1
Exhibit 13
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
2000 FINANCIAL REPORT
CONTENTS
- --------------------------------------------------------------------------------
Business of AMS 1
Financial Statements and Notes 4
Report of Independent Accountants 27
Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Assumptions Underlying Certain Forward-Looking
Statements and Factors That May Affect Future Results 35
Five-Year Financial Summary 37
Five-Year Revenues by Target Market 38
Selected Quarterly Financial Data 39
Other Information 40
2
BUSINESS OF AMS
OVERVIEW
The business of American Management Systems, Incorporated and its wholly
owned subsidiaries ("AMS" or the "Company") is to partner with clients to
achieve breakthrough performance through the intelligent use of information
technology. AMS is the premier provider of Next Generation Enterprise business
and technology solutions that dramatically improve business performance and
create value for clients. AMS provides a full range of consulting services from
strategic business analysis to the full implementation of solutions. AMS's suite
of next generation products, deep industry expertise and business alliances
provide a foundation of management and technology services that integrate the
latest technologies with existing IT infrastructures and internal processes
providing productivity gains for clients. AMS measures success based on the
results and business benefits achieved by its clients.
The Company focuses on expanding its delivery of enterprise-wide
business solutions - including eBusiness solutions - tailored to clients in
financial services, new media and communications, federal, state and local
governments as well as health care and utilities. These solutions help firms
achieve greater cost savings, deliver improved customer service and leverage
cross-sell and up-sell opportunities in their markets.
AMS is a trusted business partner for many of the largest and most
respected organizations in the markets in which it specializes. AMS is a company
that transforms organizations into Next Generation Enterprises. A key element of
this is establishing an extensive network of strategic alliances, partnerships
and joint ventures to provide "best of breed" solutions and to extend AMS's
market reach in all of the Company's target markets. Each year, approximately
85% of the Company's business comes from clients it worked with in previous
years.
The Company, which operates as one segment, focuses on clients in
specific industries, which are referred to as target markets. The Company is
targeting high value sectors within these target markets and striving to be the
market leader in providing Next Generation Enterprise solutions. Organizations
in AMS's target markets - new media and communications firms; financial services
institutions; state and local governments and education organizations; federal
government agencies; and other corporate clients -- have a crucial need to
exploit the potential benefits of information and systems integration
technology. The Company helps clients fulfill this need by ensuring quality
project execution and continuing to build a professional staff, which is
composed of experts in the necessary technical and functional disciplines. The
Company is focused on consolidating operating activities to create new
opportunities for growth and leveraging its deep industry knowledge and existing
client relationships to support that growth.
A significant component of AMS's business is the development of
proprietary software products, either with its own funds or on a jointly funded
basis with other organizations. These products are principally licensed as
elements of custom tailored systems, and, to a lesser extent, as stand-alone
applications. The Company expended $76.2 million in 2000, $102.3 million in
1999, and $77.4 million in 1998 for development associated with proprietary
software. The Company expensed in the accompanying consolidated financial
statements $45.3 million in 2000, $47.1 million in 1999, and $35.4 million in
1998 for research and development associated with proprietary software,
including amortization. In 2000, the Company reduced the unamortized costs by
$5.9 million representing collections from funding partners, compared to $21.8
million in 1999. As a percentage of revenues, license and maintenance fee
revenues were less than 10% during each of the last three years.
In order to serve clients outside of the United States, AMS has
established subsidiaries or foreign branches. Exhibit 21 of this Form 10-K
provides a complete listing of all twenty-six active AMS subsidiaries (and
branches), showing name, year organized or acquired, and place of incorporation.
1
3
Revenues attributable to AMS's non-US clients were approximately $196.3 million
in 2000, $226.7 million in 1999, and $208.4 million in 1998. Additional
information on revenues and assets attributable to AMS's geographic areas of
operation is provided in Note 12 of the consolidated financial statements
appearing in Exhibit 13 of this Form 10-K.
Founded in 1970, AMS services clients worldwide. AMS's approximately
8,500 employees serve clients from corporate headquarters in Fairfax, Virginia
and from 51 offices worldwide.
NEW MEDIA AND COMMUNICATIONS FIRMS
AMS markets systems consulting and integration services to both local
exchange and interexchange carriers, cellular and wireless telephone companies
as well as cable, new media, DSL eCommerce, and eBusiness organizations. AMS's
services encompass developing and implementing AMS's next generation software
products specializing in customer care, billing, order processing, accounts
receivable, and collections, as well as integrating leading industry partner
products to create solutions for clients.
FINANCIAL SERVICES INSTITUTIONS
AMS provides systems consulting and integration services, as well as
application software products to financial institutions and insurance companies
worldwide. The Company specializes in corporate and international banking,
consumer credit management, customer value and global risk management. The
Company focuses on providing next generation solutions by incorporating its own
suite of products while partnering with leading industry providers as well as
clients to deliver Customer Value Management and facilitate business
transformation for clients.
STATE AND LOCAL GOVERNMENTS AND EDUCATION
AMS provides information technology consulting and systems integration
services to state, county, and municipal governments as well as universities and
colleges. AMS provides these organizations industry experience and expertise in
delivering financial, tax, and revenue management applications as well as
enhancing human resources, social services, public safety and transportation
functions, and environmental systems. The Company specializes in designing,
developing, and implementing next generation- eGovernment- services and
application software products that create productivity gains for clients through
integrating the latest technologies with existing IT infrastruture and internal
services. AMS is working with both clients and leading industry providers to
develop statewide electronic malls to allow all state and local agencies to
purchase goods and services from approved vendors over the web.
2
4
FEDERAL GOVERNMENT AGENCIES
AMS's clients include civilian and defense agencies as well as aerospace
companies. AMS's long-term relationships with Federal Government Agencies
continue to enhance a deep industry expertise that is central to providing
management consulting services and systems integration that generate solutions
for these clients. AMS's services include developing and implementing
eProcurement and next generation financial solutions as well as providing
information technology consulting, systems re-engineering, large scale systems
integration and maintenance support.
OTHER CORPORATE CLIENTS
AMS provides enterprise-wide business and technology solutions for firms
in other industries, including health care and utilities. AMS's suite of
management and technology solutions (including eBusiness) supports projects with
several large organizations in the healthcare and utilities market place, which
AMS intends to pursue further.
3
5
FINANCIAL STATEMENTS AND NOTES
American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
(In millions except per share data) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
REVENUES $ 1,279.3 $ 1,240.3 $ 1,057.8
EXPENSES:
Client Project Expenses 676.5 653.8 576.2
Other Operating Expenses 401.4 380.0 305.7
Corporate Expenses 91.2 88.6 79.0
Provision for Specific Contract -- 20.0 7.0
Provision for Contract Litigation Settlement 35.2 -- --
--------- --------- ---------
1,204.3 1,142.4 967.9
INCOME FROM OPERATIONS 75.0 97.9 89.9
OTHER (INCOME) EXPENSE:
Interest (Income) Expense 3.4 -- 0.8
Other (Income) Expense (5.0) (2.8) 1.1
Loss on Equity Investments 2.4 4.3 0.7
--------- --------- ---------
0.8 1.5 2.6
INCOME BEFORE INCOME TAXES 74.2 96.4 87.3
INCOME TAXES 30.4 39.5 35.5
--------- --------- ---------
NET INCOME $ 43.8 $ 56.9 $ 51.8
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 41.5 41.9 42.1
========= ========= =========
BASIC NET INCOME PER SHARE $ 1.06 $ 1.36 $ 1.23
========= ========= =========
WEIGHTED AVERAGE SHARES AND EQUIVALENTS 41.9 42.6 42.9
========= ========= =========
DILUTED NET INCOME PER SHARE $ 1.05 $ 1.34 $ 1.21
========= ========= =========
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
4
6
American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
December 31 (In millions) 2000 1999
- ----------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 43.2 $111.3
Accounts and Notes Receivable 311.2 285.4
Prepaid Expenses and Other Current Assets 22.9 13.1
------ ------
377.3 409.8
Deferred Income Taxes -- 6.9
------ ------
377.3 416.7
FIXED ASSETS:
Equipment 49.4 50.5
Furniture and Fixtures 26.8 25.5
Leasehold Improvements 24.0 19.1
------ ------
100.2 95.1
Accumulated Depreciation and Amortization (65.2) (63.9)
------ ------
35.0 31.2
OTHER ASSETS:
Purchased and Developed Computer Software (Net of
Accumulated Amortization of $97.5 and $74.5) 141.9 114.7
Intangibles (Net of Accumulated Amortization of
$6.6 and $5.5) 25.4 6.2
Other Assets (Net of Accumulated Amortization of
$1.1 and $0.9) 66.3 31.6
------ ------
233.6 152.5
------ ------
TOTAL ASSETS $645.9 $600.4
====== ======
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
5
7
American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
December 31 (In millions, except share data) 2000 1999
- --------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Notes Payable and Line of Credit $ 41.1 $ 6.1
Accounts Payable 15.1 24.6
Accrued Incentive Compensation 24.2 51.7
Other Accrued Compensation and Related Items 50.1 40.7
Deferred Revenues 43.0 48.1
Other Accrued Liabilities 13.0 12.8
Accrued Contract Losses 0.8 27.0
Income Taxes Payable 7.5 7.0
------ ------
194.8 218.0
Deferred Income Taxes 7.1 --
------ ------
201.9 218.0
NONCURRENT LIABILITIES:
Notes Payable 10.3 16.5
Deferred Compensation 35.3 27.5
Deferred Income Taxes 38.0 28.9
------ ------
83.6 72.9
------ ------
TOTAL LIABILITIES 285.5 290.9
STOCKHOLDERS' EQUITY:
Preferred Stock ($0.10 Par Value; 4,000,000 Shares
Authorized, None Issued or Outstanding)
Common Stock ($0.01 Par Value; 200,000,000 Shares
Authorized, 51,057,214 and 51,057,214 Issued and
41,527,563 and 41,018,387 Outstanding) 0.5 0.5
Capital in Excess of Par Value 91.6 89.5
Deferred Compensation (5.3) --
Retained Earnings 341.0 297.2
