-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NMiR+rsVtqV0tt/3XCYqxt5Z4SIl8QAI6TVIUuza5PCEw8fDRFYXKpMbjKOTK+PZ PzQ2RVGkaZjz/qMY+leptg== 0000950134-99-004339.txt : 19990518 0000950134-99-004339.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950134-99-004339 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFFILIATED COMPUTER SERVICES INC CENTRAL INDEX KEY: 0000002135 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 510310342 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12665 FILM NUMBER: 99625684 BUSINESS ADDRESS: STREET 1: 2828 N HASKELL AVE STREET 2: PO BOX 219002 CITY: DALLAS STATE: TX ZIP: 75221 BUSINESS PHONE: 2148416111 MAIL ADDRESS: STREET 1: KEVIN KYSER STREET 2: 2828 N HASKELL CITY: DALLAS STATE: TX ZIP: 75221 FORMER COMPANY: FORMER CONFORMED NAME: ACS INVESTORS INC DATE OF NAME CHANGE: 19940603 10-Q 1 FORM 10-Q FOR QUARTER ENDED MARCH 31, 1999 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period from __________ to __________ Commission file number 0-24787 ------- AFFILIATED COMPUTER SERVICES, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 51-0310342 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2828 North Haskell, Dallas, Texas 75204 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (214) 841-6111 Not Applicable - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
NUMBER OF SHARES OUTSTANDING AS OF TITLE OF EACH CLASS MAY 12, 1999 ------------------------------------ ---------------------------------- Class A Common Stock, $.01 par value 45,911,582 Class B Common Stock, $.01 par value 3,299,686 ---------- 49,211,268
2 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES INDEX
PAGE PART I. FINANCIAL INFORMATION NUMBER Item 1. Consolidated Financial Statements: Consolidated Balance Sheets at March 31, 1999 and June 30, 1998 1 Consolidated Statements of Income for the Three Months and Nine Months Ended March 31, 1999 and 1998 2 Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1999 and 1998 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 5 - 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 11 Item 6. Exhibits and Reports on Form 8-K 12
3 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands)
MARCH 31, JUNE 30, 1999 1998 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 44,112 $ 75,888 ATM cash 8,700 8,100 Accounts receivable, net of allowance for doubtful accounts of $4,496 and $2,840, respectively 325,013 236,523 Inventory 13,816 9,911 Prepaid expenses and other current assets 41,658 24,455 Deferred taxes 5,889 10,210 ---------- ---------- Total current assets 439,188 365,087 Property and equipment, net of accumulated depreciation and amortization of $106,858 and $90,096, respectively 163,100 142,717 Software, net of accumulated amortization of $13,642 and $11,029, respectively 20,957 9,947 Goodwill, net of accumulated amortization of $37,267 and $25,846, respectively 543,867 373,236 Other intangible assets, net of accumulated amortization of $22,351 and $14,414, respectively 41,044 38,073 Long-term investments and other assets 28,694 20,738 ---------- ---------- Total assets $1,236,850 $ 949,798 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 33,202 $ 27,953 Accrued compensation and benefits 57,087 40,595 Other accrued liabilities 107,504 80,343 Notes payable and current portion of long-term debt 11,220 10,624 Current portion of unearned revenue 19,144 7,454 ---------- ---------- Total current liabilities 228,157 166,969 Convertible notes due 2005 230,000 230,000 Long-term debt 155,879 4,848 Deferred taxes 26,762 24,103 Other long-term liabilities 12,913 20,208 ---------- ---------- Total liabilities 653,711 446,128 ---------- ---------- Stockholders' equity: Class A common stock 459 449 Class B common stock 33 33 Additional paid-in capital 315,793 298,393 Retained earnings 266,854 204,795 ---------- ---------- Total stockholders' equity 583,139 503,670 ---------- ---------- Total liabilities and stockholders' equity $1,236,850 $ 949,798 ========== ==========
See notes to consolidated financial statements. 1 4 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ------------------------------- ------------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Revenues $ 435,884 $ 304,945 $ 1,190,874 $ 855,174 ----------- ----------- ----------- ----------- Expenses: Wages and benefits 196,518 129,218 515,670 363,435 Services and supplies 125,783 91,873 360,734 260,009 Rent, lease and maintenance 50,014 37,236 137,909 112,028 Depreciation and amortization 17,732 12,371 49,079 34,204 Merger costs -- -- -- 12,974 Other operating expenses 4,828 2,914 13,563 7,803 ----------- ----------- ----------- ----------- Total operating expenses 394,875 273,612 1,076,955 790,453 ----------- ----------- ----------- ----------- Operating income 41,009 31,333 113,919 64,721 Interest expense 4,916 3,285 12,084 8,807 Other non-operating income, net (1,916) (390) (3,080) (7,052) ----------- ----------- ----------- ----------- Pretax profit 38,009 28,438 104,915 62,966 Income tax expense 15,584 11,588 42,856 27,064 ----------- ----------- ----------- ----------- Net income $ 22,425 $ 16,850 $ 62,059 $ 35,902 =========== =========== =========== =========== Earnings per common share: Basic $ .46 $ .35 $ 1.27 $ .76 =========== =========== =========== =========== Diluted $ .43 $ .34 $ 1.20 $ .74 =========== =========== =========== =========== Shares used in computing earnings per common share: Basic 49,161 47,858 48,835 47,394 Diluted 56,047 50,011 55,674 48,923
See notes to consolidated financial statements. 2 5 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
NINE MONTHS ENDED MARCH 31, --------------------------- 1999 1998 --------- --------- Cash flows from operating activities: Net income $ 62,059 $ 35,902 --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 49,079 34,204 Non-cash portion of merger costs -- 2,250 Gain on redemption of preferred stock -- (6,742) Other 1,327 -- Changes in assets and liabilities, net of effects from acquisitions: Increase in ATM cash (600) (1,550) Increase in accounts receivable (45,901) (12,847) Increase in inventory (1,999) (980) Increase in prepaid expenses and other current assets (7,235) (3,010) Change in deferred taxes 24,857 10,678 (Increase) decrease in other long-term assets 559 (5,802) Decrease in accounts payable (4,319) (1,749) Increase (decrease) in accrued compensation and benefits 8,330 (2,672) Increase (decrease) in other accrued liabilities 10,147 (4,688) Change in income taxes receivable/payable (3,797) 10,276 Increase in unearned revenue 4,405 1,736 Decrease in other long-term liabilities (5,284) (11,590) --------- --------- Total adjustments 29,569 7,514 --------- --------- Net cash provided by operating activities 91,628 43,416 --------- --------- Cash flows from investing activities: Purchases of property, equipment and software, net of sales (47,896) (29,664) Payments for acquisitions, net of cash acquired (225,135) (69,918) Proceeds from the redemption of long-term investments -- 12,596 Additions to other intangible assets (6,680) (5,768) Other 458 (301) --------- --------- Net cash used in investing activities (279,253) (93,055) --------- --------- Cash flows from financing activities: Proceeds from issuance of long-term debt, net of issuance 183,003 329,926 costs Repayments of long-term debt (33,664) (239,555) Proceeds from stock options exercised and related tax 6,872 4,642 benefits Net borrowings of ATM debt 600 1,550 Dividends paid -- (377) Other, net (962) (227) --------- --------- Net cash provided by financing activities 155,849 95,959 --------- --------- Net increase in cash and cash equivalents (31,776) 46,320 Cash and cash equivalents at beginning of period 75,888 18,997 --------- --------- Cash and cash equivalents at end of period $ 44,112 $ 65,317 ========= =========
See notes to consolidated financial statements. 3 6 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Affiliated Computer Services, Inc. and its majority-owned subsidiaries (the "Company" or "ACS"). All material intercompany profits, transactions and balances have been eliminated. ACS provides a full range of information technology services including technology outsourcing, business process outsourcing, and systems integration and professional services primarily in North America, as well as Central America, South America, Europe and the Middle East. The financial information presented should be read in conjunction with the Company's consolidated financial statements for the year ended June 30, 1998. The foregoing unaudited consolidated financial statements reflect all adjustments (all of which are of a normal recurring nature) which are, in the opinion of management, necessary for a fair presentation of the results of the interim periods. The results for the interim periods are not necessarily indicative of results to be expected for the year. 2. BUSINESS COMBINATIONS During the quarter ended March 31, 1999, the Company completed the purchase of the remaining 5.1 million shares (the "Shares") of the common stock of BRC Holdings, Inc. ("BRC") at a purchase price of $19 per share. The total amount of funds used to acquire the Shares was approximately $104.7 million, which also included amounts due to BRC option holders. During the quarter ended December 31, 1998, the Company had purchased 63% of the issued and outstanding shares of BRC for approximately $165.4 million. The acquisition was accounted for under the purchase method of accounting with assets acquired of $298.5 million (including cash and other liquid investments of approximately $101.7 million) and liabilities assumed of $25.0 million for a net purchase price of $273.5 million. 3. EARNINGS PER SHARE In accordance with the Statement of Financial Accounting Standard No. 128, "Earnings per Share", the following table (in thousands except per share amounts) sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ---------------------- ---------------------- 1999 1998 1999 1998 ------- ------- ------- ------- Numerator: Numerator for earnings per share (basic) - Income available to common stockholders $22,425 $16,850 $62,059 $35,902 Effect of dilutive securities: Interest on 4% convertible debt 1,536 207 4,609 207 ------- ------- ------- ------- Numerator for earnings per share assuming dilution - income available to common stockholders $23,961 $17,057 $66,668 $36,109 ======= ======= ======= ======= Denominator: Weighted average shares outstanding (basic) 49,161 47,858 48,835 47,394 Effect of dilutive securities: 4% convertible debt 5,392 719 5,392 240 Stock options 1,494 1,120 1,315 1,013 Warrants and other -- 314 132 276 ------- ------- ------- ------- Total potential common shares 6,886 2,153 6,839 1,529 ------- ------- ------- ------- Denominator for earnings per share assuming dilution 56,047 50,011 55,674 48,923 ======= ======= ======= ======= Earnings per common share (basic) $ .46 $ .35 $ 1.27 $ .76 ======= ======= ======= ======= Earnings per common share assuming dilution $ .43 $ .34 $ 1.20 $ .74 ======= ======= ======= =======
4 7 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this MD&A regarding the Company's financial position, business strategy and plans and objectives of management of the Company for future operations are forward-looking statements, including statements regarding the Company's Year 2000 exposure. These forward-looking statements rely on a number of assumptions concerning future events and are subject to a number of uncertainties and other factors, many of which are outside of the Company's control, that could cause actual results to materially differ from such statements. While the Company believes that the assumptions concerning future events are reasonable, it cautions that there are inherent difficulties in predicting certain important factors, especially the timing and magnitude of technological advances; the performance of recently acquired businesses; the prospects for future acquisitions; the possibility that a current customer could be acquired or otherwise be affected by a future event that would diminish its information technology requirements; Year 2000 problems affecting the Company's and its clients' business; the competition in the information technology industry and the impact of such competition on pricing, revenues and margins; the degree to which business entities continue to outsource information technology and business processes; uncertainties surrounding budget reductions or changes in funding priorities or existing government programs and the cost of attracting and retaining highly skilled personnel. RESULTS OF OPERATIONS The following table sets forth certain items from the Company's consolidated statements of income as a percentage of revenues:
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ---------------------- ---------------------- 1999 1998 1999 1998 ------ ------ ------ ------ Revenues 100.0% 100.0% 100.0% 100.0% Expenses: Wages and benefits 45.1 42.4 43.3 42.5 Services and supplies 28.9 30.1 30.3 30.4 Rent, lease and maintenance 11.5 12.2 11.6 13.1 Depreciation and amortization 4.0 4.1 4.1 4.0 Merger costs -- -- -- 1.5 Other operating expenses 1.1 0.9 1.1 0.9 ------ ------ ------ ------ Total operating expenses 90.6 89.7 90.4 92.4 ------ ------ ------ ------ Operating income 9.4 10.3 9.6 7.6 Interest expense 1.1 1.1 1.0 1.0 Other non-operating income, net (.4) (0.1) (0.2) (0.8) ------ ------ ------ ------ Pretax profit 8.7 9.3 8.8 7.4 Income tax expense 3.6 3.8 3.6 3.2 ------ ------ ------ ------ Net income 5.1% 5.5% 5.2% 4.2% ====== ====== ====== ======
