the components of net periodic benefit cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Non-U.S. |
|
|
U.S. |
|
|
Non-U.S. |
|
|
U.S. |
|
Defined benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
1,480 |
|
|
$ |
894 |
|
|
$ |
1,570 |
|
|
$ |
926 |
|
Interest cost |
|
|
1,693 |
|
|
|
191 |
|
|
|
1,680 |
|
|
|
123 |
|
Expected return on assets |
|
|
(1,497 |
) |
|
|
(240 |
) |
|
|
(1,844 |
) |
|
|
(173 |
) |
Recognized net actuarial gain |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service costs |
|
|
|
|
|
|
55 |
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost for defined benefit plans |
|
$ |
1,677 |
|
|
$ |
900 |
|
|
$ |
1,406 |
|
|
$ |
930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Non-U.S. |
|
|
U.S. |
|
|
Non-U.S. |
|
|
U.S. |
|
Defined benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
3,212 |
|
|
$ |
1,788 |
|
|
$ |
3,098 |
|
|
$ |
1,852 |
|
Interest cost |
|
|
3,687 |
|
|
|
382 |
|
|
|
3,312 |
|
|
|
246 |
|
Expected return on assets |
|
|
(3,283 |
) |
|
|
(480 |
) |
|
|
(3,644 |
) |
|
|
(346 |
) |
Recognized net actuarial gain |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service costs |
|
|
|
|
|
|
110 |
|
|
|
|
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost for defined benefit plans |
|
$ |
3,618 |
|
|
$ |
1,800 |
|
|
$ |
2,766 |
|
|
$ |
1,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions
We made contributions to the pension plans of approximately $3.0 million and $6.6 million during
the three and six months ended December 31, 2008. We expect to contribute approximately $15.0
million to our pension plans during fiscal year 2009.
7
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Supplemental Executive Retirement Agreement
On December 23, 2008, Darwin Deason, the Chairman of our Board of Directors, agreed, at our
request, to amend the Supplemental Executive Retirement Agreement dated December 1998, between Mr.
Deason and the Company, as amended in August 2003 and June 2005(the Agreement) in order to ensure
that the Agreement would comply with Section 409A of the Internal Revenue Code (Section 409A).
Pursuant to transition rules under Section 409A, we requested that Mr. Deason agree that, on
January 1, 2009, the Agreement be terminated and that Mr. Deason receive a cash lump sum, even
though he was not retiring. The cash lump sum of approximately $9.5 million, as determined pursuant
to the amendment to the Agreement, was paid in January 2009, and was consideration for (1) the
accrued benefit that Mr. Deason would have earned under the Agreement, as if normal retirement
occurred on January 1, 2009, (2) the costs Mr. Deason incurred in connection with the exercise of
the options issued to Mr. Deason in connection with the Agreement in 1998 and (3) the termination
of the options issued to Mr. Deason in connection with the Agreement in 2003. Thereafter, we have
no obligations to Mr. Deason pursuant to the Agreement or the related options. The
termination of the Agreement (the SERP Termination) removes the potential future liability we
might incur under the Agreement. During the three and six months ended December 31,
2008, we recorded a charge of $8.9 million ($10.4 million, net of income tax) related to the SERP Termination. The $9.5 million lump sum payment, all of which was accrued as
of December 31, 2008, was made to Mr. Deason in January 2009.
7. EQUITY
On November 25, 2007, our Board of Directors
endorsed a $1 billion share repurchase program and
authorized the purchase of up to $200 million of our Class A common stock under this program. The
program allowed us to repurchase our shares on the open market, from time to time, in accordance
with the requirements of the Securities and Exchange Commission (SEC) rules and regulations, including shares that could be purchased
pursuant to SEC Rule 10b5-1. The number of shares to be purchased and the timing of purchases will
be based on the level of cash and debt balances, general business conditions, and other factors,
including alternative investment opportunities. During the three and six months ended December 31,
2007, we repurchased approximately 4.5 million shares at an average cost of approximately $44.18
per share (approximately $200 million) all of which have been retired. The purchase of these
shares was funded with cash on hand and borrowings under our Credit Facility (defined in Note 14).
8. EARNINGS PER SHARE
In accordance with SFAS No. 128, Earnings per
Share, the following table sets forth the computation of basic and diluted earnings per share (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
75,517 |
|
|
$ |
81,596 |
|
|
$ |
159,152 |
|
|
$ |
147,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares |
|
|
97,548 |
|
|
|
99,505 |
|
|
|
97,428 |
|
|
|
99,613 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
263 |
|
|
|
805 |
|
|
|
523 |
|
|
|
1,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total potential common shares |
|
|
263 |
|
|
|
805 |
|
|
|
523 |
|
|
|
1,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares |
|
|
97,811 |
|
|
|
100,310 |
|
|
|
97,951 |
|
|
|
100,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.77 |
|
|
$ |
0.82 |
|
|
$ |
1.63 |
|
|
$ |
1.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.77 |
|
|
$ |
0.81 |
|
|
$ |
1.62 |
|
|
$ |
1.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Additional dilution from assumed exercises of stock options is dependent upon several factors,
including the market price of our common stock. Weighted average stock options to purchase
approximately 13.0 million and 10.4 million shares of common stock during the three months ended
December 31, 2008 and 2007, respectively, and 11.3 million and 9.3 million shares of common stock
during the six months ended December 31, 2008 and 2007, respectively, were outstanding but were not
included in the computation of diluted earnings per share because the average market price of the
underlying stock did not exceed the sum of the option exercise price, unrecognized compensation
expense and the windfall tax benefit.
The calculation of diluted earnings per share requires us to make certain assumptions related to
the use of proceeds that would be received upon the assumed exercise of stock options. These
assumed proceeds include the excess tax benefit that we receive upon assumed exercises. We
calculate the assumed proceeds from excess tax benefits based on the deferred tax assets actually
recorded without consideration of as if deferred tax assets calculated under the provisions of
SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
123(R)).
9. COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income (SFAS 130), establishes standards for reporting
and display of comprehensive income and its components in financial statements. The objective of
SFAS 130 is to report a measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions with owners.
Comprehensive income is the total of net income and all other non-owner changes within a companys
equity.
The components of comprehensive income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
75,517 |
|
|
$ |
81,596 |
|
|
$ |
159,152 |
|
|
$ |
147,740 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(45,559 |
) |
|
|
3,814 |
|
|
|
(81,893 |
) |
|
|
15,556 |
|
Unrealized gains (losses) on foreign exchange
forward agreements (net of income tax of
$(799), $23, $(1,493) and $(91), respectively) |
|
|
(1,158 |
) |
|
|
34 |
|
|
|
(2,303 |
) |
|
|
(167 |
) |
Amortization of unrealized loss on forward
interest rate agreements (net of income tax
of $240, $240, $480 and $480, respectively) |
|
|
396 |
|
|
|
397 |
|
|
|
792 |
|
|
|
793 |
|
Unrealized gains (losses) on interest rate swap
agreement (net of income tax of $(8,793),
$(4,685), $(8,633) and $(9,174), respectively) |
|
|
(14,552 |
) |
|
|
(7,754 |
) |
|
|
(14,288 |
) |
|
|
(15,768 |
) |
Unrealized gains (losses) on interest rate collar
agreements (net of income tax of $(3,824), $0,
$(4,031) and $0, respectively) |
|
|
(6,328 |
) |
|
|
|
|
|
|
(6,670 |
) |
|
|
|
|
Amortization of prior service costs
(net of income tax of $20, $20, $40 and $40,
respectively) |
|
|
35 |
|
|
|
34 |
|
|
|
70 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
8,351 |
|
|
$ |
78,121 |
|
|
$ |
54,860 |
|
|
$ |
148,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table represents the components of accumulated other comprehensive income (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2008 |
|
|
2008 |
|
Foreign currency gains (losses) |
|
$ |
(39,891 |
) |
|
$ |
42,002 |
|
Unrealized gains (losses) on foreign exchange forward agreements
(net of income tax of $(540) and $953) |
|
|
(648 |
) |
|
|
1,655 |
|
Unrealized loss on forward interest rate agreements
(net of income tax of $(3,732) and $(4,212)) |
|
|
(6,237 |
) |
|
|
(7,029 |
) |
Unrealized gains (losses) on interest rate swap agreement
(net of income tax of $(14,811) and $(6,178)) |
|
|
(24,512 |
) |
|
|
(10,224 |
) |
Unrealized gains (losses) on interest rate collar agreements
(net of income tax of $(3,252) and $779) |
|
|
(5,381 |
) |
|
|
1,289 |
|
Unrecognized prior service costs
(net of income tax of $(488) and $(528)) |
|
|
(863 |
) |
|
|
(933 |
) |
Unrealized losses on funded status of pension and other benefit plans
(net of income tax of $(3,259) and $(3,259)) |
|
|
(7,930 |
) |
|
|
(7,930 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(85,462 |
) |
|
$ |
18,830 |
|
|
|
|
|
|
|
|
10. DERIVATIVES AND HEDGING INSTRUMENTS
Interest rate hedges
In January 2008, we entered into a zero cost interest rate collar with an interest rate cap of
3.281% and a floor of 2.425%. The notional amount of the collar is $500 million executed in two
transactions each having two year terms, $300 million of which expires on January 30, 2010 and $200
million of which expires on February 11, 2010. In March 2007, we entered into a five-year
amortizing interest rate swap agreement structured so that we pay a fixed interest rate of 4.897%,
and receive a floating interest rate equal to the one-month LIBOR rate. At December 31, 2008,
the notional amount of the interest rate swap was $600 million. The interest rate collar and
interest rate swap are designated as a cash flow hedge of forecasted interest payments on up to
$1.1 billion of outstanding floating rate debt. The transactions had a fair market value of zero
at inception. The unrealized loss on the transactions as of December 31, 2008 of $48 million
($29.9 million, net of income tax) is reflected in accumulated other comprehensive income (loss),
net and the fair market value of $(48 million) is reflected in other accrued liabilities and other
long-term liabilities. There was no deemed ineffectiveness related to these cash flow hedges. The
unrealized loss on the transactions as of June 30, 2008 of $14.3 million ($8.9 million, net of
income tax) is reflected in accumulated other comprehensive income (loss), net and the fair market
value of $(14.3 million) was reflected in other long-term liabilities.
In order to hedge the variability of future interest payments related to our Senior Notes issuance,
we entered into forward interest rate agreements in April 2005. The agreements were designated as
cash flow hedges of forecasted interest payments in anticipation of the issuance of the Senior
Notes. The notional amount of the agreements totaled $500 million and the agreements were
terminated in June 2005 upon issuance of the Senior Notes. The settlement of the forward interest
rate agreements of $19 million ($12 million, net of income tax) was recorded in accumulated other
comprehensive income (loss), net, and is being amortized as an increase in reported interest
expense over the term of the Senior Notes, with approximately $2.5 million to be amortized over the
next 12 months. We amortized approximately $0.6 million to interest expense during both the three
months ended December 31, 2008 and 2007 and $1.3 million to interest expense during both the six
months ended December 31, 2008 and 2007.
Foreign currency forward agreements
We utilize derivative financial instruments to manage our exposure to foreign currencies related to
our domestic and international operations. We enter into foreign currency forward agreements in
order to hedge the exchange rate risk associated with specific forecasted transactions, including
payments and receipts from customers and suppliers, and funding of operating expenses of our
offshore operations. We designate only those contracts which closely match the terms of the
underlying transaction as cash flow hedges for accounting purposes. The forward contracts are
assessed for effectiveness at inception and on an ongoing basis. During the three and six months
ended December 31, 2008 and 2007, there was no material deemed ineffectiveness related to cash flow
hedges, and no reclassification to earnings due to hedged transactions no
10
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
longer expected to occur. The contracts will expire at various times over the next 24 months,
with the majority expiring within the next 12 months. The net gain or loss on the contracts will
be recognized in earnings when the contracts are settled.
As of December 31, 2008 and June 30, 2008, the notional amount of our foreign exchange cash flow
hedges was $83.2 million and $42.6 million, respectively. As of December 31, 2008, an unrealized
loss of $2.9 million ($1.8 million, net of income tax) was recorded in accumulated other
comprehensive income (loss), net and the fair market value of $2.9 million was recorded in other
current liabilities. As of December 31, 2008, an unrealized gain of $1.7 million ($1.2 million, net
of income tax) was recorded in accumulated other comprehensive income (loss), net and the fair
market value of $1.7 million was recorded in other current assets. As of June 30, 2008, the
unrealized gain on these foreign exchange forward agreements, reflected in accumulated other
comprehensive income (loss), net, was $2.6 million ($1.7 million, net of income tax) and the fair
market value of $2.6 million was reflected in other current assets.
The table below provides additional information as of December 31, 2008 about our foreign currency
forward contracts designated as cash flow hedges (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$US |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Cumulative |
|
|
|
(Functional |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Unrealized |
|
|
|
currency in |
|
|
Functional |
|
|
Counter |
|
|
Contract |
|
|
Gain (Loss) |
|
Hedged Transaction |
|
$US) |
|
|
Currency |
|
|
Currency |
|
|
Rate |
|
|
in $US |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receipt of revenue |
|
$ |
638 |
|
|
EUR |
452 |
|
|
CAD |
623 |
|
|
|
0.726 |
|
|
$ |
118 |
|
Payment of operating expenses |
|
|
40,616 |
|
|
USD |
40,616 |
|
|
MXN |
550,000 |
|
|
|
13.541 |
|
|
|
(2,490 |
) |
Payment of operating expenses |
|
|
11,104 |
|
|
USD |
11,104 |
|
|
PHP |
568,800 |
|
|
|
51.223 |
|
|
|
663 |
|
Payment of operating expenses |
|
|
26,132 |
|
|
USD |
26,132 |
|
|
INR |
1,290,000 |
|
|
|
49.364 |
|
|
|
(394 |
) |
Receipt of revenue |
|
|
3,328 |
|
|
CHF |
3,514 |
|
|
NOK |
17,683 |
|
|
|
0.199 |
|
|
|
795 |
|
Receipt of revenue |
|
|
411 |
|
|
CHF |
434 |
|
|
EUR |
269 |
|
|
|
1.613 |
|
|
|
31 |
|
Payment for equipment |
|
|
976 |
|
|
USD |
976 |
|
|
CHF |
1,136 |
|
|
|
1.163 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
83,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,188 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As part of the acquisition of the Transport Revenue division of Ascom AG in December 2005, we
acquired foreign exchange forward agreements that hedge our French operations Euro foreign
exchange exposure related to its Canadian dollar and U.S. dollar revenues. These agreements do not
qualify for hedge accounting under SFAS 133. In addition, we have entered into certain other
foreign currency contracts not designated as hedges for accounting purposes, although management
believes they are essential economic hedges. We recorded a gain on non-qualified hedging
instruments of approximately $1.4 million ($0.9 million, net of income tax) and $0.7 million ($0.5
million, net of income tax) for the three and six months ended December 31, 2008, respectively, in
other non-operating expense (income), net in our Consolidated Statements of Income. We recorded
income on non-qualified hedging instruments of approximately $1.0 million ($0.7 million, net of
income tax) and $0.8 million ($0.6 million, net of income tax) for the three and six months ended
December 31, 2007, respectively, in other non-operating expense (income), net in our Consolidated
Statements of Income. As of December 31, 2008 and June 30, 2008, the notional amount of these
agreements was $8.3 million and $21.5 million, respectively, and will expire at various times over
the next 24 months, with the majority expiring within the next 6 to 12 months. The fair market
value of the foreign exchange forward agreements as of December 31, 2008 of approximately $0.2
million was recorded in other current assets in our Consolidated Balance Sheets. The fair market
value of the foreign exchange forward agreements as of June 30, 2008 of approximately $(0.6
million) was recorded in other current liabilities in our Consolidated Balance Sheets.
11
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. FAIR VALUE MEASUREMENTS
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair
Value Measurements, (SFAS 157) for financial assets and liabilities. SFAS 157 establishes a
hierarchy that prioritizes fair value measurements based on the types of inputs used for the
various valuation techniques (market approach, income approach and cost approach). SFAS 157 is
applied under existing accounting pronouncements that require or permit fair value measurements
and, accordingly, does not require any new fair value measurements. We adopted SFAS 157 effective
July 1, 2008. There was no impact to our results of operations or financial condition as a result
of the adoption of SFAS 157.
In
February 2008, the FASB issued FASB Staff Position
(FSP) FAS 157-2 (FSP 157-2), Effective Date of
FASB Statement No. 157, which provides a one-year deferral of the effective date of SFAS 157 for
non-financial assets and liabilities except those that are recognized or disclosed in the financial
statements at fair value at least annually. We are currently evaluating the impact, if any, that
FSP 157-2 will have on our financial condition and results of operations.
The fair value framework requires the categorization of assets and liabilities into three levels
based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the
most reliable measure of fair value, whereas Level 3 generally requires significant management
judgment. The three levels are defined as follows:
|
Level 1: |
|
Observable inputs such as quoted prices in active markets for identical assets or
liabilities. |
|
|
Level 2: |
|
Inputs other than quoted prices that are observable for the asset or liability,
either directly or indirectly; these include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or similar assets or
liabilities in markets that are not active. |
|
|
Level 3: |
|
Unobservable inputs reflecting managements own assumptions about the inputs used
in pricing the asset or liability. |
12
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents information about the Companys financial assets and liabilities
measured at fair value on a recurring basis as of December 31, 2008 and indicates the fair value
hierarchy of the valuation techniques utilized by the Company to determine such fair value (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities (a) |
|
$ |
9,661 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
9,661 |
|
Foreign currency derivatives (b) |
|
|
|
|
|
|
1,970 |
|
|
|
|
|
|
|
1,970 |
|
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation investments in cash surrender
life insurance (c) |
|
|
|
|
|
|
47,260 |
|
|
|
|
|
|
|
47,260 |
|
Deferred compensation investments in mutual funds (d) |
|
|
|
|
|
|
24,156 |
|
|
|
|
|
|
|
24,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
9,661 |
|
|
$ |
73,386 |
|
|
$ |
|
|
|
$ |
83,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives (b) |
|
$ |
|
|
|
$ |
2,915 |
|
|
$ |
|
|
|
$ |
2,915 |
|
Interest rate swap (e) |
|
|
|
|
|
|
19,422 |
|
|
|
|
|
|
|
19,422 |
|
Other long-term liabilties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan liabilities (f) |
|
|
|
|
|
|
67,890 |
|
|
|
|
|
|
|
67,890 |
|
Interest rate swap and collar (e) |
|
|
|
|
|
|
28,534 |
|
|
|
|
|
|
|
28,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
|
|
|
$ |
118,761 |
|
|
$ |
|
|
|
$ |
118,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The fair value of the equity securities is determined using quoted prices in active
markets for identical instruments. |
|
(b) |
|
Foreign currency derivatives consist of foreign currency forward agreements. Fair
value is determined using observable market inputs such as the forward pricing curve,
currency volatilities, currency correlations and interest rates, and considers
nonperformance risk of the Company and that of its counterparties. |
|
(c) |
|
Fair value is reflected as the cash surrender value of company owned life insurance. |
|
(d) |
|
Fair value is based on quoted market prices for actively traded assets similar to those
held by the deferred compensation plan. |
|
(e) |
|
The fair values of the interest rate swap and collar are determined using prices
obtained from pricing agencies and financial institutions that develop values based on
inputs observable in active markets, including interest rates, with consideration given to
the nonperformance risk of the Company and that of its counterparties. |
|
(f) |
|
Fair value of the deferred compensation liability is based on the fair value of
investments corresponding to employees investment selections, based on quoted prices for
similar assets in actively traded markets. |
13
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. SEGMENT INFORMATION
The following is a summary of certain financial information by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Government |
|
|
Corporate |
|
|
Consolidated |
|
Three Months Ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (a) |
|
$ |
963,354 |
|
|
$ |
648,716 |
|
|
$ |
|
|
|
$ |
1,612,070 |
|
Operating expenses (excluding depreciation and
amortization) |
|
|
813,541 |
|
|
|
515,907 |
|
|
|
18,467 |
|
|
|
1,347,915 |
|
Depreciation and amortization expense |
|
|
68,607 |
|
|
|
26,191 |
|
|
|
818 |
|
|
|
95,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
81,206 |
|
|
$ |
106,618 |
|
|
$ |
(19,285 |
) |
|
$ |
168,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (a) |
|
$ |
903,022 |
|
|
$ |
608,420 |
|
|
$ |
|
|
|
$ |
1,511,442 |
|
Operating expenses (excluding depreciation and
amortization) |
|
|
748,147 |
|
|
|
464,808 |
|
|
|
46,235 |
|
|
|
1,259,190 |
|
Depreciation and amortization expense |
|
|
69,456 |
|
|
|
24,513 |
|
|
|
389 |
|
|
|
94,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
85,419 |
|
|
$ |
119,099 |
|
|
$ |
(46,624 |
) |
|
$ |
157,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (b) |
|
$ |
1,922,771 |
|
|
$ |
1,293,753 |
|
|
$ |
|
|
|
$ |
3,216,524 |
|
Operating expenses (excluding depreciation and
amortization) |
|
|
1,611,766 |
|
|
|
1,027,102 |
|
|
|
43,147 |
|
|
|
2,682,015 |
|
Depreciation and amortization expense |
|
|
139,226 |
|
|
|
52,543 |
|
|
|
1,453 |
|
|
|
193,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
171,779 |
|
|
$ |
214,108 |
|
|
$ |
(44,600 |
) |
|
$ |
341,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (b) |
|
$ |
1,781,901 |
|
|
$ |
1,222,624 |
|
|
$ |
|
|
|
$ |
3,004,525 |
|
Operating expenses (excluding depreciation and
amortization) |
|
|
1,478,401 |
|
|
|
945,518 |
|
|
|
92,129 |
|
|
|
2,516,048 |
|
Depreciation and amortization expense |
|
|
135,352 |
|
|
|
49,027 |
|
|
|
803 |
|
|
|
185,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
168,148 |
|
|
$ |
228,079 |
|
|
$ |
(92,932 |
) |
|
$ |
303,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Revenues in our Commercial segment include revenues from operations divested through
December 31, 2008 of $3.5 million for the three months ended December 31, 2007. Revenues
in our Government segment include revenues from operations divested through December 31,
2008 of $5.5 million for the three months ended December 31, 2007. |
|
(b) |
|
Revenues in our Commercial segment include revenues from operations divested through
December 31, 2008 of $6.4 million for the six months ended December 31, 2007. Revenues in
our Government segment include revenues from operations divested through December 31, 2008
of $0.3 million and $10.7 million for the six months ended December 31, 2008 and 2007,
respectively. |
14
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. DIVESTITURES
Sale of bindery business
During the three months ended September 30, 2008, we completed the sale of our bindery business in
our Government segment and recorded a pre-tax gain on the sale of approximately $0.2 million ($0.8
million loss, net of income tax) in other operating expenses in our Consolidated Statements of
Income. The bindery business was not strategic to our ongoing operations.