Accumulated Other Comprehensive Loss (18.0) (12.2)
Common Stock in Treasury, at Cost (9,529,651 and
10,038,827 Shares) (49.4) (65.5)
------ ------
360.4 309.5
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $645.9 $600.4
====== ======
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
6
8
American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 (In millions) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 43.8 $ 56.9 $ 51.8
Adjustments to Reconcile Net Income to Net Cash (Used in)
Provided by Operating Activities:
Depreciation 9.3 12.5 17.0
Amortization 25.4 25.1 21.6
Amortization of Stock Compensation 1.5 -- --
Loss on Equity Investments 5.9 4.3 0.7
Deferred Income Taxes 23.1 (4.0) 7.7
Provision for Doubtful Accounts 6.7 6.2 10.9
Loss on Disposal of Assets -- 5.6 2.6
Changes in Assets and Liabilities:
Increase in Trade Receivables (32.4) (31.3) (30.3)
Increase in Prepaid Expenses and Other
Current Assets (9.8) (4.4) (0.3)
Increase in Other Assets (28.1) (14.6) (10.6)
(Decrease) Increase in Accrued Incentive Compensation (23.9) 1.1 31.1
Increase in Accounts Payable, Other Accrued
Compensation and Liabilities 7.9 23.8 26.0
(Decrease) Increase in Deferred Revenue (5.1) 10.3 (2.0)
(Decrease) Increase in Accrued Contract Losses (26.2) 19.7 7.3
Increase (Decrease) in Income Taxes Payable 0.5 (2.1) 0.3
------ ------ ------
Net Cash (Used In) Provided by Operating Activities (1.4) 109.1 133.8
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets (13.0) (9.3) (10.6)
Purchase and Development of Computer Software (51.6) (53.3) (45.1)
Other Investments and Intangibles (32.9) (4.5) (2.3)
------ ------ ------
Net Cash Used in Investing Activities (97.5) (67.1) (58.0)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 88.0 -- --
Payments on Borrowings (59.1) (5.4) (7.5)
Proceeds from Common Stock Options Exercised 12.3 14.2 20.9
Payments to Acquire Treasury Stock (4.5) (52.9) (21.2)
------ ------ ------
Net Cash Provided by (Used in) Financing Activities 36.7 (44.1) (7.8)
------ ------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (5.9) (5.9) 1.7
------ ------ ------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (68.1) (8.0) 69.7
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 111.3 119.3 49.6
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 43.2 $111.3 $119.3
====== ====== ======
NON-CASH OPERATING AND FINANCING ACTIVITIES:
Treasury Stock Utilized to Satisfy Accrued
Incentive Compensation Liabilities $ 3.6 $ 5.2 $ --
Tax Benefit Related to Exercise of Common Stock Options $ 2.5 $ 5.1 $ 7.3
Treasury Stock Utilized to Satisfy Stock Options Exercised $ 7.2 $ 12.3 $ 4.7
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
7
9
American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31, 2000, 1999, and 1998 (In millions)
Common Common
Stock Stock Capital in Accumulated Other
Shares (Par Value Excess of Comprehensive
Outstanding $0.01) Par Value Loss
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 41.5 $ 0.5 $ 84.1 $ (8.0)
Common Stock Options Exercised 1.2 -- 5.3
Tax Benefit Related to Exercise of
Common Stock Options 7.3
Currency Translation Adjustment 1.7
Common Stock Repurchased (0.7)
1998 Net Income
------ ------ ------ ------
Balance at December 31, 1998 42.0 0.5 96.7 (6.3)
Common Stock Options Exercised 0.7 -- (12.3)
Tax Benefit Related to Exercise of
Common Stock Options 5.1
Currency Translation Adjustment (5.9)
Common Stock Repurchased (1.9)
Restricted Stock Award 0.2
1999 Net Income
------ ------ ------ ------
Balance at December 31, 1999 41.0 0.5 89.5 (12.2)
Common Stock Options Exercised 0.6 -- (7.2)
Tax Benefit Related to Exercise of
Common Stock Options 2.5
Currency Translation Adjustment (5.8)
Deferred Compensation on
Restricted Stock 6.8
Amortization of Deferred
Compensation on Restricted Stock
Common Stock Repurchased (0.2)
Restricted Stock Award 0.1
2000 Net Income
------ ------ ------ ------
Balance at December 31, 2000 41.5 $ 0.5 $ 91.6 $(18.0)
====== ====== ====== ======
Total
Retained Deferred Treasury Stockholders'
Earnings Compensation Stock Equity
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $188.5 -- $(26.4) $238.7
Common Stock Options Exercised 8.3 13.6
Tax Benefit Related to Exercise of
Common Stock Options 7.3
Currency Translation Adjustment 1.7
Common Stock Repurchased (21.2) (21.2)
1998 Net Income 51.8 51.8
------ ------ ------ ------
Balance at December 31, 1998 240.3 -- (39.9) 291.9
Common Stock Options Exercised 21.4 9.1
Tax Benefit Related to Exercise of
Common Stock Options 5.1
Currency Translation Adjustment (5.9)
Common Stock Repurchased (52.9) (52.9)
Restricted Stock Award 5.3 5.3
1999 Net Income 56.9 56.9
------ ------ ------ ------
Balance at December 31, 1999 297.2 -- (65.5) 309.5
Common Stock Options Exercised 16.9 9.7
Tax Benefit Related to Exercise of
Common Stock Options 2.5
Currency Translation Adjustment (5.8)
Deferred Compensation on
Restricted Stock (6.8) --
Amortization of Deferred
Compensation on Restricted Stock 1.5 1.5
Common Stock Repurchased (4.5) (4.5)
Restricted Stock Award 3.7 3.7
2000 Net Income 43.8 43.8
------ ------ ------ ------
Balance at December 31, 2000 $341.0 $ (5.3) $(49.4) $360.4
====== ====== ====== ======
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
8
10
American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31 (In millions) 2000 1999 1998
- ---------------------------------------------------------------------------------
NET INCOME $43.8 $56.9 $51.8
OTHER COMPREHENSIVE INCOME (LOSS):
Currency Translation Adjustment (5.9) (5.9) 1.7
----- ----- -----
COMPREHENSIVE INCOME $37.9 $51.0 $53.5
===== ===== =====
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
9
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The business of American Management Systems, Incorporated and its
wholly-owned subsidiaries ("AMS" or the "Company") is to partner with clients to
achieve breakthrough performance through the intelligent use of information
technology. The Company has a thirty-year history of designing, developing and
implementing technology solutions that redefine entire enterprises. AMS is an
international business and information technology consulting firm that provides
leading edge business and technology solutions featuring a full range of
services: eBusiness strategy, business re-engineering, change management,
systems integration, and systems development and implementation. AMS is
headquartered in Fairfax, Virginia, with 51 offices worldwide. The Company,
which operates as a leading international business and technology consulting
service provider, considers its business to be one segment that focuses on the
following primary target markets: new media communications, financial services
institutions, state and local governments and education, federal government
agencies and other corporate clients.
A. Revenue Recognition
Revenues on fixed-price contracts are generally recorded using the
percentage of completion method based on the relationship of costs incurred to
the estimated total costs of the project. Revenues on cost reimbursable
contracts and time and material contracts are recorded as labor and other
expenses are incurred.
The Company recognizes revenue from software license arrangements in
accordance with AICPA Statement of Position 97-2, "Software Revenue Recognition"
(SOP 97-2) and related interpretations as amended. SOP 97-2 requires that
revenue recognized from software arrangements be allocated to each element of
the arrangement based on the relative fair values of the elements, such as
software products and services, post contract customer support, web site design
and development. The Company recognizes revenues on the percentage of completion
method for contracts involving both software license fees and the provision of
significant software modifications and customized services or where services are
considered essential to the functionality of the software. For all other
software license contracts, where services are not considered essential to the
functionality of the software, revenues are recorded upon execution of the
contract, provided that all shipment obligations have been met, fees are fixed
or determinable, and collection is deemed probable. Revenues from software
maintenance contracts are recognized ratably over the maintenance period.
On benefit-funded contracts (contracts whereby the amounts due the
Company are payable based on actual benefits derived by the client), the Company
defers recognition of revenues until a point at which management can predict,
with reasonable certainty, that the benefit stream will generate amounts
sufficient to fund the contract. From that point forward, revenues are
recognized on a percentage of completion basis. All of the current large
multi-year benefit-funded contracts are currently recognized on a percentage of
completion basis.
When adjustments in the contract value or estimated costs are
determined, any changes from prior estimates are reflected in earnings in the
current period. Any anticipated losses on contracts in progress are charged to
earnings when identified. The costs associated with cost-plus government
contracts are subject to audit by the U.S. Government. In the opinion of
management, no significant adjustments or disallowances of costs are anticipated
beyond those provided for in the financial statements.
B. Software Development Costs
10
12
The Company develops proprietary software products using its own funds,
or on a jointly funded basis with other organizations. These software products
are then licensed to customers, either as stand-alone applications, or as
elements of custom-built systems.
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86 -- "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed" and for software
jointly developed in accordance with Statement of Position 97-2, "Software
Revenue Recognition". For projects funded by the Company, significant
development costs incurred after technological feasibility has been established
are capitalized. After the product is available for general release to
customers, such costs are amortized on a straight-line basis over a period of 3
to 5 years or such other period as deemed appropriate. For projects where the
Company has a funding partner, the capital asset is reduced by the amount
collected from the partner. The Company recorded $19.5 million of amortization
in 2000, $16.6 million of amortization in 1999, and $14.5 million of
amortization in 1998. Unamortized costs were $133.4 million, $106.7 million, and
$79.1 million at December 31, 2000, 1999, and 1998, respectively. In 2000, the
Company reduced the unamortized costs by $5.9 million representing collections
from funding partners, compared to $21.8 million in 1999. The Company evaluates
the net realizable value of capitalized software using the estimated,
undiscounted, net-cash flows of the underlying products.
The Company capitalizes costs incurred for the development or purchase
of internal use software in accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Once the product is substantially complete and ready for its
intended use, capitalized costs are amortized on a straight-line basis over the
estimated useful life of the software.
The Company expended $76.2 million in 2000, $102.3 million in 1999, and
$77.4 million in 1998 for development associated with proprietary software. The
Company expensed in the accompanying consolidated financial statements $45.3
million in 2000, $47.1 million in 1999, and $35.4 million in 1998 for research
and development associated with proprietary software.
