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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
  FORM 10-K
  Mark One
    
    Annual Report Pursuant to Section 13 or 15(d) of the[ X ]
    
    Securities Exchange Act of 1934For the fiscal year ended June 30, 2004OR[     ]
    
    Transition Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934For the transition period from _____ to _____.Commission file number 1-12665
 AFFILIATED COMPUTER SERVICES, INC.  Delaware
    
    51-0310342State 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) 214-841-6111
(Registrants telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: Title of each class
    
    Name of exchange on
which registeredClass A common stock, par
value $.01 per share
    
    New York Stock Exchange
 Securities Registered Pursuant to Section 12(g) of the Act:
NONE
 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 the past 90 days. Yes
    
    [X]
    
    No
    
    [    ]
 Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form
10-K. [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes
    
    [X]
    
    No
    
    [    ]
 As of September 8, 2004, 121,372,636 shares of Class A common stock and
6,599,372 shares of Class B common stock were outstanding. The aggregate market value of the Class A common voting stock held
by nonaffiliates of Affiliated Computer Services, Inc. as of the last business
day of the second quarter of fiscal year 2004 approximated $6,559,366,000. DOCUMENTS INCORPORATED BY REFERENCE:Portions of the definitive Proxy Statement
for the 2004 Annual Meeting - Part III are incorporated by reference herein.




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AFFILIATED COMPUTER SERVICES, INC. FORM 10-K
June 30, 2004  
 Part IItem 1. Business
    
    
    1Item 2. Properties
    
    
    8Item 3. Legal Proceedings
    
    
    8Item 4. Submission of Matters to a Vote of Security Holders
    
    
    10Part IIItem 5. Market for Our Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    10Item 6. Selected Consolidated Financial Data
    
    
    13Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    32Item 8. Financial Statements
    
    
    33Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    62Item 9A. Controls and Procedures
    
    
    62Part IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    62Item 11. Executive Compensation
    
    
    62Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    62Item 13. Certain Relationships and Related Transactions
    
    
    62Item 14. Principal Accounting Fees and Services
    
    
    62Part IVItem 15.
Exhibits, Financial Statements and Reports on Form 8-K
    
    
    62401(k) Supplemental Plan, as amendedSubsidiaries of the CompanyConsent of PricewaterhouseCoopers LLPConsent of Value IncorporatedCertification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO Pursuant to Rule 13a-14(b)Certification of CFO Pursuant to Rule 13a-14(b)




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PART I 
 Item 1. Business General We are a Fortune 500 and S&P 500 company with approximately 43,000 employees
providing business process and information technology outsourcing solutions to
commercial and government clients. We were incorporated in Delaware on June 8,
1988 and are based in Dallas, Texas. Our clients have time-critical,
transaction-intensive business and information processing needs, and we
typically service these needs through long-term contracts. Our services enable businesses and government agencies to focus on core
operations, respond to rapidly changing technologies and reduce expenses
associated with business processes and information processing. Our business
strategy is to expand our client base and enhance our service offerings through
both marketing and acquisitions. Our marketing efforts focus on developing
long-term relationships with clients that choose to outsource mission critical
business processes and information technology requirements. Our business
expansion has been accomplished both from internal growth as well as through
acquisitions. Since inception, our acquisition program has resulted in
geographic expansion, growth and diversification of our client base, expansion
of services and products offered, and increased economies of scale. Revenues for fiscal year 2004 totaled $4.1 billion. We serve two primary
markets, which include government and commercial clients. We are a leading
provider of business process outsourcing and information technology outsourcing
services to state and local governments. During fiscal year 2004, revenues from
our Government segment accounted for approximately $2.4 billion, or 59% of our
revenues. Effective November 1, 2003, we completed the sale of a majority of
our Federal government business to Lockheed Martin Corporation (the Divested
Federal Business) for approximately $649 million. Our fiscal year 2004
Government segment revenues include approximately $251.1 million of revenues
related to operations divested through June 30, 2004, primarily related to our
Divested Federal Business. We provide technology-based services with a focus on
transaction processing and program management services such as child support
payment processing, electronic toll collection, welfare and community services,
and traffic violations processing. We also design, develop, implement, and
operate large-scale health and human services programs and the information
technology solutions that support those programs. Our Government segment
includes our relationship with the United States Department of Education (the
Department), for which we service Federal student loans, including the
Departments Direct Student Loan program, and which represents approximately 5%
of our consolidated revenues. Our Commercial segment accounted for approximately $1.7 billion, or 41% of our
fiscal year 2004 revenues. We provide business process outsourcing, information
technology outsourcing, and systems integration services to our commercial
sector clients. These services are provided to a variety of clients
nationwide, including manufacturers, healthcare providers and payors,
retailers, wholesale distributors, utilities, higher education institutions,
financial institutions, insurance, and transportation companies. Our business
process outsourcing services include administration, human resources, finance and accounting, customer care, and payment services. Our information
technology outsourcing services include mainframe, midrange, desktop, network,
and web-hosting solutions. Our systems integration services include application
development and implementation, applications outsourcing, technical support and
training, as well as network design and installation services. 1




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Market Overview The demand for our services has grown substantially in recent years, and we
believe that this will continue to increase in the future as a result of
strategic, financial and technological factors. These factors include:  
    
    the desire of organizations to focus on their core competencies;
    
    the increasing desire by organizations and governments to drive
process improvements and improve the speed of and reduce the cost of
execution;
    
    the desire by organizations to have a workforce that is able to
expand and contract in relation to their business volumes;
    
    the increasing acceptance by organizations to utilize offshore
resources for business process outsourcing;
    
    the increasing complexity of information technology systems and the
need to connect electronically with citizens, clients, suppliers, and
other external and internal systems;
    
    the increasing requirements for rapid processing of information and
the instantaneous communication of large amounts of data to multiple
locations; and
    
    the desire by organizations to take advantage of the latest advances
in technology without the cost and resource commitment required to
maintain in-house systems. Business Strategy The key components of our business strategy include the following:  
    
    Expand Client Base -We seek to develop long-term relationships
with new clients by leveraging our subject matter expertise, world-wide
data manufacturing capabilities and infrastructure of information
technology products and services. Our primary focus is to increase our
revenues by obtaining new clients with recurring requirements for
business process and information technology services.
    
    Expand Existing Client Relationships- We seek to expand existing
client relationships by increasing the scope and breadth of services we
provide.
    
    Build Recurring Revenues- We seek to enter into long-term
relationships with clients to provide services that meet their ongoing
business requirements while supporting their mission critical business
process or information technology needs.
    
    Provide Flexible Solutions- We offer custom-tailored business
process and information technology solutions using a variety of
proprietary and third-party licensed software on multiple hardware and
systems software platforms and domestic and international workforces
that are able to expand and contract in relation to clients business
volumes.
    
    Invest in Technology- We respond to technological advances and the
rapid changes in the requirements of our clients by committing
substantial amounts of our resources to the operation of multiple
hardware platforms, the customization of products and services that
incorporate new technology on a timely basis and the continuous
training of our personnel.
    
    Maximize Economies of Scale- Our strategy is to develop and
maintain a significant client and account/transaction base to create
sufficient economies of scale that enable us to achieve competitive
costs.
    
    Complete Strategic and Tactical Acquisitions- Our acquisition
strategy is to acquire companies to expand the products and services we
offer to existing clients, to obtain a presence in new, complementary
markets and to expand our geographic presence. 2




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
    
    Attract, Train and Retain Employees We believe that attracting,
training, and retaining high quality employees is essential to our
growth. We seek to hire motivated individuals with strong character
and leadership traits and provide them with ongoing technological and
leadership skills training. Segment Information During the last three fiscal years, our revenues by segment were as follows (in
thousands): Year ended June 30,2004
    
    2003
    
    2002Government (1)
    
    $
    2,428,029
    
    
    $
    2,544,298
    
    
    $
    2,105,585Commercial (2)
    
    
    1,678,364
    
    
    
    1,242,908
    
    
    
    957,333Total Revenues
    
    $
    4,106,393
    
    
    $
    3,787,206
    
    
    $
    3,062,918
  (1)
    
    Includes $251.1 million, $679.3 million and $633.7 million of
revenues for fiscal years 2004, 2003 and 2002, respectively, from
operations divested through June 30, 2004.  (2)
    
    Includes $6.9 million, $30.2 million and $63.4 million of revenues
for fiscal years 2004, 2003 and 2002, respectively, from operations
divested through June 30, 2004. Certain reclassifications have been made to the segment disclosures as the
result of the sale of our Divested Federal Business. For further information
on our segments, see Note 20 to our Consolidated Financial Statements. Government We are a leading provider of business process outsourcing and information
technology outsourcing services to state and local governments. Approximately
59% of our fiscal year 2004 consolidated revenues were derived from contracts with
government clients. Effective November 1, 2003, we completed the sale of a
majority of our Federal government business to Lockheed Martin Corporation for
approximately $649 million. Our fiscal year 2004 Government segment revenues
include approximately $251.1 million of revenues related to operations divested
through June 30, 2004, primarily related to our Divested Federal Business. Our
Government segment includes our relationship with the U. S. Department of
Education, for which we service Federal student loans, including the
Departments Direct Student Loan program, and which represents approximately 5%
of our consolidated revenues. Our services help government agencies reduce
operating costs, increase revenue streams and increase the quality of services
to citizens. Government clients may terminate most of these contracts at any
time, without cause, for convenience or lack of funding. 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. Pricing for our services in the government market is generally determined based
on the number of transactions processed, human services cases managed or, in
instances where a systems development project is required, for example, in
state healthcare, we generally price our services on a fixed fee basis for the
development work. State Healthcare We design, develop, implement, and operate large-scale healthcare programs and
the information technology solutions that support those programs. Today, we
operate state Medicaid programs and administer state child health programs,
covering approximately 18 million program recipients, process over 450 million
Medicaid healthcare claims annually, and disburse more than $42 billion in
provider payments. We also operate state pharmacy benefits management programs
that assist states in controlling prescription drug costs, pharmacy intervention and surveillance,
and the processing of drug claims. We operate state decision support systems
that provide the capability to assist states with data collection, fraud and
abuse detection and case management. We also assist states in bringing their
health programs and information systems into compliance with the Health
Insurance Portability and Accountability Act (HIPAA). 3




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Children and Family Services We are a major provider of child support payment processing services, including
high volume remittance processing and disbursements, as well as associated
employer outreach and customer service activities. Our services account for 52%
of the nations child support collections as reported to the Federal
government. Within the Children and Family Services area, we also provide
electronic benefits transfer, which is the issuance of food stamps and cash
benefits through magnetic stripe cards with redemption through point of sale
devices (POS) and automated teller machines (ATM). Transportation Systems and Services We focus on three areas within our Transportation Systems and Services:
Electronic Toll Collection, Motor Vehicle Services and Commercial Vehicle
Operations. Within Electronic Toll Collection we offer toll agencies a complete
array of services including the operation of the back-office customer service
center as well as lane installation and integration. We currently operate the
E-Z Pass programs in New Jersey and New York, the largest electronic toll
collection programs in the world. Within Motor Vehicle Services, we assist
states in the processing of fuel tax and registration revenues. We process
approximately 30% of state-issued operating credentials and support the
operations of more than 25% of the motor carriers operating in the United
States. Within Commercial Vehicle Operations, we offer a nationwide network
that electronically checks safety credentials and weighs trucks at highway
speed, granting participating truckers authorization to bypass open weigh
stations and ports-of-entry without stopping. Municipal Services We are a leading provider of full-service information technology outsourcing
services to cities and counties throughout the United States. We provide to
cities and local municipalities technology-based services and solutions with a
focus on program management and transaction processing. We currently process
approximately 70% of all parking violations in those cities among the 30
largest U.S. cities who outsource parking violation processing. Those services
support the entire timeline of a violation, from citation issuance to final
disposition, and include boot and tow programs, customer service, program
management reviews, meter installation, maintenance and collections. Our public
safety commitment further extends to emergency medical services billing and
collections programs and red light photo and speed enforcement services. We
provide photo enforcement systems and services to 15 of the 20 largest
participating cities in North America. Additionally, we provide government
records management via indexing and recording solutions to over 400 counties in
26 states. We offer court and juror management, processing and program
management of court-ordered fines and fees, and administrative solutions and
systems integration services to approximately 900 state and local clients and
more than 800 courts, including the U.S. Federal Courts, eight statewide
judicial systems, three U.S. territories, and six nations. Welfare and Community Solutions We provide management, operations and systems service offerings to local
Workforce Development Boards and Coalitions, thereby creating a
government-mandated, integrated One-Stop system linking job seekers and job
providers in accordance with government mandated requirements. Through the
operation of approximately 99 One-Stop centers across the country, we provide
job-related service to assist economically disadvantaged individuals in
securing and retaining employment and help employers find and retain potential
employees. Finance and Revenue Solutions The ACS Unclaimed Property Clearinghouse is a leading provider of unclaimed
property collection services, currently serving 49 states, the District of
Columbia and Puerto Rico. During fiscal year 2004, we identified, reported and
collected on behalf of these jurisdictions unclaimed assets owed to
approximately 2.6 million owners. 4




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U.S. Department of Education Our largest contract is with the Department of Education. In November 2003, the
Department awarded us the Common Services for Borrowers contract, which
includes comprehensive loan servicing, consolidation loan processing, debt
collection and portfolio management services. The new, five-year base contract
replaced our existing contract with the Department and will integrate a number
of services, which will allow the Department to increase service quality while
saving overall program costs. The contract is estimated at more than $1
billion in revenue over the five-year period and was effective January 1, 2004.
The contract also includes provisions for five one-year extensions. Annual
revenues from this relationship represent approximately 5% of our fiscal year
2004 consolidated revenues. Commercial Within the Commercial segment, which comprises 41% of our fiscal year 2004
consolidated revenues, we provide our clients with business process
outsourcing, information technology outsourcing and systems integration
services. Our fiscal year 2004 Commercial segment revenues include
approximately $6.9 million of revenues related to our Divested Federal
Business. Pricing for our services in the commercial market varies by type of service.
For business process outsourcing services, we typically price these services on
the basis of the number of accounts or transactions processed. Our information
technology outsourcing services are normally priced on a resource utilization
basis. Resources utilized include processing time, the number of desktops
managed, professional services, data storage and retrieval utilization, and
output media utilized. Our systems integration services are generally offered
on a time and materials basis to existing long-term clients under short-term
contractual arrangements. Business Process Outsourcing Our commercial business process outsourcing practice is focused in five major
categories: administration, human resources, finance and accounting, customer
care, and payment services. Within administration, we provide healthcare
claims processing, mailroom services and total records management. Within
human resources, we provide benefit claims processing, employee services call
centers, benefits administration, employee relocation, training administration
and learning services, payroll services, vendor administration, and employee
assistance programs. Within finance and accounting, we provide
revenue/invoicing accounting, disbursement processing, expense reporting,
procurement, payroll, cash management, fixed asset accounting, tax processing,
general ledger and other services associated with finance and accounting that
are process and technology sensitive. Within customer care, we provide
dispatch and activation services, call center services and technical support.
Within payment services, we provide check and credit/debit card processing,
loan origination and servicing, electronic benefits transfer, electronic funds
transfer and clearinghouse services. We receive client information in all media formats such as over the web, EDI,
fax, voice, paper, microfilm, computer tape, optical disk, or CD ROM.
Information is typically digitized upon receipt and sent through our
proprietary workflow software, which is tailored to our clients process
requirements. Utilizing network technology, we have developed expertise in
transmitting data around the world to our international workforce. We have
approximately 12,000 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. A majority of our business process outsourcing workforce
is compensated using performance-based metrics, and as a result, their
individual compensation varies with our clients transaction volumes, together
with the quality and productivity generated by the workforce. Information Technology Outsourcing We offer a complete range of information technology outsourcing solutions to
commercial businesses desiring to improve the performance of their information
technology organizations. Our target market for information technology
outsourcing services consists of medium-to-large-sized commercial organizations
with time-critical, transaction-intensive information processing needs. Our
information technology outsourcing solutions include the delivery of
information processing services on a remote basis from host data centers that
provide processing capacity, network management and desktop support.
Information processing services include mainframe, mid-range, desktop, network,
and web-hosting solutions. 5




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We provide our information technology outsourcing solutions through an
extensive data center network. Our data center networks support our commercial
and government clients. Our data centers and clients are connected via an
extensive telecommunications network. We monitor and maintain local and wide
area networks on a seven-day, 24hour basis and provide shared hub satellite
transmission service as an alternative to multi-drop and point-to-point hard
line telecommunications networks. Systems Integration Services Our systems integration services include applications outsourcing, technical
support and training, as well as network design and installation services. Our
systems integration services include the development of web-based applications
and web-enablement of information technology assets, allowing our clients to
conduct business with their customers and business partners via the Internet.
We also provide systems integration services to clients who are deploying
client/server architectures, advanced networks and outsourcing legacy
applications maintenance. Revenues by Service Line Our revenues by service line over the past three years are shown in the
following table (in thousands): Year ended June 30,2004
    
    2003
    
    2002Business process outsourcing
    
    $
    3,017,699
    
    
    $
    2,582,773
    
    
    $
    1,942,865Information technology outsourcing
    
    
    694,890
    
    
    
    492,848
    
    
    
    441,249Systems integration services
    
    
    393,804
    
    
    
    711,585
    

    
    
    678,804Total
    
    $
    4,106,393
    
    
    $
    3,787,206
    
    
    $
    3,062,918
 Client Base We achieve growth in our client base through marketing and acquisitions of
other business process and information technology services companies. We have a
diverse client base. Within the Government segment, our clients include a wide
variety of state governments, municipal governments and agencies and the U.S.
Department of Education. Within the Commercial segment, we serve the major
vertical markets that spend heavily on technology including the healthcare,
insurance, retail, transportation, higher education, manufacturing and
financial industries. Clients may be lost due to merger, business failure, or
conversion to a competing processor or to an in-house system. Our business with
government clients is subject to various risks, including the reduction or
modification of contracts due to changing government needs and requirements.
Government contracts, by their terms, generally can be terminated for
convenience by the government, which means that the government may terminate
the contract at any time, without cause. For fiscal year 2004, after adjusting for $258 million of revenues related to
operations divested during the year, approximately 89% of our revenues were
recurring. We define recurring revenues as revenues derived from services that
are used by our clients each year in connection with their ongoing businesses,
and accordingly, exclude software license fees, short-term contract programming
engagements, product installation fees, and hardware and software sales. Our five largest clients accounted for approximately 14%, 13% and 14% of our
fiscal years 2004, 2003 and 2002 revenues, respectively. Our largest client
represents approximately 5% of our consolidated revenues. 6




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Geographic information Over 98% of our consolidated revenues for fiscal years 2004, 2003 and 2002 were
derived from domestic clients. As of June 30, 2004 and 2003, approximately 94%
and 96% of our long-lived assets, respectively, were located in the United
States. Of our long-lived assets located outside the United States, the
largest concentration is in Mexico, with approximately 1.5% and 1.8% of our
total long-lived assets as of June 30, 2004 and 2003, respectively. Please see
Risks Related to Our Business for a discussion of the risks associated with
our international operations. Competition The markets for our services are intensely competitive and highly fragmented.
We believe our competitive advantage comes from our use of world-class
technology, subject matter expertise, process reengineering skills, proprietary
software, global production model, productivity-based compensation and the
price of services. We compete in the government market by offering a broad range of outsourcing
services. Competition in the government market is fragmented by line of
services and we are a leading provider in most of the areas we serve.
Competition in the government market is primarily Electronic Data Systems
Corporation (EDS), Unisys Corp., Maximus, JP Morgan, Accenture, Citicorp, IBM,
Tier Technologies, Transcore, and Convergys. We compete in the commercial market by offering value added business process
outsourcing services and information technology outsourcing services. The
competition for our commercial outsourcing services includes EDS, Computer
Sciences Corp., IBM, Hewlett Packard, CGI, Hewitt, Convergys, Accenture,
Sourcecorp, Inc., Sallie Mae, Perot Systems and in-house departments performing
the function we are seeking to outsource. The competition for our commercial
business process outsourcing services is most often clients in-house
departments currently performing the function that they are seeking to
outsource. We may be required to purchase technology assets from prospective
clients or to provide financial assistance to prospective clients in order to
obtain their contracts. Many of our competitors have substantially greater
resources and thus, may have a greater ability to obtain client contracts where
sizable asset purchases, investments or financing support are required. To
maintain competitive prices, we operate with low overhead and maintain a
significant client and account/transaction base to achieve sufficient economies
of scale. 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 North America and from large
consulting companies seeking operational outsourcing opportunities. We are
also beginning to see the convergence of information technology outsourcing and
business process outsourcing. We believe that vendors such as ourselves who
have the infrastructure and capabilities to provide both services will benefit
the greatest from this emerging trend. Sales and Marketing We market our services through subject matter experts and field sales forces.
In order to enhance our sales and marketing efforts, we seek to hire sales
representatives who have significant technical and subject matter expertise in
the industries to which they will be marketing. Many of our existing subject
matter experts have served in the industries in which they are servicing. Our
sales forces are focused on specific service offerings or vertical markets,
allowing our representatives to keep abreast of technology and industry
developments. Employees We believe that our success depends on our continuing ability to attract and
retain skilled technical, marketing and management personnel. As of June 30,
2004, we had approximately 43,000 employees, including approximately 31,000
employed domestically, with the balance employed in our international
operations. Of the domestic employees, approximately 200 are represented by
unions. Approximately 1,800 of our international employees are represented by
unions, primarily in Mexico. We have had no work stoppages or strikes by our
employees. Management considers its relations with employees and union
officials to be good. Please see Risks Related to Our Business for a
discussion of the risks associated with our international operations. As of June 30, 2004, approximately 31,000 employees provide services to our
commercial clients and approximately 12,000 employees provide services to our
government clients. 7




