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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the period from __________ to __________ Commission file number 001-12665 AFFILIATED COMPUTER SERVICES, INC.  Delaware
    
    51-0310342(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 2828 North Haskell, Dallas, Texas
    
    75204(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code (214) 841-6111 Not Applicable   Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes  X    No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes   X    No Indicate the number of shares outstanding of each of the registrants classes of common stock, as
of the latest practicable date. Number of shares outstanding as ofTitle of each class
    

May 5, 2005Class A Common Stock, $.01 par value
    
    
    119,858,807Class B Common Stock, $.01 par value
    
    
    6,599,372126,458,179




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES INDEX PAGEPART I.
    
    FINANCIAL INFORMATION
    
    NUMBERItem 1.
    Consolidated Financial Statements:Consolidated Balance Sheets at March 31, 2005 and
June 30, 2004
    
    
    1Consolidated Statements of Income for the Three and Nine Months
Ended March 31, 2005 and 2004
    
    
    2Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 2005 and 2004
    
    
    3Notes to Consolidated Financial Statements
    
    
    4  14Item 2.
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    15  31Item 3.
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4.
    Controls and Procedures
    
    
    32PART II.
    
    OTHER INFORMATIONItem 1.
    Legal Proceedings
    
    
    32  33Item 2.
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 6.
    Exhibits
    
    
    34Certification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer




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PART IITEM 1. CONSOLIDATED FINANCIAL STATEMENTS 
 AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) March 31,
    
    
    June 30,2005
    
    
    2004(Unaudited)
    
    
    (Audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    46,532
    
    
    $
    76,899Accounts receivable, net
    
    
    907,267
    
    
    
    873,471Prepaid expenses and other current assets
    
    
    116,745
    
    
    
    94,054Total current assets
    
    
    1,070,544
    
    
    
    1,044,424Property, equipment and software, net
    
    
    601,580
    
    
    
    521,772Goodwill
    
    
    2,129,160
    
    
    
    1,969,326Other intangibles, net
    
    
    311,671
    
    
    
    283,767Other assets
    
    
    94,876
    
    
    
    87,953Total assets
    
    $
    4,207,831
    
    
    $
    3,907,242LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    59,664
    
    
    $
    61,749Accrued compensation and benefits
    
    
    111,163
    
    
    
    133,530Other accrued liabilities
    
    
    333,349
    
    
    
    342,648Income taxes payable
    
    
    14,740
    
    
    
    10,628Deferred taxes
    
    
    39,842
    
    
    
    25,426Current portion of long-term debt
    
    
    7,206
    
    
    
    2,048Current portion of unearned revenue
    
    
    67,060
    
    
    
    61,541Total current liabilities
    
    
    633,024
    
    
    
    637,570Long-term debt
    
    
    390,889
    
    
    
    372,439Deferred taxes
    
    
    231,715
    
    
    
    234,183Other long-term liabilities
    
    
    116,466
    
    
    
    72,563Total liabilities
    
    
    1,372,094
    
    
    
    1,316,755Commitments and contingencies (See Notes 10 and 12)Stockholders equity:Class A common stock
    
    
    1,376
    
    
    
    1,360Class B common stock
    
    
    66
    
    
    
    66Additional paid-in capital
    
    
    1,780,628
    
    
    
    1,730,783Accumulated other comprehensive income (loss), net
    
    
    79
    
    
    
    (3,381
    )Retained earnings
    
    
    1,905,220
    
    
    
    1,600,252Treasury stock at cost, 16,986 and 14,900 shares, respectively
    
    
    (851,632
    )
    
    
    (738,593
    )Total stockholders equity
    
    
    2,835,737
    
    
    
    2,590,487Total liabilities and stockholders equity
    
    $
    4,207,831
    
    
    $
    3,907,242
 The accompanying notes are an integral part of these consolidated financial statements. 1




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share amounts) Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues
    
    $
    1,063,299
    
    
    $
    1,009,432
    
    
    $
    3,136,767
    
    
    $
    3,043,946Expenses:Wages and benefits
    
    
    452,794
    
    
    
    424,874
    
    
    
    1,320,612
    
    
    
    1,345,541Services and supplies
    
    
    251,825
    
    
    
    269,352
    
    
    
    777,893
    
    
    
    806,278Rent, lease and maintenance
    
    
    124,047
    
    
    
    107,780
    
    
    
    364,164
    
    
    
    300,630Depreciation and amortization
    
    
    57,801
    
    
    
    47,881
    
    
    
    167,706
    
    
    
    131,508Gain on sale of business
    
    
    
    
    
    
    (493
    )
    
    
    
    
    
    
    (284,839
    )Other operating expenses
    
    
    11,020
    
    
    
    6,218
    
    
    
    30,615
    
    
    
    44,098Total operating expenses
    
    
    897,487
    
    
    
    855,612
    
    
    
    2,660,990
    
    
    
    2,343,216Operating income
    
    
    165,812
    
    
    
    153,820
    
    
    
    475,777
    
    
    
    700,730Interest expense
    
    
    3,688
    
    
    
    3,714
    
    
    
    10,512
    
    
    
    14,259Other non-operating income, net
    
    
    (466
    )
    
    
    (423
    )
    
    
    (1,808
    )
    
    
    (1,591
    )Pretax profit
    
    
    162,590
    
    
    
    150,529
    
    
    
    467,073
    
    
    
    688,062Income tax expense
    
    
    47,924
    
    
    
    50,783
    
    
    
    162,105
    
    
    
    248,478Net income
    
    $
    114,666
    
    
    $
    99,746
    
    
    $
    304,968
    
    
    $
    439,584Earnings per share:Basic
    
    $
    0.90
    
    
    $
    0.76
    
    
    $
    2.38
    
    
    $
    3.33Diluted
    
    $
    0.88
    
    
    $
    0.72
    
    
    $
    2.33
    
    
    $
    3.14Shares used in computing earnings per share:Basic
    
    
    127,568
    
    
    
    131,503
    
    
    
    128,048
    
    
    
    131,894Diluted
    
    
    130,229
    
    
    
    139,348
    
    
    
    131,081
    
    
    
    141,717
 The accompanying notes are an integral part of these consolidated financial statements. 2




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands) Nine Months EndedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    304,968
    
    
    $
    439,584Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    167,706
    
    
    
    131,508Tax benefit on stock options
    
    
    20,612
    
    
    
    15,680Deferred income tax expense
    
    
    56,523
    
    
    
    51,367Gain on sale of business
    
    
    (70
    )
    
    
    (290,261
    )Other non-cash activities
    
    
    9,793
    
    
    
    14,591Changes in assets and liabilities, net of effects from acquisitions:Increase in accounts receivable
    
    
    (16,633
    )
    
    
    (126,902
    )Increase in prepaid expenses and other current assets
    
    
    (17,660
    )
    
    
    (11,674
    )Increase in other assets
    
    
    (1,436
    )
    
    
    (14,731
    )Increase (decrease) in accounts payable
    
    
    (14,606
    )
    
    
    4,233Decrease in accrued compensation and benefits
    
    
    (28,557
    )
    
    
    (18,459
    )Increase (decrease) in other accrued liabilities
    
    
    (49,217
    )
    
    
    34,166Increase in income taxes payable
    
    
    3,774
    
    
    
    23,856Increase in unearned revenue
    
    
    26,457
    
    
    
    9,489Increase in other long-term liabilities
    
    
    10,319
    
    
    
    7,047Total adjustments
    
    
    167,005
    
    
    
    (170,090
    )Net cash provided by operating activities
    
    
    471,973
    
    
    
    269,494Cash flows from investing activities:Purchases of property, equipment and software, net
    
    
    (170,185
    )
    
    
    (166,171
    )Payments for acquisitions, net of cash acquired
    
    
    (213,322
    )
    
    
    (235,128
    )Proceeds from divestitures, net of transaction costs
    
    
    87
    
    
    
    583,370Additions to other intangible assets
    
    
    (29,444
    )
    
    
    (23,582
    )Purchases of investments
    
    
    (6,604
    )
    
    
    (4,752
    )Additions to notes receivable
    
    
    
    
    
    
    (2,790
    )Proceeds received on notes receivable
    
    
    425
    
    
    
    4,432Other
    
    
    46
    
    
    
    1,196Net cash provided by (used in) investing activities
    
    
    (418,997
    )
    
    
    156,575Cash flows from financing activities:Proceeds from issuance of long-term debt, net
    
    
    1,341,163
    
    
    
    808,025Repayments of long-term debt
    
    
    (1,342,456
    )
    
    
    (848,482
    )Purchase of treasury shares
    
    
    (131,121
    )
    
    
    (414,444
    )Proceeds from issuance of treasury shares
    
    
    20,203
    
    
    
    Proceeds from stock options exercised
    
    
    28,868
    
    
    
    18,766Other
    
    
    
    
    
    
    (2,081
    )Net cash used in financing activities
    
    
    (83,343
    )
    
    
    (438,216
    )Net decrease in cash and cash equivalents
    
    
    (30,367
    )
    
    
    (12,147
    )Cash and cash equivalents at beginning of period
    
    
    76,899
    
    
    
    51,170Cash and cash equivalents at end of period
    
    $
    46,532
    
    
    $
    39,023Supplemental information of noncash financing activitiesConversion of 3.5% Convertible Notes to Class A Common Stock
    
    $
    
    
    
    $
    316,725
 The accompanying notes are an integral part of these consolidated financial statements. 3




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 1.       BASIS OF PRESENTATION The consolidated financial statements include the accounts of Affiliated Computer Services, Inc.
(ACS) and its majority-owned subsidiaries. All material intercompany profits, transactions and
balances have been eliminated. We are a Fortune 500 and S&P 500 company with approximately
47,000 people providing business process and information technology outsourcing solutions to
commercial and government clients. The financial information presented should be read in conjunction with our consolidated
financial statements for the year ended June 30, 2004. The foregoing unaudited consolidated
financial statements reflect all adjustments (all of which are of a normal recurring nature),
which are, in the opinion of management, necessary for a fair presentation of the results of the
interim periods. The results for the interim periods are not necessarily indicative of results
to be expected for the year. Significant accounting policies are detailed in our Annual Report on Form 10-K for the year
ended June 30, 2004. For discussion of our critical accounting policies, please refer to
Managements Discussion and Analysis of Financial Condition and Results of Operations. 2.       STOCK-BASED COMPENSATION We follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, (APB 25) in accounting for our stock-based compensation plans. Under APB 25, no
compensation expense is recognized for our stock-based compensation plans since the exercise
prices of awards under our plans are at the current market price of our stock on the date of
grant. Had compensation cost for our stock-based compensation plans been determined based on the
fair value at the grant date under those plans consistent with the fair value method of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123), our net income and earnings per share would have been reduced to the pro forma
amounts indicated below (in thousands, except per share amounts): Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net IncomeAs reported
    
    $
    114,666
    
    
    $
    99,746
    
    
    $
    304,968
    
    
    $
    439,584Less: Pro forma
employee compensation
cost of stock-based
compensation plans,
net of income tax
    
    
    5,759
    
    
    
    5,328
    
    
    
    17,074
    
    
    
    15,185Pro forma
    
    $
    108,907
    
    
    $
    94,418
    
    
    $
    287,894
    
    
    $
    424,399Basic earnings per shareAs reported
    
    $
    0.90
    
    
    $
    0.76
    
    
    $
    2.38
    
    
    $
    3.33Pro forma
    
    $
    0.85
    
    
    $
    0.72
    
    
    $
    2.25
    
    
    $
    3.22Diluted earnings per shareAs reported
    
    $
    0.88
    
    
    $
    0.72
    
    
    $
    2.33
    
    
    $
    3.14Pro forma
    
    $
    0.84
    
    
    $
    0.69
    
    
    $
    2.21
    
    
    $
    3.05
 On December 16, 2004, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)). SFAS 123(R)
will require companies to measure all employee stock-based compensation awards using a fair
value method and recognize compensation cost in its financial statements. SFAS 123(R) is
effective beginning as of the first annual reporting period beginning after June 15, 2005. We
will be required to adopt SFAS 123(R) beginning July 1, 2005 for new awards of stock-based
compensation granted after that date and for unvested awards outstanding at that date. We
believe the impact on our results of operations of SFAS 123(R) will be consistent with our
historical disclosure of pro forma stock compensation information under SFAS 123; however, a
portion of the tax benefit from the future exercise of stock options we historically have
classified as net cash provided by operating activities will be reported in net cash provided by
financing activities after the implementation of SFAS 123(R). 4




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 3.       DEBT On October 27, 2004, we entered into a Five Year Competitive Advance and Revolving Credit
Facility Agreement with JPMorgan Chase Bank, as Administrative Agent (JP Morgan), and Wells
Fargo Bank, National Association, as Syndication Agent, and a syndication of 19 other lenders
(the Credit Facility). Proceeds from advances under the Credit Facility are used for general
corporate purposes, to fund acquisitions and for repurchases under our share repurchase program.
The Credit Facility provides for an unsecured $1.5 billion multi-currency revolving credit and
competitive advance facility (fully available in US dollars, Euros or competitive loans in any
currency). Multi-currency commitments (available in certain specified currencies other than US
dollars or Euros) in an initial aggregate amount of $200 million and swing line loans in an
amount up to $150 million are provided under the facility. Subject to affirmation of
representations and warranties, status of no default and commitments by willing lenders, the
Credit Facility may be increased by up to an additional $300 million. The lending commitments
under the Credit Facility are scheduled to terminate October 27, 2009. The terms and rates of
the Credit Facility are generally more favorable than those of the Prior Facility (defined
below). At the closing of the Credit Facility, we borrowed $316 million under the Credit
Facility to pay off and terminate the Prior Facility. In addition, $94 million in letters of
credit were issued at closing under the Credit Facility to replace letters of credit outstanding
under the Prior Facility. Other than competitive loans and swing line loans, advances under the Credit Facility bear
interest at a Base Rate (generally equal to the prime rate of JP Morgan) or a Eurocurrency rate
plus a percentage (ranging from 0.220% to 0.775%, currently 0.39%) determined based on our
credit rating. We are required to pay accrued interest at established intervals based upon our
elected interest period. Among other fees, we pay a facility fee of 0.110% per annum (due quarterly), based on our credit
rating on the aggregate commitment of the Credit Facility, whether used or unused. We also pay a
utilization fee of 0.125% on the total amount outstanding under the Credit Facility for each day
that such amount exceeds 50% of the aggregate commitments then in effect. The Credit Facility contains customary covenants, including but not limited to, restrictions on
our ability, and in certain instances, our subsidiaries ability, to incur liens, merge or
dissolve, finance its accounts receivables, or sell or transfer assets. The Credit Facility also
limits our ability to incur additional indebtedness at the subsidiary level. In addition, we may
not permit our consolidated leverage ratio to exceed 2.75 to 1.0 or our consolidated interest
coverage ratio to be less than 3.50 to 1.0. Upon the occurrence of certain events of default, our obligations under the Credit Facility may
be accelerated and the lending commitments under the Credit Facility terminated. Such events of
default include, but are not limited to, payment default to lenders, material inaccuracies of
representations and warranties, covenant defaults, material payment defaults (other than under
the Credit Facility), voluntary and involuntary bankruptcy proceedings, material money
judgments, material ERISA events, or change of control. Simultaneously with entering into the $1.5 billion Credit Facility, we terminated our then
existing $875 million revolving credit facility (the Prior Facility) on October 27, 2004 and
repaid the $316 million outstanding on the Prior Facility with borrowings under the Credit
Facility. The lending commitments under the Prior Facility were evidenced by that certain
Revolving Credit Agreement, dated as of September 12, 2002 among us, Wells Fargo Bank Texas,
National Association, as administrative agent, and various other lenders, and were scheduled to
expire in December 2005. At March 31, 2005, we had approximately $1.02 billion available on our Credit Facility after
giving effect to outstanding indebtedness and $99 million of outstanding letters of credit that
secure certain contractual performance and other obligations and which reduce the availability
of our Credit Facility. At March 31, 2005, we had $383.4 million outstanding on our Credit
Facility, which is reflected in long-term debt, and which bore interest at 3.24% for
substantially all of the amount outstanding. 5