COMPARISON OF THE QUARTER ENDED MARCH 31, 1999 TO THE QUARTER ENDED MARCH 31, 1998 Revenues increased $131.0 million, or 43%, to $435.9 million in the quarter ended March 31, 1999 (the third quarter of the Company's 1999 fiscal year) from $304.9 million in the third quarter of fiscal 1998 due to acquisitions, increased volumes on certain contracts with federal agencies and the signing of new long-term contracts. Of the 43% increase in revenue, approximately 19% was from internal growth and 24% was from the five acquisitions completed since the third quarter of fiscal 1998. During the third quarter of fiscal 1999, the Company benefited from the signing of contracts in both the Company's commercial and federal government business lines subsequent to March 31, 1998. 5 8 Total operating expenses were $394.9 million in the third quarter of fiscal 1999, an increase of 44% from $273.6 million in the third quarter of fiscal 1998. Operating expenses as a percentage of revenues were 90.6% in the third quarter of fiscal 1999 as compared to 89.7% in the third quarter of fiscal 1998. Wages and benefits increased as a percentage of revenue from 42.4% in the third quarter of fiscal 1998 to 45.1% in the third quarter of fiscal 1999 due to the continued growth in the Company's business process outsourcing line. Services and supplies as a percentage of revenues decreased from 30.1% in the third quarter of fiscal 1998 to 28.9% in the third quarter of fiscal 1999 primarily due to recent acquisitions. Rent, lease and maintenance expense decreased from 12.2% of revenues in the third quarter of fiscal 1998 to 11.5% in the third quarter of fiscal 1999 primarily due to the change in business line mix with the professional services acquisitions made during the last twelve months, which have a smaller component of rent, lease and maintenance expense. Operating income increased $9.7 million, or 31%, to $41.0 million in the third quarter of fiscal 1999, as compared to the third quarter of fiscal 1998. The increase was due to internal growth and acquisitions since the third quarter of fiscal 1998. Operating income as a percentage of revenue decreased from 10.3% in the third quarter of fiscal 1998 to 9.4% in the third quarter of fiscal 1999 primarily due to growth in the Company's federal government business, which has lower operating margins than Company average, as well as startup expenses associated with new contracts in the commercial business process outsourcing line. Interest expense increased $1.6 million to $4.9 million in the third quarter of fiscal 1999, compared to $3.3 million in the third quarter of fiscal 1998, primarily due to increased borrowings under the Company's credit facility and the issuance in March 1998 of 4% convertible notes to finance acquisitions. The Company's effective tax rate of approximately 41% in the third quarter of fiscal 1999 exceeded the federal statutory rate of 35%, due primarily to the amortization of certain acquisition-related costs that are non-deductible for tax purposes, plus the net effect of state income taxes. COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 1999 TO THE NINE MONTHS ENDED MARCH 31, 1998 Revenues increased $335.7 million, or 39%, to $1.19 billion for the nine months ended March 31, 1999 from $855.2 million for the same period in fiscal 1998 due to acquisitions, increased volumes on certain contracts with federal agencies and the signing of new long-term contracts. Of the 39% increase in revenue, approximately 21% was from internal growth and 18% was from the five acquisitions completed during the nine months ended March 31, 1999. Total operating expenses were $1.08 billion in the first nine months of fiscal 1999, an increase of 39% from $777.5 million, excluding $13.0 million of merger costs, in the first nine months of fiscal 1998. Excluding merger costs, operating expenses decreased from 90.9% of revenues in the first nine months of fiscal 1998 to 90.4% in the first nine months of fiscal 1999, primarily due to a $6.0 million non-recurring charge in the first quarter of fiscal 1998 for a binding commitment to a hardware lessor to terminate a computer lease obligation prior to its expiration. Wages and benefits increased as a percentage of revenue from 42.5% in the third quarter of fiscal 1998 to 43.3% in the third quarter of fiscal 1999 due to the continued internal and acquisition growth in the business process outsourcing line. Rent, lease and maintenance expense for the first nine months of fiscal 1998 contains the $6.0 million non-recurring charge mentioned above. Excluding this $6.0 million charge, rent, lease and maintenance expense as a percentage of revenue decreased from 12.4% in the first nine months of fiscal 1998 to 11.6% in the first nine months of fiscal 1999 primarily due to the change in business line mix with the professional services acquisitions made during fiscal 1999, which have a smaller component of rent, lease and maintenance expense. After excluding the $13.0 million of merger costs in the first nine months in fiscal 1998, operating income increased $36.2 million, or 47%, to $113.9 million in the first nine months of fiscal 1999. The increase was due to internal revenue growth and acquisitions since the third quarter of fiscal 1998. Interest expense increased $3.3 million to $12.1 million in the first nine months of fiscal 1999, compared to $8.8 million in the first nine months of fiscal 1998. This increase in interest expense is due to increased borrowings on the Credit Facility and the issuance in March 1998 of 4% convertible notes to finance acquisitions. Other non-operating income for the first nine months of fiscal 1998 includes the recognition of a $6.7 million gain upon the redemption of the Company's investment in a customer's preferred stock. 6 9 The Company's effective tax rate of 41% in the first nine months of fiscal 1999 exceeded the federal statutory rate of 35% due primarily to the amortization of certain acquisition-related costs that are non-deductible for tax purposes, plus the net effect of state income taxes. The Company's effective rate for the first nine months of fiscal 1998 was approximately 43% primarily due to certain non-deductible merger costs. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1999, the Company's liquid assets, consisting of cash and cash equivalents, totaled $52.8 million, compared to $84.0 million at June 30, 1998. Working capital was $211.0 million and $198.1 million at March 31, 1999 and June 30, 1998, respectively, an increase of $12.9 million primarily due to the working capital of the companies acquired during the first nine months of fiscal 1999. Net cash provided by operating activities was $91.6 million for the first nine months of fiscal 1999, compared with $43.4 million provided by operating activities during the first nine months of fiscal 1998. The increase in cash flow was primarily due to an increase in net income in the first nine months of fiscal 1999 as compared to the first nine months of fiscal 1998. The Company used $279.3 million in investing activities for the nine months ended March 31, 1999 due to $225.1 million being used for acquisitions and $47.9 million being used for capital expenditures. Net cash provided by investing activities in the first nine months of fiscal 1998 included $12.6 million received from the redemption of a preferred stock investment. Cash flow from financing activities was $155.8 million in the first nine months of fiscal 1999 as compared to $96.0 million provided by financing activities for the first nine months of fiscal 1998. This increase in financing activities was primarily due to net borrowings on the Credit Facility of $149.3 million to fund the acquisition of BRC during the first nine months of fiscal 1999. As of March 31, 1999, the Company had $155.0 million in outstanding borrowings under the Credit Facility. After considering outstanding letters of credit, the Company has approximately $36.8 million available for use under the Credit Facility at March 31, 1999. The Company has an ATM Cash Facility of $11.0 million, of which $8.7 million was outstanding as of March 31, 1999, which expires December 1999. The Company also has two vault cash custody agreements with financial institutions which provide the use of up to $52.0 million in cash in Company-owned ATMs. Cash outstanding under the cash custody agreements at March 31, 1999 was approximately $44.9 million, and is not an asset or liability of the Company and therefore not recorded on the accompanying consolidated balance sheets. The larger custody agreement for $50 million expires February 2001. The remaining cash custody agreement expires January 2001. Recently enacted federal regulations governing financial institutions' cash requirements have allowed financial institutions to significantly reduce their vault cash reserves, which may limit ACS' ability to secure similar cash custody agreements when its current arrangements expire. The Company's management believes that available cash and cash equivalents, together with cash generated from operations and available borrowings under its credit facilities, will provide adequate funds for the Company's anticipated needs, including working capital, capital expenditures and ATM cash requirements. Management also believes that cash provided by operations will be sufficient to satisfy all existing debt obligations as they become due. Additional acquisition opportunities, however, requiring significant commitments of capital, may arise. In order to pursue such opportunities, the Company may be required to incur debt or to issue potentially dilutive equity securities in the future. However, no assurance can be given as to the Company's future acquisition and expansion opportunities and how such opportunities would be financed. YEAR 2000 The following statements and all other statements made in this Quarterly Report on Form 10-Q with respect to the Company's Year 2000 processing capabilities or readiness are "Year 2000 Readiness Disclosures" in conformance with the Year 2000 Information and Readiness Disclosure Act of 1998 (Public Law 105-271, 112 Stat. 2386). General Some computers, software, and other equipment include computer code in which calendar year data is abbreviated to only two digits. As a result of this design decision, some of these systems could fail to operate or fail to produce correct results if "00" is interpreted to mean 1900, rather than 2000. These problems are widely expected to increase in frequency and severity as the year 2000 approaches, and are commonly referred to as the "Year 2000 Problem." 7 10 ACS acts as an intermediary for the transfer of data between its clients and third parties. In this capacity, ACS supplies the operating and technical resources to cause electronic data to be transmitted between ACS and third parties. With regard to Year 2000 Problems affecting its or its clients business, ACS generally undertakes to test and modify system software and hardware platforms used in transmitting such data. In doing so, ACS relies on representations from third party vendors of system software and hardware platforms. The Company has a Year 2000 Management Control System (MCS) to monitor and track the progress toward meeting the requirements to remediate the Year 2000 Problem. ACS also has a full-time Year 2000 project manager who not only manages the MCS, but also assists in identifying points of concern and providing solutions. Additionally, ACS has designated one person from each business unit as a single point of contact for Year 2000 issues. This person coordinates all Year 2000 concerns and issues with third parties within his particular area. Accordingly, under the MCS, each business unit of ACS receives monthly reports from each of its operating units. At least bi-monthly, each business unit prepares an executive summary of its progress. The Year 2000 project manager uses these reports to prepare a monthly summary of corporate Year 2000 activities for executive management and for the Audit Committee of the Board of Directors. Status of Year 2000 Readiness The Company's MCS at each business unit consists of the following five phases: awareness, assessment, renovation, validation and implementation. The awareness phase consists of defining the scope of the Year 2000 Problem and establishing a corporate infrastructure and overall strategy to perform compliance work. The assessment phase must identify all hardware, software, networks, automatic teller machines, other various processing platforms and customer and vendor interdependencies affected by the Year 2000 Problem. This assessment must go beyond information systems and include environmental systems that are dependent on embedded microchips, such as security systems elevators and vaults. Management also evaluates the Year 2000 effect on other strategic business initiatives. The assessment considers the potential effect that mergers and acquisitions, major system development, corporate alliances and system independences will have on existing systems and/or potential Year 2000 issues that may arise from acquired systems. The renovation phase includes code enhancements, hardware and software upgrades, system replacements, vendor certification and other associated changes. The validation process includes the testing of incremental changes to hardware and software components. Finally, in the implementation phase, systems should be certified as Year 2000 compliant and be accepted by the business users. For those systems which are not compliant, the consequences will be assessed and any contingency plans put into effect. For mission critical projects, the Company has generally completed the awareness and assessment phases and will substantially complete the remaining phases before June 30, 1999. In addition to developing an internal risk assessment methodology with respect to the Year 2000 Problem, ACS is subject to external examinations and project reviews by regulatory agencies and governmental bodies of the federal government. To date, these examinations have not identified any material issues regarding our remediation efforts. The Company has not generally obtained verification or validation by independent third parties of its processes to assess Year 2000 Problems, its corrections of Year 2000 Problems or the costs associated with these activities. However, the Company's Year 2000 program team is reviewing the project plans prepared by each of the Company's business units and monitoring their methods and progress against those plans. Internal Infrastructure The Company believes that it has identified most of the major computers, software applications, and related equipment used in connection with its internal operations that must be modified, upgraded, or replaced to minimize the possibility of a material disruption to its business. The Company has commenced the process of modifying, upgrading, and replacing major systems that have been assessed as adversely affected, and expects to complete this process before the occurrence of any material disruption of its business. Client Systems We are attempting to coordinate with our clients regarding their activities related to the Year 2000 Problem. Most of our clients maintain their own application programs, although they use our computer and network resources. We generally do not have contractual responsibility to ensure that our clients' application programs are compliant. However, our business could be adversely affected if our clients experience Year 2000 problems with such applications, causing them to use less of our computing resources, alter their pattern of usage of resources or dedicate less of their information processing budgets to projects we conduct. We do undertake to test and modify system software and hardware platforms that are represented by the vendors thereof as being Year 2000 compliant. If our vendors fail to provide Year 2000 compliant versions of their system software, our business could be materially affected. 