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Code of Ethics for Senior Financial Officers and Corporate Governance Guidelines Our Code of Ethics for Senior Financial Officers and our Corporate Governance
Guidelines are posted on our internet website, www.acs-inc.com, under the
Investor Relations and Corporate Governance captions. Information contained on
our internet website is not incorporated by reference in this Annual Report on
Form 10-K. These documents are also available free of charge to any
stockholder upon written request to 2828 North Haskell Avenue, Dallas, Texas
75204, Attention: William L. Deckelman, Jr., Corporate Secretary. U.S. Securities and Exchange Commission Reports All of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K, and all amendments to those reports, filed with or
furnished to the U.S. Securities and Exchange Commission (SEC) on or after
May 14, 1996 are available free of charge through our internet website,
www.acs-inc.com, as soon as reasonably practical after we have electronically
filed such material with, or furnished it to, the SEC. Information contained
on our internet website is not incorporated by reference in this Annual Report
on Form 10-K. In addition, the SEC maintains an internet site containing
reports, proxy and information statements, and other information filed
electronically at www.sec.gov. You may also read and copy this information,
for a copying fee, at the SECs Public Reference Room at 450 Fifth Street, NW,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 to obtain
information on the operation of the Public Reference Room. 
 Item 2. Properties As of June 30, 2004, we have approximately 395 locations in the United States, of which 134 locations are occupied by Commercial operations, 260 locations are occupied
by Government operations, and our company-owned facility in Dallas, Texas, which is occupied by primarily Commercial and Corporate functions. We also have
28 locations in 15 other countries, of which 24 locations are occupied by Commercial operations and 4 locations are occupied by Government operations. We own approximately 1.1 million
square feet of real estate space and lease approximately 6.4 million square feet. The leases expire from calendar years 2004 to 2018 and we do not
anticipate any significant difficulty in obtaining lease renewals or alternate
space. Our executive offices are located in Dallas, Texas at a company-owned
facility of approximately 630,000 square feet, which also houses a host data
center and other operations. We believe that our current facilities are
suitable and adequate for our business. 
 Item 3. Legal Proceedings On December 16, 1998, a state district court in Houston, Texas entered final
judgment against us in a lawsuit brought by 21 former employees of Gibraltar
Savings Association and/or First Texas Savings Association (collectively,
GSA/FTSA). The GSA/FTSA employees alleged that they were entitled to the
value of 803,082 shares of our stock (adjusted for February 2002 stock split)
pursuant to options issued to the GSA/FTSA employees in 1988 in connection with
a former technology outsourcing services agreement between GSA/FTSA and us.
The judgment against us was for approximately $17 million, which included
attorneys fees and pre-judgment interest. The judgment was appealed by the
plaintiffs and us and the appellate process has now been concluded. As a
result of the appeals, the trial courts judgment was reversed and the case was
remanded to the trial court for further proceedings, except that the trial
court judgment was affirmed in part as to one of the plaintiffs and the trial
courts dismissal of certain of our affirmative defenses was upheld. The
amount of the judgment for the one plaintiff whose judgment was upheld has been
settled for $1.3 million. In August 2004, mediation was conducted which
resulted in the settlement of claims of the other GSA/FTSA employees. As a
result of this settlement, we accrued $10 million in other operating expenses
in the fourth quarter of fiscal year 2004 related to this settlement and paid
$10 million in full settlement of all claims of the other GSA/FTSA employees in
August 2004. 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 $25 million for the fiscal year ended
June 30, 2003, and approximately $17.2 million for the fiscal year ended June
30, 2004 representing approximately 0.7% of our revenue for fiscal year 2003
and 0.4% for fiscal year 2004. In February 2004, we sold the contracts
associated with the Hanscom Air Force Base relationship to 8




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ManTech
International Corporation; however, we have agreed to indemnify ManTech with
respect to this DOJ investigation. We are continuing our previously announced
internal investigation of this matter through outside legal counsel and we are continuing to cooperate with the DOJ in producing documents in response to the subpoena.
At this stage of this inquiry, we are unable to express an opinion as to its
likely outcome. (See Note 2 of our Consolidated Financial Statements for a
discussion of the sale of the contracts associated with the Hanscom Air Force
Base relationship.) 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. Our fiscal year 2004
revenue from these three contracts was approximately $67 million, representing
approximately 1.6% of our fiscal year 2004 revenue. 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 recent 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 are continuing our
previously announced internal investigation of this matter through outside
legal counsel and we are continuing to cooperate with the DOJ in producing
documents in response to the subpoena. At this stage of this inquiry, we are
unable to express an opinion as to its likely outcome. 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 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. We were also advised in February 2004 that the SEC is conducting
an informal investigation into the matters covered by the OIGs report. 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
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 contract in Pinellas County in Florida for the period
from January 1999 to March 2001, when the contract expired. We acquired this
contract from Lockheed Martin Corporation in August 2001 or approximately five months after
the expiration of the workforce contract in Pinellas County. Further, we settled a
civil lawsuit with Pinellas County in December 2003 with respect to claims
under 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 which 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. 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 alleges noncompliance with the Clean Water Act and the
Federal Resource Conservation and Recovery Act. The alleged violations relate
primarily to the operation of a permitted wastewater treatment system at the
ACS Image Solutions in Flora, Mississippi from August 2001 to
May 2004. We have implemented a number of remedial measures in response to
the MDEQs concerns, including closing the specific operation that generated
the 9




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wastewaters at issue. We responded to the Notice of Violation by letter
dated July 19, 2004, and are currently working with the MDEQ toward a
resolution of this matter. MDEQ has stated it will seek penalties. At this
time, MDEQ has not provided us with an official penalty demand; however, we
believe that any penalties assessed will be immaterial to our results of
operations and liquidity. 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 4. Submission of Matters to a Vote of Security Holders During the fiscal fourth quarter covered by this report, no matter was
submitted to a vote of our security holders. 
 PART II 
 Item 5. Market for Our Common Equity and Related Stockholder Matters and Issuer
Purchases of Equity Securities Our Class A common stock is traded on the New York Stock Exchange (NYSE)
under the symbol ACS. The following table sets forth the high and low sales
prices of our Class A common stock for the last two fiscal years as reported on
the NYSE. High
    
    LowFiscal year ended June 30, 2004First Quarter
    
    $
    54.36
    
    
    $
    42.10Second Quarter
    
    
    55.08
    
    
    
    45.89Third Quarter
    
    
    57.96
    
    
    
    47.72Fourth Quarter
    
    
    55.16
    
    
    
    46.01Fiscal year ended June 30, 2003First Quarter
    
    
    49.90
    
    
    
    34.84Second Quarter
    
    
    54.00
    
    
    
    32.70Third Quarter
    
    
    56.56
    
    
    
    41.16Fourth Quarter
    
    
    53.00
    
    
    
    40.01
 On
September 9, 2004, the last reported sales price of our Class A common stock
as reported on the NYSE was $55.41 per share. As of that date, there were
approximately 120,100 record holders of our Class A common stock and one
record holder of our Class B common stock. Between February 28, 2002 and March 31, 2004, we issued 1,055,968 shares of our
Class A common stock to fifteen current or former employees or directors
(collectively, the optionees) pursuant to the exercise of options granted
under our 1988 Stock Option Plan in excess of the amount originally registered
with the SEC on Form S-8 filed November 17, 1994 (Registration No. 33-86426).
The exercise price of the options exercised ranged from $4.00 to $10.56 per
share of Class A common stock and the aggregate exercise price of the options
was $9.6 million. We believe the grant of the options and the subsequent
issuance of the underlying securities to the optionees was exempt from
registration pursuant to Rule 506 promulgated under the Securities Act of 1933,
as amended (the Securities Act), or pursuant to Section 4(2) of the
Securities Act. Each of the optionees had access to sufficient information
regarding Affiliated Computer Services, Inc. required to make an informed
investment decision and had the requisite sophistication to make an investment
in our securities. In addition, some of the optionees are accredited
investors as defined in Regulation D of the Securities Act. 10




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Under the terms of our unsecured revolving credit facility we are allowed to
pay cash dividends. However, any cash dividends paid must be included in our
fixed charge covenant calculation under our unsecured revolving credit facility
agreement. Any future determination to pay dividends will be at the discretion
of our Board of Directors and will be dependent upon our financial condition,
results of operations, contractual restrictions, capital requirements, business
prospects and such other factors as the Board of Directors deems relevant. We
intend to retain earnings for use in the operation of our business and,
therefore, did not pay cash dividends in the fiscal years ended June 30, 2004
and 2003 and do not anticipate paying any cash dividends in the foreseeable
future. The following table summarizes certain information related to our stock option
and employee stock purchase plans. Number of securitiesNumber of securities
    
    
    
    
    
    remaining available forto be issued upon
    
    
    
    
    
    future issuance underexercise of
    
    Weighted average
    
    equity compensation plansoutstanding options,
    
    exercise price of
    
    (excluding securitieswarrants and rights
    
    outstanding options,
    
    reflected in initial column)Plan Category
    
    as of June 30, 2004
    
    warrants and rights
    
    as of June 30, 2004Equity compensation plans
approved by security shareholdersStock options
    
    
    13,455,710
    
    
    $
    33.04
    
    
    
    3,927,478
    (1)Employee stock purchase plan
    
    
    N/A
    
    
    
    N/A
    
    
    
    1,546,660Equity compensation plans not
approved by security shareholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    13,455,710
    
    
    $
    33.04
    
    
    
    5,474,138
  (1)
    
    These plans consist of the 1988 Stock Option Plan and the 1997 Stock Incentive Plan. No additional shares can be issued under the 1988 Stock Option Plan. Upon exercise the holder is entitled to receive
Class A common stock. Under our 1997 Stock Incentive Plan, as authorized by our
shareholders pursuant to our November 14, 1997 Proxy Statement, the
number of shares of our Class A common stock available for issuance is
subject to increase by approval of our Board of Directors pursuant to a
formula that limits the number of shares optioned, sold, granted or
otherwise issued under the 1997 Stock Incentive Plan to current
employees, consultants and non-employee directors to no more than 12.8%
of our issued and outstanding shares of common stock. On February 27, 2004, we completed the redemption of our 3.5% Convertible
Subordinated Notes due February 15, 2006 (the Notes). Holders of 99.9% of
all the outstanding Notes converted their Notes to 23.0234 shares of our Class
A common stock per $1,000 principal amount of Notes in accordance with the
procedures specified in the related indenture governing the Notes. As the
result of such conversions, approximately 7.3 million shares of our Class A common stock were
issued to such noteholders at the conversion price of $43.44 per share. The
remaining Notes were redeemed in cash at 101.4% of the principal amount,
resulting in a cash redemption of $269,000. 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 existing revolving credit facility.
As of June 30, 2004, we had repurchased approximately 15 million shares at a
total cost of approximately $743.2 million. We have not repurchased any shares
subsequent to June 30, 2004 through the date of this filing. 11




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##### Table of Contents



Repurchase activity for the quarter ended June 30, 2004 was as follows. Please
refer to the discussion above for the cumulative repurchases under our share
repurchase program. Maximum number (orTotal number of
    
    approximate dollarshares purchased
    
    value) of shares thatTotal number
    
    Average
    
    as part of publicly
    
    may yet be purchasedof shares
    
    price paid
    
    announced plans
    
    under the plans orPeriod
    
    purchased
    
    per share
    
    or programs
    
    programsInception through March 31, 2004
    
    
    8,282,693
    
    
    $
    50.04
    
    
    
    8,282,693
    
    
    $
    85,556,431April 1  April 30, 2004
    
    
    1,282,121
    
    
    
    49.42
    
    
    
    1,282,121
    
    
    
    772,200,211May 1  May 31, 2004
    
    
    4,524,300
    
    
    
    48.79
    
    
    
    4,524,300
    
    
    
    551,455,037June 1  June 30, 2004
    
    
    903,300
    
    
    
    49.43
    
    
    
    903,300
    
    
    
    506,802,627Total  Quarter ended June 30, 2004
    
    
    6,709,721
    
    
    
    49.00
    
    
    
    6,709,721
    
    
    
    506,802,627Inception through June 30, 2004
    
    
    14,992,414
    
    
    $
    49.57
    
    
    
    14,992,414
    
    
    $
    506,802,627
 12




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##### Table of Contents



Item 6. Selected Consolidated Financial Data The following selected consolidated financial data are qualified by reference
to and should be read in conjunction with our Consolidated Financial Statements
and Notes thereto and Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this document.
Please see the discussions, Significant Developments  Fiscal years 2004, 2003
and 2002, in Managements Discussion and Analysis of Financial Condition and
Results of Operations for a description of the more significant business
combinations that impact comparability, as well as the Notes to our
Consolidated Financial Statements. All share and per share information is
presented giving effect to the two-for-one stock split of our Class A and Class
B common shares that occurred February 22, 2002 (in thousands, except per share
amounts). As of and for the year ended June 30,2004
    
    2003
    
    2002(b)
    
    2001
    
    2000Results of Operations Data:Revenues (a)
    
    $
    4,106,393
    
    
    $
    3,787,206
    
    
    $
    3,062,918
    
    
    $
    2,063,559
    
    
    $
    1,962,542Net income (b), (c), (f)
    
    $
    529,843
    (c)
    
    $
    306,842
    
    
    $
    229,596
    
    
    $
    134,292
    
    
    $
    109,312Earnings per share  basic (d)
    
    $
    4.03
    (c)
    
    $
    2.32
    
    
    $
    1.94
    
    
    $
    1.35
    
    
    $
    1.11Earnings per share  diluted (d)
    
    $
    3.83
    (c)
    
    $
    2.20
    
    
    $
    1.76
    
    
    $
    1.23
    
    
    $
    1.03Weighted average shares
outstanding  basic (d)
    
    
    131,498
    
    
    
    132,445
    
    
    
    118,646
    
    
    
    99,758
    
    
    
    98,487Weighted average shares
outstanding  diluted (d)
    
    
    139,646
    
    
    
    143,430
    
    
    
    137,464
    
    
    
    116,456
    
    
    
    111,613Balance Sheet Data:Working capital
    
    $
    406,854
    
    
    $
    422,022
    
    
    $
    388,476
    
    
    $
    528,563
    
    
    $
    413,632
    (e)Total assets
    
    $
    3,907,242
    
    
    $
    3,698,705
    
    
    $
    3,403,567
    
    
    $
    1,891,687
    
    
    $
    1,656,446Total long-term debt
(less current portion)
    
    $
    372,439
    
    
    $
    498,340
    
    
    $
    708,233
    
    
    $
    649,313
    
    
    $
    525,619Stockholders equity
    
    $
    2,590,487
    
    
    $
    2,429,188
    
    
    $
    2,095,420
    
    
    $
    885,515
    
    
    $
    711,377
  (a)
    
    Revenues from operations divested through June 30, 2004 were $258
million, $709.5 million, $697.1 million, $692.6 million and $847.5
million for fiscal years 2004, 2003, 2002, 2001 and 2000, respectively.
Please see the discussion in Significant Developments in Managements
Discussion and Analysis of Financial Condition and Results of Operations
and Note 2 of our Consolidated Financial Statements for a discussion of
divestiture activity.(b)
    
    During fiscal year 2002, we acquired Lockheed Martin IMS Corporation
and AFSA Data Corporation. Please see the discussion in Significant
Developments  Fiscal Year 2002 in Managements Discussion and Analysis
of Financial Condition and Results of Operations and Note 3 of our
Consolidated Financial Statements.(c)
    
    Please see the discussion in Significant Developments  Fiscal Year
2004 in Managements Discussion and Analysis of Financial Condition and
Results of Operations and the Notes to our Consolidated Financial
Statements for discussion of significant items which impacted fiscal
year 2004 results of operations.(d)
    
    Please see Item 5 and Note 12 of our Consolidated Financial
Statements for a discussion of our share repurchase program.(e)
    
    Working capital at June 30, 2000 included $180.3 million of
receivables from the divestiture of business units prior to June 30,
2000, and $43.4 million of net assets held-for-sale from business units
to be divested subsequent to June 30, 2000.(f)
    
    During fiscal years 2001 and 2000, we had after-tax goodwill
amortization expense of $20.7 million and $18.8 million, respectively,
which, beginning July 1, 2001, were no longer expensed under Statement
of Financial Accounting Standards No. 142 Goodwill and Other Intangible
Assets. 13




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Item 7. 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 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 generally accepted accounting principles in the United States. General We derive our revenues from delivering comprehensive business process
outsourcing and information technology outsourcing solutions to commercial and
government clients. A substantial portion of our revenues is derived from
recurring monthly charges to our customers under service contracts with initial
terms that vary from one to ten years. For fiscal year 2004, after adjusting
for $258 million of revenues related to divested operations, approximately 89%
of our revenues were recurring. We define recurring revenues as revenues
derived from services that our clients use each year in connection with their
ongoing businesses, and accordingly, exclude software license fees, short-term
contract programming engagements, product installation fees, and hardware and
software sales. Since inception, our acquisition program has resulted in
geographic expansion, growth and diversification of our client base, expansion
of services offered, and increased economies of scale. Significant Developments  Fiscal Year 2004 During fiscal year 2004, we signed contracts with new clients and increased business
with existing clients representing $621.5 million of annual recurring new
revenue, which includes $25.2 million related to a majority of the Federal
business sold in November 2003 (the Divested Federal Business). Excluding
the $25.2 million related to the Divested Federal Business, the Commercial
segment contributed 70% of new business signings, including contracts with
McDonalds Corporation to provide information technology services, The Goodyear Tire and Rubber Company to
provide human resources support and services and General Electric to provide
finance and accounting services. Excluding the $25.2 million related to the
Divested Federal Business, the Government segment contributed 30% of new
business signings, including new contracts with the U. S. Department of
Education to provide comprehensive loan servicing, consolidation loan
processing, debt collection and portfolio management services, and the North
Carolina Department of Health and Human Services to replace and operate the
North Carolina Medicaid Management Information System. We define new business
signings as recurring revenue from new contracts, including the incremental
portion of renewals, signed during the period and represent the estimated first
twelve months of revenues, as measured under GAAP, 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. 14




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In November 2003, we completed the sale of the Divested Federal Business to
Lockheed Martin Corporation 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 $285.3 million ($182.3 million, net of
income tax) in fiscal year 2004. 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. The after tax proceeds from the
divestiture were generally used to pay down debt, fund the acquisitions of
Lockheed Martin Corporations commercial information technology outsourcing business,
Patient Accounting Services Center, LLC, Truckload Management Services, Inc.
and etravelexperts, LLC, and fund our share repurchase program. Revenues from
the Divested Federal Business, which are primarily included in the Government
segment, were approximately $237.7 million, $680.1 million and $627.2 million
for fiscal years 2004, 2003 and 2002, respectively. This divestiture excluded,
among others, our Department of Education relationship, which during fiscal
year 2004 had revenues of approximately $199 million. Additionally, our
Commercial and Government operations will continue to serve as a subcontractor
on portions of the Divested Federal Business. In February 2004, we sold the contracts associated with the Hanscom Air Force
Base relationship (Hanscom) to ManTech International Corporation (ManTech)
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. For the Hanscom Air Force
Base contracts, we reported revenue in our Government segment of approximately
$17.2 million, $25.2 million and $26 million for fiscal years 2004, 2003 and
2002, respectively. We have agreed to indemnify ManTech with respect to the
Department of Justice (DOJ) investigation related to purchasing activities at
Hanscom during the period 1998-2000. In the fourth quarter of fiscal year
2004, we sold an additional small contractual relationship to ManTech. We
reported revenue in our Government segment of approximately $3.1 million, $4.2
million and $4.5 million for the years ended June 30, 2004, 2003 and 2002,
respectively, for this contract. The sales of the Divested Federal Business to Lockheed Martin Corporation and the contracts
sold to ManTech International Corporation now allow 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. In November 2003, we acquired Lockheed Martin Corporations commercial
information technology outsourcing business, with annual revenues of
approximately $240 million. With this acquisition, we acquired four U.S. data
centers, approximately 1,000 employees, and a diverse client base representing
the manufacturing, automotive, retail, financial services, and communications
industries. The transaction was valued at $107 million less a working capital
settlement of $6.9 million, plus related transaction costs. The operating
results of the acquired business are included in our financial statements
primarily in the Commercial segment from the effective date of the acquisition,
November 1, 2003. In November 2003, the U.S. Department of Education awarded us the Common
Services for Borrowers contract. This contract includes comprehensive loan
servicing, consolidation loan processing, debt collection and portfolio
management services. The new, five-year base contract replaced our existing
contract with the Department and will integrate a number of services, which
will allow the Department to increase service quality while saving overall
program costs. The contract is estimated at more than $1 billion in revenue
over the five-year period and was effective January 1, 2004. The contract also
includes provisions for five one-year extensions. In January 2004, we completed the acquisition of Patient Accounting Services
Center, LLC (PASC), a provider of revenue cycle management for healthcare
providers, including billing, accounts receivables, and collection services.
PASC generated revenues of approximately $68 million for the year ended
December 31, 2003. The transaction was valued at approximately $94.9 million, excluding
contingent consideration of a maximum of $25 million based on future financial
performance, plus related transaction costs. 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 3, 2004. 15