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 4.      ACQUISITIONS In January 2005, we completed the acquisition of Superior Consultant Holdings Corporation
(Superior), acquiring all of the issued and outstanding shares of Superior through a cash
tender offer, which was completed on January 25, 2005, and subsequent short-form merger, at a
purchase price of $8.50 per share. Superior provides information technology consulting and
business process outsourcing services and solutions to the healthcare industry. The transaction
was valued at approximately $122.2 million (including payment of approximately $106 million for
issued and outstanding shares, options, and warrants and additional amounts for debentures and
other payments) plus related transaction costs and was funded from borrowings under our Credit
Facility. The purchase price was allocated to assets acquired and liabilities assumed based on
estimated fair value as of the date of acquisition. We acquired assets of $159.2 million and
assumed liabilities of $37 million. We recorded $76.5 million in goodwill, which is not
deductible for income tax purposes, and intangible assets of $16.8 million. The $16.8 million
of intangible assets is attributable to customer relationships and non-compete agreements with
useful lives of 5 years. We believe this acquisition expands our provider healthcare subject
matter expertise, as well as providing experience with most major hospital information systems
and additional healthcare management talent. The operating results of the acquired business are
included in our financial statements in the Commercial segment from the effective date of the
acquisition, January 25, 2005. Our consolidated balance sheet as of March 31, 2005 reflects
the preliminary allocation of the purchase price to the assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. Additional analysis is being
performed with regard to our ability to utilize Superiors pre-acquisition net operating loss
carryovers in the post-acquisition tax years. As a result, the purchase price allocated to the
initial deferred tax asset of $18.4 million, primarily related to net operating losses acquired,
may be adjusted if necessary. In August 2004, we acquired BlueStar Solutions, Inc. (BlueStar), an information technology
outsourcer specializing in applications management of packaged enterprise resource planning and
messaging services. The transaction was valued at approximately $73.5 million, plus related
transaction costs. The transaction value includes $6.4 million attributable to the 9.2% minority
interest we held in BlueStar prior to the acquisition; therefore, the net purchase price was
approximately $67.1 million. Of this amount, approximately $61 million was paid to former
BlueStar shareholders by March 31, 2005 and was funded from borrowings under our credit
facilities and cash on hand. The remaining purchase price of $6 million will be paid in the
first quarter of fiscal year 2006. The purchase price was allocated to assets acquired and
liabilities assumed based on estimated fair value as of the date of acquisition. We acquired
assets of $97.8 million and assumed liabilities of $30.7 million. We recorded goodwill of $38.3
million, which is not deductible for income tax purposes, and intangible assets of $11.6
million. The $11.6 million of intangible assets is attributable to customer relationships with
a useful life of seven years. We believe that the acquisition of BlueStar improves our existing
information technology services with the addition of applications management and messaging
services. The operating results of the acquired business are included in our financial
statements in the Commercial segment from the effective date of the acquisition, August 26,
2004. Our consolidated balance sheet as of March 31, 2005 reflects the preliminary allocation
of the purchase price to the assets acquired and liabilities assumed based on their estimated
fair values at the date of acquisition. Additional analysis is being performed with regard to
our ability to utilize BlueStars pre-acquisition net operating loss carryovers in the
post-acquisition tax years. As a result, the purchase price allocated to the initial deferred
tax asset of $29.2 million, primarily related to net operating losses acquired, may be adjusted
if necessary. In July 2004, we acquired Heritage Information Systems, Inc. (Heritage). Heritage provides
clinical management and pharmacy cost containment solutions to 14 state Medicaid programs, over
a dozen national commercial insurers and Blue Cross Blue Shield licensees and some of the
largest employer groups in the country. The transaction was valued at approximately $23.1
million plus related transaction costs, excluding contingent consideration of up to $17 million
maximum based upon future financial performance, and was funded from borrowings under our Prior
Facility and cash on hand. The purchase price was allocated to assets acquired and liabilities
assumed based on estimated fair value as of the date of acquisition. We acquired assets of $26.6
million and assumed liabilities of $3.5 million. We recorded $14.3 million in goodwill, which
is deductible for income tax purposes, and intangible assets of $2.4 million. The $2.4 million
of intangible assets is attributable to customer relationships and non-compete agreements with
useful lives of five years. We believe this acquisition enhances our clinical management and
cost containment service offerings. The operating results of the acquired business are included
in our financial statements in the Government segment from the effective date of the
acquisition, July 1, 2004. We also completed two other acquisitions in our government segment during the nine months ended
March 31, 2005. These acquisitions are not considered material to our results of operations, either individually
or in the aggregate; therefore, no pro forma information is presented. 6




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 5.       EQUITY Our Board of Directors has authorized two share repurchase programs totaling $1.25 billion of
our Class A common stock. On September 2, 2003, we announced that our Board of Directors
authorized a share repurchase program of up to $500 million of our Class A common stock and on
April 29, 2004, we announced that our Board of Directors authorized a new, incremental share
repurchase program of up to $750 million of our Class A common stock. The programs, which are
open-ended, will allow us to repurchase our shares on the open market from time to time in
accordance with Securities and Exchange Commission (SEC) rules and regulations, including shares
that could be purchased pursuant to SEC Rule 10b5-1. The number of shares to be purchased
and the timing of purchases will be based on the level of cash and debt balances, general
business conditions and other factors, including alternative investment opportunities. We intend
to fund the repurchase program from various sources, including, but not limited to, cash on
hand, cash flow from operations, and borrowings under our Credit Facility. As of March 31,
2005, we had repurchased approximately 17.4 million shares at a total cost of approximately
$874.3 million and reissued 0.5 million shares for proceeds totaling $22.7 million to fund
contributions to our employee stock purchase plan and 401(k) plan. As of March 31, 2005,
approximately $375.7 million remained authorized under our share repurchase programs. In order to conform our stock option program with standard market practice, on February 2, 2005,
our Board of Directors approved an amendment to stock options previously granted that did not
become exercisable until five years from the date of grant to provide that such options become
exercisable on the day they vest. Options granted under both our 1997 Stock Incentive Plan and
our 1988 Stock Option Plan generally vest in varying increments over a five year period. It is
expected that future option grants will contain matching vesting and exercise schedules. This
amendment does not amend or affect the vesting schedule, exercise price, quantity of options
granted, shares into which such options are exercisable or life of any award under any
outstanding option grant. Therefore, no compensation expense is required. 6.       GOODWILL AND OTHER INTANGIBLE ASSETS The changes in the carrying amount of goodwill for the nine months ended March 31, 2005 are as
follows (in thousands): Government
    
    
    Commercial
    
    
    TotalBalance as of June 30, 2004
    
    $
    1,082,536
    
    
    $
    886,790
    
    
    $
    1,969,326Acquisition activity
    
    
    28,151
    
    
    
    131,683
    
    
    
    159,834Balance as of March 31, 2005
    
    $
    1,110,687
    
    
    $
    1,018,473
    
    
    $
    2,129,160
 Goodwill activity for the nine months ended March 31, 2005 was primarily due to the acquisitions
of Superior, BlueStar and Heritage (see Note 4) and contingent consideration due to former
shareholders of prior years acquisitions. Approximately $1.8 billion, or 81%, of the original
gross amount of goodwill recorded is deductible for income tax purposes. The following information relates to our other intangible assets (in thousands): March 31, 2005
    
    
    June 30, 2004Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized intangible assets:Acquired customer-related
intangibles
    
    $
    215,855
    
    
    $
    (67,908
    )
    
    $
    191,517
    
    
    $
    (49,425
    )Customer-related intangibles
    
    
    171,750
    
    
    
    (67,647
    )
    
    
    142,802
    
    
    
    (53,334
    )All other
    
    
    11,708
    
    
    
    (3,132
    )
    
    
    2,854
    
    
    
    (1,447
    )Total
    
    $
    399,313
    
    
    $
    (138,687
    )
    
    $
    337,173
    
    
    $
    (104,206
    )Unamortized intangible asset:Title plant
    
    $
    51,045
    
    
    
    
    
    
    $
    50,800
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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) Aggregate Amortization:For the quarter ended March 31, 2005
    
    $
    14,018For the quarter ended March 31, 2004
    
    
    12,052For the nine months ended March 31, 2005
    
    
    41,270For the nine months ended March 31, 2004
    
    
    32,149Estimated amortization for the years ended June 30,
2005
    
    $
    54,9322006
    
    
    51,9862007
    
    
    46,1472008
    
    
    42,3722009
    
    
    34,754
 Amortization includes amounts charged to amortization expense for customer-related intangibles
and other intangibles, other than contract inducements. Amortization of contract inducements of
$3.8 million and $2.9 million for the three months ended March 31, 2005 and 2004, respectively,
and $10.1 million and $7.9 million for the nine months ended March 31, 2005 and 2004,
respectively, is recorded as a reduction of related contract revenue. Amortization expense
includes approximately $6.9 million and $6.5 million for acquired customer-related intangibles
for the three months ended March 31, 2005 and 2004, respectively, and $19.8 million and $15.8
million for the nine months ended March 31, 2005 and 2004, respectively. Amortized intangible
assets are amortized over the related contract term. The amortization period of
customer-related intangible assets ranges from 1 to 11 years, with a weighted average of
approximately 8 years. The amortization period for all other intangible assets, including
trademarks, ranges from 4 to 20 years, with a weighted average of approximately 6 years. 7.       COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), establishes standards for reporting and display of comprehensive income and its
components in financial statements. The objective of SFAS 130 is to report a measure of all
changes in equity of an enterprise that result from transactions and other economic events of
the period other than transactions with owners. Comprehensive income is the total of net income
and all other non-owner changes within a companys equity. The components of comprehensive income are as follows (in thousands): Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    114,666
    
    
    $
    99,746
    
    
    $
    304,968
    
    
    $
    439,584Other comprehensive income (loss):Foreign currency translation
adjustment (net of income tax
effect of ($690), ($880), $2,076
and ($802), respectively)
    
    
    (1,150
    )
    
    
    (1,467
    )
    
    
    3,461
    
    
    
    (1,335
    )Comprehensive income
    
    $
    113,516
    
    
    $
    98,279
    
    
    $
    308,429
    
    
    $
    438,249
 8




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 8.       EARNINGS PER SHARE In accordance with Statement of Financial Accounting Standard No. 128, Earnings per Share, the
following table sets forth the computation of basic and diluted earnings per share (in
thousands except per share amounts): Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Numerator for earnings per share (basic) 
    
    $
    114,666
    
    
    $
    99,746
    
    
    $
    304,968
    
    
    $
    439,584Income available to common stockholdersEffect of dilutive securities:Interest on 3.5% convertible debt, net of income tax
    
    
    
    
    
    
    1,088
    
    
    
    
    
    
    
    5,196Numerator for diluted earnings per share Income available to common stockholders
    
    $
    114,666
    
    
    $
    100,834
    
    
    $
    304,968
    
    
    $
    444,780Denominator:Weighted average shares outstanding (basic)
    
    
    127,568
    
    
    
    131,503
    
    
    
    128,048
    
    
    
    131,894Effect of dilutive securities:3.5% convertible debt
    
    
    
    
    
    
    4,350
    
    
    
    
    
    
    
    6,323Stock options
    
    
    2,661
    
    
    
    3,495
    
    
    
    3,033
    
    
    
    3,500Total potential common shares
    
    
    2,661
    
    
    
    7,845
    
    
    
    3,033
    
    
    
    9,823Denominator for earnings per share assuming dilution
    
    
    130,229
    
    
    
    139,348
    
    
    
    131,081
    
    
    
    141,717Earnings per share (basic)
    
    $
    0.90
    
    
    $
    0.76
    
    
    $
    2.38
    
    
    $
    3.33Earnings per share assuming dilution
    
    $
    0.88
    
    
    $
    0.72
    
    
    $
    2.33
    
    
    $
    3.14
 Options to purchase approximately 473,000 and 214,000 shares of common stock were outstanding
during the three and nine months ended March 31, 2005, respectively, but were not included in the
computation of diluted earnings per share because the options exercise price was greater than the
average market price during the period. There were no antidilutive shares for the three and nine
months ended March 31, 2004. 9




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 9.       SEGMENT INFORMATION During fiscal year 2004, as the result of the sale of the majority of our Federal business, we
combined our State and Local Government and Federal segments into our Government segment. Prior
period reporting has been restated to conform to the new segment reporting. The following is a summary of certain financial information by reportable segment (in
thousands): Government
    
    
    Commercial
    
    
    Corporate
    
    
    ConsolidatedThree months ended March 31, 2005Revenues (a)
    
    $
    525,146
    
    
    $
    538,153
    
    
    $
    
    
    
    $
    1,063,299Operating expenses (excluding depreciation and amortization)
    
    
    403,655
    
    
    
    422,330
    
    
    
    13,701
    
    
    
    839,686Depreciation and amortization
    
    
    21,503
    
    
    
    35,850
    
    
    
    448
    
    
    
    57,801Operating income
    
    $
    99,988
    
    
    $
    79,973
    
    
    $
    (14,149
    )
    
    $
    165,812Three
months ended March 31, 2004Revenues (a)
    
    $
    548,213
    
    
    $
    461,219
    
    
    $
    
    
    
    $
    1,009,432Operating expenses (excludingdepreciation and amortization)
    
    
    435,040
    
    
    
    359,130
    
    
    
    14,054
    
    
    
    808,224Gain on sale of business
    
    
    (493
    )
    
    
    
    
    
    
    
    
    
    
    (493
    )Depreciation and amortization
    
    
    18,106
    
    
    
    29,257
    
    
    
    518
    
    
    
    47,881Operating income
    
    $
    95,560
    
    
    $
    72,832
    
    
    $
    (14,572
    )
    
    $
    153,820Nine
months ended March 31, 2005Revenues (a)
    
    $
    1,619,208
    
    
    $
    1,517,559
    
    
    $
    
    
    
    $
    3,136,767Operating expenses (excludingdepreciation and amortization)
    
    
    1,268,201
    
    
    
    1,186,601
    
    
    
    38,482
    
    
    
    2,493,284Depreciation and amortization
    
    
    61,465
    
    
    
    104,802
    
    
    
    1,439
    
    
    
    167,706Operating income
    
    $
    289,542
    
    
    $
    226,156
    
    
    $
    (39,921
    )
    
    $
    475,777Nine
months ended March 31, 2004Revenues (a)
    
    $
    1,845,607
    
    
    $
    1,198,339
    
    
    $
    
    
    
    $
    3,043,946Operating expenses (excludingdepreciation and amortization)
    
    
    1,526,836
    
    
    
    930,558
    
    
    
    39,153
    
    
    
    2,496,547Gain on sale of business
    
    
    (284,839
    )
    
    
    
    
    
    
    
    
    
    
    (284,839
    )Depreciation and amortization
    
    
    53,696
    
    
    
    76,198
    
    
    
    1,614
    
    
    
    131,508Operating income
    
    $
    549,914
    
    
    $
    191,583
    
    
    $
    (40,767
    )
    
    $
    700,730
  (a)
    
    Revenues in our Government segment include revenues from operations divested during
fiscal year 2004 of $5 million for the three months ended March 31, 2004, and $0.6 million
and $250.2 million for the nine months ended March 31, 2005 and 2004, respectively.
Revenues in our Commercial segment include revenues from operations divested during fiscal
year 2004 of $6.9 million for the nine months ended March 31, 2004.
 10




