-----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, V6vW1y7E+0RPY6ZwAD0aEFxAqeJiqwUYJLVOM+d72I8lph65BSsENr0WO7Mk7g7x jGckxCsETl+cBL4rSyLmVA== 0000950134-99-001885.txt : 19990325 0000950134-99-001885.hdr.sgml : 19990325 ACCESSION NUMBER: 0000950134-99-001885 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19990323 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: S-3/A SEC ACT: SEC FILE NUMBER: 333-71941 FILM NUMBER: 99570852 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 S-3/A 1 AMENDMENT NO. 1 TO FORM S-3 FILE NO. 333-71941 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 23, 1999. REGISTRATION NO. 333-71941 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AFFILIATED COMPUTER SERVICES, INC. (Exact name of registrant as specified in its charter) DELAWARE 51-0310342 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
2828 NORTH HASKELL AVENUE DALLAS, TEXAS 75204 (214) 841-6111 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) --------------------- DAVID W. BLACK AFFILIATED COMPUTER SERVICES, INC. 2828 NORTH HASKELL AVENUE DALLAS, TEXAS 75204 (214) 841-6152 (Name, address, and telephone number, including area code, of agent for service) Copies to: DAVID G. LUTHER, JR. C. NEEL LEMON, III HUGHES & LUCE, L.L.P. THOMPSON & KNIGHT, P.C. 1717 Main Street, Suite 2800 1700 Pacific Ave., Suite 3300 Dallas, Texas 75201 Dallas, Texas 75201 (214) 939-5500 (214) 969-1700
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: [ ] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act, please check the following box: [ ] --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON THE DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON THE DATE THAT THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY SATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MARCH 23, 1999 PROSPECTUS 3,500,000 SHARES [ACS LOGO] AFFILIATED COMPUTER SERVICES, INC. CLASS A COMMON STOCK ------------------------- We are offering and selling 3,500,000 shares of our Class A common stock. We have two classes of common stock outstanding. The Class A common stock is listed on the New York Stock Exchange under the symbol "ACS." The last reported sale price of our Class A common stock on March 22, 1999 was $37 per share. ------------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT RISKS THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR CLASS A COMMON STOCK. -------------------------
PER SHARE TOTAL --------- ----- Public offering price..................... $ $ Underwriting discount..................... $ $ Proceeds, before expenses, to us.......... $ $
------------------------- The underwriters may purchase up to an additional 525,000 shares of Class A common stock from Darwin Deason, our Chairman of the Board, at the public offering price less the underwriting discount. If all of these shares are purchased, the total public offering price will be $ , the underwriting discount will be $ and the proceeds to Mr. Deason will be $ . The underwriters expect to deliver the shares against payment in New York, New York on , 1999. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------- BEAR, STEARNS & CO. INC. GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE HAMBRECHT & QUIST PRUDENTIAL SECURITIES THE DATE OF THIS PROSPECTUS IS , 1999. 3 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the risks of investing in the Class A common stock discussed under "Risk Factors." Unless otherwise specifically stated, the information throughout this prospectus assumes that the underwriters do not exercise their over-allotment option and that outstanding stock options have not been exercised, Class B common stock has not been converted into Class A common stock and the 4% convertible subordinated notes have not been converted into Class A common stock. OVERVIEW We are based in Dallas, Texas and have offices primarily in North America, as well as Central and South America, Europe and the Middle East. We provide a full range of information technology services to clients, which have time-critical, transaction-intensive information processing needs. Our services include: - technology outsourcing; - business process outsourcing; and - professional and systems integration services. A description of each of these services is provided in the following paragraphs. Generally, when our clients engage us under an outsourcing arrangement, they delegate to us core technology or business functions which they may have previously performed themselves, but which we are able to perform more economically for them on a contract basis. Our technology outsourcing services consist of processing our clients' data on a remote basis from our data centers to deliver significant cost savings and service improvements to our clients. The principal technology outsourcing services we provide include data center outsourcing, which involves processing, storing and reporting on large volumes of clients' data, and network management services, which involve managing clients' computer networks. In order to provide these services, we utilize a variety of hardware and software systems. Our business process outsourcing services, an extension of technology outsourcing, consist of managing, through an outsourcing arrangement, our clients' non-core, but mission-critical, business processes. The principal business process outsourcing services we provide include loan and mortgage processing, claims processing, accounts payable processing, data capture, storage and retrieval services and automated teller machine transaction processing. Our professional and systems integration services include technology consulting, information and computer systems design and engineering, computer software applications maintenance and development and providing technical staff to augment the client's permanent staff as required for particular projects. Our primary markets are the commercial and federal government sectors. The commercial sector accounts for approximately two-thirds of our annual revenues, and the government sector accounts for approximately one-third of our annual revenues. Approximately 90% of our revenues for the past three fiscal years were recurring revenues. Recurring revenues are derived from services that our clients use each year in connection with their ongoing businesses. Our revenues have grown from $477 million in fiscal 1994 to $1.2 billion in fiscal 1998, representing a compounded annual growth rate of approximately 26%. Of this growth, approximately half has come from internally generated services and approximately half from acquisitions. 1 4 STRATEGY In pursuit of our ultimate goal of enhancing shareholder value, we pursue a balanced strategy of internal and external growth strategies. Our internal growth strategy includes: - expanding our recurring revenue base; - maximizing economies of scale by diligently controlling our cost structure, adding new clients and enhancing our relationships with existing clients; - providing flexible solutions to those clients; - investing in technology; and - attracting and retaining high quality employees. Our external growth strategy involves an aggressive but disciplined acquisition program, focused on: - expanding our service offerings, client base and geographic coverage; and - the rapid, effective assimilation of the companies we acquire. RECENT ACQUISITIONS In December 1998, we purchased a 63% interest in BRC Holdings, Inc., a provider of specialized information technology services to the local government and healthcare sectors. We acquired the remaining 37% interest in February 1999. We have renamed the company ACS BRC Holdings, Inc. In December 1998, we also acquired two smaller companies. The annual combined revenues from continuing operations of these three companies during calendar year 1998 was approximately $146 million. We are incorporated in Delaware and our principal offices are located at 2828 North Haskell Avenue, Dallas, Texas 75204; telephone (214) 841-6111. We maintain a worldwide web site at www.acs-inc.com. In this prospectus, when we use the terms "ACS," "we," "us" and "our," these terms refer to Affiliated Computer Services, Inc. and its subsidiaries, unless the context otherwise requires. 2 5 THE OFFERING You should refer to "Description of Capital Stock" for a description of our capital structure, including the terms of the Class A and Class B common stock. Class A common stock offered.................. 3,500,000 shares Common stock to be outstanding after this offering: Class A common stock..... 49,323,877 shares Class B common stock..... 3,299,686 shares Total............ 52,623,563 shares Voting rights.............. The Class A common stock is entitled to one vote per share and the Class B common stock is entitled to ten votes per share. See "Risk Factors -- Darwin Deason has substantial control over our company and can affect virtually all decisions made by our stockholders" for more information on these voting rights. Use of proceeds............ We intend to use all of the net proceeds from this offering to repay a portion of the debt incurred under ACS's revolving credit agreement primarily in connection with our acquisition of BRC Holdings, Inc. See "Use of Proceeds" for more information on our use of net proceeds. Dividend policy............ We do not anticipate declaring or paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board of Directors and will be dependent upon then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects, and other factors as our Board of Directors deems relevant. NYSE symbol................ ACS We are offering to sell, and seeking offers to buy, shares of Class A common stock only in jurisdictions where offers and sales are permitted. RISK FACTORS For a description of risks that you should consider before buying shares of the Class A common stock, see "Risk Factors." 3 6 SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The table below sets forth the following financial data: - Summary historical consolidated financial data as of and for each of the five years ended June 30, 1998 and as of December 31, 1998 and for the six months ended December 31, 1998 and 1997; - Consolidated income statement data for the year ended June 30, 1998 and for the six months ended December 31, 1998, pro forma for the acquisition of BRC Holdings, Inc., four additional acquisitions during the year ended June 30, 1998 and five acquisitions subsequent to July 1, 1998; and - Consolidated balance sheet data as of December 31, 1998, as adjusted for the consummation of this offering. You should read this data together with the consolidated financial statements incorporated by reference in this prospectus. See "Selected Consolidated Financial Data," "Where You Can Find More Information," and "Pro Forma Condensed Consolidated Financial Information (Unaudited)" for more financial information. ACS has acquired 31 companies during the periods presented under the purchase method of accounting, and therefore revenues between periods are not comparable. In addition, all periods reflect the merger of a wholly-owned subsidiary of ACS with and into ACS Government Solutions Group, Inc., formerly known as Computer Data Systems, Inc., in December 1997. This merger was accounted for as a pooling of interests and, accordingly, historical results have been restated to reflect the combined operations of the two companies. Pro forma income statement data for the year ended June 30, 1998 and the six months ended December 31, 1998 present the results of operations of ACS for the year and the period as if the following transactions had occurred as of July 1, 1997: (1) the consummation of the acquisition of BRC Holdings, Inc.; and (2) the consummation of four additional acquisitions during the year ended June 30, 1998 and five acquisitions subsequent to July 1, 1998. No adjustment has been made for the consummation of this offering. See "Pro Forma Condensed Consolidated Financial Information (Unaudited)" included elsewhere in this prospectus for additional pro forma financial information. Balance sheet data at December 31, 1998, as adjusted, give effect to the receipt of the estimated net proceeds from the sale of 3,500,000 shares of Class A common stock offered by ACS. See "Use of Proceeds" and "Capitalization" for additional information related to the "as adjusted" balance sheet data.