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In February 2004, we completed the acquisition of Truckload Management
Services, Inc. (TMI), an expedited document processing and business process
improvement services provider for the trucking industry. TMI had revenues of
approximately $25 million for the year ended December 31, 2003. The transaction
was valued at approximately $28.1 million, excluding contingent consideration
of a maximum of $14 million based upon future financial performance, plus
related transaction costs. The operating results of the acquired business are
included in our financial statements in the Commercial segment from the
effective date of the acquisition, February 1, 2004. On February 27, 2004, we completed the redemption of our 3.5% Convertible
Subordinated Notes due February 15, 2006 (the Notes). Holders of 99.9% of
all the outstanding Notes converted their Notes to 23.0234 shares of our Class
A common stock per $1,000 principal amount of Notes in accordance with the
procedures specified in the related indenture governing the Notes. As the
result of such conversions, approximately 7.3 million shares of our Class A
common stock were issued to such noteholders at the conversion price of $43.44
per share. The remaining Notes were redeemed in cash at 101.4% of the
principal amount, resulting in a cash redemption of $269,000. In April 2004, we acquired etravelexperts, LLC. etravelexperts had annual
revenue of approximately $15 million and provides electronic ticket fulfillment
and related customer care for the airline industry and travel websites. The
transaction was valued at approximately $17.2 million, excluding contingent
consideration of a maximum of $5.8 million based upon future financial
performance, plus related transaction costs. The operating results of the
acquired business are included in our financial statements in the Commercial
segment from the effective date of the acquisition, April 1, 2004. 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). 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 in principle. 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 a $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 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. 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 existing revolving credit facility.
As of June 30, 2004, we had repurchased approximately 15 million shares at a
total cost of approximately $743.2 million. We have not repurchased any shares
subsequent to June 30, 2004 through the date of this filing. 16




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On May 17, 2004, we announced that our outsourcing agreement with Gateway, Inc.
was being terminated as a result of Gateways March 2004 acquisition of
eMachines, Inc., which significantly changed its business strategy. The
transition of the majority of the outsourcing operations back to Gateway will
occur by the end of the first quarter of our fiscal year 2005. The outsourcing
agreement contributed approximately $47.4 million in revenue during fiscal year 2004. Concurrent with the termination of our outsourcing relationship with
Gateway, we also terminated our obligation to purchase products and services
from Gateway (see Liquidity and Capital Resources  Disclosures About
Contractual Obligations and Commercial Commitments). Subsequent Events In July 2004, we acquired Heritage Information Systems, Inc. (Heritage).
Heritage provides clinical management and pharmacy cost containment solutions
to fourteen 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 million, plus related transaction costs, excluding contingent
consideration of maximum of $17 million based upon future financial performance, and was funded from
our existing cash on hand. The operating results of the acquired business will be included in our Government segment from the effective date of the acquisition, July 1, 2004. On August 13, 2004, we entered into a settlement agreement with former
employees of Gibraltar Savings Association and/or First Texas Savings
Association, whereby we paid $10 million in cash to settle in full their claims
against us in August 2004 (see Item 3. Legal Proceedings). We accrued $10
million related to this settlement in other operating expenses in the fourth
quarter of fiscal year 2004. In August 2004, we acquired BlueStar Solutions, an information technology
outsourcer specializing in applications management of packaged enterprise
resource planning (ERP) and messaging services. The transaction was valued at
approximately $73 million plus related transaction costs and was funded from cash on hand.
We believe that the acquisition of BlueStar provides us penetration into the
emerging ERP/messaging market. The operating results of the acquired business
will be included in our financial statements in the Commercial segment from the
effective date of the acquisition, August 26, 2004. Significant Developments  Fiscal Year 2003 During fiscal year 2003, we signed contracts with new clients and increased business
with existing clients representing $701 million of annual recurring new
revenue, which included $56.4 million related to the Divested Federal Business.
The Government segment contributed 55% of new business signings, including new
contracts with the Texas Health and Human Services Commission to provide fiscal
agent and administrative services and New Jersey E-ZPass to provide electronic
toll collection services. The Commercial segment contributed 45% of new
business signings, including new contracts with Motorola to provide human
resource outsourcing services and Ingram Micro to manage their IT
infrastructure. In January 2003, we acquired CyberRep, Inc. (CyberRep), which is included in
our Commercial segment. CyberRep provides customer care and customer
relationship management services for the telecommunications, wireless
communications, technology, and consumer products industries. The transaction
was valued at approximately $42 million plus transaction costs. CyberReps operating results
are included in our consolidated financial statements from the effective date
of the acquisition, January 1, 2003. We completed four other acquisitions during fiscal year 2003, all of which were
included in our state and local governments segment. Significant Developments  Fiscal Year 2002 During fiscal year 2002, we signed contracts with new clients and increased business
with existing clients representing $478.1 million of annual recurring new
revenue, which included $46.5 million related to the Divested Federal Business.
We acquired eight companies in fiscal year 2002, three of which serve our
Government segment, four of which serve our Commercial segment, and AFSA, which
serves both segments. 17




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In August 2001, we acquired Lockheed Martin IMS Corporation (IMS), a
wholly-owned subsidiary of Lockheed Martin Corporation, now known as ACS State
and Local Solutions, for $825 million plus transaction costs. ACS State and
Local Solutions, with its principal offices located in Washington, D.C. and
approximately 4,800 employees primarily throughout the United States, provides services to state and local government agencies in child support enforcement,
welfare and community services, electronic toll collection, and other
intelligent transportation services involving the trucking industry, photo
enforcement of red-light and speeding violations, parking management, and
information technology outsourcing. ACS State and Local Solutions operating
results are included in the Government segment of our consolidated financial statements from the
effective date of the acquisition, August 1, 2001. In August 2001, we acquired the business process outsourcing services unit of
National Processing Company (NPC). NPC provides healthcare claims
processing, credit card application processing, and airline lift ticket
processing. As part of the transaction, we acquired all of NPCs offshore
operations in Jamaica, the Dominican Republic, Barbados and a majority of NPCs
Mexican operations. The transaction value was approximately $43 million plus related
transaction costs. NPCs operating results are included in the Commercial segment of our consolidated
financial statements from the effective date of the acquisition, August 1,
2001. On October 10, 2001, we completed our offering of 18.4 million shares of our
Class A common stock (adjusted for stock split). The shares were issued at
$40.50 per share yielding proceeds of $714.3 million (net of underwriters fees
and other costs), which were used to repay the $550 million 18-month interim
credit facility incurred to fund the IMS acquisition and a portion of the
amount outstanding under our revolving credit facility. In February 2002, we completed a two-for-one stock split of our outstanding
Class A common stock and Class B common stock implemented in the form of a 100%
stock dividend (Stock Split). Each holder of record of our Class A common
stock and Class B common stock as of the close of business on February 15, 2002
received an additional share of such stock held by them at that time. On March 15, 2002, we completed the redemption of our 4% Convertible
Subordinated Notes due March 15, 2005 (the 4% Notes). Holders of all of the
outstanding 4% Notes converted their 4% Notes to shares of our Class A common
stock in accordance with the Indenture dated as of March 20, 1998 between ACS
and U.S. Trust Company of Texas, N.A., as trustee prior to the March 15, 2002
redemption date. As a result of such conversions, approximately 10.8 million
shares of our Class A common stock were issued to such holders. In May 2002, we acquired the finance and accounting business process
outsourcing unit of Andersen Worldwide (Andersen). Included in this
acquisition are contracts with General Motors (GM) and the University of
Phoenix (the University). Under a 10-year agreement with GM, we provide
transactional accounting services such as payroll processing, disbursement
processing, dealer accounting, accounts receivable processing, lease and
subsidiary accounting, and expense reporting in the United States and Europe.
Under the arrangement with the University, we provide student financial aid
business process outsourcing services to the University including federal
eligibility determinations, loan and grant processing, and disbursement of
student aid as well as other support services related to student financial aid
processing. The transaction was valued at approximately $65.2 million plus
related transaction costs. Andersens operating results are included in the Commercial segment of our
consolidated financial statements from the effective date of the acquisition,
May 1, 2002 for the domestic operations, and June 1, 2002 for the foreign
operations. In June 2002, we acquired AFSA, a subsidiary of FleetBoston Financial
Corporation, for approximately $410 million plus related transaction costs.
AFSA is the nations largest educational services company, servicing a student
loan portfolio of 8.1 million borrowers with outstanding loans of approximately
$85 billion. Additionally, AFSA is a leading business process outsourcer for
federal, state, and local governments for a variety of health and human
services programs, including Medicare, Medicaid, childrens health insurance
programs (CHIP), and welfare and community services. AFSAs operating results
are included primarily in the Commercial segment of our consolidated financial statements from the effective date
of the acquisition, June 1, 2002. 18




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##### Table of Contents



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. Prior period calculations are as of the end of the reporting
period presented and are not restated for subsequent acquisitions or
divestitures. The following table sets forth the calculation of internal
revenue growth (in thousands): Consolidated Year ended June 30,
    
    
    
    
    
    
    
    
    
    Year ended June 30,2004
    
    2003
    
    $ Growth
    
    Growth %
    
    2003
    
    2002
    
    $ Growth
    
    Growth %Total Revenues
    
    $
    4,106,393
    
    
    $
    3,787,206
    
    
    $
    319,187
    
    
    
    8
    %
    
    $
    3,787,206
    
    
    $
    3,062,918
    
    
    $
    724,288
    
    
    
    24
    %Less: Divestitures
    
    
    (258,037
    )
    
    
    (709,512
    )
    
    
    451,475
    
    
    
    
    
    
    
    
    
    
    
    (37,340
    )
    
    
    37,340Adjusted
    
    $
    3,848,356
    
    
    $
    3,077,694
    
    
    $
    770,662
    
    
    
    25
    %
    
    $
    3,787,206
    
    
    $
    3,025,578
    
    
    $
    761,628
    
    
    
    25
    %Acquired revenues
    
    $
    259,596
    
    
    $
    668
    
    
    $
    258,928
    
    
    
    8
    %
    
    $
    451,583
    
    
    $
    146,236
    
    
    $
    305,347
    
    
    
    10
    %Internal revenues
    
    
    3,588,760
    
    
    
    3,077,026
    
    
    
    511,734
    
    
    
    17
    %
    
    
    3,335,623
    
    
    
    2,879,342
    
    
    
    456,281
    
    
    
    15
    %Total
    
    $
    3,848,356
    
    
    $
    3,077,694
    
    
    $
    770,662
    
    
    
    25
    %
    
    $
    3,787,206
    
    
    $
    3,025,578
    
    
    $
    761,628
    
    
    
    25
    %
 Government Year ended June 30,
    
    
    
    
    
    
    
    
    
    Year ended June 30,2004
    
    2003
    
    $ Growth
    
    Growth %
    
    2003
    
    2002
    
    $ Growth
    
    Growth %Total Revenues (a)
    
    $
    2,428,029
    
    
    $
    2,544,298
    
    
    $
    (116,269
    )
    
    
    (5
    )%
    
    $
    2,544,298
    
    
    $
    2,105,585
    
    
    $
    438,713
    
    
    
    21
    %Less: Divestitures
    
    
    (251,122
    )
    
    
    (679,340
    )
    
    
    428,218
    
    
    
    
    
    
    
    
    
    
    
    (4,343
    )
    
    
    4,343Adjusted
    
    $
    2,176,907
    
    
    $
    1,864,958
    
    
    $
    311,949
    
    
    
    17
    %
    
    $
    2,544,298
    
    
    $
    2,101,242
    
    
    $
    443,056
    
    
    
    21
    %Acquired revenues
    
    $
    30,833
    
    
    $
    668
    
    
    $
    30,165
    
    
    
    2
    %
    
    $
    261,579
    
    
    $
    117,771
    
    
    $
    143,808
    
    
    
    7
    %Internal revenues
    
    
    2,146,074
    
    
    
    1,864,290
    
    
    
    281,784
    
    
    
    15
    %
    
    
    2,282,719
    
    
    
    1,983,471
    
    
    
    299,248
    
    
    
    14
    %Total
    
    $
    2,176,907
    
    
    $
    1,864,958
    
    
    $
    311,949
    
    
    
    17
    %
    
    $
    2,544,298
    
    
    $
    2,101,242
    
    
    $
    443,056
    
    
    
    21
    %
 Commercial Year ended June 30,
    
    
    
    
    
    
    
    
    
    Year ended June 30,2004
    
    2003
    
    $ Growth
    
    Growth %
    
    2003
    
    2002
    
    $ Growth
    
    Growth %Total Revenues (b)
    
    $
    1,678,364
    
    
    $
    1,242,908
    
    
    $
    435,456
    
    
    
    35
    %
    
    $
    1,242,908
    
    
    $
    957,333
    
    
    $
    285,575
    
    
    
    30
    %Less: Divestitures
    
    
    (6,915
    )
    
    
    (30,172
    )
    
    
    23,257
    
    
    
    
    
    
    
    
    
    
    
    (32,997
    )
    
    
    32,997Adjusted
    
    $
    1,671,449
    
    
    $
    1,212,736
    
    
    $
    458,713
    
    
    
    38
    %
    
    $
    1,242,908
    
    
    $
    924,336
    
    
    $
    318,572
    
    
    
    34
    %Acquired revenues
    
    $
    228,763
    
    
    $
    
    
    
    $
    228,763
    
    
    
    19
    %
    
    $
    190,004
    
    
    $
    28,465
    
    
    $
    161,539
    
    
    
    17
    %Internal revenues
    
    
    1,442,686
    
    
    
    1,212,736
    
    
    
    229,950
    
    
    
    19
    %
    
    
    1,052,904
    
    
    
    895,871
    
    
    
    157,033
    
    
    
    17
    %Total
    
    $
    1,671,449
    
    
    $
    1,212,736
    
    
    $
    458,713
    
    
    
    38
    %
    
    $
    1,242,908
    
    
    $
    924,336
    
    
    $
    318,572
    
    
    
    34
    %
  (a)
    
    The Government segment includes revenues from operations divested
through June 30, 2004 of $251.1 million, $679.3 million and $633.7
million for fiscal years 2004, 2003 and 2002, respectively.(b)
    
    The Commercial segment includes revenues from operations divested
through June 30, 2004 of $6.9 million, $30.2 million and $63.4 million
for fiscal years 2004, 2003 and 2002, respectively. 19




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##### Table of Contents



Results of Operations The following table sets forth certain items from our Consolidated Statements
of Income expressed as a percentage of revenues: Percentage of RevenuesYear ended June 30,2004
        
        2003
        
        2002Revenues
        
        
        100.0
        %
        
        
        100.0
        %
        
        
        100.0
        %Operating expenses:Wages and benefits
        
        
        43.6
        
        
        
        45.3
        
        
        
        44.1Services and supplies
        
        
        26.5
        
        
        
        26.3
        
        
        
        29.0Rent, lease and maintenance
        
        
        10.1
        
        
        
        9.3
        
        
        
        9.1Depreciation and
            amortization
        
        
        4.5
        
        
        
        4.0
        
        
        
        3.6Gain on sale of business
        
        
        (6.9
        )
        
        
        
        
        
        
        Other operating expenses
        
        
        1.7
        
        
        
        1.4
        
        
        
        1.1Total operating expenses
        
        
        79.5
        
        
        
        86.3
        
        
        
        86.9Operating income
        
        
        20.5
        
        
        
        13.7
        
        
        
        13.1Interest expense
        
        
        0.4
        
        
        
        0.6
        
        
        
        1.0Other non-operating
            expense (income), net
        
        
        (0.1
        )
        
        
        0.1
        
        
        
        0.3Pretax profit
        
        
        20.2
        
        
        
        13.0
        
        
        
        11.8Income tax expense
        
        
        7.3
        
        
        
        4.9
        
        
        
        4.3Net income
        
        
        12.9
        %
        
        
        8.1
        %
        
        
        7.5
        %
 Comparison of Fiscal Year 2004 to Fiscal Year 2003 Revenues
Revenues increased $319.2 million, or 8%, to $4.1 billion in fiscal year 2004
from $3.8 billion in fiscal year 2003. Revenues related to the Divested
Federal Business and the contracts sold to ManTech were $258 million and $709.5
million in fiscal year 2004 and 2003, respectively. Excluding the impact of
the revenues related to the Divested Federal Business and the contracts sold to
ManTech, revenues increased from $3.1 billion in fiscal year 2003 to $3.8
billion in fiscal year 2004, or 25%. Revenue in fiscal year 2004 includes a $6.7 million
reduction resulting from the change in our percentage-of-completion estimates
on the Georgia Contract primarily as a result of the termination of Phase II of
the contract, which was recognized in the second quarter of fiscal year 2004.
Internal revenue growth, excluding the impact of the revenues related to the
Divested Federal Business and contracts sold to ManTech, for fiscal year 2004
was 17%. The remainder of the growth was related to acquisitions. Revenue in our Government segment, which represents 59% of consolidated revenue
for fiscal year 2004, decreased $116.3 million, or 5%,to $2.4 billion in
fiscal year 2004 compared to fiscal year 2003. Revenues related to the
Divested Federal Business and contracts sold to ManTech included in the
Government segment were $251.1 million and $679.3 million for fiscal years 2004
and 2003, respectively. Excluding the impact of the revenues related to the
Divested Federal  Business and the contracts sold to ManTech, revenues grew 17%
in fiscal year 2004 to $2.2 billion from $1.9 billion in fiscal year 2003.
Revenues include a $6.7 million reduction resulting from the change in our
percentage-of-completion estimates on the Georgia Contract primarily as a
result of the termination of Phase II of the contract, which was recognized in
the second quarter of fiscal year 2004. Internal revenue growth, excluding the
impact of the revenues related to the Divested Federal 20




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##### Table of Contents



Business and the
contracts sold to ManTech, was 15%, due primarily to increased revenue in our
Texas Medicaid, Department of Education, New Jersey E-ZPass, Florida Medicaid,
Georgia Healthcare Partnership, Ohio and Illinois child support payment
processing contracts, and higher non-recurring revenues related to our unclaimed property
business and HIPAA remediation work. These revenues collectively represent 82%
of the internal growth for the period in this segment. The remaining 2% of
total revenue growth is from acquisitions. Revenue in our Commercial segment, which represents 41% of consolidated revenue
for fiscal year 2004, increased $435.5 million, or 35%, to $1.7 billion in
fiscal year 2004 compared to fiscal year 2003. Revenues related to the
Divested Federal Business included in the Commercial segment were $6.9 million
and $30.2 million in fiscal years 2004 and 2003, respectively. Excluding the
impact of the revenues related to the Divested Federal Business, revenues grew
38% in fiscal year 2004 compared to fiscal year 2003. Internal revenue
growth, excluding the impact of the revenues related to the Divested Federal
Business, was 19% primarily due to the ramp up of new business including, among
others, the Motorola, General Motors, Gateway, Ingram Micro, Miller Brewing,
Northwest Airlines, and Trilegiant contracts. These contracts collectively
represent 74% of the internal growth for the period in this segment. As
discussed previously, our Gateway contract has been terminated. The remaining
19% of total revenue growth was from acquisitions. Operating Expense Wages and benefits increased $73.5 million, or 4%, to $1.8 billion. As a
percentage of revenues, wages and benefits decreased 1.7% to 43.6%. Included
in fiscal year 2004 wages and benefits were compensation costs of $9.8 million
associated with former Federal employees, which were primarily stay bonuses and
accelerated option vesting due to the Divested Federal Business. Excluding
these costs, wages and benefits increased $63.7 million, or 4% in fiscal year
2004 as compared to fiscal year 2003 (calculated as the $73.5 million increase
less $9.8 million compensation costs, divided by reported fiscal year 2003
wages and benefits costs) and therefore decreased to 43.3% as a percentage of
revenue. The sale of the Divested Federal Business and the acquisition of
Lockheed Martin Corporations commercial information outsourcing business were
primarily responsible for the decrease in labor costs 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 expenses to its revenues. In addition, the
acquisition of Lockheed Martin Corporations commercial information technology
outsourcing business had a lower proportion of labor costs as a percentage of
revenue than business process outsourcing. Services and supplies increased $95.8 million, or 10%, to $1.1 billion. As a
percentage of revenues, services and supplies increased 0.2% to 26.5% in fiscal
year 2004. This percentage increase is primarily due to $2.6 million of
wind-down costs related to the termination of Phase II of the Georgia Contract
discussed earlier. Rent, lease and maintenance expense increased $64.5 million, or 18%, to $416.4
million. As a percentage of revenue, rent, lease and maintenance increased
0.8% to 10.1%. This increase was primarily due to the sale of our Divested
Federal Business in fiscal year 2004, which provided primarily system
integration services to its clients. These services typically have a lower
percentage of rent, lease and maintenance than information technology services,
which have higher equipment costs. Gain on sale of business was $285.3 million, or 6.9%, of revenues for fiscal
year 2004. This gain was related to the sale of our Divested Federal Business,
as discussed above. Depreciation and amortization increased $31.7 million, or 21% to $183.8
million. Depreciation and amortization expense was positively impacted by
approximately $6.2 million in fiscal year 2004 as a result of the cessation of
depreciation and amortization related to the assets held for sale in our
Divested Federal Business. As a percentage of revenue, depreciation and
amortization increased 0.5%, to 4.5%, due to $258 million of capital
expenditures and additions to intangible assets, offset by the sale of the
Divested Federal Business, which had a lower percentage of depreciation and
amortization to revenue than our remaining business, and the cessation of
depreciation and amortization. Other operating expenses increased $14.5 million, or 28% to $67.1 million. As
a percentage of revenue, other operating expenses increased 0.3% to 1.7%
primarily as a result of the previously discussed $10 million legal settlement
with former employees of Gibraltar Savings Association and/or First Texas
Savings Association and the $10 million settlement with the DCH discussed
earlier, offset by the $5.4 million gain on the sale of the Hanscom contracts. 21