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 10.       COMMITMENTS AND CONTINGENCIES One of our subsidiaries, ACS Defense, LLC, and several other government contractors received a
grand jury document subpoena issued by the U.S. District Court for the District of Massachusetts
in October 2002. The subpoena was issued in connection with an inquiry being conducted by the
Antitrust Division of the U.S. Department of Justice (DOJ). The inquiry concerns certain IDIQ
(Indefinite Delivery  Indefinite Quantity) procurements and their related task orders, which
occurred in the late 1990s at Hanscom Air Force Base in Massachusetts. Our revenue from the
contracts that we believe to be the focus of the DOJs inquiry was approximately $17.2 million
for the fiscal year ended June 30, 2004, representing approximately 0.4% of our revenue for
fiscal year 2004. In February 2004, we sold the contracts associated with the Hanscom Air Force
Base relationship to ManTech International Corporation; however, we have agreed to indemnify
ManTech with respect to this DOJ investigation. We understand that the DOJ is continuing its
investigation, but we have no information as to when the DOJ will conclude this process. We
have cooperated with the DOJ in producing documents in response to the subpoena, and our
internal investigation and review of this matter through outside legal counsel will continue
through the conclusion of the DOJ investigatory process. We are unable to express an opinion as
to the likely outcome of this matter at this time. Another of our subsidiaries, ACS State & Local Solutions, Inc. (ACS SLS), and a teaming
partner of this subsidiary, Tier Technologies, Inc. (Tier), received a grand jury document
subpoena issued by the U.S. District Court for the Southern District of New York in May 2003.
The subpoena was issued in connection with an inquiry being conducted by the Antitrust Division
of the DOJ. The inquiry concerns the teaming arrangements between ACS SLS and Tier on child
support payment processing contracts awarded to ACS SLS, and Tier as a subcontractor to ACS SLS,
in New York, Illinois and Ohio. Effective June 30, 2004, Tier was no longer a subcontractor to
us in Ohio. Our revenue from the contracts for which Tier was a subcontractor was approximately
$67 million in fiscal year 2004 and approximately $32.4 million for the nine months ended March
31, 2005, representing approximately 1.6% and 1% of our fiscal year 2004 and the first nine
months of fiscal year 2005 revenues, respectively. Our teaming arrangement also contemplated the
California child support payment processing request for proposals, which was issued in late
2003; however, we did not enter into a teaming agreement with Tier for the California request
for proposals. Based on Tiers filings with the Securities and Exchange Commission, we
understand that on November 20, 2003 the DOJ granted conditional amnesty to Tier in connection
with this inquiry pursuant to the DOJs Corporate Leniency Policy. The policy provides that the
DOJ will not bring any criminal charges against Tier as long as it continues to fully cooperate
in the inquiry (and makes restitution payments if it is determined that parties were injured as
a result of impermissible anticompetitive conduct). We understand that the DOJ is continuing
its investigation, but we have no information as to when the DOJ will conclude this process. We
have cooperated with the DOJ in producing documents in response to the subpoena, and our
internal investigation and review of this matter through outside legal counsel will continue
through the conclusion of the DOJ investigatory process. We are unable to express an opinion as
to the likely outcome of this matter at this time. On January 30, 2004, the Florida Agency for Workforce Innovations (AWI) Office of Inspector
General (OIG) issued a report that reviewed 13 Florida workforce regions, including Dade and
Monroe counties, and noted concerns related to the accuracy of customer case records maintained
by our local staff. Our total revenue generated from the Florida workforce services amounts to
approximately 1% of our total fiscal year 2004 revenue. In March 2004, we filed our response
to the OIG report. On May 20, 2004, at a meeting of the Workforce Florida, Inc. (WFI) Board
of Directors which was attended by representatives of ACS SLS, which is our subsidiary
performing these services, a representative of WFI, which is the principal workforce policy
organization for the State of Florida and oversees and monitors the administration of the
States workforce policy as well as the programs and services carried out by regional workforce
boards and AWI, indicated that WFI did not see a systemic problem with the performance of these
workforce services by ACS SLS and that it considered the issue closed. There were also certain
contract billing issues that arose during the course of our performance of our workforce
contract in Dade County, Florida, which ended in June 2003. However, during the first quarter
of fiscal year 2005, we settled all financial issues with Dade County with respect to our
workforce contract with that county and the settlement is fully reflected in our results of
operations for the first quarter of fiscal year 2005. We were also advised in February 2004 that
the SEC had initiated an informal investigation into the matters covered by the OIGs report,
although we have not received any request for information or documents since the middle of
calendar year 2004. On March 22, 2004, ACS SLS received a grand jury document subpoena issued by
the U.S. District Court for the Southern District of Florida. The subpoena was issued in
connection with an inquiry being conducted by the DOJ and the Inspector Generals Office of the
U.S. Department of Labor (DOL) into the subsidiarys workforce contracts in Dade and Monroe
counties in Florida, which also expired in June 2003, and which were included in the OIGs
report. On August 25, 2004, ACS SLS received a grand jury document subpoena issued by the U.S.
District Court for the Middle District of Florida in connection with an inquiry being conducted
by the DOJ and the Inspector Generals Office of the DOL. The subpoena relates to a workforce
contract in Pinellas County in Florida for the period from January 1999 to the contracts
expiration in March 2001, 11




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) which was prior to our acquisition of this business from Lockheed Martin Corporation in August
2001. Further, we settled a civil lawsuit with Pinellas County in December 2003 with respect to
claims related to services rendered to Pinellas County by Lockheed Martin Corporation prior to
our acquisition of ACS SLS (those claims having been transferred with ACS SLS as part of the
acquisition), and the settlement resulted in Pinellas County paying ACS SLS an additional
$600,000. We are continuing our internal investigation of these matters through outside legal
counsel and we are continuing to cooperate with the DOJ, the SEC and DOL to produce documents in
connection with their investigations. At this stage of these investigations, we are unable to
express an opinion as to their likely outcome. We anticipate that we may receive additional
subpoenas for information in other Florida Workforce regions as a result of the AWI report
issued in January 2004. Certain contracts, primarily in our Government segment, require us to provide a surety bond or a
letter of credit as a guarantee of performance. As of March 31, 2005, $264.6 million of
outstanding surety bonds and $84.9 million of our outstanding letters of credit secure our
performance of contractual obligations with our clients. In general, we would only be liable for
the amount of these guarantees in the event of default in the performance of our obligations
under each contract, the probability of which we believe is remote. In addition, we had
approximately $14.1 million of letters of credit which secure our casualty insurance programs.
We believe that we have sufficient capacity in the surety markets and liquidity from our cash
flow and our Credit Facility to respond to future requests for proposals. We are obligated to make certain contingent payments to former shareholders of acquired entities
upon satisfaction of certain contractual criteria. As of March 31, 2005, the maximum aggregate
amount of the outstanding contingent obligations is approximately $58.1 million. Upon
satisfaction of the specified contractual criteria, any such payment would result primarily in a
corresponding increase in goodwill. During the first nine months of fiscal year 2005, we paid
$4.4 million related to these obligations and accrued an additional $12.6 million, of which $6.8
million was paid in April 2005 and the remainder will be paid in May 2005. We have indemnified Lockheed Martin Corporation against certain specified claims from certain
pre-sale litigation, investigations, government audits and other issues related to the sale of
the majority of our Federal business to Lockheed Martin Corporation in fiscal year 2004. Our
maximum exposure under these indemnifications is $85 million; however, we believe the actual
exposure to be significantly less. As of March 31, 2005, other accrued liabilities includes a
reserve for these claims in an amount we believe to be adequate at this time. Our Education Services business, which is included in our Commercial segment, performs third
party student loan servicing in the Federal Family Education Loan program (FFEL) on behalf of
various financial institutions. We service these loans for investors under an outsourcing
arrangement and do not acquire any servicing rights that are transferable by us to a third
party. At March 31, 2005, we serviced a FFEL portfolio of approximately 1.6 million loans with
an outstanding principal balance of approximately $20.6 billion. Some servicing agreements
contain provisions that, under certain circumstances, require us to purchase the loans from the
investor if the loan guaranty has been permanently terminated as a result of a loan default
caused by our servicing error. If defaults caused by us are cured during an initial period, any
obligation we may have to purchase these loans expires. Loans that we purchase may be
subsequently cured, the guaranty reinstated and then we repackage the loans for sale to third
parties. We evaluate our exposure under our purchase obligations on defaulted loans and
establish a reserve for potential losses, or default liability reserve, through a charge to the
provision for loss on defaulted loans purchased. The reserve is evaluated periodically and
adjusted based upon managements analysis of the historical performance of the defaulted loans.
As of March 31, 2005, other accrued liabilities include a reserve for these claims in an amount
we believe to be adequate at this time. In June 2004, the Mississippi Department of Environmental Quality (MDEQ) issued a Notice of
Violation to ACS Image Solutions, Inc., one of our subsidiaries, that alleged noncompliance with
the Clean Water Act and the Federal Resource Conservation and Recovery Act. On September 20,
2004, we agreed to settle this matter with the MDEQ for $150,000. We have closed the specific
operation whose activities resulted in this notice. In April 2004, we were awarded a contract by the North Carolina Department of Health and Human
Services (DHHS) to replace and operate the North Carolina Medicaid Management Information
System (NCMMIS). Prior to DHHS award of the contract, our proposal was reviewed and
approved by the State of North Carolinas Information Technology Services group and the Federal
Center for Medicare and Medicaid Services. Two competitors protested the contract award. In
considering the protests, DHHS again reviewed our proposal and determined that our technical
solutions did, in fact, comply with all technical requirements and denied protests on June 3,
2004. Electronic Data Systems (EDS) protested the denial. On January 12, 2005, an
administrative law judge made a non-binding recommendation to sustain EDS protest of the
contract between us and the DHHS. Notwithstanding the reviews, approvals, and decisions in
awarding the contract and in considering the protests, the 12




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) administrative law judge based his recommendation on his assessment that our technical solution
did not fully comply with the DHHS technical standards for proposals. The non-binding
recommendation was issued to the North Carolina State Chief Information Officer (CIO), Office
of Technology Services. We, DHHS and EDS, each had an opportunity to present written arguments
to the CIO. An oral hearing was held before the CIO on March 15, 2005 during which each of the
parties were permitted to present oral arguments. On April 28, 2005, the CIO issued a decision
in favor of the DHHS and us as to the issues of: (i) the sufficiency of our technical solution,
(ii) our satisfaction of RFP requirements relative to our integrated testing facility, and (iii)
whether the States evaluation was consistent with the RFPs evaluation criteria. However, his
ruling also found insufficient evidence or argument had been submitted to address three other
issues raised by EDS in its initial protest filing. Therefore, the CIO has directed that a
hearing be conducted on the issues of whether our (a) proposal complied with RFP requirements
relative to experience of proposed key personnel; (b) proposal complied with RFP requirements
for pricing; and (c) perceived price advantage is illusory and in any event was miscalculated by
DHHS. We intend to vigorously pursue affirmation of DHHS contract award. DHHS has instructed
us to continue performance of our services under the contract. In addition to the foregoing, we are subject to certain other legal proceedings, inquiries,
claims and disputes, which arise in the ordinary course of business. Although we cannot predict
the outcomes of these other proceedings, we do not believe these other actions, in the
aggregate, will have a material adverse effect on our financial position, results of operations
or liquidity. 11.      NEW ACCOUNTING PRONOUNCEMENTS Please refer to our discussion of SFAS 123(R) in Note 2. On March 29, 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 107 (SAB 107), Share-Based Payment. SAB 107 provides guidance related to
specific topics affected by SFAS 123(R), including share-based payment transactions with
non-employees, valuation methods, accounting for certain redeemable financial instruments issued
under share-based payment arrangements, the classification of compensation expense, non-GAAP
financial measures, capitalization of compensation cost related to share-based payment
arrangements, the accounting for income tax effects of share based-payment arrangements upon
adoption of SFAS 123(R), the modification of employee share options prior to the adoption of
SFAS 123(R) and disclosures in Managements Discussion and Analysis required after
implementation of SFAS 123(R). We do not believe SAB 107 will have a material impact on our
implementation of SFAS 123(R). On October 22, 2004, the President signed into law the American Jobs Creation Act of 2004 (the
Act). The Act creates a temporary incentive for U.S. corporations to repatriate accumulated
income earned abroad by providing an 85% dividends received deduction for certain dividends from
controlled foreign corporations. FASB Staff Position 109-2 Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004
allows companies additional time beyond that provided in Statement of Financial Accounting
Standards No. 109 Accounting for Income Taxes to determine the impact of the Act on its
financial statements and provides guidance for the disclosure of the impact of the Act on the
financial statements. At June 30, 2004, cumulative undistributed earnings of non-U.S.
subsidiaries for which U.S. taxes have not been recorded totaled $16.8 million. This incentive
is available to us until June 30, 2006. The 85% dividends received deduction is subject to a
number of limitations, and we have not yet decided whether, or to what extent, we might
repatriate foreign earnings that have not yet been remitted to the U.S. We will continue to
monitor our international activities. 12.      SUBSEQUENT EVENTS On March 16, 2005, we announced a definitive agreement to acquire the human resources consulting
and outsourcing businesses (the HR Business) of Mellon Financial Corporation for approximately
$445 million. For the trailing twelve months ended December 31, 2004, the HR Business recorded
revenues of approximately $660 million. The transaction is expected to close by the end of the
fourth quarter of fiscal year 2005 and has been approved by the boards of directors of both
companies. Closing is subject to customary closing conditions. We expect to initially fund the
transaction and related costs from cash on hand and our Credit Facility. We believe
that this acquisition makes us a stronger competitor in the end-to-end HR marketplace and
strengthens our position as a leading global provider of business process outsourcing services. 13




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) In April 2005, our Board of Directors authorized the issuance of up to $750 million of senior or
subordinated debt instruments under our existing shelf registration. Proceeds from the issuance
of the debt instruments will be used to pay down borrowings under the Credit Facility and for
general corporate purposes, including acquisitions and share repurchases. The debt instruments
are anticipated to be fixed-rate senior bonds with terms of 5 and 10 years. In addition, we
entered into forward interest rate agreements, which expire in the fourth quarter of fiscal year
2005, to hedge the variability of future interest payments related to the anticipated issuance
of fixed-rate senior bonds. These agreements total a notional amount of $250 million based on
the 5-year benchmark U.S. Treasury rate and $250 million based on the 10-year benchmark U.S.
Treasury rate. Upon termination of these agreements, we will make or receive payments based on
the difference between the interest rate specified in the forward interest rate agreements and
the then current 5 or 10-year benchmark U.S. Treasury rate. Upon the issuance of fixed-rate
senior bonds, we anticipate the change in the fair value of the forward interest rate
agreements, which will be recorded in accumulated other comprehensive income, will be amortized
as an adjustment to interest expense over the life of the fixed-rate senior bonds. However,
there is no assurance we will be able to complete an offering of fixed-rate senior bonds that
would allow us to amortize the payments. If we are unable to complete the offering, we would
have to recognize the payments on the forward interest rate agreements immediately in earnings. 14




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS All statements in this Managements Discussion and Analysis of Financial Condition and Results of
Operations that are not based on historical fact are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended (which Sections were adopted as part of the Private Securities Litigation Reform Act of
1995). While management has based any forward-looking statements contained herein on its current
expectations, the information on which such expectations were based may change. These
forward-looking statements rely on a number of assumptions concerning future events and are subject
to a number of risks, uncertainties, and other factors, many of which are outside of our control
that could cause actual results to materially differ from such statements. Such risks,
uncertainties, and other factors include, but are not necessarily limited to, those set forth under
the caption Risks Related to our Business. In addition, we operate in a highly competitive and
rapidly changing environment, and new risks may arise. Accordingly, investors should not place any
reliance on forward-looking statements as a prediction of actual results. We disclaim any
intention to, and undertake no obligation to, update or revise any forward-looking statement. We report our financial results in accordance with generally accepted accounting principles in the
United States (GAAP). However, we believe that certain non-GAAP financial measures and ratios
used in managing our business may provide users of this financial information with additional
meaningful comparisons between current results and prior reported results. Certain of the
information set forth herein and certain of the information presented by us from time to time
(including free cash flow and internal revenue growth) may constitute non-GAAP financial measures
within the meaning of Regulation G adopted by the Securities and Exchange Commission (SEC). We
have presented herein and we will present in other information we publish that contains any of
these non-GAAP financial measures a reconciliation of these measures to the most directly
comparable GAAP financial measure. The presentation of this additional information is not meant to
be considered in isolation or as a substitute for comparable amounts determined in accordance with
GAAP. GENERAL We are a Fortune 500 and S&P 500 company with approximately 47,000 people providing business
process and information technology outsourcing solutions to commercial and government clients. Our
clients have time-critical, transaction-intensive business and information processing needs, and we
typically service these needs through long-term contracts. New Business
During the quarter ended March 31, 2005, we signed contracts with new clients and incremental
business with existing clients representing $130.5 million of
annualized recurring revenue and approximately
$524.1 million in estimated total contract value. The Government segment contributed 28% of the new contract
signings (based on annual recurring revenues), including contracts with New Jerseys Child Support
Program to provide payment processing and debit card services. The Commercial segment contributed
72% of the new contract signings (based on annual recurring revenues), including contracts with
Nextel Partners for expanded customer care services and Delta Airlines to provide human resources
outsourcing services. While there are no third party standards or requirements governing the
calculation of new business signings, we define new business signings as recurring revenue from new
contracts, including the incremental portion of renewals, signed during the period and represents
the estimated first twelve months of revenue to be recorded under that contract after full
implementation. We use new business signings as a measure of estimated recurring revenues
represented by contractual commitments, both to forecast prospective revenues and to estimate
capital commitments. While there are no third party standards or requirements governing the
calculation of total contract value, we define total contract value as the estimated total revenues
from contracts signed during the period and represents estimated total revenue over the term of the
contract. We use total contract value as an additional measure of estimating total revenue
represented by contractual commitments, both to forecast prospective revenues and to estimate
capital commitments. Revenues for both new business signings and total contract value are measured
under GAAP. Acquisitions
In January 2005, we completed the acquisition of Superior Consultant Holdings Corporation
(Superior), acquiring all of the issued and outstanding shares of Superior through a cash tender
offer, which was completed on January 25, 2005, and subsequent short-form merger, at a purchase
price of $8.50 per share. Superior provides information technology consulting and business process
outsourcing services and solutions to the healthcare industry. The transaction was valued at
approximately $122.2 million (including payment of approximately $106 million for issued and
outstanding shares, options, and warrants and additional amounts for debentures and other payments)
plus related transaction costs and was funded from borrowings under our Credit Facility (as defined
below). The purchase price was allocated to assets acquired and liabilities assumed based on
estimated fair value as of the date of acquisition. We acquired assets of $159.2 million and
assumed liabilities of $37 million. We recorded $76.5 million in goodwill, which is not deductible
for income tax purposes, and intangible assets of $16.8 million. The $16.8 million of intangible
assets is attributable to customer relationships and non-compete agreements with useful lives of 5
years. We believe this acquisition expands our provider healthcare subject matter expertise, as
well as providing experience with most major hospital information systems and additional healthcare 15