C. Fixed Assets, Purchased Computer Software Licenses and Intangibles
Fixed assets and purchased computer software licenses are recorded at
cost. Furniture, fixtures, and equipment are depreciated over estimated useful
lives ranging from 3 to 10 years. Leasehold improvements are amortized ratably
over the lesser of the applicable lease term or the useful life of the
improvement. For financial statement purposes, depreciation is computed using
the straight-line method. Purchased software licenses are amortized over 2 to 5
years using the straight-line method. Intangibles are generally amortized over 5
to 15 years.
11
13
D. Income Taxes
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities, using enacted tax rates for the year in which the differences are
expected to reverse.
Deferred income taxes are provided for temporary differences in
recognizing certain income, expense, and credit items for financial reporting
purposes and tax reporting purposes. Such deferred income taxes primarily relate
to the methods of accounting for revenue, capitalized software development
costs, restricted stock, and the timing of deductibility of certain reserves and
accruals for income tax purposes. A valuation allowance is recorded if it is
"more likely than not" that some portion or all of a deferred tax asset will not
be realized.
E. Earnings Per Share
Basic EPS excludes dilution and is computed by dividing net income by
the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
and is computed using the treasury stock method.
F. Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The carrying
amount approximates fair value because of the short maturity of these
instruments.
G. Currency Translation
For operations outside the United States with functional currencies
other than the U.S. dollar, the Company translates income statement amounts at
the average monthly exchange rates throughout the year. The Company translates
assets and liabilities at exchange rates prevailing as of the balance sheet
date. The resulting translation adjustments and gains and losses on intercompany
transactions which are long-term in nature are shown as other comprehensive
income.
H. Principles of Consolidation
The consolidated financial statements include the accounts of American
Management Systems, Incorporated and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated. The Company's
investments in companies in which it has the ability to exercise significant
influence over operating and financial policies are accounted for under the
equity method, with the remaining investments carried at cost.
I. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Future actual results could be different due to these
estimates. Significant estimates inherent in the preparation of the accompanying
consolidated financial statements include: management's forecasts of contract
costs and progress towards completion which are used to determine revenue
recognition under the percentage-of-completion method, management's estimates of
allowances for doubtful accounts, tax valuation allowances, and management's
estimates of the net realizable value of purchased and developed computer
software and intangible assets.
12
14
J. Foreign Currency Hedging
From time to time, the Company has entered into foreign exchange
contracts as a hedge against market fluctuations. Hedges are established in
order to reduce the risk of market fluctuations associated with changes in
exchange rates. Market gains and losses are recognized, and the resulting
credits and debits offset foreign exchange gains and losses on those
transactions when settled. No contracts were outstanding as of December 31,
2000.
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133 as amended by statements No. 137 and 138 entitled "Accounting for
Derivative Instruments and Hedging Activities." This Statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company will adopt this new accounting standard effective January 1, 2001. The
adoption of this standard will have no material impact on the Company's
consolidated financial statements.
K. Reclassifications
Certain prior year information has been reclassified to conform with the
current year presentation.
L. Comprehensive Income
The Company's principal components of comprehensive income are net
income and foreign currency translation adjustments.
M. Investments
The Company's uses the equity method of accounting for investments in
companies and other investments in which the Company has significant influence,
generally this represents common stock ownership or partnership equity of at
least 20% or more. Employing this method the Company records the initial
investment at cost and subsequently adjusts the carrying amount of the
investment to reflect the Company's share of income or loss of the investee and
to reflect when applicable any dividends received from the investee.
NOTE 2 -- ACCOUNTS AND NOTES RECEIVABLE
December 31 (In millions) 2000 1999
- -----------------------------------------------------------------
Trade Accounts Receivable
Amounts Billed and Billable $228.6 $226.8
Amounts Not yet Billable 77.6 58.4
Contract Retention 13.0 11.0
------ ------
Total 319.2 296.2
Allowance for Doubtful Accounts (8.0) (10.8)
------ ------
Total $311.2 $285.4
====== ======
13
15
The Company enters into large, long-term contracts and, as a result,
periodically maintains individually significant receivable balances with certain
major clients. At December 31, 2000, the ten largest individual receivable
balances totaled approximately $112.7 million.
Management believes that credit risk, with respect to the Company's
receivables, is low due to the creditworthiness of its clients and the
diversification of its client base across different industries and geographies.
In addition, the Company is further diversified in that it enters into a range
of different types of contracts, such as fixed price, cost-plus, time and
material, and benefits funded contracts. The Company may also, from time to
time, work as a subcontractor on particular contracts. The Company performs
ongoing evaluations of contract performance as well as evaluations of the
client's financial condition.
NOTE 3 - OTHER ASSETS
December 31 (In millions) 2000 1999
- ----------------------------------------------------------------------------
Company Owned Life Insurance $32.6 $28.1
Long Term Contract Receivables 14.4 --
Other Investments 7.1 0.4
Other Assets, Net of Accumulated Amortization 12.2 3.1
----- -----
Total $66.3 $31.6
===== =====
NOTE 4 -- NOTES PAYABLE AND LINE OF CREDIT
Effective January 9, 1998, the Company entered into a syndicated
five-year $120 Million Multi-Currency Revolving Credit Agreement with Bank of
America and Wachovia Bank (the "1998 Agreement") as agents. A term loan (the
"Term Loan"), which was funded by Wachovia Bank and Bank of America on January
6, 1997 under a term loan agreement, remains outstanding and is presently
governed by the 1998 Agreement.
The weighted average borrowings under all revolving credit agreements
was approximately $34.1 million in 2000, and $0.4 million in 1999 at weighted
daily average interest rates of approximately 6.5% in 2000, and 5.7% in 1999.
The maximum amount outstanding under all agreements was $106.1 million in 2000
and $37.8 million in 1999. At December 31, 2000 the Company had $35 million
outstanding under its revolving credit facility and $16.4 million in term loans
compared to no amounts outstanding under its revolving credit facility and $22.6
million outstanding in term loans at December 31, 1999.
The Company and most of its existing subsidiaries may borrow funds under
the 1998 Agreement in the approved currencies, subject to certain minimum
amounts per borrowing. Interest on such borrowings generally ranged from LIBOR
plus 12.5 basis points to LIBOR plus 45 basis points, depending upon the ratio
of total debt to EBITDA. The Company also was required to pay a facility fee
ranging from 12.5 basis points to 20 basis points of the total facility, based
upon the same performance measure. In addition, if 50% or more of the facility
was utilized, an additional usage fee of 12.5 basis points applied. Based upon
such measures, at December 31, 2000, interest payments were based upon an
interest rate of approximately 6.8%.
The 1998 Agreement, and the Term Loan, both contain certain financial
covenants with which the Company must comply. These covenants include: (i)
maintain at the end of each fiscal quarter for the four quarters ending on such
a date a fixed charge coverage ratio of not less than 2.5 to 1.0, (ii) maintain
total debt to EBITDA ratio of no more than 3.0 to 1.0, (iii) restrictions on
using net worth to acquire other companies or transferring assets to a
subsidiary, and (iv) restrictions on declaring or paying cash dividends
14
16
in any one fiscal year in excess of twenty-five percent of its net income for
such year. As of December 31, 2000, the Company was in compliance with these
covenants.
The following schedule summarizes the total outstanding notes; there are
no outstanding capitalized lease obligations.
December 31 (In millions) 2000 1999
- ---------------------------------------------------------------------------------
Revolving Line-of-Credit $35.0 $ --
Unsecured Notes With Interest at 5.250% - 6.938%
Principal and Interest Payable Monthly Through
January 2004 16.4 22.6
----- -----
Total $51.4 $22.6
===== =====
Principal amounts are repayable as shown below:
2001 41.1
2002 5.3
2003 4.0
2004 1.0
-----
51.4
Less Current Portion 41.1
-----
Long-Term Portion $10.3
=====
Interest paid by the Company totaled $4.5 million in 2000, including
approximately $0.7 million related to additional borrowings associated with the
Mississippi settlement (see Note 11), $4.2 million in 1999, and $4.2 million in
1998.
NOTE 5 -- EQUITY SECURITIES
The Company has an equity incentive plan which as amended (Plan F),
provides for the issuance of 5,800,000 shares of the Company's common stock
either as incentive stock options (ISOs) or non-qualified stock options (NSOs).
The maximum lifetime for options range from five to ten years in the case of
NSOs and eight to ten years in the case of ISOs. Plan F allows the Compensation
Committee to grant stock options to Outside Directors generally on a
discretionary basis.
On December 3, 1999 the Board approved the 1999 Contractor Stock Option
Plan. The purpose of the plan is to offer certain non-employees ("contractors"),
who contribute materially to the successful operation of the Company, additional
incentive to continue to serve as contractors by increasing their participation
in the Company through stock ownership. Under the plan, the Company is
authorized to issue up to 20,000 shares of common stock as NSOs that will expire
on a date no later than five years from the date of issuance. During 2000, 1,500
options were granted under this plan for which the Company recorded compensation
expense of $23,760. No grants were made during 1999.
Under all plans, the exercise price of an ISO granted is not less than
the fair market value of the common stock on the date of grant and for NSOs, the
exercise price is either the fair market value of the
15
17
common stock on the date of the grant or, when granted in connection with
one-year performance periods under the Company's incentive compensation program,
the exercise price may be determined by a formula selected by the Board or
appropriate Board committee that is based on the fair market value of the common
stock as of a date, or for a period, that is within three months of the date of
grant. In cases where the market value exceeds the exercise price on the date of
grant, the differential is recorded as compensation expense. Options granted are
exercisable immediately, in monthly installments, or at a future date, as
determined by the appropriate Board committee or as otherwise specified in the
plan.
At December 31, 2000 there were 826,346 shares available for grant under
Plan F. No options remain available for grant under any previous stock option
plan. The following table summarizes information with respect to stock options
outstanding at December 31, 2000 under all plans.
Options Exercisable
Total Options Outstanding at 12/31/00 at 12/31/00
-------------------------------------------------------- ---------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Prices of Shares (Years) Price of Shares Price
- -----------------------------------------------------------------------------------------------------------------
$ 8.33 - $14.83 238,822 1.61 $11.75 203,307 $11.42
16.13 - 16.31 1,286,250 9.78 16.31 0 0.00
16.44 - 23.72 884,897 4.12 20.52 515,177 19.01
23.75 - 28.81 926,715 2.98 26.17 608,853 26.00
29.25 - 32.75 866,541 8.83 31.70 342,972 31.75
33.00 - 39.00 987,091 6.68 36.05 363,287 33.86
--------- ---------
5,190,316 6.48 $24.90 2,033,596 $25.15
16
18
Additional information with respect to stock options awarded pursuant to such
plans is summarized in the following schedule.