Revenues from the bindery business were $0 and $3.7 million for the three months ended December 31,
2008 and 2007, respectively, and $0.3 million and $7.1 million for the six months ended December
31, 2008 and 2007, respectively. Operating income from the bindery business, excluding the gain on
sale, was $0 and $0.9 million for the three months ended December 31, 2008 and 2007, respectively,
and $0 and $1.7 million for the six months ended December 31, 2008 and 2007, respectively.
Sale of Unclaimed Property Reporting and Recovery Business
During the three months ended June 30, 2008, we completed the sale of Unclaimed Property Reporting
and Recovery (UPRR) in our Commercial segment. During the three months ended June 30, 2008, we
recorded a pre-tax gain on the sale of approximately $1.0 million ($0.6 million, net of income
tax). During the three and six months ended December 31, 2008, we recorded an additional $0.3
million ($0.2 million, net of income tax) and $0.5 million ($0.4 million, net of income tax),
respectively, in other operating expenses in our Consolidated Statements of Income. The UPRR
business was not strategic to our ongoing operations.
Revenues from the UPRR business were $3.5 and $6.4 million for the three and six months ended
December 31, 2007, respectively. Operating income from the UPRR business, excluding the gain on
sale, was $0.2 million and $0.3 million for the three and six months ended December 31, 2007,
respectively.
Sale of our decision support business
During the three months ended December 31, 2007, we completed the sale of our decision support
business in our Government segment and recorded a pre-tax gain on the sale of approximately $2.4
million ($1.6 million, net of income tax) in other operating expenses in our Consolidated Statements
of Income. The decision support business was not strategic to our ongoing operations.
Revenues from the decision support business were $1.8 million and $3.7 million for the three and
six months ended December 31, 2007, respectively. Operating income from the decision support
business was $0.8 million and $1.5 million for the three and six months ended December 31, 2007,
respectively.
14. COMMITMENTS AND CONTINGENCIES
Regulatory Agency Investigations Relating to Stock Option Grant Practices
On March 3, 2006, we received notice from the SEC that it was conducting an investigation into
certain stock option grants made by us from October 1998 through March 2005. On June 7, 2006 and
on June 16, 2006, we received requests from the SEC for information on all of our stock option
grants since 1994. We have been providing supplemental information to the SEC on a voluntary basis
following the initial SEC requests. The SEC issued its formal order of investigation in August
2006.
On May 17, 2006, we received a grand jury subpoena from the United States District Court, Southern
District of New York, requesting production of documents related to the granting of our stock
option grants. We have responded to the grand jury subpoena and have produced documents to the
United States Attorneys Office in connection with the grand jury proceeding. We have informed the
SEC and the United States Attorneys Office for the Southern District of New York of the results of
our internal investigation into our stock option grant practices (discussed below) and will
continue to cooperate with these governmental entities and their investigations.
We initiated an internal investigation of our stock option grant practices in response to the
pending informal investigation by the SEC and a subpoena from a grand jury in the Southern District
of New York. The investigation reviewed our historical stock option grant practices during the
period from 1994 through 2005, including all 73 stock option grants made by us during this period,
and the related disclosure in our Form 10-Q for the three months ended March 31, 2006, filed May
15,
15
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2006 (the May 2006 Form 10-Q). The results of our internal investigation are fully disclosed in
our Annual Report on Form 10-K/A for the fiscal year ended June 30, 2006.
Subsequent to the delivery of the results of the investigation, we, with the approval of our Audit
Committee, determined that the cumulative non-cash stock-based compensation expense adjustment and
related income tax effects were material. Our decision to restate our financial statements was
based on the facts obtained by management and a special committee comprised of all of the then
independent members of the Board of Directors, which oversaw the internal investigation. We
determined that the cumulative, pre-tax, non-cash stock-based compensation expense resulting from
revised measurement dates was approximately $51.2 million during the period from our initial public
offering in 1994 through June 30, 2006. The corrections relate to options covering approximately
19.4 million shares. Previously reported total revenues were not impacted by our restatement. The
impact of the restatement on each year of our previously issued financial statements is more fully
disclosed in our Annual Report on Form 10-K/A for the fiscal year ended June 30, 2006.
Related income tax effects included deferred income tax benefits on the compensation expense, and
additional income tax liabilities and estimated penalties and interest related to the application
of Internal Revenue Code Section 162(m) and related Treasury Regulations (Section 162(m)) to
stock-based executive compensation previously deducted, that was no longer deductible as a result
of revised measurement dates of certain stock option grants. We also included in our restatements
additional income tax liabilities and estimated penalties and interest, with adjustments to
additional paid-in capital and income tax expense, related to certain cash and stock-based
executive compensation deductions previously taken under Section 162(m), which we believed may be
non-deductible as a result of information that has been obtained by us in connection with our
internal investigation, due to factors unrelated to revised measurement dates. During the three
months ended March 31, 2007, we paid approximately $35 million of estimated income taxes, penalties
and interest related to Section 162(m) issues. This payment is reflected in cash flows from
operating activities at June 30, 2007. During fiscal year 2008, we resolved Section 162(m)
executive compensation issues for fiscal years 2001 through 2003 with the Internal Revenue Service
and used the same resolution criteria to adjust the liabilities for fiscal years 2004 and 2005,
resulting in a revised liability of $26.9 million of income tax, interest and penalties. During
the three months ended June 30, 2008, $5.9 million was released to income tax expense and $0.5
million was credited to additional paid-in capital. At this time, we cannot predict when these
Section 162(m) issues will be resolved for fiscal years 2004 and 2005.
In December 2006, we amended the exercise price of outstanding stock options of certain current
executive officers, other executive officers and former executive officers in order to re-price all
or a portion of the respective option grant to the revised measurement date to avoid adverse tax
consequences to individual option holders under Section 409A of the Internal Revenue Code. We paid
cash payments in the aggregate amount of $2.4 million in accordance with the terms of the amendment
during the three months ended March 31, 2008 from cash flows from operating activities. Of the
$2.4 million cash payment, approximately $0.5 million was charged to wages and benefits in our
Consolidated Statement of Income during the three months ended December 31, 2006, and the balance
was charged to additional paid-in capital in our Consolidated Balance Sheet.
On June 18, 2007, we initiated a tender offer to amend certain options (the Eligible Options) to
purchase an aggregate of 1,703,650 shares (as amended) of our Class A common stock in order to
re-price all or a portion of the respective option grant to the revised measurement date to avoid
adverse tax consequences to individual option holders under Section 409A of the Internal Revenue
Code. The Eligible Options included options that (i) were granted under our 1997 Stock Incentive
Plan, as amended; (ii) had exercise prices per share that were less, or may have been less, than
the fair market value per share of our common stock on the revised measurement dates for such
options, as determined by us for accounting and tax purposes; (iii) were unexercised and unvested,
either in whole or in part, as of January 1, 2005; (iv) were outstanding as of the expiration time
of this tender offer; and (v) were held by individuals who (x) were employed by the Company through
the expiration time of this tender offer (other than any executive officer or director) and (y) are
subject to income taxation in the United States. Eligible participants could elect to (i) amend
Eligible Options to increase the exercise price per share to the fair market value of the Companys
Class A common stock on the respective options measurement date or (ii) receive a cash payment
equal to the difference between the new exercise price per share of each amended option and the
original exercise price per share of such amended option, multiplied by the number of unexercised
shares of the Companys Class A common stock subject to such amended option.
The tender offer expired on July 17, 2007. Pursuant to the offer, we accepted for amendment options
to purchase 1,696,650 shares of our Class A common stock, which represented 99.6% of the shares of
our Class A common stock subject to all Eligible Options. We paid cash payments in the aggregate
amount of $4 million in accordance with the terms of the tender offer in the three months ended
March 31, 2008 from cash flows from operating activities. During the three months ended
16
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2007, we charged approximately $1.3 million to wages and benefits in our Consolidated
Statement of Income and charged the balance of the estimated cash payments to additional paid-in
capital in our Consolidated Balance Sheet.
In July 2007, we notified certain former employees with vested, unexercised and outstanding options
which had exercise prices per share that were less, or may have been less, than the fair market
value per share of our Class A common stock on the revised measurement dates for such options, as
determined by us for accounting and tax purposes, that we will pay them
the additional 20% income tax imposed by Section 409A based on the excess, if any, of the fair
market value of our Class A common stock (up to $62 per share or up to $1.9 million in the
aggregate) on the date a triggering event occurs or condition exists that under Section 409A
results in the excess being recognized and reported as income on the former employees W-2 and the
exercise price of the affected option (reduced by any gain that had become subject to tax in a
prior year because of an earlier triggering event). As of December 31, 2008, we anticipate that
these income tax reimbursements will be up to approximately $0.6 million based on the fair market
value of our Class A common stock on the exercise date and will be paid from cash flows from
operating activities as the triggering event occurs for each option holder. During the three and
six months ended December 31, 2008, we credited approximately $(0.5 million) and $(0.8 million),
respectively, and during the three and six months ended December 31, 2007, we (credited)/charged
approximately $(0.4 million) and $0.5 million, respectively, to wages and benefits in our
Consolidated Statements of Income related to these income tax reimbursements based on the current
fair market value of our Class A common stock as of December 31, 2008 and 2007, respectively. The
estimated liability related to these income tax reimbursements will be adjusted to reflect changes
in the current fair market value of our Class A common stock each quarter until the options are
exercised.
During the three months ended September 30, 2007, we amended the exercise price of outstanding
stock options of certain current executive officers in order to re-price all or a portion of the
respective option grants to the revised measurement date to avoid adverse tax consequences to
individual option holders under Section 409A of the Internal Revenue Code. We paid cash payments in
the aggregate amount of $0.3 million in accordance with the terms of the amendment during the three
months ended March 31, 2008 from cash flows from operating activities. Of the $0.3 million cash
payment, approximately $43,000 was charged to wages and benefits in our Consolidated Statement of
Income in the three months ended September 30, 2007, and the balance was charged to additional
paid-in capital in our Consolidated Balance Sheet.
Lawsuits Related to Stock Option Grant Practices
Several derivative lawsuits have been filed in connection with our stock option grant practices,
generally alleging claims related to breach of fiduciary duty and unjust enrichment by certain of
our directors and senior executives. Those cases have been consolidated into three venues as
follows:
Dallas County Texas State District Court
|
|
Merl Huntsinger, Derivatively on Behalf of Nominal Defendant Affiliated Computer
Services, Inc., Plaintiff, v. Darwin Deason, Mark A. King, J. Livingston Kosberg, Dennis
McCuistion, Joseph P. ONeill, Jeffrey A. Rich and Frank A. Rossi, Defendants, and Affiliated
Computer Services, Inc., Nominal Defendant, Cause No. 06-03403 in the District Court of
Dallas County, Texas, 193rd Judicial District filed on April 7, 2006. |
|
|
|
Robert P. Oury, Derivatively on Behalf of Nominal Defendant Affiliated Computer Services,
Inc., Plaintiff, v. Darwin Deason, Mark A. King, J. Livingston Kosberg, Dennis McCuistion,
Joseph P. ONeill, Jeffrey A. Rich and Frank A. Rossi, Defendants, and Affiliated Computer
Services, Inc., Nominal Defendant, Cause No. 06-03872 in the District Court of Dallas
County, Texas, 193rd Judicial District filed on April 21, 2006. |
|
|
|
Anchorage Police & Fire Retirement System, derivatively on behalf of nominal defendant
Affiliated Computer Services Inc., Plaintiff v. Jeffrey Rich; Darwin Deason; Mark King; Joseph
ONeill; Frank Rossi; Dennis McCuistion; J. Livingston Kosberg; Gerald Ford; Clifford Kendall;
David Black; Henry Hortenstine; Peter Bracken; William Deckelman; and Affiliated Computer
Services Inc. Cause No. 06-5265-A in the District Court of Dallas County, Texas,
14th Judicial District filed on June 2, 2006. |
The Huntsinger, Oury, and Anchorage lawsuits were consolidated into one
case on June 5, 2006, under the caption In Re Affiliated Computer Services, Inc. Derivative
Litigation in the District Court of Dallas County, Texas, 193rd Judicial District
(the Texas State Derivative Action). Plaintiffs seek to recover damages sustained by the Company,
equitable relief, including disgorgement, and reimbursement for fees and expenses incurred in
connection with the suits, including attorneys fees. On March 26, 2007, plaintiffs filed a Third
Amended Consolidated Complaint in which the plaintiffs alleged certain of the defendants breached
their fiduciary duties in evaluating the buyout offer from Cerberus and any other offers (see
further
17
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
discussion below in Litigation Arising from Buy-out Offer). Defendant Jeff Rich filed a Motion
for Summary judgment on the basis of his purported release that has not been heard yet by the
court. Additionally, the individual defendants filed a Motion for Partial Summary Judgment on the
basis that plaintiffs lack standing concerning certain option grants that has not yet been heard by
the court. On June 5, 2008, the parties filed a Stipulation to Stay Proceedings, ceasing all case
activity for 60 days and on August 7, 2008 ACS filed an agreed motion to extend the stay. There is
no pending trial date at this time.
On November 20, 2008, the parties filed their Joint Motion for Preliminary Approval of Settlement
of Derivative Claims and Approval of Notice. The judge granted preliminary approval of the motion
and scheduled a hearing for final approval of the settlement to be held on February 13, 2009.
Please see Regarding the Texas State Derivative Action and the Delaware Chancery Case below for
more information.
Court of Chancery for the State of Delaware
|
|
Jan Brandin, in the Right of and for the Benefit of Affiliated Computer Services, Inc.,
Plaintiff, v. Darwin Deason, Jeffrey A. Rich, Mark A. King, Joseph ONeill and Frank Rossi,
Defendants, and Affiliated Computer Services, Inc., Nominal Defendant, Civil Action No.
2123-VCL, pending before the Court of Chancery of the State of Delaware in and for New Castle
County, filed on May 2, 2006. |
On August 15, 2006, plaintiff filed a First Amended Complaint in the Brandin lawsuit (the Delaware
Chancery Case). The First Amended Complaint added Lynn R. Blodgett, David W. Black, Henry
Hortenstine, Peter A. Bracken, William L. Deckelman, Jr., Warren Edwards, John M. Brophy, John
Rexford, Dennis McCuistion, J. Livingston Kosberg and Clifford M. Kendall. On April 5, 2007,
plaintiff Brandin filed a Motion for Summary Judgment against Darwin Deason, Jeffrey Rich and Mark
King. Each of the parties has filed their respective briefs and a hearing on the Motion for
Summary Judgment was held on February 5, 2008. In addition, on October 16, 2007, each of the
individual defendants filed a Motion for Partial Dismissal, based on plaintiffs lack of standing
to challenge most of the stock option grants at issue. On June 3, 2008, an Unopposed Motion to
Stay Pending SLC Determination was filed, which automatically granted a 60 day stay in this matter
with a later court order extending the stay for an additional 30 days. The stay was extended an
additional 60 days by agreement of all parties on August 7, 2008. On November 25, 2008, the
Delaware court was informed of the proposed settlement and related filing in the Texas State Derivative Action.
There is no pending trial date at this time. Please see Regarding the Texas State Derivative
Action and the Delaware Chancery Case below for more information.
United States District Court for the Northern District of Texas
|
|
Alaska Electrical Fund, derivatively on behalf of Affiliated Computer Services Inc. v.
Jeffrey Rich; Joseph ONeill; Frank A. Rossi; Darwin Deason; Mark King; Lynn Blodgett; J.
Livingston Kosberg; Dennis McCuistion; Warren Edwards; John Rexford and John M. Brophy,
Defendants, and Affiliated Computer Services, Inc., Nominal Defendant, Cause No.
3-06CV1110-M, in the United States District Court for the Northern District of Texas, Dallas
Division, filed on June 22, 2006. |
|
|
Bennett Ray Lunceford and Ann M. Lunceford, derivatively on behalf of Affiliated Computer
Services Inc. v. Jeffrey Rich; Joseph ONeill; Frank A. Rossi; Darwin Deason; Mark King; Lynn
Blodgett; J. Livingston Kosberg; Dennis McCuistion; Warren Edwards; John Rexford and John M.
Brophy, Defendants, and Affiliated Computer Services, Inc., Nominal Defendant, Cause No.
3-06CV1212-M, filed on July 7, 2006, in the United States District Court for the Northern
District of Texas, Dallas Division. |
The Alaska Electrical and Lunceford cases were consolidated into one case on August
1, 2006, under the caption In Re Affiliated Computer Services Federal Derivative
Litigation, in the United States District Court for the Northern District of Texas, Master File
No. 3:06-CV-1110-M (the Texas Federal Derivative Action). On April 6, 2007, the plaintiffs filed
an Amended Verified Consolidated Shareholder Derivative Complaint (Amended Complaint), adding
causes of action related to the announced buy-out transaction, and adding as defendants Clifford
Kendall, David Black, Henry Hortenstine, Peter A. Bracken, William Deckelman, Jr.,
PricewaterhouseCoopers LLP, and Cerberus Capital Management, L.P. Plaintiffs seek equitable relief
and recovery of unspecified monetary damages sustained by the Company. On June 4, 2007, ACS and the
individual defendants filed a Motion to Dismiss the Amended Complaint, including the grounds that
the buy-out claims were
18
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
not yet ripe for adjudication. Plaintiffs voluntarily dismissed David Black,
PricewaterhouseCoopers LLP and Cerberus Capital Management, L.P.
On December 17, 2007, after a hearing on August 1, 2007, the judge dismissed all buy-out related
causes of action, dismissed the section 16(b) claims against defendants Jeff Rich and Mark King
without prejudice, and dismissed the section 10(b) causes of action against defendants Lynn
Blodgett, John Rexford, and John Brophy with prejudice. The judge determined that the section
10(b) and 14(a) claims against other individual defendants were insufficiently pled, and granted
plaintiffs leave to amend their complaint to state these claims with sufficient particularity.
On February 1, 2008, plaintiffs filed their Second Amended Derivative Complaint. Defendants filed
motions to dismiss this complaint and filed a Motion to Strike the complaint for failing to comply
with the parameters of the December 17, 2007 order permitting plaintiffs to file an amended
complaint.
On May 23, 2008, plaintiffs filed a Motion Seeking an Order re Defendants Efforts to Compromise
the Claims seeking an injunction against settlement of either the Delaware or Texas derivative
matters (the Injunction Motion). On May 30, 2008, ACS filed a Motion to Stay Pending SLC
Determination (the ACS Stay Motion). On September 18, 2008, the judge denied the Injunction
Motion and the ACS Stay Motion. On November 17, 2008, the judge denied all motions to dismiss.
The trial of this matter is scheduled for December 7, 2009.