8 11 Vendors The Company has mailed questionnaires to substantially all third party vendors and suppliers of the major computers, software, and other equipment used, operated, or maintained by the Company for itself or its clients to identify and, to the extent possible, to resolve issues involving the Year 2000 Problem. Responses to these questionnaires are verified against information included with current releases of vendors' products and services and on vendor web sites and are shared with ACS' clients. In addition, operating units are instructed not to acquire hardware, software or other technology that is not contractually represented by the vendor as Year 2000 compliant. However, the Company has limited or no control over the actions of these third party vendors. Thus, while the Company expects that it will be able to resolve any significant issues with these systems related to the Year 2000 Problem, there can be no assurance that the Company's vendors will resolve any or all issues with these systems related to the Year 2000 Problem, before the occurrence of a material disruption to the business of the Company or any of its clients. Any failure of these third parties to timely resolve Year 2000 Problems with their systems could have a material adverse effect on the Company's business, financial condition, and results of operation. Systems Other than Information Technology Systems. In addition to computers and related systems, the operation of office and facilities equipment, such as fax machines, photocopiers, telephone switches, security systems, elevators, air conditioning, fire systems and other common devices may be affected by the Year 2000 Problem. The Company is currently assessing the potential effect of, and costs of remediating, the Year 2000 Problem on its office and facilities equipment. In addition, the Company has initiated a project to assess whether all major leased facilities are Year 2000 compliant. Costs Of the approximately $15 million of estimated expenditures for Year 2000 remediation projects, approximately $11 million relates to costs incurred in the ordinary course of business and $4 million is incremental costs solely attributable to Year 2000 related problems. Of the $15 million, approximately $11 million has been incurred through March 31, 1999 and a majority of the remainder is expected to be incurred by the end of June 1999. This estimate is being monitored and will be revised as additional information becomes available. The costs required to achieve substantial Year 2000 compliance or failure to do so could have a material adverse impact on our business, financial condition and results of operations. Most Likely Consequences of Year 2000 Problems The Company expects to identify and resolve all Year 2000 Problems that could materially adversely affect its business operations. However, management believes that it is not possible to determine with complete certainty that all Year 2000 Problems affecting the Company or its clients have been identified or corrected. The number of devices that could be affected and the interactions among these devices are simply too numerous. In addition, no one can accurately predict how many Year 2000 Problem-related failures will occur or the severity, duration, or financial consequences of these perhaps inevitable failures. As a result, management believes that the following consequences are possible: o a significant number of operational inconveniences and inefficiencies for the Company and its clients that will divert management's time and attention and financial and human resources from ordinary business activities; o a lesser number of serious system failures that will require significant efforts by the Company or its clients to prevent or alleviate material business disruptions; o several routine business disputes and claims for pricing adjustments or penalties due to Year 2000 Problems incurred by clients, which will be resolved in the ordinary course of business; and o a few serious business disputes alleging that the Company failed to comply with the terms of contracts or industry standards of performance, some of which could result in litigation or contract termination. Contingency Plans The Company is currently developing contingency plans to be implemented if its efforts to identify and correct Year 2000 Problems affecting its internal systems are not effective. At this time, business units comprising approximately 30% of fiscal 1998 revenues have completed formal contingency plans. For mission critical projects, the Company expects to complete its contingency plans for most of its remaining business groups by the end of June 1999. Depending on the systems affected, these plans could include accelerated replacement of affected equipment or software; short- to medium-term use of backup sites, equipment, and software, increased work hours for Company personnel; use of contract personnel to correct on an accelerated schedule any Year 2000 Problems that arise or to provide manual workarounds for 9 12 information systems; and similar approaches. If the Company is required to implement any of these contingency plans, it could have a material adverse effect on the Company's financial condition and results of operations. Disclaimer The discussion of the Company's efforts, and management's expectations, relating to Year 2000 compliance are forward-looking statements. The Company's ability to achieve Year 2000 compliance and the level of incremental costs associated therewith, could be adversely affected by, among other things, the availability and cost of programming and testing resources, third party suppliers' ability to modify proprietary software, and unanticipated problems identified in the ongoing compliance review. NEW ACCOUNTING STANDARDS In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative and Hedging Activities", was issued. SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company is evaluating the impact of SFAS 133 on the Company's future earnings and financial position, but does not expect it to be material. In April 1998, Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up Activities", was issued. This SOP provides guidance on the financial reporting of start-up and organization costs and requires that these costs be expensed as incurred. The provisions of SOP 98-5 are effective for financial statements for fiscal years beginning after December 15, 1998, although early adoption is allowed. The adoption of SOP 98-5 is not expected to have a material impact on the Company's financial statements. The Company will adopt the provisions of this SOP on July 1, 1999. In June 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", were issued. SFAS No. 130 establishes standards for reporting comprehensive income and its components with the same prominence as other financial statements. The Company adopted SFAS No. 130 on July 1, 1998; however, the Company does not have any items of comprehensive income that would require disclosure in the periods presented. SFAS No. 131 establishes standards for reporting information about operating segments in annual and interim financial statements, although this statement need not be applied to interim financial statements in the initial year of its application. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997, and therefore the Company will adopt its requirements in connection with its annual reporting for the year ending June 30, 1999. 10 13 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES PART II. OTHER INFORMATION Item 1. Legal Proceedings On December 16, 1998, a state district court in Houston, Texas entered final judgment against the Company in a lawsuit brought by twenty-one former employees of Gibraltar Savings Association and/or First Texas Savings Association (collectively, "GSA/FTSA"). The GSA/FTSA employees alleged that they were entitled to the value of 401,541 shares of the Company's stock pursuant to options issued to the GSA/FTSA employees in 1988 in connection with a former data processing services agreement between GSA/FTSA and the Company. The judgment against the Company was for approximately $17 million, which includes attorneys' fees and prejudgment interest, but excludes additional attorneys' fees of approximately $850,000 which could be awarded in the event the plaintiffs are successful upon appeal and final judgment. The Company continues to believe that it has a meritorious defense to all or a substantial portion of the Plaintiffs' claims. The Company filed its appeal of the judgment on March 15, 1999 and plans to vigorously pursue the appeal. The Plaintiffs also have filed a notice of appeal. Should the proceedings not be favorably resolved on appeal, the Company may be subject to a material charge. A putative class action complaint by Matador Capital Management Corporation, among other plaintiffs, against BRC, the Company and the directors of BRC at that time, was filed on October 30, 1998 in the Court of Chancery of the State of Delaware alleging, among other things, misstatements and omissions by BRC in documents mailed to the stockholders of BRC in connection with the tender offer, breaches of the fiduciary duties of the board of directors of BRC and the aiding and abetting of these alleged breaches of fiduciary duties by the Company. On November 25, 1998, the Court of Chancery issued an opinion and related order denying Matador's motion for a preliminary injunction except insofar as it sought to require the disclosure and dissemination of additional information outlined in the opinion to BRC's stockholders by the Company. On December 2, 1998, the Court of Chancery entered a further order permitting the tender offer to be consummated on December 14, 1998, following dissemination by BRC to its stockholders of a disclosure reviewed by the Court of Chancery. BRC mailed the disclosure to its stockholders on December 2, 1998. No BRC stockholders exercised their dissenter's rights under Delaware law in connection with the merger of a subsidiary of the Company with and into BRC, which was concluded on February 12, 1999. BRC and the Company anticipate prompt settlement of Matador's remaining claims for an immaterial sum. On February 11, 1999, and on or about April 16, 1999, Caremark, Inc., one of the Company's significant outsourcing clients, filed separate lawsuits in federal district court in Illinois alleging that the Company had breached contractual obligations to provide certain information and pricing reductions and a price quote for cost plus pricing to Caremark. Caremark seeks to terminate the contract, which comprised approximately 1.5% of the Company's revenues for the nine month period ended March 31, 1999. Caremark's pleadings also request damages in the millions of dollars, without further specificity. The Company feels that it has complied with all contractual obligations, provided the required information and is not contractually obligated to provide the price reduction. On February 25, 1999, the Company filed a lawsuit in County Court in Dallas, Texas against Caremark and its parent, MedPartners, Inc., alleging that Caremark and MedPartners, Inc. have caused significant injury to the Company by trying to manufacture a basis to repudiate this contract and to avoid payment and other obligations. The Company is asking for actual, consequential and punitive damages. Although the Company cannot predict the outcome of either of these lawsuits, if the Company is unsuccessful, the resulting losses could hurt the Company's revenues and profitability. The Company is subject to certain other legal proceedings, claims and disputes which arise in the ordinary course of the Company's business. Although the Company cannot predict the outcomes of these legal proceedings, the Company's management does not believe these actions will have a material adverse effect on the Company's financial position, results of operations or liquidity. However, if unfavorably resolved, these proceedings could have a material adverse effect on the Company's financial position, results of operations and liquidity. 11 14 Item 6. Exhibits and Reports on Form 8-K a) Exhibits: * 3.(ii). Bylaws of the Company, as amended and in effect on February 15, 1999 * 10.(iii)(A). Employment Agreement between the Company and Darwin Deason, Chairman of the Board, dated February 16, 1999 * 27. Financial Data Schedule b) Reports on Form 8-K: On February 5, 1999 the Company filed a Current Report on Form 8-K/A to report the historical and proforma financial statements of BRC Holdings, Inc. * Filed herewith 12 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 14th day of May 1999. AFFILIATED COMPUTER SERVICES, INC. By: /s/ Mark A. King ------------------------------------- Mark A. King Executive Vice President and Chief Financial Officer 13 16 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------ ----------- * 3.(ii). Bylaws of the Company, as amended and in effect on February 15, 1999 * 10.(iii)(A). Employment Agreement between the Company and Darwin Deason, Chairman of the Board, dated February 16, 1999 * 27. Financial Data Schedule