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management talent. The operating results of the acquired business are included in our financial
statements in the Commercial segment from the effective date of the acquisition, January 25, 2005.
Our consolidated balance sheet as of March 31, 2005 reflects the preliminary allocation of the
purchase price to the assets acquired and liabilities assumed based on their estimated fair values
at the date of acquisition. Additional analysis is being performed with regard to our ability to
utilize Superiors pre-acquisition net operating loss carryovers in the post-acquisition tax years.
As a result, the purchase price allocated to the initial deferred tax asset of $18.4 million,
primarily related to net operating losses acquired, may be adjusted if necessary. In August 2004, we acquired BlueStar Solutions, Inc. (BlueStar), an information technology
outsourcer specializing in applications management of packaged enterprise resource planning and
messaging services. The transaction was valued at approximately $73.5 million, plus related
transaction costs. The transaction value includes $6.4 million attributable to the 9.2% minority
interest we held in BlueStar prior to the acquisition; therefore, the net purchase price was
approximately $67.1 million. Of this amount, approximately $61 million was paid to former BlueStar
shareholders by March 31, 2005 and was funded from borrowings under our credit facilities and cash
on hand. The remaining purchase price of $6 million will be paid in the first quarter of fiscal
year 2006. The purchase price was allocated to assets acquired and liabilities assumed based on
estimated fair value as of the date of acquisition. We acquired assets of $97.8 million and assumed
liabilities of $30.7 million. We recorded goodwill of $38.3 million, which is not deductible for
income tax purposes, and intangible assets of $11.6 million. The $11.6 million of intangible
assets is attributable to customer relationships with a useful life of seven years. We believe
that the acquisition of BlueStar improves our existing information technology services with the
addition of applications management and messaging services. The operating results of the acquired
business are included in our financial statements in the Commercial segment from the effective date
of the acquisition, August 26, 2004. Our consolidated balance sheet as of March 31, 2005 reflects
the preliminary allocation of the purchase price to the assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. Additional analysis is being
performed with regard to our ability to utilize BlueStars pre-acquisition net operating loss
carryovers in the post-acquisition tax years. As a result, the purchase price allocated to the
initial deferred tax asset of $29.2 million, primarily related to net operating losses acquired,
may be adjusted if necessary. In July 2004, we acquired Heritage Information Systems, Inc. (Heritage). Heritage provides
clinical management and pharmacy cost containment solutions to 14 state Medicaid programs, over a
dozen national commercial insurers and Blue Cross Blue Shield licensees and some of the largest
employer groups in the country. The transaction was valued at approximately $23.1 million plus
related transaction costs, excluding contingent consideration of up to $17 million maximum based
upon future financial performance, and was funded from borrowings under our Prior Facility (defined
below) and cash on hand. The purchase price was allocated to assets acquired and liabilities
assumed based on estimated fair value as of the date of acquisition. We acquired assets of $26.6
million and assumed liabilities of $3.5 million. We recorded $14.3 million in goodwill, which is
deductible for income tax purposes, and intangible assets of $2.4 million. The $2.4 million of
intangible assets is attributable to customer relationships and non-compete agreements with useful
lives of five years. We believe this acquisition enhances our clinical management and cost
containment service offerings. The operating results of the acquired business are included in our
financial statements in the Government segment from the effective date of the acquisition, July 1,
2004. State Healthcare Contracts
In April 2004, we were awarded a contract by the North Carolina Department of Health and Human
Services (DHHS) to replace and operate the North Carolina Medicaid Management Information System
(NCMMIS). Prior to DHHS award of the contract, our proposal was reviewed and approved by the
State of North Carolinas Information Technology Services group and the Federal Center for Medicare
and Medicaid Services. Two competitors protested the contract award. In considering the protests,
DHHS again reviewed our proposal and determined that our technical solutions did, in fact, comply
with all technical requirements and denied protests on June 3, 2004. Electronic Data Systems
(EDS) protested the denial. On January 12, 2005, an administrative law judge made a non-binding
recommendation to sustain EDS protest of the contract between us and the DHHS. Notwithstanding
the reviews, approvals, and decisions in awarding the contract and in considering the protests, the
administrative law judge based his recommendation on his assessment that our technical solution did
not fully comply with the DHHS technical standards for proposals. The non-binding recommendation
was issued to the North Carolina State Chief Information Officer (CIO), Office of Technology
Services. We, DHHS and EDS, each had an opportunity to present written arguments to the CIO. An
oral hearing was held before the CIO on March 15, 2005 during which each of the parties were
permitted to present oral arguments. On April 28, 2005, the CIO issued a decision in favor of the
DHHS and us as to the issues of: (i) the sufficiency of our technical solution, (ii) our
satisfaction of RFP requirements relative to our integrated testing facility, and (iii) whether the
States evaluation was consistent with the RFPs evaluation criteria. However, his ruling also
found insufficient evidence or argument had been submitted to address three other issues raised by
EDS in its initial protest filing. Therefore, the CIO has directed that a hearing be conducted on
the issues of whether our (a) proposal complied with RFP requirements relative to experience of
proposed key personnel; (b) proposal complied with RFP requirements for pricing; and (c) perceived
price advantage is illusory and in any event was miscalculated by DHHS. We intend to vigorously
pursue affirmation of DHHS contract award. DHHS has instructed us to continue performance of our
services under the contract. In 2001, we were awarded a contract by the Georgia Department of Community Health (DCH) to
develop, implement and operate a system to administer health benefits to Georgia Medicaid
recipients as well as state government employees (the Georgia Contract). 16




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This system development project was large and complex and anticipated the development of a system
that would process both Medicaid and state employee claims. The Medicaid phase of this project was
implemented on April 1, 2003. Various disputes arose because of certain delays and operational
issues that were encountered in this phase. During the second quarter of fiscal year 2004, in
connection with a settlement in principle, we recorded a $6.7 million reduction in revenue
resulting from the change in our percentage-of-completion estimates primarily as a result of the
termination of Phase II of the contract, a charge of $2.6 million to services and supplies
associated with the accrual of wind-down costs associated with the termination of Phase II and an
accrual of $10 million in other operating expenses to be paid to DCH pursuant to the settlement
which was paid in the first quarter of fiscal year 2005. On July 21, 2004 we entered into a
definitive settlement agreement with the DCH to settle these disputes. The terms of the definitive
settlement, which were substantially the same as those announced in January 2004, include the $10
million payment by us to DCH; a payment by DCH to us of $9 million in system development costs;
escrow of $11.8 million paid by DCH, with $2.4 million of the escrowed funds to be paid to us upon
completion of an agreed work plan ticket and reprocessing of July 2003  June 2004 claims, and the
remaining $9.4 million of escrowed funds to be paid to us upon final certification of the system by
the Center for Medicare/Medicaid Services, the governing Federal regulatory agency; cancellation of
Phase II of the contract; and an agreement to settle outstanding operational invoices resulting in
a payment to us of over $8.2 million and approximately $7 million of reduction in such invoices. Divestitures
In November 2003, we completed the sale of a majority of our Federal government business to
Lockheed Martin Corporation (the Divested Federal Business) for approximately $649.4 million,
which included a cash payment of $586.5 million at closing and $70 million payable pursuant to a
five-year non-compete agreement, less a working capital settlement of $7.1 million paid in the
third quarter of fiscal year 2004. Assets sold were approximately $346.8 million and liabilities
assumed by Lockheed Martin Corporation were approximately $67.9 million, both of which were
primarily in the Government segment. We recognized a pretax gain of $284.3 million ($182 million,
net of income tax) in the second quarter of fiscal year 2004. We recognized an additional pretax
gain of $0.5 million ($0.3 million, net of income tax) in the third quarter of fiscal year 2004 due
to our final working capital settlement with Lockheed Martin. We incurred $9.8 million ($6.2
million, net of income tax) for compensation costs associated with former Federal employees, which
is reflected in wages and benefits in the second quarter of fiscal year 2004. As of September 30,
2003, we classified as held-for-sale those assets and liabilities related to that portion of our
Federal business we expected to dispose of in the sale. Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets requires that
depreciation and amortization of long-lived assets held for sale be suspended during the holding
period prior to sale. Accordingly, we suspended depreciation and amortization in the amount of
$4.3 million ($2.7 million, net of income tax) and $1.9 million ($1.2 million, net of income tax)
in the first and second quarters of fiscal year 2004, respectively, related to those long-lived
assets sold. In February 2004, we sold the contracts associated with the Hanscom Air Force Base relationship
(Hanscom) to ManTech International Corporation for $6.5 million in cash. We recognized a pretax
gain of $5.4 million ($3.4 million, net of income tax) for this transaction. We also completed the
sale of one other small contract during fiscal year 2004. Revenues in our Government segment include revenues from operations divested through June 30, 2004
(primarily the Divested Federal Business and Hanscom) of $5 million for the three months ended
March 31, 2004, and $0.6 million and $250.2 million for the nine months ended March 31, 2005 and
2004, respectively. Revenues in our Commercial segment include revenues from operations divested
as of June 30, 2004 (primarily the Divested Federal Business) of $6.9 million for the nine months
ended March 31, 2004. The sale of the Divested Federal Business to Lockheed Martin Corporation
allows us to focus on our business process and information technology outsourcing service offerings
in the commercial, state and local, and Federal education and healthcare markets.
Please see Liquidity and Capital Resources for a discussion of indemnities provided to the purchaser
of the Divested Federal Business and Hanscom contracts. SUBSEQUENT EVENTS On March 16, 2005, we announced a definitive agreement to acquire the human resources consulting
and outsourcing businesses (the HR Business) of Mellon Financial Corporation for approximately
$445 million. For the trailing twelve months ended December 31, 2004, the HR Business recorded
revenues of approximately $660 million. The transaction is expected to close by the end of the
fourth quarter of fiscal year 2005 and has been approved by the boards of directors of both
companies. Closing is subject to customary closing conditions. We expect to initially fund the
transaction and related costs from cash on hand and our Credit Facility (defined below). We believe
that this acquisition makes us a stronger competitor in the end-to-end HR marketplace and
strengthens our position as a leading global provider of business process outsourcing services. 17




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In April 2005, our Board of Directors authorized the issuance of up to $750 million of senior or
subordinated debt instruments under our existing shelf registration. Proceeds from the issuance of
the debt instruments will be used to pay down borrowings under the Credit Facility and for general
corporate purposes, including acquisitions and share repurchases. The debt instruments are
anticipated to be fixed-rate senior bonds with terms of 5 and 10 years. In addition, we entered
into forward interest rate agreements, which expire in the fourth quarter of fiscal year 2005, to
hedge the variability of future interest payments related to the anticipated issuance of fixed-rate
senior bonds. These agreements total a notional amount of $250 million based on the 5-year
benchmark U.S. Treasury rate and $250 million based on the 10-year benchmark U.S. Treasury rate.
Upon termination of these agreements, we will make or receive payments based on the difference
between the interest rate specified in the forward interest rate agreements and the then current 5
or 10-year benchmark U.S. Treasury rate. Upon the issuance of fixed-rate senior bonds, we
anticipate the change in the fair value of the forward interest rate agreements, which will be
recorded in accumulated other comprehensive income, will be amortized as an adjustment to interest
expense over the life of the fixed-rate senior bonds. However, there is no assurance we will be
able to complete an offering of fixed-rate senior bonds that would allow us to amortize the
payments. If we are unable to complete the offering, we would have to recognize the payments on
the forward interest rate agreements immediately in earnings. REVENUE GROWTH Internal revenue growth is measured as total revenue growth less acquired revenue from acquisitions
and revenues from divested operations. Acquired revenue from acquisitions is based on
pre-acquisition normalized revenue of acquired companies. We use the calculation of internal
revenue growth to measure revenue growth excluding the impact of acquired revenues and the revenue
associated with divested operations and we believe these adjustments to historical reported results
are necessary to accurately reflect our internal revenue growth. The following table sets forth the
calculation of internal revenue growth (in thousands): Three months ended March 31,
    Nine months ended March 31,2005
    
    
    2004
    
    
    $ Growth
    
    
    Growth %
    
    
    2005
    
    
    2004
    
    
    $ Growth
    
    
    Growth %ConsolidatedTotal Revenues
    
    $
    1,063,299
    
    
    $
    1,009,432
    
    
    $
    53,867
    
    
    
    5
    %
    
    $
    3,136,767
    
    
    $
    3,043,946
    
    
    $
    92,821
    
    
    
    3
    %Less: Divestitures (1)
    
    
    (1
    )
    
    
    (5,034
    )
    
    
    5,033
    
    
    
    
    
    
    
    (561
    )
    
    
    (257,155
    )
    
    
    256,594Adjusted
    
    $
    1,063,298
    
    
    $
    1,004,398
    
    
    $
    58,900
    
    
    
    6
    %
    
    $
    3,136,206
    
    
    $
    2,786,791
    
    
    $
    349,415
    
    
    
    13
    %Acquired revenues (2)
    
    $
    46,026
    
    
    $
    4,263
    
    
    $
    41,763
    
    
    
    4
    %
    
    $
    247,367
    
    
    $
    44,977
    
    
    $
    202,390
    
    
    
    8
    %Internal revenues
    
    
    1,017,272
    
    
    
    1,000,135
    
    
    
    17,137
    
    
    
    2
    %
    
    
    2,888,839
    
    
    
    2,741,814
    
    
    
    147,025
    
    
    
    5
    %Total
    
    $
    1,063,298
    
    
    $
    1,004,398
    
    
    $
    58,900
    
    
    
    6
    %
    
    $
    3,136,206
    
    
    $
    2,786,791
    
    
    $
    349,415
    
    
    
    13
    %GovernmentTotal Revenues
    
    $
    525,146
    
    
    $
    548,213
    
    
    $
    (23,067
    )
    
    
    (4
    )%
    
    $
    1,619,208
    
    
    $
    1,845,607
    
    
    $
    (226,399
    )
    
    
    (12
    )%Less: Divestitures (1)
    
    
    (1
    )
    
    
    (5,034
    )
    
    
    5,033
    
    
    
    
    
    
    
    (561
    )
    
    
    (250,239
    )
    
    
    249,678Adjusted
    
    $
    525,145
    
    
    $
    543,179
    
    
    $
    (18,034
    )
    
    
    (3
    )%
    
    $
    1,618,647
    
    
    $
    1,595,368
    
    
    $
    23,279
    
    
    
    1
    %Acquired revenues (2)
    
    $
    5,907
    
    
    $
    
    
    
    $
    5,907
    
    
    
    1
    %
    
    $
    26,651
    
    
    $
    
    
    
    $
    26,651
    
    
    
    1
    %Internal revenues
    
    
    519,238
    
    
    
    543,179
    
    
    
    (23,941
    )
    
    
    (4
    )%
    
    
    1,591,996
    
    
    
    1,595,368
    
    
    
    (3,372
    )
    
    
    Total
    
    $
    525,145
    
    
    $
    543,179
    
    
    $
    (18,034
    )
    
    
    (3
    )%
    
    $
    1,618,647
    
    
    $
    1,595,368
    
    
    $
    23,279
    
    
    
    1
    %CommercialTotal Revenues
    
    $
    538,153
    
    
    $
    461,219
    
    
    $
    76,934
    
    
    
    17
    %
    
    $
    1,517,559
    
    
    $
    1,198,339
    
    
    $
    319,220
    
    
    
    27
    %Less: Divestitures (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,916
    )
    
    
    6,916Adjusted
    
    $
    538,153
    
    
    $
    461,219
    
    
    $
    76,934
    
    
    
    17
    %
    
    $
    1,517,559
    
    
    $
    1,191,423
    
    
    $
    326,136
    
    
    
    27
    %Acquired revenues (2)
    
    $
    40,119
    
    
    $
    4,263
    
    
    $
    35,856
    
    
    
    8
    %
    
    $
    220,716
    
    
    $
    44,977
    
    
    $
    175,739
    
    
    
    14
    %Internal revenues
    
    
    498,034
    
    
    
    456,956
    
    
    
    41,078
    
    
    
    9
    %
    
    
    1,296,843
    
    
    
    1,146,446
    
    
    
    150,397
    
    
    
    13
    %Total
    
    $
    538,153
    
    
    $
    461,219
    
    
    $
    76,934
    
    
    
    17
    %
    
    $
    1,517,559
    
    
    $
    1,191,423
    
    
    $
    326,136
    
    
    
    27
    %
  (1)
    Divested revenues are revenues of businesses divested as if the divestiture had
occurred at the beginning of the period. Amounts presented are primarily related to
the sale of the Divested Federal Business and other fiscal year 2004 divestitures.(2)
    Acquired revenues are based on pre-acquisition normalized revenues of acquired companies. 18




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##### Table of Contents



RESULTS OF OPERATIONS The following table sets forth certain items from our consolidated statements of income as a
percentage of revenues: Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Expenses:Wages and benefits
    
    
    42.6
    
    
    
    42.1
    
    
    
    42.1
    
    
    
    44.2Services and supplies
    
    
    23.7
    
    
    
    26.7
    
    
    
    24.8
    
    
    
    26.6Rent, lease and maintenance
    
    
    11.7
    
    
    
    10.7
    
    
    
    11.6
    
    
    
    9.9Depreciation and amortization
    
    
    5.4
    
    
    
    4.7
    
    
    
    5.3
    
    
    
    4.3Gain on sale of business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9.4
    )Other operating expenses
    
    
    1.0
    
    
    
    0.6
    
    
    