The Texas Federal Derivative Action is being vigorously defended. 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 Consolidated Balance Sheets related to the lawsuits. However, it
is not possible at this time to reasonably estimate the possible loss or range of loss, if any,
should an unfavorable outcome occur for the Texas Federal Derivative Action.
Regarding the Texas State Derivative Action and the Delaware Chancery Case
On October 21, 2008, a Special Litigation Committee previously formed by the Companys Board of
Directors completed its review of the Texas State Derivative Action and the Delaware Chancery Case.
The Special Litigation Committee formally recommended that these cases be settled pursuant to the
terms of a Memorandum of Understanding which was signed by the Company, the individual defendants
in these cases and the plaintiffs in these cases on October 28, 2008.
On November 20, 2008, the parties filed their Joint Motion for Preliminary Approval of Settlement
of Derivative Claims and Approval of Notice with the Texas State District Court. The judge granted
preliminary approval of the motion and scheduled a hearing for final approval on February 13, 2009.
Notice to shareholders of the proposed settlement as defined in the approved notice was sent on
December 10, 2008. Shareholders had until January 23, 2009 to file an objection to the settlement,
including the award and amount of attorneys fees to the plaintiffs. The proposed settlement
includes the release of all state and federal derivative claims related to our prior stock option
grant practices, the dismissal of the Texas State Derivative Action and the Delaware Chancery Case,
the payment of an amount up to $13 million in legal fees by the Company to the plaintiffs law
firms and the collection of approximately $1.8 million from certain current and former executive
officers and other monetary and non-monetary benefits to the Company, such as the cancellation of
amounts claimed to be owed some of the defendants. The cancellation or repricing of such stock
options was completed in previous periods. The proposed settlement also requires the Company to
make or have made specified corporate governance and other changes.
On January 23, 2009, the Plaintiffs in the Federal Court action filed an Objection to the proposed
settlement. The parties filed their respective responses. The Texas
State Court will hold the final approval hearing on February 13, 2009 where the court will rule on
any stockholder objections and decide whether or not to approve the final settlement. An award of
attorneys fees to the plaintiffs is not final until the court rules on the anticipated objections
to the settlement and approves the settlement.
We have assessed the probability of loss pursuant to SFAS No. 5 Accounting for Contingencies (SFAS 5). Due to the uncertainty related to the approval of
the terms in the Memorandum of Understanding or the amounts that may be paid or collected upon
reaching a settlement and final approval by the Court and resolution of the expected appeal
process, we do not believe it is possible at this time to reasonably estimate the possible loss or
range of loss, if any, related to the execution of the Memorandum of Understanding and therefore
have not recorded any amounts in our financial statements for these claims.
19
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
United States District Court of Texas for the Northern District of Texas
Based on the same set of facts as alleged in the above cases, two lawsuits were filed under the
Employee Retirement Income Security Act (ERISA) alleging breach of ERISA fiduciary duties by the
directors and officers as well as the ACS Benefits Administrative Committee, in connection with the
retention of ACS Class A common stock as an investment option in the ACS Savings Plan, and by
causing the our Savings Plan to invest in our Class A common stock in light of the alleged stock
option issues, as follows:
|
|
Terri Simeon, on behalf of Herself and All Others Similarly Situated, Plaintiff, vs.
Affiliated Computer Services, Inc., Darwin Deason, Mark A. King, Lynn R. Blodgett, Jeffrey A.
Rich, Joseph ONeill, Frank Rossi, J. Livingston Kosberg, Dennis McCuistion, The Retirement
Committee of the ACS Savings Plan, and John Does 1-30, Civil Action No. 306-CV-1592P, in
the United States District Court for the Northern District of Texas, Dallas Division, filed
August 31, 2006. |
|
|
Kyle Burke, Individually and on behalf of All Others Similarly Situated, Plaintiff, vs.
Affiliated Computer Services, Inc., the ACS Administrative Committee, Lora Villarreal, Kellar
Nevill, Gladys Mitchell, Meg Cino, Mike Miller, John Crysler, Van Johnson, Scott Bell, Anne
Meli, David Lotocki, Randall Booth, Pam Trutna, Brett Jakovac, Jeffrey A. Rich, Mark A. King,
Darwin Deason, Joseph P. ONeill and J. Livingston Kosberg, Case No. 306-CV-02379-M,
United States District Court for the Northern District of Texas, Dallas Division, filed on
September 15, 2006. |
On February 12, 2007, the Simeon case and the Burke case were consolidated into one
case, under the caption, In re Affiliated Computer Systems [sic] ERISA Litigation, Master
File No. 3:06-CV-1592-M. On December 20, 2007, an Order Preliminarily Approving Settlement was
entered in the In re Affiliated Computer Systems [sic] ERISA Litigation consolidated case.
Principally, the settlement provided for a payment to the plaintiffs and the ACS Savings Plan of a
total of $1.5 million, which included attorney fees, and received the final approval of the court
at a hearing held on October 23, 2008. We recorded a charge of $1.5 million ($1.0 million, net of
income tax) in other operating expense in our Consolidated Statement of Income during the three
months ended December 31, 2007.
Other Related Matters
On December 9, 2008, Mr. Deason received a Wells Notice (the Notice) from the staff of the SEC
indicating that the staff is considering recommending that the SEC bring civil claims against Mr.
Deason for alleged violations of the federal securities laws in connection with certain public
disclosures relating to the Companys historical stock option grant practices. Under the procedure
established by the SEC, Notice recipients have the opportunity to respond in writing to a Notice
before the staff makes any formal recommendation to the SEC regarding what claims, if any, should
be brought by the SEC. Mr. Deason and the Company believe that there is no basis for any claim
against Mr. Deason, and they have separately provided written submissions to the SEC vigorously
defending that position. The Company has not received any indication that it will receive a Wells
Notice from the SEC.
Litigation Arising from Buy-Out Offer
Several lawsuits have been filed in connection with the announced buyout transaction, generally
alleging claims related to breach of fiduciary duty, and seeking class action status. The
plaintiffs in each case purport to be ACS stockholders bringing a class action on behalf of all of
our public stockholders. Each plaintiff alleges that the proposal (Proposal) presented to us by
Darwin Deason and Cerberus on March 20, 2007, to acquire our outstanding stock, was unfair to
shareholders, because the consideration offered in the Proposal is alleged to be inadequate and to
have resulted from an unfair process.
In the Delaware Chancery Court, six cases were filed, as follows:
|
|
Momentum Partners v. Darwin Deason, Lynn R. Blodgett, Joseph P. ONeill, Frank A.
Rossi, J. Livingston Kosberg, Robert B. Holland, Dennis McCuistion, Affiliated Computer
Services, Inc., and Cerberus Capital Management, L.P., Civil Action No. 2814-VCL, in the
Court of Chancery of the State of Delaware in and for New Castle County, filed on March 20,
2007. |
|
|
Mark Levy v. Darwin Deason, Lynn Blodgett, John Rexford, Joseph P. ONeill, Frank A.
Rossi, J. Livingston Kosberg, Dennis McCuistion, Affiliated Computer Services, Inc., and
Cerberus Capital Management, L.P., Civil Action No. 2816-VCL, in the Court of Chancery of
the State of Delaware in and for New Castle County, filed on March 21, 2007. |
|
|
St. Clair Shores Police and Fire Retirement System v. Darwin Deason, Lynn Blodgett,
Joseph P. ONeill, Frank A. Rossi, J. Livingston Kosberg, Dennis McCuistion, Robert B.
Holland, Cerberus Capital Management, L.P., Citigroup Global Markets Inc., and Affiliated
Computer Services, Inc., Civil Action No. 2821-VCL, in the Court of Chancery of the State
of Delaware in and for New Castle County, filed on March 22, 2007. |
|
|
Louisiana Municipal Police Employees Retirement System v. Darwin Deason, Joseph P.
ONeill, Frank A. Rossi, J. Livingston Kosberg, Dennis McCuistion, Robert B. Holland,
Affiliated Computer Services, Inc., and Cerberus Capital |
20
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Management, L.P., Civil Action No. 2839-VCL, in the Court of Chancery of the State of
Delaware in and for New Castle County, filed on March 26, 2007. |
|
|
Edward R. Koller v. Darwin Deason, Frank A. Rossi, J. Livingston Kosberg, Robert B.
Holland, Affiliated Computer Services, Inc., and Cerberus Capital Management, L.P., Civil
Action No. 2908-VCL, in the Court of Chancery of the State of Delaware in and for New Castle
County, filed on April 20, 2007. |
|
|
Suzanne Sweeney Living Trust v. Darwin Deason, Lynn R. Blodgett, John H. Rexford,
Joseph P. ONeill, Frank A. Rossi, J. Livingston Kosberg, Dennis McCuistion, Robert B.
Holland, Affiliated Computer Services, Inc., and Cerberus Capital Management, L.P., Civil
Action No. 2915-VCL, in the Court of Chancery of the State of Delaware in and for New Castle
County, filed on April 24, 2007. |
On May 4, 2007, each of the six Delaware buy-out cases was consolidated into one case, pending in
the Delaware Chancery Court, entitled In Re Affiliated Computer Services, Inc. Shareholder
Litigation, Civil Action No. 2821-VCL. On October 30, 2007, Cerberus withdrew its offer to
acquire ACS. On November 2, 2007, a Consolidated Amended Class Action and Derivative Complaint was
filed by the plaintiffs, adding allegations of breach of fiduciary duties related to the events
surrounding the resignation of the outside directors. Plaintiffs seek equitable relief and
recovery of unspecified monetary damages sustained by the Company. On April 8, 2008, a Verified
Consolidated Second Amended Class and Derivative Action Complaint was filed alleging class and
derivative claims of breach of fiduciary duty against all individual defendants and class and
derivative for aiding and abetting against Cerberus and Citigroup. On May 23, 2008, all
defendants, including
ACS, filed their respective motions to dismiss. The hearing on the motions occurred on October 22,
2008. On February 6, 2009, the judge in the case granted ACS Motion to Dismiss and dismissed each of
plaintiffs counts with prejudice. The plaintiffs may appeal this decision.
In the District Court of Dallas County, Texas, two stand-alone buy-out cases were filed, as
follows:
|
|
Steamship Trade Association/International Longshoremans Association Pension Fund v
Affiliated Computer Services, Inc., Darwin Deason, Lynn Blodgett, John Rexford, Joseph P.
ONeill, Gerardo I. Lopez, Frank A. Rossi, J. Livingston Kosberg, Dennis McCuistion, Robert B.
Holland, and Cereberus [sic] Capital Management, L.P., Cause No. 07-02691 in the District
Court of Dallas County, Texas, 44th Judicial District, filed on March 22, 2007. |
|
|
The City of Birmingham, Alabama Retirement and Relief System v. Darwin Deason, Robert
B. Holland, III, J. Livingston Kosberg, Frank A. Rossi, Joseph P. ONeill, Lynn R. Blodgett,
John H. Rexford, Dennis McCuistion, Affiliated Computer Services, Inc., and Cerberus Capital
Management, L.P., Cause No. 07-02768 in the District Court of Dallas, Texas,
160th Judicial District, filed on March 28, 2007. |
In addition, in the Texas State Court Consolidated stock option derivative case, on March
26, 2007, plaintiffs filed a Third Amended Consolidated Complaint, adding causes of action related
to the announced buy-out transaction as well. On May 1, 2007, ACS and the individual defendants
filed a Special Exceptions Motion, on the grounds that plaintiffs buy-out claims were not yet ripe
for adjudication, i.e., no claim related to the Proposal can properly be the subject of litigation,
because the Proposal has not been accepted or recommended by either the Company or by the Special
Committee formed to evaluate the Proposal and strategic alternatives to the Proposal, and that
plaintiffs cannot bring both direct and derivative claims in a single lawsuit. The Third Amended
Petition also alleges breach of fiduciary duty premised upon an allegation that our assets and
information were misappropriated by Mr. Deason and Cerberus in order to facilitate their
preparation of the Proposal, and that the Proposal represents an attempt to extinguish the
derivative claims related to stock option practices by eliminating the standing of the plaintiff
stockholders to pursue those claims. The Third Amended Petition also suggested that the
consideration offered to stockholders in the Proposal was inadequate and sought to enjoin
consummation of the Proposal. Plaintiffs sought equitable relief and recovery of unspecified
monetary damages sustained by the Company.
Also, on March 29, 2007, the two stand-alone buy-out cases pending in the District Court of Dallas
County, Texas were consolidated into the Texas State Court Consolidated stock option derivative
case.
In the Texas Federal Court Consolidated stock option derivative case, on April 5, 2007, the
plaintiffs filed an Amended Complaint, adding causes of action related to the announced buy-out
transaction as well, and adding as defendants, Clifford Kendall, David Black, Henry Hortenstine,
Peter A. Bracken, William Deckelman, Jr., PricewaterhouseCoopers LLP, and Cerberus Capital
Management, L.P. Like the Third Amended Petition in the Texas State Court Derivative Action, the
Amended Complaint in the Texas Federal Court Derivative Action challenged both the process through
which the Proposal
21
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
was generated, and the substance of the Proposal. On June 4, 2007, ACS and the individual
defendants filed a Motion to Dismiss the Amended Complaint, including the grounds that the buy-out
claims were not yet ripe for adjudication, i.e., no claim related to the Proposal can properly be
the subject of litigation, because the Proposal has not been accepted or recommended by either the
Company or by the Special Committee formed to evaluate the Proposal and strategic alternatives to
the Proposal. Plaintiffs voluntarily dismissed David Black, PricewaterhouseCoopers LLP and
Cerberus Capital Management, L.P. On December 17, 2007, the judge dismissed all buy-out related
causes of action, dismissed the section 16(b) claims against defendants Jeff Rich and Mark King and
dismissed the section 10(b) causes of action against defendants Lynn Blodgett, John Rexford and
John Brophy with prejudice. The judge also determined that the section 10(b) and section 14(a)
claims against the other defendants were insufficiently pled, and granted plaintiffs leave to amend
their complaint to state these claims with sufficient particularity. Plaintiffs filed their Second
Amended Derivative Complaint on February 1, 2008 in response to the December 17, 2007 order.
The Second Amended Derivative Complaint does not contain any allegations concerning the buy-out.
Defendants filed motions to dismiss this complaint and filed a Motion to Strike the complaint for
failing to comply with the parameters of the December 17, 2007 order permitting plaintiffs to file
an amended complaint.
On May 23, 2008, Plaintiffs filed a Motion Seeking an Order re Defendants Efforts to Compromise
the Claims which sought an injunction against settlement of either the Delaware or Texas derivative
matters (the Injunction Motion). On May 30, 2008, we filed a Motion to Stay Pending SLC
Determination (the ACS Stay Motion). On September 18, 2008, the judge denied the Injunction
Motion and the ACS Stay Motion. On November 17, 2008, the judge denied all motions to dismiss.
The trial is scheduled for December 7, 2009.
All of the litigation arising from the buy-out offer is being vigorously defended. 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 these
lawsuits. However, it is not possible at this time to reasonably estimate the possible loss or
range of loss, if any, should an unfavorable outcome occur for the matters noted above.
Declaratory Action with Respect to Alleged Default and Purported Acceleration of our Senior Notes
and Amendment, Consent and Waiver for our Credit Facility
On June 6, 2005, we completed a public offering of $250 million aggregate principal amount of 4.70%
Senior Notes due June 1, 2010 and $250 million aggregate principal amount of 5.20% Senior Notes due
June 1, 2015 (collectively, the Senior Notes). Interest on the Senior Notes is payable
semiannually. We may redeem some or all of the Senior Notes at any time prior to maturity, which
may include prepayment penalties determined according to pre-established criteria. The Senior
Notes were issued pursuant to that certain Indenture dated June 6, 2005 (which, along with any
Supplemental Indentures entered into subsequent thereto and in connection therewith, is referred to
as the Indenture) between us and The Bank of New York Trust Company, N.A. (BONY), as trustee,
with the Wilmington Trust Company having replaced BONY as trustee on December 19, 2006 (the
Trustee).
As the result of our failure to timely file our Annual Report on Form 10-K for the period ending
June 30, 2006 by September 13, 2006, certain holders of the Senior Notes sent various notices
alleging that we were in default of our covenants under the Indenture. Subsequently, those certain
holders declared an acceleration of the Senior Notes, as a result of our failure to remedy the
purported default set forth in their earlier notices and demanded payment of all amounts owed in
respect of the Senior Notes.
It is our position that no default occurred under the Indenture and that no acceleration occurred
with respect to the Senior Notes or otherwise under the Indenture. Further we filed a lawsuit
against the Trustee in the United States District Court, Northern District of Texas, Dallas
Division, seeking a declaratory judgment affirming our position. The Trustee filed an answer and
counterclaim seeking immediate payment of all principal and accrued and unpaid interest on the
Senior Notes. Alternatively, the counterclaim sought damages measured by the difference between the
fair market value of the Senior Notes on or about September 22, 2006 and par value of the Senior
Notes. On February 12, 2008, the judge granted our Motion for Summary Judgment, awarded us our
court costs, and dismissed all counter-claims against us. Subsequently, Defendant Wilmington Trust
Co. filed its Notice of Appeal and Appellant Brief. We have filed our response and the matter is
set for oral argument in the 5th Circuit Court on February 9, 2009.
Unless and until there is a final judgment rendered in the lawsuit described above (including any
appellate proceedings), no legally enforceable determination can be made as to whether the failure
to timely file the Annual Report on Form 10-K for the period ending June 30, 2006 is a default
under the Indenture as alleged by the letters referenced above. If there is a final
22
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
legally enforceable determination that the failure to timely file the Annual Report on Form 10-K
for the period ending June 30, 2006 is a default under the Indenture, and that acceleration with
respect to the Senior Notes was proper, the principal and premium, if any, and all accrued and
unpaid interest, if any, on the Senior Notes would be immediately due and payable.
In the event the claim of default against us made by certain holders of the Senior Notes is upheld
in a court of law and we are required to pay off the Senior Notes, it is most likely that we would
utilize cash on hand and borrowings under our Credit Facility to fund such payoff. Under the terms
of the Credit Facility, we can utilize borrowings under the Revolving Facility, subject to certain
liquidity requirements, or may seek additional commitments for funding under the Term Loan Facility
of the Credit Facility. We estimate we have sufficient liquidity to meet both the needs of our
operations and any potential payoff of the Senior Notes. While we do have availability under our
Credit Facility to draw funds to repay the Senior Notes, there may be a decrease in our credit
availability that could otherwise be used for other corporate purposes, such as acquisitions and
share repurchases.
If our Senior Notes are refinanced or the determination is made that the outstanding balance is due
to the noteholders, the remaining unrealized loss on forward interest rate agreements reported in
other comprehensive income of $10 million ($6.2 million, net of income tax), unamortized deferred
financing costs of $1.8 million ($1.1 million, net of income tax) and unamortized discount of $0.4
million ($0.3 million, net of income tax) associated with our Senior Notes as of December 31, 2008
may be adjusted and reported as interest expense in our Consolidated Statement of Income in the
period of refinancing or demand.
Investigation Concerning Procurement Process at Hanscom Air Force Base
One of our subsidiaries, ACS Defense, LLC, and several other government contractors received a
grand jury document subpoena issued by the U.S. District Court for the District of Massachusetts in
October 2002. The subpoena was issued in connection with an inquiry being conducted by the
Antitrust Division of the Department of Justice (DOJ). The inquiry concerns certain IDIQ
(Indefinite Delivery Indefinite Quantity) procurements and their related task orders, which
occurred
in the late 1990s at Hanscom Air Force Base in Massachusetts. In February 2004, we sold the
contracts associated with the Hanscom Air Force Base relationship to ManTech International
Corporation (ManTech); however, we have agreed to indemnify ManTech with respect to this DOJ
investigation. The DOJ is continuing its investigation, but we have no information as to when the
DOJ will conclude this process. We have cooperated with the DOJ in producing documents in response
to the subpoena, and our internal investigation and review of this matter through outside legal
counsel will continue through the conclusion of the DOJ investigatory process. We are unable to
express an opinion as to the likely outcome of this matter at this time. It is not possible at
this time to reasonably estimate the possible loss or range of loss, if any, should an unfavorable
outcome occur for the matters noted above.
Investigations Regarding Florida Workforce Contracts
On January 30, 2004, the Florida Agency for Workforce Innovations (AWI) Office of Inspector
General (OIG) issued a report that reviewed 13 Florida workforce regions, including Dade and
Monroe counties, and noted concerns related to the accuracy of customer case records maintained by
our local staff. We had no revenue related to our workforce contracts in the state of Florida in
fiscal years 2009 and 2008, as this business was sold during fiscal year 2006. In March 2004, we
filed our response to the OIG report. The principal workforce policy organization for the State of
Florida, which oversees and monitors the administration of the States workforce policy and the
programs carried out by AWI and the regional workforce boards, is Workforce Florida, Inc. (WFI).