* Filed herewith EX-3.(II) 2 BYLAWS OF THE COMPANY 1 EXHIBIT 3(ii) BYLAWS OF AFFILIATED COMPUTER SERVICES, INC. As Amended and in Effect on February 15, 1999 2 TABLE OF CONTENTS
Page ---- STOCKHOLDERS' MEETINGS...................................................................................1 1. Time and Place of Meetings..........................................................................1 2. Annual Meeting......................................................................................1 3. Special Meetings ...................................................................................1 4. Notice of Meetings..................................................................................1 5. Inspectors .........................................................................................1 6. Quorum .............................................................................................1 7. Voting .............................................................................................2 8. Order of Business ..................................................................................2 DIRECTORS................................................................................................4 9. Function ...........................................................................................4 10. Number, Election, and Terms.........................................................................4 11. Vacancies and Newly Created Directorships ..........................................................4 12. Removal.............................................................................................4 13. Nominations of Directors: Election..................................................................4 14. Resignation.........................................................................................5 15. Regular Meeting.....................................................................................6 16. Special Meetings ...................................................................................6 17. Quorum .............................................................................................6 18. Participation in Meetings by Telephone Conference...................................................6 19. Committees..........................................................................................6 20. Compensation .......................................................................................7 21. Rules ..............................................................................................7 NOTICES..................................................................................................7 22. Generally...........................................................................................7 23. Waivers.............................................................................................7 OFFICERS.................................................................................................8 24. Generally...........................................................................................8 25. Compensation........................................................................................8 26. Succession..........................................................................................8 27. Authority and Duties................................................................................8 STOCK....................................................................................................8 28. Certificates........................................................................................8 29. Classes of Stock....................................................................................9 30. Transfers...........................................................................................9 31. Lost, Stolen, or Destroyed Certificates.............................................................9 32. Record Dates........................................................................................9
3 INDEMNIFICATION.........................................................................................10 33. Damages and Expenses...............................................................................10 34. Insurance, Contracts and Funding...................................................................10 GENERAL.................................................................................................11 35. Fiscal Year........................................................................................11 36. Seal...............................................................................................11 37. Reliance upon Books, Reports, and Records..........................................................11 38. Time Periods.......................................................................................11 39. Amendments.........................................................................................11 40. Certain Defined Terms..............................................................................11
4 STOCKHOLDERS' MEETINGS 1. Time and Place of Meetings. All meetings of the stockholders for the election of Directors or for any other purpose will be held at such time and place, within or without the State of Delaware, as may be designated by the Board of Directors or, in the absence of a designation by the Board of Directors, the Chairman of the Board of Directors, the President, or the Secretary, and stated in the notice of meeting. The Board of Directors may postpone and reschedule any previously scheduled annual or special meeting of the stockholders. 2. Annual Meeting. An annual meeting of the stockholders will be held at such date and time as may be designated from time to time by the Board of Directors, at which meeting the stockholders will elect by a plurality vote the Directors to succeed those whose terms expire at such meeting and will transact such other business as may properly be brought before the meeting in accordance with Bylaw 8. 3. Special Meetings. Special meetings of the stockholders may be called only by (a) the Chairman of the Board of Directors, and (b) the Secretary within 10 calendar days after receipt of the written request of a majority of the Whole Board of Directors. Any such request by a majority of the Whole Board of Directors must be sent to the Chairman of the Board of Directors and the Secretary and must state the purpose or purposes of the proposed meeting. Special meetings of holders of the outstanding Preferred Stock, if any, may be called in the manner and for the purposes provided in the applicable Preferred Stock Designation. 4. Notice of Meetings. Written notice of every meeting of the stockholders, stating the place, date, and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, will be given not less than 10 nor more than 60 calendar days before the date of the meeting to each stockholder of record entitled to vote at such meeting, except as otherwise provided herein or by law. When a meeting is adjourned to another place, date, or time, written notice need not be given of the adjourned meeting if the place, date, and time thereof are announced at the meeting at which the adjournment is taken; provided however, that if the adjournment is for more than 30 calendar days, or if after the adjournment a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting must be given in conformity herewith. At any adjourned meeting, any business may be transacted which properly could have been transacted at the original meeting. 5. Inspectors. The Board of Directors may appoint one or more inspectors of election to act as judges of the voting and to determine those entitled to vote at any meeting of the stockholders, or any adjournment thereof, in advance of such meeting. The Board of Directors may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the presiding officer of the meeting may appoint one or more substitute inspectors. 6. Quorum. Except as otherwise provided by law or in a Preferred Stock Designation, the holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, will constitute a quorum at all meetings of the stockholders for the 1 5 transaction of business thereat. If, however, such quorum is not present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, will have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. 7. Voting. Except as otherwise provided by law, by the Certificate of Incorporation, or in a Preferred Stock Designation, each stockholder will be entitled at every meeting of the stockholders to one vote for each share of stock having voting power standing in the name of such stockholder on the books of the Company on the record date for the meeting and such votes may be cast either in person or by written proxy. Every proxy must be duly executed and filed with the Secretary. A stockholder may revoke any proxy that is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary. The vote upon any question brought before a meeting of the stockholders may be by voice vote, unless otherwise required by the Certificate of Incorporation or these Bylaws or unless the Chairman of the Board of Directors or the holders of a majority of the outstanding shares of all classes of stock entitled to vote thereon present in person or by proxy at such meeting otherwise determine. Every vote taken by written ballot will be counted by the inspectors of election. When a quorum is present at any meeting, the affirmative vote of the holders of a majority of the stock present in person or represented by proxy at the meeting and entitled to vote on the subject matter and which has actually been voted will be the act of the stockholders, except in the election of Directors or as otherwise provided in these Bylaws, the Certificate of Incorporation, a Preferred Stock Designation, or by law. 8. Order of Business. (a) The Chairman of the Board of Directors, or such other officer of the Company designated by a majority of the Whole Board of Directors, will call meetings of the stockholders to order and will act as presiding officer thereof. Unless otherwise determined by the Board of Directors prior to the meeting, the presiding officer of the meeting of the stockholders will also determine the order of business and have the authority in his or her sole discretion to regulate the conduct of any such meeting, including, without limitation, by imposing restrictions on the persons (other than stockholders of the Company or their duly appointed proxies) who may attend any such stockholders' meeting, by ascertaining whether any stockholder or his proxy may be excluded from any meeting of the stockholders based upon any determination by the presiding officer, in his sole discretion, that any such person has unduly disrupted or is likely to disrupt the proceedings thereat, and by determining the circumstances in which any person may make a statement or ask questions at any meeting of the stockholders. (b) At an annual meeting of the stockholders, only such business will be conducted or considered as is properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors in accordance with Bylaw 4, (ii) otherwise properly brought before the meeting by the presiding officer or by or at the direction of a majority of the Whole Board of Directors, or (iii) otherwise properly requested to be brought before the meeting by a stockholder in accordance with Bylaw 8(c). 2 6 (c) In order to properly submit any business to an annual meeting of stockholders, a stockholder must give timely notice in writing to the Secretary of the Company. To be considered timely, a stockholder's notice must be delivered either in person or by United States certified mail, postage prepaid, and received at the principal executive offices of the Company (a) not less than 120 days nor more than 150 days before the first anniversary date of the Company's proxy statement in connection with the last annual meeting of stockholders or (b) if no annual meeting has been called after the expiration of more than 30 days from the date for such meeting contemplated at the time of the previous year's proxy statement, not less than a reasonable time, as determined by the Board of Directors, prior to the date of the applicable annual meeting. The Secretary of the Company will deliver any stockholder proposals and nominations received in a timely manner for review by the Board of Directors or a committee designated by the Board of Directors. A stockholder's notice to submit business to an annual meeting of stockholders will set forth (i) the name and address of the stockholder, (ii) the class and number of shares of stock beneficially owned by such stockholder, (iii) the name in which such shares are registered on the stock transfer books of the Company, (iv) a representation that the stockholder intends to appear at the meeting in person or by proxy to submit the business specified in such notice, (v) any material interest of the stockholder in the business to be submitted, and (vi) a brief description of the business desired to be submitted to the annual meeting, including the complete text of any resolutions to be presented at the annual meeting, and the reasons for conducting such business at the annual meeting. In addition, the stockholder making such proposal will promptly provide any other information reasonably requested by the Company. Notwithstanding the foregoing provisions of this Bylaw 8(c), a stockholder who seeks to have any proposal included in the Company's proxy statement will comply with the requirements of Regulation 14A under the Securities Exchange Act of 1934, as amended. (d) At a special meeting of stockholders, only such business may be conducted or considered as is properly brought before the meeting. To be properly brought before a special meeting, business must be (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Chairman of the Board of Directors or a majority of the Whole Board of Directors in accordance with Bylaw 4, or (ii) otherwise properly brought before the meeting by the presiding officer or by or at the direction of a majority of the Whole Board of Directors. (e) The determination of whether any business sought to be brought before any annual or special meeting of the stockholders is properly brought before such meeting in accordance with this Bylaw will be made by the presiding officer of such meeting. If the presiding officer determines that any business is not properly brought before such meeting, he or she will so declare to the meeting and any such business will not be conducted or considered. 