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##### Table of Contents



Interest Expense Interest expense decreased $8.2 million to $17 million primarily due to lower
average debt outstanding. The lower average outstanding debt was the result of
the paydown of our revolving credit facility with the proceeds from the sale of
the Divested Federal Business in the second quarter of fiscal year 2004 and the
conversion of our 3.5% Convertible Subordinated Notes in the third quarter of
fiscal year 2004, offset by subsequent increases in our revolving credit facility
resulting from borrowings incurred to fund our share repurchase program. Other Non-Operating Expense (Income) Other non-operating income in fiscal year 2004 includes increases of $1.2
million of investment income. Other non-operating expense in fiscal year 2003
includes $3.4 million of write-downs of long-term cost basis investments. Tax Expense Our effective tax rate decreased from 37.5% in fiscal year 2003 to 36.1% in
fiscal year 2004. In fiscal year 2004, we recognized $4.6 million of income tax
credits related to prior years research and development costs, $1.5 million of
income tax credits related to current year research and development costs and
approximately $1.6 million of divestiture related tax benefits related to the
sale of a foreign subsidiary. In addition, the effective tax rate on the gain
related to the sale of the Divested Federal Business was 36.1%. Our effective
tax rate exceeds the 35% statutory rate primarily due to state income taxes,
offset by the items above. Comparison of Fiscal Year 2003 to Fiscal Year 2002 Revenues Revenues increased $0.7 billion, or 24%, to $3.8 billion in fiscal year 2003
from $3.1 billion in fiscal year 2002. Internal revenue growth for fiscal year
2003 was 15% and the remaining growth resulted from acquisitions. Revenues
include $709.5 million and $697.1 million for fiscal years 2003 and 2002,
respectively, related to operations divested through June 30, 2004, primarily
related to the Divested Federal Business. Revenues in our Government segment increased $438.7 million to $2.5 billion in
fiscal year 2003 from $2.1 billion in fiscal year 2002, or 21% over the prior
year, including the full year impact of the AFSA and Andersen acquisitions.
Internal revenue growth was 14%, due primarily to new contracts, including
contracts with the Texas Health and Human Services Commission for fiscal agent
and administrative services to support the States Medicaid traditional
fee-for-service program and the Texas Health Network primary care case
management and managed care program, New Jersey to operate its E-Z Pass system,
State of Ohio to operate its child support collections and disbursement unit,
Mississippi Medicaid and Commercial Vehicle Operations and full year impact of
the Georgia Medicaid contract signed in the fourth quarter of fiscal year 2002.
These contracts collectively represent 60% of the internal growth for the
period in this segment. The remainder of total revenue growth is from
acquisitions. Revenues in our Government segment include $679.3 million and
$633.7 million for fiscal years 2003 and 2002, respectively, related to
operations divested through June 30, 2004, primarily related to the Divested
Federal Business. Revenues in our Commercial segment increased $285.6 million, to $1.2 billion in
fiscal year 2003 from $924 million in fiscal year 2002, or approximately 30%.
After adjusting for revenues from operations divested in fiscal year 2002 of
$33 million, internal growth was 17% due primarily to the Motorola and Ingram
Micro contracts and full year impact of the Ingersoll Rand contract signed in
the fourth quarter of fiscal year 2002. These contracts collectively represent
65% of the internal growth for the period in this segment. The remainder of
total revenue growth is from acquisitions. Acquisition growth in our Commercial
segment was 17% due primarily to the full year impact of the fiscal year 2002
AFSA and Andersen acquisitions. Revenues in our Commercial segment include
$30.2 million and $63.4 million for fiscal years 2003 and 2002, respectively,
for operations divested through June 30, 2004, primarily related to our
Divested Federal Business. Operating Expense Wages and benefits increased $366.9 million, or 27% to $1.7 billion in fiscal
year 2003. As a percentage of revenues, wages and benefits increased 1.2% to
45.3% in fiscal year 2003 from 44.1% in fiscal year 2002 due to increased
business process outsourcing services in our revenue mix. Business process
outsourcing (BPO) services are more labor intensive and have higher component
of wages and benefits than traditional information technology outsourcing. BPO
services accounted for approximately 68% of our fiscal year 2003 revenues as compared to approximately
63% in fiscal year 2002. The increase in BPO services is primarily the result
of our 2002 acquisitions of AFSA and Andersen, as well as new business growth.
Prior 22




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to the acquisition, AFSA served as a sub-contractor on the Department of
Education contract, and therefore the payments to AFSA were included in
services and supplies. Subsequent to the acquisition, AFSAs employee costs
related to this contract are included in wages and benefits. Services and supplies increased $105.9 million, or 12%, to $1.0 billion. As a
percentage of revenues, services and supplies decreased 2.7% to 26.3% in fiscal
year 2003, primarily due to the acquisition of AFSA in June 2002 as discussed
in wages and benefits above. Rent, lease and maintenance expense increased $73.2 million, or 26%, to $351.9
million in fiscal year 2003. As a percentage of revenue, rent, lease and
maintenance increased 0.2% to 9.3% for fiscal year 2003 due to new information
technology outsourcing contracts in our Commercial segment. Information
technology outsourcing contracts have a higher component of rent, lease and
maintenance than our other lines of business. Depreciation and amortization increased $41.6 million, or 38%, to $152.1
million in fiscal year 2003. As a percentage of revenue, depreciation and
amortization increased 0.4%, to 4.0%, due to $253.6 million of capital
expenditures and additions to other intangible assets during the year resulting
from our growth and increased customer related intangible asset amortization
primarily as a result of the full year impact of acquisitions during fiscal
year 2002. Other operating expenses increased $18 million to $52.6 million during fiscal
year 2003. As a percentage of revenue, other operating expenses increased 0.3%
due to increased legal and marketing expenses. Interest Expense Interest expense decreased $5.4 million to $25.2 million primarily due to lower
average outstanding borrowings and lower borrowing costs, resulting from the
conversion to equity of the 4% Convertible Subordinated Notes in March 2002 and
reductions in amounts outstanding under our credit facilities. Other Non-Operating Expense (Income) Other non-operating expense in fiscal year 2003 includes $3.4 million of
write-downs of long-term cost basis investments during fiscal year 2003. Other
non-operating expense in fiscal year 2002 includes $8.4 million of write-downs
of long-term cost basis investments and a $1.8 million loss on the sale of a
business unit. Tax Expense Our effective tax rate of approximately 37.5% exceeded the federal statutory
rate of 35% due primarily to the net effect of state income taxes. Our
effective tax rate increased 1.2% for fiscal year 2003 to 37.5% from 36.3% for
fiscal year 2002. Included in tax expense in fiscal year 2002 are certain tax
benefits of approximately $4.3 million resulting primarily from recently
enacted federal income tax rules that provide for a larger tax deduction
associated with our June 2000 divestitures and deferred tax adjustments to
reflect realization of tax deductions for which their probability is no longer
uncertain. 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. During fiscal year 2004, we generated approximately $476.2 million in cash flow
from operations compared to the fiscal year 2003 amount of approximately $545.3
million. However, fiscal year 2004 was negatively impacted by a tax payment of
approximately $88.1 million related to the gain from the sale of the Divested
Federal Business (gross proceeds from the sale of the Divested Federal Business
are reflected in cash flow from investing activities, but the tax payment
related to the sale is presented as a reduction in cash flows from operating
activities). Excluding this $88.1 million tax payment, fiscal year 2004
operating cash flow was $564.3 million. This increase from the prior year was
primarily a result of growth in our business and the corresponding increase in
net income. The fiscal year 2004 growth of operating cash flow over fiscal
year 2003 was negatively impacted by deferred taxes, which decreased from
$100.9 million in fiscal year 2003 to $66.2 million in fiscal year
2004. The decrease in deferred taxes was primarily due to differences in
timing of deductibility of amortization as well as other tax and book
differences. 23




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During fiscal year 2003, we generated $545.3 million in cash flow from
operations compared to the fiscal year 2002 amount of approximately $372
million. This increase from the prior year was primarily a result of growth in
our business and the corresponding increase in net income. The year over year
growth in operating cash flow was also positively impacted by deferred taxes,
which increased from $55.8 million in fiscal year 2002 to $100.9 million in
fiscal year 2003. This increase was a result of an increase in the amount of
deductible goodwill and accelerated depreciation on property and equipment. Accounts receivable fluctuations may have a significant impact on our cash
flows from operations. The payments received from customers on our billed
accounts receivables and the increase in such accounts receivable are reflected
as a single component of our cash flow from operations, and the timing of
collections of these receivables may have either a positive or negative impact
on our liquidity. During fiscal year 2004, free cash flow was approximately $218.3 million versus
approximately $291.7 million for fiscal year 2003. However, as discussed
above, fiscal year 2004 was negatively impacted by a tax payment of
approximately $88.1 million related to the gain from the sale of the Divested
Federal Business. Excluding this $88.1 million tax payment, fiscal year 2004
free cash flow was $306.4 million. Other items impacting the year over year
growth of free cash flow are discussed above. Capital expenditures (defined as
purchases of property, equipment and software, net) and additions to other
intangibles for fiscal year 2004 were $258 million, or 6.3% of revenue compared
to $253.6 million, or 6.7% of revenue, in fiscal year 2003. During fiscal year 2003, free cash flow was approximately $291.7 million versus
approximately $208.3 million for fiscal year 2002. Items impacting the year
over year growth of free cash flow are discussed above. Capital expenditures
(defined as purchases of property, equipment and software, net) and additions
to other intangibles for fiscal year 2003 were $253.6 million, or 6.7% of
revenue compared to $163.7 million, or 5.3% of revenue, in fiscal year 2002. Free cash flow is measured as operating cash flow (net cash provided by
operating activities, as reported in our consolidated statements of cash flow),
less capital expenditures (purchases of property, equipment and software, net
of sales, as reported in our consolidated statements of cash flow) less
additions to other intangible assets (as reported in our consolidated
statements of cash flows). We believe this free cash flow metric provides an
additional measure of available cash flow after we have satisfied the capital
expenditure requirements of our operations, and should not be taken in
isolation to be a measure of cash flow available for us to satisfy all of our
obligations and execute our business strategies. We also rely on cash flows
from 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): Year ended June 30,2004
    
    2003
    
    2002Net cash provided by operating
activities (a)
    
    $
    476,209
    
    
    $
    545,305
    
    
    $
    372,014Purchases of property, equipment
and software, net
    
    
    (224,621
    )
    
    
    (205,673
    )
    
    
    (144,406
    )Additions to other intangible assets
    
    
    (33,329
    )
    
    
    (47,967
    )
    
    
    (19,317
    )Free cash flow (a)
    
    $
    218,259
    
    
    $
    291,665
    
    
    $
    208,291
  (a)
    
    Fiscal year 2004 net cash provided by operating activities and free
cash flow includes a tax payment of approximately $88.1 million related
to the gain from the sale of the Divested Federal Business. During fiscal year 2004, cash provided by investing activities was $70.4
million. This includes $583.1 million of proceeds from divestitures, primarily
to the sale of the Divested Federal Business, net of transaction costs. We
used $251.7 million for acquisitions during the period, primarily for the
purchase of Lockheed Martin Corporations commercial information technology outsourcing
business, PASC, TMI and etravelexperts, LLC. Cash used for the purchase of
property, equipment and software and additions to other intangible assets was
$258 million in fiscal year 2004 versus $253.6 million in fiscal year 2003. During fiscal year 2004, approximately $520.9 million was used in financing
activities. Such financing activities included $743.2 million to repurchase
approximately 15 million shares of our common stock pursuant to our share
repurchase 24




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programs, offset by net borrowings primarily under our Credit
Facility (defined below) of $185.4 million, primarily to fund our share
repurchase programs. 
We have an $875 million unsecured revolving credit facility (Credit
Facility), which matures in December 2005. The Credit Facility provides for
unsecured borrowings at rates based on our credit rating. Currently,
borrowings bear interest at LIBOR (1.369% at June 30, 2004) plus 0.575%. The
agreement contains certain covenants, including maintaining certain interest
coverage and debt-to-equity ratios, as defined by the agreement. At June 30,
2004, we were in compliance with these covenants. Draws made under our Credit Facility are normally made to fund cash
acquisitions, share repurchases and general working capital requirements.
During fiscal year 2004, the balance outstanding under our Credit Facility for
borrowings ranged from $0 to $443.9 million. At June 30, 2004, we had $354.5
million available under our Credit Facility, after giving effect to outstanding
letters of credit of $150.5 million that secure certain contractual performance
and other obligations. These letters of credit reduce the availability of our
Credit Facility. We had $370 million outstanding on our Credit Facility, which
is reflected in long-term debt. In August 2004, letters of credit outstanding
were reduced by $25 million. 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 June 30,
2004, outstanding surety bonds of $323.4 million and $109.7 million of our
outstanding letters of credit secure our performance of contractual obligations
with our clients. In addition, we had approximately $32.5 million of letters of
credit outstanding which serve as collateral for our surety bond program.
Approximately $8.3 million of letters of credit secure our casualty insurance
programs. In general, we would only be liable for the amount of these
guarantees in the event of default in our performance of our obligations under
each contract, the probability of which we believe is remote. We believe that
we have sufficient capacity in the surety markets and liquidity from our cash
flow and Credit Facility to respond to future requests for proposals. 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 existing revolving credit facility.
As of June 30, 2004, we had repurchased approximately 15 million shares at a
total cost of approximately $743.2 million. We have not repurchased any shares
subsequent to June 30, 2004 through the date of this filing. On February 27, 2004, we completed the redemption of our 3.5% Convertible
Subordinated Notes due February 15, 2006 (the Notes). Holders of 99.9% of
all the outstanding Notes converted their Notes to 23.0234 shares of our Class
A common stock per $1,000 principal amount of Notes in accordance with the
procedures specified in the related indenture governing the Notes. As the
result of such conversions, approximately 7.3 million shares of our Class A
common stock were issued to such noteholders at the conversion price of $43.44
per share. The remaining Notes were redeemed in cash at 101.4% of the
principal amount, resulting in a cash redemption of $269,000. Our management believes 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
needs, including working capital expenditures. Our management also believes
that cash provided by operations will be sufficient to satisfy all existing
debt and other contractual obligations as they become due. However, we intend
to continue our growth through acquisitions and from time to time to engage in
discussions with potential acquisition candidates. In order to pursue such
opportunities, which could require significant commitments of capital, 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
acquisition and expansion opportunities and how such opportunities will be
financed. 25




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Related Party Transactions As of June 30, 2002, we held a minority preferred stock interest in DDH
Aviation, Inc., a corporate airplane brokerage company organized in 1997
(DDH). Our Chairman owns a majority voting interest in DDH and our President
and General Counsel, along with our Chairman, were directors of DDH. At June
30, 2002, DDH had a $48 million line of credit with Citicorp USA, Inc., for
which we and our Chairman, in exchange for warrants to acquire additional
voting stock, acted as partial guarantors. In addition, we obtained access to
corporate aircraft at favorable rates in consideration of our guaranty. We had
guaranteed up to approximately $11.5 million of the line of credit and our
Chairman guaranteed up to approximately $17.5 million of the line of credit. In July 2002, our Chairman assumed in full our guaranty obligations to Citicorp
and our guaranty to Citicorp was released in full. Our minority preferred
stock interest and warrants (with a recorded value of $100,000 at June 30,
2002) in DDH were cancelled. We have no further ownership interest in DDH.
Our officers, other than the Chairman, are no longer directors of DDH. In the
first quarter of fiscal year 2003, we purchased $1 million in prepaid charter
flights at favorable rates from DDH. As of June 30, 2004, we have $0.7 million
remaining in prepaid flights with DDH. During fiscal year 2003, we paid DDH
approximately $0.5 million for maintenance services, chartered aircraft and
equipment. We made no payments to DDH during fiscal year 2004. In August 2001, we purchased a Challenger 600 aircraft from DDH for a purchase
price of $8.5 million, which included interior and exterior refurbishment of
the aircraft. As of June 30, 2002, the purchase price for the aircraft was
paid in full, and refurbishment was near completion. The aircraft was
delivered to us in the first quarter of fiscal year 2003. Disclosures about Contractual Obligations and Commercial Commitments as of June
30, 2004 (in thousands): Payments Due by PeriodLess thanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    After 5 YearsLong-term debt
    
    $
    370,000
    
    
    $
    
    
    
    $

    370,000
    
    
    $
    
    
    
    $
    Capital lease obligations
    
    
    4,487
    
    
    
    2,048
    
    
    
    2,040
    
    
    
    399
    
    
    
    Operating leases
    
    
    428,092
    
    
    
    135,979
    
    
    
    161,357
    
    
    
    73,692
    
    
    
    57,064Total Contractual Cash
Obligations
    
    $
    802,579
    
    
    $
    138,027
    
    
    $
    533,397
    
    
    $
    74,091
    
    
    $
    57,064
 Total
    
    Amount of Commitment Expiration per PeriodOther Commercial
    
    Amounts
    
    Less thanCommitments
    
    Committed
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    After 5 YearsStandby letters of credit
    
    $
    150,539
    
    
    $
    150,539
    
    
    $
    
    
    
    $
    
    
    
    $
    Surety Bonds
    
    
    323,428
    
    
    
    297,131
    
    
    
    26,257
    
    
    
    40
    
    
    
    Total Commercial
Commitments
    
    $
    473,967
    
    
    $
    447,670
    
    
    $
    26,257
    
    
    $
    40
    
    
    $
    
 During fiscal year 2004, we entered into an agreement with a customer, Gateway,
Inc., to purchase $50 million of products and services over a seven-year term,
with a minimum purchase of $5 million annually, at prices consistent with
Gateways commercial pricing and discount guidelines. As discussed earlier, we
have announced that our outsourcing agreement has been terminated. Concurrent
with the termination of our outsourcing relationship with Gateway, we have also
terminated our obligation to purchase products and services from Gateway. 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 June 30, 2004, outstanding surety bonds of
$323.4 million and $109.7 million of our outstanding letters of credit secure
our performance of contractual obligations with our clients. In addition, we
had approximately $32.5 million of letters of credit outstanding which serve as
collateral for our surety bond program. Approximately $8.3 million of letters
of credit secure our casualty insurance programs. In general, we would only be
liable 26




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for the amount of these guarantees in the event of default in our
performance of our obligations under each contract, the probability of which we
believe is remote. 

We are obligated to make certain contingent payments to former shareholders of
acquired entities upon satisfaction of certain contractual criteria. As of
June 30, 2004, the maximum aggregate amount of the outstanding contingent
obligations is approximately $67.3 million. Upon satisfaction of the specified
contractual criteria, any such payment would result primarily in a
corresponding increase in goodwill. 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 June 30, 2004, other accrued
liabilities include a reserve for these claims in an amount we believe to be
adequate at this time. As discussed in Item 3. Legal Proceedings, 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. 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 June 30,
2004, we serviced a FFEL portfolio of approximately 1.5 million loans with an
outstanding principal balance of approximately $18.2 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.
This reserve was approximately $3.7 million and $4.2 million at June 30, 2004
and 2003, respectively. During fiscal years 2004, 2003 and 2002, we purchased
and charged against the reserve $4.5 million, $3.6 million and $0.2 million of
loans, respectively, and recovered or sold loans with proceeds totaling $1.3
million, $1.3 million and $0.3 million, respectively, which were credited to
our reserve. We recorded provisions of $2.7 million, $2.5 million and $0.2
million in fiscal years 2004, 2003 and 2002, respectively. 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 Bulletin Topic 13 to be consistent with recently
issued guidance, primarily Emerging Issues Task Force Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables (EITF 00-21). We recognize revenues
when persuasive evidence of 27




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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 28




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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 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 In December 2003, the SEC issued SAB 104. SAB 104 updates existing Staff
Accounting Bulletin Topic 13 Revenue Recognition to be consistent with
recently issued guidance, primarily EITF 00-21. We do not believe that SAB 104
has had a material impact on our financial position or results of operations. 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, clients. The loss of clients and/or the
reduction of volumes and services provided to our clients could materially
affect our revenues, profitability and cash flows. 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 costs than is
necessary to serve our remaining clients, thereby reducing our revenues,
profitability and cash flow. Termination of all or a part of a contract by a client or deterioration of the
financial condition of a client. We may be required to make significant capital
investments in order to attract and retain large outsourcing agreements. The
termination of all or a part of a client contract or the deterioration of the
financial condition or prospects of a client has in the past, and may in the
future, result in an impairment of the net book value of the assets recorded,
including a portion of our intangible assets, and a reduction in our earnings
and cash flow. 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 greater resources, and they
may be able to use their resources to adapt more quickly to new or emerging
technologies or to devote greater resources to the promotion and sale of their
products and services. 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. 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 29




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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, and results of operations
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. 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. Some 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. Some of our contracts
contain pricing provisions that require the client to pay a set fee for our
services regardless of whether our costs to perform these services exceed the
amount of the set fee. 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 or refuse to renew our contracts with them, we might
not be able to replace the related software programs and would be unable to
serve our clients, 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 30




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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 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 fiscal year 2004, 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 12,000 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. International operations and
acquisitions are subject to a number of risks including, but not limited to the
following: fluctuations in foreign currency exchange rates; licensing and labor
counsel requirements; staffing key managerial positions; cultural differences;
integration of companies, their management, and operations, which are located
in distant locations; data privacy laws adopted by various countries in which
we do business, including but not limited to member states of the European
Union; general economic conditions in foreign countries; additional expenses
and risks inherent in conducting operations in geographically distant
locations; laws of those foreign countries; political instability; trade
restrictions such as tariffs and duties or other controls affecting foreign
operations, and 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. 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 $18.2 billion of loans 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 31




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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 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 7A.
Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risk from changes in interest rates and foreign
currency exchange rates. Sensitivity analysis is one technique used to measure
the impact of changes in the interest rates and foreign exchange rates on our
results of operations or financial position. The following analysis provides a
framework to understand our sensitivity to hypothetical changes in interest
rates and foreign currency exchange rates as of June 30, 2004. We have variable rate debt instruments. Our variable rate debt instruments are
subject to market risk from changes in interest rates. Risk can be estimated by
measuring the impact of a near-term adverse movement of 10% in short-term
market interest rates. If these rates averaged 10% higher or lower during
fiscal years 2004 and 2003, there would have been no material adverse impact on
our results of operations. We conduct business in the United States and in foreign countries. We are
exposed to foreign currency risk from changes in the value of underlying assets
and liabilities of our non-United States denominated foreign investments and
foreign currency transactions. Risk can be estimated by measuring the impact
of a near-term adverse movement of 10% in foreign currency rates against the
U.S. dollar. If these rates averaged 10% higher or lower in fiscal years 2004
or 2003, there would have been no material adverse impact on our results of
operations or financial position. 32