On May 20, 2004, the Board of Directors of WFI held a public meeting at which the Board of
Directors of WFI announced that WFI did not see a systemic problem with our performance of these
workforce services and that it considered the issue closed. There were also certain contract
billing issues that arose during the course of our performance of our workforce contract in Dade
County, Florida, which ended in June 2003. However, during the three months ended September 30,
2004, we settled all financial issues with Dade County with respect to our workforce contract with
that county and the settlement was fully reflected in our results of operations for the three
months ended September 30, 2004. We were also advised in February 2004 that the SEC had initiated
an informal investigation into the matters covered by the OIGs report, although we have not
received any request for information or documents since the middle of calendar year 2004. On March
22, 2004, ACS State and Local Solutions (ACS SLS) received a grand jury document subpoena issued
by the U.S. District Court for the Southern District of Florida. The subpoena was issued in
connection with an inquiry being conducted by the DOJ and the Inspector Generals Office of the
U.S. Department of Labor (DOL) into the subsidiarys workforce contracts in Dade and Monroe
counties in Florida, which also expired in June 2003, and which were included in the OIGs report.
On August 11, 2005, the South Florida Workforce Board notified us that all deficiencies in our Dade
County workforce contract have been appropriately addressed and all findings are considered
resolved.
23
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On August 25, 2004, ACS SLS received a grand jury document subpoena issued by the U.S. District
Court for the Middle District of Florida in connection with an inquiry being conducted by the DOJ
and the Inspector Generals Office of the DOL. The subpoena related to a workforce contract in
Pinellas County, Florida, for the period from January 1999 to the contracts expiration in March
2001, which was prior to our acquisition of this business from Lockheed Martin Corporation in
August 2001. Further, we settled a civil lawsuit with Pinellas County in December 2003, with
respect to claims related to the services rendered to Pinellas County by Lockheed Martin
Corporation prior to our acquisition of ACS SLS (those claims having been transferred with ACS SLS
as part of the acquisition), and the settlement resulted in Pinellas County paying ACS SLS an
additional $600,000. We are continuing to cooperate with the DOJ and DOL in connection with their
investigations. At this stage of these investigations, we are unable to express an opinion as to
their likely outcome. It is not possible at this time to reasonably estimate the possible loss or
range of loss, if any. During the three months ended December 31, 2005, we completed the
divestiture of substantially all of our welfare-to-workforce business. However, we retained the
liabilities for this business which arose from activities prior to the date of closing, including
the contingent liabilities discussed above.
On January 3, 2003, a Complaint was filed under seal in the United States District Court, Middle
District of Florida, Tampa Division, by a former Pinellas County Administrator under the Qui Tam
provisions of the False Claims Act. On October 23, 2006, the United States filed a notice with the
court that it would not intervene in the Complaint. The court then entered an order to unseal the
Complaint and we were subsequently served with the Complaint. The allegations in this Complaint
arise from the workforce contract in Pinellas County, Florida, that is the subject of the grand
jury document subpoena issued by the U.S. District Court for the Middle District of Florida in
connection with an inquiry being conducted by the DOJ and the Inspector Generals Office of the DOL
(as discussed above). The plaintiff is seeking statutory penalties for each violation.
On September 20, 2008, a court ordered mediation was held in Tampa, Florida. ACS asked that
Plaintiff or his counsel set forth facts which demonstrate a single instance in which Plaintiff was
the original source of information evidencing a fraudulent act. They refused to do so and the
mediation reached an impasse without settlement. We intend to vigorously defend this case.
However, it is not possible at this time to reasonably estimate the likelihood of liability or
range of loss, if any.
Litigation arising from alleged patent infringement
On April 4, 2008, JP Morgan Chase & Co. (JPMorgan) filed a lawsuit against Affiliated Computer
Services, Inc. and ACS State & Local Solutions, Inc. (collectively, ACS) in U.S. District Court
in Wilmington, Delaware. JPMorgan seeks certain declarations as well as unspecified monetary
damages related to alleged violations by ACS of JPMorgans electronic payment card, lockbox, and
check processing and imaging patents. ACS is vigorously defending this lawsuit and has
counterclaimed against JPMorgan seeking certain declarations as well as monetary damages related to
JPMorgans violations of ACSs payment processing patents. At this time, we are unable to express
an opinion as to the likely outcome of this matter and it is not possible to reasonably estimate
either the range of recovery or range of loss, if any.
Other
Certain contracts, primarily in our Government segment, require us to provide a surety bond or a
letter of credit as a guarantee of performance. As of December 31, 2008, $626.3 million of our
outstanding surety bonds and $54.8 million of our outstanding letters of credit secure our
performance of contractual obligations with our clients. Approximately $18.8 million of our
letters of credit secure our casualty insurance and vendor programs and other corporate
obligations. In general, we would only be liable for the amount of these guarantees in the event of
default in our performance of our obligations under each contract; the probability of which we
believe is remote. We believe that we have sufficient capacity in the surety markets and liquidity
from our cash flow and our Credit Facility to respond to future requests for proposals.
Our Commercial education business performs third party student loan servicing in the Federal Family
Education Loan program (FFEL) on behalf of various financial institutions. We service these
loans for investors under outsourcing arrangements and do not acquire any servicing rights that are
transferable by us to a third party. At December 31, 2008, we serviced a FFEL portfolio of
approximately 3.3 million loans with an outstanding principal balance of approximately $43.1
billion. Some servicing agreements contain provisions that, under certain circumstances, require
us to purchase the loans from the investor if the loan guaranty has been permanently terminated as
a result of a loan default caused by our servicing error. If defaults caused by us are cured
during an initial period, any obligation we may have to purchase these loans expires. Loans that
we purchase may be subsequently cured, the guaranty reinstated and the loans repackaged for sale to
third parties. We evaluate our exposure under our purchase obligations on defaulted loans and
establish a reserve for potential losses, or default liability reserve, through a charge to the
provision for loss on defaulted loans purchased. The reserve is
24
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
evaluated periodically and adjusted based upon managements analysis of the historical performance of the
defaulted loans. As of December 31, 2008, other accrued liabilities include reserves which we
believe to be adequate.
We are obligated to make certain contingent payments to former shareholders of acquired entities
upon satisfaction of certain contractual criteria in conjunction with certain acquisitions. During
the six months ended December 31, 2008 and 2007, we made contingent consideration payments of $2.9
million and $23.7 million, respectively, related to acquisitions completed in prior years. As of
December 31, 2008, the maximum aggregate amount of the outstanding contingent obligations to former
shareholders of acquired entities was approximately $57.5 million. Any such payments result in a
corresponding increase in goodwill.
As of December 31, 2008, we had gross reserves for uncertain tax positions totaling $35.0 million,
which excludes $8.4 million of offsetting tax benefits recorded in accordance with FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB
Statement No. 109 (FIN 48). We anticipate a significant change in the next 12 months to the
total amount of FIN 48 unrecognized benefits due to ongoing negotiations with taxing authorities.
However, due to the uncertain nature of the settlement process, we are unable to make a reasonable
estimate as to when cash settlements of these uncertain tax positions with taxing authorities will
occur.
In addition to the foregoing, we are subject to certain other legal proceedings, inquiries, claims
and disputes, which arise in the ordinary course of business. Although we cannot predict the
outcomes of these other proceedings, we do not believe these other actions, in the aggregate, will
have a material adverse effect on our financial position, results of operations or liquidity.
15. NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS 157 which defines fair value, establishes a framework for
measuring fair value in accordance with U.S. generally accepted accounting principles, and expands
disclosures about fair value measurements. The statement clarifies that the exchange price is the
price in an orderly transaction between market participants to sell an asset or transfer a
liability at the measurement date. The statement emphasizes that fair value is a market-based
measurement and not an entity-specific measurement. It also establishes a fair value hierarchy
used in fair value measurements and expands the required disclosures of assets and liabilities
measured at fair value. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. We adopted SFAS 157 effective July 1, 2008. Please see Note 11
for a discussion of the adoption of SFAS 157 for financial assets and liabilities. There was no
impact on our financial condition
and results of operations as a result of the adoption of SFAS 157.
In February 2008, FASB issued FSP 157-2 which provides a one-year deferral of the effective date of SFAS 157 for
non-financial assets and liabilities except those that are recognized or disclosed in the financial
statements at fair value at least annually. We are currently evaluating the impact, if any, that
FSP 57-2 will have on our financial condition and results of operations.
In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active. FSP 157-3 clarifies the application of SFAS 157 in a
market that is not active and provides an example to illustrate key considerations in determining
the fair value of a financial asset when the market for that financial asset is not active. FSP
157-3 is effective upon issuance, including prior periods for which financial statements have not
been issued. We adopted FSP 157-3 effective with the financial statements ended September 30,
2008. The adoption of FSP 157-3 had no impact on our financial condition and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115, (SFAS 159) which
permits entities to choose to measure many financial instruments and certain other items at fair
value at specified election dates. Unrealized gains and losses on items for which the fair value
option has been elected will be recognized in earnings at each subsequent reporting date. SFAS
159 provides entities with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. We adopted SFAS 159 effective July 1, 2008. We did not elect the fair
value option under SFAS 159 for any of our financial assets or liabilities upon adoption. The
adoption of SFAS 159 did not have a material impact on our financial condition or results of
operations.
25
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In December 2007, the FASB issued SFAS No. 141 (revised), Business Combinations (SFAS 141R),
which establishes principles and requirements for how an acquirer accounts for business
combinations. SFAS 141R includes guidance for
recognizing and measuring the assets acquired, liabilities assumed, and any noncontrolling or
minority interests in an acquisition. SFAS 141R applies prospectively and will become effective
for business combinations occurring on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. We are currently evaluating the impact, if any, that SFAS
141R will have on our financial condition and results of operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51, (SFAS 160). SFAS 160 establishes accounting and
reporting standards that require noncontrolling interests to be reported as a separate component of
equity, and net income attributable to the parent and to the noncontrolling interest to be
separately identified in the income statement. SFAS 160 also requires changes in a parents
ownership interest while the parent retains its controlling interest to be accounted for as equity
transactions, and any retained noncontrolling equity investment upon the deconsolidation of a
subsidiary to be initially measured at fair value. SFAS 160 applies prospectively and is
effective for the Company beginning July 1, 2009. Certain presentation requirements of SFAS 160 are
effective retrospectively. We are currently evaluating the impact, if any, that SFAS 160 will have
on our financial condition and results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133, (SFAS 161). This statement is intended to
improve transparency in financial reporting by requiring enhanced disclosures about an entitys
derivative instruments and hedging activities and their effects on the entitys financial position,
financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the
scope of SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) as
well as related hedged items, bifurcated derivatives, and nonderivative instruments that are
designated and qualify as hedging instruments. SFAS 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008, with
early application permitted. We are currently evaluating the impact, if any, that SFAS 161 will
have on our financial statement disclosures.
In December 2008, the FASB issued FSP 132(R)-1, Employers Disclosures about Postretirement
Benefit Plan Assets. This FSP amends FAS No. 132 (revised 2003), Employers Disclosures about
Pensions and Other Postretirement Benefits, to provide guidance on an employers disclosures about
plan assets of a defined benefit pension or other postretirement plan. FSP 132(R)-1 is effective
for fiscal years ending after December 15, 2009. We have not yet determined the effect, if any,
that FSP 132(R)-1 will have on our financial statement disclosures.
26
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
All statements and assumptions contained or referenced in this Quarterly Report and its exhibits
that are not based on historical fact, such as statements with respect to our financial condition,
results of operations, cash flows, business strategies, operating efficiencies, indebtedness,
litigation, competitive positions, growth opportunities and plans and objectives of management,
are forward-looking statements within the meaning of the Private Securities Litigation Reform Act
of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended (which Sections were adopted as part of the
Private Securities Litigation Reform Act of 1995). Such forward-looking statements and assumptions
include, among other things, statements with respect to our financial condition, results of
operations, cash flows, business strategies, operating efficiencies, indebtedness, litigation,
competitive positions, growth opportunities, plans and objectives of management, and other matters.
Such forward-looking statements are based upon managements current knowledge and assumptions about
future events and are subject to numerous assumptions, risks, uncertainties and other factors, many
of which are outside of our control, which could cause actual results to differ materially from the
anticipated results, prospects, performance or achievements expressed or implied by such
statements. Such risks and uncertainties include, but are not limited to: (a) the cost and cash
flow impact of our debt and our ability to obtain further financing; (b) a reversal, on appeal, of
a lower courts determination that we have not defaulted on our Senior Notes and that those Notes
have not been accelerated; (c) the complexity of the legal and regulatory environments in which we
operate, including the effect of claims and litigation; (d) our oversight by the SEC and other
regulatory agencies and investigations by those agencies; (e) our credit rating or further
reductions of our credit rating; (f) a decline in revenues from or a loss or failure of significant
clients; (g) our ability to recover capital investments in connection with our contracts; (h)
possible period-to-period fluctuations in our non-recurring revenues and related cash flows; (i)
competition and our ability to compete effectively; (j) dissatisfaction with our services by our
clients; (k) our dependency to a significant extent on third party providers, such as
subcontractors, a relatively small number of primary software vendors, utility providers and
network providers; (l) our ability to identify, acquire or integrate other businesses or
technologies; (m) our ability to manage our operations and our growth; (n) termination rights,
audits and investigations related to our Government contracts; (o) delays in signing and commencing
new business; (p) the effect of some provisions in contracts and our ability to control costs; (q)
claims associated with our actuarial consulting and benefit plan management services; (r) claims of
infringement of third-party intellectual property rights; (s) laws relating to individually
identifiable information; (t) potential breaches of our security system; (u) the impact of budget
deficits and/or fluctuations in the number of requests for proposals issued by governments; (v)
risks regarding our international and domestic operations; (w) fluctuations in foreign currency
exchange rates; (x) our ability to attract and retain necessary technical personnel, skilled
management and qualified subcontractors; (y) risks associated with loans that we service; (z) the
effect of certain provisions of our certificate of incorporation, bylaws and Delaware law and our
stock ownership; and (aa) the price of our Class A common stock.
For more details on factors that may cause actual results to differ materially from such
forward-looking statements, please see Item 1A. Risk Factors of our Annual Report on Form 10-K for
the fiscal year ended June 30, 2008, and other reports from time to time we file with or furnish to
the SEC. Forward-looking statements contained or referenced in this Quarterly Report and its
exhibits speak only as of the date of this Report and forward-looking statements in documents
incorporated by reference speak only as to the date of those documents. We disclaim, and do not
undertake any obligation to, update or release any revisions to any forward-looking statement.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We provide non-core, mission critical services that our clients need to run their day-to-day
business. We believe the market for our services is vast. The demand for our services has grown in
recent years and we believe that this demand will continue to grow as the overall acceptance of
outsourcing increases in both the Commercial and Government segments. The cornerstone of our
business strategy is our focus on vertical markets and technology solutions that we can leverage
across our business and client base.
We generate the majority of our revenues under long-term contracts, which historically has provided
a certain level of predictability with regards to our financial results. However, our financial
results may be impacted by global economic conditions. If the current economic downturn is
prolonged or severe, it could negatively affect our clients, their financial results and their
demand for our services. If the demand for our services declines, it could have a material
negative impact on our business. However, we believe that the diversity of our services and client
base will help us mitigate the impact of a sustained downturn. We continue to closely monitor our
costs of operations in order to remain flexible in responding to the overall economic uncertainty.
27
We generally enter into long-term relationships with clients to provide services that meet their
ongoing business requirements while supporting their mission critical business process or
information technology needs. We derive our revenues from delivering comprehensive business process
outsourcing and information technology solutions to commercial and government clients. A
substantial portion of our revenues is derived from recurring monthly charges to our clients under
service contracts with initial terms that vary from one to ten years. The recurring nature of our
revenue provides us with a certain level of predictability with regards to our revenue streams
during differing economic cycles. We define recurring revenues as revenues derived from services
that our clients use each year in connection with their ongoing businesses, and accordingly,
exclude non-recurring revenue related to software license fees, short-term contract programming
and consulting engagements, product installation fees, and hardware and software sales. We may
experience variations in our mix of recurring versus non-recurring revenues if we provide
consulting or other services that are primarily short-term in nature.
New Business Pipeline
Management focuses on various metrics in analyzing our business and its performance and outlook.
One such metric is our sales pipeline, which was approximately $2.1 billion of annual recurring
revenues as of December 31, 2008. Our sales pipeline includes potential business opportunities
that we expect will be contracted within the next six months and excludes business opportunities
with estimated annual recurring revenue that are in excess of $100 million. Both the Commercial and
Government pipelines have significant, quality opportunities within our vertical markets and
horizontal solutions. As of December 31, 2008, the Commercial segment comprised approximately 51%
of our pipeline and the Government segment comprised the remaining 49%. By service line,
approximately 81% of our pipeline is business process outsourcing and approximately 19% of the
pipeline is information technology solutions as of December 31, 2008. The Commercial segment
pipeline includes opportunities in information technology services, commercial healthcare,
transactional business process outsourcing including customer care centers, human resources
outsourcing, learning process outsourcing and finance and accounting outsourcing. The Government
segment pipeline includes opportunities in our domestic and international transportation business,
in the state and local market for information technology, eligibility and electronic payment
services, in government healthcare and with the federal government.
While the size of our sales pipeline is an important indicator of potential new business signings
and potential future internal revenue growth, actual new business signings and internal revenue
growth depend on a number of factors including the effectiveness of our sales pursuit teams,
competition for a deal, deal pricing, cash flow generation qualities of each deal and are subject
to risks described further in Item 1A. Risk Factors of our Annual Report on Form 10-K for the
fiscal year ended June 30, 2008.
New Business Signings
We define new business signings as estimated annual recurring revenue from new contracts and the
incremental portion of renewals that are signed during the period, which represents the estimated
first twelve months of revenue to be recorded under the contracts after full implementation. We use
new business signings to forecast prospective revenues and to estimate capital commitments.
Revenues for new business signings are measured under generally accepted accounting principles in
the United States (GAAP). There are no third party standards or requirements governing the
calculation of new business signings and our measure may not be comparable to similarly titled
measures of other companies. We define total contract value as the estimated total revenues from
contracts signed during the period. We use total contract value as an additional measure of
estimating total revenue represented by contractual commitments, both to forecast prospective
revenues and to estimate capital commitments. Revenues for annual recurring revenue and total
contract value are measured under GAAP.
During the three months ended December 31, 2008, we signed contracts with new clients and
incremental business with existing clients representing $201.8 million of annual recurring revenue
with an estimated $852.8 million in total contract value. The Commercial segment contributed 54% of
the new contract signings (based on annual recurring revenues) including contracts with US Bank,
Bridgepoint Education, Delta Air Lines, Inc., Ingersoll Rand and T-Mobile. The Government segment
contributed 46% of the new contract signings (based on annual recurring revenues) including
contracts with the Saudi Arabian Ministry of Interior for global transportation services and the
Massachusetts Department of Workforce Development for electronic payment services. We continued to
leverage our student loan processing solution with the Department of Education.
28
Internal Revenue Growth
We use internal revenue growth as a measure of the organic growth of our business. Internal revenue
growth is measured as total revenue growth less revenues from acquisitions and revenues from
divested operations. At the date of an acquisition, we identify the trailing twelve months of
revenue of the acquired company as the pre-acquisition revenue of acquired companies.
Pre-acquisition revenue of the acquired companies is considered acquired revenues in our
calculation, and actual revenues from the acquired company, either above or below acquired
revenues are components of internal growth in our calculation. Revenues from divested
operations are excluded from the internal revenue growth calculation in the periods following the
effective date of the divestiture. We believe these adjustments to historical reported results are
necessary to accurately reflect our internal revenue growth. Prior period internal revenue growth
calculations are not restated for current period divestitures. Our measure of internal revenue
growth may not be comparable to similarly titled measures of other companies. During the three
months ended December 31, 2008, total revenue grew 7% over the prior year period, excluding
divestitures, and internal revenue grew 4% over the prior year period. During the six months ended
December 31, 2008, total revenue grew 8% over the prior year period, excluding divestitures, and
internal revenue growth grew 4% over the prior year period.
Client Renewal Rates
We focus on the performance of our contractual obligations and continually monitor client
satisfaction. Renewal rates are the best indicator of client satisfaction. We calculate our renewal
rate based on the total annual recurring revenue of renewals won as a percentage of total annual
recurring revenue of all renewals sought. During the three and six months ended December 31, 2008,
we renewed approximately 94% and 86%, respectively, of total renewals sought, totaling $456.5
million and $760.8 million, respectively, of annual recurring revenue with a total contract value
of approximately $1.3 billion and $2.4 billion, respectively. The decline of our renewal rate
during the six months ended December 31, 2008 was primarily due to the non-renewal of the Georgia
Medicaid contract, for which our protest of the award to a competitor was denied during the three
months ended September 30, 2008. We will continue to earn revenue under our Georgia Medicaid
contract until the end of fiscal year 2010. We do not expect a permanent drop in our renewal
rates. Average contract life for renewals varies between our government and commercial segments.