Number of Weighted
Option Average
Shares Exercise Price
- -------------------------------------------------------------------------------------------
Balance Outstanding at December 31, 1997 3,779,302 $15.31
For the Year Ended December 31, 1998:
Options Granted 731,244 25.34
Options Canceled (122,325) 21.88
Options Exercised (1,204,535) 11.20
----------
Balance Outstanding at December 31, 1998 3,183,686 18.92
For the Year Ended December 31, 1999:
Options Granted 1,084,684 30.73
Options Canceled (150,473) 24.06
Options Exercised (725,322) 12.64
----------
Balance Outstanding at December 31, 1999 3,392,575 23.81
For the Year Ended December 31, 2000:
Options Granted 3,002,008 25.92
Options Canceled (645,740) 30.51
Options Exercised (558,527) 17.17
----------
Balance Outstanding at December 31, 2000 5,190,316 24.90
==========
The Company has chosen to continue to account for stock-based
compensation using the method prescribed in APB Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company has adopted, for disclosure purposes
only, Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" (SFAS No. 123).
If the Company determined compensation cost for these plans in
accordance with SFAS No. 123, the Company's pro-forma net income and earnings
per share for fiscal year 2000, 1999 and 1998 would have been decreased to the
pro-forma amounts indicated below:
December 31 (In millions, except per share data): 2000 1999 1998
- -----------------------------------------------------------------------------------------
Reported:
Net Income $ 43.8 $ 56.9 $ 51.8
====== ====== ======
Basic Net Income per Share $ 1.06 $ 1.36 $ 1.23
====== ====== ======
Diluted Net Income per Share $ 1.05 $ 1.34 $ 1.21
====== ====== ======
Pro-Forma:
Net Income $ 36.6 $ 51.1 $ 48.8
====== ====== ======
Basic Net Income per Share $ 0.88 $ 1.22 $ 1.16
====== ====== ======
Diluted Net Income per Share $ 0.87 $ 1.20 $ 1.14
====== ====== ======
17
19
The Company has ten-year, eight-year and five-year options. For
disclosure purposes, the fair value of each stock option grant is estimated on
the date of grant using the Black-Scholes option-pricing model. Under the
Black-Scholes model, the total value of the ten-year options granted in 2000 and
1999 was $38.9 million and $8.7 million, respectively, for which certain options
would be amortized on a graded vesting schedule on a pro-forma basis over a
seven-year period, and others would be amortized ratably on a pro-forma basis
over a ten-year period (which varies between four months and ten years). The
weighted-average fair value of the ten-year options granted in 2000 and 1999 was
$12.97 and $15.63, respectively. In accordance with the amendment to Plan F
ratified on May 21, 1999, there were no eight-year or five-year options granted
in 2000. The total value of the eight-year options granted in 1999 and 1998 was
$0.4 million and $2.8 million, respectively, which would be amortized on a
graded vesting schedule on a pro-forma basis over a seven-year period. The
weighted-average fair value of the eight-year stock options granted in 1999 and
1998 was $17.82 and $12.37, respectively. The total value of the five-year stock
options granted in 1999 and 1998 was $8.0 million and $5.2 million,
respectively. These would be amortized ratably on a pro-forma basis over a
five-year period (which varies between four months and five years). The
weighted-average fair value of the five-year stock options granted in 1999 and
1998 was $16.00 and $10.18, respectively.
Additionally, the following weighted average assumptions were used for
the ten-year, eight-year and five-year stock options granted in 2000, 1999 and
1998 respectively.
Ten Year Eight Year Five Year
-------------------------- ------------------------ ------------------------
December 31 2000 1999 1998 2000 1999 1998 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Expected Volatility 47.11% 44.44% -- -- 44.99% 43.86% -- 49.92% 45.44%
Risk-Free Interest Rate 6.12% 6.09% -- -- 4.90% 5.36% -- 4.99% 5.48%
Expected Life 5 yrs 8 yrs -- -- 6 yrs 5 yrs -- 4 yrs 4 yrs
Expected Dividend Yield 0% 0% -- -- 0% 0% -- 0% 0%
On September 21, 1999, the Company announced that its Board of Directors
had authorized the purchase, from time to time, of up to 2 million shares of its
common stock through open market and negotiated purchases. This authorization is
in addition to the actions in August of 1998 and in February 1999, where in both
cases the Board of Directors authorized the purchase of 1 million shares. The
Company repurchased approximately 190,000, 1,900,000, and 720,000 shares of its
common stock during 2000, 1999, and 1998, respectively, for a total of $78.6
million. In addition, the Company has been funding stock option exercises
through the reissuance of previously acquired treasury shares.
The Company has a Restricted Stock Profit Sharing Plan whereby
restricted shares may be issued to employees if the Company meets performance
objectives. The Board of Directors specifies the total award pool as a fixed
dollar amount as set at the beginning of the performance period. The total
shares distributed are based upon the number of shares to which the pool
converts using the fair market value of the Company's common stock on the date
of grant. These shares generally vest over a three year period. Total shares
issued were 0, 140,393 and 186,165 for the years ended December 31, 2000, 1999
and 1998 respectively, with compensation expense being recorded of $3.7 million,
$5.3 million and zero for the years then ended.
In fiscal year 2000 the Board authorized the issuance of 415,800
Restricted Shares under an employee retention program. These shares vest over a
three year period. The Company recorded compensation expense of $1,507,276 for
the year ended December 31, 2000, resulting in a remaining deferred compensation
balance of $5,275,463 at December 31, 2000.
18
20
NOTE 6 -- EARNINGS PER SHARE RECONCILIATION
Year Ended December 31 (In millions except per share data) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Basic Earnings per Share Computation
- ------------------------------------
Net Income (Numerator) $ 43.8 $ 56.9 $ 51.8
------ ------ ------
Weighted Average Shares (Denominator) 41.5 41.9 42.1
------ ------ ------
Basic Net Income per Share $ 1.06 $ 1.36 $ 1.23
====== ====== ======
Diluted Earnings per Share Computation
- --------------------------------------
Net Income (Numerator) $ 43.8 $ 56.9 $ 51.8
------ ------ ------
Weighted Average Shares and Equivalents:
Weighted Average Shares Outstanding 41.5 41.9 42.1
Shares Issuable Upon Exercise of Stock Options 2.5 2.7 3.3
Less Shares Assumed to be Repurchased at Fair Market Value (2.1) (2.0) (2.5)
------ ------ ------
Total Weighted Average Shares and Equivalents (Denominator) 41.9 42.6 42.9
------ ------ ------
Diluted Net Income per Share $ 1.05 $ 1.34 $ 1.21
====== ====== ======
19
21
NOTE 7 -- INCOME TAXES
Year Ended December 31 (In millions) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
Income before income taxes for the year ended
December 31 was derived in the following jurisdictions:
U.S $57.9 $59.7 $58.5
Non-U.S 16.3 36.7 28.8
----- ----- -----
$74.2 $96.4 $87.3
===== ===== =====
The provision for income taxes is comprised of the following:
Current:
U.S. Federal $(1.0) $21.7 $15.5
U.S. State (0.2) 5.1 4.1
Non-U.S 8.5 16.7 8.1
Deferred:
U.S. Federal 21.5 (1.7) 6.4
U.S. State 4.0 (0.2) (1.9)
Non-U.S (2.4) (2.1) 3.3
----- ----- -----
Total Provision $30.4 $39.5 $35.5
===== ===== =====
The differences between the U.S. federal statutory income tax
as measured based on pre-tax income and the Company's
effective rate are:
U.S. federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 1.4 4.1 3.3
Change in valuation allowance (0.4) (0.2) 0.7
Research tax credits (0.5) (1.5) (0.4)
Meals and entertainment 3.3 2.7 2.4
Goodwill and Other Non-deductibles 1.4 0.8 0.6
Benefit of Non-U.S. Subsidiary Conversion -- -- (1.7)
Impact of Non-U.S. jurisdictions 2.0 2.4 1.4
Other (1.2) (2.3) (0.6)
----- ----- -----
Effective Rate 41.0% 41.0% 40.7%
===== ===== =====
20
22
Year Ended December 31 (In millions) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
The tax effect of temporary differences that give rise to
significant portions of the deferred tax assets and deferred
tax liabilities at December 31 are as follows:
Deferred Tax Assets:
Accrued Expenses $ 0.0 $ 10.3 $ 3.2
Employee Related Compensation 23.9 19.3 13.7
Deferred Revenue 1.6 1.7 1.0
Allowance for Doubtful Accounts 3.3 4.5 3.9
Loss and Credit Carryforwards 6.7 5.2 3.5
Other 7.5 6.9 5.0
------- ------- -------
Subtotal 43.0 47.9 30.3
Valuation Allowance (0.6) (0.9) (1.1)
------- ------- -------
Total Deferred Tax Assets $ 42.4 $ 47.0 $ 29.2
------- ------- -------
Deferred Tax Liabilities:
Unbilled Receivables $ (35.1) $ (27.1) $ (19.9)
Capitalized Software (51.0) (42.4) (29.2)
Other (1.4) 0.5 (6.1)
------- ------- -------
Total Deferred Tax Liabilities (87.5) (69.0) (55.2)
------- ------- -------
Net Deferred Tax Liabilities $ (45.1) $ (22.0) $ (26.0)
======= ======= =======
Certain of the Company's subsidiaries have net operating losses totaling
$22.4 million. Losses of $8.1 million expire on or before the close of year
2020. Losses of $14.3 million carry forward over an indefinite period. As a
result of restrictions on the utilization of certain losses, a valuation
allowance has been placed on those losses. The net changes in total valuation
allowance for the years ended December 31, 2000, 1999, and 1998 were a decrease
of $0.3 million, a decrease of $0.2 million, and an increase of $0.6 million
respectively. The Company also has jobs tax credits of $0.3 million that expire
between 2010 and 2012.