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Item 8.
Financial Statements PageReport of Independent Registered Public Accounting Firm
    
    34Consolidated Balance Sheets
    
    35Consolidated Statements of Income
    
    36Consolidated Statements of Changes in Stockholders Equity
    
    37Consolidated Statements of Cash Flows
    
    38Notes to Consolidated Financial Statements
    
    39-61
 33




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Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of
Affiliated Computer Services, Inc.: In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in stockholders equity and cash
flows present fairly, in all material respects, the financial position of
Affiliated Computer Services, Inc. and its Subsidiaries at June 30, 2004 and
2003, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 2004 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP Dallas, Texas
July 29, 2004, except as to the seventh
paragraph of Note 17, which is as of
August 13, 2004, the tenth paragraph of Note 17, which is as
of August 25, 2004, and the second
paragraph of Note 23, which is as of August 26, 2004. 34




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
 (In thousands)
 June 30,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    76,899
    
    
    $
    51,170Accounts receivable, net
    
    
    873,471
    
    
    
    835,478Prepaid expenses and other current assets
    
    
    94,054
    
    
    
    92,850Total current assets
    
    
    1,044,424
    
    
    
    979,498Property, equipment and software, net
    
    
    521,772
    
    
    
    478,212Goodwill
    
    
    1,969,326
    
    
    
    1,905,878Other intangibles, net
    
    
    283,767
    
    
    
    265,091Other assets
    
    
    87,953
    
    
    
    70,026Total assets
    
    $
    3,907,242
    
    
    $
    3,698,705LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    61,749
    
    
    $
    58,376Accrued compensation and benefits
    
    
    133,530
    
    
    
    132,027Other accrued liabilities
    
    
    342,648
    
    
    
    272,578Income taxes payable
    
    
    10,628
    
    
    
    17,057Deferred taxes
    
    
    25,426
    
    
    
    26,054Current portion of long-term debt
    
    
    2,048
    
    
    
    1,764Current portion of unearned revenue
    
    
    61,541
    
    
    
    49,620Total current liabilities
    
    
    637,570
    
    
    
    557,476Convertible notes
    
    
    
    
    
    
    316,990Long-term debt
    
    
    372,439
    
    
    
    181,350Deferred taxes
    
    
    234,183
    
    
    
    176,484Other long-term liabilities
    
    
    72,563
    
    
    
    37,217Total liabilities
    
    
    1,316,755
    
    
    
    1,269,517Commitments and contingencies (See Note 17)Stockholders equity:Class A common stock, $.01 par value, 500,000 shares authorized,
135,981 and 126,607 shares outstanding, respectively
    
    
    1,360
    
    
    
    1,266Class B common stock, $.01 par value, 14,000 shares authorized,
6,600 shares outstanding
    
    
    66
    
    
    
    66Additional paid-in capital
    
    
    1,730,783
    
    
    
    1,358,418Accumulated other comprehensive loss, net
    
    
    (3,381
    )
    
    
    (971
    )Retained earnings
    
    
    1,600,252
    
    
    
    1,070,409Treasury stock at cost, 14,900 shares
    
    
    (738,593
    )
    
    
    Total stockholders equity
    
    
    2,590,487
    
    
    
    2,429,188Total liabilities and stockholders equity
    
    $
    3,907,242
    
    
    $
    3,698,705
 The accompanying notes are an integral part of these consolidated financial statements. 35




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
 (In thousands except per share amounts)
 Year ended June 30,2004
    
    2003
    
    2002Revenues
    
    $
    4,106,393
    
    
    $
    3,787,206
    
    
    $
    3,062,918Operating expenses:Wages and benefits
    
    
    1,790,479
    
    
    
    1,716,946
    
    
    
    1,350,057Services and supplies
    
    
    1,090,207
    
    
    
    994,410
    
    
    
    888,497Rent, lease and maintenance
    
    
    416,394
    
    
    
    351,855
    
    
    
    278,621Depreciation and amortization
    
    
    183,796
    
    
    
    152,128
    
    
    
    110,486Gain on sale of business
    
    
    (285,273
    )
    
    
    
    
    
    
    Other operating expenses
    
    
    67,079
    
    
    
    52,586
    
    
    
    34,625Total operating expenses
    
    
    3,262,682
    
    
    
    3,267,925
    
    
    
    2,662,286Operating income
    
    
    843,711
    
    
    
    519,281
    
    
    
    400,632Interest expense
    
    
    17,037
    
    
    
    25,194
    
    
    
    30,619Other non-operating expense (income), net
    
    
    (2,509
    )
    
    
    3,140
    
    
    
    9,557Pretax profit
    
    
    829,183
    
    
    
    490,947
    
    
    
    360,456Income tax expense
    
    
    299,340
    
    
    
    184,105
    
    
    
    130,860Net income
    
    $
    529,843
    
    
    $
    306,842
    
    
    $
    229,596Earnings per share:Basic
    
    $
    4.03
    
    
    $
    2.32
    
    
    $
    1.94Diluted
    
    $
    3.83
    
    
    $
    2.20
    
    
    $
    1.76Shares used in computing earnings per share:Basic
    
    
    131,498
    
    
    
    132,445
    
    
    
    118,646Diluted
    
    
    139,646
    
    
    
    143,430
    
    
    
    137,464
 The accompanying notes are an integral part of these consolidated financial statements. 36




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 (In thousands)
 Common Stock
    
    
    
    
    
    
    
    
    
    AccumulatedOther
    
    Treasury StockClass A
    
    Class B
    
    Additional
    
    
    
    
    
    ComprehensivePaid-in
    
    Retained
    
    Income (Loss),
    
    SharesShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Earnings
    
    Net
    
    Held
    
    Amount
    
    TotalBalance at June 30, 2001
    
    
    47,282
    
    
    $
    473
    
    
    
    3,300
    
    
    $
    33
    
    
    $
    350,767
    
    
    $
    534,374
    
    
    $
    (132
    )
    
    
    
    
    
    $
    
    
    
    $
    885,515Comprehensive income:Unrealized loss on
marketable
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (84
    )
    
    
    
    
    
    
    
    
    
    
    (84
    )Interest rate hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    216
    
    
    
    
    
    
    
    
    
    
    
    216Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229,596
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229,596Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229,728Employee stock
transactions and
related tax benefits
    
    
    1,137
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    38,993
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,004Equity offering
    
    
    9,200
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    714,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    714,292Two-for-one stock
dividend
    
    
    57,024
    
    
    
    570
    
    
    
    3,300
    
    
    
    33
    
    
    
    (603
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of 4%
Convertible
Subordinated Notes
    
    
    10,781
    
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    227,176
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    227,284Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (403
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (403
    )Balance at June 30, 2002
    
    
    125,424
    
    
    
    1,254
    
    
    
    6,600
    
    
    
    66
    
    
    
    1,330,533
    
    
    
    763,567
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,095,420Comprehensive income:Foreign currency
translation losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (971
    )
    
    
    
    
    
    
    
    
    
    
    (971
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    306,842
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    306,842Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    305,871Employee stock
transactions and
related tax benefits
    
    
    1,183
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    27,776
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,788Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109Balance at June 30, 2003
    
    
    126,607
    
    
    
    1,266
    
    
    
    6,600
    
    
    
    66
    
    
    
    1,358,418
    
    
    
    1,070,409
    
    
    
    (971
    )
    
    
    
    
    
    
    
    
    
    
    2,429,188Comprehensive income:Foreign currency
translation losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,410
    )
    
    
    
    
    
    
    
    
    
    
    (2,410
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    529,843
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    529,843Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    527,433Share repurchases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,992
    )
    
    
    (743,198
    )
    
    
    (743,198
    )Employee stock
transactions and
related tax benefits
    
    
    2,082
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    59,167
    
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    4,605
    
    
    
    63,793Conversion of 3.5%
Convertible
Subordinated Notes
    
    
    7,292
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    313,198
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    313,271Balance at June 30, 2004
    
    
    135,981
    
    
    $
    1,360
    
    
    
    6,600
    
    
    $
    66
    
    
    $
    1,730,783
    
    
    $
    1,600,252
    
    
    $
    (3,381
    )
    
    
    (14,900
    )
    
    $
    (738,593
    )
    
    $
    2,590,487
 The accompanying notes are an integral part of these consolidated financial statements. 37




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##### Table of Contents



AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Year ended June 30,2004
    
    2003
    
    2002Cash flows from operating activities:Net income
    
    $
    529,843
    
    
    $
    306,842
    
    
    $
    229,596Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    183,796
    
    
    
    152,128
    
    
    
    110,486Contract inducement amortization
    
    
    10,981
    
    
    
    7,346
    
    
    
    887Provision for uncollectible accounts receivable
    
    
    1,461
    
    
    
    4,838
    
    
    
    3,283Deferred financing fee amortization
    
    
    3,142
    
    
    
    4,172
    
    
    
    2,938Provision for default loan liability
    
    
    2,685
    
    
    
    2,540
    
    
    
    200(Gain) loss on sale of business units
    
    
    (291,967
    )
    
    
    (1,585
    )
    
    
    1,841(Gain) loss on long-term investments
    
    
    (820
    )
    
    
    3,375
    
    
    
    8,449Deferred income tax expense
    
    
    66,155
    
    
    
    100,851
    
    
    
    55,821Tax benefit of stock options
    
    
    26,263
    
    
    
    16,124
    
    
    
    21,951Other non-cash activities
    
    
    5,000
    
    
    
    5,575
    
    
    
    1,012Changes in assets and liabilities, net of effects from acquisitions:Increase in accounts receivable
    
    
    (156,063
    )
    
    
    (100,643
    )
    
    
    (115,806
    )(Increase) decrease in prepaid expenses and other current assets
    
    
    (3,596
    )
    
    
    6,263
    
    
    
    1,958Increase in other assets
    
    
    (18,362
    )
    
    
    (19,631
    )
    
    
    (9,448
    )Increase (decrease) in accounts payable
    
    
    14,194
    
    
    
    (15,867
    )
    
    
    26,252Increase in accrued compensation and benefits
    
    
    11,502
    
    
    
    787
    
    
    
    7,209Increase in other accrued liabilities
    
    
    52,711
    
    
    
    61,962
    
    
    
    12,775Increase (decrease) in income taxes payable
    
    
    16,182
    
    
    
    (3,350
    )
    
    
    13,118Increase (decrease) in other long-term liabilities
    
    
    12,047
    
    
    
    1,468
    
    
    
    (638
    )Increase in unearned revenue
    
    
    11,055
    
    
    
    12,110
    
    
    
    130Total adjustments
    
    
    (53,634
    )
    
    
    238,463
    
    
    
    142,418Net cash provided by operating activities
    
    
    476,209
    
    
    
    545,305
    
    
    
    372,014Cash flows from investing activities:Purchases of property, equipment and software, net
    
    
    (224,621
    )
    
    
    (205,673
    )
    
    
    (144,406
    )Payments for acquisitions, net of cash acquired
    
    
    (251,727
    )
    
    
    (76,838
    )
    
    
    (1,425,529
    )Proceeds from (payments on) divestitures, net of transaction costs
    
    
    583,133
    
    
    
    4,093
    
    
    
    (5,887
    )Additions to other intangible assets
    
    
    (33,329
    )
    
    
    (47,967
    )
    
    
    (19,317
    )Purchases of investments
    
    
    (7,690
    )
    
    
    
    
    
    
    (4,129
    )Proceeds from sale of investments
    
    
    1,196
    
    
    
    466
    
    
    
    700Additions to notes receivable
    
    
    (3,015
    )
    
    
    (3,478
    )
    
    
    (3,577
    )Proceeds from notes receivable
    
    
    6,452
    
    
    
    9,314
    
    
    
    3,981Net cash provided by (used in) investing activities
    
    
    70,399
    
    
    
    (320,083
    )
    
    
    (1,598,164
    )Cash flows from financing activities:Proceeds from issuance of long-term debt, net
    
    
    1,459,600
    
    
    
    927,762
    
    
    
    1,279,210Payments of long-term debt
    
    
    (1,274,238
    )
    
    
    (1,146,561
    )
    
    
    (992,510
    )Purchase of treasury shares
    
    
    (743,198
    )
    
    
    
    
    
    
    Proceeds from equity offering, net of transaction costs
    
    
    
    
    
    
    
    
    
    
    714,292Employee stock transactions
    
    
    39,038
    
    
    
    14,243
    
    
    
    17,901Other, net
    
    
    (2,081
    )
    
    
    (3,310
    )
    
    
    (1,387
    )Net cash provided by (used in) financing activities
    
    
    (520,879
    )
    
    
    (207,866
    )
    
    
    1,017,506Net increase (decrease) in cash and cash equivalents
    
    
    25,729
    
    
    
    17,356
    
    
    
    (208,644
    )Cash and cash equivalents at beginning of year
    
    
    51,170
    
    
    
    33,814
    
    
    
    242,458Cash and cash equivalents at end of year
    
    $
    76,899
    
    
    $
    51,170
    
    
    $
    33,814Supplemental information of non-cash financing activities:Conversion of 3.5% Convertible Subordinated Notes to Class A Common Stock
    
    $
    316,725
    
    
    $
    
    
    
    $
    
  The accompanying notes are an integral part of these consolidated financial statements. 38




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Business and Summary of Significant Accounting Policies Description of business and basis of presentation We are a Fortune 500 and S&P 500 company with approximately 43,000 employees
providing business process and information technology outsourcing solutions to
commercial and government clients. We were incorporated in Delaware on June 8,
1988 and are based in Dallas, Texas. Our clients have time-critical,
transaction-intensive business and information processing needs, and we
typically service these needs through long-term contracts. The consolidated financial statements are comprised of our accounts and the
accounts of our majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Our fiscal
year ends on June 30. The accompanying consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America that require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, the reported amount of
revenues and expenses during the reporting period, as well as the accompanying
notes. These estimates are based on information available to us. Actual results
could differ from these estimates. Cash and cash equivalents Cash and cash equivalents consist primarily of cash, short-term investments in
commercial paper, and money market investments that have an initial maturity of
three months or less. Cash equivalents are valued at cost, which approximates
market. 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. Property, equipment and software, net Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which for
equipment ranges primarily from 3 to 12 years and for buildings and
improvements up to 40 years. Leasehold improvements are depreciated over the
shorter of the term of the lease or the estimated life. In accordance with Statement of Position 98-1, Accounting for Costs of
Computer Software Developed or Obtained for Internal Use (SOP 98-1), certain
costs related to the development or purchase of internal-use software are
capitalized and amortized over the estimated useful life of the software.
During fiscal years 2004, 2003 and 2002, we capitalized approximately $53.1
million, $44 million and $15.8 million, respectively, in software costs under
SOP 98-1, which are being amortized over expected useful lives, which range
from 2 to 10 years. These capitalized amounts include internal costs of
approximately $12.2 million, $19.9 million and $12.1 million and external
costs of approximately $40.9 million, $24.1 million and $3.7 million for fiscal
years 2004, 2003 and 2002, respectively. These costs were incurred primarily
in the development of our proprietary software used in connection with our
long-term client relationships. Goodwill 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. The
determination of the value of goodwill 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 may not be recoverable. In evaluating impairment, we estimate the sum
of expected future cash flows derived from the goodwill and 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, such revision could result in a non-cash impairment charge that could
have a material impact on our financial results. 39




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Other intangible assets Other intangible assets consist primarily of acquired customer-related
intangibles, and contract and migration costs related to new business activity,
both of which are recorded at cost and amortized using the straight-line method
over the contract terms. 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 contractual credits, which are capitalized and amortized as a
reduction of revenue over the term of the contract. 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 7 years. For all the fiscal year 2004 acquisitions, the
CyperRep acquisition in fiscal year 2003 and the IMS, Andersen, and AFSA
acquisitions in fiscal year 2002 (as described in Note 3), we obtained a
third-party valuation of the intangible assets from Value Incorporated. The
determination of the value of 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 intangible assets may not be recoverable. In evaluating impairment,
we estimate the sum of expected future cash flows derived from the 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 other intangibles, such revision could result in a non-cash
impairment charge that could have a material impact on our financial results. Other assets Other assets primarily consist of long-term receivables and long-term
investments accounted for using the cost method, long-term deposits and
deferred debt issuance costs. It is our policy to periodically review the net
realizable value of our long-term investments through an assessment of the
recoverability of the carrying amount of each investment. Each investment is
reviewed to determine if events or changes in circumstances have occurred which
indicate that the recoverability of the carrying amount may be uncertain. In
the event that an investment is found to be carried at an amount in excess of
its recoverable amount, the asset is adjusted for impairment to a level
commensurate with the recoverable amount of the underlying asset. The deferred
debt issuance costs are being amortized using the straight-line method over the
life of the related debt, which approximates the effective interest method. 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 Bulletin Topic 13 to be consistent with recently
issued guidance, primarily 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% was 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. 40




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. Income taxes The determination of our provision for income taxes requires significant
judgment, the use of estimates, and the interpretation and application of
complex tax laws. Significant judgment is required in assessing the timing and
amounts of deductible and taxable items. We establish reserves when,
despite our belief that our tax return positions are fully supportable, we
believe that certain positions may be challenged and that we may not succeed.
We adjust these reserves in light of changing facts and circumstances. Our
provision for income taxes includes the impact of these reserve changes. In the
event that there is a significant unusual or one-time item recognized in our
operating results, the taxes attributable to that item would be separately
calculated and recorded at the same time as the unusual or one-time item. Deferred income taxes are determined based on the difference between financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the years in which such differences are expected to reverse. We
routinely evaluate all deferred tax assets to determine the likelihood of their
realization. See Note 11 for discussion of income taxes. Earnings per share Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the combination of dilutive common share equivalents and the
weighted average number of common shares outstanding during the period. See
Note 14 for the computation of earnings per share. 41




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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
current market prices 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: For the year ended June 30,2004
    
    2003
    
    2002Net incomeAs reported
    
    $
    529,843
    
    
    $
    306,842
    
    
    $
    229,596Less: Pro forma employee
compensation cost of
stock-based compensation
plans, net of income tax
    
    
    20,480
    
    
    
    17,570
    
    
    
    11,936Pro forma
    
    $
    509,363
    
    
    $
    289,272
    
    
    $
    217,660Basic earnings per shareAs reported
    
    $
    4.03
    
    
    $
    2.32
    
    
    $
    1.94Pro forma
    
    $
    3.87
    
    
    $
    2.18
    
    
    $
    1.83Diluted earnings per shareAs reported
    
    $
    3.83
    
    
    $
    2.20
    
    
    $
    1.76Pro forma
    
    $
    3.70
    
    
    $
    2.09
    
    
    $
    1.68
 The fair value of each option grant was estimated at the date of grant using a
separate Black-Scholes option pricing calculation for each grant. The
following weighted average assumptions were used for grants in fiscal years 2004,
2003 and 2002: dividend yield of 0% in all years for all plans; volatility of
30.25%, 34.65% and 34.94%, for fiscal years 2004, 2003, and 2002, respectively, for
all plans; risk-free interest rates of 3.46%, 3.74% and 4.36% for fiscal years 2004,
2003, and 2002, respectively, for all plans; and weighted average expected
option life of 5.5 years for the 1997 and 1988 Plans and 3 years for the 1991
Plan for all years presented. The average fair values of the options granted
during fiscal years 2004, 2003, and 2002 are estimated at $15.70, $14.49 and $16.01,
respectively, for the combined plans. The fair values have been adjusted to
reflect the February 2002 two-for-one stock split. Reclassifications Certain reclassifications have been made to prior period financial statements
to conform to current presentation. 2. Sale of the Majority of our Federal Business Effective November 1, 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 $285.3 million ($182.3 million, net of income tax) in fiscal
year 2004. The after tax proceeds from the divestiture were generally used to
pay down debt, fund the acquisitions of Lockheed Martin Corporations commercial
information technology outsourcing business, Patient Accounting Services
Center, LLC, Truckload Management Services, Inc. and etravelexperts, LLC (see
Note 3), and fund our share repurchase program (see Note 12). 42




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Revenues from the Divested Federal Business, which are primarily included in
the Government segment, were approximately $237.7 million, $680.1 million and
$627.2 million for the years ended June 30, 2004, 2003 and 2002, respectively.
This divestiture excludes, among others, our Department of Education
relationship. Additionally our Commercial and Government operations will
continue to serve as a subcontractor on portions of the Divested Federal
Business. 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
prior to the consummation of the sale in the amount of $6.2 million ($3.9 million, net of income tax) in 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 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. For the Hanscom Air Force Base contracts, we
reported revenue in our Government segment of approximately $17.2 million,
$25.2 million and $26 million for the years ended June 30, 2004, 2003 and 2002,
respectively. We have agreed to indemnify ManTech with respect to the
Department of Justice (DOJ) investigation related to purchasing activities at
Hanscom during the period 1998-2000 (see Note 17). In the fourth quarter of
fiscal year 2004, we sold an additional small contractual relationship to
ManTech International Corporation. We reported revenue in our Government
segment of approximately $3.1 million, $4.2 million and $4.5 million for the
years ended June 30, 2004, 2003 and 2002, respectively, for this contract. The sales of the Divested Federal Business to Lockheed Martin Corporation and the contracts
sold to ManTech International Corporation now allow 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. 3. Business Combinations From our inception through June 30, 2004, we have acquired several businesses
in the information technology services and business process outsourcing
industries. Our recent acquisition activity is summarized as follows (excluding
transaction costs): Year ended June 30,
    
    2004
    
    2003
    
    2002Purchase consideration (in thousands):Net cash paid
    
    $
    242,402
    
    
    $
    65,395
    
    
    $
    1,405,009Amounts due to seller
    
    
    22
    
    
    
    325
    
    
    