The average contract life of renewals in the government segment is often longer than those in the
commercial segment.
Capital Intensity
Management responds to technological advances and the rapid changes in the requirements of our
clients by committing substantial amounts of our resources to the operation of multiple hardware
platforms, the customization of products and services that incorporate new technology and the
continuous training of our personnel. Management continually assesses the capital intensity of
these technological advances and client requirements, addressing the challenge to stay ahead of the
competition with innovative solutions and provide a lower cost solution for clients.
We monitor the capital intensity of new business signings, which we define as the total of capital
expenditures and additions to intangible assets as a percentage of revenue. The capital intensity
of new business signings is critical to determine the future free cash flow generating levels of
our business. Historically, the capital intensity in our business has ranged between 5% and 7% of
revenue. During the six months ended December 31, 2008 and 2007, the overall capital intensity of
our business was approximately 5.2% and 5.0% of revenues, respectively. We expect that as our new
business signings ramp, we will incur capital expenditures associated with the new business, which
could result in increased capital intensity over the fiscal year 2008 percentage, but we expect
that the capital intensity will remain within our historical range. We believe the expected capital
intensity range of our new business signings reflects a healthy competitive environment and the
related risks we are taking with respect to our new business process outsourcing business and
information technology solutions business.
Employees
Attracting, retaining and training our employees has been a key component to our historical success
and will continue to be a major factor in our future success. Because we operate in intensely
competitive markets, our success depends to a significant extent on our ability to attract, retain
and motivate highly skilled and qualified personnel. We review our employee retention rates on a
regional and global basis to ensure that we are competitive in hiring, retaining and motivating our
employees. We utilize activity based compensation as a means to motivate certain of our employees
in both segments of our business and believe our use of activity based compensation is a
competitive advantage for ACS.
Other
We identified a number of risk factors in Item 1A. Risk Factors of our Annual Report on Form 10-K
for the fiscal year ended June 30, 2008. Management monitors the general economic conditions,
changes in technology and other developments in the markets we serve, competitive pricing trends
and contractual terms for future impact on the Company in order to be able to respond effectively
and on a timely basis to these developments.
29
We report our financial results in accordance with GAAP. However, we believe that certain non-GAAP
financial measures and ratios, used in managing our business, may provide users of this financial
information with additional meaningful comparisons between current results and prior reported
results. Certain of the information set forth herein and certain of the information presented by
us from time to time (including free cash flow and internal revenue growth) may constitute non-GAAP
financial measures within the meaning of Regulation G adopted by the SEC. We have presented herein
and we will present in other information we publish that contains any of these non-GAAP financial
measures a reconciliation of these measures to the most directly comparable GAAP financial measure.
The presentation of this non-GAAP information is not meant to be considered in isolation or as a
substitute for comparable amounts determined in accordance with GAAP.
Significant Developments
Global Production Initiative
In October 2008, we announced plans to implement a global production initiative to lower future
labor costs. Under this initiative, we intend to hire approximately 4,200 full-time employees in
locations outside of the United States and reduce corresponding positions within the United States
and Europe by the end of the first quarter of fiscal year 2010. The total pre-tax cost to reduce
these employee positions under this initiative is estimated to be approximately $38.0 million to
$42.0 million, of which severance costs are estimated to be approximately $14.0 million to $16.0
million and transition and other expenses are estimated to be approximately $24.0 million to $26.0
million. The transition costs consist primarily of duplicate labor costs as a result of job
training and work shadowing, as well as related travel, retention and facility costs during the
transition. We expect that substantially all of these expenses will be cash expenditures. The
following table reflects the estimated charges over the term of the initiative for each of our
segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Government |
|
|
Corporate |
|
|
Total |
|
Severance costs |
|
$ |
12,000 - $13,000 |
|
|
$ |
2,000 - $3,000 |
|
|
$ |
|
|
|
$ |
14,000 - $16,000 |
|
Transition and other expenses |
|
|
18,000 - 19,000 |
|
|
|
4,000 - 5,000 |
|
|
|
2,000 - 2,000 |
|
|
|
24,000 - 26,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs |
|
$ |
30,000 - $32,000 |
|
|
$ |
6,000 - $8,000 |
|
|
$ |
2,000 - $2,000 |
|
|
$ |
38,000 - $42,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, we have added approximately 2,000 positions outside the United States and
reduced corresponding positions in the United States and Europe as a result of this initiative. We
accrued severance costs of $12.9 million ($8.0 million, net of income tax) and incurred $3.8
million ($2.3 million, net of income tax) for transition and other expenses in cost of revenues in
our Consolidated Statement of Income during the three months ended December 31, 2008. The
following table reflects charges recorded during the period in each of our segments (in thousands):
|
|
|
|
|
Three Months Ended December 31, 2008 |
|
|
|
Commercial |
|
|
Government |
|
|
Corporate |
|
|
Total |
|
Accrued severance costs |
|
$ |
10,849 |
|
|
$ |
2,043 |
|
|
$ |
|
|
|
$ |
12,892 |
|
Transition and other expenses |
|
|
3,180 |
|
|
|
540 |
|
|
|
62 |
|
|
|
3,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs |
|
$ |
14,029 |
|
|
$ |
2,583 |
|
|
$ |
62 |
|
|
$ |
16,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We anticipate using a substantial portion
of the savings generated from this initiative to invest in
innovation, sales and other client opportunities. Upon completion, we estimate the full annual
run rate pre-tax savings will be approximately $40 million after these investments.
Additionally, we anticipate opening new facility sites and expanding current facilities globally in
order to accommodate the increased offshore headcount. Capital expenditures related to these
facilities are currently estimated at $15 million to $20
million over the next three quarters. During the three months ended December 31, 2008, we incurred
$0.7 million in capital expenditures related to these facilities.
The following table reflects the activity for the accruals for involuntary termination of employees
related to this initiative (in thousands):
|
|
|
|
|
Balance at September 30, 2008 |
|
$ |
|
|
Accruals |
|
|
12,892 |
|
Payments |
|
|
(1,189 |
) |
|
|
|
|
Balance at December 31, 2008 |
|
$ |
11,703 |
|
|
|
|
|
30
Acquisition
Please see Note 2 to our Consolidated Financial Statements for a discussion of our acquisition
activity during the period.
Supplemental Executive Retirement Agreement
Please see Note 6 to our Consolidated Financial Statements for a discussion of the termination of
the Supplemental Executive Retirement Plan Agreement (the SERP Termination) with the Chairman of
our Board of Directors.
Deason/Cerberus Proposal
Please see Note 3 to our Consolidated Financial Statements in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2008 for a discussion of the Deason/Cerberus proposal to purchase
the Company.
31
Revenue Growth
Internal revenue growth is measured as total revenue growth less acquired revenue from acquisitions
and revenues from divested operations. At the date of acquisition, we identify the trailing twelve
months of revenue of the acquired company as the pre-acquisition revenue of acquired companies.
Pre-acquisition revenue of the acquired companies is considered acquired revenues in our
calculation, and revenues from the acquired company, either above or below that amount are
components of internal growth in our calculation. We use the calculation of internal revenue
growth to measure revenue growth excluding the impact of acquired revenues and the revenue
associated with divested operations and we believe these adjustments to historical reported results
are necessary to accurately reflect our internal revenue growth. Revenues from divested operations
are excluded from the internal revenue growth calculation in the periods following the effective
date of the divestiture. Internal revenue growth calculations reported in prior periods are not
restated for current period divestitures. Our measure of internal revenue growth may not be
comparable to similarly titled measures of other companies. The following table sets forth the
calculation of internal revenue growth (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, |
|
|
Six Months Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
$ Growth |
|
|
% Growth |
|
|
2008 |
|
|
2007 |
|
|
$ Growth |
|
|
% Growth |
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
1,612,070 |
|
|
$ |
1,511,442 |
|
|
$ |
100,628 |
|
|
|
7 |
% |
|
$ |
3,216,524 |
|
|
$ |
3,004,525 |
|
|
$ |
211,999 |
|
|
|
7 |
% |
Less: Divestitures |
|
|
(24 |
) |
|
|
(8,972 |
) |
|
|
8,948 |
|
|
|
|
|
|
|
(340 |
) |
|
|
(17,088 |
) |
|
|
16,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
$ |
1,612,046 |
|
|
$ |
1,502,470 |
|
|
$ |
109,576 |
|
|
|
7 |
% |
|
$ |
3,216,184 |
|
|
$ |
2,987,437 |
|
|
$ |
228,747 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired revenues |
|
$ |
51,041 |
|
|
$ |
|
|
|
$ |
51,041 |
|
|
|
3 |
% |
|
$ |
99,552 |
|
|
$ |
|
|
|
$ |
99,552 |
|
|
|
4 |
% |
Internal revenues |
|
|
1,561,005 |
|
|
|
1,502,470 |
|
|
|
58,535 |
|
|
|
4 |
% |
|
|
3,116,632 |
|
|
|
2,987,437 |
|
|
|
129,195 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,612,046 |
|
|
$ |
1,502,470 |
|
|
$ |
109,576 |
|
|
|
7 |
% |
|
$ |
3,216,184 |
|
|
$ |
2,987,437 |
|
|
$ |
228,747 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues (a) |
|
$ |
963,354 |
|
|
$ |
903,022 |
|
|
$ |
60,332 |
|
|
|
7 |
% |
|
$ |
1,922,771 |
|
|
$ |
1,781,901 |
|
|
$ |
140,870 |
|
|
|
8 |
% |
Less: Divestitures |
|
|
(24 |
) |
|
|
(3,461 |
) |
|
|
3,437 |
|
|
|
|
|
|
|
(48 |
) |
|
|
(6,363 |
) |
|
|
6,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
$ |
963,330 |
|
|
$ |
899,561 |
|
|
$ |
63,769 |
|
|
|
7 |
% |
|
$ |
1,922,723 |
|
|
$ |
1,775,538 |
|
|
$ |
147,185 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired revenues |
|
$ |
36,774 |
|
|
$ |
|
|
|
$ |
36,774 |
|
|
|
4 |
% |
|
$ |
71,018 |
|
|
$ |
|
|
|
$ |
71,018 |
|
|
|
4 |
% |
Internal revenues |
|
|
926,556 |
|
|
|
899,561 |
|
|
|
26,995 |
|
|
|
3 |
% |
|
|
1,851,705 |
|
|
|
1,775,538 |
|
|
|
76,167 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
963,330 |
|
|
$ |
899,561 |
|
|
$ |
63,769 |
|
|
|
7 |
% |
|
$ |
1,922,723 |
|
|
$ |
1,775,538 |
|
|
$ |
147,185 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues (b) |
|
$ |
648,716 |
|
|
$ |
608,420 |
|
|
$ |
40,296 |
|
|
|
7 |
% |
|
$ |
1,293,753 |
|
|
$ |
1,222,624 |
|
|
$ |
71,129 |
|
|
|
6 |
% |
Less: Divestitures |
|
|
|
|
|
|
(5,511 |
) |
|
|
5,511 |
|
|
|
|
|
|
|
(292 |
) |
|
|
(10,725 |
) |
|
|
10,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
$ |
648,716 |
|
|
$ |
602,909 |
|
|
$ |
45,807 |
|
|
|
8 |
% |
|
$ |
1,293,461 |
|
|
$ |
1,211,899 |
|
|
$ |
81,562 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired revenues |
|
$ |
14,267 |
|
|
$ |
|
|
|
$ |
14,267 |
|
|
|
3 |
% |
|
$ |
28,534 |
|
|
$ |
|
|
|
$ |
28,534 |
|
|
|
3 |
% |
Internal revenues |
|
|
634,449 |
|
|
|
602,909 |
|
|
|
31,540 |
|
|
|
5 |
% |
|
|
1,264,927 |
|
|
|
1,211,899 |
|
|
|
53,028 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
648,716 |
|
|
$ |
602,909 |
|
|
$ |
45,807 |
|
|
|
8 |
% |
|
$ |
1,293,461 |
|
|
$ |
1,211,899 |
|
|
$ |
81,562 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Commercial segment includes revenues from operations divested through December 31,
2008 of $3.5 million and $6.4 million for the three and six months ended December 31, 2007,
respectively. |
|
(b) |
|
The Government segment includes revenues from operations divested through December 31,
2008 of $5.5 million for the three months ended December 31, 2007, and $0.3 million and
$10.7 million for the six months ended December 31, 2008 and 2007, respectively. |
32
Results of Operations
The following table sets forth the items from our Consolidated Statements of Income expressed as a
percentage of revenues. Please refer to the comparisons below for discussion of items affecting
these percentages.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and benefits |
|
|
45.4 |
% |
|
|
47.4 |
% |
|
|
45.6 |
% |
|
|
47.1 |
% |
Services and supplies |
|
|
25.0 |
% |
|
|
21.6 |
% |
|
|
24.2 |
% |
|
|
22.2 |
% |
Rent, lease and maintenance |
|
|
12.2 |
% |
|
|
12.3 |
% |
|
|
12.4 |
% |
|
|
12.3 |
% |
Depreciation and amortization |
|
|
5.9 |
% |
|
|
6.2 |
% |
|
|
6.0 |
% |
|
|
6.2 |
% |
Other |
|
|
0.6 |
% |
|
|
0.5 |
% |
|
|
0.6 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
89.1 |
% |
|
|
88.0 |
% |
|
|
88.8 |
% |
|
|
88.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses |
|
|
0.4 |
% |
|
|
1.6 |
% |
|
|
0.6 |
% |
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
89.5 |
% |
|
|
89.6 |
% |
|
|
89.4 |
% |
|
|
89.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
10.5 |
% |
|
|
10.4 |
% |
|
|
10.6 |
% |
|
|
10.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
2.3 |
% |
|
|
2.8 |
% |
|
|
2.2 |
% |
|
|
2.9 |
% |
Other non-operating expense (income), net |
|
|
0.2 |
% |
|
|
-0.4 |
% |
|
|
0.2 |
% |
|
|
-0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax profit |
|
|
8.0 |
% |
|
|
8.0 |
% |
|
|
8.2 |
% |
|
|
7.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
3.3 |
% |
|
|
2.6 |
% |
|
|
3.3 |
% |
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4.7 |
% |
|
|
5.4 |
% |
|
|
4.9 |
% |
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the three months ended December 31, 2008 to the three months ended December 31, 2007
Revenues
During the three months ended December 31, 2008, our revenues increased $100.6 million, or 7%, to
$1.61 billion from $1.51 billion during the three months ended December 31, 2007. Excluding
operations divested through December 31, 2008, revenues increased $109.6 million, or 7%. Internal
revenue growth for the three months ended December 31, 2008 was 4% and the remainder of the revenue
growth was related to acquisitions.
Revenue in our Commercial segment, which represents 60% of consolidated revenue for the three
months ended December 31, 2008, increased $60.3 million, or 7%, to $963.4 million during the three
months ended December 31, 2008 compared to the same period last year. Excluding operations
divested through December 31, 2008, revenues increased $63.8 million, or 7%. Internal revenue
growth was 3% and growth from acquisitions was 4%. Internal revenue growth was due to growth in
the following areas: (i) information technology outsourcing related to project deliveries of
hardware and software as well as our contract with Allergan, Inc., offset by declines in our
information technology consulting business and our contracts with Nike, Inc. and Computer Sciences
Corporation; (ii) business process outsourcing with growth in our relationships with Verizon and
Wellpoint, Inc. offset by declines in our healthcare consulting business; and (iii) commercial
services with growth in our learning process outsourcing business offset by rate reductions on
renewals in our commercial education and financial services business. The items discussed above
collectively represent approximately 83% of our internal revenue growth for the period in this
segment.
Revenue in our Government segment, which represents 40% of consolidated revenue for the three
months ended December 31, 2008, increased $40.3 million, or 7%, to $648.7 million during the three
months ended December 31, 2008 compared to the same period last year. Excluding revenues from
operations divested through December 31, 2008, revenues increased $45.8 million, or 8%. Internal
revenue growth was 5% and growth from acquisitions was 3%. We experienced internal revenue growth
in the following areas: (i) our government healthcare line of business for Medicaid contracts with
the states of Texas, Alaska, North Dakota, Tennessee and the District of Columbia, a contract with
Florida Healthy Kids Corporation offset by declines due to the non-renewal of the Florida Medicaid
contract; (ii) our state and local line of business with
33
contracts with the Texas Department of
Housing and Community Affairs for eligibility determination and (iii) our federal business with
incremental Federal Family Education Loan program (FFEL) loan volumes. The areas discussed above
collectively
represent approximately 87% of our internal revenue growth for the period in this segment.
Operating expenses
Wages and benefits increased $14.9 million, or 2.1%, to $731.9 million. As a percentage of
revenue, wages and benefits decreased 2% to 45.4% from 47.4% during the same period in the prior
year. During the three months ended December 31, 2008 and 2007, we recorded a (benefit) charge in wages and
benefits of approximately $(12.8 million) and $1.8 million, respectively, related to our deferred
compensation plans as a result of the change in the market value of the liability to employees.
Increased revenue related to project deliveries of hardware and software contributed 1.2% of the
decrease in wages and benefits as a percentage of revenue due to the lower component of wages and
benefits than our other operations. During the three months ended December 31, 2008, we recorded
$12.9 million in severance costs and $2.1 million in other labor and benefit costs related to our
global production initiative as discussed in Significant Developments above and Note 3 to our
Consolidated Financial Statements. During the three months ended December 31, 2008, we recorded an
$8.9 million charge associated with the SERP Termination as discussed in Note 6 to our Consolidated
Financial Statements. During the three months ended December 31, 2008 and 2007, we recorded a
credit of $(0.5 million) and $(0.4 million), respectively, for estimated costs related to certain
former employees stock options as discussed in Note 14 to our Consolidated Financial Statements.
Services and supplies increased $76.9 million, or 23.6%, to $403.4 million. As a percentage of
revenue, services and supplies increased 3.4% to 25.0% from 21.6% during the same period of the prior
year. Increased revenue related to project deliveries of hardware and software contributed
approximately 1.9% of the increase in services and supplies as a percentage of revenue. These
project deliveries have a higher component of services and supplies than our other operations.
During the three months ended December 31, 2008, we recorded $0.5 million in costs related to our
global production initiative as discussed in Significant Developments above and Note 3 to our
Consolidated Financial Statements. During the three months ended December 31, 2008, we recorded
$0.1 million in costs related to our ongoing stock option investigation. During the three
months ended December 31, 2008 and 2007, we recorded a charge (credit) of approximately $0.2
million and $(0.2 million), respectively, related to the potential sale of the Company and
stockholder derivative lawsuits.
Rent, lease and maintenance expenses increased $11.3 million, or 6.1%, to $196.5 million. As a
percentage of revenue, rent, lease and maintenance expenses decreased 0.1%, to 12.2% from 12.3%
during the same period in the prior year. During the three months ended December 31, 2008, we
recorded $1.2 million related to our global production initiative as discussed in Significant
Developments above and Note 3 to our Consolidated Financial Statements. During the three months
ended December 31, 2008 and 2007, we recorded $0.8 million and $0.7 million, respectively, for
electronic data storage costs related to our ongoing stock option investigation.
Other expenses increased $2.7 million, or 38.7%, to $9.7 million. As a percentage of revenue,
other expenses increased 0.1%, to 0.6% from 0.5% during the same period in the prior year. During
the three months ended December 31, 2007, we recorded a $1.6 million asset impairment charge in our
Commercial segment related to the termination of a Commercial client that was acquired.