The Company has not provided for U.S. federal income and foreign
withholding taxes on $15.7 million of non-U.S. subsidiaries' undistributed
earnings as of December 31, 2000, because such earnings are intended to be
reinvested indefinitely. It is not practicable to estimate the amount of any
additional taxes which may be payable on the undistributed earnings. If these
earnings were distributed, foreign tax credits would become available under
current law to reduce or eliminate the resulting U.S. income tax liability.
The Company paid income taxes of approximately $13.0 million, $43.0
million, and $23.4 million, in 2000, 1999, and 1998, respectively.
NOTE 8 -- DEFERRED COMPENSATION PLAN
The Company has deferred compensation plans which were implemented in
late 1996, and permit eligible employees and directors to defer a specified
portion of their compensation. The deferred compensation earns a specified rate
of return. As of year end 2000 and 1999 the Company had accrued $36.4 million
and $28.3 million, respectively, for its obligations under these plans. The
Company
21
23
expensed $2.6 million,$1.8 million, and $1.4 million in 2000, 1999 and 1998,
respectively, related to the earnings by the deferred compensation plan
participants.
To fund these plans, the Company purchases corporate-owned life
insurance contracts. Proceeds from the insurance policies are payable to the
Company upon the death of the insured. During 1999 the Company received proceeds
of $1.2 million associated with one of the policies, which were subsequently
re-invested in the existing corporate-owned life insurance contracts. The cash
surrender value of these policies, included in "Other Assets", was $32.6 million
at December 31, 2000 and $28.1 million at December 31, 1999. There were no
outstanding loans at December 31, 2000 or December 31, 1999 on these policies.
NOTE 9 -- EMPLOYEE PENSION PLAN
The Company has a simplified employee pension plan, which became
effective January 1, 1980. This plan is a defined contribution plan whereby
contributions are based on the application of a percentage specified by the
Company to the qualified gross wages of eligible employees. The Company makes
annual contributions to the plan equal to the amount accrued for pension
expense. Total expense of the plan was $16.7 million in 2000, $14.0 million in
1999, and $11.5 million in 1998.
NOTE 10 -- JOINT VENTURE AND ACQUISITION
In 1998, the Company established a joint venture with Bank of Montreal
to provide online loan application and decisioning services to small and
mid-size financial institutions via a new limited liability company, Competix
L.L.C. In October 1999, Competix converted from a limited liability company to a
C-corporation in which the Company currently maintains a 40% interest. Competix
is authorized to issue up to 20% of its stock to its employees, issuable upon
the exercise of stock options. At such time or times as Competix employees
exercise these stock options, AMS's percent ownership in Competix will be
reduced. The Company recorded a gain of $3.5 million during fiscal year 2000 in
connection with the sale of a portion of the Company's then current holdings. In
2000 and 1999, the Company invested $3.8 million and $1.8 million, respectively,
in connection with its interest in Competix, which investment was reduced by
$4.2 million and $4.3 million related to the Company's share of the losses
incurred by Competix in 2000 and 1999 respectively. These losses have reduced
the Company's investment to zero as of December 31, 2000. The Company has a note
receivable from Competix with a gross value of $4.3 million at December 31,
2000. Approximately $1.7 million was charged to earnings as a "Loss on Equity
Investment" which served to reduce this note receivable during fiscal year 2000
bringing the net balance to $2.6 million.
In September 2000, the Company acquired Synergy Consulting, Inc., a
California based provider of systems integration, eBusiness and management
consulting services in a purchase business combination for a cash payment of $20
million. The Company recorded Goodwill associated with the acquisition of
approximately $20.0 million, which will be amortized over 15 years. In addition,
the Company has a contingent obligation to pay the seller up to an additional
$15 million based upon certain financial and/or project related targets being
met. These payments, if made, will be added to the acquisition price and
recorded as additional Goodwill. The results of Synergy have been included in
the Company's Statement of Operations since September 1, 2000.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
The Company occupies production facilities and office space (real
property) and uses various equipment under operating lease agreements, expiring
at various dates through the year 2011.
22
24
The commitments under these agreements, as of December 31, 2000, are
summarized in the table below. Payments under the real property leases are
generally subject to escalation based upon increases in the Consumer Price
Index, operating expenses, and property taxes.
Gross Rentals and Maintenance Payments
(In millions) Real Property Equipment Total
- -------------------------------------------------------------
2001 44.9 15.0 59.9
2002 41.9 7.6 49.5
2003 37.1 2.3 39.4
2004 31.2 1.3 32.5
2005 and beyond 139.1 -- 139.1
------ ------ ------
Total $294.2 $ 26.2 $320.4
====== ====== ======
Operating lease expense for 2000, 1999, and 1998 was approximately $67.4
million, $51.0 million and $45.1 million, respectively.
The Company has an extended leave program for certain employees that
provides for compensated leave of eight weeks after seven years of service. The
leave is not vested and can be taken only at the discretion of management.
Because of the extended period over which the leave accumulates and the highly
discretionary nature of the program, the amount of extended leave accumulated at
any period end which will ultimately be taken is indeterminable. Consequently,
the Company expenses such leave as it is taken.
On April 22, 1999 the Company was served with a complaint alleging that
it failed to deliver software conforming to a contract that it entered into with
the State of Mississippi (the State). The matter proceeded to trial and on
August 23, 2000, a jury awarded the State actual and punitive damages totaling
$474.5 million. On August 28, 2000 the Company reached a fully negotiated
settlement with the State for $185.0 million and on the same day the court
signed an order dismissing the matter with prejudice in recognition of the
settlement. The present value of the settlement was approximately $135.0
million, of which approximately $102.0 million was paid by the Company's
insurers.
The Company recorded a charge of $35.2 million to earnings for the
quarter ended September 30, 2000 for the settlement and the related expenses.
Approximately $34.4 million of this liability was paid during fiscal year 2000,
$12.3 million of which was used to purchase guaranteed funding contracts. The
guaranteed funding contracts were purchased from two large insurance companies,
in the names of the State agencies which are to receive the settlement payments
to fund all remaining amounts owed under the settlement. In the remote event
that the insurance companies are unable to pay the amounts, the Company remains
contingently liable. The Company's balance sheet does not reflect either the
assets (guaranteed funding contracts) or the contingent liability.
On September 11, 2000 the Company filed a lawsuit against National Union
Fire Insurance Company, one of its insurance carriers, seeking damages arising
from National Union's failure to take advantage of opportunities to settle the
Mississippi litigation (discussed in the preceding paragraph) well within
National Union's policy limits. Federal Insurance Company (Federal) has joined
in that claim to recover the amount of secondary excess coverage that it
contributed to the Mississippi settlement. On November 13, 2000, National Union
filed a motion to dismiss the case, to stay the matter pending decision in a
case that it filed against the Company and Federal in the Fairfax County Circuit
Court (discussed in the following paragraph), or in the alternative, to transfer
the case from the United States District Court for the Southern District of
Mississippi to the United States District Court for the Eastern District of
Virginia. The
23
25
Company and Federal have responded to the motion and it is pending before the
court. The motion to stay may be rendered moot by actions of the Fairfax County
Circuit Court (discussed below). The court has set a schedule under which
discovery is to be completed by June 1, 2001, substantive motions are to be
filed by June 15, 2001, and a pretrial conference is to be held on September 14,
2001. The case is scheduled for trial during the period from October 1, 2001 to
October 19, 2001.
On September 22, 2000 the Company was served with a declaratory
judgement complaint filed by National Union in the Circuit Court for Fairfax
County, Virginia. National Union seeks a determination that it did not breach
its obligation to the Company in the failure to settle the Mississippi action
and further seeks a court determination that its excess policy has been
exhausted as a consequence of National Union's payment toward the settlement.
The Company and Federal have filed a motion to dismiss or stay the Virginia
lawsuit in favor of the lawsuit filed by the Company and Federal in Mississippi.
On January 11, 2001, the Fairfax County Court denied the requests to dismiss or
stay the case. The court invited the parties to move for reconsideration of its
order and both the Company and Federal have done so. On February 9, 2001, the
Company and Federal asserted defenses to National Union's complaint. On the same
day, National Union filed a motion to amend its complaint to add (i) a request
for a declaration that National Union has no liability for any existing or
potential claim that otherwise would be within the coverage of the National
Union policy and (ii) a claim that the Company breached duties of cooperation
and participation under the National Union policy and that the Company is liable
to National Union for damages in the amount of $37 million plus interest. On
March 28, 2001, the Court issued a ruling dismissing National Union's claims
without prejudice, with the exception of the counterclaim for $37 million plus
interest, which is stayed pending the outcome of the case pending in
Mississippi.
On September 9, 1999 Bezeq, an Israeli Company, filed suit against a
subsidiary of the Company alleging that the subsidiary was in breach of a
contract with Bezeq. In the complaint, Bezeq sought damages in the approximate
amount of $39.0 million, which amount included amounts secured by bank
guarantees made in favor of Bezeq. On January 19, 2000, the Company's subsidiary
filed a counterclaim against Bezeq alleging, among other things, breach of
contract and seeking approximately $58.8 million in damages. On September 21,
2000, the Company's subsidiary and Bezeq entered into a settlement agreement,
pursuant to which, among other things, neither party admitted any fault and each
party released the other and the other's affiliates from any claims. The total
amount paid by the Company's subsidiary to Bezeq pursuant to the settlement
agreement did not exceed the amount previously reserved for potential losses
under the contract. In light of the settlement, the applicable court dismissed
both the claim and counterclaim with prejudice on October 24, 2000. The
settlement agreement has been performed fully and the mutual releases contained
therein are effective. The Company recorded approximately $3.7 million in other
income for the year ended December 31, 2000 related to the recovery of certain
previously recorded costs associated with this project.
AMS performs, at any point in time, under a variety of contracts for
many different clients. Situations can occasionally arise where factors may
result in the renegotiation of existing contracts. Additionally, certain
contracts may provide the client the right to suspend or terminate the
contracts. To the extent any contracts may provide the client with such rights,
the contracts generally provide for AMS to be compensated for work performed to
date and may include provisions for payment of certain termination costs.
However, business and other considerations may at times influence the ultimate
outcome of contract renegotiations, suspension and/or cancellation.