    1.0
    
    
    
    1.4Total operating expenses
    
    
    84.4
    
    
    
    84.8
    
    
    
    84.8
    
    
    
    77.0Operating income
    
    
    15.6
    
    
    
    15.2
    
    
    
    15.2
    
    
    
    23.0Interest expense
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.5Other non-operating income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Pretax profit
    
    
    15.3
    
    
    
    14.9
    
    
    
    14.9
    
    
    
    22.6Income tax expense
    
    
    4.5
    
    
    
    5.0
    
    
    
    5.2
    
    
    
    8.2Net income
    
    
    10.8
    %
    
    
    9.9
    %
    
    
    9.7
    %
    
    
    14.4
    %
 COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2005 TO THE THREE MONTHS ENDED MARCH 31, 2004 Revenues
In the third quarter of fiscal year 2005, our revenue increased $53.9 million, or 5%, to $1.06
billion from $1.01 billion in the third quarter of fiscal year 2004. Revenues related to the
Divested Federal Business and other small contracts (collectively, the 2004 Divestitures) were $5
million in the quarter ended March 31, 2004. Excluding the impact of the revenues related to the
2004 Divestitures, revenues increased from $1 billion in the third quarter of fiscal year 2004 to
$1.06 billion in the third quarter of fiscal year 2005, or 6%. Internal revenue growth, excluding
the impact of the revenues related to the 2004 Divestitures, for the third quarter of fiscal year
2005 was 2%. The remainder of the revenue growth was related to acquisitions. Internal revenue growth for the three months ended March 31, 2005 was adversely impacted by the
following items: (1) the terminations of the Gateway and Roadway contracts in our Commercial
segment, which together accounted for approximately $1 million and $23.6 million of revenue in the
three months ended March 31, 2005 and 2004, respectively. The Gateway contract was effectively
terminated during the first quarter of fiscal year 2005 as a result of Gateways acquisition of
eMachines, Inc., which significantly changed its business strategy. The Roadway contract was
terminated at the end of fiscal year 2004 due to Roadways acquisition by Yellow Freight; and (2)
HIPAA remediation work and our development work on the Georgia Contract in our Government segment,
which together accounted for approximately $0.4 million and $17.7 million of revenue in the three
months ended March 31, 2005 and 2004, respectively. Revenue in our Government segment, which represents 49% of consolidated revenue for the third
quarter of fiscal year 2005, decreased $23.1 million, or 4%, to $525.1 million in the third quarter
of fiscal year 2005 compared to the same period last year. Revenues related to the 2004
Divestitures included in the Government segment were $5 million for the quarter ended March 31,
2004. Excluding the impact of the revenues related to the 2004 Divestitures, total Government
segment revenues decreased 3% in the third quarter of fiscal year 2005 to $525.1 million from
$543.2 million in the third quarter of fiscal year 2004. Internal revenue growth was negative 4%
primarily due to decreased revenue related to our development work on the Georgia Contract and
lower HIPAA revenues discussed above as well as lower revenues related to our government unclaimed
property business. The decrease was partially offset by increased revenues derived from our Texas
Medicaid, New Jersey EZPass, Oklahoma City public safety, and New Jersey Department of Human
Services contracts. The items discussed above collectively represent 97% of our internal revenue
decline for 19




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the period in this segment. Revenue in our Commercial segment, which represents 51% of consolidated revenue for the third
quarter of fiscal year 2005, increased $76.9 million, or 17%, to $538.2 million in the third
quarter of fiscal year 2005 compared to the same period last year. Revenue growth from
acquisitions was 8% for the three months ended March 31, 2005. Internal revenue growth was 9%, due
primarily to increased revenue related to contracts with Nextel, Chubb & Sons, McDonalds,
Hallmark, General Motors, University of Phoenix, General Electric, Scotts Company, Delta Airlines
and Goodyear. These increases were partially offset by the loss of the Roadway and Gateway
contracts discussed above and lower revenues in our commercial unclaimed property business. The
contracts discussed above collectively represent 74% of our internal revenue growth for the period
in this segment. Operating Expenses
Wages and benefits increased $27.9 million, or 6.6%, to $452.8 million. As a percentage of
revenue, wages and benefits increased 0.5% to 42.6% in the third quarter of fiscal year 2005 from
42.1% in the same quarter of fiscal year 2004. As a percentage of revenue, approximately 1.8% of
the increase was primarily due to a decrease in our unclaimed property business, which had a low
component of wages and benefits. This increase was partially offset by a decrease of approximately
0.5% primarily related to the reduction in HIPAA remediation work, as discussed above, which was
labor intensive and therefore had a higher proportion of wages and benefits as compared to revenue
as well as a decrease of 0.6% in our government segment primarily as a result of cost reductions. Services and supplies decreased $17.5 million, or 6.5%, to $251.8 million. As a percentage of
revenue, services and supplies decreased 3.0% to 23.7% in the third quarter of fiscal year 2005
from 26.7% in the third quarter of fiscal year 2004. This decrease as a percentage of revenue is
primarily due to lower revenues in our unclaimed property business, which have a higher component
of services and supplies than our other ongoing operations. Rent, lease and maintenance increased $16.3 million, or 15.1%, to $124 million. As a percentage of
revenue, rent, lease and maintenance increased to 11.7% in the third quarter of fiscal year 2005
from 10.7% in the third quarter of fiscal year 2004. This increase as a percentage of revenue was
primarily due to growth in our information technology outsourcing business. Information technology
outsourcing has a higher component of rent, lease and maintenance due to higher equipment costs. Depreciation and amortization increased $9.9 million, or 20.7%, to $57.8 million. As a percentage
of revenue, depreciation and amortization increased 0.7%, to 5.4% due to capital expenditures and
additions to intangible assets necessary to support our new business and acquisitions completed in
the trailing twelve months. Other operating expense increased $4.8 million to $11 million. As a percentage of revenue, other
operating expense increased 0.4%, to 1.0%. Included in the third quarter of fiscal year 2004 was a
$5.4 million gain related to the sale of the Hanscom contracts. Income tax expense
Our effective tax rate decreased to 29.5% in the third quarter of fiscal year 2005 from 33.7% in
the third quarter of fiscal year 2004. Our effective tax rate is lower than the 35% statutory rate
due to prior year divestiture tax benefit of $9.4 million recognized in the third quarter of fiscal
year 2005 as well as research and development and other tax credits recognized in the third
quarters of both fiscal years 2005 and 2004. COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2005 TO THE NINE MONTHS ENDED MARCH 31, 2004 Revenues
For the first nine months of fiscal year 2005, our revenue increased $92.8 million, or 3%, to $3.14
billion from $3.04 billion for the first nine months of fiscal year 2004. Revenues related to the
2004 Divestitures were $0.6 million and $257.2 million for the nine months ended March 31, 2005 and
2004, respectively. Excluding the impact of the revenues related to the 2004 Divestitures,
revenues increased to $3.14 billion for the first nine months of fiscal year 2005 from $2.79
billion for the first nine months of fiscal year 2004, or 13%. Internal revenue growth, excluding
the impact of the revenues related to the 2004 Divestitures, for the first nine months of fiscal
year 2005 was 5%. The remainder of the growth was related to acquisitions. Internal revenue growth for the nine months ended March 31, 2005 was adversely impacted by the
following items: (1) the termination of the Roadway contract in our Commercial segment, which
accounted for approximately $0.8 million and $29.6 million of revenue in the nine months ended
March 31, 2005 and 2004, respectively. The Roadway contract was terminated at the end of fiscal
year 2004 due to Roadways acquisition by Yellow Freight; and (2) HIPAA remediation work and our
development work on the Georgia Contract in our Government segment, which together accounted for
approximately $2.3 million and $87.2 million of revenue in the nine months ended March 31, 2005 and
2004, respectively. Revenue in our Government segment, which represents 52% of consolidated revenue for the first nine
months of fiscal year 2005, decreased $226.4 million, or 12%, to $1.62 billion for the first nine
months of fiscal year 2005 compared to the same period last year. 20




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Revenues related to the 2004 Divestitures included in the Government segment were $0.6 million and
$250.2 million for the nine months ended March 31, 2005 and 2004, respectively. Excluding the
impact of the revenues related to the 2004 Divestitures, total Government segment revenues grew 1%
for the first nine months of fiscal year 2005 to $1.62 billion. Revenue growth from acquisitions
was 1% for the nine months ended March 31, 2005. Internal revenue growth, excluding the impact of
the revenues related to the 2004 Divestitures, was zero, primarily due to new revenues on our Texas
Medicaid, Department of Education, North Carolina Medicaid, Oklahoma City public safety and New
Jersey Department of Human Services contracts and increased revenues on our New Jersey EZPass
contract offset by decreases related to the development work on the Georgia Contract and lower
HIPAA related revenues discussed above and lower revenues in our government unclaimed property
business. Revenue in our Commercial segment, which represents 48% of consolidated revenue for the first nine
months of fiscal year 2005, increased $319.2 million, or 27%, to $1.52 billion for the first nine
months of fiscal year 2005 compared to the same period last year. Revenues related to the Divested
Federal Business included in the Commercial segment were $6.9 million for the first nine months of
fiscal year 2004. Excluding the impact of the revenues related to the Divested Federal Business,
revenues grew 27% for the first nine months of fiscal year 2005 compared to the same period in
fiscal year 2004. Revenue growth from acquisitions was 14% in the nine months ended March 31,
2005. Internal revenue growth, excluding the impact of the revenues related to the Divested Federal
Business, was 13%, due primarily to increased revenues on contracts with Nextel, McDonalds,
Hallmark, Goodyear, Chubb & Sons, University of Phoenix, General Electric, General Motors,
Northwest Airlines and Queens Medical Center. These increases were partially offset by the loss of
the Roadway contract discussed above and decreased revenues in our commercial unclaimed property
business. The contracts discussed above collectively represent 76% of our internal revenue growth
for the period in this segment. Operating Expenses
Wages and benefits decreased $24.9 million, or 1.9%, to $1.32 billion. As a percentage of revenue,
wages and benefits decreased 2.1% to 42.1% for the first nine months of fiscal year 2005 from 44.2%
in the same period of fiscal year 2004. Included in wages and benefits for the first nine months
of fiscal year 2004 are compensation costs associated with former Federal employees of $9.8
million, which were primarily stay bonuses and accelerated option vesting due to the sale of the
Divested Federal Business. Excluding these costs, wages and benefits decreased $15.1 million, or
1.1%, for the first nine months of fiscal year 2005 (calculated as the $24.9 million decrease less
$9.8 million compensation costs, divided by reported wages and benefits costs for the nine months
ended March 31, 2004 less the $9.8 million compensation costs) and therefore was 43.9% as a
percentage of revenue resulting in a decrease of 1.8%. The sale of the Divested Federal Business,
the acquisition of Lockheed Martin Corporations commercial information technology outsourcing
business and the new Common Services for Borrowers contract with the Department of Education were
responsible for approximately 1.4% of the decrease in wages and benefits as a percentage of
revenue. The Divested Federal Business, which provided primarily system integration services to
the Federal Government and its agencies, had a higher proportion of labor related expense to its
revenues. The acquisition of Lockheed Martin Corporations commercial information technology
outsourcing business has a lower proportion of labor costs as a percentage of revenue than our
existing business process outsourcing operations. The new Common Services for Borrowers contract
also has a lower component of wages and benefits than our other operations due to the use of
subcontractors. Services and supplies decreased $28.4 million, or 3.5%, to $777.9 million. As a percentage of
revenue, services and supplies decreased 1.8% to 24.8% for the first nine months of fiscal year
2005 from 26.6% in the same period of fiscal year 2004. A decrease of approximately 2.6% as a
percentage of revenue is primarily due to the sale of the Divested Federal Business and lower
revenue in our unclaimed property business, both of which had a higher component of services and
supplies than our other ongoing operations and the $2.6 million of wind-down costs related to the
termination of Phase II of the Georgia Contract recorded in the second quarter of fiscal year 2004.
This decrease was partially offset by a 1% increase as a percentage of revenue as a result of
increased subcontractor costs related to the new Common Services for Borrowers contract with the
Department of Education. Rent, lease and maintenance increased $63.5 million, or 21.1%, to $364.2 million. As a percentage
of revenue, rent, lease and maintenance increased 1.7% to 11.6% for the first nine months of fiscal
year 2005 from 9.9% in the same period of fiscal year 2004. Approximately 1.1% of this increase as
a percentage of revenue was due to growth in our information technology outsourcing business, both
from acquisitions, including Lockheed Martin Corporations commercial information technology
outsourcing business, and internal growth. Information technology outsourcing services have higher
equipment costs than business process outsourcing services. The impact of the sale of the Divested
Federal Business in fiscal year 2004, which primarily provided system integration services to its
clients, contributed approximately 0.2% of the increase as a percentage of revenue. These services
typically have a lower component of rent, lease and maintenance than information technology
outsourcing services, which have higher equipment costs. Depreciation and amortization increased $36.2 million, or 27.5%, to $167.7 million. As a
percentage of revenue, depreciation and amortization increased 1%, to 5.3% due to capital
expenditures and additions to intangible assets necessary to support our new business and
acquisitions, as well as the cessation of $6.2 million of depreciation in the first nine months of
fiscal year 2004 as a result of classifying the assets related to the Divested Federal Business as
held-for-sale at September 30, 2003. In addition, depreciation and 21




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amortization increased as a percentage of revenue due to the acceleration of intangible asset
amortization related to the Gateway contract termination. Other operating expense decreased $13.5 million, or 30.6%, to $30.6 million. As a percentage of
revenue, other operating expense decreased 0.4%, to 1%. The first nine months of fiscal year 2004
included a $10 million accrual for the settlement with the Georgia Department of Community Health
offset by a $5.4 million gain on the sale the Hanscom contracts. Interest expense
Interest expense decreased $3.7 million the first nine months of fiscal year 2005 compared to the
same period of fiscal year 2004, primarily as a result of the redemption of our 3.5% Subordinated
Convertible Notes in the third quarter of fiscal year 2004, partially offset by higher interest
expense resulting from an increase in the average balance outstanding on our revolving credit
facilities used to fund share repurchases and acquisitions. Income tax expense
Our effective tax rate decreased to 34.7% in the first nine months of fiscal year 2005 from 36.1%
for the first nine months of fiscal year 2004. Our effective tax rate is lower than the 35%
statutory rate due to a prior year divestiture tax benefit of $9.4 million recognized in the third
quarter of fiscal year 2005 as well as research and development and other tax credits recognized in
the first nine months of both fiscal years 2005 and 2004. LIQUIDITY AND CAPITAL RESOURCES We finance our ongoing business operations through cash flows from operations and utilize excess
cash flow combined with the issuance of debt and equity to finance our acquisition strategy. Cash Flow
During the first nine months of fiscal year 2005, we generated approximately $472 million in cash
flow from operations compared to $269.5 million in the same period of fiscal year 2004. The
increase from the prior year period was primarily a result of increased net income (excluding the
gain on the sale of the Divested Federal Business and related income taxes) and increased
collections on accounts receivable, including the collection of operational and termination fees
from Gateway and timing of collections in our unclaimed property business. Cash flows for the
prior year period included an $88.1 million payment of the tax liability related to the sale of the
Divested Federal Business (gross proceeds from the sale of the Divested Federal Business are
reflected in cash flows from investing activities, but the tax payment related to the sale is
presented as a reduction in cash flows from operations). Additionally in the prior year period,
cash flows were adversely impacted by increased receivables related to development work on our
Georgia Contract, which was substantially completed in the third quarter of fiscal year 2004. We
collected billed amounts outstanding related to this development work in the first nine months of
fiscal year 2005. The current year improvement in accounts receivable was partially offset by
increased payments on our accrued liability balances, including the payment of a prior year legal
settlement of $10 million and the payment of the settlement on the Georgia Contract of $10 million,
as well as the timing of payments related to software used in our information technology
outsourcing business, transfer agent fees related to our unclaimed property business and other
contract related costs. Free cash flow (as defined below) was approximately $272.3 million for the first nine months of
fiscal year 2005 versus approximately $79.7 million for the same
period of fiscal year 2004. Free cash flow for the prior year
included an $88.1 million payment of the tax liability related
to the sale of the Divested Federal Business discussed above. Our
capital expenditures, defined as purchases of property, equipment and software, net, and additions
to other intangible assets, were approximately $199.6 million, or 6.4% of total revenues, and
$189.8 million, or 6.2% of total revenues, for the nine months ended March 31, 2005 and 2004,
respectively. 22




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Free cash flow is measured as operating cash flows (net cash provided by operating activities, as
reported in our consolidated statements of cash flows) less capital expenditures (purchases of
property, equipment and software, net of sales, as reported in our consolidated statements of cash
flows) less additions to other intangible assets (as reported in our consolidated statements of
cash flows). We believe this free cash flow metric provides an additional measure of available
cash flow after we have satisfied the capital expenditure requirements of our operations, and
should not be taken in isolation to be a measure of cash flow available for us to satisfy all our
obligations and execute our business strategies. We also rely on cash flows from investing and
financing activities, which together with free cash flow, are expected to be sufficient for us to
execute our business strategies. Our measure of free cash flow may not be comparable to similarly
titled measures of other companies. The following table sets forth the calculations of free cash
flow (in thousands): Nine months endedMarch 31,2005
    