PRO FORMA SIX MONTHS YEAR ENDED YEAR ENDED JUNE 30, ENDED DECEMBER 31, ------------------------------------------------------ JUNE 30, ------------------- 1994 1995 1996 1997 1998 1998 1997 1998 -------- -------- -------- -------- ---------- ---------- -------- -------- INCOME STATEMENT DATA: Revenues........................... $476,978 $533,848 $647,608 $928,925 $1,189,123 $1,439,871 $550,229 $754,990 Operating income................... 37,475 44,378 56,583 90,266 98,319 127,301 33,388 72,910 Net income......................... 19,654 25,655 33,525 49,666 54,422 54,234 19,052 39,634 Earnings per common share: Basic............................. $ 0.64 $ 0.74 $ 0.88 $ 1.08 1.14(1) $ 1.13(1) $ 0.40 $ 0.82 Diluted........................... 0.59 0.71 0.85 1.05 1.11(1) 1.10(1) 0.39 0.77 Shares used in computing earnings per common share: Basic............................. 30,664 34,625 38,228 46,136 47,599 47,913 47,167 48,488 Diluted........................... 33,233 35,998 39,320 47,452 50,487 50,801 48,453 55,304 PRO FORMA SIX MONTHS ENDED DECEMBER 31, 1998 ------------ INCOME STATEMENT DATA: Revenues........................... $818,853 Operating income................... 83,443 Net income......................... 42,799 Earnings per common share: Basic............................. $ 0.88 Diluted........................... 0.83 Shares used in computing earnings per common share: Basic............................. 48,761 Diluted........................... 55,577
AS OF JUNE 30, AS OF DECEMBER 31, 1998 ---------------------------------------------------- ------------------------ 1994 1995 1996 1997 1998 ACTUAL AS ADJUSTED -------- -------- -------- -------- -------- ---------- ----------- BALANCE SHEET DATA: Working capital................................. $ 76,583 $ 77,615 $ 79,928 $110,866 $198,118 $ 210,472 Total assets.................................... 266,734 309,903 636,098 761,477 949,798 1,328,310 Total long-term debt (less current portion)..... 84,534 37,940 57,028 130,680 234,848 408,964 Total stockholders' equity...................... 90,439 156,686 363,204 427,481 503,670 559,411
- --------------- (1) Includes $12,974,000, $8,880,000 net of tax, or $.19 and $.18, per basic and diluted shares, respectively, of merger costs incurred by ACS in connection with the merger of a wholly-owned subsidiary of ACS with and into ACS Government Solutions Group, Inc. in December 1997. 4 7 RISK FACTORS You should carefully consider the following risk factors and warnings before making an investment decision. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected, the price of the Class A common stock could decline, and you may lose all or part of your investment. You should also refer to the other information contained in this prospectus and incorporated in this prospectus by reference, including our consolidated financial statements and the related notes. LOSS OF SIGNIFICANT CLIENTS COULD ADVERSELY AFFECT OUR BUSINESS BY REDUCING OUR REVENUES AND PROFITABILITY Our success depends substantially upon retaining our significant clients. Generally, we may lose clients due to merger or acquisition, business failure, contract expiration, conversion to a competing data processor or conversion to an in-house data processing system. We cannot guarantee that we will be able to retain long-term relationships or secure renewals of short-term relationships with our significant clients in the future. We incur a high level of fixed costs related to our technology outsourcing and business process outsourcing clients. These fixed costs result from significant investments in data processing centers, including computer hardware platforms, computer software, facilities, and client service infrastructure. The loss of any one of our significant clients could leave us with a significantly higher level of fixed costs than is necessary to serve our remaining clients, thereby reducing our profitability. We also are vulnerable to reduced processing volumes from our clients, which could occur due to business downturns, product liability issues, work stoppages by organized labor, potential year 2000 problems affecting our clients' business or other business reasons. Many of our clients are in industries that are currently undergoing significant consolidation. In the past, we have modified contracts on terms that have been both adverse and beneficial, and it is possible that future adverse modifications may occur. Our five largest clients accounted for approximately 25% of our revenue for the fiscal year ended June 30, 1998. For the fiscal year ended June 30, 1997, our five largest clients accounted for approximately 26% of our revenue. Approximately 8% of our revenue in fiscal 1998 and 11% of our revenue in fiscal 1997 came from services performed for the Department of Education. Our agreement with the Department of Education expires in September 2003; however, the agreement contains provisions allowing the Department of Education to terminate the contract prior to the expiration date, in specified circumstances, including termination for convenience. If the Department of Education terminates the contract, we would generally be reimbursed for the then remaining unamortized costs incurred with respect to providing the services under the contract, except to the extent that we are able to use any hardware, software or other resources for other purposes. Our relationship with the Department of Education is also subject to the risks of the reduction or modification of the contract due to changing needs and requirements or to unavailability of funds from the United States government. See "-- Our government contracts expose us to risks of government actions which could adversely affect our financial results" for a description of related risks. We cannot assure you that the Department of Education will not cancel or modify the contract or that we will maintain our historic level of revenues or profits from this relationship. After the Department of Education, our next four largest clients accounted for approximately 17% of our revenue in fiscal 1998 and 15% of our revenue in fiscal 1997, and have remaining terms of one and one-half to five years. WE HAVE SIGNIFICANT INVESTMENTS IN SOME CLIENT CONTRACTS WHICH EXPOSE US TO THE RISK OF THESE CLIENTS' FINANCIAL CONDITION We must make significant capital investments in order to attract and retain large outsourcing agreements. We sometimes must purchase assets such as computing equipment and purchased software, assume financial obligations such as computer lease and software maintenance obligations, make investments in securities issued by clients, incur capital expenditures or incur expenses necessary to provide outsourcing services to a client. We cannot guarantee that we will be able to finance and properly evaluate these assets and investments. We record these investments and asset purchases at fair market value. We record the remainder of the purchase amount as intangible assets, which are then amortized over the term of each contract. The termination of a client contract or the deterioration of the financial condition of a 5 8 client has in the past, and may in the future, result in an impairment of the net book value of the assets recorded. WE OPERATE IN HIGHLY COMPETITIVE HIGH-TECHNOLOGY MARKETS; OUR FAILURE TO MEET RAPIDLY CHANGING MARKET DEMANDS COULD ADVERSELY AFFECT OUR COMPETITIVE POSITION We cannot guarantee that we will be able to compete successfully in the future. We expect to encounter additional competition as we address new markets and as the computing and communications markets converge. If we are forced to lower our pricing or if demand for our services decreases, our business, financial condition, and results of operations will be materially and adversely affected. Our markets are intensely competitive and highly fragmented. Our market share represents a small percentage of the total technology services market. Our clients' requirements and the technology available to satisfy those requirements continually change. Our principal competitors include Electronic Data Systems Corporation, IBM Global Services, Computer Sciences Corporation and several other national and regional competitors. Many of our competitors have greater financial, technical, and operating resources and a larger client base than we do. They may be able to use their resources to adapt more quickly to new or emerging technologies or to devote greater resources to the promotion and sale of their products and services. Many of our largest competitors have a greater international presence than us and offer a broader range of services. In addition, we must frequently compete with a client's own internal information technology capability, which may constitute a fixed cost for the client. OUR ABILITY TO MEET CHANGES IN TECHNOLOGY COULD BE EXPENSIVE AND, IF WE DO NOT KEEP UP WITH THESE CHANGES, WE COULD LOSE EXISTING CUSTOMERS AND BE UNABLE TO ATTRACT NEW CUSTOMERS The markets for our information technology services are subject to rapid technological changes and rapid changes in client requirements. To compete, we commit substantial resources to operating multiple hardware platforms, to customizing third-party software programs and to training client personnel and our personnel in the use of new technologies. Future hardware and software products may be able to manipulate large amounts of data more cost-effectively than existing mainframe platforms which we use. Information processing is shifting toward client-server and web-based systems, in which individual computers or groups of personal computers and mid-range systems replace mainframe systems. This trend could adversely affect our business and financial results. We have committed substantial resources to developing outsourcing solutions for these distributed computing environments. We cannot guarantee that we will be successful in customizing products and services that incorporate new technology on a timely basis. We also cannot guarantee that we will continue to be able to deliver the services and products demanded by the marketplace. Technology costs have also dropped significantly in recent years due in large part to hardware technology advances. New contracts are generally priced at lower unit rates than historical contracts. We sometimes renegotiate client contracts in advance of the scheduled expiration date and will lower our charges in return for other contractual considerations. If we are not able to lower our technology costs to keep up with market rates, then our business, financial condition, and results of operations could be adversely affected. OUR RELIANCE ON SIGNIFICANT SOFTWARE VENDOR RELATIONSHIPS COULD RESULT IN SIGNIFICANT EXPENSE OR INABILITY TO SERVE OUR CLIENTS IF WE LOSE THESE RELATIONSHIPS Our ability to service our clients depends to a large extent on our use of various software programs that we license from a small number of primary software vendors. We may not be able to replace them with alternative vendors. If our significant software vendors assert claims against us for infringement of intellectual property rights or other claims of breach of our contracts with them, or if they attempt to re-price our licenses or require us to cure a claimed breach under a license agreement, we could be required to expend significant resources to resolve these matters. If our significant vendors were to terminate or refuse to renew our contracts with them, we might not be able to replace the related software 6 9 programs and would be unable to serve our clients. As a result our business would be materially adversely affected. OUR CONTRACTS CONTAIN TERMINATION PROVISIONS AND PRICING RISKS WHICH COULD ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY Some of our contracts with clients permit termination in the event our performance is not consistent with service levels specified in those contracts. Some of our government clients can terminate their contracts for any reason or no reason. Our clients' ability to terminate contracts creates an uncertain revenue stream. If clients are not satisfied with our level of performance, our reputation in the industry may suffer, which could also materially and adversely affect our business, financial condition, and results of operations. Some of our contracts contain pricing provisions that require the client to pay a set fee for our services regardless of whether our costs to perform these services exceed the amount of the set fee. Many of our technology outsourcing and business process outsourcing contracts provide for credits for our clients if we fail to achieve specific contract standards. Some of our contracts contain re-pricing provisions which can result in reductions of our fees for performing our services. In these situations, we could incur significant unforeseen costs or financial penalties in performing the contract. WE MAY HAVE DIFFICULTIES EXECUTING OUR ACQUISITION STRATEGY, WHICH COULD AFFECT OUR GROWTH AND FINANCIAL CONDITION We intend to continue to expand our business through acquisitions of companies. Through acquisitions, we intend to expand our geographic presence, to expand the products and services we offer to existing clients and to enter new markets. Since our inception in June 1988, we have completed 44 acquisitions. Approximately one-half of the increase in our revenues during the five years ended June 30, 1998 is due to acquisitions. We regularly evaluate potential acquisition candidates. Risks that we have encountered in our acquisitions include: - higher acquisition prices due to increased competition for acquisitions; - fewer suitable acquisition candidates at acceptable prices; - insufficient capital resources for acquisitions; - inability to successfully integrate or operate acquired companies; - loss of key management and other employees of acquired companies; and - departure of key clients of acquired companies. Although we have not experienced the problem to date, governmental and regulatory constraints could prevent some acquisitions in the future. We cannot assure you that any acquisitions, if consummated, will be advantageous to us. Without additional acquisitions, we may not grow at historical rates. If our acquisition strategy fails, our business, financial condition and results of operations could be materially and adversely affected. FAILURE TO PROPERLY MANAGE OUR OPERATIONS AND OUR GROWTH COULD ADVERSELY AFFECT OUR EXISTING BUSINESS AND IMPEDE OUR ABILITY TO ATTRACT NEW BUSINESS We have rapidly expanded our operations in recent years. We intend to continue expansion in the foreseeable future to pursue existing and potential market opportunities. This rapid growth places a significant demand on our management and operational resources. In order to manage growth effectively, we must implement and improve our operational systems, procedures, and controls on a timely basis. If we fail to implement these systems procedures and controls on a timely basis, we may not be able to service our clients' needs, hire and retain new employees, pursue new business, complete future acquisitions or 7 10 operate our businesses effectively. We could also trigger contractual credits to clients. Failure to properly integrate acquired operations with vendors' systems could result in increased cost. As a result of any of these problems associated with expansion, our business, financial condition and results of operations could be materially and adversely affected. OUR GOVERNMENT CONTRACTS EXPOSE US TO RISKS OF GOVERNMENT ACTIONS WHICH COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS Loss or termination of one or more large government contracts could have a material adverse effect on our business and financial results. Approximately one-third of our revenues in fiscal 1998 were derived from contracts with the United States government or its agencies. We have over 40 active prime contracts and numerous active subcontracts with the United States government or its agencies. The largest of these contracts accounted for approximately 8% of our revenue for fiscal 1998 and 11% in fiscal 1997. Government contracts, by their terms, generally can be terminated for convenience by the government. This means that the government may terminate the contract at any time, without cause. In some instances, we will receive compensation only for the services provided or costs incurred at the time of termination. Many of our government contracts contain base periods of one or more years, as well as one or more option periods that may cover more than half of the potential contract duration. The government generally has the right not to exercise option periods. Its failure to exercise option periods could curtail the contract term of some of our government contracts. The government's termination of, or failure to exercise option periods for, significant government contracts could have a material adverse effect on our business and financial results. Government contracts are generally subject to audits and investigations by government agencies. These audits and investigations involve a review of the contractor's performance on its contracts, as well as its pricing practices, its cost structure, and its compliance with applicable laws, regulations and standards. If the government finds that we improperly charged any costs to a contract, the costs are not reimbursable. If already reimbursed, the cost must be refunded to the government. If the government discovers improper or illegal activities in the course of audits or investigations, the contractor may be subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the government. In recent years, the government has substantially increased the personnel and resources it devotes to audits and investigations and has encouraged auditors and investigators to emphasize the detection of fraud or improper activities. We believe that this high level of industry scrutiny will continue for the foreseeable future. The government could subject us to similar scrutiny in the future. Any resulting penalties or sanctions could have a material adverse effect on our business and financial results. YEAR 2000 PROBLEMS FOR US OR OUR CLIENTS COULD INCREASE OUR LIABILITIES AND EXPENSES AND DECREASE OUR REVENUES AND PROFITABILITY We use many computer software programs and operating systems across our organization. If our programs or systems contain source code that is unable to interpret appropriately the upcoming calendar year 2000, modification or replacement of programs or systems may be necessary. We are evaluating and managing the risks associated with Year 2000 software failures, and we are attempting to ensure a smooth Year 2000 transition. We believe, however, that it is not possible to determine with complete certainty that all Year 2000 problems affecting us or our 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, we believe that the following consequences are possible: - a significant number of operational inconveniences and inefficiencies for us and our clients that will divert management's time and attention and financial and human resources from its ordinary business activities; 8 11 - a few serious system failures that will require significant efforts by us or our clients to prevent or alleviate material business disruptions; - several routine business disputes and claims for pricing adjustments or penalties due to Year 2000 problems by our clients, which will be resolved in the ordinary course of business; and - a few serious business disputes alleging that we failed to comply with the terms of contracts or industry standards of performance, some of which could result in litigation or contract termination. We are attempting to coordinate with our clients, suppliers and other parties regarding their Year 2000 compliance. Most of our clients maintain their own application programs, although they use our computer and network resources. We do undertake to test and modify system software for our clients, and we rely on vendors of systems software to provide Year 2000 compliant products. In some situations, we have agreed to modify or upgrade our client application programs to remedy any existing Year 2000 problems. We have estimated our costs to perform these services and have taken steps to plan for these costs. We cannot, however, guarantee that these steps will be sufficient or that our estimates are accurate. If we fail to adequately assess these costs, our business could be adversely affected. In addition, our business could be adversely affected if our clients experience Year 2000 problems with applications, causing management resources to be devoted to resulting problems. Consequently, affected clients could 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 could also be adversely affected if potential new clients decide not to pursue outsourcing projects because they are focusing their information technology resources on Year 2000 issues in their own organizations. We have identified and analyzed both internally developed and acquired software that utilizes date embedded codes that may experience operational problems when the Year 2000 is reached. We intend to complete substantial necessary modifications to the identified software by June 1999. However, we expect our efforts regarding Year 2000 compliance to continue thereafter as necessary. We are spending or incurring significant financial and operating expenses and resources to become Year 2000 compliant. However, we cannot guarantee that our systems or our clients' systems will be entirely Year 2000 compliant. 