24
26
NOTE 12 -- SEGMENT REPORTING AND SIGNIFICANT CUSTOMERS
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" as
required and comparative information for earlier years is presented below. The
Company engages in business activities in one operating segment that provides
information technology consulting services to large clients in targeted vertical
markets. The chief operating decision-maker is provided information about the
revenues generated in key client industries. The resources needed to deliver the
Company's services are not separately reported by industry. The Company markets
its services worldwide, and its operations are grouped into two main geographic
areas according to the location of each of the Company's subsidiaries. The
Company's long-lived assets are located primarily in the United States. The two
groupings consist of United States locations and non-US locations. Pertinent
financial data is summarized below.
Year Ended December 31 (In millions) 2000 1999 1998
- ------------------------------------------------------------------------------------------------
Revenues by Target Market
New Media and Communications Firms $ 317.4 $ 337.6 $ 266.6
Financial Services and Institutions 213.9 193.9 210.2
State and Local Governments and Education 327.6 346.3 282.1
Federal Government Agencies 353.2 300.3 241.3
Other Corporate Clients 67.2 62.2 57.6
-------- -------- --------
Consolidated Total $1,279.3 $1,240.3 $1,057.8
======== ======== ========
Revenues by Geographic Area
U.S. Companies $1,100.2 $1,048.4 $ 873.3
Non-US Companies 179.1 191.9 184.5
-------- -------- --------
Consolidated Total $1,279.3 $1,240.3 $1,057.8
======== ======== ========
Revenues from AMS's U.S. Companies include export sales to non-US
clients of $17.2 million in 2000, $34.8 million in 1999, and $23.9 million in
1998. As a result the Company's total non-US client revenues, primarily in
Western Europe, were as follows:
Year Ended December 31 (In millions) 2000 1999 1998
- ---------------------------------------------------------------------------------------
Exports By U.S. Companies $ 17.2 $ 34.8 $ 23.9
Non-US Companies 179.1 191.9 184.5
------- ------- -------
Total Non-US Client Revenues $ 196.3 $ 226.7 $ 208.4
======= ======= =======
Percent of Total Revenues 15.3% 18.3% 19.7%
======= ======= =======
Long lived assets located within the U.S. were approximately $166.9
million, $135.7 million and $108.2 million for fiscal year 2000, 1999 and 1998,
respectively. Long lived assets held outside the U.S. were approximately $10.0
million, $10.2 million and $13.0 million for 2000, 1999 and 1998, respectively.
25
27
Significant Customers:
Total revenues from the U.S. Government, comprising 91 clients in 2000,
112 clients in 1999, and 109 clients in 1998, were approximately $342.2 million
in 2000, $288.2 million in 1999, and $224.8 million in 1998. No other customer
accounted for 10% or more of total revenues in 2000, 1999, or 1998.
26
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
American Management Systems, Incorporated
Fairfax, Virginia
We have audited the accompanying consolidated balance sheets of American
Management Systems, Incorporated and subsidiaries (the Company) as of December
31, 2000 and 1999, and the related consolidated statements of operations,
comprehensive income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2000. 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 audit in accordance with generally accepted auditing standards.
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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of American Management Systems,
Incorporated and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
McLean, Virginia
February 14, 2001
27
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") contains certain forward-looking statements. In
addition, the Company or its representatives from time to time may make, or may
have made, certain forward-looking statements, orally or in writing, including,
without limitation, any such statements made in this MD&A, press releases, or
any such statements made, or to be made, in the MD&A contained in other filings
with the Securities and Exchange Commission. The Company wishes to ensure that
such forward-looking statements are accompanied by meaningful cautionary
statements so as to ensure, to the fullest extent possible, the protections of
the safe harbor established by Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended.
Accordingly, such forward-looking statements made by, or on behalf of, the
Company are qualified in their entirety by reference to, and are accompanied by,
the discussion herein of important factors that could cause the Company's actual
results to differ materially from those projected in such forward-looking
statements.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
of total revenues of major items in the Consolidated Statements of Operations
and the percentage change in such items from period to period (see "Financial
Statements and Notes"), excluding percentage changes in de minimus dollar
amounts. The effect of inflation and price changes on the Company's revenues,
income from operations, and expenses, is generally comparable to the general
rate of inflation in the U.S. economy.
Period-to-Period
Percentage of Total Revenues Change
---------------------------- ------------------
2000 1999
vs. vs.
2000 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------
Revenues .................................... 100.0% 100.0% 100.0% 3.1% 17.3%
Expenses
Client Project Expenses ............... 52.9 52.7 54.5 3.5 13.5
Other Operating Expenses .............. 31.4 30.7 28.8 5.6 24.3
Corporate Expenses .................... 7.1 7.1 7.5 2.9 12.2
Provision for Specific Contract ....... -- 1.6 0.7 -- 185.7
Provision for Contract Litigation
Settlement .......................... 2.7 -- -- -- --
----- ----- -----
94.1 92.1 91.5 5.4 18.0
Income from Operations ...................... 5.9 7.9 8.5 (23.4) 8.9
Other (Income) Expense ...................... 0.1 0.1 0.2 (46.7) (42.3)
----- ----- -----
Income Before Income Taxes .................. 5.8 7.8 8.3 (23.0) 10.4
Income Taxes ................................ 2.4 3.2 3.4 (23.0) 11.3
----- ----- -----
Net Income .................................. 3.4 4.6 4.9 (23.0) 9.8
Weighted Average Shares Outstanding ......... (1.0) (0.5)
Basic Net Income per Share .................. (22.1) 10.6
Weighted Average Shares and Equivalents ..... (1.6) (0.7)
Diluted Net Income per Share ................ (21.6) 10.7
28
30
RESULTS OF OPERATIONS (continued)
REVENUES
Revenues increased 3% for the year ended December 31, 2000, compared to
17% for the fiscal year ended December 31, 1999. Approximately 85% of each
year's revenues came from clients for whom the Company performed services in
prior years. Looking ahead to 2001, the Company expects revenue growth to
continue at rates moderately above the rates experienced in 2000. Through
leveraging existing client relationships, ensuring quality execution, and
targeting new clients, the Company expects revenues within the Federal
Government market and Other Corporate clients market to grow faster than the
overall growth rate of the Company while revenues in all other markets will
approximate the Company's overall growth rate.
The Company continues to focus on expanding its delivery of
enterprise-wide business and technology solutions - including eBusiness
solutions- tailored to clients in financial services, new media and
communications, federal, state and local governments as well as health care and
utilities. These solutions help our clients to improve business performance by
creating tools for businesses to achieve greater cost savings, deliver improved
customer service, and leverage cross-sell and up-sell opportunities in their
markets.
Business with non-US clients decreased 14% to $196 million during 2000
compared to an increase of 9% to $227 million during 1999. The decrease in
revenues during 2000 was a result of lower than expected revenue growth in the
New Media and Communications Firms market driven by the ramping down of large
projects across Europe and slower than expected project starts. A principal
contributor to this decrease in revenues was a slowdown in the growth of the
telecommunications industry worldwide, which experienced significant industry
market consolidations, and larger than expected decreases in industry wide
spending. Business with non-US clients represented 15% and 18% of the Company's
total revenues for 2000 and 1999, respectively. The Company continues to focus
on positioning itself to achieve growth in non-US business going forward and
expanding the number of services offered to these clients. For fiscal year 2001,
the Company expects revenues for non-US business to be in line with the overall
Company revenue growth rate when compared to the same 2000 periods.
In the New Media and Communications Firms market, a market characterized
by large projects with relatively few clients, revenues decreased 6% in fiscal
2000 when compared to 1999 and increased 27% during 1999 when compared to 1998.
The completion of large projects in 1999, as well as certain new projects not
ramping up as quickly as anticipated, produced lower revenues than the Company
expected in 2000. Non-US revenues decreased 21% in 2000 and increased 19% in
1999 when compared to 1998. As previously discussed, a principal contributor to
these decreases in revenues was a slowdown in the growth of the
telecommunications industry world-wide that experienced significant industry
market consolidations and larger then expected decreases in spending. Despite
industry slow-downs throughout 2000, the Company experienced continued success
with key clients and emerging work in this market. By continuing to focus on key
client relationships and quality project execution during 2001, the Company
expects revenue growth in this market to increase at rates similar to the
Company's overall revenue growth rate. In the first half of 2000, the Company
substantially completed work related to its joint development contract with a
European client for its next generation customer care and billing software known
as "Tapestry." The Company therefore began amortizing this asset which resulted
in approximately $6.4 million of amortization expense for fiscal 2000. The asset
will continue to be amortized in the amount of approximately $3.9 million each
quarter. On October 19, 2000 the Company announced a multi-year, multi-million
dollar contract for implementation of its Tapestry customer care and billing
product suite to its first North American client, a multi-billion dollar Fortune
100 company. The Company has since signed a second smaller contract and there
continues to be significant market interest in Tapestry.
29
31
Notwithstanding projected revenue growth, there continues to be risks in
this market. Competition for experienced staff is especially intense in the
telecommunications field, and staffing remains one of the Company's critical
challenges. Additionally, the Company works in countries located in regions
other than Western Europe and North America from time to time and the delivery
risks in some of these other countries may be higher. Revenues in the New Media
and Communications Firms market in these other locations were less than 3% of
the Company's total revenues for the years ended 2000 and 1999.
In the Financial Services Institutions target market, revenues increased
10% in 2000 and decreased 8% in 1999. The increase in revenues during 2000 was
driven by increased business with new clients and a rebounding of the retail
banking and insurance marketplace from last year's slowdown associated with Year
2000 "lockdowns" and business consolidation activity. Business with non-US
clients accounted for approximately 34% of both fiscal 2000 and 1999 revenues in
this market (approximately $73 million and $67 million respectively). In 2001,
industry projections point to a slower demand for IT services in the financial
services sector and increased competition for new client business. Throughout
2001, the Company expects to leverage its existing client relationships, next
generation product solutions and strategic alliance relationships with leading
industry providers to achieve revenue growth at rates in line with the Company's
overall anticipated revenue growth rate for 2001.