3 7 DIRECTORS 9. Function. The business and affairs of the Company will be managed under the direction of its Board of Directors. 10. Number, Election, and Terms. (a) Subject to the rights, if any, of any series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation and to the minimum and maximum number of authorized Directors provided in the Certificate of Incorporation, the authorized number of Directors may be determined from time to time only by a vote of a majority of the Whole Board of Directors. The Directors, other than those who may be elected by the holders of any series of the Preferred Stock, will be classified with respect to the time for which they severally hold office in accordance with the Certificate of Incorporation. (b) Notwithstanding anything contained in the Certificate of Incorporation or these Bylaws to the contrary, the term of any Director who is also an officer of the Company will terminate automatically, without any further action on the part of the Board of Directors or such Director, upon the termination for any reason of such Director in his or her capacity as an officer of the Company. Notwithstanding anything contained in the Certificate of Incorporation or these Bylaws to the contrary, the affirmative vote of at least 80% of the Directors then in office will be required to amend, repeal, or adopt any provision inconsistent with this Bylaw 10(b). 11. Vacancies and Newly Created Directorships. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation, newly created directorships resulting from any increase in the number of Directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal, or other cause will be filled solely by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board of Directors, or by a sole remaining Director. Any Director elected in accordance with the preceding sentence will hold office for the remainder of the full term of the class of Directors in which the new directorship was created or the vacancy occurred and until such Director's successor is elected and qualified. No decrease in the number of Directors constituting the Board of Directors will shorten the term of an incumbent Director. 12. Removal. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation, any Director may be removed from office by the stockholders only for cause and only in the manner provided in the Certificate of Incorporation. 13. Nominations of Directors; Election. (a) Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional Directors under circumstances specified in a Preferred Stock Designation, only persons who are nominated in accordance with the following procedures will be eligible for election at a meeting of stockholders as Directors of the Company. (b) Nominations of persons for election as Directors of the Company may be made at an annual meeting of stockholders only (i) by or at the direction of the Board of Directors or (ii) by any 4 8 stockholder who is a stockholder of record at the time of giving of notice provided for in this Bylaw 13, who is entitled to vote for the election of Directors at such meeting, and who complies with the procedures set forth in this Bylaw 13. All nominations by stockholders must be made pursuant to timely notice in proper written form to the Secretary. (c) Nominations by stockholders, if made, must be made pursuant to timely notice in writing to the Secretary of the Company. To be timely, a stockholder's notice will be delivered to or mailed and received at the principal executive offices of the Company (a) with respect to an election to be held at the annual meeting of the stockholders of the Company, not less than 120 nor more than 150 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the Company, and (b) with respect to an election to be held at a special meeting of stockholders of the Company for the election of Directors, not later than the close of business on the tenth day following the date on which notice of the date of the special meeting was mailed to stockholders of the Company or public disclosure of the date of the special meeting was made, whichever first occurs. Such stockholder's notice to the Secretary will set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a Director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serve as a Director if elected), and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Company's books, of such stockholder and (ii) the class and number of shares of voting stock of the Company which are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director will furnish to the Secretary of the Company that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. In the event that a person is validly designated as a nominee to the Board of Directors in accordance with the procedures set forth in this Bylaw 13(c) and thereafter becomes unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the stockholder who proposed such nominee, as the case may be, may designate a substitute nominee. The presiding officer of the meeting of stockholders will, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these bylaws, and if he should so determine, he will so declare to the meeting and the defective nomination will be disregarded. Notwithstanding the foregoing provisions of this Bylaw 13(c), a stockholder will also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Bylaw 13(c). 14. Resignation. Any Director may resign at any time by giving written notice of his resignation to the Chairman of the Board of Directors or the Secretary. Any resignation will be effective upon actual receipt by any such person or, if later, as of the date and time specified in such written notice. 5 9 15. Regular Meetings. Regular meetings of the Board of Directors may be held immediately after the annual meeting of the stockholders and at such other time and place either within or without the State of Delaware as may from time to time be determined by the Board of Directors. Notice of regular meetings of the Board of Directors need not be given. 16. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors or the President on one day's notice to each Director by whom such notice is not waived, given either personally or by mail, telephone, telegram, telex, facsimile, or similar medium of communication, and will be called by the Chairman of the Board of Directors or the President in like manner and on like notice on the written request of five or more Directors. Special meetings of the Board of Directors may be held at such time and place either within or without the State of Delaware as is determined by the Board of Directors or specified in the notice of any such meeting. 17. Quorum. At all meetings of the Board of Directors, a majority of the total number of Directors then in office will constitute a quorum for the transaction of business. Except for the designation of committees as hereinafter provided and except for actions required by these Bylaws or the Certificate of Incorporation to be taken by a majority of the Whole Board of Directors, the act of a majority of the Directors present at any meeting at which there is a quorum will be the act of the Board of Directors. If a quorum is not present at any meeting of the Board of Directors, the Directors present thereat may adjourn the meeting from time to time to another place, time, or date, without notice other than announcement at the meeting, until a quorum is present. 18. Participation in Meetings by Telephone Conference. Members of the Board of Directors or any committee designated by the Board of Directors may participate in a meeting of the Board of Directors or any such committee, as the case may be, by means of telephone conference or similar means by which all persons participating in the meeting can hear other, and such participation in a meeting will constitute presence in person at the meeting. 19. Committees. (a) The Board of Directors, by resolution passed by a majority of the Whole Board of Directors, may designate one or more directorate committees, each such committee to consist of one or more Directors and each to have such lawfully delegable powers and duties as the Board of Directors may confer. (b) Each committee of the Board of Directors will serve at the pleasure of the Board of Directors or as may be specified in any resolution from time to time adopted by the Board of Directors. The Board of Directors may designate one or more Directors as alternate members of any such committee, who may replace any absent or disqualified member at any meeting of such committee. In lieu of such action by the Board of Directors, in the absence or disqualification of any member of a committee of the Board of Directors, the members thereof present at any such meeting of such committee and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. 6 10 (c) Except as otherwise provided in these Bylaws or by law, any committee of the Board of Directors, to the extent provided in the resolution of the Board of Directors, will have and may exercise all the powers and authority of the Board of Directors in the direction of the management of the business and affairs of the Company. Any such committee designated by the Board of Directors will have such name as may be determined from time to time by resolution adopted by the Board of Directors. Unless otherwise prescribed by the Board of Directors, a majority of the members of any committee of the Board of Directors will constitute a quorum for the transaction of business, and the act of a majority of the members present at a meeting at which there is a quorum will be the act of such committee. Each committee of the Board of Directors may prescribe its own rules for calling and holding meetings and its method of procedure, subject to any rules prescribed by the Board of Directors, and will keep a written record of all actions taken by it. 20. Compensation. The Board of Directors may establish the compensation for, and reimbursement of the expenses of, Directors for membership on the Board of Directors and on committees of the Board of Directors, attendance at meetings of the Board of Directors or committees of the Board of Directors, and for other services by Directors of the Company or any of its majority-owned subsidiaries. 21. Rules. The Board of Directors may adopt rules and regulations for the conduct of meetings and the oversight of the management of the affairs of the Company. NOTICES 22. Generally. Except as otherwise provided by law, these Bylaws, or the Certificate of Incorporation, whenever by law or under the provisions of the Certificate of Incorporation or these Bylaws notice is required to be given to any Director or stockholder, it will not be construed to require personal notice, but such notice may be given in writing, by mail, addressed to such Director or stockholder, at the address of such Director or stockholder as it appears on the records of the Company, with postage thereon prepaid, and such notice will be deemed to be given at the time when the same is deposited in the United States mail. Notice to Directors may also be given by telephone, telegram, telex, facsimile, or similar medium of communication or as otherwise may be permitted by these Bylaws. 23. Waivers. Whenever any notice is required to be given by law or under the provisions of the Certificate of Incorporation or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time of the event for which notice is to be given, will be deemed equivalent to such notice. Attendance of a person at a meeting will constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. 7 11 OFFICERS 24. Generally. The officers of the Company will be elected by the Board of Directors and will consist of a Chairman of the Board of Directors (who, if the Board of Directors so specifies, may but will not be required to be also the Chief Executive Officer), a President (who may also be the Chief Executive Officer), a Secretary, and a Treasurer. The Board of Directors may also choose any or all of the following: one or more Vice Chairmen of the Board of Directors, one or more Assistants to the Chairman of the Board of Directors, one or more Vice Presidents (who may be given particular designations with respect to authority, function, or seniority), and such other officers as the Board of Directors may from time to time determine. Notwithstanding the foregoing, by specific action the Board of Directors may authorize the Chairman of the Board of Directors to appoint any person to any office other than Chairman and may authorize the President to appoint any person to any office other than Chairman, President, Secretary or Treasurer. Any number of offices may be held by the same person. Any of the offices may be left vacant from time to time as the Board of Directors may determine. In the case of the absence or disability of any officer of the Company or for any other reason deemed sufficient by a majority of the Board of Directors, the Board of Directors may delegate the absent or disabled officer's powers or duties to any other officer or to any Director. 25. Compensation. The compensation of all officers and agents of the Company who are also Directors of the Company will be fixed by the Board of Directors or by a committee of the Board of Directors. The Board of Directors may fix, or delegate the power to fix, the compensation of other officers and agents of the Company to an officer of the Company. 