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 approximately $4 million is incremental costs solely attributable to Year 2000 related problems. Of the $15 million, approximately $7 million had been incurred through December 31, 1998, and a majority of the remainder is expected to be incurred by June 30, 1999. The costs required to achieve substantial Year 2000 compliance, or our failure to do so, could have a material adverse effect on our business, financial condition or results of operations. ATM LEGISLATION COULD REDUCE OUR REVENUE AND PROFITABILITY State and federal governmental entities have proposed legislation and regulations to regulate and limit or eliminate the fees that may be collected by automated teller machine owners. The regulation and limitation or elimination of ATM fees may reduce the economic viability of many ATMs. If this type of legislation is enacted, the number of ATMs operated in geographic areas affected by the legislation could decrease significantly, adversely affecting our results of operations as they relate to our ATM business. Approximately 10% of our revenues for fiscal 1998 were derived from our ATM business. 9 12 FAILURE TO RETAIN AND ATTRACT HIGH-TECH PERSONNEL AND SKILLED MANAGEMENT COULD ADVERSELY AFFECT OUR ABILITY TO DIRECT GROWTH AND MANAGEMENT OF OUR BUSINESS Our success depends to a significant extent upon our ability to attract, retain and motivate highly skilled and qualified personnel. If we fail to attract, train, and retain sufficient numbers of these technically-skilled people, our business, financial condition, and results of operations will be materially and adversely affected. Competition for personnel is intense in the information technology services industry, and recruiting and training personnel requires substantial resources. We must continue to grow internally by hiring and training technically-skilled people in order to perform services under our existing contracts and new contracts that we will enter into. The people capable of filling these positions are in great demand and recruiting and training these personnel require substantial resources. We have to pay an increasing amount to hire and retain a technically-skilled workforce. Our business also experiences significant turnover of technically-skilled people. Our success also depends on the skills, experience, and performance of key members of our management team. The loss of any key employee could have an adverse effect on our business, financial condition and results of operations and prospects. Other than with Darwin Deason, we have not entered into employment agreements with any of our key personnel, although we have entered into severance agreements with each of our executive officers and we may in the future enter into employment agreements with our key personnel. DARWIN DEASON HAS SUBSTANTIAL CONTROL OVER OUR COMPANY AND CAN AFFECT VIRTUALLY ALL DECISIONS MADE BY OUR STOCKHOLDERS Darwin Deason, our Chairman of the Board, beneficially owns 3,299,686 shares of Class B common stock and 2,575,802 shares of Class A common stock as of December 31, 1998. Accordingly, upon completion of this offering, Mr. Deason will control approximately 43.2% of the total voting power of our company assuming no exercise of the underwriters' over-allotment option, and 42.6% if the underwriters' over-allotment option is exercised. As a result, Mr. Deason has the requisite voting power to significantly affect virtually all decisions made by ACS and our stockholders, including the power to block corporate actions such as an amendment to most provisions of our certificate of incorporation. In addition, Mr. Deason may significantly influence the election of directors and any other action requiring shareholder approval. Mr. Deason was recently succeeded by Jeffrey A. Rich as Chief Executive Officer. Mr. Deason has an employment contract including severance arrangements, which has an expiration date of May 2004, and is annually renewable thereafter. LEGAL PROCEEDINGS, INCLUDING A $17 MILLION JUDGMENT, COULD RESULT IN MATERIAL CHARGES AGAINST EARNINGS On December 16, 1998, a state district court in Houston, Texas entered judgment against ACS for approximately $17 million in a lawsuit brought by former employees of Gibraltar Savings Association and/or First Texas Savings Association. These employees alleged that they were entitled to the value of 401,541 shares of ACS stock under options issued to these employees in 1988 in connection with a former data processing services agreement between Gibraltar Savings Association/First Texas Savings Association and ACS. We have filed a motion for new trial, and plan to immediately and vigorously appeal the judgment. The plaintiffs also have filed a notice of appeal. Should the proceedings not be favorably resolved in the trial court or on appeal, we may be subject to a material charge. See "Business -- Legal Proceedings" for additional information on this lawsuit. We are also subject to other legal proceedings, claims and disputes which arise in the ordinary course of our business. If unfavorably resolved, these proceedings could have a material adverse effect on our financial position, results of operation and liquidity. PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW COULD DETER TAKEOVER ATTEMPTS Some provisions in our certificate of incorporation and bylaws could also delay, defer, prevent or make more difficult a merger, tender offer, or proxy contest involving our company. Our stockholders might view 10 13 transactions such as these as being in their best interests because, for example, a change of control might result in a price higher than the market price for shares of our Class A common stock. Among other things, these provisions: - require an 80% vote of the stockholders to amend some provisions of our certificate of incorporation; - require an 80% vote of the stockholders to amend some provisions of our bylaws; - permit only our Chairman, President or a majority of the Board of Directors to call stockholder meetings; - authorize our Board of Directors to issue up to 3,000,000 shares of preferred stock in series with the terms of each series to be fixed by our Board of Directors; - authorize our Board of Directors to issue Class B common stock, which shares are entitled to ten votes per share; - divide our Board of Directors into three classes so that only approximately one-third of the total number of directors will be elected each year; - permit directors to be removed, with or without cause, only by vote of at least 80% the combined voting power; and - specify advance notice requirements for stockholder proposals and director nominations to be considered at a meeting of stockholders. In addition, with some exceptions, Section 203 of the Delaware General Corporation Law restricts mergers and other business combinations between us and any holder of 15% or more of our voting stock. We also have a stockholder rights plan. Under this plan, after the occurrence of specified events, our stockholders will be able to buy stock from us or our successor at reduced prices. These rights will not extend, however, to persons participating in takeover attempts without the consent of our Board of Directors. Accordingly, this plan could delay, defer or prevent a change of control of our company. See "Description of Capital Stock -- Rights Agreement" for additional information about the rights plan. Further, we have entered into severance agreements with each of our executive officers, which may have the effect of discouraging an unsolicited takeover proposal. Finally, Mr. Deason's ownership of approximately 45% of the voting power of our company (approximately 43.2% after completion of the offering, assuming no exercise of the underwriters' over-allotment option, and 42.6% if the underwriters' over-allotment option is exercised) could have the effect of delaying, deterring or preventing a takeover of our company. See "-- Darwin Deason has substantial control over our company and can affect virtually all decisions made by our stockholders" for additional information about Mr. Deason's ownership. INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD ADVERSELY AFFECT OUR BUSINESS We and other companies in our industry rely heavily on the use of intellectual property. We do not own the majority of the software that we use to run our business; instead we license this software from a small number of primary vendors. If these vendors assert claims that we or our clients are infringing on their software or related intellectual property, we could incur substantial costs to defend these claims. In addition, if any of our vendors' infringement claims are ultimately successful, our vendors could require us (1) to cease selling or using products or services that incorporate the challenged software or technology, (2) to obtain a license or additional licenses from our vendors, or (3) to redesign our products and services which rely on the challenged software or technology. We are not currently involved in any material intellectual property litigation, but could be in the future to protect our trade secrets or know-how, or to defend ourselves or our clients against alleged infringement claims. 11 14 AVAILABILITY OF SIGNIFICANT AMOUNTS OF CLASS A COMMON STOCK FOR SALE COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR CLASS A COMMON STOCK Our stockholders hold a substantial number of shares of common stock which they may be able to sell in the public market in the near future. In addition, there are a substantial number of shares of the Class A common stock that may be issued and subsequently sold upon exercise of employee stock options, and upon conversion of our Class B common stock and our 4% convertible subordinated notes. The sale or issuance of additional shares of Class A common stock following this offering could adversely affect the prevailing market price of the Class A common stock. See "Description of Capital Stock" for a description of these shares and "Underwriting" for a description of limitations on ACS' ability to issue new shares of Class A common stock and on directors' and officers' ability to dispose of shares of Class A common stock they hold after this offering. RISKS RELATED TO INTERNATIONAL OPERATIONS COULD AFFECT OUR BUSINESS IN THE FUTURE We currently have limited operations in many countries around the world but may increase our international presence in the future. Risks that affect international operations include: - fluctuations in currency exchange rates; - complicated licensing and work permit requirements; - variations in the protection of intellectual property rights; - restrictions on the ability to convert currency; and - additional expenses and risks inherent in conducting operations in geographically distant locations, with clients speaking different languages and having different cultural approaches to the conduct of business. OTHER RISKS, UNKNOWN OR IMMATERIAL TODAY, MAY BECOME KNOWN OR MATERIAL IN THE FUTURE We have attempted to identify material risk factors currently affecting our company. However, additional risks that we do not yet know of, or that we currently think are immaterial, may occur or become material. These risks could impair our business operations or adversely affect revenues or profitability. WHERE YOU CAN FIND MORE INFORMATION ACS files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy the reports, statements or other information we file at the SEC's public reference room in Washington, D.C. located at 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC also maintains regional offices where you can read and copy the reports. These are located at 500 West Madison Street, Room 1400, Chicago, Illinois 60606 and at 7 World Trade Center, Suite 1300, New York, New York 10048. You can request copies of these documents, upon payment of photocopying fees, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings are also available to the public on the SEC's internet site (http://www.sec.gov). These documents are also available for viewing and copying at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. This prospectus is part of a registration statement on Form S-3 that we filed with the SEC. This prospectus does not contain all the information in that registration statement. For further information with respect to ACS and the securities offered by this prospectus, you should review the registration statement. You can obtain the registration statement from the SEC and the NYSE at the public reference facilities we referred to above. 12 15 The SEC allows us to "incorporate by reference" information into this prospectus. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is deemed to be part of this prospectus, except for any information superseded by information contained directly in this prospectus. This prospectus incorporates by reference the documents set forth below that ACS and BRC Holdings, Inc. have previously filed with the SEC. These documents contain important information about ACS and its financial condition. There may be statements in a document incorporated by reference in this prospectus that are modified or updated by statements in this prospectus or in a document filed after the date of this prospectus. Any prior statements that are so modified or updated in this prospectus or subsequently filed documents are not considered to be a part of this prospectus. You should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. The information contained or incorporated by reference in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the Class A common stock. The reference to our worldwide web address in this prospectus does not constitute incorporation by reference of the information contained at the site. The following ACS documents are incorporated by reference into this prospectus:
FILING PERIOD - ------ ------ Annual Report on Form 10-K......................... Year Ended June 30, 1998 Quarterly Report on Form 10-Q...................... Quarter Ended September 30, 1998 Quarterly Report on Form 10-Q...................... Quarter Ended December 31, 1998 Current Report on Form 8-K......................... Dated February 19, 1998 Current Report on Form 8-K......................... Dated December 30, 1998 Current Report on Form 8-K/A....................... Dated February 5, 1999 Proxy Statement on Schedule 14A.................... Dated September 29, 1998 The description of common stock purchase rights included in the Company's registration statement on Form 8-A...................................... Dated August 21, 1997
The following BRC Holdings, Inc. information is incorporated by reference into this prospectus:
INFORMATION PERIOD - ----------- ------ Financial Statements of BRC Holdings, Inc. as of December 31, 1996 and 1997 and for the three years ended December 31, 1997 located on pages 22 through 49 of the Annual Report on Form 10-K..... Year Ended December 31, 1997 Financial Statements of BRC Holdings, Inc. (unaudited) as of September 30, 1998 and for the quarter ended September 30, 1998 located on pages 1 through 9 of the Quarterly Report on Form 10-Q/A.................. Quarter Ended September 30, 1998
All documents filed by ACS as required by Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 subsequent to the date of this prospectus will be deemed to be incorporated by reference into this prospectus and to be a part hereof from the date of filing of these documents. Documents incorporated by reference are available from ACS without charge, excluding all exhibits unless specifically incorporated by reference as an exhibit to this prospectus. Prospective investors may obtain documents incorporated by reference in this prospectus by requesting them in writing or by telephone from the company at its executive offices: Attention: General Counsel, 2828 North Haskell Avenue, Dallas, Texas 75204, (214) 841-6111. 13 16 CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS Some of the statements under "Prospectus Summary," "Risk Factors," "Business" and elsewhere in this prospectus, or incorporated in this prospectus by reference, constitute 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. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Statements about ACS' outlook and all other statements in this prospectus other than historical facts are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "anticipates," "plans," "believes," "estimates," "predicts," "potential," "intends," "foresees," "projects," "forecasts" or "continue" or the negative of these terms or other comparable terminology. These forward looking statements rely on a number of assumptions concerning future events and are subject to a number of uncertainties and factors, many of which are outside of our control, that could cause actual results to differ materially from these statements. While we believe that the assumptions concerning future events are reasonable, we caution that there are inherent difficulties in predicting important factors, especially the loss of any significant customers, the competition in the information technology industry and the impact of competition on pricing, the timing and magnitude of technological advances, reliance on key software vendors, the performance of recently acquired businesses and prospects for future acquisitions, uncertainties surrounding budget reductions or changes in funding priorities or existing government programs, Year 2000 problems affecting ACS' and its clients' business, the costs of attracting and retaining highly skilled personnel and the other factors described under "Risk Factors" beginning on page 5. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results. USE OF PROCEEDS We estimate that the net proceeds to us from this Class A common stock offering, after deducting estimated expenses will be approximately $ million. We will use all of the net proceeds of this offering for repayment of a portion of the bank debt under our revolving credit agreement with Wells Fargo Bank (Texas) N.A., as agent, Bank One, Texas, N.A., as co-agent, and the other lenders that are parties to the credit agreement. As of December 31, 1998, our outstanding debt under the credit agreement was $174.0 million, including approximately $165 million used in connection with the acquisition of BRC Holdings, Inc., now known as ACS BRC Holdings, Inc. See "Business -- Recent Acquisitions" for a description of the acquisition of BRC Holdings, Inc. The credit agreement expires in July 2002, and loans outstanding at December 31, 1998 under the credit agreement bear interest at LIBOR plus 0.625%. As of December 31, 1998, after giving effect to the receipt of the estimated net proceeds to us from the sale of the Class A common stock offered by this prospectus, we will have $ of indebtedness under the credit agreement and $ million of availability under the credit agreement. We intend to borrow under the credit agreement from time to time as necessary to fund acquisitions and for other general corporate purposes. If the underwriters exercise their over-allotment option in full, Mr. Deason will receive estimated net proceeds of approximately $ million. ACS will receive no proceeds from the sale of Mr. Deason's shares of Class A common stock in connection with the exercise of the underwriters' over-allotment option. 14 17 SELLING STOCKHOLDER IF UNDERWRITERS' OVER-ALLOTMENT OPTION IS EXERCISED The following table sets forth information regarding the shares of the Class A common stock and Class B common stock beneficially owned by Mr. Deason, our Chairman of the Board, as of the date of this prospectus, and as adjusted to reflect the sale of the shares of Class A common stock offered by this prospectus, assuming that the underwriters' over-allotment option is exercised. In calculating the percent of total voting power, the voting power of shares of Class A common stock, which has one vote per share, and Class B common stock, which has ten votes per share, is aggregated.