34
Other operating expenses decreased $17.1 million, or 72.7%, to $6.4 million. As a percentage of
revenue, other operating expenses decreased 1.2%, to 0.4%. Operating expenses during the three
months ended December 31, 2008 and 2007 were impacted by the items discussed above, including the
following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Commercial segment: |
|
|
|
|
|
|
|
|
Gain on sale of unclaimed property business |
|
$ |
(0.3 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Government segment: |
|
|
|
|
|
|
|
|
Gain on sale of our decision support business |
|
|
|
|
|
|
(2.4 |
) |
Gain on settlement of indemnification and other claims with Lockheed
Martin Corporation |
|
|
|
|
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
Corporate segment: |
|
|
|
|
|
|
|
|
Legal costs associated with the ongoing stock option investigations and
stockholder derivative lawsuits, net of insurance recovery |
|
|
(5.6 |
) |
|
|
12.3 |
|
Legal costs associated with the potential sale of the Company and
stockholder derivative lawsuits |
|
|
0.2 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
Total |
|
$ |
(5.7 |
) |
|
$ |
11.7 |
|
|
|
|
|
|
|
|
As a percentage of revenue |
|
|
-0.4 |
% |
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
Change as a percentage of revenue explained above |
|
|
-1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
35
Operating income
Operating income increased $10.6 million, or 6.7%, to $168.5 million. As a percentage of revenue,
operating income increased 0.1% to 10.5% during the three months ended December 31, 2008 from 10.4%
during the same period of the prior year. Operating income during the three months ended December
31, 2008 and 2007 was impacted by the items discussed above, including the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Commercial segment: |
|
|
|
|
|
|
|
|
Costs related to our global production initiative |
|
$ |
(14.0 |
) |
|
$ |
|
|
Gain on sale of unclaimed property business |
|
|
0.3 |
|
|
|
|
|
Impairment charge related to the termination of a Commercial client that
was acquired |
|
|
|
|
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
|
Government segment: |
|
|
|
|
|
|
|
|
Costs related to our global production initiative |
|
|
(2.6 |
) |
|
|
|
|
Gain on sale of decision support business |
|
|
|
|
|
|
2.4 |
|
Gain on settlement of indemnification and other claims with Lockheed
Martin Corporation |
|
|
|
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
Corporate segment: |
|
|
|
|
|
|
|
|
Benefit (costs) related to our deferred compensation plans |
|
|
12.8 |
|
|
|
(1.8 |
) |
SERP Termination |
|
|
(8.9 |
) |
|
|
|
|
Legal credit (costs) associated with the ongoing stock option investigations
and stockholder derivative lawsuits, net of insurance recovery |
|
|
4.7 |
|
|
|
(13.0 |
) |
Legal costs associated with the potential sale of the Company and stockholder
derivative lawsuits |
|
|
(0.4 |
) |
|
|
(3.8 |
) |
Credit related to certain former employees stock options |
|
|
0.5 |
|
|
|
0.4 |
|
Costs related to our global production initiative |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(7.7 |
) |
|
$ |
(15.2 |
) |
|
|
|
|
|
|
|
As a percentage of revenue |
|
|
-0.5 |
% |
|
|
-1.0 |
% |
|
|
|
|
|
|
|
|
|
Change as a percentage of revenue explained above |
|
|
0.5 |
% |
|
|
|
|
Other net change as a percentage of revenue |
|
|
-0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Total change as a percentage of revenue |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
Interest expense decreased $7.2 million compared to the same period in the prior year primarily due
to lower interest rates on outstanding debt.
Other non-operating expense (income), net
Other non-operating expense (income), net increased $8.7 million compared to the same period in the
prior year. The three months ended December 31, 2008 and 2007 include (losses) gains on the
investments supporting our deferred compensation plans of approximately $(12.3 million) and $1.5
million, respectively, offset by gains on foreign currency and marketable securities.
Income tax expense
Our effective income tax rate increased to 41.7% for the three months ended December 31, 2008 from
32.2% for the three months ended December 31, 2007. The effective tax rate for the three months
ended December 31, 2007 included interest credits on tax refunds which were netted against our tax
liability, resulting in a $4.0 million reduction of interest expense calculated in accordance with
FIN 48. Our effective income tax rate for the three months ended December 31, 2008 is higher than
the 35% federal statutory rate primarily due to the effect of state income taxes, the tax impact of
the cash lump sum payment related to the SERP Termination as discussed in Note 6 to our
Consolidated Financial Statements and the change in cash surrender value of life insurance policies
underlying certain of our deferred compensation obligations.
36
Comparison of the six months ended December 31, 2008 to the six months ended December 31, 2007
Revenues
During the six months ended December 31, 2008, our revenues increased $212 million, or 7%, to $3.22
billion from $3.0 billion during the six months ended December 31, 2007. Excluding operations
divested through December 31, 2008, revenues increased $228.7 million, or 8%. Internal revenue
growth for the six months ended December 31, 2008 was 4% and the remainder of the revenue growth
was related to acquisitions.
Revenue in our Commercial segment, which represents 60% of consolidated revenue for the six months
ended December 31, 2008, increased $140.9 million, or 8%, to $1.92 billion during the six months
ended December 31, 2008 compared to the same period last year. Excluding operations divested
through December 31, 2008, revenues increased $147.2 million, or 8%. Internal revenue growth was 4%
and growth from acquisitions was 4%. Internal revenue growth was due to growth in the following
areas: (i) information technology outsourcing related to project deliveries of hardware and
software as well as our contract with Allergan, Inc. offset by declines in our information
technology consulting business and our contract with Nike, Inc.; (ii) business process outsourcing
with growth in our relationships with Verizon and Wellpoint, Inc.; and (iii) commercial services
with growth in our learning process outsourcing business and our human resources consulting
business offset by rate reductions on renewals in our commercial education and financial services
business. The items discussed above collectively represent approximately 82% of our internal
revenue growth for the period in this segment.
Revenue in our Government segment, which represents 40% of consolidated revenue for the six months
ended December 31, 2008, increased $71.1 million, or 6%, to $1.29 billion during the six months
ended December 31, 2008 compared to the same period last year. Excluding revenues from operations
divested through December 31, 2008, revenues increased $81.6 million, or 7%. Internal revenue
growth was 4% and growth from acquisitions was 3%. We experienced internal revenue growth in the
following areas: (i) our government healthcare line of business for Medicaid contracts with the
states of Alaska, North Dakota, Tennessee and the District of Columbia, and a contract with Florida
Healthy Kids Corporation offset by declines due to the non-renewal of the Florida Medicaid
contract; (ii) our state and local business with contracts with the Texas Department of Housing
and Community Affairs for eligibility determination; (iii) our federal business with incremental
FFEL loan volumes; and (iv) our transportation business due to nonrecurring fare collection work in
fiscal year 2008 for the city of Melbourne, Australia. The areas discussed above collectively
represent approximately 91% of our internal revenue growth for the period in this segment.
Operating expenses
Wages and benefits increased $49.0 million, or 3.5%, to $1.47 billion. As a percentage of revenue, wages and benefits decreased 1.5% to 45.6% from 47.1% during the same period in the prior year.
During the six months ended December 31, 2008 and 2007, we recorded a (benefit) charge to wages and
benefits of approximately $(18.9 million) and $0.3 million, respectively, related to our deferred
compensation plans as a result of changes in the market value of the liability to employees.
Increased revenue related to project deliveries of hardware and software contributed approximately
0.8% of the decrease in wages and benefits as a percentage of revenue, due to a lower component of
wages and benefits than our other operations. During the six months ended December 31, 2008, we
recorded $12.9 million in severance costs and $2.1 million in other labor and benefit costs related
to our global production initiative as discussed in Significant Developments above and Note 3 to our Consolidated Financial Statements. During the six
months ended December 31, 2008, we recorded an $8.9 million charge associated with the SERP
Termination as discussed in Note 6 to our Consolidated Financial Statements. During the six months
ended December 31, 2008 and 2007, we recorded a (benefit) charge of approximately $(0.8 million)
and $0.5 million, respectively, for estimated costs related to certain former employees stock
options as discussed in Note 14 to our Consolidated Financial Statements. During the six months
ended December 31, 2007, we recorded a charge of approximately $1.2 million of compensation expense
related to amending certain employee stock options as discussed in Note 14 to our Consolidated
Financial Statements.
Services and supplies increased $108.6 million, or 16.3%, to $776.9 million. As a percentage of
revenue, services and supplies increased 2.0% to 24.2% from 22.2% during the same period of the
prior year. Increased revenue related to project deliveries of hardware and software contributed
approximately 1.5% of the change in services and supplies as a percentage of revenue. These project
deliveries have a higher component of services and supplies than our other operations. During the
six months ended December 31, 2008, we recorded $0.5 million in costs related to our global
production initiative. During the six months ended December 31, 2008, we recorded $0.3 million in
costs related to our ongoing stock option investigation. During the six months ended December 31,
2008 and 2007, we recorded $0.3 million and $3.5 million, respectively, in costs related to the
potential sale of the Company and stockholder derivative lawsuits.
Rent, lease and maintenance expenses increased $28.5 million, or 7.7%, to $398.6 million. As a
percentage of revenue, rent, lease and maintenance expenses increased 0.1%, to 12.4% from 12.3%
during the same period in the prior year. During the six months ended December 31, 2008, we
recorded $1.2 million in costs related to our global production initiative. During
the six months ended December 31, 2008 and 2007, we recorded $1.4 million and $1.1 million,
respectively, for electronic data storage costs related to our ongoing stock option investigation.
37
Other expenses increased $6.1 million, or 44.2%, to $20.0 million. As a percentage of revenue,
other expenses increased 0.1%, to 0.6% from 0.5% during the same period in the prior year. During
the six months ended December 31, 2007, we recorded a $1.6 million asset impairment charge in our
Commercial segment related to the termination of a Commercial client that was acquired.
Other operating expenses decreased $26.3 million, or 56.2%, to $20.5 million. As a percentage of
revenue, other operating expenses decreased 1.0%, to 0.6%. Operating expenses during the six
months ended December 31, 2008 and 2007 were impacted by the items discussed above, including the
following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Commercial segment: |
|
|
|
|
|
|
|
|
Gain on sale of unclaimed property business |
|
$ |
(0.5 |
) |
|
$ |
|
|
Estimated pre-acquisition litigation settlement related to our human resources
consulting and outsourcing business acquired from Mellon Financial
Corporation in May 2005 |
|
|
|
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
Government segment: |
|
|
|
|
|
|
|
|
Gain on sale of bindery business |
|
|
(0.2 |
) |
|
|
|
|
Gain on sale of our decision support business |
|
|
|
|
|
|
(2.4 |
) |
Gain on settlement of indemnification and other claims with Lockheed
Martin Corporation |
|
|
|
|
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
Corporate segment: |
|
|
|
|
|
|
|
|
Legal costs associated with the ongoing stock option investigations and
stockholder derivative lawsuits, net of insurance recovery |
|
|
(2.0 |
) |
|
|
23.0 |
|
Legal costs associated with the potential sale of the Company and
stockholder derivative lawsuits |
|
|
0.9 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
Total |
|
$ |
(1.8 |
) |
|
$ |
26.6 |
|
|
|
|
|
|
|
|
As a percentage of revenue |
|
|
-0.1 |
% |
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
Change as a percentage of revenue explained above |
|
|
-1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
38
Operating income
Operating income increased $38.0 million, or 12.5%, to $341.3 million. As a percentage of revenue,
operating income increased 0.5% to 10.6% during the six months ended December 31, 2008 from 10.1%
during the same period of the prior year. Operating income during the six months ended December 31,
2008 and 2007 was impacted by the items discussed above, including the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Commercial segment: |
|
|
|
|
|
|
|
|
Costs related to our global production initiative |
|
$ |
(14.0 |
) |
|
$ |
|
|
Gain on sale of unclaimed property business |
|
|
0.5 |
|
|
|
|
|
Estimated pre-acquisision litigation settlement related to our human resources
consulting and outsourcing business acquired from Mellon Financial
Corporation in May 2005 |
|
|
|
|
|
|
(3.0 |
) |
Impairment charge related to the termination of a Commercial client that
was acquired |
|
|
|
|
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
|
Government segment: |
|
|
|
|
|
|
|
|
Costs related to our global production initiative |
|
|
(2.6 |
) |
|
|
|
|
Gain on sale of bindery business |
|
|
0.2 |
|
|
|
|
|
Gain on sale of our decision support business |
|
|
|
|
|
|
2.4 |
|
Gain on settlement of indemnification and other claims with Lockheed
Martin Corporation |
|
|
|
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
Corporate segment: |
|
|
|
|
|
|
|
|
Benefit (cost) related to our deferred compensation plans |
|
|
18.9 |
|
|
|
(0.3 |
) |
SERP Termination |
|
|
(8.9 |
) |
|
|
|
|
Legal credit (costs) associated with the ongoing stock option investigations
and stockholder derivative lawsuits , net of insurance recovery |
|
|
0.3 |
|
|
|
(24.1 |
) |
Legal costs associated with the potential sale of the Company and stockholder
derivative lawsuits |
|
|
(1.2 |
) |
|
|
(8.7 |
) |
Cost related to amending certain employee stock options |
|
|
|
|
|
|
(1.2 |
) |
Credit (cost) related to certain former employees stock options |
|
|
0.8 |
|
|
|
(0.5 |
) |
Costs related to our global production initiative |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(6.1 |
) |
|
$ |
(34.8 |
) |
|
|
|
|
|
|
|
As a percentage of revenue |
|
|
-0.2 |
% |
|
|
-1.2 |
% |
|
|
|
|
|
|
|
|
|
Change as a percentage of revenue explained above |
|
|
1.0 |
% |
|
|
|
|
Other net change as a percentage of revenue |
|
|
-0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Total change as a percentage of revenue |
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
Interest expense decreased $15.9 million compared to the same period in the prior year primarily
due to lower interest rates on outstanding debt.
Other non-operating expense (income), net
Other non-operating expense (income), net increased $13.1 million compared to the same period in
the prior year. During the six months ended December 31, 2008 and 2007, we recorded losses on the
investments supporting our deferred compensation plans of approximately $18.1 million and $0.1
million, respectively, offset by gains on foreign currency and marketable securities.
Income tax expense
Our effective income tax rate increased to 39.6% for the six months ended December 31, 2008 from
33.6% for the six months ended December 31, 2007. The effective tax rate for the six months ended
December 31, 2007 included interest credits on tax refunds which were netted against our tax
liability, resulting in a $4.0 million reduction of interest expense calculated in accordance with
FIN 48. Our effective income tax rate for the six months ended December 31, 2008 is higher than
the 35% federal statutory rate primarily due to the effect of state income taxes, the tax impact of
the cash lump sum payment related to
the SERP Termination as discussed in Note 6 to our Consolidated Financial Statements and the change
in cash surrender value of life insurance policies underlying certain of our deferred compensation
obligations.
39
Liquidity and Capital Resources
Cash flow
During the six months ended December 31, 2008, we generated approximately $308.7 million in cash
flows provided by operating activities compared to $330.6 million in the six months ended December
31, 2007. Our cash flows provided by operating activities were impacted by increases in accounts
receivable and higher payments to taxing authorities during the six months ended December 31, 2008
compared to the prior year. During the six months ended December 31, 2007, we received a favorable
ruling from the Internal Revenue Service that resulted in our recording a refund of prior year
taxes paid, which reduced payments due for then current income tax obligations.
Accounts receivable fluctuations may have a significant impact on our cash flows provided by
operating activities. Accounts receivable can be negatively impacted by growth in revenues in one
fiscal year or quarter compared to the prior fiscal year or quarter, where collections typically
lag behind the related client billings, resulting in a use of cash for operating activities.
Conversely, when revenue growth slows, then accounts receivable is positively impacted, resulting
in a source of cash for operating activities. Additionally, accounts receivable is impacted by
contracts where we apply percentage-of-completion accounting in the recognition of revenues. Under
such contracts we may receive a different amount of payments from the clients during that fiscal
year or quarter than the amount that we record as revenues during the same period. Such payments
are typically dependent on original contract negotiations as to the timing of when such payments
are due, and based on actual operational performance in the delivery of the contract milestones and
associated client acceptance required under the contracts.
Free cash flow is measured as cash flow provided by operating activities (as reported in our
Consolidated Statements of Cash Flows), less capital expenditures (purchases of property, equipment
and software, net, as reported in our Consolidated Statements of Cash Flows) less additions to
other intangible assets (as reported in our Consolidated Statements of Cash Flows). We believe this
free cash flow metric provides an additional measure of available cash flow after we have satisfied
the capital expenditure requirements of our operations, and should not be taken in isolation to be
a measure of cash flow available for us to satisfy all of our obligations and execute our business
strategies. We also rely on cash flows from financing activities which, together with free cash
flow, are expected to be sufficient for us to execute our business strategies. Our measure of free
cash flow may not be comparable to similarly titled measures of other companies. The following
table sets forth the calculations of free cash flow (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Net cash provided by operating activities |
|
$ |
308,725 |
|
|
$ |
330,621 |
|
Purchases of property, equipment and software, net |
|
|
(148,596 |
) |
|
|
(132,402 |
) |
Additions to other intangible assets |
|
|
(17,818 |
) |
|
|
(17,416 |
) |
|
|
|
|
|
|
|
Free cash flow |
|
$ |
142,311 |
|
|
$ |
180,803 |
|
|
|
|
|
|
|
|
During the six months ended December 31, 2008, net cash used in investing activities was $170.0
million compared to $175.2 million during the same period of the prior year. Net cash used in
investing activities includes the following:
|
|
|
During the six months ended December 31, 2008, we used $19.0 million for acquisitions,
net of cash acquired, primarily for the acquisition of a
South American-based customer care
services provider and contingent consideration and a working capital settlement related to
prior year acquisitions. During the six months ended December 31, 2007, we used $23.8
million for acquisitions, net of cash acquired, primarily for contingent consideration
payments for prior year acquisitions, including Heritage Information Systems, Inc. and
Primax Recoveries, Inc. |
|
|
|
|
During the six months ended December 31, 2008, we received $10.3 million related to our
divestiture activities, including the sale of our bindery business. During the six months
ended December 31, 2007, we received $4 million related to the sale of our decision support
business. |
|
|
|
|
Cash used for the purchase of property, equipment and software and additions to other
intangible assets was $166.4 million and $149.8 million for the six months ended December
31, 2008 and 2007, respectively. Historically, the
capital intensity in our business has ranged between 5% and 7% of revenue. During the six
months ended December 31, 2008 and 2007, the overall capital intensity of our business was
approximately 5.2% and 5.0% of revenues, respectively. |
|
|
|
|
During the six months ended December 31, 2008, we received $12.6 million in proceeds
primarily for investments
|
40
|
|
|
which matured during the period and purchased $7.6 million of
investments to support our deferred compensation plans. |
|
|
|
|
During the six months ended December 31, 2007, we paid Lockheed Martin Corporation $6.5
million to settle all claims related to the sale of the majority of our federal business
and our acquisition of Lockheed Martin Corporations commercial information technology
services business in fiscal year 2004. |
During the six months ended December 31, 2008 and 2007, net cash used in financing activities was
$33.4 million and $165.0 million, respectively. Such financing activities include net borrowings
on our Credit Agreement with Citicorp USA, Inc., as Administrative Agent (Citicorp), Citigroup
Global Markets Inc., as Sole Lead Arranger and Book Runner, and with Morgan Stanley Bank, SunTrust
Bank, Bank of Tokyo-Mitsubishi UFJ, Ltd., Wachovia Bank National Association, Bank of America,
N.A., Bear Stearns Corporate Lending and Wells Fargo Bank, N.A., as Co-Syndication Agents, and
various other lenders and issuers (the Credit Facility), proceeds from the exercise of stock
options and excess tax benefits from stock-based compensation offset by purchases of treasury
shares under our share repurchase program.
Credit arrangements
Draws made under our Credit Facility are made to fund cash acquisitions and share repurchases and
for general working capital requirements. During the last twelve months, the balance outstanding
under our credit facilities for borrowings ranged from $1.81 billion to $1.87 billion. At December
31, 2008, we have approximately $859.4 million of unused commitment under our revolving credit
facility after giving effect to outstanding indebtedness of $67.0 million and $73.6 million of
outstanding letters of credit that secure certain contractual performance and other obligations.
Based on the current leverage ratios under our Credit Facility, we have approximately $394.2
million available for current draw under this revolving facility. At December 31, 2008, we had
$1.82 billion outstanding under our Credit Facility, of which $1.8 billion is reflected in
long-term debt and $18 million is reflected in current portion of long-term debt. Approximately
$1.78 billion of our outstanding Credit Facility bore interest from 2.47% to 4.2% and approximately
$33.2 million bore interest of approximately 1.61%. Please see Note 10 to our Consolidated
Financial Statements for a discussion of the interest rate swap and interest rate collar agreements
related to interest rates on our Credit Facility. We are in compliance with the covenants of our
Credit Facility, as amended, as of the date of filing of this report.
Please see Note 14 to our Consolidated Financial Statements for a discussion of our outstanding
surety bonds and letters of credit.
Please see Note 14 to our Consolidated Financial Statements for a discussion of the declaratory
action with respect to the alleged default and purported acceleration of our Senior Notes.
Capital and Credit Market Risk
Due to the tightening of the capital and credit markets, we have performed assessments to determine
the impact, if any, of recent market developments on our financial statements. Our additional
assessment has included a review of access to liquidity in the credit market, counterparty
creditworthiness, and operational risk. While we believe that the defensive nature of our business
model provides us with a certain level of predictability in our revenue streams during differing
economic cycles, the current market volatility may create additional risks in the future.