26. Succession. The officers of the Company will hold office until their successors are elected and qualified. The Chief Executive Officer, President, Chief Financial Officer, any Executive Vice President, General Counsel, Secretary and Treasurer may be removed from office at any time by the Chairman and any other officers may be removed at any time by the President or Chief Executive Officer. Any vacancy occurring in any office of the Company may be filled by the Board of Directors or by the Chairman of the Board of Directors as provided in Bylaw 24. 27. Authority and Duties. Each of the officers of the Company will have such authority and will perform all duties as are customarily incident to their respective offices or as may be specified from time to time by the Board of Directors. STOCK 28. Certificates. Certificates representing shares of stock of the Company will be in such form as from time to time may be determined by the Board of Directors, subject to applicable legal requirements. Each such certificate will be numbered and its issuance recorded in the books of the Company, and such certificate will exhibit the holder's name and the number of shares and will be signed by, or in the name of, the Company by the Chairman of the Board of Directors and the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, and will also be signed by, or bear the facsimile signature of, a duly authorized officer or agent of any properly designated transfer agent of the Company. Any or all of the signatures and the seal of the Company, 8 12 if any, upon such certificates may be facsimiles, engraved, or printed. Such certificates may be issued and delivered notwithstanding that the person whose facsimile signature appears thereon may have ceased to be such officer at the time the certificates are issued and delivered. 29. Classes of Stock. The designations, preferences, and relative participating, optional, or other special rights of the various classes of stock or series thereof, and the qualifications, limitations, or restrictions thereof, will be set forth in full or summarized on the face or back of the certificates which the Company issues to represent its stock or, in lieu thereof, such certificates will set forth the office of the Company from which the holders of certificates may obtain a copy of such information. 30. Transfers. Upon surrender to the Company or the transfer agent of the Company of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, it will be the duty of the Company to issue, or to cause its transfer agent to issue, a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. 31. Lost, Stolen or Destroyed Certificates. The Secretary may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Company alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact, satisfactory to the Secretary, by the person claiming the certificate of stock to be lost, stolen, or destroyed. As a condition precedent to the issuance of a new certificate or certificates, the Secretary may require the owners of such lost, stolen, or destroyed certificate or certificates to give the Company a bond in such sum and with such surety or sureties as the Secretary may direct as indemnity against any claims that may be made against the Company with respect to the certificate alleged to have been lost, stolen, or destroyed or the issuance of the new certificate. 32. Record Dates. (a) In order that the Company may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which will not be more than 60 nor less than 10 calendar days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders will be at the close of business on the calendar day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the calendar day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of the stockholders will apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Company may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date will not be more than 60 calendar days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose will be at the close of business on the calendar day on which the Board of Directors adopts the resolution relating thereto. 9 13 (c) The Company will be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes, and will not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Company has notice thereof, except as expressly provided by applicable law. INDEMNIFICATION 33. Damages and Expenses. (a) Without limiting the generality or effect of Article Ninth of the Certificate of Incorporation, the Company will to the fullest extent permitted by applicable law as then in effect indemnify any person (an "Indemnitee") who is or was involved in any manner (including, without limitation, as a party or a witness) or is threatened to be made so involved in any threatened, pending, or completed investigation, claim, action, suit or proceeding, whether civil, criminal, administrative, or investigative (including, without limitation, any action, suit, or proceeding by or in the right of the Company to procure a judgment in its favor) (a "Proceeding") by reason of the fact that such person is or was or had agreed to become a Director, officer, employee, or agent of the Company, or is or was serving at the request of the Board of Directors or an officer of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, whether for profit or not for profit, or anything done or not by such person in any such capacity, against all expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by such person in connection with such Proceeding. Such indemnification will be a contract right and will include the right to receive payment in advance of any expenses incurred by an Indemnitee in connection with such Proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Company as authorized by this Bylaw 33 or otherwise. (b) The right of indemnification provided in this Bylaw 33 will not be exclusive of any other rights to which any person seeking indemnification may otherwise be entitled, and will be applicable to Proceedings commenced or continuing after the adoption of this Bylaw 33, whether arising from acts or omissions occurring before or after such adoption. (c) The indemnification and advancement of expenses provided by, or granted pursuant to, this Bylaw 33 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of such person. 34. Insurance, Contracts, and Funding. The Company may purchase and maintain insurance to protect itself and any Indemnitee against any expenses, judgments, fines, and amounts paid in settlement or incurred by any Indemnitee in connection with any Proceeding referred to in Bylaw 33 or otherwise, to the fullest extent permitted by applicable law as then in effect. The Company may enter into contracts with any person entitled to indemnification under Bylaw 33 or otherwise, and may create a trust fund, grant a security interest, or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in Bylaw 33. 10 14 GENERAL 35. Fiscal Year. The fiscal year of the Company will end on June 30 of each year or such other date as may be fixed from time to time by the Board of Directors. 36. Seal. The Board of Directors may adopt a corporate seal and use the same by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. 37. Reliance upon Books, Reports and Records. Each Director, each member of a committee designated by the Board of Directors, and each officer of the Company will, in the performance of his or her duties, be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports, or statements presented to the Company by any of the Company's officers or employees, or committees of the Board of Directors, or by any other person or entity as to matters the Director, committee member, or officer believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Company. 38. Time Periods. In applying any provision of these Bylaws that requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days will be used unless otherwise specified, the day of the doing of the fact will be excluded, and the day of the event will be included. 39. Amendments. Except as otherwise provided by law or by the Certificate of Incorporation or these Bylaws, these Bylaws or any of them may be amended in any respect or repealed at any time, either (a) at any meeting of stockholders, provided that any amendment or supplement proposed to be acted upon at any such meeting has been described or referred to in the notice of such meeting, or (b) at any meeting of the Board of Directors, provided that no amendment adopted by the Board of Directors may vary or conflict with any amendment properly adopted by the stockholders. 40. Certain Defined Terms. Terms used herein with initial capital letters that are not otherwise defined are used herein as defined in the Certificate of Incorporation. 11 EX-10.(III)(A) 3 EMPLOYMENT AGREEMENT - DARWIN DEASON 1 EXHIBIT 10(iii)(A) EMPLOYMENT AGREEMENT AGREEMENT made as of the 16th day of February, 1999, between Affiliated Computer Services, Inc., a Delaware corporation (the "Company"), and Darwin Deason (the "Executive"). WHEREAS, the Executive has served on the Board of Directors (the "Board") of the Company and as its Chairman and Chief Executive Officer since the date of the Company's incorporation; WHEREAS, it is currently contemplated that although Executive will continue to have certain powers and authority customarily associated with a chief executive officer position, the Company's President will be designated as the Chief Executive Officer while the Executive will retain the title of Chairman; WHEREAS, the Executive will, consistent with the preceding recital, have exclusive authority for the following specified areas: (i) selecting and appointing the individual(s) to serve in, or to be removed from, the offices of Chief Executive Officer, President, Chief Financial Officer, Executive Vice Presidents, General Counsel, Secretary and Treasurer and (subject to appropriate charter amendment confirming the Executive's authority to fill such vacancies) to fill any director vacancies created in the event any such removal from office, (ii) recommending to the Board individuals for election to, or removal from, the Board itself, and (iii) recommending to the Compensation Committee to the Board or, as applicable, to the Special Compensation Committee to the Board salary, bonus, stock option and other compensation matters for such officers, (iv) approval of acquisitions to the extent authority has previously been granted by the Board to the Executive in his capacity as the member of the Special Transactions Committee (except to the extent the Executive has previously delegated authority to the President with 1 2 respect to such acquisitions which do not exceed $25 million in total consideration), (v) spending commitments in excess of $5 million, and (vi) approval of expense reports for the CEO and CFO; WHEREAS, the Executive possesses an intimate knowledge of the business and affairs of the Company, its policies, methods, personnel and plans for the future; WHEREAS, the Board recognizes that the Executive's contribution as Chairman and Chief Executive Officer to the growth and success of the Company has been substantial and desires to assure the Company of the Executive's continued employment in an executive capacity and to compensate him therefor; WHEREAS, the Executive is desirous of committing himself to serve the Company on the terms herein provided; WHEREAS, the Executive and the Company are currently parties to that certain Severance Agreement ("Severance Agreement") made and effective as of the 6th day of August, 1997, which Severance Agreement is to be replaced completely by this Agreement; and WHEREAS, the Executive and the Company are also currently parties to that certain Supplemental Executive Retirement Agreement, dated as of December 15, 1998 ("SERP Agreement"), which SERP Agreement the parties hereto do not intend to abrogate by this Agreement; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Employment. The Company hereby agrees to continue to employ the Executive, and the Executive hereby agrees to continue to serve the Company, on the terms and conditions set forth herein for the period commencing on the date hereof and expiring on May 18, 2004 2 3 (unless sooner terminated as hereinafter set forth); provided, however, that commencing on May 18, 2000 and each May 18 thereafter, the term of this Agreement shall automatically be extended for one (1) additional year unless at least thirty (30) days prior to any such May 18 date, either the Company (upon a unanimous vote by all of the Board except the Executive) or the Executive shall have given notice that it or he does not wish to extend this Agreement. The term of this Agreement, as it may from time to time be extended in accordance with this Section, may be referred to herein as the "Period of Employment." 2. Position and Duties. The Executive, during the Period of Employment, shall be the Chairman of the Board, shall have the power and authority outlined below, shall report only to the Board, shall devote sufficient working time and efforts to the business and affairs of the Company, and shall have such other powers and duties as may from time to time be prescribed by the Board, provided that such duties are consistent with his present duties and with the Executive's position as a senior executive officer in charge of the general management of the Company. Upon designation of the Company's President as Chief Executive Officer, the Executive shall have sole responsibility and authority with respect to the following specified areas: (i) selecting and appointing the individual(s) to serve in, or to be removed from, the offices of Chief Executive Officer, President, Chief Financial Officer, Executive Vice Presidents, General Counsel, Secretary and Treasurer and (subject to appropriate charter amendment confirming the Executive's authority to fill such vacancies) to fill any director vacancies created in the event any such removal from office, (ii) recommending to the Board individuals for election to, or removal from, the Board itself, (iii) recommending to the Compensation Committee to the Board, or as applicable, to the Special Compensation Committee to the Board, salary, bonus, stock option and other compensation matters for such officers, (iv) approval of 3 4 acquisitions to the extent authority has previously been granted by the Board to the Executive in his capacity as the member of the Special Transactions Committee (except to the extent the Executive had previously delegated authority to the President with respect to such acquisitions which do not exceed $25 million in total consideration), (v) spending commitments in excess of $5 million, and (vi) approval of expense reports for the CEO and CFO. With respect to the responsibility and authority of Executive referenced in sub-clause (ii) regarding recommending to the Board individuals for election to the Board, the Board shall annually designate the Executive to serve as a one-person Nominating Committee for the Board charged with recommending to the Board charged with recommending to the Board (x) a slate of director nominees proposed for election at each annual meeting of stockholders and (y) director nominees proposed to be elected by the remaining directors or by the stockholders at a special meeting to fill any vacancies on the Board resulting from a loss of one or more directors (other than vacancies resulting from removal from office of an officer who was also serving as a director, which vacancy shall be filled by the Executive). In the event any time during the Period of Employment the current President of the Company no longer occupies such office or no longer carries the title of "Chief Executive Officer", any and all powers, duties and authority and such title of "Chief Executive Officer" shall, automatically and without further action, revert to the Executive until a successor is duly appointed and qualified. 