In the State and Local Governments and Education target market, revenues
decreased 5% in fiscal 2000 and increased 23% in 1999. The Company's reduction
in revenues was driven by the completion of several large projects as well as a
longer than expected slowdown in the marketplace from Year 2000 "lockdowns,"
which led to slower project starts. During 2001, the Company will focus on
repositioning itself for continued growth in revenues by consolidating
operations to establish a targeted enterprise-wide focus for our clients as well
as expand and leverage our eGovernment capabilities and existing client
relationships. Revenues in the State and Local Governments and Education target
market are expected to increase in 2001 at rates below the company's overall
growth rate. On certain contracts with state taxation departments, the Company's
fees are paid out of the benefits (increased collections) that the client
achieves. The Company defers recognition of revenues on these contracts until
that point at which management can predict, with reasonable certainty, that the
benefit stream will generate amounts sufficient to fund the contract. From that
point forward, revenues are recognized on a percentage of completion basis.
Revenues on all of the current large multi-year benefits-funded contracts are
currently recognized on a percentage of completion basis.
Revenues in the Federal Government Agencies target market increased 18%
in 2000 and 24% in 1999. The Company's leadership in financial systems and
procurement business solutions combined with the continued expansion and
extension of contracted work with the Department of Defense for its Standard
Procurement System ("SPS") continued to drive the growth rate in revenues in
this market above the Company's overall growth rate in 2000. Revenues with the
Department of Defense accounted for approximately one-third of revenue growth in
2000 and 1999. For fiscal year 2001, the Company expects revenue growth in this
market to exceed the Company's overall revenue growth rate when compared to the
same 2000 period. These revenue increases will continue to be driven by the SPS
contract, contracts with clients using the Company's federal financial systems
and contracts leveraging the Company's strategic alliance relationships with
both Seibel and Ariba.
Revenues in the Other Corporate Clients market increased 8% in both
fiscal years 2000 and 1999. The Company continues to expand its business with
clients in the utilities and healthcare marketplace. For fiscal year 2001, the
Company expects revenue growth in this market to increase at rates above the
Company's overall growth rate.
30
32
EXPENSES
Client project expenses and other operating expenses together increased
4% during 2000, which was slightly above the growth rate in revenues. Comparing
1999 to 1998, client project and other operating expenses increased 17%, which
was in line with the growth in revenues. The Company has made significant
expenditures related to development of the "Tapestry" software which have been
capitalized. Key software deliveries were completed late in the first half of
2000 and the Company began amortization of this asset yielding approximately
$6.4 million of amortization expense for 2000. Amortization expense is expected
to be approximately $3.9 million per quarter going forward.
In February 2001, the Company announced a restructuring plan that will
realign the Company's internal operations to a shared services model to
significantly streamline support activities across the corporation. In addition,
the Company is placing increased emphasis on employee skill-fit and performance.
During fiscal 2001 the Company will take a restructuring charge of between $14
million and $19 million related to these efforts of which approximately $13
million will be recorded in the first quarter. The Company expects the increased
emphasis on employee skill-fit and performance and the move to shared services
to impact approximately 10% of the Company's US- based workforce by year end of
2001.
Corporate expenses increased 3% and 12% in 2000 and 1999 respectively.
The Company slowed the increase in Corporate expenses during fiscal year 2000 by
focusing on reducing overall corporate expenses. In addition in 2000 there were
no longer any significant Y2K remediation expenses that were part of corporate
expenses driving the comparable 1999 period. As part of the restructuring plan
previously discussed, in 2001 the Company will realign internal operations to
streamline support activities by moving to a shared services model for internal
functions such as Human Resources and internal IT support. For fiscal 2001, the
Company expects corporate expenses to grow at rates corresponding to the
Company's overall revenue growth rate due to focused efforts on streamlining the
Company's business model as well as reductions in corporate level performance
based incentive compensation and profit based compensation under the Company's
restricted stock program.
As discussed more fully in the section of this Form 10-K entitled "Legal
Proceedings," the Company recorded a charge of $35.2 million to pre-tax earnings
in the second half of 2000 due to the settlement of a lawsuit filed by the State
of Mississippi and the payment of related expenses. During the second half of
2000 the Company made payments of approximately $34.4 million in relation to the
settlement, and expects to pay the remaining liability of $0.8 million through
the first quarter of fiscal year 2001. Approximately $12.3 million of the $34.4
million paid, as well as amounts paid by the Company's insurers, was used to
purchase guaranteed funding contracts in the names of the State agencies which
are to receive the settlement payments. In the remote event that the insurance
companies from which the Company purchased the guaranteed funding contracts are
unable to make the settlement payments, the Company remains contingently liable.
INCOME FROM OPERATIONS
Income from operations decreased 23% in 2000 compared to an increase of
9% in 1999. The 2000 decrease was primarily driven by the above-mentioned
contract litigation settlement with the State of Mississippi. Additionally,
throughout 2000 the Company made substantial investments in marketing, training,
and infrastructure focusing on the Company's strategic alliances as well as
business development efforts. Importantly, the Company's operating profit
margins have continued to remain strong due to an ongoing emphasis on
well-structured and well-priced engagements, tightly managed delivery risk, and
focused reductions in indirect costs company-wide. For 2001, the Company will
continue to focus on streamlining its corporate support activities and
controlling expenses while emphasizing managed growth.
31
33
OTHER (INCOME) EXPENSE
The Company incurred $3.4 million of interest expense net of interest
income in 2000 compared to no interest (income) expense in 1999 and $0.8 million
net interest expense in 1998. The increase in 2000 was due to temporary
increases in the amounts of short-term borrowings driven by the Company's
increased investments in strategic alliances, the Company's acquisition of
Synergy Consulting, Inc. and the Company's settlement with the State of
Mississippi. Other Expense decreased in both 2000 and 1999 over the preceding
years. The continued decrease in 2000 was primarily driven by approximately $3
million in expenses recovered related to the finalization of the contract
settlement with an Israeli telecommunications firm, Bezeq, discussed in detail
in "Legal Proceedings," which offset losses recorded for the Company's
investment in Competix, which is described below.
The Company continues to develop its investment strategy and evaluate
opportunities presented by certain business relationships that would generate
additional income for its core business, leverage its existing assets
(customers, competencies, relationships, and technologies) and maximize
shareholder value. In late 1998, the Company established a joint venture with
Bank of Montreal to provide online processing services for loan applications to
small and mid-size financial institutions via a new firm, Competix.com (formerly
Competix, L.L.C.). The Company's share of Competix.com's losses was $5.9 million
in 2000, $4.3 during 1999, and $0.7 in 1998, related to the Competix.com joint
venture. During the first half of 2000 the Company sold a small portion of its
investment in Competix.com. This sale generated a $3.5 million gain. At year-end
2000, the Company's remaining basis in its investment is a $2.6 million note
receivable due from Competix.com. In 2001, the Company will continue to
recognize its share of losses to write-down this receivable.
INCOME TAXES
The Company's effective tax rate for 2000 and 1999 was 41% compared to
40.7% in 1998. The Company expects that its effective tax rate in 2001 will be
generally consistent with its historical rates.
FOREIGN CURRENCY EXCHANGE
Approximately 15% of the Company's total revenues in 2000, 18% in 1999,
and 20% in 1998 were derived from non-US clients. The Company's practice is to
negotiate contracts in the same currency in which the predominant expenses are
incurred, thereby mitigating the exposure to foreign currency exchange
fluctuations. It is not possible to accomplish this in all cases; thus, there is
some risk that profits will be affected by foreign currency exchange
fluctuations. In a further effort to mitigate foreign currency exchange risk,
the Company has established a notional cash pool with a European bank. This
arrangement allows the Company to better utilize its cash resources among all of
the Company's subsidiaries, without incurring foreign currency conversion risks,
thereby mitigating foreign currency exposure for these transactions. The Company
also actively manages the excess cash balances in the cash pool, which tends to
increase net interest income. In the past, the Company had employed limited
hedging of inter-company balance sheet transactions through derivative
instruments (foreign currency swap contracts); however, as of December 31, 2000
the Company had no such outstanding derivative contracts.
32
34
LIQUIDITY AND CAPITAL RESOURCES
The Company provides for its operating cash requirements primarily
through funds generated from operations. Through an available bank facility, the
Company can also provide for cash and currency management with respect to the
short-term impact of certain cyclical uses, such as annual payments of incentive
compensation as well as financing, from time to time, accounts receivable and
other obligations. At December 31, 2000, the Company's cash and cash equivalents
totaled $43.2 million, down from $111.3 million at the end of 1999. Cash used in
operating activities during 2000 was $1.4 million compared to cash provided by
operating activities of $109.1 million in 1999. The primary drivers of cash used
in operating activities during 2000 were payments associated with the losses
related to Bezeq and the litigation settlement with the State of Mississippi.
Other drivers include payments for incentive compensation and a reduction in
contract pre-payments (deferred revenue).
During 2000, the Company invested approximately $97.5 million in fixed
assets, software purchases, internally developed computer software and other
investments compared to $67.1 in 1999. The Company's expansion of its strategic
alliances and business ventures as well as the creation of the next generation
software products drive these investments for the State and Local Government and
Financial Services markets. During the second half of 2000 the Company invested
approximately $20 million in the purchase of Synergy Consulting, Inc., a
California based provider of systems integration, eBusiness, and management
consulting services. This investment continues to build on the Company's core
competencies in the State and Local Governments and Education markets. This
investment has been accretive to earnings in fiscal 2000 and is expected to be
so in fiscal 2001 and beyond.
Revolving line of credit borrowings were $35 million at December 31,
2000 compared to zero at December 31, 1999. During 2000, the Company made
principal payments of $59.1 million on outstanding debts owed to banks compared
to $5.4 million in 1999. The aggregate weighted average short-term borrowings
were approximately $34.1 million in 2000 and $0.4 million in 1999 at weighted
daily average interest rates of 6.5% and 5.7% respectively. In 2000, the Company
received proceeds of approximately $12.3 million from the exercise of stock
options compared to $14.2 million in 1999. The Company repurchased approximately
190,000 shares of common stock in the open market during 2000 at a cost of
approximately $4.5 million compared to 1.9 million shares repurchased in 1999 at
a cost of approximately $52 million. The Company has authorization from the
Board of Directors to purchase up to an additional 1.2 million shares.
The Company's material unused source of liquidity at the end of 2000
consisted of approximately $85 million under the $120 million multi-currency
revolving credit agreement with Bank of America and Wachovia Bank as agents
("the 1998 Agreement").