    

2004
(1)Net cash provided by operating activities
    
    $
    471,973
    
    
    $
    269,494Purchases of property, equipment and software, net
    
    
    (170,185
    )
    
    
    (166,171
    )Additions to other intangible assets
    
    
    (29,444
    )
    
    
    (23,582
    )Free cash flow
    
    $
    272,344
    
    
    $
    79,741
  (1)
    The nine months ended March 31, 2004 includes an $88.1 million tax payment related to
the Divested Federal Business. During the nine months ended March 31, 2005, net cash used in investing activities was $419
million. We used $213.3 million for acquisitions during the period, primarily the purchase of
Superior Consultant Holdings Corporation, BlueStar Solutions, Inc. and Heritage Information
Systems, Inc. Cash used for the purchase of property, equipment and software and additions to
other intangible assets was $199.6 million and $189.8 million for the nine months ended March 31,
2005 and 2004, respectively. During the first nine months of fiscal year 2005, net cash used in financing activities was $83.3
million. Such financing activities include net repayments of debt and purchases of treasury shares
offset by proceeds from stock options and proceeds from issuance of treasury shares to fund
employer contributions under our Employee Stock Purchase and 401(k) plans. Credit Arrangements
On October 27, 2004, we entered into a Five Year Competitive Advance and Revolving Credit Facility
Agreement with JPMorgan Chase Bank, as Administrative Agent (JP Morgan), and Wells Fargo Bank,
National Association, as Syndication Agent, and a syndication of 19 other lenders (the Credit
Facility). Proceeds from advances under the Credit Facility are used for general corporate
purposes, to fund acquisitions and for repurchases under our share repurchase program. The Credit
Facility provides for an unsecured $1.5 billion multi-currency revolving credit and competitive
advance facility (fully available in US dollars, Euros or competitive loans in any currency).
Multi-currency commitments (available in certain specified currencies other than US dollars or
Euros) in an initial aggregate amount of $200 million and swing line loans in an amount up to $150
million are provided under the facility. Subject to affirmation of representations and warranties,
status of no default and commitments by willing lenders, the Credit Facility may be increased by up
to an additional $300 million. The lending commitments under the Credit Facility are scheduled to
terminate October 27, 2009. The terms and rates of the Credit Facility are generally more favorable
than those of the Prior Facility (defined below). At the closing of the Credit Facility, we
borrowed $316 million under the Credit Facility to pay off and terminate the Prior Facility. In
addition, $94 million in letters of credit were issued at closing under the Credit Facility to
replace letters of credit outstanding under the Prior Facility. Other than competitive loans and swing line loans, advances under the Credit Facility bear interest
at a Base Rate (generally equal to the prime rate of JP Morgan) or a Eurocurrency rate plus a
percentage (ranging from 0.220% to 0.775%, currently 0.39%) determined based on our credit rating.
We are required to pay accrued interest at established intervals based upon our elected interest
period. Among other fees, we pay a facility fee of 0.110% per annum (due quarterly), based on our credit
rating on the aggregate commitment of the Credit Facility, whether used or unused. We also pay a
utilization fee of 0.125% on the total amount outstanding under the Credit Facility for each day
that such amount exceeds 50% of the aggregate commitments then in effect. The Credit Facility contains customary covenants, including but not limited to, restrictions on our
ability, and in certain instances, our subsidiaries ability, to incur liens, merge or dissolve,
finance its accounts receivables, or sell or transfer assets. The Credit Facility also limits our
ability to incur additional indebtedness at the subsidiary level. In addition, we may not permit
our consolidated leverage ratio to exceed 2.75 to 1.0 or our consolidated interest coverage ratio
to be less than 3.50 to 1.0. Upon the occurrence of certain events of default, our obligations under the Credit Facility may be
accelerated and the lending commitments under the Credit Facility terminated. Such events of
default include, but are not limited to, payment default to lenders, material inaccuracies of
representations and warranties, covenant defaults, material payment defaults (other than under the
Credit 23




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Facility), voluntary and involuntary bankruptcy proceedings, material money judgments, material
ERISA events, or change of control. Simultaneously with entering into the $1.5 billion Credit Facility, we terminated our then existing
$875 million revolving credit facility (the Prior Facility) on October 27, 2004 and repaid the
$316 million outstanding on the Prior Facility with borrowings under the Credit Facility. The
lending commitments under the Prior Facility were evidenced by that certain Revolving Credit
Agreement, dated as of September 12, 2002 among us, Wells Fargo Bank Texas, National Association,
as administrative agent, and various other lenders, and were scheduled to expire in December 2005. Draws made under our credit facilities are made to fund cash acquisitions, share repurchases and
for general working capital requirements. During the trailing twelve months ending March 31, 2005,
the balance outstanding under our credit facilities for borrowings ranged from $0 to $452 million.
At March 31, 2005, we had approximately $1.02 billion available on our Credit Facility after giving
effect to outstanding indebtedness and $99 million of outstanding letters of credit that secure
certain contractual performance and other obligations and which reduce the availability of our
Credit Facility. At March 31, 2005, we had $383.4 million outstanding on our Credit Facility,
which is reflected in long-term debt, and which bore interest at 3.24% for substantially all of the
amount outstanding. In April 2005, our Board of Directors authorized the issuance of up to $750 million of senior or
subordinated debt instruments under our existing shelf registration. Proceeds from the issuance of
the debt instruments will be used to pay down borrowings under the Credit Facility and for general
corporate purposes, including acquisitions and share repurchases. The debt instruments are
anticipated to be fixed-rate senior bonds with terms of 5 and 10 years. In addition, we entered
into forward interest rate agreements, which expire in the fourth quarter of fiscal year 2005, to
hedge the variability of future interest payments related to the anticipated issuance of fixed-rate
senior bonds. These agreements total a notional amount of $250 million based on the 5-year
benchmark U.S. Treasury rate and $250 million based on the 10-year benchmark U.S. Treasury rate.
Upon termination of these agreements, we will make or receive payments based on the difference
between the interest rate specified in the forward interest rate agreements and the then current 5
or 10-year benchmark U.S. Treasury rate. Upon the issuance of fixed-rate senior bonds, we
anticipate the change in the fair value of the forward interest rate agreements, which will be
recorded in accumulated other comprehensive income, will be amortized as an adjustment to interest
expense over the life of the fixed-rate senior bonds. However, there is no assurance we will be
able to complete an offering of fixed-rate senior bonds that would allow us to amortize the
payments. If we are unable to complete the offering, we would have to recognize the payments on
the forward interest rate agreements immediately in earnings. Certain contracts, primarily in our Government segment, require us to provide a surety bond or a
letter of credit as a guarantee of performance. As of March 31, 2005, $264.6 million of outstanding
surety bonds and $84.9 million of our outstanding letters of credit secure our performance of
contractual obligations with our clients. In general, we would only be liable for the amount of
these guarantees in the event of default in the performance of our obligations under each contract,
the probability of which we believe is remote. In addition, we had approximately $14.1 million of
letters of credit which secure our casualty insurance programs. We believe that we have sufficient
capacity in the surety markets and liquidity from our cash flow and Credit Facility to respond to
future requests for proposals. We believe that available cash and cash equivalents, together with cash generated from operations
and available borrowings under our Credit Facility, will provide adequate funds for our anticipated
internal growth and operating needs, including capital expenditures, and to meet the cash
requirements of our contractual obligations below. In addition, we intend to continue our growth
through acquisitions, which could require significant commitments of capital. In order to pursue
such opportunities we may be required to incur debt or to issue additional potentially dilutive
securities in the future. No assurance can be given as to our future acquisitions and expansion
opportunities and how such opportunities will be financed. Share Repurchase Program
Our Board of Directors has authorized two share repurchase programs totaling $1.25 billion of our
Class A common stock. On September 2, 2003, we announced that our Board of Directors authorized a
share repurchase program of up to $500 million of our Class A common stock and on April 29, 2004,
we announced that our Board of Directors authorized a new, incremental share repurchase program of
up to $750 million of our Class A common stock. The programs, which are open-ended, will allow us
to repurchase our shares on the open market from time to time in accordance with SEC rules and
regulations, including shares that could be purchased pursuant to SEC Rule 10b5-1. The number of
shares to be purchased and the timing of purchases will be based on the level of cash and debt
balances, general business conditions and other factors, including alternative investment
opportunities. We intend to fund the repurchase program from various sources, including, but not
limited to, cash on hand, cash flow from operations, and borrowings under our Credit Facility. As
of March 31, 2005, we had repurchased approximately 17.4 million shares at a total cost of
approximately $874.3 million and reissued 0.5 million shares for proceeds totaling $22.7 million to
fund contributions to our employee stock purchase plan and 401(k) plan. As of March 31, 2005,
approximately $375.7 million remained authorized under our share repurchase programs. Through May
5, 2005, on a trade date basis, we have repurchased 18.3 million shares at a total cost of
approximately $916.5 million. 24




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Other
On March 16, 2005, we announced a definitive agreement to acquire the human resources consulting
and outsourcing businesses (the HR Business) of Mellon Financial Corporation (Mellon) for
approximately $445 million. For the trailing twelve months ended December 31, 2004, the HR
Business recorded revenues of approximately $660 million. The transaction is expected to close by
the end of the fourth quarter of fiscal year 2005 and has been approved by the boards of directors
of both companies. Closing is subject to customary closing conditions. We expect to initially fund
the transaction and related costs from cash on hand and our Credit Facility. We believe that this
acquisition makes us a stronger competitor in the end-to-end HR marketplace and strengthens our
position as a leading global provider of business process outsourcing services. At March 31, 2005, we had cash and cash equivalents of $46.5 million compared to $76.9 million at
June 30, 2004. Our working capital (defined as current assets less current liabilities) increased
$30.6 million to $437.5 million at March 31, 2005 from $406.9 million at June 30, 2004. Our current
ratio (defined as total current assets divided by total current liabilities) was 1.7 and 1.6 at
March 31, 2005 and June 30, 2004, respectively. Our debt-to-capitalization ratio (defined as the
sum of short-term and long-term debt divided by the sum of short-term and long-term debt and
equity) was 12.3% and 12.6% at March 31, 2005 and June 30, 2004, respectively. We expect that our
debt-to-capitalization ratio will increase following the completion of the acquisition of Mellons
HR Business discussed above. In order to conform our stock option program with standard market practice, on February 2, 2005,
our Board of Directors approved an amendment to stock options previously granted that did not
become exercisable until five years from the date of grant to provide that such options become
exercisable on the day they vest. Options granted under both our 1997 Stock Incentive Plan and our
1988 Stock Option Plan generally vest in varying increments over a five year period. It is
expected that future option grants will contain matching vesting and exercise schedules. This
amendment does not amend or affect the vesting schedule, exercise price, quantity of options
granted, shares into which such options are exercisable or life of any award under any outstanding
option grant. Therefore, no compensation expense is required. DISCLOSURES ABOUT
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS AS OF MARCH 31, 2005 (IN THOUSANDS): Payments Due by PeriodLess thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    After 5 YearsLong-term debt
    
    $
    384,557
    
    
    $
    820
    
    
    $
    337
    
    
    $
    383,400
    
    
    $
    Capital lease obligations
    
    
    13,538
    
    
    
    6,386
    
    
    
    6,816
    
    
    
    336
    
    
    
    Operating leases
    
    
    542,025
    
    
    
    167,760
    
    
    
    202,592
    
    
    
    87,549
    
    
    
    84,124Purchase obligations
    
    
    26,622
    
    
    
    8,202
    
    
    
    15,848
    
    
    
    2,572
    
    
    
    Total Contractual Cash Obligations
    
    $
    966,742
    
    
    $
    183,168
    
    
    $
    225,593
    
    
    $
    473,857
    
    
    $
    84,124
 Amount of Commitment Expiration per PeriodTotalAmounts
    
    
    Less thanOther Commercial Commitments
    
    Committed
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    After 5 YearsStandby letters of credit
    
    $
    99,022
    
    
    $
    99,022
    
    
    $
    
    
    
    $
    
    
    
    $
    Surety bonds
    
    
    264,619
    
    
    
    233,897
    
    
    
    30,707
    
    
    
    15
    
    
    
    Total Commercial Commitments
    
    $
    363,641
    
    
    $
    332,919
    
    
    $
    30,707
    
    
    $
    15
    
    
    $
    
 We have entered into various contractual agreements to purchase telecom services. These agreements
provide for minimum annual spending commitments, and have varying terms through fiscal year 2009,
and are included in purchase obligations in the table above. As discussed previously, certain contracts, primarily in our Government segment, require us to
provide a surety bond or a letter of credit as a guarantee of performance. As of March 31, 2005,
$264.6 million of outstanding surety bonds and $84.9 million of our outstanding letters of credit
secure our performance of contractual obligations with our clients. In general, we would only be
liable for the amount of these guarantees in the event of default in the performance of our
obligations under each contract, the probability of which we believe is remote. In addition, we had
approximately $14.1 million of letters of credit which secure our casualty insurance programs. We are obligated to make certain contingent payments to former shareholders of acquired entities
upon satisfaction of certain contractual criteria. As of March 31, 2005, the maximum aggregate
amount of the outstanding contingent payments to former shareholders of 25




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acquired entities is approximately $58.1 million. Upon satisfaction of the specified contractual
criteria, any such payment would result primarily in a corresponding increase in goodwill. During
the first nine months of fiscal year 2005, we paid $4.4 million related to these obligations and
accrued an additional $12.6 million, of which $6.8 million was paid in April 2005 and the remainder
will be paid in May 2005. We have indemnified Lockheed Martin Corporation against certain specified claims from certain
pre-sale litigation, investigations, government audits and other issues related to the Divested
Federal Business. Our contractual maximum exposure under these indemnifications is $85 million;
however, we believe the actual exposure to be significantly less. As of March 31, 2005, other
accrued liabilities includes a reserve for these claims in an amount we believe to be adequate at
this time. We have agreed to indemnify ManTech International Corporation with respect to the DOJ
investigation related to purchasing activities at Hanscom during the period 1998-2000. (Please see
Part II. Item 1. Legal Proceedings for further discussion.) Our Education Services business, which is included in our Commercial segment, performs third party
student loan servicing in the Federal Family Education Loan program (FFEL) on behalf of various
financial institutions. We service these loans for investors under an outsourcing arrangement and
do not acquire any servicing rights that are transferable by us to a third party. At March 31,
2005, we serviced a FFEL portfolio of approximately 1.6 million loans with an outstanding principal
balance of approximately $20.6 billion. Some servicing agreements contain provisions that, under
certain circumstances, require us to purchase the loans from the investor if the loan guaranty has
been permanently terminated as a result of a loan default caused by our servicing error. If
defaults caused by us are cured during an initial period, any obligation we may have to purchase
these loans expires. Loans that we purchase may be subsequently cured, the guaranty reinstated and
then we repackage the loans for sale to third parties. We evaluate our exposure under our purchase
obligations on defaulted loans and establish a reserve for potential losses, or default liability
reserve, through a charge to the provision for loss on defaulted loans purchased. The reserve is
evaluated periodically and adjusted based upon managements analysis of the historical performance
of the defaulted loans. As of March 31, 2005, other accrued liabilities include a reserve for these
claims in an amount we believe to be adequate at this time. In April 2005, our Board of Directors authorized the issuance of up to $750 million of senior or
subordinated debt instruments under our existing shelf registration. Proceeds from the issuance of
the debt instruments will be used to pay down borrowings under the Credit Facility and for general
corporate purposes, including acquisitions and share repurchases. The debt instruments are
anticipated to be fixed-rate senior bonds with terms of 5 and 10 years. In addition, we entered
into forward interest rate agreements, which expire in the fourth quarter of fiscal year 2005, to
hedge the variability of future interest payments related to the anticipated issuance of fixed-rate
senior bonds. These agreements total a notional amount of $250 million based on the 5-year
benchmark U.S. Treasury rate and $250 million based on the 10-year benchmark U.S. Treasury rate.
Upon termination of these agreements, we will make or receive payments based on the difference
between the interest rate specified in the forward interest rate agreements and the then current 5
or 10-year benchmark U.S. Treasury rate. Upon the issuance of fixed-rate senior bonds, we
anticipate the change in the fair value of the forward interest rate agreements, which will be
recorded in accumulated other comprehensive income, will be amortized as an adjustment to interest
expense over the life of the fixed-rate senior bonds. However, there is no assurance we will be
able to complete an offering of fixed-rate senior bonds that would allow us to amortize the
payments. If we are unable to complete the offering, we would have to recognize the payments on
the forward interest rate agreements immediately in earnings. CRITICAL ACCOUNTING POLICIES The preparation of our financial statements in conformity with generally accepted accounting
principles requires us to make estimates and assumptions relating to the reporting of assets and
liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. We base our estimates on historical experience and on various other
assumptions or conditions that are believed to be reasonable under the circumstances. Actual
results could differ from those estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and
uncertainties and may result in materially different results under different assumptions and
conditions. We believe that the following critical accounting policies used in the preparation of
our consolidated financial statements involve significant judgments and estimates. Revenue recognition. A significant portion of our revenue is recognized based on
objective criteria that does not require significant estimates or uncertainties. For example,
transaction volumes and time and costs under time and material and cost reimbursable arrangements
are based on specific, objective criteria under the contracts. Accordingly, revenues recognized
under these methods do not require the use of significant estimates that are susceptible to change.
Revenue recognized using the percentage-of-completion accounting method does require the use of
estimates and judgment as discussed below. Our policy follows the guidance from SEC Staff Accounting Bulletin 104 Revenue Recognition (SAB
104). SAB 104 provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements and updates existing Staff Accounting 26