SHARES BENEFICIALLY OWNED PRIOR TO OFFERING --------------------------------------------------------- PERCENT OF TOTAL PERCENT SHARES OF NUMBER OF TOTAL NUMBER CLASS A PERCENT SHARES OF OF SHARES SHARES OF OF SHARES AND OF CLASS A OF CLASS A CLASS A OF CLASS B CLASS B TOTAL COMMON COMMON COMMON COMMON COMMON VOTING STOCK STOCK STOCK STOCK STOCK POWER OFFERED ---------- --------- ---------- --------- ------- --------- SELLING STOCKHOLDER Darwin Deason................. 2,575,802 5.6% 3,299,686 12.0% 45.1% 525,000 SHARES BENEFICIALLY OWNED AFTER OFFERING, ASSUMING EXERCISE OF OVER-ALLOTMENT OPTION --------------------------------------------------------- PERCENT OF TOTAL PERCENT SHARES OF NUMBER OF TOTAL NUMBER CLASS A PERCENT OF SHARES SHARES OF OF SHARES AND OF OF CLASS A CLASS A OF CLASS B CLASS B TOTAL COMMON COMMON COMMON COMMON VOTING STOCK STOCK STOCK STOCK POWER ---------- --------- ---------- --------- ------- SELLING STOCKHOLDER Darwin Deason................. 2,050,802 4.2% 3,299,686 10.2% 42.6%
The shares listed above include 1,628,397 shares of Class A common stock owned by The Deason International Trust and 72,728 of the shares of Class A common stock owned by the Deason Foundation. Mr. Deason holds the sole voting power with respect to these shares through an irrevocable proxy granted by the trust and a board resolution passed by the foundation. The investment power with respect to these shares is held by the trust and the foundation. The shares of Class A common stock also include 7,310 shares owned by Mr. Deason's spouse and her daughter, to which Mr. Deason disclaims beneficial ownership. 15 18 PRICE RANGE OF CLASS A COMMON STOCK Since February 5, 1997, the Class A common stock has been traded on the NYSE. From February 5, 1997 to November 30, 1998, the Class A common stock traded under the symbol "AFA." Since December 1, 1998, it has traded under the symbol "ACS." From September 26, 1994 to February 5, 1997, the Class A common stock was traded on the Nasdaq National Market under the symbol "ACSA." The following table shows the quarterly high and low sales prices of the Class A common stock for the last two fiscal years as reported on the Nasdaq through February 1997 and then on the NYSE, and has been retroactively adjusted for the two-for-one stock split which occurred in November 1996.
HIGH LOW ---- --- Fiscal year ended June 30, 1997 First Quarter............................................. $32 $21 1/8 Second Quarter............................................ $32 $24 3/4 Third Quarter............................................. $30 1/4 $19 1/2 Fourth Quarter............................................ $28 5/8 $20 3/4 Fiscal year ended June 30, 1998 First Quarter............................................. $29 15/16 $24 5/16 Second Quarter............................................ $26 1/2 $21 1/2 Third Quarter............................................. $37 1/8 $24 1/2 Fourth Quarter............................................ $39 3/4 $30 5/8 Fiscal year ended June 30, 1999 First Quarter............................................. $38 3/4 $29 3/4 Second Quarter............................................ $45 $22 3/8 Third Quarter (through March 22, 1999).................... $51 3/4 $36 1/2
On March 22, 1999, the last reported sales price of the Class A common stock as reported on the NYSE was $37 per share. DIVIDEND POLICY Except for the dividends paid by ACS Government Solutions Group, Inc., formerly known as Computer Data Systems, Inc., prior to its merger with a wholly-owned subsidiary of ACS in December 1997, ACS has not paid any cash dividends to date on its Class A common stock. We intend to continue to retain earnings for use in the operation of our business and, therefore, do not anticipate declaring or paying any cash dividends in the foreseeable future. Under the terms of our credit agreement, we are prohibited from paying cash dividends in any fiscal year in a total amount that would exceed 50% of our net income for the preceding fiscal year. Any future determination to pay dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors the Board of Directors deems relevant. 16 19 CAPITALIZATION The following table shows the capitalization of our company as of December 31, 1998, and as adjusted to give effect to the sale of shares of Class A common stock offered by ACS by this prospectus and the application of the estimated net proceeds to us from this offering as described under "Use of Proceeds." You should read this table in conjunction with the other financial information appearing elsewhere in this prospectus.
AS OF DECEMBER 31, 1998 ------------------------ AS ACTUAL ADJUSTED --------- ------------ (IN THOUSANDS) Notes payable and current portion of long-term debt......... $ 11,699 $ ======== ======== Long-term debt: Credit agreement.......................................... $174,000 $ 4% convertible subordinated notes due 2005................ 230,000 Other debt, net of current portion........................ 4,964 -------- -------- Total long-term debt.............................. 408,964 Stockholders' equity: Common stock: Class A, $.01 par value, 500,000,000 shares authorized, 45,823,877 shares issued and outstanding (49,323,877 after this offering).................................. 459 Class B, par value $.01 per share, 14,000,000 shares authorized, 3,299,686 shares issued and outstanding... 33 Additional paid-in capital................................ 314,490 Retained earnings......................................... 244,429 -------- -------- Total stockholders' equity........................ 559,411 -------- -------- Total capitalization.............................. $968,375 $ ======== ========
In reviewing the table above, you should note the following: - Our notes payable and current portion of long-term debt consists of $9.0 million borrowed from a commercial bank for cash used in ACS-owned ATMs and $2.7 million in capital lease obligations and other notes payable to individuals and corporations. - Our credit agreement with Wells Fargo, among others, has a maximum availability of $200 million, expires in July 2002 and accrues interest at LIBOR plus 0.3% to 0.875%, or the bank's prime rate, as elected by ACS. At December 31, 1998, our borrowing rate was LIBOR plus 0.625%. - Our other long-term debt includes $2.2 million in capital lease obligations and $2.8 million in other amounts due to individuals and corporations. - The number of shares of Class A common stock listed above does not include (a) 6,326,457 shares of Class A common stock reserved for issuance under our stock option plans, under which options to purchase 4,876,957 shares were outstanding as of December 31, 1998 at a weighted average exercise price of $21.22 per share, (b) 5,391,936 shares of Class A common stock issuable upon conversion of our 4% convertible subordinated notes due March 15, 2005, or (c) 3,299,686 shares of Class A common stock issuable upon conversion of all outstanding shares of Class B common stock. See "Description of Capital Stock -- Class A Common Stock and Class B Common Stock" for a description of the terms of the common stock, including conversion rights. 17 20 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following selected consolidated income statement data for the fiscal years ended June 30, 1995, 1996, 1997 and 1998 and selected consolidated balance sheet data as of June 30, 1996, 1997 and 1998 were derived from our audited financial statements, incorporated in this prospectus by reference. The following selected consolidated income statement data for the fiscal year ended June 30, 1994 and selected consolidated balance sheet data as of June 30, 1994 and 1995 were derived from our audited financial statements, incorporated in this prospectus by reference, and the audited financial statements of ACS Government Solutions Group, Inc., formerly Computer Data Systems, Inc. The following selected consolidated income statement data for the six months ended June 30, 1997 and 1998 and the selected consolidated balance sheet data as of December 31, 1998 were derived from our unaudited financial statements, incorporated in this prospectus by reference. In the opinion of management, our unaudited financial statements reflect all adjustments, consisting of only normal recurring accruals, that are necessary to present fairly the financial results for the periods presented. The selected financial data do not purport to indicate results of operations as of any future date or any future period. We acquired 31 companies during the periods presented under the purchase method of accounting, and therefore revenues between periods are not comparable. In addition, all periods reflect the merger of a wholly-owned subsidiary of ACS with and into ACS Government Solutions Group, Inc., formerly known as Computer Data Systems, Inc., in December 1997. This merger was accounted for as a pooling of interests and, accordingly, historical results have been restated to reflect the combined operations of the two companies.
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ------------------------------------------------------ ------------------- 1994 1995 1996 1997 1998 1997 1998 -------- -------- -------- -------- ---------- -------- -------- INCOME STATEMENT DATA: Revenues $476,978 $533,848 $647,608 $928,925 $1,189,123 $550,229 $754,990 Operating expenses: Wages and benefits............................ 233,678 248,680 298,659 395,780 504,284 234,217 319,152 Services and supplies......................... 116,483 132,737 185,550 264,104 364,285 168,136 234,951 Rent, lease and maintenance................... 72,184 87,661 82,314 132,837 150,253 74,792 87,895 Depreciation and amortization................. 10,614 14,784 18,450 35,510 47,475 21,833 31,347 Merger costs.................................. -- -- -- -- 12,974 12,974 -- Other operating expenses...................... 6,544 5,608 6,052 10,428 11,533 4,889 8,735 -------- -------- -------- -------- ---------- -------- -------- Total operating expenses................ 439,503 489,470 591,025 838,659 1,090,804 516,841 682,080 -------- -------- -------- -------- ---------- -------- -------- Operating income.............................. 37,475 44,378 56,583 90,266 98,319 33,388 72,910 Interest expense.............................. 6,483 4,729 3,417 7,121 12,059 5,456 7,168 Other nonoperating income, net................ (1,727) (3,321) (2,751) (425) (7,832) (6,596) (1,164) -------- -------- -------- -------- ---------- -------- -------- Income before income taxes.................... 32,719 42,970 55,917 83,570 94,092 34,528 66,906 Income tax expense............................ 13,065 17,315 22,392 33,904 39,670 15,476 27,272 -------- -------- -------- -------- ---------- -------- -------- Net income..................................... $ 19,654 $ 25,655 $ 33,525 $ 49,666 $ 54,422 $ 19,052 $ 39,634 ======== ======== ======== ======== ========== ======== ======== Earnings per common share: Basic......................................... $ 0.64 $ 0.74 $ 0.88 $ 1.08 $ 1.14(1) $ 0.40 $ 0.82 Diluted....................................... 0.59 0.71 0.85 1.05 1.11(1) 0.39 0.77 Shares used in computing earnings per common share: Basic......................................... 30,664 34,625 38,228 46,136 47,599 47,167 48,488 Diluted....................................... 33,233 35,998 39,320 47,452 50,487 48,453 55,304
AS OF JUNE 30, AS OF DECEMBER 31, ---------------------------------------------------- ------------------ 1994 1995 1996 1997 1998 1998 -------- -------- -------- -------- -------- ------------------ BALANCE SHEET DATA: Working capital................................... $ 76,583 $ 77,615 $ 79,928 $110,866 $198,118 $ 210,472 Total assets...................................... 266,734 309,903 636,098 761,477 949,798 1,328,310 Total long-term debt (less current portion)....... 84,534 37,940 57,208 130,680 234,848 408,964 Total stockholders' equity........................ 90,439 156,686 363,204 427,481 503,670 559,411
- --------------- (1) Includes $12,974,000, $8,880,000 net of tax, or $.19 and $.18 per basic and diluted shares, respectively, of merger costs incurred by ACS in connection with the merger of a wholly-owned subsidiary of ACS with and into ACS Government Solutions Group, Inc. in December 1997. 18 21 BUSINESS GENERAL We are based in Dallas, Texas and have offices primarily in North America, as well as Central and South America, Europe and the Middle East. We provide a full range of information technology services to clients which have time-critical, transaction-intensive information processing needs. Our services include technology outsourcing, business process outsourcing and professional and systems integration services. Approximately 90% of our revenues for the past three fiscal years were recurring revenues, which are revenues derived from services that our clients use each year in connection with their ongoing businesses. We were formed in 1988 to participate in the trend to outsource technology intensive information processing functions to third parties, which enables businesses to focus on core operations, respond to rapidly changing technologies and reduce technology expenses. Our business strategy is to continue to lower our unit processing costs by expanding our client base through both internal marketing and the acquisition of complementary companies. Our marketing efforts focus on developing long-term relationships with clients that choose to outsource various information processing requirements, as well as on expanding the services we offer to existing clients. Since inception through December 31, 1998, we have completed 44 acquisitions, which have resulted in geographic expansion, growth and diversification of our client base, expansion of services and products offered, and increased economies of scale. Approximately half of the increase in our revenues for the five years ended June 30, 1998 has been attributable to acquisitions. Our largest transaction occurred in December 1997, when we acquired ACS Government Solutions Group, Inc., formerly known as Computer Data Systems, Inc., a provider of information technology solutions primarily to Federal government agencies. We accounted for this transaction as a pooling of interests, and as a result, we have restated our historical financial statements to reflect the combined operations of both companies. We serve two primary markets. Our largest market is the commercial sector, which accounts for approximately two-thirds of our annual revenue. Within the commercial sector, we provide technology outsourcing, business process outsourcing and professional and systems integration services to a variety of clients nationwide, including retailers, local municipalities, healthcare providers, telecommunications companies, wholesale distributors, manufacturers, utilities, financial institutions and insurance companies. We also serve the federal government market which accounts for approximately one-third of our annual revenues. Our services in this market are comprised primarily of professional and systems integration services and business process outsourcing. Within our federal government business, approximately half of our revenues are derived from civilian agencies with the remaining half from the Department of Defense. Our revenues, derived from the services indicated, are as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, -------------------------------- ------------ 1996 1997 1998 1998 -------- -------- ---------- ------------ (IN THOUSANDS) Technology outsourcing............................. $185,945 $297,268 $ 330,727 $187,396 Business process outsourcing....................... 260,220 385,937 468,175 303,091 Professional services/systems integration.......... 201,443 245,720 390,221 264,503 -------- -------- ---------- -------- Total.................................... $647,608 $928,925 $1,189,123 $754,990 ======== ======== ========== ========