In March 2001, the Company and certain of its subsidiaries amended the
1998 Agreement (the "March 2001 Amendment"), and the 1998 Agreement, as amended
(the "Amended 1998 Agreement") became effective as of March 21, 2001. Under the
Amended 1998 Agreement, interest on borrowings will generally range from LIBOR
plus 62.5 basis points to LIBOR plus 77.5 basis points, dependent upon the fixed
charge coverage ratio. In addition, under the Amended 1998 Agreement, the
facility fee will range from 25 to 35 basis points of the total facility, based
upon the same performance measure. Previously under the 1998 Agreement, if 50%
or more of the facility was utilized, an additional usage fee of 12.5 basis
points applied. The March 2001 Amendment eliminated the utilization fee. The
Company believes that its liquidity needs can be met from the sources described
above.
33
35
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133 as amended by statements No. 137 and 138 entitled "Accounting for
Derivative Instruments and Hedging Activities." This Statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company will adopt this new accounting standard effective January 1, 2001. The
adoption of this standard will have no material impact on the Company's
consolidated financial statements.
34
36
ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING
STATEMENTS AND
FACTORS THAT MAY AFFECT FUTURE RESULTS
Over the next several years, the Company expects to continue to
experience managed growth in revenues. The continuing controlled growth in
revenues should enable the Company to continue improving its profit margins,
which have been reduced from time to time for after-tax reserves related to
troubled contracts.
The Company faces continuing risks in the area of project delivery and
staffing. AMS has established a reputation in the marketplace of being a firm
that delivers on time and in accordance with specifications regardless of the
complexity of the application and the technology. The Company's customers often
have a great deal at stake in being able to meet market and regulatory demands,
and demand very ambitious delivery requirements. In order to meet its
contractual commitments, AMS must continue to recruit, train, and assimilate
successfully large numbers of entry-level and experienced employees annually, as
well as to provide sufficient senior managerial experience on engagements,
especially on large, complex projects. Moreover, this staff must be re-deployed
on projects globally. Staffing projects in certain less industrialized countries
can pose special risks and challenges. The Company must also manage rates of
attrition, in view of increased competition for its talent.
There is also the risk of failing to successfully manage large projects
and the risk that the unanticipated delay, suspension, renegotiation or
cancellation of a large project could have an adverse impact on operating
results. Any such development in a project could result in a decline in revenues
or profits, the need to relocate staff, a lawsuit or other dispute with a client
regarding money owed, or damages incurred as a result of alleged non-performance
by AMS and a diminution of AMS's reputation. Changing client requirements, such
as scope changes and process issues, and delays in client acceptance of interim
project deliverables, are other examples of risks of non-performance, especially
in large complex projects. All of these risks are magnified in the largest
projects and markets simply because of their size. The Company's business is
characterized by large contracts producing high percentages of the Company's
revenues. For example, 40% of the Company's total revenues in 2000 was derived
from business with 17 clients.
There is also the risk of revenues not being realized when expected,
such as in certain contracts in the State and Local Governments market. On
certain large contracts, the Company's fees are paid out of the benefits (for
example, increased revenues from tax collections) that the client achieves. The
Company historically has deferred recognition of such revenues until management
can predict, with reasonable certainty, that the benefit stream will generate
amounts sufficient to fund the contract. From that point forward revenues are
recognized on a percentage of completion basis. As the number of such contracts,
and the Company's experience with predicting the timing and certainty of such
revenues, have increased over time, the Company expects to be able to recognize
revenues earlier on such contracts in the future.
The Company also faces the risk of increased competition in the markets
in which it participates. In addition to any risk that the Company's competitors
may create, some of the Company's current or prospective clients may decide to
perform projects with their in-house staff that the Company might otherwise have
undertaken. The Company also faces the risk of shrinking markets resulting from
mergers and other consolidations of clients or prospective clients. Increased
competition from industry rivals, as well as decisions by clients to outsource
fewer projects or to consolidate with others in the Company's markets, could
have a negative effect on pricing, revenues and margins.
35
37
Events such as declines in revenues or profits, downturns in the
industry in which the Company operates and downturns in the stock markets
generally could result in immediate fluctuations in the trading price and volume
of the Company's stock. Certain other risks, including, but not limited to, the
Company's international scope of operations, are discussed elsewhere in this
Form 10-K. The Company conducts business in countries other than Western Europe
and North America. Contracts being performed in such non-Western countries can
have higher delivery risks for a variety of reasons. Because the Company
operates in a rapidly changing and highly competitive market, additional risks
not discussed in this Form 10-K may emerge from time to time. The Company cannot
predict such risks or assess the effect, if any, that such risks may have on its
business. Consequently, the Company's various forward-looking statements, made,
or to be made, should not be relied upon as a prediction of actual results.
36
38
FIVE-YEAR FINANCIAL SUMMARY
Year Ended December 31
(In millions except share and per share data) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
- ----------------------------------------------------------------------------------------------------------------------------
Revenues $1,279.3 $1,240.3 $1,057.8 $872.3 $812.2
Client Project Expenses 676.5 653.8 576.2 485.0 525.9
Other Operating Expenses 401.4 380.0 305.7 271.6 201.9
Corporate Expenses 91.2 88.6 79.0 61.4 56.8
Provision for Specific Contract -- 20.0 7.0 -- --
Provision for Contract Litigation
Settlement 35.2 -- -- -- --
-------- -------- -------- ------ ------
Total Operating Expenses 1,204.3 1,142.4 967.9 818.0 784.6
Income From Operations 75.0 97.9 89.9 54.3 27.6
Other (Income) Expense 0.8 1.5 2.6 2.9 1.4
-------- -------- -------- ------ ------
Income Before Income Taxes 74.2 96.4 87.3 51.4 26.2
Income Taxes 30.4 39.5 35.5 20.2 10.7
-------- -------- -------- ------ ------
Net Income $ 43.8 $ 56.9 $ 51.8 $ 31.2 $ 15.5
======== ======== ======== ====== ======
PER COMMON SHARE DATA
- ----------------------------------------------------------------------------------------------------------------------------
Basic Net Income per Common Share $ 1.06 $ 1.36 $ 1.23 $ 0.75 $ 0.38
Weighted Average Shares 41,482,378 41,917,762 42,133,843 41,361,967 40,656,760
Diluted Net Income per Common Share $ 1.05 $ 1.34 $ 1.21 $ 0.74 $ 0.37
Weighted Average Shares and Equivalents 41,912,696 42,558,786 42,938,896 42,304,018 41,925,353
Common Shares Outstanding at Year End 41,527,563 41,018,387 42,026,510 41,544,299 40,939,209
FINANCIAL POSITION
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets $645.9 $600.4 $537.6 $421.4 $424.2
Fixed Assets, Net 35.0 31.2 37.6 45.2 48.0
Working Capital 175.4 198.7 202.4 168.9 125.0
Notes Payable 10.3 16.5 22.7 27.9 13.7
Noncurrent Liabilities 83.6 72.9 59.7 52.7 22.3
Stockholders' Equity 360.4 309.5 291.9 238.7 203.1
37
39
FIVE-YEAR REVENUES BY TARGET MARKET
Year Ended December 31 (In millions) 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Revenues
New Media and Communications Firms(1) $317.4 $337.6 $266.6 $283.0 $331.9
Financial Services Institutions 213.9 193.9 210.2 181.1 154.1
State and Local Governments and Education 327.6 346.3 282.1 171.4 140.7
Federal Government Agencies 353.2 300.3 241.3 189.2 135.7
Other Corporate Clients 67.2 62.2 57.6 47.6 49.8
-------- -------- -------- -------- --------
Total Revenues $1,279.3 $1,240.3 $1,057.8 $872.3 $812.2
======== ======== ======== ======== ========
- ----------------------------
(1) Formerly referred to as Telecommunications Firms
38
40
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summary represents the results of operations for the two
years in the period ended December 31, 2000. (In millions except per share data)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
- ----------------------------------------------------------------------------------------------------------------
2000:
- ----------------------------------------------------------------------------------------------------------------
Revenues $311.1 $318.0 $322.8 $327.4 $1,279.3
Income Before Income Taxes 25.9 27.3 (7.1) 28.1 74.2
Net Income (Loss) 15.3 16.1 (4.2) 16.6 43.8
Basic Earnings per Share 0.37 0.39 (0.10) 0.40 1.06
Diluted Earnings per Share 0.36 0.39 (0.10) 0.40 1.05
1999:
- ----------------------------------------------------------------------------------------------------------------
Revenues $290.9 $305.3 $321.9 $322.2 $1,240.3
Income Before Income Taxes 26.8 7.8 30.6 31.2 96.4
Net Income 15.8 4.6 18.1 18.4 56.9
Basic Earnings per Share 0.37 0.11 0.43 0.45 1.36
Diluted Earnings per Share 0.37 0.10 0.43 0.44 1.34
The Company has never paid any cash dividends on its common stock and
does not anticipate paying dividends in the foreseeable future. Its policy is to
invest retained earnings in the operation and expansion of its business. Future
dividend policy with respect to its common stock will be determined by the Board
based upon the Company's earnings, financial condition, capital requirements,
and other then-existing conditions.
STOCK MARKET INFORMATION
The common stock of American Management Systems, Incorporated, is traded
on the NASDAQ over-the-counter market under the symbol AMSY. References to the
stock prices are the high and low bid prices during the calendar quarters.
2000 1999
--------------------- ---------------------
High Low High Low
- -----------------------------------------------------------------------------
1st Quarter $44.375 $25.500 $39.375 $31.375
2nd Quarter 44.440 31.750 35.000 25.875
3rd Quarter 34.063 14.000 32.060 23.563
4th Quarter 22.938 15.563 35.250 20.188
The approximate number of shareholders of record of the Company's common
stock as of March 23, 2001 was 1,158.
39
41
OTHER INFORMATION
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C.
Ridgefield Park, N.J.
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
McLean, Virginia
COUNSEL
Shaw Pittman
Washington, D.C.
STOCKHOLDER AND 10-K INFORMATION
Financial inquiries should be directed to Ronald L. Schillereff, Chief Financial
Officer, American Management Systems, Incorporated, 4050 Legato Road, Fairfax,
Virginia 22033. Telephone (703) 267-8000. A complimentary copy of the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission
will be provided upon written request.
ANNUAL MEETING
The annual shareholders meeting has been scheduled for May 11, 2001 in Fairfax,
Virginia, for stockholders of record on March 22, 2001.
40