Credit ratings
On March 20, 2007, following the announcement that ACS founder Darwin Deason and private equity
fund Cerberus proposed to buy the Company, Fitch, Moodys and Standard & Poors (S&P) placed us
on review for potential downgrade. On December 3, 2007, Fitch removed us from Rating Watch
Negative and on December 20, 2007 affirmed our rating at BB with a Stable Outlook, except for our
Senior Notes which remain at BB-. On January 3, 2008, S&P removed us from
CreditWatch with negative implications and confirmed our credit rating at BB with a negative
outlook. On January 28, 2008, Moodys concluded their review of ACS for potential downgrade and
confirmed our rating at Ba2 with a stable outlook. On August 8, 2008, S&P confirmed our BB rating
and revised our outlook to stable. There may be additional reductions in our ratings depending on
the timing and amounts that may be drawn under our Credit Facility. As a result, the terms of any
financings we choose to enter into in the future may be adversely affected. In addition, as a
result of these downgrades, the sureties which provide performance bonds backing our contractual
obligations could reduce the availability of these bonds, increase the price of the bonds to us or
require us to provide collateral such as a letter of credit. However, we believe that we will
continue to have sufficient capacity in the surety markets and liquidity from our cash flow and
Credit Facility to respond to future requests for proposals. In addition, certain of our
commercial outsourcing contracts provide that,
in the event our credit ratings are downgraded to certain specified levels, the client may elect to
terminate its contract with us and either pay a reduced termination fee or in some limited
instances, no termination fee. While we do not anticipate that the downgrading of our credit
ratings will result in a material loss of commercial outsourcing revenue due to the clients
exercise of these termination rights, there can be no assurance that such a credit ratings
downgrade will not adversely affect these client relationships.
41
Derivative instruments and hedging activities
Please see Note 10 to our Consolidated Financial Statements for a discussion of our derivative
instruments and hedging activities.
Share Repurchase Program
Please see Note 7 to our Consolidated Financial Statements for a discussion of our share repurchase
program.
Stock Option Repricing
Please see Note 14 to our Consolidated Financial Statements for a discussion of our offer to
former employees related to stock option revised measurement dates as the result of our internal
investigation of our stock option grant practices.
Other
At December 31, 2008, we had cash and cash equivalents of $567.2 million compared to $461.9 million
at June 30, 2008. Our working capital (defined as current assets less current liabilities)
increased $150.3 million to $1.17 billion at December 31, 2008 from $1.02 billion at June 30, 2008.
Our current ratio (defined as total current assets divided by total current liabilities) was 2.0
and 1.9 at December 31, 2008 and June 30, 2008, respectively. Our debt-to-capitalization ratio
(defined as the sum of short-term and long-term debt divided by the sum of short-term and long-term
debt and equity) was 50% and 51% at December 31, 2008 and June 30, 2008, respectively.
We believe 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 and operating needs, including capital expenditures, and will meet the cash
requirements of our contractual obligations. Should interest rates rise, our interest expense
could increase and impact our results of operations and cash flows. In addition, we intend to
continue our growth through acquisitions, 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.
Disclosures about Contractual Obligations and Commercial Commitments as of December 31, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
After |
Contractual Obligations |
|
Total |
|
1 Year |
|
1-3 Years |
|
4-5 Years |
|
5 Years |
|
Long-term debt (1) |
|
$ |
1,818,395 |
|
|
$ |
18,230 |
|
|
$ |
36,065 |
|
|
$ |
1,764,061 |
|
|
$ |
39 |
|
Senior Notes, net of unamortized discount (1) |
|
|
499,569 |
|
|
|
|
|
|
|
249,976 |
|
|
|
|
|
|
|
249,593 |
|
Capital lease obligations (1) |
|
|
53,313 |
|
|
|
31,930 |
|
|
|
20,524 |
|
|
|
859 |
|
|
|
|
|
Operating leases (2) |
|
|
906,393 |
|
|
|
323,510 |
|
|
|
420,016 |
|
|
|
109,303 |
|
|
|
53,564 |
|
Purchase obligations (3) (4) |
|
|
34,787 |
|
|
|
10,987 |
|
|
|
23,800 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations |
|
$ |
3,312,457 |
|
|
$ |
384,657 |
|
|
$ |
750,381 |
|
|
$ |
1,874,223 |
|
|
$ |
303,196 |
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration per Period |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts |
|
Less than |
|
|
|
|
|
|
|
|
|
After 5 |
Other Commercial Commitments |
|
Committed |
|
1 Year |
|
1-3 Years |
|
4-5 Years |
|
Years |
|
Standby letters of credit |
|
$ |
73,563 |
|
|
$ |
73,563 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Surety bonds |
|
|
626,319 |
|
|
|
570,469 |
|
|
|
53,675 |
|
|
|
2,175 |
|
|
|
|
|
|
|
|
Total Commercial Commitments |
|
$ |
699,882 |
|
|
$ |
644,032 |
|
|
$ |
53,675 |
|
|
$ |
2,175 |
|
|
$ |
|
|
|
|
|
|
|
|
(1) |
|
Excludes accrued interest of $5.4 million at December 31, 2008. |
|
(2) |
|
We have various contractual commitments to lease hardware and software and for the
purchase of maintenance on such leased assets with varying terms through fiscal year 2013,
which are included in operating leases in the table. |
|
(3) |
|
We have entered into various contractual agreements to purchase telecommunications
services. These agreements provide for minimum annual spending commitments, and have
varying terms through fiscal year 2011, and are
included in purchase obligations in the table. |
|
(4) |
|
In June 2006, we entered into a two year agreement with Rich Capital, LLC, an M&A
advisory firm owned by Jeffery A. Rich, a former Chief Executive Officer, to provide us
with advisory services in connection with potential acquisition candidates. This
contractual obligation is included in purchase obligations in the table above. However, we
have currently suspended payment under this agreement pending determination whether Rich
Capital, LLC is
capable of performing its obligations under the contract in view of the
previously reported internal investigations conclusions regarding stock options awarded to
Mr. Rich. |
42
We made contributions of approximately $6.6 million to our pension plans during the six months
ended December 31, 2008 and expect to contribute approximately $15.0 million to our pension plans
during fiscal year 2009. Minimum pension funding requirements are not included in the table above
as such amounts are zero for our pension plans as of December 31, 2008. Please see Critical
Accounting Policies Pensions and Post-Employment Benefits below for discussion of our pension
plans.
As of December 31, 2008, we had gross reserves for uncertain tax positions totaling $35 million,
which excludes $8.4 million of offsetting tax benefits recorded in accordance with FIN 48 (defined
in Critical Accounting Policies Income Taxes below). We anticipate a significant change in the
next 12 months to the total amount of FIN 48 unrecognized benefits due to ongoing negotiations with
taxing authorities. However, due to the uncertain nature of the settlement process, we are unable
to make a reasonable estimate as to when cash settlements of these uncertain tax positions with
taxing authorities will occur.
Please see Note 14 to our Consolidated Financial Statements for a discussion of our outstanding
surety bonds and letters of credit.
Please see Note 14 to our Consolidated Financial Statements for a discussion of our obligation to
make contingent payments to former shareholders of acquired entities upon satisfaction of certain
contractual criteria in conjunction with certain acquisitions.
As discussed in Note 14 to our Consolidated Financial Statements, as of December 31, 2008 we
accrued approximately $0.6 million to be paid to former employees related to stock option revised
measurement dates as the result of our internal investigation of our stock option grant practices.
Please see Note 14 to our Consolidated Financial Statements for a discussion of our exposure under
our Commercial contract to perform third party student loan servicing
in the FFEL program on behalf of various financial institutions.
Critical Accounting Policies
The preparation of our financial statements in conformity with generally accepted accounting
principles requires us to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. We base our estimates on historical experience and on various other
assumptions or conditions that are believed to be reasonable under the circumstances. Actual
results could differ from those estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and
uncertainties and may result in materially different results under different assumptions and
conditions. We believe that the following critical accounting policies used in the preparation of
our Consolidated Financial Statements involve significant judgments and estimates.
Revenue Recognition
A significant portion of our revenue is recognized based on objective criteria that do not require
significant estimates or uncertainties. For example, transaction volumes and time and material and
cost reimbursable arrangements are based on specific, objective criteria under the contracts.
Accordingly, revenues recognized under these methods do not require the use of significant
estimates that are susceptible to change. Revenue recognized using the percentage-of-completion
accounting method does require the use of estimates and judgment as discussed below.
Our policy follows the guidance from SEC Staff Accounting Bulletin 104, Revenue Recognition (SAB
104), unless the transaction is within the scope of other specific authoritative guidance. SAB 104
provides guidance on the recognition, presentation, and disclosure of revenue in financial
statements. We recognize revenues when persuasive evidence of an arrangement exists, the services
have been provided to the client, the fee is fixed or determinable, and collectibility is
reasonably assured.
During fiscal year 2008, approximately 74% of our revenue was recognized based on transaction
volumes, approximately 8% was fixed fee based, wherein our revenue is earned as we fulfill our
performance obligations under the arrangement, approximately 6% was related to cost reimbursable
contracts, approximately 6% of our revenue was recognized using percentage-of-completion accounting
and the remainder is related to time and material contracts. Our revenue mix is subject to change
due to the impact of acquisitions, divestitures and new business.
43
Revenues on cost reimbursable contracts are recognized by applying an estimated factor to costs as
incurred, such factor being determined by the contract provisions and prior experience. Revenues on
unit-price contracts are recognized at the contractual selling prices of work completed and
accepted by the client. Revenues on time and material contracts are recognized at the contractual
rates as the labor hours and direct expenses are incurred.
Revenues for business process outsourcing services are recognized as services are rendered,
generally on the basis of the number of accounts or transactions processed. Information technology
processing revenues are recognized as services are provided to the client, generally at the
contractual selling prices of resources consumed or capacity utilized by our clients. Revenues from
annual maintenance contracts are deferred and recognized ratably over the maintenance period.
Revenues from hardware sales are recognized upon delivery to the client and when uncertainties
regarding client acceptance have expired.
Revenues on certain fixed price contracts where we provide information technology system
development and implementation services are recognized over the contract term based on the
percentage of development and implementation services that are provided during the period compared
with the total estimated development and implementation services to be provided over the entire
contract using Statement of Position 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts (SOP 81-1). SOP 81-1 requires the use of
percentage-of-completion accounting for long-term contracts that are binding agreements between us
and our clients in which we agree, for compensation, to perform a service to the clients
specifications. These services require that we perform significant, extensive and complex design,
development, modification and implementation activities for our clients systems. Performance will
often extend over long periods, and our right to receive future payment depends on our future
performance in accordance with the agreement.
The percentage-of-completion methodology involves recognizing probable and reasonably estimable
revenue using the percentage of services completed, on a current cumulative cost to estimated total
cost basis, using a reasonably consistent profit margin over the period. Due to the longer term
nature of these projects, developing the estimates of costs often requires significant judgment.
Factors that must be considered in estimating the progress of work completed and ultimate cost of
the projects include, but are not limited to, the availability of labor and labor productivity, the
nature and complexity of the work to be performed, and the impact of delayed performance. If
changes occur in delivery, productivity or other factors used in developing the estimates of costs
or revenues, we revise our cost and revenue estimates, which may result in increases or decreases
in revenues and costs, and such revisions are reflected in income in the period in which the facts
that give rise to that revision become known.
At times, we may contract with a client to provide more than one service; for instance, we may
contract for an implementation or development project and also provide services or operate the
system over a period of time. In these situations, we follow the guidance of Emerging Issues Task
Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21). EITF
00-21 provides the methodology for separating the contract elements and allocating total
arrangement consideration to the contract elements but does not stipulate the revenue recognition
methodology that should be applied to these separate elements. Once the contract has been
separated under the guidance of EITF 00-21 and arrangement consideration allocated, revenue
recognition for each of the segments follows the applicable revenue recognition method, as
described above. In certain instances where revenue cannot be allocated to a contract element
delivered earlier than other elements, costs of delivery are deferred and recognized as the
subsequent elements are delivered. Costs deferred cannot exceed the relative fair value of the
related element and are tested for impairment regularly.
Revenues earned in excess of related billings are accrued, whereas billings in excess of revenues
earned are deferred until the related services are provided. We recognize revenues for
non-refundable, upfront implementation fees on a straight-line basis over the period between the
initiation of the ongoing services through the end of the contract term.
Cost of
Revenues
We present cost of revenues in our Consolidated Statements of Income based on the nature of the
costs incurred. Substantially all these costs are incurred in the provision of services to our
clients. The selling, general and administrative costs included in cost of revenues are not
material and are not separately presented in the Consolidated Statements of Income.
Contingencies
We account for claims and contingencies in accordance with Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies
(SFAS 5). SFAS 5 requires that we record an estimated loss from a claim or loss contingency when
information available prior to issuance of our financial statements indicates that it is probable
that an asset has been impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accounting for claims and
contingencies requires us to use our judgment. We consult with legal counsel on those issues
related to litigation and seek input from other experts and advisors with respect to matters in the
ordinary course of business.
44
Our contracts with clients typically span several years. We continuously review and reassess our
estimates of contract profitability. If our estimates indicate that a contract loss will occur, a
loss accrual is recorded in the Consolidated Financial Statements in the period it is first
identified, if allowed by relevant accounting guidance. Circumstances that could potentially result
in contract losses over the life of the contract include variances from expected costs to deliver
our services, and other factors affecting revenues and costs.
Valuation
of Goodwill and Intangibles
Due to the fact that we are primarily a services company, our business acquisitions typically
result in significant amounts of goodwill and other intangible assets, which affect the amount of
future period amortization expense and possible expense we could incur as a result of an
impairment. In addition, in connection with our revenue arrangements, we incur costs to originate
long-term contracts and to perform the transition and setup activities necessary to enable us to
perform under the terms of the arrangement. We capitalize certain incremental direct costs which
are related to the contract origination or transition, implementation and setup activities and
amortize them over the term of the arrangement. From time to time, we also provide certain
inducements to clients in the form of various arrangements, including contractual credits, which
are capitalized and amortized as a reduction of revenue over the term of the contract. The
determination of the value of goodwill and other intangibles requires us to make estimates and
assumptions about future business trends and growth. In addition to our annual impairment testing,
we continually evaluate whether events and circumstances have occurred that indicate the balance of
goodwill or intangible assets may not be recoverable. In evaluating goodwill for impairment, we
compare the estimated fair value of the reporting unit to its underlying book value. In evaluating
intangible assets for impairment, we compare the estimated fair value of the intangible asset to
its underlying book value. Such evaluation is significantly impacted by estimates and assumptions
of future revenues, costs and expenses and other factors. If an event occurs which would cause us
to revise our estimates and assumptions used in analyzing the value of our goodwill or other
intangible assets, such revision could result in a non-cash impairment charge that could have a
material impact on our financial results.
Valuation
of Property, Equipment and Software
We continually evaluate whether events and circumstances have occurred that indicate the balance of
our property, equipment and software may not be recoverable. Such evaluation is significantly
impacted by estimates and assumptions of future revenues, costs and expenses and other factors. If
an event occurs which would cause us to revise our estimates and assumptions used in analyzing the
value of our property, equipment and software, such revision could result in a non-cash impairment
charge that could have a material impact on our financial results.
Stock-Based
Compensation
SFAS No. 123 (revised 2004), Share-based Payment (SFAS 123(R)) requires us to recognize
compensation expense for all stock-based payment arrangements based on the fair value of the
stock-based payment on the date of grant. In determining the fair value of stock options, we use
the Black-Scholes option pricing model that employs the following assumptions:
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Expected volatility of our stock price based on historical monthly volatility over the
expected term. |
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Expected term of the option based on historical employee stock option exercise behavior
and the vesting and contractual terms of the respective option. |
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Risk-free interest rate for periods within the expected term of the option. |
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Expected dividend yield. |
Our stock price volatility and expected option lives are based on managements best estimates at
the time of grant, both of which impact the fair value of the option calculated under the
Black-Scholes methodology and, ultimately, the expense that will be recognized over the vesting
term of the option.
SFAS 123(R) requires that we recognize compensation expense for only the portion of stock-based
payment arrangements that are expected to vest. Therefore, we apply estimated forfeiture rates that
are based on historical employee termination behavior. We periodically adjust the estimated
forfeiture rates so that only the compensation expense related to stock-based payment arrangements
that vest are included in wages and benefits. If the actual number of forfeitures differs from
those estimated by management, additional adjustments to compensation expense may be required in
future periods.
45
Pension
and Post-Employment Benefits
SFAS No. 87, Employers Accounting for Pensions (SFAS 87), establishes standards for reporting
and accounting for pension benefits provided to employees. On June 30, 2007, we adopted SFAS No.
158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans An
Amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). This Statement requires
recognition of the funded status of a defined benefit plan in the statement of financial position
as an asset or liability if the plan is overfunded or underfunded, respectively. Changes in the
funded status of a plan are required to be recognized in the year in which the changes occur, and
reported in comprehensive income as a separate component of stockholders equity. Further, certain
gains and losses that were not previously recognized in the financial statements are required to be
reported in comprehensive income, and certain disclosure requirements were changed.
We made assumptions of discount rate, long-term rate of return on assets and rate of increase in
compensation levels in order to determine our benefit obligations and net periodic benefit costs.
These assumptions are described in our Annual Report on Form 10-K for the fiscal year ended June
30, 2008. There have been no changes to our assumptions since that filing.
Allowance
for Doubtful Accounts
We make estimates of the collectibility of our accounts receivable. We specifically analyze
accounts receivable and historical bad debts, client credit-worthiness, current economic trends,
and changes in our client payment terms and collection trends when evaluating the adequacy of our
allowance for doubtful accounts. Any change in the assumptions used in analyzing a specific account
receivable may result in additional allowance for doubtful accounts being recognized in the period
in which the change occurs.
Income
Taxes
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. The
determination of our provision for income taxes requires significant judgment, the use of
estimates, and the interpretation and application of complex tax laws. Significant judgment is
required in assessing the timing and amounts of deductible and taxable items. We establish reserves
when, despite our belief that our tax return positions are fully supportable, we believe that
certain positions may be challenged and that we may not succeed. We adjust these reserves in light
of changing facts and circumstances. Our provision for income taxes includes the impact of these
reserve changes. In the event that there is a significant unusual or one-time item recognized in
our operating results, the taxes attributable to that item would be separately calculated and
recorded at the same time as the unusual or one-time item.
Deferred income taxes are determined based on the difference between financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the years in which such
differences are expected to reverse. We routinely evaluate all deferred tax assets to determine the
likelihood of their realization.
Effective July 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN 48), which
clarifies the accounting for and disclosure of uncertainty in tax positions. Additionally, FIN 48
provides guidance on the recognition, measurement, de-recognition, classification and disclosure of
tax positions and on the accounting for related interest and penalties.
Fair
Value Measurements
We adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS
157) effective July 1, 2008. SFAS 157 establishes a hierarchy that prioritizes fair value
measurements based on the types of inputs used for the various valuation techniques (market
approach, income approach, and cost approach). SFAS 157 is applied under existing accounting
pronouncements that require or permit fair value measurements and, accordingly, does not require
any new fair value measurements. There was no impact on our financial condition and results of
operations as a result of the adoption of SFAS 157.
In February 2008, FASB issued FASB Staff Position FAS 157-2 (FSP FAS 157-2), Effective Date of
FASB Statement No. 157 which provides a one-year deferral of the effective date of SFAS 157 for
non-financial assets and liabilities except those that are recognized or disclosed in the financial
statements at fair value at least annually. We are currently evaluating the impact, if any, that
FSP FAS 157-2 will have on our financial condition and results of operations.
The fair value framework requires the categorization of assets and liabilities into three levels
based upon the assumptions (inputs) used to price the assets or liabilities. Our fair value
measurements as of December 31, 2008 are derived from Level 1 and Level 2 inputs that vary by type
of financial instrument and consider nonperformance risk of the Company and that of its
counterparties. We attributed Level 1 support to our trading securities for which we were able
to verify quoted prices for identical assets in actively traded markets. We attributed Level 2
support to our foreign currency and interest rate risk hedges for which we were able to independently verify the valuation provided to us by the sponsoring
financial institutions, using inputs such as currency exchange rates and interest rate forward
pricing curves obtained from third party information and
46
data retrieval services. We attributed Level 2 support to the values provided by third party
administrators and fund custodians for the assets and liabilities related to our deferred
compensation plans, for which we were able to independently verify quoted prices for similar assets
traded in active markets.
New Accounting Pronouncements
Please see Note 15 to our Consolidated Financial Statements for a discussion of recent accounting
pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign currency exchange rates.
Our Credit Facility is a variable rate facility that is tied to LIBOR. We have $1.8 billion of
variable rate debt, of which $1.1 billion is hedged under our interest rate swap and interest rate
collar agreements discussed below. Based on the net amount of outstanding variable rate debt of
$717 million at December 31, 2008, a 100 basis point change in LIBOR would change annual interest
expense by approximately $7.2 million ($4.5 million, net of income tax).
We entered into a zero cost interest rate collar in January 2008. The collar is designated as a
cash flow hedge of forecasted interest payments associated with our floating rate debt, and
contains an interest rate cap of 3.281% and a floor of 2.425%. The notional amount of the collar
is $500 million, which combined with our $600 million interest rate swap (discussed below), hedges
$1.1 billion of our floating rate debt. The interest rate collar was executed in two transactions
each having two year terms, $300 million of which expires on January 30, 2010 and $200 million of
which expires February 11, 2010.