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Bulletin Topic 13 to be consistent with Emerging Issues Task Force Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables (EITF 00-21). We recognize revenues when persuasive
evidence of an arrangement exists, the services have been provided to the client, the sales price
is fixed or determinable, and collectibility is reasonably assured. During fiscal year 2004, approximately 62% of our revenue was recognized based on transaction
volumes, approximately 19% were fixed fee based, wherein our revenue is earned as we fulfill our
performance obligations under the arrangement, approximately 10% were related to cost reimbursable
contracts, approximately 5% of our revenues were recognized using percentage-of-completion
accounting and the remainder is related to time and material contracts. Revenues on cost reimbursable contracts are recognized by applying an estimated factor to costs as
incurred, such factor being determined by the contract provisions and prior experience. Revenues on
unit-price contracts are recognized at the contractual selling prices of work completed and
accepted by the client. Revenues on time and material contracts are recognized at the contractual
rates as the labor hours and direct expenses are incurred. Revenues for business process outsourcing services are recognized as services are rendered,
generally on the basis of the number of accounts or transactions processed. Information technology
processing revenues are recognized as services are provided to the client, generally at the
contractual selling prices of resources consumed or capacity utilized by our clients. Revenues from
annual maintenance contracts are deferred and recognized ratably over the maintenance period.
Revenues from hardware sales are recognized upon delivery to the client and when uncertainties
regarding customer acceptance have expired. Revenues on certain fixed price contracts where we provide information technology system
development and implementation services are recognized over the contract term based on the
percentage of development and implementation services that are provided during the period compared
with the total estimated development and implementation services to be provided over the entire
contract using Statement of Position 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts (SOP 81-1). SOP 81-1 requires the use of
percentage-of-completion accounting for long-term contracts that are binding agreements between us
and our customers in which we agree, for compensation, to perform a service to the customers
specifications. These services require that we perform significant, extensive and complex design,
development, modification and implementation activities for our customers systems. Performance
will often extend over long periods, and our right to receive future payment depends on our future
performance in accordance with the agreement. The percentage-of-completion methodology involves recognizing revenue using the percentage of
services completed, on a current cumulative cost to total cost basis, using a reasonably consistent
profit margin over the period. Due to the longer term nature of these projects, developing the
estimates of costs often requires significant judgment. Factors that must be considered in
estimating the progress of work completed and ultimate cost of the projects include, but are not
limited to, the availability of labor and labor productivity, the nature and complexity of the work
to be performed, and the impact of delayed performance. If changes occur in delivery, productivity
or other factors used in developing the estimates of costs or revenues, we revise our cost and
revenue estimates, which may result in increases or decreases in revenues and costs, and such
revisions are reflected in income in the period in which the facts that give rise to that revision
become known. EITF 00-21 addresses the accounting treatment for an arrangement to provide the delivery or
performance of multiple products and/or services where the delivery of a product or system or
performance of services may occur at different points in time or over different periods of time.
The Emerging Issues Task Force reached a consensus regarding, among other issues, the applicability
of the provisions regarding separation of contract elements in EITF 00-21 to contracts where one or
more elements fall within the scope of other authoritative literature, such as SOP 81-1. EITF 00-21
does not impact the use of SOP 81-1 for contract elements that fall within the scope of SOP 81-1,
such as the implementation or development of an information technology system to client
specifications under a long-term contract. Where an implementation or development project is
contracted with a client, and we will also provide services or operate the system over a period of
time, EITF 00-21 provides the methodology for separating the contract elements and allocating total
arrangement consideration to the contract elements. We adopted the provisions of EITF 00-21 on a
prospective basis to transactions entered into after July 1, 2003. We believe that EITF 00-21 did
not have a material impact on our financial position or results of operations. Revenues earned in excess of related billings are accrued, whereas billings in excess of revenues
earned are deferred until the related services are provided. Valuation of goodwill and intangibles. Due to the fact that we are primarily a services
company, our business acquisitions typically result in significant amounts of goodwill and other
intangible assets, which affect the amount of future period amortization expense and possible
expense we could incur as a result of an impairment. In addition, in connection with our revenue
arrangements, we incur costs to originate contracts and to perform the transition and setup
activities necessary to enable us to perform under the terms of the arrangement. We capitalize
certain incremental direct costs in connection with these activities and amortize them over the
term of the arrangement. From time to time, we also provide certain inducements to customers in the
form of various arrangements, including 27




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contractual credits, which are capitalized and amortized as a reduction of revenue over the term of
the contract. The determination of the value of goodwill and other intangibles requires us to make
estimates and assumptions about future business trends and growth. We continually evaluate whether
events and circumstances have occurred that indicate the balance of goodwill or intangible assets
may not be recoverable. In evaluating impairment, we estimate the sum of expected future cash
flows derived from the goodwill or intangible asset. Such evaluation is significantly impacted by
estimates and assumptions of future revenues, costs and expenses and other factors. If an event
occurs which would cause us to revise our estimates and assumptions used in analyzing the value of
our goodwill or other intangibles, such revision could result in a non-cash impairment charge that
could have a material impact on our financial results. Allowance for doubtful accounts. We make estimates of the collectibility of our accounts
receivable. We specifically analyze accounts receivable and historical bad debts, customer
credit-worthiness, current economic trends, and changes in our customer payment terms and
collection trends when evaluating the adequacy of our allowance for doubtful accounts. Any change
in the assumptions used in analyzing a specific account receivable may result in additional
allowance for doubtful accounts being recognized in the period in which the change occurs. NEW ACCOUNTING PRONOUNCEMENTS On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)). SFAS 123(R)
will require companies to measure all employee stock-based compensation awards using a fair value
method and recognize compensation cost in its financial statements. SFAS 123(R) is effective
beginning as of the first annual reporting period beginning after June 15, 2005. We will be
required to adopt SFAS 123(R) beginning July 1, 2005 for new awards of stock-based compensation
granted after that date and for unvested awards outstanding at that date. We believe the impact of
SFAS 123(R) on our results of operations will be consistent with our historical disclosures of pro
forma stock compensation information under Statement of Financial Accounting Standards No. 123
Accounting for Stock-Based Compensation; however, a portion of the tax benefit from the future
exercise of stock options we historically have classified as net cash provided by operating
activities will be reported in net cash provided by financing activities after the implementation
of SFAS 123(R). On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107), Share-Based
Payment. SAB 107 provides guidance related to specific topics affected by SFAS 123(R), including
share-based payment transactions with non-employees, valuation methods, accounting for certain
redeemable financial instruments issued under share-based payment arrangements, the classification
of compensation expense, non-GAAP financial measures, capitalization of compensation cost related
to share-based payment arrangements, the accounting for income tax
effects of share-based payment
arrangements upon adoption of SFAS 123(R), the modification of employee share options prior to the
adoption of SFAS 123(R) and disclosures in Managements Discussion and Analysis required after
implementation of SFAS 123(R). We do not believe SAB 107 will have a material impact on our
implementation of SFAS 123(R). On October 22, 2004, the President signed into law the American Jobs Creation Act of 2004 (the
Act). The Act creates a temporary incentive for U.S. corporations to repatriate accumulated
income earned abroad by providing an 85% dividends received deduction for certain dividends from
controlled foreign corporations. FASB Staff Position 109-2 Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 allows
companies additional time beyond that provided in Statement of Financial Accounting Standards No.
109 Accounting for Income Taxes to determine the impact of the Act on its financial statements
and provides guidance for the disclosure of the impact of the Act on the financial statements. At
June 30, 2004, cumulative undistributed earnings of non-U.S. subsidiaries for which U.S. taxes have
not been recorded totaled $16.8 million. This incentive is available to us until June 30, 2006.
The 85% dividends received deduction is subject to a number of limitations, and we have not yet
decided whether, or to what extent, we might repatriate foreign earnings that have not yet been
remitted to the U.S. We will continue to monitor our international activities. RISKS RELATED TO OUR BUSINESS The risks described below should not be considered to be comprehensive and all-inclusive.
Additional risks that we do not yet know of or that we currently think are immaterial may also
impair our business operations. If any events occur that give rise to the following risks, our
business, financial condition, cash flow or results of operations could be materially and adversely
affected, and as a result, the trading price of our Class A common stock could be materially and
adversely impacted. These risk factors should be read in conjunction with other information set
forth in this report, including our Consolidated Financial Statements and the related notes. Loss of, or reduction of business from significant clients.
 Our revenues, profitablility and cash flow could be materially adversely
affected by the loss of significant clients and/or the reduction of volumes and services provided to our significant
clients as a result of, among other things, their merger or acquisition, divesiture of assets or businesses,
contract expiration or non-renewal, or business failure or deterioration.
In addition, we incur fixed costs related to our information technology outsourcing
and business process outsourcing clients. Therefore the loss of any one of our significant clients
could leave us with a significantly higher level of fixed 28




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costs than is necessary to serve our
remaining clients, thereby reducing our profitability and cash flow. Impairment of investments made to attract clients.
In order to attract and retain large outsourcing contracts we sometimes make significant capital investments
to perform the agreement, such as purchases of information technology equipment. The net book value of such assets recorded, including a portion of our intangible
assets, could be impaired, and our earnings and cash flow could be materially adversely affected in the event of the early termination of all or a
part of such a contract or the reduction in volumes and services thereunder for reasons such as, among other things, the
clients merger or acquisition, divestiture of assets or businesses, or business failure or deterioration. Competition. We expect to encounter additional competition as we address new markets and
new competitors enter our existing markets. If we are forced to lower our pricing or if demand for
our services decreases, our business, financial condition, results of operations, and cash flow may
be materially and adversely affected. Some of our competitors have substantially greater resources, and they may
be able to use their resources to adapt more quickly to new or emerging technologies, to devote
greater resources to the promotion and sale of their products and services, or to obtain client contracts
where sizeable asset purchases, investments or financing support are required. In addition, we must
frequently compete with a clients own internal business process and information technology
capabilities, which may constitute a fixed cost for the client. In the future, competition could continue to emerge from large computer hardware or software
providers as they shift their business strategy to include services. Competition has also emerged from European and Indian offshore
service providers seeking to expand into our markets and from large consulting companies seeking operational outsourcing opportunities. Difficulties in executing our acquisition strategy. We intend to continue to expand our
business through the acquisition of complementary companies. We cannot, however, make any
assurances that we will be able to identify any potential acquisition candidates or consummate any
additional acquisitions or that any future acquisitions will be successfully integrated or will be
advantageous to us. Without additional acquisitions, we are unlikely to maintain historical total
growth rates. Failure to properly manage our operations and our growth. 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 operate our businesses effectively. We could also trigger contractual credits to
clients. Failure to properly transition new customers to our systems, properly budget transition
costs or accurately estimate new contract operational costs could result in delays in our contract
performance, trigger service level penalties or result in contracts whose profit margins did not
meet our expectations or our historical profit margins. Failure to properly integrate acquired
operations could result in increased cost. As a result of any of these problems associated with
expansion, our business, financial condition, results of operations and cash flow could be
materially and adversely affected. Government clients  termination rights, audits and investigations. A substantial portion
of our revenues are derived from contracts with state and local governments and from contracts with
the Department of Education. Governments and their agencies may terminate most of these contracts
at any time, without cause. Also, our Department of Education contracts are subject to the
approval of appropriations being made by the United States Congress to fund the expenditures to be
made by the Federal government under these contracts. Additionally, government contracts are
generally subject to audits and investigations by government agencies. If the government finds
that we improperly charged any costs to a contract, the costs are not reimbursable or, 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. Any resulting penalties or sanctions could have a material
adverse effect on our business, financial condition, results of operations and cash flow. Further,
the negative publicity that arises from findings in such audits, investigations or the penalties or
sanctions therefore could have an adverse effect on our reputation in the industry and reduce our
ability to compete for new contracts and may also have a material adverse effect on our business,
financial condition, results of operations and cash flow. Government clients  protests of contract awards. After an award of a government
contract, a competing bidder may protest the award. If we are awarded the contract and it is
protested, it will be necessary to incur costs to defend the award of the contract, which costs may
be significant and could include hiring experts to defend the basis for the contract award. Some
contract protests may take years to resolve. In some instances where we are awarded a contract,
the contracting government entity may request that we sign a contract and commence services, even
though the contract award has been protested. If the protest is upheld, then our contract would be
terminated and the amounts due to us for services that have been performed to date would be subject
to payment pursuant to the
terms of the terminated contract. Such terms may not provide for full
recovery of our incurred costs. In addition, we may suffer negative publicity as the result of any
contract protest being upheld and our contract being terminated. Further, if there is a re-bid of 29




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the contract, we would incur additional costs associated with the re-bid process and be subject to
a potential protest if we are awarded a subsequent contract. Exercise of contract termination provisions and service level penalties. Most of our
contracts with our clients permit termination in the event our performance is not consistent with
service levels specified in those contracts, or provide for credits to our clients for failure to
meet service levels. In addition, if clients are not satisfied with our level of performance, our
clients may seek damages as permitted under the contract and/or our reputation in the industry may
suffer, which could materially and adversely affect our business, financial condition, results of operations, and cash flow. Pricing risks. Many of our contracts contain provisions requiring that our services be
priced based on a pre-established standard or benchmark regardless of the costs we incur in
performing these services. Many 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. Some of our contracts contain re-pricing provisions which can result in
reductions of our fees for performing our services. In such situations, we are exposed to the risk
that we may be unable to price our services to levels that will permit recovery of our costs, and
may adversely affect our operating results and cash flow. Loss of significant software vendor 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. If our significant software vendors were to terminate, refuse
to renew our contracts with them or offer to renew our contracts with them on less advantageous
terms than previously contracted, we might not be able to replace the related software programs and
would be unable to serve our clients or we would recognize reduced margins from the contracts with
our clients, either of which could have a material adverse effect on our business, revenues,
profitability and cash flow. Intellectual property infringement claims. We 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, which could have a material effect on our profitability
and cash flow. 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. If we are unsuccessful in the defense of an infringement claim and our vendors
require us to initiate any of the above actions, then such actions could have a material adverse
effect on our business, financial condition, results of operations and cash flow. Rapid technological changes. The markets for our business process and information
technology services are subject to rapid technological changes and rapid changes in client
requirements. We may be unable to timely and successfully customize products and services that
incorporate new technology or to deliver the services and products demanded by the marketplace. Federal and State laws relating to individually identifiable information. We process and
store information relating to identifiable individuals, both in our role as a service provider and
as an employer. As a result, we are subject to numerous Federal and State laws and regulations
designed to protect individually identifiable information, including financial and health
information. For example, in 1996, Congress passed the Health Insurance Portability and
Accountability Act and as required therein, the Department of Health and Human Services established
regulations governing, among other things, the privacy, security and electronic transmission of
individually identifiable health information. We have taken measures to comply with each of those
regulations on or before the required dates. Other Federal and State laws apply to the processing
of individually identifiable information as well, and additional legislation may be enacted at any
time. Failure to comply with these types of laws may subject us to liability for monetary damages,
fines and/or criminal prosecution and may have a material adverse effect on our profitability and
cash flow. Budget deficits at, or fluctuations in the number of requests for proposals issued by,
state and local governments and their agencies. A substantial portion of our revenues are
derived from contracts with state and local governments and their agencies. Currently, many state
and local governments that we have contracts with are facing potential budget deficits. Also, the
number of requests for proposals issued by state and local government agencies is subject to
fluctuation. While this has not had a material adverse impact on our results of operations through
the third quarter of fiscal year 2005, it is unclear what impact, if any, these deficits may have
on our future business, revenues, results of operations and cash flow. International risks. Recently we have expanded our international operations and have also
contemplated the acquisition of companies formed and operating in foreign countries. We have
approximately 14,000 employees in Mexico, Guatemala, India, Ghana, Jamaica, Dominican Republic,
Spain, Malaysia, Ireland, Germany and China, as well as several other countries, that support our
commercial business process outsourcing services.
Our international operations and acquisitions are
subject to a number of risks. These risks
include the possible impact on our operations of the laws
of foreign countries where we may do business,
data privacy laws, and laws regarding licensing and labor counsel requirements. In addition, we may
experience difficulty integrating the management and 30