    14,740Liabilities assumed
    
    
    68,040
    
    
    
    17,089
    
    
    
    188,699Fair value of assets acquired
(including intangibles)
    
    $
    310,464
    
    
    $
    82,809
    
    
    $
    1,608,448
 Fiscal year 2004 acquisitions During fiscal year 2004, we acquired five companies, the most significant of
which was the acquisition of Lockheed Martin Corporations commercial
information technology outsourcing business. The transaction was valued at
$107 million less a working capital settlement of $6.9 million plus related
transaction costs, and was funded from 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 $152.6 million and
assumed liabilities of $52.5 million. Included in the assets acquired are
goodwill of $88.9 million, which is deductible for income tax purposes, and
$26.8 million in intangible assets. The $26.8 million of intangible assets are
attributable to customer relationships and non-compete agreements with useful
lives ranging from 5 to 8 years, with a weighted average anticipated useful
life of approximately 6 years. The operating results of the acquired business
are included in our financial statements primarily in the Commercial segment
from the effective date of the acquisition, November 1, 2003. We believe this
transaction expands our client bases representing the manufacturing,
automotive, retail, financial services and communications industries and
provides acquired clients with access to additional BPO and IT services. This
acquisition is not considered material to our results of operations; therefore,
no pro forma information is presented. 43




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In January 2004, we completed the acquisition of Patient Accounting Services
Center, LLC (PASC), a provider of revenue cycle management for healthcare
providers, including billing, accounts receivables, and collection services.
The transaction was valued at approximately $94.9 million, excluding contingent
consideration of a maximum of $25 million based on future financial
performance, plus related transaction costs, and was funded from 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 $104.3 million and assumed liabilities of $9.4 million. We recorded
goodwill of $71.9 million, which is deductible for income tax purposes, and
$9.3 million in intangible assets. The $9.3 million of intangible assets are
attributable to customer relationships and non-compete agreements with useful
lives of 5 years. 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 3, 2004. We believe this transaction expands the
suite of business process outsourcing solutions we can offer new and existing
healthcare clients. This acquisition is not considered material to our results
of operations; therefore, no pro forma information is presented. In February 2004, we completed the acquisition of Truckload Management
Services, Inc. (TMI), an expedited document processing and business process
improvement services provider for the trucking industry. The transaction was
valued at approximately $28.1 million, excluding contingent consideration of a
maximum of $14 million based upon future financial performance, plus related
transaction costs, and was funded from 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 $30.2 million and
assumed liabilities of $2.1 million. We recorded goodwill of $22.9 million,
which is deductible for income tax purposes, and $2.5 million in intangible
assets attributable to customer relationships and non-compete agreements with
useful lives of 4 to 6 years, with a weighted average anticipated useful life
of approximately 6 years. The operating results of the acquired business are
included in our financial statements in the Commercial segment from the
effective date of the acquisition, February 1, 2004. We believe this
transaction will expand our business process outsourcing service offerings in
the transportation industry, adding document management and document processing
services for long-haul trucking fleets to our list of services. This
acquisition is not considered material to our results of operations; therefore,
no pro forma information is presented. We also completed two other acquisitions during fiscal year 2004, one in our
Commercial segment and the other in our Government segment. These acquisitions are not considered material to our results of operations,
either individually or in the aggregate; therefore, no pro forma information is
presented. Fiscal year 2003 acquisitions During fiscal year 2003, we acquired five companies, the most significant of
which was the acquisition of CyberRep, Inc. (CyberRep) in January 2003.
CyberRep, which is included in our Commercial segment, provides customer care
and customer relationship management services for the telecommunications,
wireless communications, technology, and consumer products industries. The
transaction was valued at approximately $42 million plus transaction costs,
with assets acquired of $56.6 million and liabilities assumed of $14.9 million.
We recorded goodwill of $33.6 million, which is fully deductible for income
tax purposes, and $5.5 million in customer related intangible assets, which are
attributable to customer relationships with lives of approximately 7 years.
CyberReps operating results are included in our consolidated financial
statements from the effective date of the acquisition, January 1, 2003. We
believe this transaction expands our suite of business process outsourcing
solutions for commercial clients worldwide by enhancing high-volume, customer
care center capability and CRM business process outsourcing solutions for
Fortune 500 companies. We also completed four other acquisitions during fiscal year 2003, all of which
were included in our Government segment. These acquisitions are not considered material to our results of operations,
either individually or in the aggregate; therefore, no pro forma information is
presented. Fiscal year 2002 acquisitions During fiscal year 2002, we acquired eight companies, the most significant of
which were the acquisitions of Lockheed Martin IMS Corporation (IMS) in
August 2001 and AFSA Data Corporation (AFSA) in June 2002. We acquired 100% of the stock of IMS, a wholly-owned subsidiary of Lockheed
Martin Corporation, (now known as ACS State and Local Solutions), for
approximately $825 million plus related transaction costs. The acquisition was
funded from a $550 million 18-month interim credit facility, borrowings from
our then existing revolving credit facility, and existing cash on hand. This
interim credit facility was repaid in October 2001 with the proceeds from the
equity offering of 18.4 million shares of our Class A common stock at $40.50
per share (see Note 12). IMS results have been included in the Government
segment of our consolidated financial statements from the effective date of the
acquisition, August 1, 2001. IMS provides 44




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) business process outsourcing services to more than 230 state and local
government agencies in 45 U.S. states, the District of Columbia, Canada,
Australia, and Europe. IMS specializes in child support enforcement, welfare
and community services, electronic toll collection, and other intelligent
transportation services involving the trucking industry, photo enforcement of
red-light and speeding violations, parking management, and information
technology outsourcing. We believe the acquisition of IMS solidified us as a
leader in technology-based outsourcing solutions to state and local government
agencies. The acquisition was accounted for under the purchase method of accounting with
assets acquired of $934.1 million and liabilities assumed of $109.1 million.
The purchase price was allocated to assets acquired and liabilities assumed
based on the estimated fair value at July 31, 2001 as follows (in thousands): Current assets
    
    $
    111,561Property, equipment and software
    
    
    50,972Other assets
    
    
    2,826Intangible assets
    
    
    64,300Goodwill
    
    
    704,392Total assets acquired
    
    
    934,051Current liabilities
    
    
    109,051Total liabilities assumed
    
    
    109,051Net assets acquired
    
    $
    825,000
 The total amount of goodwill is deductible for income tax purposes. Software
of $41.5 million is included in property, equipment and software and has lives
ranging from 2 to 10 years. The $64.3 million of acquired intangible assets is
attributable to customer relationships with useful lives of 5 to 20 years, with
a weighted average anticipated useful life of approximately 11 years. In June 2002 we acquired AFSA, a subsidiary of FleetBoston Financial
Corporation, for approximately $410 million plus related transaction costs.
The acquisition was funded with a combination of a $375 million 18-month
interim credit facility, borrowings from our then existing revolving credit
facility, and existing cash on hand. AFSA is a leading business process
outsourcer for federal, state, and local governments for a variety of health
and human services programs, including Medicare, Medicaid, childrens health
insurance programs (CHIP), and welfare and community services. AFSAs results
have been included primarily in the Commercial segment of our consolidated financial
statements from the effective date of the acquisition, June 1, 2002. We
believe this transaction expanded our presence in student loan servicing, state
healthcare programs and local government welfare-to-workforce programs. The acquisition was accounted for under the purchase method of accounting with
assets acquired of $488.6 million and liabilities assumed of $54.7 million.
The purchase price was allocated to assets acquired and liabilities assumed
based on the estimated fair value at June 1, 2002 as follows (in thousands): Current assets
    
    $
    83,855Property, equipment and software
    
    
    37,440Other assets
    
    
    5,475Intangible assets
    
    
    48,331Goodwill
    
    
    313,487Total assets acquired
    
    
    488,588Current liabilities
    
    
    54,678Total liabilities assumed
    
    
    54,678Net assets acquired
    
    $
    433,910
 The total amount of goodwill is deductible for income tax purposes. Software
of $17.6 million is included in property, equipment and software and has an
anticipated useful life of approximately 6 years. The $48.3 million of
acquired intangible assets is primarily attributable to customer relationships
with lives of approximately 11 years and non-compete agreements with
amortization periods of approximately 5 years. 45




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In May 2002, we acquired the finance and accounting business process
outsourcing unit of Andersen Worldwide (Andersen). Included in this
acquisition are contracts with General Motors (GM) and the University of
Phoenix (the University). Under a 10-year agreement with GM, we provide
transactional accounting services such as payroll processing, disbursement
processing, dealer accounting, accounts receivable processing, lease and
subsidiary accounting, and expense reporting in the United States and Europe.
Under the arrangement with the University, we provide student financial aid
business process outsourcing services to the University including federal
eligibility determinations, loan and grant processing, and disbursement of
student aid as well as other support services related to student financial aid
processing. The acquisition was valued at $65.2 million plus related
transaction costs, with assets acquired of $79 million and liabilities assumed
of $13.8 million. We recorded goodwill of $58.7 million (which is deductible
for income tax purposes) and $9.1 million in customer related intangible
assets, which are attributable to customer relationships with lives of three to
ten years. Andersens operating results are included in the Commercial segment
of our consolidated financial statements from the effective date of the
acquisition, May 1, 2002 for the domestic operations and June 1, 2002 for the
foreign operations. We believe this transaction advanced our finance and
accounting business process outsourcing service offerings. This acquisition is
not considered material to our results of operations; therefore, no pro forma
information is presented. In August 2001, we acquired the business process outsourcing services unit of
National Processing Company (NPC). NPC provides healthcare claims
processing, credit card application processing, and airline lift ticket
processing. As part of the transaction, we acquired all of NPCs offshore
operations in Jamaica, the Dominican Republic, Barbados, and a majority of
NPCs Mexican operations. The transaction value was $43 million plus related
transaction costs, with assets acquired of $50.3 million and liabilities
assumed of $7.3 million. We recorded goodwill of $25.8 million of which 61% is
deductible for income tax purposes and $2.8 million in customer related
intangible assets, which are attributable to customer relationships with a life
of approximately 3 years. NPCs operating results are included in the
Commercial segment of our consolidated financial statements from the effective
date of the acquisition, August 1, 2001. We believe this transaction expanded
our offshore business process outsourcing capabilities. This acquisition is not
considered material to our results of operations; therefore, no pro forma
information is presented. We completed four other acquisitions during fiscal year 2002, two of which were
included in our Commercial segment and two in our Government segment. These acquisitions are not considered material to our results of operations
either individually or in the aggregate; therefore, no pro forma information is
presented. We are obligated to make certain contingent payments to former owners based on
the achievement of specified profit levels in conjunction with certain
acquisitions. During fiscal year 2004, we made contingent consideration payments of
$10.4 million related to acquisitions completed in prior years. During fiscal
year 2003, we made $8 million contingent consideration payments related to
acquisitions completed in prior years. As of June 30, 2004, the maximum
aggregate amount of the outstanding contingent obligations is approximately
$67.3 million, none of which has been earned to date. Any such payments
primarily result in a corresponding increase in goodwill. Unaudited Pro Forma Financial Information The following unaudited pro forma financial information presents a summary of
our consolidated results of operations as if the IMS and AFSA acquisitions had
occurred at the beginning of the period presented and are not necessarily
indicative of future results or actual results that would have been achieved
had the acquisitions occurred at the beginning of the period presented (in
thousands, except per share amounts). Pro forma information for these
acquisitions is not presented for fiscal years 2003 or 2004 because there is no
difference between pro forma and reported financial information. For the year endedJune 30, 2002Revenue
    
    $
    3,267,517Net income
    
    $
    256,268Earnings per common share:Basic
    
    $
    2.16Diluted
    
    $
    1.96
 46




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. Georgia 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). 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 in principle. 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 announced in January 2004, include a $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 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. 5. Accounts Receivable The components of accounts receivable are as follows (in thousands): June 30,2004
    
    2003Amounts Billed or Billable:Government
    
    $
    377,619
    
    
    $
    472,704Commercial
    
    
    283,341
    
    
    
    204,386660,960
    
    
    
    677,090Amounts Unbilled:Amounts not yet billed
    
    
    217,267
    
    
    
    159,997Excess of actual indirect costs over amounts currently
billable under cost reimbursable contracts
    
    
    
    
    
    
    4,445Contract retainages not currently billable
    
    
    
    
    
    
    1,186217,267
    
    
    
    165,628Total accounts receivable
    
    
    878,227
    
    
    
    842,718Allowance for doubtful accounts
    
    
    (4,756
    )
    
    
    (7,240
    )$
    873,471
    
    
    $
    835,478
 Unbilled amounts reflect those amounts that are associated primarily with
percentage of completion accounting, and other unbilled amounts not currently
billable due to contractual provisions. Of the above unbilled amounts at June
30, 2004 and 2003, approximately $157.5 million and $77.7 million, respectively
was not expected to be billed and collected within one year. These amounts are
primarily related to the Georgia Contract (see Note 4) and our Commercial
Vehicle Operations contract in our Government segment. Billings are based on
reaching contract milestones or other contractual terms. Amounts to be invoiced in the subsequent month for current services provided
are included in billable. Billable amounts at June 30, 2004 and 2003 include
approximately $266.1 million and $278 million, respectively, for services which
have been rendered and will be billed in the normal course of business in the
succeeding month. 47




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Changes in the allowance for doubtful accounts were as follows: For the year ended June 30,2004
    
    2003
    
    2002Balance at beginning of period
    
    $
    7,240
    
    
    $
    6,956
    
    
    $
    5,620Provision for uncollectible accounts receivable
    
    
    1,461
    
    
    
    4,838
    
    
    
    3,283Losses sustained, net of recoveries and other
    
    
    (2,913
    )
    
    
    (4,554
    )
    
    
    (1,947
    )Sale of Divested Federal Business
    
    
    (1,032
    )
    
    
    
    
    
    
    Balance at end of period
    
    $
    4,756
    
    
    $
    7,240
    
    
    $
    6,956
 6. Property, Equipment and Software Property, equipment and software consists of the following (in thousands): June 30,2004
    
    2003Land
    
    $
    19,089
    
    
    $
    21,631Buildings and improvements
    
    
    106,003
    
    
    
    114,897Computer equipment
    
    
    532,450
    
    
    
    413,981Computer software
    
    
    236,188
    
    
    
    185,022Furniture and fixtures
    
    
    77,285
    
    
    
    135,861Construction in progress
    
    
    
    
    
    
    1,968971,015
    
    
    
    873,360Accumulated depreciation and amortization
    
    
    (449,243
    )
    
    
    (395,148
    )$
    521,772
    
    
    $
    478,212
 Depreciation expense on property and equipment was approximately $117.5
million, $98.8 million and $74.5 million for the fiscal years ended June 30,
2004, 2003 and 2002, respectively. Amortization of computer software was
approximately $30.7 million, $23.8 million and $13.9 million in fiscal years
2004, 2003 and 2002, respectively. 7. Goodwill and Other Intangible Assets The changes in the carrying amount of goodwill for the years ended June 30,
2004 and 2003 are as follow (in thousands): Government
    
    Commercial
    
    TotalBalance as of June 30, 2002
    
    $
    1,191,738
    
    
    $
    654,744
    
    
    $
    1,846,482Acquisition activity during the year
    
    
    23,853
    
    
    
    35,543
    
    
    
    59,396Balance as of June 30, 2003
    
    
    1,215,591
    
    
    
    690,287
    
    
    
    1,905,878Acquisition activity during the year
    
    
    3,024
    
    
    
    202,937
    
    
    
    205,961Divestiture activity during the year
    
    
    (136,079
    )
    
    
    (6,434
    )
    
    
    (142,513
    )Balance as of June 30, 2004
    
    $
    1,082,536
    
    
    $
    886,790
    
    
    $
    1,969,326
 Goodwill balances by segment as of June 30, 2003 and 2002 have been restated to
reflect a change in our internal organization that caused the composition of
our reportable segments to change (see Note 20). Fiscal years 2004 and 2003 activity
is primarily related to acquisitions and divestitures completed during the
periods (see Notes 2 and 3). 48




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table reflects the balances of our other intangibles (in
thousands): June 30,2004
    
    2003Gross Carrying
    
    Accumulated
    
    Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationAmortized intangible assets:Acquired customer-related intangibles
    
    $
    191,517
    
    
    $
    (49,425
    )
    
    $
    154,771
    
    
    $
    (31,735
    )Customer contract costs
    
    
    142,802
    
    
    
    (53,334
    )
    
    
    139,667
    
    
    
    (50,129
    )All other
    
    
    2,854
    
    
    
    (1,447
    )
    
    
    4,031
    
    
    
    (2,314
    )Total
    
    $
    337,173
    
    
    $
    (104,206
    )
    
    $
    298,469
    
    
    $
    (84,178
    )Unamortized intangible asset:Title plant
    
    $
    50,800
    
    
    
    
    
    
        $
    50,800Aggregate amortization:For the year ended June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    46,600For the year ended June 30, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,889For the year ended June 30, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,994Estimated amortization for the years ended
June 30:2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    45,4792006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,7092007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,8502008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,7022009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,065
 Amortization includes amounts charged to amortization expense for customer
contract costs and other intangibles, other than contract inducements.
Amortization of contract inducements of $11 million, $7.3 million and $0.9 million for
fiscal years 2004, 2003 and 2002, respectively, is recorded as a reduction to
related contract revenue. Amortization for fiscal years 2004, 2003 and 2002
includes approximately $21.9 million, $16.2 million, and $9 million,
respectively, related to acquired customer-related intangibles. 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 7 years. 8. Other Assets Other assets primarily consist of long-term receivables, long-term investments
accounted for using the cost method, long-term deposits, and deferred debt
issuance costs. During fiscal year 2003, we recorded $3.4 million ($2.1
million, net of income tax) in other non-operating expense associated with the
write-down of several long-term investments to their estimated net realizable
value. We had approximately $26.8 million and $19.5 million in long-term
investments as of June 30, 2004 and 2003, respectively, primarily related to
our deferred compensation plan (see Note 13). 49




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. Other Accrued Liabilities The following summarizes other accrued liabilities at June 30, 2004 and 2003
(in thousands): June 30,2004
    
    2003Accrued payments to vendors and contract related accruals
    
    $
    213,027
    
    
    $
    185,808Software and equipment lease and maintenance
    
    
    42,836
    
    
    
    27,117Accruals related to acquisitions and divestitures
    
    
    28,937
    
    
    
    19,643Accrual for Georgia Contract settlement (see Note 4)
    
    
    10,000
    
    
    
    Accrual for GSA/FTSA settlement (see Note 17)
    
    
    10,000
    
    
    
    Other
    
    
    37,848
    
    
    
    40,010Total
    
    $
    342,648
    
    
    $
    272,578
 10. Long-term Debt A summary of long-term debt follows (in thousands): June 30,2004
    
    2003Unsecured $875 million revolving credit agreement ($875 million Credit
Facility) payable to banks, due in December 2005
    
    $
    370,000
    
    
    $
    177,7003.5% Convertible Subordinated Notes due February 2006
    
    
    
    
    
    
    316,990Capitalized lease obligations at various interest rates, payable through 2008
    
    
    4,487
    
    
    
    5,414374,487
    
    
    
    500,104Less current portion
    
    
    (2,048
    )
    
    
    (1,764
    )$
    372,439
    
    
    $
    498,340
 Maturities of long-term debt at June 30, 2004 are as follows: Year ending June 30,2005
    
    $
    2,0482006
    
    
    371,2082007
    
    
    8322008
    
    
    3992009
    
    
    Total
    
    $
    374,487
 Interest on the $875 million Credit Facility is payable monthly at floating
rates and fees based upon LIBOR and our credit rating. As a result, rates will
fluctuate with both changes in the overall interest rate environment as well as
changes in our credit rating. Currently, borrowings bear interest at LIBOR
(1.369% at June 30, 2004) plus .575%, a facility fee of 0.175% per annum on the
committed amount of the facility. We incur a usage fee of 0.125% per annum
which is applicable only when borrowings and letters of credit outstanding
exceed $437.5 million. The agreement contains covenants, which require that we
comply with certain negative, affirmative and financial covenants customary in
facilities of this nature, including but not limited to the maintenance of
fixed charge ratios and minimum net worth requirements. The agreement also has
provisions which would permit acceleration of the maturity of the borrowings
after the occurrence of certain defined events of default. As of June 30, 2004
we were in compliance with the covenants of our $875 million Credit Facility. On February 27, 2004, we completed the redemption of our 3.5% Convertible
Subordinated Notes due February 15, 2006 (the Notes). Holders of 99.9% of
all the outstanding Notes converted their Notes to 23.0234 shares of our Class
A common stock per $1,000 principal amount of Notes in accordance with the
procedures specified in the related indenture governing the Notes. As the
result of such conversions, approximately 7.3 million shares of our Class A
common stock were issued to such noteholders at the conversion price of $43.44
per share. The remaining Notes were redeemed in cash at 101.4% of the 50




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 principal amount, resulting in a cash redemption of $269,000. The Notes were
convertible at any time prior to the maturity date, unless redeemed or
repurchased, into Class A common stock at a conversion rate of 23.0234 shares
of Class A common stock for each $1,000 principal amount of Notes (equivalent
to a conversion price of $43.44 per share of Class A common stock), subject to
adjustments in certain events. Interest on the Notes was payable semi-annually
on February 15 and August 15 of each year commencing August 15, 2001. Cash payments for interest for the years ended June 30, 2004, 2003, and 2002
were approximately $16.4 million, $21.1 million, and $27.5 million,
respectively. The decrease in cash paid for interest in fiscal year 2004 from
fiscal year 2003 is due to the redemption of our Notes discussed above. At June 30, 2004, we have approximately $354.5 million available for use under
the $875 million revolving credit agreement after considering outstanding
letters of credit of $150.5 million. We use letters of credit to secure certain
contractual performance and other obligations. 11. Income Taxes Income tax expense (benefit) is comprised of the following (in thousands): Year ended June 30,2004
    