MARKET OVERVIEW According to industry sources, the 1997 worldwide market for information technology services and solutions was approximately $266 billion, with the United States market accounting for $124 billion, or 19 22 approximately half of the total market. These sources estimate that approximately $47 billion, or one-third, of the U.S. market has been outsourced to companies like ours, and that the U.S. outsourced market is expected to grow to $76 billion in 2002, representing a 10% compounded annual growth rate. However, in the particular markets in which ACS competes, industry sources estimate that information technology spending in the U.S. was approximately $38 billion in 1997, of which approximately $18 billion was outsourced. This outsourced market is expected by these industry sources to increase to $36 billion in 2002, representing a 14% compounded annual growth rate. We believe that the demand for third-party information processing services has grown substantially in recent years and will continue to increase in the future as a result of financial, strategic and technological factors. These factors include: - the increasing complexity in the information technology systems environment; - the desire by businesses to take advantage of the latest advances in technology without the cost and time commitment required to maintain an in-house system; - the increasing requirements for rapid processing and communication of large amounts of data to multiple locations; - the increasing attention by businesses to controlling costs, causing them to compare the fully allocated cost of in-house processing with the cost of outsourcing; and - the desire of organizations to focus on their primary competencies. As a result of rapid technological change in our markets, we expect strong demand for third-party professional programming and consulting services. Because we provide professional programming services to clients with mainframe environments as well as with client-server and network applications, we believe that we are well-positioned to expand our services in current locations as well as in new geographic markets. As part of our consulting services, we advise clients on the strategic acquisition and utilization of information technology to achieve and improve their competitive position. BUSINESS STRATEGY The key components of our business strategy include the following: - Expand Client Base -- We seek to develop long-term relationships with new clients by leveraging our expertise and breadth of information technology products and services. Our primary focus is to increase our revenues by obtaining new clients with recurring requirements for information technology services. - Expand Existing Client Relationships -- We seek to leverage existing clients relationships in which we are currently not providing a full range of services in order to increase the information technology services we provide to these clients. - Build Recurring Revenues -- We seek to enter into long-term contracts with clients to provide services that meet their ongoing information technology needs. - Invest in Technology -- We respond to technological advances and the rapid changes in the requirements of our clients by committing substantial amounts of our resources to the operation of multiple hardware platforms, customization of products and services that incorporate new technology on a timely basis and continuous training of our client service personnel. - Provide Flexible Solutions -- We offer custom-tailored information processing solutions using a variety of proprietary and third-party licensed software on multiple hardware and systems software platforms. - Maximize Economies of Scale -- Our strategy is to develop and maintain a significant client and account/transaction base to create sufficient economies of scale that will enable us to achieve competitive costs. 20 23 - Complete Strategic and Tactical Acquisitions -- Our acquisition strategy is to acquire companies to expand our geographic presence, to expand the products and services we offer to existing clients, and to obtain a presence in new, complementary markets. Although we currently generate virtually all of our revenue from domestic clients, we believe we have significant international growth opportunities and intend to pursue those opportunities in a disciplined manner. - Attract, Train, and Retain Employees -- We believe that attracting, training, and retaining high quality employees is essential to our growth. We hire motivated individuals with strong character and leadership traits and provide them with ongoing technological and leadership skills training. We emphasize retaining our employees with challenging work assignments and incentive programs. COMMERCIAL SECTOR In the commercial sector we provide our clients with technology outsourcing, business process outsourcing and professional programming and systems integration services. Technology Outsourcing We offer a diverse set of technology outsourcing solutions to businesses desiring to achieve reductions in data processing costs and/or improvements in the quality of data processing. Our principal technology outsourcing service is the delivery of data processing services on a remote basis from host data centers with sufficient computer processing capacity to deliver significant cost savings and process improvements to clients. We typically outsource a client's in-house data processing operation by migrating the processing workload to one of our data centers over a period of three to six months, and in some instances we acquire the client's data processing assets and hire some client personnel. Our services include both on-line and batch processing of data and network management assistance. We process the mission-critical application systems for our clients including financial, human resources, retail and wholesale inventory distribution, manufacturing, healthcare management, transportation management, commercial and residential telephone billing, mortgage portfolio information and software development systems. We provide our technology outsourcing services through an extensive national data and service center network, which comprises five host data centers and seven remote data centers, as well as an extensive telecommunications network. We manage data communications and, in some instances, voice communications for our clients, as well as various local and wide area networks. We maintain a nationwide voice and data network to support the complex telecommunications requirements of our client base. We monitor and maintain network lines and circuits on a seven-day, 24-hour basis from our host data centers. We also provide shared hub satellite transmission services as an alternative to multi-drop and point-to-point hard line telecommunication networks. Our target market for technology outsourcing services consists of medium- to large-sized commercial organizations with time-critical, transaction-intensive information processing needs. We typically provide our technology outsourcing services based on multi-year contracts which are typically priced on a resource utilization basis. Resources utilized include processing time, professional services, hardware, data storage and retrieval requirements and output volume required for processing. Business Process Outsourcing We participate in several segments of the business process outsourcing market. We developed and acquired our business process outsourcing services to capitalize on a growing trend in corporate America. More and more companies are concluding that it is more efficient to focus on their core competencies and to outsource their non-core but mission-critical processes. As a result, they turn to companies such as ours to manage their processes. We provide a variety of services on behalf of our clients, including loan and mortgage processing, claims processing, accounts payable processing, data capture, storage and retrieval services and trade marketing. We typically receive client information in a variety of media such as paper, microfilm, computer tape, optical disk or CD ROM. Upon receipt, we either duplicate, electronically scan or convert the information into another suitable medium for processing. Using state-of-the-art image 21 24 transmission, storage and retrieval technology, we digitize and transmit millions of information records daily from client locations for high-speed conversion and database update. In many instances, we store the information for our clients on a long term basis. Pricing is typically based on the number of accounts or transactions processed. We also provide automated teller machine transaction processing services primarily for financial institutions and retailers. We believe we are one of the largest processors of retail automated teller machines in the United States. Professional Services/Systems Integration Our professional services include consulting, contract programming, applications and technical support and training, as well as network design and installation services. We provide a variety of clients with professional services allowing our clients the opportunity to use a planned, flexible workforce, either through staff augmentation or by serving as a client's in-house development staff. Our ability to deliver high-level skill sets and proven methodologies across a variety of technologies enhances our ability to offer complementary services to clients and prospects dealing with technological change. We also provide systems integration services to clients in selected industries who are deploying newer technology such as client/server architectures, advanced networks and web-based systems. We use a combination of third party and proprietary systems to offer packaged solutions to clients with intensive document management needs. We currently have approximately 1,500 employees providing professional and systems integration services to commercial clients. We provide these services in fifteen offices in major cities throughout the United States. Due to the nature of the work, we generally offer our professional services on a time and materials basis to a changing client base under short-term contractual arrangements. FEDERAL GOVERNMENT SECTOR Within the federal government sector, we provide professional services/system integration services and business process outsourcing services to several agencies. Our civilian agency clients account for about half of our federal government revenues and our department of defense clients accounts for the remaining half. Professional Services/Systems Integration We provide applications maintenance and development, network implementation and maintenance, desktop services, technical staff augmentation, training and web page development. Department of Defense and civilian agencies generally either contract directly with us or through the General Services Administration. The GSA performs the procurement function for many civilian and Department of Defense agencies. Approximately 41% of the professional services/systems integration services we provided to the federal government for fiscal 1998 were based on three contracts with the GSA. We provide our services to a variety of civilian agencies such as the Departments of Labor, Treasury and Transportation, the U.S. Senate, the U.S. Postal Service, the Federal Energy Regulatory Commission and the National Drug Intelligence Center. In addition, we also provide these services to a variety of Department of Defense agencies such as Strategic Command, Air Combat Command, the National Security Agency and the Defense Special Weapons Agency. We currently have over 3,900 employees providing these services to our government clients. Additionally, approximately 1,100 of these employees have security clearance. We generally price these services on a time and materials basis. Business Process Outsourcing Our business process outsourcing services consist primarily of loan servicing to federal agencies. Our services include billing, lockbox payment processing, related accounting and reconciliation and client service call center operations. Our largest contract for these services is with the Department of Education, 22 25 for which we service student loans under the Department of Education's Direct Student Loan program. Under this contract, we currently provide loan servicing to over 3.8 million borrowers, or over 10.8 million loans with an aggregate value of $39 billion. During fiscal year 1998, revenue from this contract was approximately $97 million. This contract is scheduled to expire September 2003. We also have contracts with the Small Business Administration and Department of Veterans Administration. Pricing is typically based on the number of accounts or transactions processed. RECENT ACQUISITIONS We purchased approximately 63% of the shares of BRC Holdings, Inc., now known as ACS BRC Holdings, Inc., in a tender offer completed on December 15, 1998 for a total of approximately $165 million in cash. We purchased the remaining shares of BRC in a second-step merger in February 1999 for a total of approximately $104 million, and as a result, BRC is a wholly-owned subsidiary of our company. BRC is an information technology services firm with 30 years experience providing consulting, project management, technical support and system services, and specializing in information technology outsourcing, consulting, information systems and document management services to the local government and healthcare sectors. In December 1998 we also acquired two other companies. The combined annual revenues of BRC and these two companies during calendar year 1998 was approximately $146 million. COMPETITION The markets for our services are intensely competitive and highly fragmented. The most significant competitive factors are reliability and quality of services, technical competence and price of services. In connection with some large technology outsourcing contracts, we may be required to purchase technology assets from prospective clients or to provide financial assistance to prospective clients in order to obtain their contracts. Many of our competitors have substantially greater resources and, as a result, may have a greater ability to obtain client contracts where sizable asset purchases or investments are required. To maintain competitive prices, we operate with efficient and low overhead and maintain a significant client base and account/transaction base to achieve sufficient economies of scale. Our competition for technology outsourcing contracts consists of - the first-tier outsourcers, including IBM, Electronic Data Systems Corporation and Computer Sciences Corporation; - mid-sized divisions of large corporations, such as MCI WorldCom and Lockheed-Martin; and - other smaller, regional competitors. In professional services markets, we actively compete with small specialized firms as well as with large competitors with a wider range of professional services. We believe that the key competitive factors in obtaining and retaining clients include the ability to understand project requirements, deliver appropriate skill sets in a timely manner and price services effectively. We must also compete for qualified personnel through competitive wages and by maintaining a consistent demand for the skills recruited. Our competition in professional services includes EDS, CSC, Science Applications International Corporation and several other local and regional players. We compete successfully in the business process outsourcing business by offering a wide range of high quality services and achieving favorable pricing by maintaining a significant volume of transactions to obtain economies of scale. Competition is highly fragmented and depends on the specific business process. Principal competitors for accounts payable, claims processing and records storage and retrieval services include FYI, Inc., National Processing Company, Lason, Inc., and several other small- to medium-sized local and regional competitors. Principal electronic commerce solution competitors include EDS, Deluxe Data Corporation, Concord EFS, Inc., large financial institutions and several regional automated teller machine networks and processors. 