3. Place of Performance. In connection with his employment by the Company during the Period of Employment, the Executive shall be based at the Company's principal executive offices in Dallas, Texas and shall not be required to be absent therefrom on travel status or otherwise more than forty-five (45) days in any calendar year. The Company shall not, during the Period of Employment, without the written consent of the Executive, relocate or 4 5 transfer its principal executive offices to a location more than twenty (20) miles from the Executive's current principal residence. The Company will promptly pay (or reimburse the Executive for) all reasonable moving expenses incurred by the Executive relating to a change of his principal residence in connection with any such relocation of the Company's principal executive offices to which the Executive has consented. 4. Compensation and Related Matters. (a) Base Salary. Initially, the Executive shall receive a base salary ("Base Salary") at the annual rate of Five Hundred Twenty Five Thousand Dollars ($525,000) during the period ending June 30, 1999. Thereafter, the Executive's Base Salary (or, if applicable, Adjusted Base Salary) shall be adjusted (increased or decreased, as the case may be), effective on July 1, 1999 and on each July 1 thereafter during the Period of Employment, by a percentage equal to the average percentage adjustment (increase or decrease, as the case may be), if any, in the annual salaries for the top five executive officers of the Company for the fiscal year beginning on the applicable July 1 as compared to the annual salaries for such executives for the immediately preceding fiscal year (provided that if any such executive did not occupy such executive position, or a similar one, for such preceding year, then that executive's salary shall not be used in calculating the average adjustment). The Base Salary, as changed by such adjustments, may be referred to herein as "Adjusted Base Salary." Base Salary or Adjusted Base Salary shall be payable in substantially equal bi-monthly installments, shall in no way limit or reduce the obligations of the Company hereunder. (b) Bonus Compensation. In addition to Base Salary or Adjusted Base Salary, the Executive shall be entitled to receive, on or about June 30 (the Company's fiscal year 5 6 end), but in no event later than August 31 next following, of each year, during the Period of Employment, bonus compensation of up to (or greater than, if so decided by the Special Compensation Committee) a Yearly Targeted Bonus. For purposes of this Agreement, the Yearly Targeted Bonus for a particular fiscal year will be two hundred fifty percent (250%) (or, in the discretion of the Special Compensation Committee, a greater percentage) of the Base Salary or, as the case may be, of the Adjusted Base Salary for the fiscal year associated with such June 30. In the case of a particular fiscal year, if the Executive achieves the financial goals set for the Executive for that year (which goals shall be set each year by the Special Compensation Committee to the Board based upon the criteria currently in use), then the Company will pay the entire (or, in the discretion of the Special Compensation Committee, a greater amount) Yearly Targeted Bonus. If such goals are not achieved by the Executive for a particular fiscal year, the exact portion of the Yearly Targeted Bonus to be paid for that particular fiscal year shall be determined in accordance with the provisions of the Company's existing executive bonus plan. (c) Expenses. During any Period of Employment the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him (in accordance with the policies and procedures presently established by the Company for its senior executive officers) in performing services hereunder, provided that the Executive properly accounts therefor in accordance with Company policy. (d) Other Benefits. The Executive shall be entitled to continue to participate in or receive benefits under all of the Company's Employee Benefit Plans or Other Arrangements in effect on the date hereof, or under plans or arrangements that provide the Executive with at least equivalent benefits to those provided under such Employee 6 7 Benefit Plans or Other Arrangements. As used herein, "Employee Benefit Plans or Other Arrangements" include, without limitation, each pension and retirement plan, supplemental pension, retirement and deferred compensation plan, savings and profit-sharing plan, stock ownership plan, stock purchase plan, stock option plan, life insurance plan, medical insurance plan, disability plan, health and accident plan or arrangement established and maintained by the Company on the date hereof. The Executive shall be entitled to participate in or receive benefits under any employee benefit plan or arrangement which may, in the future, be made available by the Company to its executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plan or arrangement. Nothing paid to the Executive under any Employee Benefit Plan or Other Arrangement presently in effect or any employee benefit plan or arrangement which may be made available in the future shall be deemed to be in lieu of compensation payable to the Executive pursuant to Subsections 4(a) and 4(b) above. Any payments or benefits payable to the Executive under a plan or arrangement referred to in this Subsection 4(d) in respect of any calendar year during which the Executive is employed by the Company for less than the whole of such year shall, unless otherwise provided in the applicable plan or arrangement, be prorated in accordance with the number of days in such calendar year during which he is so employed. Should any such payments or benefits accrue on a fiscal (rather than calendar) year, then the proration in the preceding sentence shall be on the basis of a fiscal year rather than calendar year. (e) Vacations. The Executive shall be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its senior 7 8 executive officers, but not less than four (4) weeks in any calendar year (prorated in any calendar year during which the Executive is employed hereunder for less than the entire such year in accordance with the number of days in such calendar year during which he is so employed). The Executive shall also be entitled to all paid holidays given by the Company to its senior executive officers. (f) Perquisites. The Executive shall be entitled to continue to receive the perquisites and fringe benefits in accordance with present practices currently received by the Executive. 5. Offices. The Executive agrees to serve as a director of the Company and any of its direct or indirect subsidiaries and in one or more executive offices of any of the Company's direct or indirect subsidiaries, if elected or appointed thereto, provided he is indemnified for serving in any and all such capacities on a basis no less favorable than is currently provided by the Company's By-laws; such service will be provided without any additional compensation beyond what is set out in this Agreement. 6. Unauthorized Disclosure. (a) During the Period of Employment hereunder, the Executive shall not, without the written consent of the Board or a person authorized thereby, disclose to any person, other than an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company or a may be required by law or regulations, any material confidential information obtained by him while in the employ of the Company with respect to any of the Company's products, systems, customers or organization, the disclosure of which he knows will be materially damaging to the 8 9 Company; provided, however, that confidential information shall not include any information known generally to the public (other than as a result of unauthorized disclosure by the Executive) or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that conducted by the Company. For the period ending two (2) years following the termination of employment hereunder, the Executive shall not disclose any confidential information of the type described above except as determined by him to be reasonably necessary in connection with any business or activity in which he is then engaged. (b) The foregoing provisions of this Section 6 shall be binding upon the Executive's heirs, successors and legal representatives. 7. Termination. The Executive's employment hereunder may be terminated without any breach of this Agreement only under the following circumstances: (a) Death. The Executive's employment hereunder shall terminate upon his death. (b) Disability. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties hereunder on a full-time basis for one hundred eighty (180) consecutive calendar days, and within thirty (30) days after written Notice of Termination is given (which may occur no earlier than thirty (30) days before, but at any time after, the end of such one hundred eighty (180) day period), the Executive shall not have returned to the performance of his duties hereunder on a full-time basis, the Company may terminate the Executive's employment hereunder. (c) Termination by Company for Cause. Upon a vote to terminate by the Board in which at least all of the members of the Board other than the Executive vote to 9 10 terminate, the Company may terminate the Executive's employment hereunder for Cause. For purposes of this Agreement, the term "Cause" shall have the meaning as set out in Schedule A to this Agreement. (d) Termination by the Executive. The Executive may, during the Period of Employment, upon giving Notice of Termination, terminate his employment hereunder. (e) Notice of Termination. Any termination, during the Period of Employment, of the Executive's employment by the Company or any such termination by the Executive (other than termination pursuant to Subsection 7(a) above on account of death) shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (f) Date of Termination. "Date of Termination" shall, during the Period of Employment, mean (i) if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's employment is terminated on account of disability pursuant to Subsection 7(b) above, thirty (30) days after Notice of Termination is given (provided that the Executive shall not, during such thirty (30) day period, have returned to the performance of his duties on a full-time basis), (iii) if the Executive's employment is terminated (by the Company for Cause) pursuant to Subsection 7(c) above, the date specified in the Notice of Termination, and (iv) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given. Should, however, within thirty (30) days after any Notice of Termination is given, the 10 11 party receiving such Notice of Termination notify the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award or by a final judgment order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). 