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operations of businesses we acquire
internationally, and we may have difficulty attracting, retaining and motivating highly
skilled and qualified personnel to staff key managerial positions in our ongoing
international operations. Further, our international operations and acquisitions
are subject to a number of risks related to general economic
and political conditions in foreign countries where we operate,
including among others, fluctuations in foreign currency exchange
rates, cultural differences, political instability and additional expenses and risks
inherent in conducting operations in geographically distant locations. Our
international operations and acquisitions may also be impacted by
trade restrictions, such as tariffs and duties or other trade controls imposed
by the United States or other jurisdictions,
as well as other factors that may adversely affect our business, financial condition
and operating results. Armed hostilities and terrorist attacks.Terrorist attacks and further acts of violence or
war may cause major instability in the U.S. and other financial markets in which we operate. In
addition, armed hostilities and acts of terrorism may directly impact our physical facilities and
operations, which are located in North America, Central America, South America, Europe, Africa,
Australia, Asia and the Middle East, or those of our clients. These developments subject our
worldwide operations to increased risks and, depending on their magnitude, could have a material
adverse effect on our business. Failure to attract and retain necessary technical personnel and skilled management and
qualified subcontractors. Our success depends to a significant extent upon our ability to
attract, retain and motivate highly skilled and qualified personnel and to subcontract with
qualified, competent subcontractors. If we fail to attract, train, and retain, sufficient numbers
of these technically-skilled people or are unable to contract with qualified, competent
subcontractors, our business, financial condition, and results of operations will be materially and
adversely affected. Experienced and capable personnel in the technology industry remain in high demand, and there is
continual competition for their talents.
Our success also depends on the skills, experience, and performance of key
members of our management team and on qualified, competent subcontractors. The loss of any key
employee or the loss of a key subcontract relationship could have an adverse effect on our
business, financial condition, cash flow, results of operations and prospects. Servicing Risks. We service (for various lenders and under various service agreements) a
portfolio of approximately $20.6 billion of loans, as of
March 31, 2005, made under the Federal Family Education Loan
Program, which loans are guaranteed by a Federal government agency. If a loan is in default, then
a claim is made upon the guarantor. If the guarantor denies the claim because of a servicing
error, then under certain of the servicing agreements we may be required to purchase the loan from
the lender. Upon purchase of the loan, we attempt to cure the servicing errors and either sell the
loan back to the guarantor (which must occur within a specified period of time) or sell the loan on
the open market to a third party. We are subject to the risk that we may be unable to cure the
servicing errors or sell the loan on the open market. Our reserves, which are based on historical
information, may be inadequate if our servicing performance results in the requirement that we
repurchase a substantial number of loans, which repurchase could have a material adverse impact on
our cash flow and profitability. Disruption in Utility or Network Services. Our services are dependent on the companies
providing electricity and other utilities to our operating facilities, as well as network companies
providing connectivity to our facilities and clients. While there are backup systems in many of
our operating facilities, an extended outage of utility or network services may have a material adverse effect
on our operations, revenues, cash flow and profitability. Indemnification Risk. Our contracts, including our agreements with respect to divestitures,
include various indemnification obligations. If we are required to satisfy an indemnification
obligation, that may have a material adverse effect on our business, profitability and cash flow. Other Risks. We have attempted to identify material risk factors currently affecting our
business and 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, cash flow or profitability. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in interest rates and foreign currency exchange rates.
As of March 31, 2005, there have been no material changes in our market risk from June 30, 2004.
For further information regarding our market risk, refer to our Annual Report on Form 10-K for the
fiscal year ended June 30, 2004. 31




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ITEM 4. CONTROLS AND PROCEDURES The management of the Company, including the Companys principal executive officer and principal
financial officer have evaluated the effectiveness of the Companys disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of March 31,
2005. Based on such evaluation, the Companys principal executive officer and principal financial
officer have concluded that such disclosure controls and procedures were operating effectively as
of March 31, 2005. There have not been any
changes in the Companys internal control over
financial reporting (as defined in Exchange Act Rule 13a-15(f) of the Securities Exchange Act of
1934) during the quarter ended March 31, 2005 that have materially affected or are reasonably
likely to materially affect the Companys internal control over financial reporting. 
 PART II 
 ITEM 1. LEGAL PROCEEDINGS One of our subsidiaries, ACS Defense, LLC, and several other government contractors received a
grand jury document subpoena issued by the U.S. District Court for the District of Massachusetts in
October 2002. The subpoena was issued in connection with an inquiry being conducted by the
Antitrust Division of the U.S. Department of Justice (DOJ). The inquiry concerns certain IDIQ
(Indefinite Delivery  Indefinite Quantity) procurements and their related task orders, which
occurred in the late 1990s at Hanscom Air Force Base in Massachusetts. Our revenue from the
contracts that we believe to be the focus of the DOJs inquiry was approximately $17.2 million for
the fiscal year ended June 30, 2004, representing approximately 0.4% of our revenue for fiscal year
2004. In February 2004, we sold the contracts associated with the Hanscom Air Force Base
relationship to ManTech International Corporation; however, we have agreed to indemnify ManTech
with respect to this DOJ investigation. We understand that the DOJ is continuing its investigation,
but we have no information as to when the DOJ will conclude this process. We have cooperated with
the DOJ in producing documents in response to the subpoena, and our internal investigation and
review of this matter through outside legal counsel will continue through the conclusion of the DOJ
investigatory process. We are unable to express an opinion as to the likely outcome of this matter
at this time. Another of our subsidiaries, ACS State & Local Solutions, Inc. (ACS SLS), and a teaming partner
of this subsidiary, Tier Technologies, Inc. (Tier), received a grand jury document subpoena
issued by the U.S. District Court for the Southern District of New York in May 2003. The subpoena
was issued in connection with an inquiry being conducted by the Antitrust Division of the DOJ. The
inquiry concerns the teaming arrangements between ACS SLS and Tier on child support payment
processing contracts awarded to ACS SLS, and Tier as a subcontractor to ACS SLS, in New York,
Illinois and Ohio. Effective June 30, 2004, Tier was no longer a subcontractor to us in Ohio. Our
revenue from the contracts for which Tier was a subcontractor was approximately $67 million in
fiscal year 2004 and approximately $32.4 million for the nine months ended March 31, 2005,
representing approximately 1.6% and 1% of our fiscal year 2004 and the first nine months of fiscal
year 2005 revenues, respectively. Our teaming arrangement also contemplated the California child
support payment processing request for proposals, which was issued in late 2003; however, we did
not enter into a teaming agreement with Tier for the California request for proposals. Based on
Tiers filings with the Securities and Exchange Commission, we understand that on November 20, 2003
the DOJ granted conditional amnesty to Tier in connection with this inquiry pursuant to the DOJs
Corporate Leniency Policy. The policy provides that the DOJ will not bring any criminal charges
against Tier as long as it continues to fully cooperate in the inquiry (and makes restitution
payments if it is determined that parties were injured as a result of impermissible anticompetitive
conduct). We understand that the DOJ is continuing its investigation, but we have no information
as to when the DOJ will conclude this process. We have cooperated with the DOJ in producing
documents in response to the subpoena, and our internal investigation and review of this matter
through outside legal counsel will continue through the conclusion of the DOJ investigatory
process. We are unable to express an opinion as to the likely outcome of this matter at this time. On January 30, 2004, the Florida Agency for Workforce Innovations (AWI) Office of Inspector
General (OIG) issued a report that reviewed 13 Florida workforce regions, including Dade and
Monroe counties, and noted concerns related to the accuracy of customer case records maintained by
our local staff. Our total revenue generated from the Florida workforce services amounts to
approximately 1% of our total fiscal year 2004 revenue. In March 2004, we filed our response to
the OIG report. On May 20, 2004, at a meeting of the Workforce Florida, Inc. (WFI) Board of
Directors which was attended by representatives of ACS SLS, which is our subsidiary performing
these services, a representative of WFI, which is the principal workforce policy organization for
the State of Florida and oversees and monitors the administration of the States workforce policy
as well as the programs and services carried out by regional workforce boards and AWI, indicated
that WFI did not see a systemic problem with the performance of these workforce services by ACS SLS
and that it considered the issue closed. There were also certain contract billing issues that arose
during the course of our performance of our workforce contract in Dade County, Florida, which ended
in June 2003. However, during the first quarter of fiscal year 2005, we settled all financial
issues with Dade County with respect to our workforce contract with that county and the settlement
is fully reflected in our results of operations for the first quarter of fiscal year 2005. We were
also advised in February 2004 that the SEC had initiated an informal investigation into the matters
covered by the OIGs report, although we have not 32




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received any request for information or documents
since the middle of calendar year 2004. On March 22, 2004, ACS SLS received a grand jury document
subpoena issued by the U.S. District Court for the Southern District of Florida. The subpoena was
issued in connection with an inquiry being conducted by the DOJ and the Inspector Generals
Office
of the U.S. Department of Labor (DOL) into the subsidiarys workforce contracts in Dade and
Monroe counties in Florida, which also expired in June 2003, and which were included in the OIGs
report. On August 25, 2004, ACS SLS received a grand jury document subpoena issued by the U.S.
District Court for the Middle District of Florida in connection with an inquiry being conducted by
the DOJ and the Inspector Generals Office of the DOL. The subpoena relates to a workforce
contract in Pinellas County in Florida for the period from January 1999 to the contracts
expiration in March 2001, which was prior to our acquisition of this business from Lockheed Martin
Corporation in August 2001. Further, we settled a civil lawsuit with Pinellas County in December
2003 with respect to claims related to the services rendered to Pinellas County by Lockheed Martin
Corporation prior to our acquisition of ACS SLS (those claims having been
transferred with ACS SLS as part of the acquisition), and the settlement resulted in Pinellas
County paying ACS SLS an additional $600,000. We are continuing our internal investigation of
these matters through outside legal counsel and we are continuing to cooperate with the DOJ, the
SEC and DOL to produce documents in connection with their investigations. At this stage of these
investigations, we are unable to express an opinion as to their likely outcome. We anticipate that
we may receive additional subpoenas for information in other Florida Workforce regions as a result
of the AWI report issued in January 2004. In June 2004, the Mississippi Department of Environmental Quality (MDEQ) issued a Notice of
Violation to ACS Image Solutions, Inc., one of our subsidiaries, that alleged noncompliance with
the Clean Water Act and the Federal Resource Conservation and Recovery Act. On September 20, 2004,
we agreed to settle this matter with the MDEQ for $150,000. We have closed the specific operation
whose activities resulted in this notice. In addition to the foregoing, we are subject to certain other legal proceedings, inquiries, claims
and disputes, which arise in the ordinary course of business. Although we cannot predict the
outcomes of these other proceedings, we do not believe these other actions, in the aggregate, will
have a material adverse effect on our financial position, results of operations or liquidity. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Our Board of Directors has authorized two share repurchase programs totaling $1.25 billion of our
Class A common stock. On September 2, 2003, we announced that our Board of Directors authorized a
share repurchase program of up to $500 million of our Class A common stock and on April 29, 2004,
we announced that our Board of Directors authorized a new, incremental share repurchase program of
up to $750 million of our Class A common stock. The programs, which are open-ended, will allow us
to repurchase our shares on the open market from time to time in accordance with SEC rules and
regulations, including shares that could be purchased pursuant to SEC Rule 10b5-1. The number of
shares to be purchased and the timing of purchases will be based on the level of cash and debt
balances, general business conditions and other factors, including alternative investment
opportunities. We intend to fund the repurchase program from various sources, including, but not
limited to, cash on hand, cash flow from operations, and borrowings under our Credit Facility. As
of March 31, 2005, we had repurchased approximately 17.4 million shares at a total cost of
approximately $874.3 million and reissued 0.5 million shares for proceeds totaling $22.7 million to
fund contributions to our employee stock purchase plan and 401(k)
plan. Through May 5, 2005, on a
trade date basis, we have repurchased 18.3 million shares at a
total cost of approximately $916.5
million. Repurchase activity for the quarter ended March 31, 2005 was as follows. Please refer to the
discussion above for the cumulative repurchases under our share repurchase program. Maximum number (orTotal number of
    
    
    approximate dollarTotal
    
    
    
    
    
    
    shares purchased as
    
    
    value) of sharesnumber of
    
    
    Average
    
    
    part of publicly
    
    
    that may yet beshares
    
    
    price paid
    
    
    announced plans or
    
    
    purchased under thePeriod
    
    purchased
    
    
    per share
    
    
    programs
    
    
    plans or programsInception through December 31, 2004
    
    
    15,265,714
    
    
    $
    49.66
    
    
    
    15,265,714
    
    
    $
    491,953,721January 1  January 31, 2005
    
    
    1,024,000
    
    
    
    53.11
    
    
    
    1,024,000
    
    
    
    437,564,328February 1   February 28, 2005
    
    
    1,149,000
    
    
    
    53.86
    
    
    
    1,149,000
    
    
    
    375,681,777March 1   March 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    375,681,777Total  Quarter ended March 31, 2005
    
    
    2,173,000
    
    
    
    53.51
    
    
    
    2,173,000
    
    
    
    375,681,777Inception through March 31, 2005
    
    
    17,438,714
    
    
    $
    50.14
    
    
    
    17,438,714
    
    
    $
    375,681,777
 33




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ITEM 6. EXHIBITS a.) Exhibits Reference is made to the Index to Exhibits beginning on page 36 for a list of all exhibits
filed as part of this report. Note: Any public debt offering will be effected under our existing effective shelf registration
statement previously filed with the Securities and Exchange Commission and offered only through a
prospectus and accompanying prospectus supplement issued under that registration statement. This
communication shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of any offered debt securities in any state in which such offer,
solicitation or sale would be unlawful prior to registration or qualification under the securities
laws of any such state. 34




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized on the 10th day
of May, 2005. AFFILIATED COMPUTER SERVICES, INC.By:
    /s/ Warren D. EdwardsWarren D. EdwardsExecutive Vice President and
Chief Financial Officer   35




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INDEX TO EXHIBITS ExhibitNumber
    
    Exhibit Name2.1
    
    Purchase Agreement, dated as of March 15, 2005, among Mellon
Financial Corporation, Mellon Consultants European Holdings
Limited, Affiliated Computer Services, Inc., ACS Business
Process Solutions Limited and Affiliated Computer Services of
Germany GmbH (filed as Exhibit 2.1 to our Current Report on Form
8-K, filed March 17, 2005 and incorporated herein by reference).3.1
    
    Certificate of Incorporation of the Company (filed as Exhibit
3.1 to our Registration Statement on Form S-3, filed March 30,
2001, File No. 333-58038 and incorporated herein by reference).3.2
    
    Certificate of Correction to Certificate of Amendment of the
Company, dated August 30, 2001 (filed as Exhibit 3.2 to our
Annual Report on Form 10-K, filed September 17, 2003 and
incorporated herein by reference).3.3
    
    Bylaws of the Company, as amended and in effect on September 11,
2003 (filed as Exhibit 3.3 to our Quarterly Report on Form 10-Q,
filed February 17, 2004 and incorporated herein by reference).4.1
    
    Form of New Class A Common Stock Certificate (filed as Exhibit
4.3 to our Registration Statement on Form S-1, filed May 26,
1994, File No. 33-79394 and incorporated herein by reference).4.2
    
    Amended and Restated Rights Agreement, dated April 2, 1999,
between the Company and First City Transfer Company, as Rights
Agent (filed as Exhibit 4.1 to our Current Report on Form 8-K,
filed May 19, 1999 and incorporated herein by reference).4.3
    
    Amendment No. 1 to Amended and Restated Rights Agreement, dated
as of February 5, 2002, by and between the Company and First
City Transfer Company (filed as Exhibit 4.1 to our Current
Report on Form 8-K, filed February 6, 2002 and incorporated
herein by reference).4.4
    
    Form of Rights Certificate (included as Exhibit A to the Amended
and Restated Rights Agreement (Exhibit 4.2)).31.1*
    
    Certification of Chief Executive Officer of Affiliated Computer
Services, Inc. pursuant to Rule 13a-14(a) promulgated under the
Securities Exchange Act of 1934, as amended.31.2*
    
    Certification of Chief Financial Officer of Affiliated Computer
Services, Inc. pursuant to Rule 13a-14(a) promulgated under the
Securities Exchange Act of 1934, as amended.32.1*
    
    Certification of Chief Executive Officer of Affiliated Computer
Services, Inc. pursuant to Rule 13a-14(b) promulgated under the
Securities Exchange Act of 1934, as amended and Section 1350 of
Chapter 63 of Title 18 of the United States Code. Pursuant to
SEC Release 34-47551, this Exhibit is furnished to the SEC and
shall not be deemed to be filed.32.2*
    
    Certification of Chief Financial Officer of Affiliated Computer
Services, Inc. pursuant to Rule 13a-14(b) promulgated under the
Securities Exchange Act of 1934, as amended and Section 1350 of
Chapter 63 of Title 18 of the United States Code. Pursuant to
SEC Release 34-47551, this Exhibit is furnished to the SEC and
shall not be deemed to be filed.
 * Filed herewith 36