23 26 GOVERNMENT CONTRACTS AND REGULATION One-third of our revenues are derived from contracts and subcontracts with federal government agencies. Our allowable federal government contract costs and fees are subject to audit by the Defense Contract Audit Agency. These audits may result in non-reimbursement of some contract costs and fees. To date, we have experienced no material adjustments as a result of audits by the DCAA. The DCAA has completed audits of our federal contracts through fiscal 1996, with the exception of the operations of our subsidiary, Analytical Systems Engineering Corporation, which have been audited through calendar year 1995. We are not directly subject to federal or state regulations specifically applicable to financial institutions. As a provider of services to financial institutions, however, our technology outsourcing and electronic commerce solutions operations are examined periodically by various state and federal regulatory agencies. These agencies make recommendations regarding various aspects of our operations, and generally, we implement such recommendations. We also arrange for an annual independent examination of our major data processing facilities. Our ATM network operations are subject to federal and state regulations governing consumers' rights with respect to ATM transactions. Fees charged by ATM owners are currently regulated, and additional legislation which would regulate or eliminate some ATM fees has been proposed by the federal government and by several states. There can be no assurance whether new regulations or legislation will be enacted in the future or that existing consumer protection laws will not be expanded to apply to fees charged in connection with ATM transactions. However, if new legislation were enacted, the number of ATMs operated nationwide, or within the geographic areas affected by the legislation, could be significantly reduced. This could adversely affect our revenues and income as they relate to our ATM network operations. PROPERTIES As of December 31, 1998, we had approximately 248 locations in the United States and countries outside the United States, nine of which are owned and 239 of which are leased. Our leases have expiration dates ranging from 1999 to 2018. Our executive offices are located in Dallas, Texas at a company-owned facility of approximately 587,000 square feet, which also houses a host data center and other operations. Our other significant facilities include four host data centers, seven remote data centers, 58 facilities for business process outsourcing service centers, one records center located on 334 acres of land with 38 underground storage bunkers and another records center located on 199 acres of land with 23 underground storage bunkers, and 88 other facilities we use for office or warehouse space. Upon expiration of our leases, we do not anticipate any significant difficulty in obtaining renewals or alternative space. In addition to these properties, we occupy office space at client locations throughout the world, generally under the terms of the agreement with the particular client. All properties we lease or own are in good repair and in suitable condition for the purposes for which we use them. LEGAL PROCEEDINGS On December 16, 1998, a state district court in Houston, Texas entered final judgment against ACS in a lawsuit brought by twenty-one former employees of Gibraltar Savings Association and/or First Texas Savings Association. The GSA/FTSA employees alleged that they were entitled to the value of 401,541 shares of ACS stock under options issued to the GSA/FTSA employees in 1988 in connection with a former data processing services agreement between GSA/FTSA and ACS. The judgment against ACS 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. We continue to believe that we have a meritorious defense to all or a substantial portion of the plaintiffs' claims. ACS has filed a motion for new trial, and if that motion is denied, ACS plans to immediately and vigorously appeal the judgment. The plaintiffs also 24 27 have filed a notice of appeal. Should the proceedings not be favorably resolved in the trial court or on appeal, we may be subject to a material charge. A putative class action complaint by Matador Capital Management Corporation, among other plaintiffs, against BRC, our 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 seeking, among other things, to enjoin the tender offer and proposed merger involving BRC. The complaint alleged, 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 ACS. 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 our stockholders by ACS. 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 ACS with and into BRC, which was concluded on February 12, 1999. We are also subject to other legal proceedings, claims and disputes which arise in the ordinary course of our business. Although we cannot predict the outcomes of these legal proceedings, our management does not believe these actions will have a material adverse effect on our financial position, results of operations or liquidity. However, if unfavorably resolved, these proceedings could have a material adverse effect on our financial position, results of operations and liquidity. DESCRIPTION OF CAPITAL STOCK We are authorized to issue up to 500,000,000 shares of Class A common stock, $.01 par value, up to 14,000,000 shares of Class B common stock, $.01 par value, and up to 3,000,000 shares of preferred stock, $1.00 par value. As of December 31, 1998, we had issued and outstanding 45,823,877 shares of Class A common stock held by 364 stockholders of record, 3,299,686 shares of Class B common stock held by one holder of record, and no shares of preferred stock. As of December 31, 1998, 4,876,957 shares of Class A common stock were subject to outstanding options. In addition, up to 5,391,936 shares of Class A common stock could be issued upon conversion of our 4% convertible subordinated notes due March 15, 2005 in the aggregate principal amount of $230 million at a conversion price of $42.66 per share (equivalent to a conversion rate of 23.4432 shares per $1,000 principal amount of 4% notes), and 3,299,686 shares of Class A common stock could be issued upon conversion of all outstanding shares of Class B common stock. The relative rights and limitations of the Class A common stock and the Class B common stock, as well as our preferred stock, are summarized below. The following is a summary description of our capital stock. We refer you to the certificate of incorporation and the bylaws, copies of which have been filed as exhibits to our reports or registration statements filed with the SEC, for the complete terms of our capital stock. PREFERRED STOCK Our Board of Directors has the authority, without further action by the stockholders, to issue up to 3,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any unissued shares of preferred stock and to fix the number of shares constituting any series and the designations of the series. The issuance of preferred stock could adversely affect the voting power of the holders of Class A common stock and the likelihood that holders will receive dividend payments and payments upon liquidation and may have the effect of delaying, deferring or preventing a change in control of ACS. 25 28 CLASS A COMMON STOCK AND CLASS B COMMON STOCK Voting Rights Each share of Class A common stock is entitled to one vote and each share of Class B common stock is entitled to ten votes on all matters submitted to a vote of the stockholders. Except as otherwise provided by law, Class A common stock and Class B common stock vote together as a single class on all matters presented for a vote of the stockholders. Neither class of our common stock has cumulative voting rights. Conversion Class A common stock has no conversion rights. Each share of Class B common stock is convertible at any time, at the option of and without cost to the stockholder, into one share of Class A common stock upon surrender to our transfer agent of the certificate or certificates evidencing the Class B common stock to be converted, together with a written notice of the election of a stockholder to convert shares into Class A common stock. Shares of Class B common stock will also be automatically converted into shares of Class A common stock on the occurrence of events described below. Once shares of Class B common stock are converted into shares of Class A common stock, the shares may not be converted back into Class B common stock. Restrictions on Transfer of Class B Common Stock No person or entity holding shares of Class B common stock may transfer the shares, whether by sale, assignment, gift, bequest, appointment or otherwise, except to a permitted transferee (as described below). In the case of a Class B holder who is a natural person and the beneficial owner of shares of Class B common stock to be transferred, a permitted transferee consists of: - the Class B holder's spouse; provided, however, that upon divorce any Class B common stock held by the spouse shall automatically be converted into Class A common stock; - any lineal descendant of any great-grandparent of the Class B holder, including adopted children, and the descendant's spouse (the descendants and their spouses, together with the Class B holder's spouse, are referred to as "family members"); - the trustee of a trust for the sole benefit of the Class B holder or any of the Class B holder's family members; - any charitable organization established by the Class B holder or any of the Class B holder's family members; - any partnership made up exclusively of the Class B holder and any of the Class B holder's family members or any corporation wholly-owned by the Class B holder and any of the Class B holder's family members; provided that, if there is any change in the partners of the partnership or in the stockholders of the corporation that would cause the partnership or corporation no longer to be a permitted transferee, any Class B common stock held by the partnership or corporation shall automatically be converted into Class A common stock; - in the case of a Class B holder that is a partnership or corporation, (1) the partnership's partners or the corporation's stockholders, as the case may be, (2) any transferor to the partnership or corporation of shares of Class B common stock after the record date of the initial distribution of Class B common stock and (3) successors by merger or consolidation; - in the case of a Class B holder that is an irrevocable trust on the record date of the distribution of Class B common stock, (1) successor trustees of the trust, (2) any person to whom or for whose benefit principal or income may be distributed under the terms of the trust or any person to whom the trust may be obligated to make future transfers, provided the obligation exists prior to the date the trust becomes a holder of Class B common stock and (3) any family member of the creator of the trust; and 26 29 - in the case of a Class B holder that is any trust other than an irrevocable trust on the date of the distribution of Class B common stock, (1) successor trustees of the trust and (2) the person who established the trust and the person's permitted transferees. Upon the death or permanent incapacity of any Class B holder, the holder's Class B common stock shall automatically be converted into Class A common stock. All shares of Class B common stock will automatically convert into shares of Class A common stock on the ninetieth day after the death of Darwin Deason or upon the conversion by Mr. Deason of all Class B common stock beneficially owned by Mr. Deason into shares of Class A common stock. Subject to compliance with applicable securities laws, shares of Class B common stock are freely transferable among permitted transferees, but any other transfer of Class B common stock will result in its automatic conversion into Class A common stock. The restriction on transfers of shares of Class B common stock to other than a permitted transferee may preclude or delay a change in control of ACS. Dividends and Liquidation Rights The holders of Class A common stock and Class B common stock are entitled to receive dividends out of assets legally available therefore at times and in amounts as the Board of Directors may from time to time determine. Upon liquidation and dissolution of ACS, the holders of Class A common stock and Class B common stock are entitled to receive all assets available for distribution to stockholders. Other Rights The holders of Class A common stock and Class B common stock are not entitled to preemptive or subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. RIGHTS AGREEMENT On August 5, 1997, ACS entered into a rights agreement and authorized and declared a dividend distribution of one right for each share of Class A common stock and one right for each share of Class B common stock, each as outstanding at the close of business on August 25, 1997. Class A common stock and Class B common stock issued after August 25, 1997 will be issued with an associated right. Each right entitles the registered holder to purchase from ACS one share of Class A common stock at an exercise price of $150.00 per share, subject to adjustment from time to time. CERTIFICATE OF INCORPORATION AND BYLAWS The certificate of incorporation and bylaws contain several provisions that may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt. See "Risk Factors -- Provisions of our certificate of incorporation, bylaws and Delaware law could deter takeover attempts" for a discussion of the effects of these provisions. The certificate of incorporation does not provide for cumulative voting. Any action required or permitted to be taken by our stockholders may be taken at a duly called annual or special meeting of stockholders. The bylaws provide that special meetings of the stockholders may be called only by the Chairman of the Board of Directors, the President or a majority of the members of the Board of Directors. These provisions could have the effect of delaying until the next annual stockholders' meeting actions that are not favored by the holders of a majority of the voting power of our outstanding capital stock. Moreover, the bylaws authorize the stockholders to take action by written consent signed by the holders of a majority of the voting power of our outstanding capital stock, provided that written notice is given to those stockholders who have not consented in writing. Under the Delaware General Corporation Law, the approval of a Delaware corporation's board of directors, in addition to stockholder approval, is required to adopt any amendment to the company's 27 30 certificate of incorporation, but the exclusive power to adopt, amend and repeal the bylaws is conferred solely upon the stockholders, unless the corporation's certificate of incorporation also confers the power on its board of directors. The certificate of incorporation grants the power to amend the bylaws to the Board of Directors. The certificate of incorporation contains provisions permitted under the Delaware General Corporation Law that limit the liability of directors. In addition to these provisions of the certificate of incorporation and bylaws, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which restricts the consummation of some business combination transactions, including mergers, stock and asset sales and other transactions resulting in financial benefit to the stockholder, between a Delaware public corporation and an "interested stockholder" for a period of three years after the date the interested stockholder acquired its stock. An "interested stockholder" is defined as a person who, together with any of the person's affiliates and/or associates, beneficially owns 15% or more of any class or series of stock entitled to vote in the election of directors. However, a person is not an "interested stockholder" if: - the transaction is approved by (1) the corporation's board of directors prior to the date the interested stockholder acquired the shares or (2) a majority of the board of directors and by the affirmative vote of the holders of two-thirds of the outstanding shares of each class or series of stock entitled to vote generally in the election of directors, not including the shares owned by the interested stockholder; or - the interested stockholder acquired at least 85% of the voting stock of the corporation in the transaction in which it became an interested stockholder. Section 203 of the Delaware General Corporation Law is intended to discourage some takeover practices by impeding the ability of a hostile acquirer to engage in some types of transactions with the target company. Moreover, the bylaws contain a provision that permits any contract or other transaction between ACS and any of our directors, officers or stockholders, or any corporation or firm in which any of them are directly or indirectly interested, to be valid notwithstanding the presence of the director, officer or stockholder at the meeting authorizing the contract or transaction, or his participation or vote in the stockholder's meeting or authorization, subject to conditions, including disclosure. TRANSFER AGENT First City Transfer Company, our affiliate, serves as transfer agent and registrar for the Class A common stock. 28 31 UNDERWRITING Bear, Stearns & Co. Inc., Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC and Prudential Securities Incorporated are representing the underwriters listed below. Subject to the terms and conditions of an underwriting agreement, dated , 1999, the underwriters have severally agreed to purchase from us the number of shares of Class A common stock set forth opposite their names below:
NUMBER UNDERWRITERS OF SHARES - ------------ --------- Bear, Stearns & Co. Inc..................................... Goldman, Sachs & Co......................................... Donaldson, Lufkin & Jenrette Securities Corporation......... Hambrecht & Quist LLC....................................... Prudential Securities Incorporated.......................... --------- Total............................................. 3,500,000 =========