    2003
    
    2002Current:U.S. Federal
    
    $
    202,797
    
    
    $
    71,420
    
    
    $
    74,112State
    
    
    25,285
    
    
    
    8,334
    
    
    
    8,934Foreign
    
    
    5,103
    
    
    
    3,500
    
    
    
    2,727Total current expense
    
    
    233,185
    
    
    
    83,254
    
    
    
    85,773Deferred:U.S. Federal
    
    
    60,121
    
    
    
    92,182
    
    
    
    42,150State
    
    
    5,767
    
    
    
    9,517
    
    
    
    2,937Foreign
    
    
    267
    
    
    
    (848
    )
    
    
    Total deferred expense
    
    
    66,155
    
    
    
    100,851
    
    
    
    45,087Total income tax expense
    
    $
    299,340
    
    
    $
    184,105
    
    
    $
    130,860
 Deferred tax assets (liabilities) consist of the following (in thousands): June 30,2004
    
    2003Deferred tax assets:Accrued expenses not yet deductible for tax purposes
    
    $
    31,955
    
    
    $
    15,825Unearned revenue
    
    
    8,366
    
    
    
    5,626Tax credits and loss carryforwards
    
    
    6,319
    
    
    
    2,198Divestiture-related accruals
    
    
    6,909
    
    
    
    1,017Subtotal
    
    
    53,549
    
    
    
    24,666Deferred tax assets valuation allowance
    
    
    (3,695
    )
    
    
    (83
    )Total deferred tax assets
    
    
    49,854
    
    
    
    24,583Deferred tax liabilities:Goodwill amortization
    
    
    (160,809
    )
    
    
    (120,023
    )Depreciation and amortization
    
    
    (83,834
    )
    
    
    (64,605
    )Unbilled revenue
    
    
    (52,976
    )
    
    
    (31,832
    )Prepaid and receivables
    
    
    (10,221
    )
    
    
    (7,512
    )Other
    
    
    (1,623
    )
    
    
    (3,149
    )Total deferred tax liabilities
    
    
    (309,463
    )
    
    
    (227,121
    )Net deferred tax liabilities
    
    $
    (259,609
    )
    
    $
    (202,538
    )
 At June 30, 2004, we had available unused domestic net operating loss
carry-forwards (NOLs), net of Internal Revenue Code Section 382 limitations,
of approximately $4.6 million which will expire over various periods through
2017. We also generated approximately $3.6 million in tax credits
carryforwards as of June 30, 2004 which may be carried forward indefinitely. A
valuation allowance of $3.7 million and $83 thousand was recorded at June 30,
2004 and June 30, 2003, 51




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) respectively, against deferred tax assets associated with net operating losses
and tax credits carryforwards for which realization of any future benefit is
uncertain due to taxable income limitations. We routinely evaluate all
deferred tax assets to determine the likelihood of their realization. The
valuation allowance for deferred tax assets increased by $3.6 million and
decreased by $22 thousand during the years ended June 30, 2004 and 2003,
respectively. The depreciation and amortization related deferred tax liabilities
significantly increased during the years ended June 30, 2004 and 2003
predominantly due to current tax deductions for acquired intangibles, goodwill
and depreciation. Generally, since the adoption of SFAS 142 eliminates the
book goodwill amortization, the difference between the cumulative book and tax
bases of these intangibles will continue to grow as current tax deductions are
realized. In addition, accelerated tax depreciation is provided for under the
Jobs and Growth Tax Relief Reconciliation Act of 2003 on capital expenditures
through December 2004. Income tax expense varies from the amount computed by applying the statutory
federal income tax rate to income before income taxes as follows (in
thousands): Year ended June 30,2004
    
    2003
    
    2002Statutory U.S. Federal income tax
    
    $
    290,214
    
    
    $
    171,831
    
    
    $
    126,160State income taxes, net
    
    
    19,873
    
    
    
    11,603
    
    
    
    7,716Basis difference on sale of subsidiary
    
    
    (5,595
    )
    
    
    
    
    
    
    (2,104
    )Research and development tax credits
    
    
    (6,068
    )
    
    
    
    
    
    
    Other
    
    
    916
    
    
    
    671
    
    
    
    (912
    )Total income tax expense
    
    $
    299,340
    
    
    $
    184,105
    
    
    $
    130,860
 The effective tax rate for June 30, 2004 was 36.1%. It includes tax
implications recognized from the sale of the Divested Federal Business, sale of
a foreign subsidiary and research and development tax credits. The effective
tax rate on normal operations excluding these items was 37.5%. Cumulative undistributed earnings of non-U.S. subsidiaries for which U.S. taxes
have not been provided are included in consolidated retained earnings in the
amount of approximately $16.8 million, $5.5 million and $8 million as of June
30, 2004, 2003 and 2002, respectively. These earnings are intended to be
permanently reinvested outside the U.S. If future events necessitates that these
earnings should be repatriated to the U.S., an additional tax provision and
related liability would be required. If such earnings were distributed, U.S.
income taxes would be partially reduced by available credits for taxes paid to
the jurisdictions in which the income was earned. Federal, state and foreign income tax payments during the years ended June 30,
2004, 2003 and 2002 were approximately $189.6 million, $67.1 million and $39.5
million, respectively. Taxes paid in fiscal year 2004 include $88.1 million
related to the gain on the Divested Federal Business (see Note 2). 12. Common Stock Our Class A common stock trades publicly on the New York Stock Exchange (symbol
ACS) and is entitled to one vote per share. Our Class B common stock is
entitled to ten votes per share. Class B shares are convertible, at the
holders option, into Class A shares, but until converted carry significant
transfer restrictions. On February 27, 2004, we completed the redemption of our 3.5% Convertible
Subordinated Notes due February 15, 2006. Please see Note 10 for further
discussion. 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 52




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 existing
revolving credit facility. As of June 30, 2004, we had repurchased
approximately 15 million shares at a total cost of approximately $743.2
million. In March 2002, we completed the redemption of our 4% Convertible Subordinated
Notes due March 2005 (4% Notes). Holders of all of the outstanding 4% Notes
converted their 4% Notes to shares of our Class A common stock in accordance
with procedures specified in the related Indenture governing the 4% Notes. As
the result of such conversions, 10.8 million shares of our Class A common stock
were issued to such holders. In fiscal year 2001, prior to conversion, $63 thousand
of our 4% Notes were converted into 2,952 shares of Class A common stock. In February 2002, we completed a two-for-one stock split of our outstanding
Class A common stock and Class B common stock implemented in the form of a 100%
stock dividend (Stock Split). Each holder of record of our Class A common
stock and Class B common stock as of the close of business on February 15, 2002
received an additional share of such stock held by them at that time. In
connection with the Stock Split, the number of shares of Class A common stock
reserved for issuance or subject to outstanding options granted under our
employee stock option or other benefit plans, as well as the number of shares
reserved for issuance under our 4% Notes and Notes outstanding at that time,
were proportionately increased in accordance with the terms of such options,
plans and other instruments. On October 10, 2001, we completed our offering of 18.4 million shares (adjusted
for stock split) of our Class A common stock. The shares were issued at $40.50
per share. Net proceeds of $714.3 million (net of transaction costs) were used
to repay the $550 million 18-month interim credit facility incurred to fund the
IMS acquisition and a portion of the amount outstanding under our then existing
revolving credit facility. 13. Employee Benefit Plans Under our 1997 Stock Incentive Plan (the 1997 Plan), we have reserved
approximately 7.4 million shares of Class A common stock for issuance to key
employees at exercise prices determined by the Board of Directors. In May
2000, February 2001, October 2001 and July 2003, the Board of Directors
approved the additional allotment of approximately 1.7 million, 1.6 million,
4.1 million and 3.8 million shares, respectively, to the 1997 Plan in
accordance with the terms and conditions of the 1997 Plan authorized by our
shareholders pursuant to our November 14, 1997 Proxy Statement. Options
granted under the 1997 Plan to our current employees cannot exceed 12.8% of our
issued and outstanding shares. Our 1988 Stock Option Plan (the 1988 Plan),
which originally reserved 12 million shares of Class A common stock for
issuance, was discontinued for new grants during fiscal year 1998 and terminated
(except for the exercise of then existing option grants as of September 1997)
and subsequently, 3.2 million unissued shares expired. Generally, the options
under each plan vest in varying increments over a five-year period, generally
become exercisable after five years, expire ten years from the date of grant
and are issued at exercise prices no less than 100% of the fair market value of
our Class A common stock at the time of the grant. As reported in Note 1, we
have elected to adopt the disclosure only provisions of SFAS 123 and we account
for stock-based employee compensation plans in accordance with APB 25. As a
result, no compensation cost has been recognized in the periods presented for
stock option or employee stock purchase plans. Between February 28, 2002 and March 31, 2004, we issued 1,055,968 shares of our
Class A common stock to fifteen current or former employees or directors
(collectively, the optionees) pursuant to the exercise of options granted
under our 1988 Stock Option Plan in excess of the amount originally registered
with the SEC on Form S-8 filed November 17, 1994 (Registration No. 33-86426).
The exercise price of the options exercised ranged from $4.00 to $10.56 per
share of Class A common stock and the aggregate exercise price of the options
was $9.6 million. We believe the grant of the options and the subsequent
issuance of the underlying securities to the optionees was exempt from
registration pursuant to Rule 506 promulgated under the Securities Act of 1933,
as amended (the Securities Act), or pursuant to Section 4(2) of the
Securities Act. Each of the optionees had access to sufficient information
regarding Affiliated Computer Services, Inc. required to make an informed
investment decision and had the requisite sophistication to make an investment
in our securities. In addition, some of the optionees are accredited
investors as defined in Regulation D of the Securities Act. 53




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Computer Data Systems, Inc. 1991 Long-Term Incentive Plan (the 1991 Plan)
provides for the granting of options to various employees, officers, and
directors of ACS Government Solutions. This plan was discontinued for new
grants effective with the December 1997 Government Solutions merger. All
options issued under the 1991 Plan were fully vested as of the effective date
of the merger. Exercise prices of options awarded in all years were equal to
the market price of the stock on the date of the grant; therefore, no
compensation costs have been recognized for awards under this plan. As of June
30, 2002, there are no outstanding options to be exercised under the 1991 Plan. Option activity for the years ended June 30, 2004, 2003, and 2002 is summarized
as follows: WeightedAverageOptions
    
    Option PriceOutstanding at June 30, 2001
    
    
    10,712,090
    
    
    $
    16.87Granted
    
    
    2,543,000
    
    
    
    39.82Exercised
    
    
    (1,679,390
    )
    
    
    10.66Canceled
    
    
    (445,200
    )
    
    
    21.11Outstanding at June 30, 2002
    
    
    11,130,500
    
    
    
    22.88Granted
    
    
    3,439,500
    
    
    
    37.45Exercised
    
    
    (1,182,800
    )
    
    
    12.04Canceled
    
    
    (427,400
    )
    
    
    32.34Outstanding at June 30, 2003
    
    
    12,959,800
    
    
    
    27.42Granted
    
    
    3,167,000
    
    
    
    45.09Exercised
    
    
    (2,077,890
    )
    
    
    16.46Canceled
    
    
    (593,200
    )
    
    
    33.12Outstanding as of June 30, 2004
    
    
    13,455,710
    
    
    
    33.04Vested and exercisable at June 30, 2004
    
    
    1,353,810
    
    
    $
    15.98Vested and unexercisable at June 30, 2004
    
    
    3,261,500
    
    
    $
    24.94
 Further information regarding outstanding and exercisable stock options by
exercise price range as of June 30, 2004 is disclosed below: Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    Number
    
    Remaining
    
    Average
    
    Number
    
    AverageExercise Prices
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$4.00 - $12.68
    
    
    727,200
    
    
    
    3.68
    
    
    $
    11.27
    
    
    
    577,200
    
    
    $
    11.20$15.26 - $20.94
    
    
    3,041,110
    
    
    
    5.30
    
    
    
    17.65
    
    
    
    776,610
    
    
    
    19.52$27.56 - $38.66
    
    
    5,400,600
    
    
    
    7.35
    
    
    
    35.23
    
    
    
    
    
    
    
    $40.62 - $50.23
    
    
    4,286,800
    
    
    
    8.78
    
    
    
    44.90
    
    
    
    
    
    
    
    13,455,710
    
    
    
    7.15
    
    
    $
    33.04
    
    
    
    1,353,810
    
    
    $
    15.98
 Under our 1995 Employee Stock Purchase Plan (ESPP), a maximum of 4 million
shares of Class A common stock can be issued to substantially all full-time
employees who elect to participate. In October 2002, the Board of Directors
approved an amendment to the ESPP to increase the number of shares that can be
issued under the plan from 2 million to 4 million. Through payroll deductions,
eligible participants may purchase our stock at a 15% discount to market value.
The stock is either purchased by the ESPP in the open market or issued from
our treasury account, and our contributions for the years ended June 30, 2004,
2003, and 2002 which were charged to additional paid-in capital, were
approximately $1.9 million, $3.3 million and $1.4 million, respectively.
During fiscal year 2004, we issued 92,000 treasury shares to fund the ESPP. Under a Supplemental Executive Retirement Agreement (the Retirement
Agreement) dated December 15, 1998, we are obligated to pay our Chairman
certain retirement benefits (the Retirement Benefit). The payment of the
Retirement Benefit would commence on the occurrence of several different
events, including, retirement, total and permanent disability, death,
resignation, change in control, or termination for any reason other than cause.
We have issued (and may in the future issue) certain stock options to fund the
Retirement Benefit. Based on assumptions we consider reasonable under the
circumstances, 54




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) we expect that the value of the existing stock options will be sufficient to
fund the Retirement Benefit, but to the extent the value of the options granted
would be insufficient to fund the Retirement Benefit, then we will have to fund
such insufficiency. At our option, we may grant additional stock options prior
to the commencement of the payment of the Retirement Benefit, if we estimate
that the existing stock option grants are insufficient to satisfy our
obligation under this arrangement. We offer a deferred compensation plan to employees who meet specified
compensation criteria. The assets and liabilities of this plan are included in
our consolidated financial statements. Approximately 900 employees participate
in the plan. Participants may elect to defer a specified percentage of base
salary and incentive compensation annually. The assets of the plan as of June
30, 2004 and 2003 were $19.2 million and $11.5 million, respectively.
Liabilities of the plan, representing participants account balances, were
$20.4 million and $12.1 million at June 30, 2004 and 2003, respectively. We have contributory retirement and savings plans, which cover substantially
all employees and allow for discretionary matching contributions by us as
determined by our Board of Directors. Contributions made by us to certain
plans during the years ended June 30, 2004, 2003, and 2002 were approximately
$14.8 million, $24.5 million and $22.6 million, respectively. 14. Earnings Per Share Basic earnings per share of common stock is computed using the weighted average
number of our common shares outstanding during the period. Diluted earnings
per share is adjusted for the after-tax impact of interest on the Notes and the
4% Notes and reflects the incremental shares that would be available for
issuance upon the assumed exercise of stock options and conversion of the Notes
and the 4% Notes. The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share amounts): Year ended June 30,2004
    
    2003
    
    2002Numerator:Numerator
for earnings per share (basic) - income available to common stockholders
    
    $
    529,843
    
    
    $
    306,842
    
    
    $
    229,596Effect of dilutive securities:Interest on convertible debt (net of income tax)
    
    
    5,196
    
    
    
    8,218
    
    
    
    12,610Numerator for earnings per share assuming dilution-income available to common stockholders
    
    $
    535,039
    
    
    $
    315,060
    
    
    $
    242,206Denominator:Weighted average shares outstanding (basic)
    
    
    131,498
    
    
    
    132,445
    
    
    
    118,646Effect of dilutive securities:Convertible debt
    
    
    4,750
    
    
    
    7,298
    
    
    
    14,851Stock options
    
    
    3,398
    
    
    
    3,687
    
    
    
    3,967Total potential common shares
    
    
    8,148
    
    
    
    10,985
    
    
    
    18,818Denominator for earnings per share assuming dilution
    
    
    139,646
    
    
    
    143,430
    
    
    
    137,464Earnings per share (basic)
    
    $
    4.03
    
    
    $
    2.32
    
    
    $
    1.94Earnings per share assuming dilution
    
    $
    3.83
    
    
    $
    2.20
    
    
    $
    1.76
 Options to purchase approximately 457,000 shares of common stock were
outstanding during fiscal year 2004 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 159,000 antidilutive
shares in fiscal year 2003 and no antidilutive shares in fiscal year 2002. 55




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. Financial Instruments As of June 30, 2004 and 2003, the fair values of our revolving credit balances
and other variable-rate debt instruments approximated the related carrying
values. As of June 30, 2003, we estimated the fair value of the Notes at approximately
$373 million based on trading prices on that date. As discussed in Note 10, we
redeemed the Notes in February 2004. We had no derivative financial instruments as of June 30, 2004, 2003 or 2002. 16. Related Party Transactions As of June 30, 2002, we held a minority preferred stock interest in DDH
Aviation, Inc., a corporate airplane brokerage company organized in 1997
(DDH). Our Chairman owns a majority voting interest in DDH and our President
and General Counsel, along with our Chairman, were directors of DDH. At June
30, 2002, DDH had a $48 million line of credit with Citicorp USA, Inc., for
which we and our Chairman, in exchange for warrants to acquire additional
voting stock, acted as partial guarantors. In addition, we obtained access to
corporate aircraft at favorable rates in consideration of our guaranty. We had
guaranteed up to approximately $11.5 million of the line of credit and our
Chairman guaranteed up to approximately $17.5 million of the line of credit. In July 2002, our Chairman assumed in full our guaranty obligations to Citicorp
and our guaranty to Citicorp was released in full. Our minority preferred
stock interest and warrants (with a recorded value of $100,000 at June 30,
2002) in DDH were cancelled. We have no further ownership interest in DDH.
Our officers, other than the Chairman, are no longer directors of DDH. In the
first quarter of fiscal year 2003, we purchased $1 million in prepaid charter
flights at favorable rates from DDH. As of June 30, 2004, we have $0.7 million
remaining in prepaid flights with DDH. During fiscal year 2003, we paid DDH
approximately $0.5 million for maintenance services, chartered aircraft and
equipment. We made no payments to DDH during fiscal year 2004. In August 2001, we purchased a Challenger 600 aircraft from DDH for a purchase
price of $8.5 million, which included interior and exterior refurbishment of
the aircraft. As of June 30, 2002, the purchase price for the aircraft was
paid in full, and refurbishment was near completion. The aircraft was
delivered to us in the first quarter of fiscal year 2003. 17. Commitments and Contingencies We have various non-cancelable operating lease agreements for information
technology equipment, software and facilities with terms through 2018. A
summary of these commitments at June 30, 2004 is as follows (in thousands): Year ending June 30,2005
    
    $
    135,9792006
    
    
    94,2582007
    
    
    67,0992008
    
    
    44,7182009
    
    
    28,974Thereafter
    
    
    57,064$
    428,092
 Lease expense for information technology equipment, software and facilities was
approximately $227.7 million, $174.7 million and $147 million for the years
ended June 30, 2004, 2003 and 2002, respectively. 56




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 June 30,
2004, we serviced a FFEL portfolio of approximately 1.5 million loans with an
outstanding principal balance of approximately $18.2 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.
This reserve was approximately $3.7 million and $4.2 million at June 30, 2004
and 2003, respectively. During fiscal years 2004, 2003 and 2002, we purchased
and charged against the reserve $4.5 million, $3.6 million and $0.2 million of
loans, respectively, and recovered or sold loans with proceeds totaling $1.3
million, $1.3 million and $0.3 million, respectively, which were credited to
our reserve. We recorded provisions of $2.7 million, $2.5 million and $0.2
million in fiscal years 2004, 2003 and 2002, respectively. 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 June 30,
2004, outstanding surety bonds of $323.4 million and $109.7 million of our
outstanding letters of credit secure our performance of contractual obligations
with our clients. In addition, we had approximately $32.5 million of letters of
credit outstanding which serve as collateral for our surety bond program.
Approximately $8.3 million of letters of credit secure our casualty insurance
programs. In general, we would only be liable for the amount of these
guarantees in the event of default in our performance of our obligations under
each contract, the probability of which we believe is remote. We are obligated to make certain contingent payments to former shareholders of
acquired entities upon satisfaction of certain contractual criteria. As of
June 30, 2004, the maximum aggregate amount of the outstanding contingent
obligations is approximately $67.3 million. Upon satisfaction of the specified
contractual criteria, any such payment would result primarily in a
corresponding increase in goodwill. 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 maximum exposure
under these indemnifications is $85 million; however, we believe the actual
exposure to be significantly less. As of June 30, 2004, other accrued
liabilities include a reserve for these claims in an amount we believe to be
adequate at this time. As discussed below, 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. On December 16, 1998, a state district court in Houston, Texas entered final
judgment against us in a lawsuit brought by 21 former employees of Gibraltar
Savings Association and/or First Texas Savings Association (collectively,
GSA/FTSA). The GSA/FTSA employees alleged that they were entitled to the
value of 803,082 shares of our stock (adjusted for February 2002 stock split)
pursuant to options issued to the GSA/FTSA employees in 1988 in connection with
a former technology outsourcing services agreement between GSA/FTSA and us.
The judgment against us was for approximately $17 million, which included
attorneys fees and pre-judgment interest. The judgment was appealed by the
plaintiffs and us and the appellate process has now been concluded. As a
result of the appeals, the trial courts judgment was reversed and the case was
remanded to the trial court for further proceedings, except that the trial
court judgment was affirmed in part as to one of the plaintiffs and the trial
courts dismissal of certain of our affirmative defenses was upheld. The
amount of the judgment for the one plaintiff whose judgment was upheld has been
settled for $1.3 million. In August 2004, mediation was conducted which
resulted in the settlement of claims of the other GSA/FTSA employees. As a
result of this settlement, we accrued $10 million in other operating expenses
in the fourth quarter of fiscal year 2004 related to this settlement and paid
$10 million in full settlement of all claims of the other GSA/FTSA employees in
August 2004. 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 $25 million for the fiscal year ended
June 30, 2003, and approximately $17.2 million for the fiscal year ended June
30, 2004, representing approximately 0.7% of our revenue for fiscal year 2003
and 0.4% for fiscal year 2004. In February 2004, we sold the contracts
associated with the Hanscom Air Force Base relationship to 57