In March 2007, we entered into a five-year amortizing interest rate swap agreement. As of December
31, 2008 and June 30, 2008, the notional amount of the agreement totaled $600 million. The
agreement is designated as a cash flow hedge of forecasted interest payments on floating rate debt.
The interest rate swap is structured such that we pay a fixed rate of interest of 4.897%, and
receive a floating rate of interest based on one month LIBOR.
As of December 31, 2008, there have been no other material changes in our market risk from June 30,
2008. For further information regarding our market risk, please see Item 7A. Quantitative and
Qualitative Disclosures about Market Risk in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2008.
ITEM 4. CONTROLS AND PROCEDURES
Our management, including our principal executive officer and principal financial officer, has
evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)
of the Securities Exchange Act of 1934) as of December 31, 2008. Based on such evaluation, our
principal executive officer and principal financial officer have concluded that as of December 31,
2008 our disclosure controls and procedures were effective. There have not been any changes in our
internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) of the
Securities Exchange Act of 1934) during the three months ended December 31, 2008 that have
materially affected or are reasonably likely to materially affect our internal control over
financial reporting.
47
PART II
ITEM 1. LEGAL PROCEEDINGS
Information regarding legal proceedings is incorporated by reference from Note 14 to our
Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
As of the date of filing of this report, there have not been any material changes to the
information related to the Item 1A. Risk Factors disclosed in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2008 filed with the SEC on August 28, 2008.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Information regarding alleged defaults upon senior securities is incorporated by reference from the
discussion of the declaratory action with respect to the alleged default and purported acceleration
of our Senior Notes contained in Note 14 to our Consolidated Financial Statements in this Quarterly
Report on Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The 2008 Annual Meeting of Stockholders will be held on May 28, 2009. Pursuant to Rule 14a-8 of
the Exchange Act and in accordance with Section 8(c) of our Bylaws, respectively, our Board of
Directors has made an affirmative determination of (i) a reasonable deadline for timely submission
under Rule 14a-8 and (ii) a reasonable deadline by which stockholders must provide notice of a
proposal to us under our Bylaws. Stockholder proposals for the 2008 Annual Meeting of
Stockholders, including those that will not be included in the proxy statement and form of proxy
distributed by the Board of Directors, must be received no sooner than February 11, 2009, but not
later than March 4, 2009, which the Board has determined constitutes a reasonable deadline for
timely submission of proposals under Rule 14a-8 and separately constitutes a reasonable time for
stockholders to provide notice to us under our Bylaws. The foregoing time limits also apply in
determining whether notice is timely for purposes of rules adopted by the Securities and Exchange
Commission relating to the exercise of discretionary voting authority with respect to proxies.
Stockholder proposals must be sent to our principal executive offices, 2828 North Haskell Avenue,
Dallas, Texas 75204.
ITEM 6. EXHIBITS
Reference is made to the Index to Exhibits beginning on page 50 for a list of all exhibits filed as
part of this report.
48
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 9th day
of February, 2009.
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AFFILIATED COMPUTER SERVICES, INC.
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By: |
/s/ Kevin Kyser
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Kevin Kyser |
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Executive Vice President and
Chief Financial Officer |
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49
Index to Exhibits
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Exhibit |
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Number |
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Exhibit Name |
2.1
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Stock Purchase Agreement, dated as of July 31, 2003 between
Lockheed Martin Corporation and Affiliated Computer Services,
Inc. (filed as Exhibit 10.1 to our Quarterly Report on Form
10-Q, filed November 14, 2003 and incorporated herein by
reference). |
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2.2
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Asset Purchase Agreement, dated as of July 31, 2003 between
Lockheed Martin Service, Inc. and Affiliated Computer Services,
Inc. (filed as Exhibit 10.2 to our Quarterly Report on Form
10-Q, filed November 14, 2003 and incorporated herein by
reference). |
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2.3
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Purchase Agreement, dated as of March 15, 2005, among Mellon
Financial Corporation, Mellon Consultants European Holdings
Limited, Affiliated Computer Services, Inc., ACS Business
Process Solutions Limited and Affiliated Computer Services of
Germany GmbH (filed as Exhibit 2.1 to our Current Report on Form
8-K, filed March 17, 2005 and incorporated herein by reference). |
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2.4
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Amendment No. 1 to Purchase Agreement, dated as of May 25, 2005,
among Mellon Financial Corporation, Mellon Consultants European
Holdings Limited, Affiliated Computer Services, Inc., ACS
Business Process Solutions Limited and Affiliated Computer
Services of Germany GmbH (filed as Exhibit 2.1 to our Current
Report on Form 8-K, filed June 1, 2005 and incorporated herein
by reference). |
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2.5
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Amendment No. 2 to Purchase Agreement, dated as of November 11,
2005, among Mellon Financial Corporation, Mellon Consultants
European Holdings Limited, Affiliated Computer Services, Inc.,
ACS Business Process Solutions Limited and Affiliated Computer
Services of Germany GmbH (filed as Exhibit 2.1 to our Current
Report on Form 8-K, filed November 16, 2005 and incorporated
herein by reference). |
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3.1
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Certificate of Incorporation of Affiliated Computer Services,
Inc. (filed as Exhibit 3.1 to our Registration Statement on Form
S-3, filed March 30, 2001, File No. 333-58038 and incorporated
herein by reference). |
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3.2
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Certificate of Correction to Certificate of Amendment of
Affiliated Computer Services, Inc., dated August 30, 2001 (filed
as Exhibit 3.2 to our Annual Report on Form 10-K, filed
September 17, 2003 and incorporated herein by reference). |
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3.3
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Certificate of Elimination of the Series A Cumulative Redeemable
Preferred Stock of Affiliated Computer Services, Inc. dated
August 20, 2001 (filed as Exhibit 4.3 to our Registration
Statement on Form S-8, File No. 333-42385, filed June 13, 2007
and incorporated herein by reference). |
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3.4
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Bylaws of Affiliated Computer Services, Inc., as amended and in
effect on August 21, 2008 (filed as Exhibit 3.2 to our Current
Report on Form 8-K, filed August 27, 2008 and incorporated
herein by reference). |
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4.1
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Form of New Class A Common Stock Certificate (filed as Exhibit
4.3 to our Registration Statement on Form S-1, filed May 26,
1994, File No. 33-79394 and incorporated herein by reference). |
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4.2
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Indenture, dated as of June 6, 2005, by and between Affiliated
Computer Services, Inc. as Issuer and The Bank of New York Trust
Company, N.A. as Trustee (filed as Exhibit 4.1 to our Current
Report on Form 8-K, filed June 6, 2005 and incorporated herein
by reference). |
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4.3
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First Supplemental Indenture, dated as of June 6, 2005, by and
between Affiliated Computer Services, Inc. as Issuer and The
Bank of New York Trust Company, N.A. as Trustee, relating to our
4.70% Senior Notes due 2010 (filed as Exhibit 4.2 to our Current
Report on Form 8-K, filed June 6, 2005 and incorporated herein
by reference). |
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4.4
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Second Supplemental Indenture, dated as of June 6, 2005, by and
between Affiliated Computer Services, Inc. as Issuer and The
Bank of New York Trust Company, N.A. as Trustee, relating to our
5.20% Senior Notes due 2015 (filed as Exhibit 4.3 to our Current
Report on Form 8-K, filed June 6, 2005 and incorporated herein
by reference). |
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4.5
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Specimen Note for 4.70% Senior Notes due 2010 (filed as Exhibit
4.4 to our Current Report on Form 8-K, filed June 6, 2005 and
incorporated herein by reference). |
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4.6
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Specimen Note for 5.20% Senior Notes due 2015 (filed as Exhibit
4.5 to our Current Report on Form 8-K, filed June 6, 2005 and
incorporated herein by reference). |
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9.1
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Voting Agreement, as amended December 7, 2007, by and between
Affiliated Computer Services, Inc. and Darwin Deason (filed as
Exhibit 99.1 to our Current Report on Form 8-K filed December
10, 2007 and incorporated herein by reference). |
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10.1
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1997 Stock Incentive Plan of the Company (filed as Appendix D to
our Joint Proxy Statement on Schedule 14A, filed November 14,
1997 and incorporated herein by reference). |
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10.2
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Amendment No.1 to Affiliated Computer Services, Inc. 1997 Stock
Incentive Plan, dated as of October 28, 2004 (filed as Exhibit
4.6 to our Registration Statement on Form S-8, filed December 6,
2005 and incorporated herein by reference). |
50
Index to Exhibits
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Exhibit |
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Number |
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Exhibit Name |
10.3
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2007 Equity Incentive Plan of the Company (filed as Appendix C
to our Proxy Statement on Schedule 14A, filed April 30, 2007 and
incorporated herein by reference). |
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10.4
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Form of Directors Indemnification Agreement (filed as Exhibit
10.1 to our Current Report on Form 8-K, filed June 5, 2008 and
incorporated herein by reference). |
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10.5
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Form of Change in Control Agreement, dated as of June 9, 2008
(June 6, 2008, in the case of Ann Vezina), by and between
Affiliated Computer Services, Inc. and each of Tom Burlin, Kevin
Kyser and Tom Blodgett (filed as Exhibit 10.1 to our Current
Report on Form 8-K, filed June 11, 2008 and incorporated herein
by reference). |
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10.6
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Change in Control Agreement, dated as of June 9, 2008, by and
between Affiliated Computer Services, Inc. and John Rexford
(filed as Exhibit 10.2 to our Current Report on Form 8-K, filed
June 11, 2008 and incorporated herein by reference). |
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10.7
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Amendment to Change in Control Agreements with certain executive
officers (filed as Exhibit 10.4 to our Current Report on Form
8-K, filed December 30, 2008 and incorporated herein by
reference). |
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10.8
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Supplemental Executive Retirement Agreement, dated as of
December 15, 1998, by and between Affiliated Computer Services,
Inc. and Darwin Deason (filed as Exhibit 10.13 to our Annual
Report on Form 10-K, filed September 29, 1999 and incorporated
herein by reference). |
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10.9
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Amendment to Supplemental Executive Retirement Agreement, dated
as of November 13, 2003, by and between Affiliated Computer
Services, Inc. and Darwin Deason (filed as Exhibit 10.1 to our
Quarterly Report on Form 10-Q, filed February 17, 2004 and
incorporated herein by reference). |
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10.10
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Amendment No. 2 to Supplemental Executive Retirement Agreement,
dated as of June 30, 2005, by and between Affiliated Computer
Services, Inc. and Darwin Deason (filed as Exhibit 10.1 to our
Current Report on Form 8-K, filed July 1, 2005 and incorporated
herein by reference). |
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10.11
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Amendment No. 3 to Supplemental Executive Retirement Agreement
by and between Affiliated Computer Services, Inc. and Darwin
Deason (filed as Exhibit 10.1 to our Current Report on Form 8-K,
filed December 30, 2008 and incorporated herein by reference). |
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10.12
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Amended and Restated Executive Employment Agreement, effective
as of May 1, 2008, by and between Affiliated Computer Services,
Inc. and Lynn Blodgett (filed as Exhibit 10.3 to our Current
Report on Form 8-K, filed June 11, 2008 and incorporated herein
by reference). |
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10.13
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Amendment to Amended and Restated Executive Employment Agreement
by and between Affiliated Computer Services, Inc. and Lynn
Blodgett (filed as Exhibit 10.3 to our Current Report on Form
8-K, filed December 30, 2008 and incorporated herein by
reference). |
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10.14
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Employment Agreement, as amended December 7, 2007, between the
Company and Darwin Deason (filed as Exhibit 99.2 to our Current
Report on Form 8-K, filed December 10, 2007 and incorporated
herein by reference). |
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10.15
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Amendment to Employment Agreement between the Company and Darwin
Deason (filed as Exhibit 10.2 to our Current Report on Form 8-K,
filed December 30, 2008 and incorporated herein by reference). |
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10.16
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Affiliated Computer Services, Inc. 401(k) Supplemental Plan,
effective as of July 1, 2000, as amended (filed as Exhibit 10.15
to our Annual Report on Form 10-K, filed September 13, 2004 and
incorporated herein by reference). |
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10.17
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Affiliated Computer Services, Inc. Executive Benefit Plan,
effective as of January 1, 2002, as amended (filed as Exhibit
10.15 to our Annual Report on Form 10-K, filed September 13,
2005 and incorporated herein by reference). |
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10.18
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Form of Stock Option Agreement (filed as Exhibit 10.17 to our
Annual Report on Form 10-K, filed September 13, 2005 and
incorporated herein by reference). |
|
|
|
10.19
|
|
Form of Stock Option Agreement (UK grant) (filed as Exhibit
10.18 to our Annual Report on Form 10-K, filed September 13,
2005 and incorporated herein by reference). |
|
|
|
10.20
|
|
Form of Stock Option Agreement (Switzerland, Canton of Fribourg)
(filed as Exhibit 10.8 to our Quarterly Report on Form 10-Q
filed May 16, 2006 and incorporated herein by reference. |
|
|
|
10.21
|
|
Form of Stock Option Agreement (Switzerland, Cantons of Aargau,
Basel-Landschaft, Bern & Zurich) (filed as Exhibit 10.9 to our
Quarterly Report on Form 10-Q filed May 16, 2006 and
incorporated herein by reference. |
|
|
|
10.22
|
|
1997 Stock Incentive Plan for Employees in France (filed as
Exhibit 10.35 to our Annual Report on Form 10-K filed January
23, 2007 and incorporated herein by reference.) |
|
|
|
10.23
|
|
Form of Stock Option Agreement (France) (filed as Exhibit 10.36
to our Annual Report on Form 10-K filed January 23, 2007 and
incorporated herein by reference.) |
51
Index to Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Name |
10.24
|
|
Form of Stock Option Agreement (Canada, other than Quebec)
(filed as Exhibit 10.20 to our Annual Report on Form 10-K filed
August 28, 2008 and incorporated herein by reference.) |
|
|
|
10.25
|
|
Form of Stock Option Agreement (Quebec) (filed as Exhibit 10.21
to our Annual Report on Form 10-K filed August 28, 2008 and
incorporated herein by reference.) |
|
|
|
10.26
|
|
Form of Stock Option Agreement (Germany) (filed as Exhibit 10.22
to our Annual Report on Form 10-K filed August 28, 2008 and
incorporated herein by reference.) |
|
|
|
10.27
|
|
Agreement, dated as of September 30, 2005, between Affiliated
Computer Services, Inc. and Jeffrey A. Rich (filed as Exhibit
10.1 to our Current Report on Form 8-K, filed October 3, 2005
and incorporated herein by reference). |
|
|
|
10.28
|
|
Credit Agreement, dated March 20, 2006, by and among Affiliated
Computer Services, Inc., and certain subsidiary parties thereto,
as Borrowers, Citicorp USA, Inc., as Administrative Agent,
Citigroup Global Markets Inc., as Sole Lead Arranger and Book
Runner, and various other agents, lenders and issuers (filed as
Exhibit 10.1 to our Current Report on Form 8-K, filed March 21,
2006 and incorporated herein by reference). |
|
|
|
10.29
|
|
Amendment No. 1 to Credit Agreement dated as of March 30, 2006,
by and among Affiliated Computer Services, Inc., and certain
subsidiary parties thereto, as Borrowers, and Citicorp USA,
Inc., as Administrative Agent (filed as Exhibit 10.24 to our
Annual Report on Form 10-K, filed January 23, 2007 and
incorporated herein by reference). |
|
|
|
10.30
|
|
Amendment No. 2 to Credit Agreement dated as of July 6, 2006, by
and among Affiliated Computer Services, Inc., and certain
subsidiary parties thereto, as Borrowers, and Citicorp USA,
Inc., as Administrative Agent (filed as Exhibit 10.1 to our
Current Report on Form 8-K, filed July 7, 2006 and incorporated
herein by reference). |
|
|
|
10.31
|
|
Amendment No. 3, Consent and Waiver to Credit Agreement, by and
among Affiliated Computer Services, Inc., and certain subsidiary
parties thereto and Citicorp USA, Inc., as Administrative Agent
(filed as Exhibit 10.1 to our Current Report on Form 8-K, filed
September 28, 2006 and incorporated herein by reference). |
|
|
|
10.32
|
|
Amendment No. 4, Consent and Waiver to Credit Agreement, by and
among Affiliated Computer Services, Inc., and certain subsidiary
parties thereto and Citicorp USA, Inc., as Administrative Agent
(filed as Exhibit 10.1 to our Current Report on Form 8-K, filed
December 22, 2006 and incorporated herein by reference). |
|
|
|
10.33
|
|
Pledge and Security Agreement, dated March 20, 2006, by and
among Affiliated Computer Services and certain of its
subsidiaries, and Citicorp USA, Inc., as Administrative Agent
(filed as Exhibit 10.2 to our Current Report on Form 8-K, filed
March 21, 2006 and incorporated herein by reference). |
|
|
|
10.34
|
|
Deed of Assignment, dated March 20, 2006, by and among the
companies listed on Schedule thereto, as Assignors, and Citicorp
USA, Inc., as Security Agent (filed as Exhibit 10.3 to our
Current Report on Form 8-K, filed March 21, 2006 and
incorporated herein by reference). |
|
|
|
10.35
|
|
Assignment of Receivables, dated March 20, 2006, by and among
the entities listed in Schedule 1 thereto, as Assignors, and
Citicorp USA, Inc. as Security Agent (filed as Exhibit 10.4 to
our Current Report on Form 8-K, filed March 21, 2006 and
incorporated herein by reference). |
|
|
|
10.36
|
|
Agreement and Deed of the Creation of a First Ranking Right of
Pledge of Shares in Affiliated Computer Services International
B.V., dated March 20, 2006 (filed as Exhibit 10.5 on Form 8-K,
filed March 21, 2006 and incorporated herein by reference). |
|
|
|
10.37
|
|
Agreement and Deed of the Creation of a First Ranking Right of
Pledge of Receivables of Affiliated Computer Services
International B.V., dated March 20, 2006 (filed as Exhibit 10.6
to our Current Report on Form 8-K, filed March 21, 2006 and
incorporated herein by reference). |
|
|
|
10.38
|
|
Affirmation of Liens and Guaranties, dated as of July 6, 2006,
by and among Affiliated Computer Services, Inc. and certain of
its subsidiaries, and Citicorp USA, Inc., as Administrative
Agent (filed as Exhibit 10.2 to our Current Report on Form 8-K,
filed July 7, 2006 and incorporated herein by reference). |
|
|
|
10.39
|
|
Confirmation Deed, dated as of July 6, 2006, by and among the
entities listed on the Schedule thereto and Citicorp USA, Inc.,
as Security Agent (filed as Exhibit 10.3 to our Current Report
on Form 8-K, filed July 7, 2006 and incorporated herein by
reference). |
|
|
|
10.40
|
|
Engagement Letter between Rich Capital, LLC and Affiliated
Computer Services, Inc. dated June 9, 2006 (filed as Exhibit
10.1 on Form 8-K, filed June 12, 2006 and incorporated herein by
reference). |
|
|
|
10.41
|
|
Separation Agreement dated as of November 26, 2006 between
Affiliated Computer Services, Inc. and Mark A. King (filed as
Exhibit 10.1 to our Current Report on Form 8-K, filed November
27, 2006 and incorporated herein by reference). |
52
Index to Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Name |
10.42
|
|
Separation Agreement dated as of November 26, 2006 between
Affiliated Computer Services, Inc. and Warren D. Edwards (filed
as Exhibit 10.2 to our Current Report on Form 8-K, filed
November 27, 2006 and incorporated herein by reference). |
|
|
|
31.1*
|
|
Certification of Chief Executive Officer of Affiliated Computer
Services, Inc. pursuant to Rule 13a-14(a) promulgated under the
Securities Exchange Act of 1934, as amended. |
|
|
|
31.2*
|
|
Certification of Chief Financial Officer of Affiliated Computer
Services, Inc. pursuant to Rule 13a-14(a) promulgated under the
Securities Exchange Act of 1934, as amended. |
|
|
|
32.1*
|
|
Certification of Chief Executive Officer of Affiliated Computer
Services, Inc. pursuant to Rule 13a-14(b) promulgated under the
Securities Exchange Act of 1934, as amended and Section 1350 of
Chapter 63 of Title 18 of the United States Code. Pursuant to
Item 601(b)(32)(ii) of Regulation S-K, this Exhibit is furnished
to the SEC and shall not be deemed to be filed. |
|
|
|
32.2*
|
|
Certification of Chief Financial Officer of Affiliated Computer
Services, Inc. pursuant to Rule 13a-14(b) promulgated under the
Securities Exchange Act of 1934, as amended and Section 1350 of
Chapter 63 of Title 18 of the United States Code. Pursuant to
Item 601(b)(32)(ii) of Regulation S-K, this Exhibit is furnished
to the SEC and shall not be deemed to be filed. |
|
|
|
* |
|
Filed herewith. |
|
|
|
Management contract or compensatory plan or arrangement. |
53