The underwriting agreement provides that the obligations of the several underwriters to purchase and accept delivery of the shares of Class A common stock offered by this prospectus are subject to approval by their counsel and to other conditions. The underwriters are obligated to purchase and accept delivery of all the shares of Class A common stock offered by this prospectus, other than shares covered by the over-allotment option, if any are purchased. The underwriters propose to offer the shares of Class A common stock to the public initially at the public offering price set forth on the cover page of this prospectus and in part to dealers, including the underwriters, at that price less a concession not to exceed $ per share. The underwriters may allow, and some dealers may reallow to other dealers, a concession not in excess of $ per share. After the initial offering to the public, the public offering price and other selling terms may be changed by the representatives of the underwriters at any time without notice. Mr. Deason, our Chairman of the Board, has granted to the underwriters an option to purchase up to 525,000 additional shares of Class A common stock at the public offering price less the underwriting discount set forth on the cover page of this prospectus solely for the purpose of covering over-allotments, if any. The option may be exercised at any time until 30 days after the date of this prospectus. To the extent that the underwriters exercise such option, each underwriter will become obligated, subject to some conditions, to purchase a number of additional shares proportionate to the underwriter's initial commitment as indicated in the preceding table. We and Mr. Deason have agreed to indemnify the underwriters against liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments that the underwriters may be required to make in respect to these liabilities. We have agreed that, for a period of 90 days from the commencement of this offering, we will not issue, sell, offer, or agree to sell any shares of Class A or Class B common stock (except for existing employee stock option and stock purchase plans, upon the conversion of outstanding convertible securities or for existing earn-out obligations arising out of prior acquisitions), without the prior consent of Bear, Stearns & Co. Inc. We may, however, issue up to 1,000,000 shares of Class A common stock in consideration for acquisitions of businesses occurring after this offering. In addition, our directors and executive officers have agreed not to sell their shares of Class A and Class B common stock for a period of 90 days from the commencement of this offering. They may, however, beginning on the 31st day after the commencement of this offering sell up to 15% of their individual holdings of shares of Class A common stock and Class B common stock. These individual holdings represent approximately 952,000 shares of common stock issued and outstanding as of the date of this prospectus (including 881,323 shares held by Mr. Deason), excluding options. In the event that the underwriters' over-allotment option is exercised in full, and as a result Mr. Deason sells 525,000 shares of his Class A common stock, Mr. Deason may 29 32 thereafter offer, sell, contract to sell or otherwise dispose of a maximum of 356,323 shares of common stock during the period specified above. The following table shows the underwriting discounts and commissions to be paid by ACS and, assuming the exercise in full of the underwriters' over-allotment option, Mr. Deason upon the sale of the shares offered by this prospectus:
ACS MR. DEASON -------- ---------- Per share................................................... $ $ Total....................................................... $ $
In order to facilitate the offering, persons participating in the offering may engage in transactions that stabilize, maintain or otherwise affect the price of the Class A common stock during and after the offering. Specifically, the underwriters may over-allot or otherwise create a short position in the Class A common stock for their own account by selling more shares of Class A common stock than have been sold to them by us. The underwriters may elect to cover any short position by purchasing shares of Class A common stock in the open market or by exercising the over-allotment option. In addition, these persons may stabilize or maintain the price of the Class A common stock by bidding for or purchasing shares of Class A common stock in the open market and may impose penalty bids, under which selling concessions allowed to syndicate members or other broker-dealers participating in this offering are reclaimed if shares of Class A common stock previously distributed in the offering are repurchased in connection with stabilization transactions or otherwise. The effect of these transactions may be to stabilize or maintain the market price of the Class A common stock at a level above the level that might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of the Class A common stock to the extent that it discourages resales. No representation is made as to the magnitude or effect of any stabilization or other transactions. These transactions, if commenced, may be discontinued at any time. Some of the underwriters (including the representatives of the underwriters) or their affiliates provide ACS with investment banking services from time to time for which they receive customary compensation. EXPERTS The consolidated financial statements of ACS as of June 30, 1998 and 1997 and for each of the fiscal years in the three-year period ended June 30, 1998 have been incorporated in this prospectus by reference from the ACS Annual Report on Form 10-K for the year ended June 30, 1998, except as they relate to ACS Government Solutions Group, Inc., formerly Computer Data Systems, Inc., as of June 30, 1997 and for each of the two years in the period ended June 30, 1997, and have been audited by PricewaterhouseCoopers LLP, independent accountants, as set forth in their report which is incorporated in this prospectus by reference. The consolidated financial statements of ACS Government Solutions Group, Inc. as of June 30, 1997 and for each of the two years in the period ended June 30, 1997, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included in our Annual Report on Form 10-K for the year ended June 30, 1998, which is incorporated in this prospectus by reference. ACS' consolidated financial statements are incorporated in this prospectus by reference in reliance upon these reports given on the authority of these firms as experts in accounting and auditing. The consolidated financial statements of BRC as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 as included in our Current Report on Form 8-K/A dated February 5, 1999, which is incorporated in this prospectus by reference, have been audited by PricewaterhouseCoopers LLP, independent accountants, as set forth in their report which appears in the Current Report on Form 8-K/A. These consolidated financial statements are incorporated in this prospectus by reference in reliance upon this report given on the authority of PricewaterhouseCoopers LLP as experts in accounting and auditing. 30 33 LEGAL MATTERS The validity of the Class A common stock offered by this prospectus has been passed upon on behalf of ACS by Hughes & Luce, L.L.P., Dallas, Texas. Some legal matters with respect to the Class A common stock will be passed upon on behalf of the underwriters by Thompson & Knight, P.C., Dallas, Texas, which firm also represents ACS with respect to intellectual property matters from time to time. 31 34 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) The following unaudited pro forma condensed consolidated balance sheet as of December 31, 1998 set forth below presents the financial position of ACS as if the consummation of this offering, including the issuance and sale of 3,500,000 shares of Class A common stock by ACS and the application of the estimated net proceeds to ACS therefrom occurred on December 31, 1998. The unaudited pro forma condensed consolidated statements of income for the six months ended December 31, 1998 and for the year ended June 30, 1998 set forth below present the results of operations of ACS for the period and year as if the following transactions had occurred at the beginning of each period: (1) the consummation of the acquisition of BRC Holdings, Inc., now known as ACS BRC Holdings, Inc.; (2) the four additional acquisitions completed during fiscal 1998 and the five acquisitions (excluding BRC) completed subsequent to July 1, 1998 (collectively, the "Other Acquisitions"); and (3) the consummation of this offering including the issuance and sale of 3,500,000 shares of Class A common stock by ACS and the application of the estimated net proceeds to ACS from this offering. The unaudited pro forma condensed consolidated statement of income for the six months ended December 31, 1998 combines, with appropriate adjustments, our unaudited consolidated statement of income for the six months ended December 31, 1998 with the unaudited consolidated statement of income of BRC and the Other Acquisitions for the same six month period to the extent they are not included in our results of operations. The unaudited pro forma condensed consolidated statement of income for the year ended June 30, 1998 combines, with appropriate adjustments, our audited consolidated statements of income for our fiscal year ended June 30, 1998 and the unaudited consolidated statements of income of BRC and the Other Acquisitions for the twelve months ended June 30, 1998 to the extent they are not included in our statements of income. Some reclassifications were made to conform the historical financial statements of BRC and the Other Acquisitions with our historical financial statements. The unaudited pro forma condensed consolidated financial statements have been prepared on the basis of preliminary assumptions and estimates. The pro forma adjustments represent our preliminary determinations of these adjustments and are based on assumptions we consider reasonable under the circumstances. Final amounts could differ from those set forth in this prospectus. The unaudited pro forma consolidated financial statements may not be indicative of the results of operations that would have been achieved if the acquisition of BRC and the Other Acquisitions and this offering had been effected on the dates indicated or which may be achieved in the future. The unaudited pro forma consolidated financial statements and notes to the financial statements should be read in conjunction with our "Selected Consolidated Financial Data", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the annual consolidated financial statements of ACS and BRC appearing or incorporated in this prospectus by reference. F-1 35 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET DECEMBER 31, 1998 (UNAUDITED) (IN THOUSANDS) ASSETS
PRO FORMA --------------------------- OFFERING ACS(A) ADJUSTMENTS(B) COMBINED ---------- -------------- ---------- Current assets: Cash and cash equivalents............................. $ 146,254 $ $ ATM cash.............................................. 9,000 Accounts receivable, net of allowance for doubtful accounts of $4,188 and $2,840, respectively........ 305,333 Inventory............................................. 15,984 Prepaid expenses and other current assets............. 45,273 Deferred taxes........................................ 12,902 ---------- --------- ---------- Total current assets.......................... 534,746 Property and equipment, net of accumulated depreciation and amortization of $107,668 and $90,096, respectively.......................................... 160,698 Software, net of accumulated amortization of $12,353 and $11,029, respectively................................. 16,998 Goodwill, net of accumulated amortization of $32,860 and $25,846, respectively................................. 545,001 Other intangible assets, net of accumulated amortization of $19,596 and $14,414, respectively.................. 39,107 Long-term investments and other assets.................. 31,760 ---------- --------- ---------- Total assets.................................. $1,328,310 $ -- $ ========== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................................... $ 41,728 $ $ Accrued compensation and benefits..................... 43,012 Other accrued liabilities............................. 108,558 Due to BRC Holdings, Inc. shareholders................ 104,066 Notes payable and current portion of long-term debt... 11,699 Current portion of unearned revenue................... 15,211 ---------- --------- ---------- Total current liabilities..................... 324,274 -- Convertible notes due 2005.............................. 230,000 Long-term debt.......................................... 178,964 Deferred taxes.......................................... 19,712 Other long-term liabilities............................. 15,949 ---------- --------- ---------- Total liabilities............................. 768,899 ---------- --------- ---------- Stockholders' equity: Class A common stock.................................. 459 Class B common stock.................................. 33 Additional paid-in capital............................ 314,490 Retained earnings..................................... 244,429 ---------- --------- ---------- Total stockholders' equity.................... 559,411 ---------- --------- ---------- Total liabilities and stockholders' equity.... $1,328,310 $ -- $ ========== ========= ==========
F-2 36 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) AS OF DECEMBER 31, 1998 (A) Information obtained from the December 31, 1998 unaudited condensed consolidated balance sheet of ACS. Amounts include the allocation of the purchase price for BRC and five other acquisitions completed since July 1, 1998. (B) Reflects an estimate of the net proceeds to be received by ACS from this offering of 3,500,000 new shares of our Class A common stock at an assumed offering price of $ per share less underwriting discounts and estimated offering expenses. Proceeds received will be used to pay down a substantial portion of our line of credit. F-3 37 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
PRO FORMA -------------------------------------- BRC BRC ACQUISITION DIVESTED BRC OTHER ACS BRC(A) ADJUSTMENTS OPERATIONS(B) SUBTOTAL ACQUISITIONS(G) -------- ------- ----------- ------------- -------- --------------- Revenues.................... $754,990 $54,540 $ -- $(5,690) $48,850 $16,382 Operating expenses Wages and benefits......... 319,152 27,557 (925)(C) (4,171) 22,461 5,522 Services and supplies...... 234,951 13,791 (516)(C) (1,731) 11,544 5,578 Rent, lease and maintenance.............. 87,895 4,123 (151)(C) (357) 3,615 699 Depreciation and amortization............. 31,347 3,105 (227)(D) (235) 2,643 429 Other operating expenses... 8,735 612 275 887 1,074 -------- ------- ------- ------- ------- ------- Total operating expenses............ 682,080 49,188 (1,819) (6,219) 41,150 13,302 -------- ------- ------- ------- ------- ------- Operating income........... 72,910 5,352 1,819 529 7,700 3,080 Other non-operating (income) expense, net............... 6,004 (3,282) 7,134(D) 32 3,884 -- -------- ------- ------- ------- ------- ------- Pretax profit from continuing operations.... 66,906 8,634 (5,315) 497 3,816 3,080 Income tax expense.......... 27,272 3,419 (1,364)(F) 199 2,254 1,217 -------- ------- ------- ------- ------- ------- Income from continuing operations............... $ 39,634 $5,215 $(3,951) $ 298 $ 1,562 $ 1,863 ======== ======= ======= ======= ======= ======= Earnings per common share: Basic...................... $ 0.82 Diluted.................... $ 0.77 Shares used in computing earnings per common share: Basic...................... 48,488 -- -- -- -- -- Diluted.................... 55,304 -- -- -- -- -- PRO FORMA ------------------------- AS ADJUSTED OTHER ------------------------- ACQUISITIONS OFFERING ADJUSTMENTS(H) COMBINED ADJUSTMENTS(J) COMBINED -------------- -------- -------------- -------- Revenues.................... $(1,369) $818,853 $ -- $ Operating expenses Wages and benefits......... (151) 346,984 -- Services and supplies...... (1,401) 250,672 -- Rent, lease and maintenance.............. -- 92,209 -- Depreciation and amortization............. 435 34,854 -- Other operating expenses... (5) 10,691 -- ------- -------- -------- -------- Total operating expenses............ (1,122) 735,410 -- ------- -------- -------- -------- Operating income........... (247) 83,443 Other non-operating (income) expense, net............... 179 10,067 ------- -------- -------- -------- Pretax profit from continuing operations.... (426) 73,376 Income tax expense.......... (166) 30,577 ------- -------- -------- -------- Income from continuing operations............... $ (260) $42,799 $ $ ======= ======== ======== ======== Earnings per common share: Basic...................... $ 0.88 $ Diluted.................... $ 0.83 $ Shares used in computing earnings per common share: Basic...................... 273(I) 48,761 $ Diluted.................... 273(I) 55,577 $
