Sunday, January 13, 2002

Cameras capture
profit for a firm
on the move

Affiliated Computer Services'
per-ticket fees are proving profitable,
but prompt complaints

By Tim Ruel

The mainland company hired to catch Hawaii's speeding cars and red-light runners on camera is changing the way it does business in some cities because of concerns about its profits.

In Washington, D.C., Affiliated Computer Services Inc. is renegotiating its fees because of public outcry.

Since August, the District of Columbia has issued 266,944 red-light tickets from its cameras, as of November, and 163,322 tickets for speeding, as of December, said Kevin P. Morison, a spokesman for District of Columbia police. Of the $14.8 million in fines issued for red-light running, ACS received $5.6 million, and of speeding fines totaling $5.3 million, ACS got $2.1 million.

ACS produces revenue by charging Washington a fee of $29 for each speeding ticket and $32.50 for each red-light ticket. The firm only gets the fee after a ticket is paid, so any dispute would delay payment, Morison said.

The city is renegotiating its contract because the contract has the appearance that ACS would have a profit motive to generate tickets, Morison said. "That's a consistent complaint," he said. Although Morison maintains that the program is set up so there is no such conflict, people still are concerned.

"It leads to a legitimate question of the credibility of the program," said Justin McNaull, a Mid-Atlantic regional spokesman for the American Automobile Association and a former police officer. "It's not necessarily a bad thing if it's done correctly."

The city of Sacramento, Calif., has also been looking to change its ACS contract to a flat fee, a police spokesman confirmed. The specifics of the negotiations were not immediately available.

The move follows a September decision by a judge in San Diego, who threw out the tickets of some 300 motorists, saying that the evidence provided by traffic cameras was not trustworthy because the company was paid for each ticket and had a profit motive.

In Honolulu, where ACS began issuing speeding tickets Jan. 2 under a three-year pilot project, the state is also paying the company on a per-ticket basis. Plus, ACS also plans to start targeting red-light runners, once the state navigates difficulties with wiring the system.

Brent White of the American Civil Liberties Union of Hawaii has said he objects to ACS being paid per ticket instead of a flat rate because it's an incentive to ticket more motorists.

Marilyn Kali, spokeswoman for the state Department of Transportation, said the state didn't want to take the economic risk for a technology that it wasn't familiar with. She noted that the traffic program is temporary and that a flat fee would be a good idea if the state made the project permanent. Ending the temporary contract prematurely would cost a lot of money, because the state would essentially have to pay off ACS, Kali said.

The law that allowed the state to set up the system was passed by the Legislature in 1998 without much opposition. The project was delayed last year when ACS competitor Redflex Traffic Systems Inc. complained that ACS had an unfair advantage in winning the contract from the state. Redflex sued in September but dropped the suit shortly after the 1st Circuit Court denied its request for a temporary restraining order to block the contract. The court said the dispute did not fall under its jurisdiction because it was a state procurement matter.

A spokeswoman for the ACS company that handles traffic cameras agreed that per-ticket fees have the appearance of a conflict of interest. "It is on a level, but in our projects, cities and counties, law enforcement folks review all the tickets," said Phyllis Guss, vice president of marketing for ACS State and Local Solutions.

Most cities and counties typically don't have big budgets, and initially, it made sense to offer a program that would essentially pay for itself, Guss said.

ACS bought into the traffic camera market when it acquired IMS Corp. in August from military contractor Lockheed Martin Corp. for $825 million in cash. IMS is now known as ACS State and Local Solutions.

The company is the market leader in traffic cameras, operating 80 percent of the cameras nationwide under 55 separate contracts in cities including Denver, Los Angeles, Baltimore, Phoenix and San Francisco, Guss said.

ACS wants to change to flat-fee contracts that have no apparent conflict, Guss said, but it is up to each city to renegotiate its contract. "We react to it," she said.

It's not clear how much ACS profits from each contract. In D.C., the firm must pay for several costs of the city's program, including overtime salaries for the police officers who run the system, Morison said. He did not have a specific figure for costs.

Even if ACS begins adopting more flat fees, it is not likely to hurt the firm's bottom line. Traffic citations are just a small part of the Dallas-based company, which has 30,000 employees in 29 countries, and a market capitalization of $6.4 billion.

The parent firm ACS has purchased a total of 55 companies since it was founded in 1988, said Lesley Pool, the firm's vice president and chief marketing officer.

ACS was founded by technology industry executive Darwin Deason, whose salary and bonus last year as chairman totaled just over $2 million. Deason owns 1.5 million shares of ACS, or 2.6 percent of the firm, a stake worth about $160.4 million as of Friday.

Of the 15 analysts who rate the stock of the parent company ACS, all but one have given positive reviews lately, with most analysts recommending to buy the shares.

The stock itself has more than doubled in value since Jan. 18, 2001, and reached an all-time high of $108.60 a share on Thursday. Profitability for the IMS subsidiary is part of the reason, said Moshe Katri, an analyst at SG Cowen in New York, who raised his rating for ACS to a "buy" from "neutral" in July.

IMS, the subsidiary that holds the traffic-camera component at ACS, had $303.9 million in revenue in the first half of 2001, a 15 percent increase from $263.7 million in the same period a year earlier, according to a filing with the Securities and Exchange Commission. IMS had a profit of $27 million in the first half of 2001, a 56 percent jump from $17.3 million a year earlier, the filing said.

The ACS parent company does not release financial information specifically for traffic cameras, which are just one segment of the IMS subsidiary.

ACS increased its own revenue 37 percent in the third quarter of 2001 to $655 million from $478.6 million in the same quarter a year earlier, according to its statement to the SEC. Profits rose 44 percent to $43.9 million from $30.6 million during the same time.

After ACS completed its purchase of IMS Corp., it immediately paid off the entire debt in October by selling 8 million shares of its stock at $81 a share, Pool said.

In November, ACS kicked off a $27 million deal to manage and operate information technology services at the Queen's Medical Center, Hawaii's largest hospital, for seven years.

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