8. Change of Control Benefits. Upon a Change of Control (as defined in Schedule A to this Agreement), the Executive shall be entitled to the benefits provided herein. (a) Severance Payments. Within two (2) business days after a Change of Control, the Company shall pay the Executive a lump sum amount, in cash, equal to: (i) a multiple equal to number of years (including any portion of a year) left remaining under this Agreement applied to, (A) the Executive's per annum base salary in effect on the date of the Change of Control ("Base Salary"), and (B) the greater of the Executive's bonus for the immediately preceding fiscal year and the average of the Executive's bonuses for the two immediately preceding fiscal years; and (ii) the Executive's target bonus for the current fiscal year multiplied by a fraction, the numerator of which shall be the number of days the Executive was employed by the Company in the fiscal year in which the Change of Control occurs and the denominator of which shall be 365. (b) Continued Benefits. Until the earlier of the third anniversary of the Change of Control or the date on which the Executive becomes employed by a new 11 12 employer, the Company shall, at its expense, provide the Executive with medical, dental, life insurance, disability and accidental death and dismemberment benefits at the highest level provided to the Executive immediately prior to the Change of Control, provided, however, that if the Executive becomes employed by a new employer which maintains a major medical plan that either (i) does not cover the Executive with respect to a pre-existing condition which was covered under the Company's major medical plan, or (ii) does not cover the Executive for a designated waiting period, the Executive's coverage under the Company's major medical plan shall continue (but shall be limited in the event of noncoverage due to a preexisting condition, to the preexisting condition itself) until the earlier of the end of the applicable period of noncoverage under the new employer's plan or the third anniversary of the Change of Control. (c) Payment of Accrued But Unpaid Amounts. Within two (2) business days after a Change of Control, the Company shall pay the Executive (i) any unpaid portion of compensation previously earned by the Executive; and (ii) all compensation previously deferred by the Executive but not yet paid. (d) Post-Retirement Welfare Benefits. For purposes of determining the Executive's eligibility for post-retirement benefits under any welfare benefit plan (as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended) maintained by the Company immediately prior to the Change of Control and in which the Executive then participated other than the SERP, the Executive shall be credited with the excess of three (3) years of participation in the applicable plan and three (3) years of age over the actual years of participation and age credited to the Executive on the date of the Change of Control. If, after taking into account the credited participation 12 13 and age, the Executive would have been eligible for post-retirement benefits, the Executive shall receive, commencing on the date of the Change of Control, post-retirement benefits based on the terms and conditions of the applicable plans in effect immediately prior to the Change of Control. (e) Supplemental Retirement Benefits. (i) Upon a Change of Control, the Executive shall become vested in the benefits provided under the Company's retirement plan or any successor plans (the "Supplemental Plan"). (ii) Within two (2) business days after the Change of Control, the Company shall pay the Executive a lump sum cash amount equal to the present value of the Executive's accrued benefit under the Supplemental Plan as of the date of the Change of Control. For purposes of computing the lump sum present value of the Executive's accrued benefit under the Supplemental Plan, (A) the Company shall credit the Executive with the excess of three (3) years of plan participation and service and three (3) years of age for all purposes (including additional accruals and eligibility for early retirement) over the Executive's actual years and fractional years of plan participation and service and age credited to the Executive after the Change of Control; and (B) the Company shall apply the factors prescribed by the Pension Benefit Guaranty Corporation for determining the actuarial equivalent of a single sum payment of an immediate annuity for a plan termination on the date of the Change of Control with insufficient assets. In determining the Executive's benefits under this paragraph (e)(ii), the terms of the 13 14 Supplemental Plan as in effect immediately prior to the Change of Control, except as expressly modified in this paragraph (e), shall govern. (iii) These supplemental retirement benefits are in addition to, and not in replacement of, the SERP. (f) Effect on Existing Plans. Except as provided below, all Change of Control provisions applicable to the Executive and contained in any plan, program, agreement or arrangement maintained on or after the date hereof by the Company (including, but not limited to, any stock option, restricted stock or pension plan and the SERP) shall remain in effect for such period after the date of a Change of Control as is necessary to carry out such provisions and provide the benefits payable thereunder, and may not be altered in a manner which adversely affects the Executive without the Executive's prior written approval. No benefits shall be paid to the Executive, however, under any severance plan maintained generally for the employees of the Company if the Executive is eligible to receive benefits under this Section 3. Notwithstanding the foregoing, the Severance Agreement is hereby terminated and replaced in its entirety by this Agreement. (g) Outplacement Counseling. The Company shall reimburse all reasonable expenses incurred by the Executive for professional outplacement services by qualified consultants selected by the Executive. (h) Mitigation. The Executive shall not be required to seek other employment after a Change of Control and any compensation earned from other employment shall not reduce the amounts otherwise payable under this Agreement. (i) Gross-up. In the event it shall be determined that any payment, benefit or distribution (or combination thereof) by the Company, or any trust established by the 14 15 Company for the benefit of its employees, to or for the benefit of the Executive (whether payable pursuant to the terms of this Agreement (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code and any interest or penalties are incurred by the Executive with respect to such excise tax (the excise tax, together with interest and penalties thereon, hereinafter collectively referred to as the "Excise Tax"), the Executive shall be entitled to receive an additional payment (a "Gross-up Payment") in an amount such that after payment by the Executive of all taxes, including, without limitation, any income taxes and the Excise Tax imposed upon the Gross-up Payment, the Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. Subject to the provisions set out below, all determinations required to be made under this Section 8, including whether and when a Gross-up Payment is required and the amount of such Gross-up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized certified public accounting firm as may be designated by the Executive (the "Accounting Firm"). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within five (5) days after the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall so indicate to the Executive in writing. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-up Payment. Such notification shall be given no later than ten (10) business 15 16 days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of the claim and the date of requested payment. The Executive shall not pay the claim prior to the expiration of the thirty (30) day period following the date on which it gives notice to the Company. If the Company notifies the Executive in writing prior to the expiration of the period that it desires to contest such claim, the Executive shall: (1) give the Company any information reasonably requested by the Company relating to such claim; (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (3) cooperate with the Company in good faith in order to effectively contest such claim; and (4) permit the Company to participate in any proceedings relating to such claim; Without limitation on the foregoing provisions of this Section 8, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administration tribunal, in a court of initial jurisdiction and in 16 17 one or more appellate courts, as the Company shall determine provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of the contest; provided, further, that it the Company directs the Executive to pay any claim and sue for a refund, the Company shall advance the amount of the payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to the advance or with respect to any imputed income with respect to the advance. In the event that the Company exhausts its remedies pursuant to this Section 8 and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Gross-up Payment required and such payment shall be promptly paid by the Company to or for the benefit of the Executive. If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to this Section 8, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be 17 18 required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-up Payment required to be paid. (j) Indemnification; Director's and Officer's Liability Insurance. The Executive shall, after the Change of Control, retain all rights to indemnification under applicable law or under the Company's Certificate of Incorporation or Bylaws, as they may be amended or restated from time to time. In addition, the Company shall maintain Director's and Officer's liability insurance on behalf of the Executive, at the level in effect immediately prior to the Change of Control, for the three (3) year period following the Change of Control, and throughout the period of any applicable statute of limitations. 9. Office and Support. During the Period of Employment, the Company will, consistent with Section 3 of this Agreement, provide the Executive at the Company's principal executive offices in Dallas (and at such other location in Dallas, Texas as may be designated by the Executive from time to time) with an office and secretarial and administrative support, consistent with current practices. 10. Successors; Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any 18 19 successor to its business and/or all or part of its assets as aforesaid which executes and delivers the agreement provided for in this Section 10 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 11. Notice. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Darwin Deason 8181 Douglas, #1000 Dallas, Texas 75205 If to the Company: Affiliated Computer Services, Inc. 2828 North Haskell Avenue Dallas, Texas 75204 Attention: General Counsel or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 19 20 12. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, unless specifically referred to herein, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas. 13. Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 15. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Dallas, Texas, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided that the Company shall be entitled to seek a restraining order or injunction in any court of competent jurisdiction to prevent any continuation of any violation of Section 6 hereof. 20 21 IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written. AFFILIATED COMPUTER SERVICES, INC. ----------------------------------------- Mark A. King Executive Vice President & Chief Financial Officer ----------------------------------------- Darwin Deason Approved this _____ day of February, 1999, by the undersigned members of the Special Compensation Committee of the Board of Directors of Affiliated Computer Services, Inc. ----------------------------------------- Joseph P. O'Neill ----------------------------------------- Frank A. Rossi 21 22 SCHEDULE A CERTAIN DEFINITIONS An used in this Agreement, and unless the context requires a different meaning, the following terms, when capitalized, have the meaning indicated; "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board which specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purpose of this provision, no act or failure to act, on the part of the Executive, shall be considered willful unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The termination of employment of the Executive shall not be deemed to be for cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above and specifying the particulars thereof in detail. "Change of Control" shall mean the first to occur of any of the following dates : (1) the date the Board of Directors votes to approve and recommends a stockholder vote to approve: (A) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's Common Stock would be converted into cash, securities or other property, other than any consolidation or merger of the Company in which the holders of the Company's Common Stock immediately prior to the consolidation or merger have the same proportionate ownership of 22 23 common stock of the surviving corporation immediately after the consolidation or merger; (B) any sale, lease, or other transfer of all, or substantially all, of the assets of the Company, other than any sale, lease, or other transfer to any corporation where the Company owns, directly or indirectly, at least eighty percent (80%) of the outstanding voting securities of the corporation after the transfer; or (C) any plan or proposal for the liquidation or dissolution of the Company. (2) the date of any person (as such term as used in Section 13(d) of the Securities Exchange Act of 1934, hereinafter the "1934 Act"), other than one or more trusts established by the Company for the benefit of employees of the Company or its subsidiaries, shall become the beneficial owner (within the meaning of Rule 13d-3 under the 1934 Act) of Rule 13d-3 under the 1934 Act) of twenty percent (20%) or more of the Company's outstanding Common Stock; or (3) the date, during any period of twenty-four (24) consecutive months, on which individuals who at the beginning of such period constitute the entire Board of Directors of the Company shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director comprising the majority was approved by a vote of at least a majority of the Continuing Directors in office on the date of such election or nomination for election of the new director. For purposes hereof, a "Continuing Director" shall mean: (A) any member of the Board of Directors at the close of business on February 1, 1999; (B) any member of the Board who succeeds any Continuing Director described in subparagraph (A) above if such successor was elected, or nominated for election by the Company's stockholders, by a majority of the Continuing Directors then still in office; (C) any director elected, or nominated for election by the Company's stockholders to fill any vacancy or newly created directorship on the Board of Directors of the Company by a majority of the Continuing Directors then still in office; or (D) any member of the Board who succeeds any Continuing Director described in subparagraph (A), (B) or (C) above or in this subparagraph, which member was selected and appointed by the Executive to fill the unexpired term of a director who, because such person is no longer an officer of the Company, is no longer on the Board. 23 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JUN-30-1999 MAR-31-1999 44,112 0 325,013 4,496 13,816 439,188 184,057 120,500 1,236,850 228,157 385,879 0 0 492 582,647 1,236,850 0 435,884 0 394,875 (1,916) 0 4,916 38,009 15,584 22,425 0 0 0 0 .46 .43
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