F-4 38 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (A) Information obtained from the unaudited financial statements of BRC for the six months ended December 31, 1998 to the extent they are not included in ACS's results of operations. (B) Reflects an adjustment to eliminate operating results for businesses of BRC which we either divested or shut down after consummation of the merger. The operating results for these businesses are included in BRC's historical financial information noted in (A) above. (C) Reflects employee terminations (i.e., salary and related expenses of general and administration personnel) and elimination of redundant public company and facility costs effected immediately after consummation of the acquisition. (D) Reflects the additional amortization of expense of approximately $2.0 million resulting from the allocation of the excess cost of the acquisition to software, non-compete agreements and goodwill, offset by a reduction in depreciation and amortization expense of approximately $2.2 million as a result of recording BRC's fixed assets at their respective fair values based upon an independent appraisal. (E) Reflects interest expense for the financing of the transaction based upon the terms of our increase in our revolving line of credit (See "Use of Proceeds" discussed elsewhere in this prospectus). (F) Reflects the income tax effect for the pro forma adjustments at the statutory tax rate adjusted for the impact of non-deductible goodwill amortization. (G) Other Acquisitions reflects the aggregate historical results of operations for the three acquisitions we made during the period from July 1, 1998 through the date of this prospectus (excluding BRC). Two other acquisitions we made during the period from July 1, 1998 through the date of this prospectus were effective July 1, 1998 and are therefore included in our unaudited historical consolidated statement of operations for the six months ended December 31, 1998. (H) Reflects the aggregate pro forma adjustments from the three acquisitions we made during the period noted in (G) above. The adjustments represent primarily: (i) decreases to revenue to conform revenue recognition policies to those of ACS, (ii) net decreases to expenses upon the consolidation of the acquired business operations, including the elimination of costs associated with the prior owners and overhead allocations by the prior owners which would not be reflective of the ongoing operations of the acquired operations, (iii) the net decrease to depreciation and amortization expense from the allocation of the purchase price of each acquisition to the assets and liabilities of the business acquired, (iv) the increase to amortization expense resulting from the allocation of the excess cost of the acquisition to client contracts, software and goodwill after recording the fair value of the assets acquired and the liabilities assumed, (v) the net increase to interest expense reflecting the financing of the transactions, (vi) the related tax effect of the pro forma adjustments at the statutory tax rates adjusted for the impact of non-deductible goodwill amortization, and (vii) the elimination of sales between ACS and the acquired businesses during the period presented. (I) Reflects an adjustment to the shares used in computing earnings per common share issued in connection with the purchase of Other Acquisitions as if the issuance had occurred at the beginning of the period. (J) Reflects the reduction in interest expense, including related tax effect, after applying estimated net proceeds from this offering to pay down our line of credit. F-5 39 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE FISCAL YEAR ENDED JUNE 30, 1998 (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
PRO FORMA --------------------------------------- BRC BRC ACQUISITION DIVESTED BRC OTHER ACS BRC(A) ADJUSTMENTS OPERATIONS(B) SUBTOTAL ACQUISITIONS(G) ---------- -------- ----------- ------------- -------- --------------- Revenues.................... $1,189,123 $113,723 $ -- $(17,769) $95,954 $157,194 Operating expenses Wages and benefits......... 504,284 60,871 (2,221)(C) (10,498) 48,152 84,253 Services and supplies...... 364,285 25,287 (1,238)(C) (5,503) 18,546 42,792 Rent, lease and maintenance.............. 150,253 8,844 (362)(C) (827) 7,655 7,205 Depreciation and amortization............. 47,475 8,135 (933)(D) (860) 6,342 5,490 Merger costs............... 12,974 -- -- -- -- -- Other operating expenses... 11,533 2,707 -- (1,305) 1,402 3,600 ---------- -------- -------- -------- ------- -------- Total operating expenses... 1,090,804 105,844 (4,754) (18,993) 82,097 143,340 ---------- -------- -------- -------- ------- -------- Operating income........... 98,319 7,879 4,754 1,224 13,857 13,854 Other non-operating (income) expense net................ 4,227 (873) 17,741(E) (241) 16,627 615 ---------- -------- -------- -------- ------- -------- Pretax profit from continuing operations.... 94,092 8,752 (12,987) 1,465 (2,770) 13,239 Income tax expense.......... 39,670 5,177 (3,090)(F) 579 2,666 5,783 ---------- -------- -------- -------- ------- -------- Income from continuing operations............... $ 54,422 $ 3,575 $ (9,897) $ 886 $(5,436) $ 7,456 ========== ======== ======== ======== ======= ======== Earnings per common share: Basic...................... $ 1.14 Diluted.................... $ 1.11 Shares used in computing earnings per common share: Basic...................... 47,599 -- -- -- -- -- Diluted.................... 50,487 -- -- -- -- -- PRO FORMA AS ADJUSTED --------------------------- --------------------------- OTHER ACQUISITIONS OFFERING ADJUSTMENTS(H) COMBINED ADJUSTMENTS(J) COMBINED -------------- ---------- -------------- ---------- Revenues.................... $(2,400) $1,439,871 -- $ Operating expenses Wages and benefits......... (974) 635,715 -- Services and supplies...... (4,076) 421,547 -- Rent, lease and maintenance.............. (2) 165,111 -- Depreciation and amortization............. 1,386 60,693 -- Merger costs............... -- 12,974 -- Other operating expenses... (5) 16,530 -- ------- ---------- ------- ---------- Total operating expenses... (3,671) 1,312,570 -- ------- ---------- ------- ---------- Operating income........... 1,271 127,301 -- Other non-operating (income) expense net................ 4,755 26,224 ------- ---------- ------- ---------- Pretax profit from continuing operations.... (3,484) 101,077 Income tax expense.......... ( 1,276) 46,843 ------- ---------- ------- ---------- Income from continuing operations............... $(2,208) $ 54,234 $ $ ======= ========== ======= ========== Earnings per common share: Basic...................... $ 1.13 $ Diluted.................... $ 1.10 $ Shares used in computing earnings per common share: Basic...................... 314(I) 47,913 Diluted.................... 314(I) 50,801
F-6 40 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) FOR THE FISCAL YEAR ENDED JUNE 30, 1998 (A) Information obtained from the unaudited financial statements of BRC for the twelve months ended June 30, 1998. In December 1997, BRC recognized a $5.8 million charge to other non-operating income related to the impairment of goodwill and other intangible assets of BRC's payor services healthcare business unit in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." (B) Reflects an adjustment to eliminate operating results for businesses of BRC which we either divested or shut down after consummation of the merger. The operating results for these businesses are included in BRC's historical financial information noted in (A) above. (C) Reflects employee terminations (i.e., salary and related expenses of general and administration personnel) and elimination of redundant public company and facility costs effected immediately after consummation of the acquisition. (D) Reflects the additional amortization of expense of approximately $4.8 million resulting from the allocation of the excess cost of the acquisition to software, non-compete agreements and goodwill, offset by a reduction in depreciation and amortization expense of approximately $5.7 million as a result of recording BRC's fixed assets at their respective fair values based upon an independent appraisal. (E) Reflects interest expense for the financing of the transaction based upon the terms of our increase in our revolving line of credit. (See "Use of Proceeds" included elsewhere in this prospectus). (F) Reflects the income tax effect for the pro forma adjustments at the statutory tax rate adjusted for the impact of non-deductible goodwill amortization. (G) Other Acquisitions reflects the aggregate historical results of operations for the nine acquisitions we made during the period from July 1, 1997 through the date of this prospectus (excluding BRC). (H) Reflects the aggregate pro forma adjustments from the nine acquisitions we made during the period noted in (G) above. The adjustments represent primarily: (i) decreases to revenue to conform revenue recognition policies to those of ACS, (ii) net decreases to expenses upon the consolidation of the acquired business' operations, including the elimination of costs associated with the prior owners and overhead allocations by the prior owners which would not be reflective of the ongoing operations of the acquired operations, (iii) the net decrease to depreciation and amortization expense from the allocation of the purchase price of each acquisition to the assets and liabilities of the businesses acquired, (iv) the increase to amortization expense resulting from the allocation of the excess cost of the acquisition to client contracts, software and goodwill after recording the fair value of the assets acquired and the liabilities assumed, (v) the net increase to interest expense reflecting the financing of the transactions, (vi) the related tax effect of the pro forma adjustments at the statutory tax rates adjusted for the impact of non-deductible goodwill amortization, and (vii) the elimination of sales between ACS and the acquired businesses during the period presented. (I) Reflects an adjustment to the shares used in computing earnings per common share issued in connection with the purchase of Other Acquisitions as if the issuance had occurred at the beginning of the period. (J) Reflects the reduction in interest expense, including related tax effect, after applying estimated net proceeds from this offering to pay down our line of credit. F-7 41 - ------------------------------------------------------ - ------------------------------------------------------ PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NEITHER ACS NOR ANY UNDERWRITER HAS AUTHORIZED ANYONE TO PROVIDE PROSPECTIVE INVESTORS WITH DIFFERENT OR ADDITIONAL INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES. ------------------------- TABLE OF CONTENTS -------------------------
PAGE ---- Prospectus Summary.................... 1 Risk Factors.......................... 5 Where You Can Find More Information... 12 Cautionary Statement Concerning Forward-Looking Statements.......... 14 Use of Proceeds....................... 14 Selling Stockholder if Underwriters' Over-Allotment Option is Exercised.. 15 Price Range of Class A Common Stock... 16 Dividend Policy....................... 16 Capitalization........................ 17 Selected Consolidated Financial Data.. 18 Business.............................. 19 Description of Capital Stock.......... 25 Underwriting.......................... 29 Experts............................... 30 Legal Matters......................... 31 Pro Forma Condensed Consolidated Financial Information (Unaudited)... F-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ [ACS Logo] AFFILIATED COMPUTER SERVICES, INC. 3,500,000 SHARES CLASS A COMMON STOCK ------------------------- PROSPECTUS ------------------------- BEAR, STEARNS & CO. INC. GOLDMAN, SACHS & CO. ------------------------- DONALDSON, LUFKIN & JENRETTE HAMBRECHT & QUIST PRUDENTIAL SECURITIES , 1999 - ------------------------------------------------------ - ------------------------------------------------------ 42 PART II ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table indicates the estimated expenses to be incurred in connection with the offering described in this registration statement, all of which will be paid by ACS. Registration fee............................................ $ 54,873 Accounting fees and expenses................................ 60,000 Legal fees and expenses..................................... 80,000 NASD fees................................................... 20,239 Blue Sky fees and expenses (including counsel fees)......... 2,500 Printing and engraving expenses............................. 55,000 Miscellaneous expenses...................................... 127,388 -------- Total............................................. $400,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Our certificate of incorporation provides that no director of ACS will be personally liable to ACS or any of its stockholders for monetary damages arising from the director's breach of fiduciary duty as a director, with limited exceptions. Under the provisions of Section 145 of the Delaware General Corporation Law, every Delaware corporation has the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of any corporation, partnership, joint venture, trust or other enterprise, against any and all expenses, judgments, fines and amounts paid in settlement and reasonably incurred in connection with an action, suit or proceeding. The power to indemnify applies only if the person acted in good faith and in a manner the person reasonably believed to be in the best interests, or not opposed to the best interests, of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The power to indemnify applies to actions brought by or in the right of the corporation as well, but only to the extent of defense and settlement expenses and not to any satisfaction of a judgment or settlement of the claim itself, and with the further limitation that in these actions no indemnification shall be made in the event of any adjudication of negligence or misconduct unless the court, in its discretion, believes that in light of all the circumstances indemnification should apply. Our certificate of incorporation contains provisions requiring us to indemnify our officers and directors to the fullest extent permitted by the Delaware General Corporation Law. ITEM 16. EXHIBITS. The exhibits to this registration statement are listed in the Index to Exhibits on page II-4 of this registration statement, which index is incorporated herein by reference. ITEM 17. UNDERTAKINGS. (a) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. II-1 43 (b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) and 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. II-2 44 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this amendment to the registration statement on Form S-3 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on March 22, 1999. AFFILIATED COMPUTER SERVICES, INC. By: /s/ JEFFREY A. RICH ---------------------------------- President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Act of 1933, this amendment to the registration statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- * Chairman of the Board and March 22, 1999 - ----------------------------------------------------- Director Darwin Deason /s/ JEFFREY A. RICH President, Chief Executive March 22, 1999 - ----------------------------------------------------- Officer and Director Jeffrey A. Rich * Chief Financial Officer and March 22, 1999 - ----------------------------------------------------- Director Mark A. King * Executive Vice President and March 22, 1999 - ----------------------------------------------------- Director Henry G. Hortenstine * Executive Vice President, March 22, 1999 - ----------------------------------------------------- Secretary, General Counsel David W. Black and Director * Executive Vice President and March 22, 1999 - ----------------------------------------------------- Director Peter A. Bracken * Director March 22, 1999 - ----------------------------------------------------- Clifford M. Kendall * Director March 22, 1999 - ----------------------------------------------------- Joseph P. O'Neill * Director March 22, 1999 - ----------------------------------------------------- Frank A. Rossi *By: /s/ JEFFREY A. RICH March 22, 1999 ------------------------------------------------- Jeffrey A. Rich As attorney-in-fact
II-3 45 INDEX TO EXHIBITS
EXHIBIT NO. ------- *1.1 -- Form of Underwriting Agreement 4.1 -- Rights Agreement, dated August 5, 1997 between the Company and ChaseMellon Shareholder Services, L.L.C., filed as Exhibit 4.1 to the Company's Form 8-K (date of earliest event reported: August 20, 1997) and incorporated herein by reference *5.1 -- Opinion of Hughes & Luce, L.L.P. *23.1 -- Consent of PricewaterhouseCoopers LLP *23.2 -- Consent of PricewaterhouseCoopers LLP *23.3 -- Consent of Ernst & Young LLP *23.4 -- Consent of Hughes & Luce, L.L.P. (included in Exhibit 5.1) *24.1 -- Power of Attorney (included on signature page of Registration Statement)
- --------------- * previously filed II-4 -----END PRIVACY-ENHANCED MESSAGE-----