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ManTech International Corporation; however, we have agreed to indemnify ManTech
with respect to this DOJ investigation. We are continuing our previously
announced internal investigation of this matter through outside legal counsel
and we are continuing to cooperate with the DOJ in producing documents in
response to the subpoena. At this stage of this inquiry, we are unable to
express an opinion as to its likely outcome. (See Note 2 for a discussion of
the sale of the contracts associated with the Hanscom Air Force Base
relationship.) 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. Our fiscal year 2004
revenue from these three contracts was approximately $67 million, representing
approximately 1.6% of our fiscal year 2004 revenue. 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 recent 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 are continuing our
previously announced internal investigation of this matter through outside
legal counsel and we are continuing to cooperate with the DOJ in producing
documents in response to the subpoena. At this stage of this inquiry, we are
unable to express an opinion as to its likely outcome. 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 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. We were also advised in February 2004 that the SEC is conducting
an informal investigation into the matters covered by the OIGs report. 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
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 contract in Pinellas County in Florida for the period
from January 1999 to March 2001, when the contract expired. We acquired this
contract from Lockheed Martin Corporation in August 2001 or approximately five months after
the expiration of the workforce contract in Pinellas County. Further, we settled a
civil lawsuit with Pinellas County in December 2003 with respect to claims
under 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 which 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. 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 alleges noncompliance with the Clean Water Act and the
Federal Resource Conservation and Recovery Act. The alleged violations relate
primarily to the operation of a permitted wastewater treatment system at the
ACS Image Solutions in Flora, Mississippi from August 2001 to
May 2004. We have implemented a number of remedial measures in response to
the MDEQs concerns, including closing the specific operation that generated
the wastewaters at issue. We responded to the Notice of Violation by letter
dated July 19, 2004, and are currently working with the MDEQ toward a
resolution of this matter. MDEQ has stated it will seek penalties. At this
time, MDEQ has not provided us with an official penalty demand; however, we
believe that any penalties assessed will be immaterial to our results of
operations and liquidity. 58




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 18. New Accounting Standards In December 2003, the SEC issued SAB 104. SAB 104 updates existing Staff
Accounting Bulletin Topic 13 Revenue Recognition to be consistent with
recently issued guidance, primarily EITF 00-21. We do not believe that SAB 104
has had a material impact on our financial position or results of operations. 19. 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): Year ended June 30,2004
    
    2003
    
    2002Net income
    
    $
    529,843
    
    
    $
    306,842
    
    
    $
    229,596Other comprehensive income (loss):Foreign currency translation
adjustment (net of income taxes of
$1,445 and $583, respectively)
    
    
    (2,410
    )
    
    
    (971
    )
    
    
    Unrealized loss on marketable security
    
    
    
    
    
    
    
    
    
    
    (84
    )Unrealized gain on hedging
instruments (net of income taxes of $139)
    
    
    
    
    
    
    
    
    
    
    216Comprehensive income
    
    $
    527,433
    
    
    $
    305,871
    
    
    $
    229,728
 The unrealized loss on marketable security relates to an investment in a
marketable security, which was sold in June 2002. The unrealized gain on
hedging instruments relates to derivative instruments held by us due in fiscal year
2002. 20. Segment Information We are organized into Commercial and Government segments due to the different
operating environments of each segment, caused by different types of customers,
differing economic characteristics, and the nature of regulatory environments.
In the Government segment, we provide business process outsourcing and
information technology services to state and local governments. Our Government
segment also includes our relationship with the Department of Education. In
the Commercial segment, we provide business process outsourcing, information
technology outsourcing, and systems integration services to clients in such
industries as healthcare, retail, wholesale distributing, manufacturing,
utilities, financial institutions, insurance, and transportation. In fiscal year 2003, we reported our results of operations in three segments:
Commercial, State and Local Government, and Federal. In fiscal year 2004, as a
result of the sale of our Divested 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. Over 98% of our consolidated revenues for fiscal years 2004, 2003 and 2002 were
derived from domestic clients. Our relationship with the Department of
Education is our largest contract and represents approximately 5%, 4% and 5% of
consolidated revenues for fiscal years 2004, 2003, and 2002, respectively. No
other single customer exceeded 5% of our revenues. The accounting policies of each segment are the same as those described in the
summary of significant accounting policies (see Note 1). 59




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following tables reflect the results of the segments consistent with our
management system (in thousands): Government
    
    Commercial
    
    Corporate
    
    ConsolidatedFiscal year 2004Revenues (a)
    
    $
    2,428,029
    
    
    $
    1,678,364
    
    
    $
    
    
    
    $
    4,106,393Operating expenses
    
    
    1,989,392
    
    
    
    1,308,411
    
    
    
    66,356
    
    
    
    3,364,159Gain on sale of Divested Federal
Business
    
    
    (285,273
    )
    
    
    
    
    
    
    
    
    
    
    (285,273
    )Depreciation and amortization expense
    
    
    72,286
    
    
    
    109,382
    
    
    
    2,128
    
    
    
    183,796Operating income (loss)
    
    $
    651,624
    
    
    $
    260,571
    
    
    $
    (68,484
    )
    
    $
    843,711Total assets
    
    $
    2,088,841
    
    
    $
    1,718,115
    
    
    $
    100,286
    
    
    $
    3,907,242Capital expenditures
    
    $
    110,649
    
    
    $
    112,519
    
    
    $
    1,453
    
    
    $
    224,621Fiscal year 2003Revenues (a)
    
    $
    2,544,298
    
    
    $
    1,242,908
    
    
    $
    
    
    
    $
    3,787,206Operating expenses
    
    
    2,117,025
    
    
    
    954,762
    
    
    
    44,010
    
    
    
    3,115,797Depreciation and amortization expense
    
    
    69,195
    
    
    
    80,111
    
    
    
    2,822
    
    
    
    152,128Operating income (loss)
    
    $
    358,078
    
    
    $
    208,035
    
    
    $
    (46,832
    )
    
    $
    519,281Total assets
    
    $
    2,241,799
    
    
    $
    1,338,728
    
    
    $
    118,178
    
    
    $
    3,698,705Capital expenditures
    
    $
    109,819
    
    
    $
    93,912
    
    
    $
    1,942
    
    
    $
    205,673Fiscal year 2002Revenues (a)
    
    $
    2,105,585
    
    
    $
    957,333
    
    
    $
    
    
    
    $
    3,062,918Operating expenses
    
    
    1,748,850
    
    
    
    774,197
    
    
    
    28,753
    
    
    
    2,551,800Depreciation and amortization expense
    
    
    51,351
    
    
    
    57,020
    
    
    
    2,115
    
    
    
    110,486Operating income (loss)
    
    $
    305,384
    
    
    $
    126,116
    
    
    $
    (30,868
    )
    
    $
    400,632Total assets
    
    $
    2,086,039
    
    
    $
    1,235,841
    
    
    $
    81,687
    
    
    $
    3,403,567Capital expenditures
    
    $
    90,105
    
    
    $
    43,432
    
    
    $
    10,869
    
    
    $
    144,406
  (a)
    
    Revenues in our Government segment for fiscal years 2004, 2003 and
2002 include revenues from operations divested through June 30, 2004 of
$251.1 million, $679.3 million and $633.7 million, respectively.
Revenues in our Commercial segment for fiscal years 2004, 2003 and 2002
include revenues from operations divested as of June 30, 2004 of $6.9
million, $30.2 million and $63.4 million, respectively. 60




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AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 21. Revenue by Service Line Our revenues by service line are shown in the following table (in thousands): Year ended June 30,2004
    
    2003
    
    2002Business process outsourcing
    
    $
    3,017,699
    
    
    $
    2,582,773
    
    
    $
    1,942,865Information technology outsourcing
    
    
    694,890
    
    
    
    492,848
    
    
    
    441,249Systems integration services
    
    
    393,804
    
    
    
    711,585
    
    
    
    678,804Total
    
    $
    4,106,393
    
    
    $
    3,787,206
    
    
    $
    3,062,918
 22. Quarterly Results of Operations (unaudited) (in thousands, except per share amounts) Quarter endedFiscal Year 2004
    
    Fiscal Year 2003June 30,
    
    Mar. 31,
    
    Dec. 31,
    
    Sept. 30,
    
    June 30,
    
    Mar. 31,
    
    Dec. 31,
    
    Sept. 30,2004
    
    2004
    
    2003
    
    2003
    
    2003
    
    2003
    
    2002
    
    2002Revenues
    
    $
    1,062,447
    
    
    $
    1,009,432
    
    
    $
    997,879
    
    
    $
    1,036,635
    
    
    $
    1,014,178
    
    
    $
    981,633
    
    
    $
    908,814
    
    
    $
    882,581Operating income
    
    $
    142,981
    (a)
    
    $
    153,820
    (a)
    
    $
    402,981
    (a)
    
    $
    143,929
    
    
    $
    139,571
    
    
    $
    135,089
    
    
    $
    124,966
    
    
    $
    119,655Net income
    
    $
    90,259
    (a)
    
    $
    99,746
    (a)
    
    $
    253,030
    (a)
    
    $
    86,808
    
    
    $
    83,892
    
    
    $
    79,493
    
    
    $
    74,001
    
    
    $
    69,456Earnings per share  basic
    
    $
    0.69
    (a)
    
    $
    0.76
    (a)
    
    $
    1.93
    (a)
    
    $
    0.65
    
    
    $
    0.63
    
    
    $
    0.60
    
    
    $
    0.56
    
    
    $
    0.53Weighted average shares
outstanding
    
    
    130,216
    
    
    
    131,503
    
    
    
    131,001
    
    
    
    133,235
    
    
    
    132,998
    
    
    
    132,540
    
    
    
    132,175
    
    
    
    132,073Earnings per share  diluted
    
    $
    0.68
    (a)
    
    $
    0.72
    (a)
    
    $
    1.80
    (a)
    
    $
    0.62
    
    
    $
    0.60
    
    
    $
    0.57
    
    
    $
    0.53
    
    
    $
    0.50Weighted average shares
outstanding  diluted
    
    
    133,304
    
    
    
    139,348
    
    
    
    141,880
    
    
    
    143,960
    
    
    
    143,791
    
    
    
    143,657
    
    
    
    143,295
    
    
    
    142,984
  (a)
    
    During the second quarter of fiscal year 2004, we completed the sale
of our Divested Federal Business. As a result of this transaction, we
recognized a pretax gain of $284.3 million ($181.7 million, net of
income tax) in the second quarter of fiscal year 2004. We recognized
additional pretax gains of $0.5 million ($0.3 million, net of income
tax) and $0.4 million ($0.3 million, net of income tax) in the third and
fourth quarters of fiscal year 2004, respectively, primarily due to our
final working capital settlement with Lockheed Martin Corporation.
Please see the Notes to our Consolidated Financial Statements for
discussion of other significant items which impacted fiscal year 2004
results of operations. 23. Subsequent Events In July 2004, we acquired Heritage Information Systems, Inc. (Heritage).
Heritage provides clinical management and pharmacy cost containment solutions to fourteen 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 million plus related transaction costs, excluding contingent consideration of a maximum
of $17 million based upon future financial performance, and was funded from our existing cash on hand. The operating results of the acquired business will
be included in our Government segment from the effective date of the acquisition, July 1, 2004. In August 2004, we acquired BlueStar Solutions, an information technology outsourcer specializing in applications
management of packaged enterprise resource planning (ERP) and messaging services. The transaction was valued at
approximately $73 million plus related transaction costs and was funded from cash on hand. We believe that the acquisition
of BlueStar provides us penetration into the emerging ERP/messaging market. The operating results of the acquired business
will be included in our financial statements in the Commercial segment from the effective date of the acquisition, August 26, 2004. 61




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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure Not applicable. 
 Item 9A. 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 June 30, 2004. 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 June 30, 2004.  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 and year ending June
30, 2004 that have materially affected or are reasonably likely to materially
affect the Companys internal control over financial reporting. 
 PART III Pursuant to Instruction G(3) to Form 10-K, the information required in Items 10
through 14is incorporated by reference from our definitive proxy statement,
which is incorporated herein by reference. 
 PART IV 
 Item 15. Exhibits, Financial Statements and Reports on Form 8-K  (a)
    
    Financial StatementsThe following consolidated financial statements of Affiliated Computer
Services, Inc. and Subsidiaries are included in Part II, Item 8:  Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements  (b)
    
    Reports on Form 8-K  1.)
    
    On April 5, 2004, the Company filed a Current Report on Form
8-K (dated as of April 5, 2004) to announce the acquisition of
etravelexperts, LLC and to furnish a copy of the Companys press
release regarding this matter.2.)
    
    On April 20, 2004, the Company filed a Current Report on Form
8-K (dated as of April 20, 2004) for the purpose of furnishing the
third quarter of fiscal year 2004 earnings press release, announcing
the conference call to be hosted on the Companys website to disclose
the Companys financial results and disclosing the location of the
Companys Supplementary Financial Information used during the
conference call for the quarter ended March 31, 2004.3.)
    
    On April 27, 2004, the Company filed a Current Report on Form
8-K (dated as of April 20, 2004) for the purpose of furnishing the
transcript of the Companys presentation during the conference call
hosted on the Companys website disclosing the Companys financial
results, the questions and answers following the presentation and
furnishing a copy of the slides presented during the conference call
hosted on the Companys website.4.)
    
    On April 29, 2004, the Company filed a Current Report on Form
8-K (dated as of April 29, 2004) for the purposes of furnishing the
press release announcing that the Board of Directors had authorized a
share repurchase program for the purchase of up to $750 million of
its outstanding shares of Class A common stock.  (c)
    
    Exhibits  Reference is made to the Index to Exhibits beginning on page 64 for a
list of all exhibits filed as part of this report. 62




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, we have duly caused this Report to be signed on our behalf by the
undersigned thereunto duly authorized representative. Affiliated Computer Services, Inc.Date: September 13, 2004By:
    /s/ Warren D. EdwardsWarren D. EdwardsExecutive Vice President and
Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 13th day of September 2004. Signature
    
    Title/s/ Darwin Deason
(Darwin Deason)
    
    Director, Chairman of the Board/s/ Jeffrey A. Rich
(Jeffrey A. Rich)
    
    Director and Chief Executive Officer/s/ Mark A. King
(Mark A. King)
    
    Director, President and Chief Operating Officer/s/ Warren D. Edwards
(Warren D. Edwards)
    
    Executive Vice President and Chief Financial Officer/s/ Charles E. McDonald
(Charles E. McDonald)
    
    Senior Vice President and Chief Accounting Officer/s/ J. Livingston Kosberg
(J. Livingston Kosberg)
    
    Director/s/ Joseph P. ONeill
(Joseph P. ONeill)
    
    Director/s/ Frank A. Rossi
(Frank A. Rossi)
    
    Director/s/ Dennis McCuistion
(Dennis McCuistion)
    
    Director
 63




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INDEX TO EXHIBITS ExhibitNumber
    
    Exhibit Name3.1
    
    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 4.3)).4.5
    
    Indenture, dated as of February 21, 2001, between the Company,
as Issuer, and U.S. Trust Company of Texas, N.A., as Trustee,
relating to the Companys 3.5% Convertible Subordinated Notes
due February 15, 2006 (filed as Exhibit 4.1 to our Registration
Statement on Form S-3, filed March 30, 2001, File No. 333-58038
and incorporated herein by reference).4.6
    
    Registration Rights Agreement, dated February 21, 2001, by and
between the Company and Goldman, Sachs & Co., as representative
of the several purchasers named therein relating to the
Companys 3.5% Convertible Subordinated Notes due February 15,
2006 (filed as Exhibit 4.4 to our Registration Statement on
Form S-3, filed March 30, 2001, File No. 333-58038 and
incorporated herein by reference).4.7
    
    Specimen Note for the Companys 3.5% Convertible Subordinated
Notes due February 15, 2006 (filed as Exhibit 4.2 to our
Registration Statement on Form S-3, filed March 30, 2001, File
No. 333-58038 and incorporated herein by reference).10.1
    
    Amended Stock Option Plan of the Company (filed as Exhibit 10.1
to Amendment No. 1 to our Registration Statement on Form S-1,
filed July 15, 1994, File No. 33-79394 and incorporated herein
by reference).10.2
    
    1997 Stock Incentive Plan of the Company (filed as Appendix D to
our Joint Proxy Statement on Schedule 14A, filed November 14,
1997 and incorporated herein by reference).10.3
    
    Form of Directors Indemnification Agreement (filed as Exhibit
10.20 to Amendment No. 3 to our Registration Statement on Form
S-1, filed August 23, 1994, File No. 33-79394 and incorporated
herein by reference).10.4
    
    U.S. Department of Education Contract No. PM94017001 (portions
of which are subject to an Order for Confidential Treatment
pursuant to Rule 24b-2) (filed as an exhibit to Form 10-Q/A
filed August 24, 1994 by ACS Government Solutions, Inc.
(formerly known as Computer Data Systems, Inc.) and incorporated
herein by reference).10.5
    
    Form of Severance Agreement, dated as of March 1, 2004, by and
between Affiliated Computer Services, Inc. and each of Jeffrey
A. Rich, Mark A. King, Warren D. Edwards, Lynn Blodgett, John
Brophy and
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##### Table of Contents



INDEX TO EXHIBITS ExhibitNumber
    
    Exhibit NameWilliam L. Deckelman, Jr. (filed as Exhibit 10.1 to
our Quarterly Report on Form 10-Q, filed May 17, 2004 and
incorporated herein by reference).10.6
    
    Supplemental Executive Retirement Agreement, dated December 15,
1998 between the Company and Darwin Deason (filed as Exhibit
10.13 to our Annual Report on Form 10-K, filed September 29,
1999 and incorporated herein by reference).10.7
    
    Amendment to Supplemental Executive Retirement Agreement, dated
November 13, 2003 between the Company and Darwin Deason (filed
as Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed
February 17, 2004 and incorporated herein by reference).10.8
    
    Employment Agreement, dated February 16, 1999 between the
Company and Darwin Deason (filed as Exhibit 10(iii)(A) to our
Quarterly Report on Form 10-Q, filed May 17, 1999 and
incorporated herein by reference).10.9
    
    Credit Agreement, dated August 24, 2001 among the Company, Bear
Stearns Corporate Lending Inc. as Administrative Agent and
Syndication Agent, Bear, Stearns & Co., Inc. as Bookrunner and
Co-Lead Arranger, Wells Fargo Bank Texas, National Association
as Documentation Agent and Co-Lead Arranger, certain Lenders and
certain Subsidiary Guarantors (filed as Exhibit 10.2 to our
Current Report on Form 8-K, filed August 29, 2001 and
incorporated herein by reference).10.10
    
    Second Amendment to the Credit Agreement and Consent, dated
August 10, 2001 among the Company, Wells Fargo Bank Texas,
National Association as Administrative Agent and Co-Lead
Arranging Agent for Lenders, Bank One N.A. as Syndication Agent
and Co-Lead Arranging Agent for Lenders, SunTrust Bank as
Documentation Agent for Lenders and The Bank of
Tokyo-Mitsubishi, LTD. as Co-Agent for Lenders and the
Subsidiary Guarantors (filed as Exhibit 10.3 to our Current
Report on Form 8-K, filed August 29, 2001 and incorporated
herein by reference).10.11
    
    Credit Agreement, dated June 10, 2002 among the Company, Goldman
Sachs Credit Partners L.P. as Co-Lead Arranger, Sole Bookrunner
and Sole Syndication Agent, Wells Fargo Bank Texas, National
Association as Co-Lead Arranger and Administrative Agent,
certain Lenders and certain Subsidiary Guarantors (filed as
Exhibit 10.2 to our Current Report on Form 8-K, filed June 12,
2002 and incorporated herein by reference).10.12
    
    Revolving Credit Agreement, dated as of September 12, 2002 among
the Company and other borrowers from time to time party thereto,
Wells Fargo Bank, National Association as Co-Lead Arranger and
Sole Book Runner, JP Morgan Chase Bank as Co-Lead Arranger,
Wells Fargo Bank Texas, National Association as Administrative
Agent, JP Morgan Chase Bank And Bank One, N.A. as Co-Syndication
Agents and Key Corporate Capital, Inc. and The Bank Of
Tokyo-Mitsubishi, Ltd. as Co-Documentation Agents (filed as
Exhibit 10.25 to our Annual Report on Form 10-K for the year
ended June 30, 2002, filed September 18, 2002 and incorporated
herein by reference).10.13
    
    Stock Purchase Agreement, dated as of July 31, 2003 between
Lockheed Martin Corporation and the Company (filed as Exhibit
10.1 to our Quarterly Report on Form 10-Q, filed November 14,
2003 and incorporated herein by reference).10.14
    
    Asset Purchase Agreement, dated as of July 31, 2003 between
Lockheed Martin Service, Inc. and the Company (filed as Exhibit
10.2 to our Quarterly Report on Form 10-Q, filed November 14,
2003 and incorporated herein by reference).10.15*
    
    Affiliated Computer Services, Inc. 401(k) Supplemental Plan,
effective as of July 1, 2000, as amended.21.1*
    
    Subsidiaries of the Company23.1*
    
    Consent of PricewaterhouseCoopers LLP23.2*
    
    Consent of Value Incorporated
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##### Table of Contents



INDEX TO EXHIBITS ExhibitNumber
    
    Exhibit Name31.1*
    
    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 66