1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From: To:
------------ ------------
Commission File No.: 0-9233
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
(Exact name of registrant as specified in its charter)
State or other Jurisdiction of I.R.S. Employer
Incorporation or Organization: Delaware Identification No.: 54-0856778
4050 Legato Road
Fairfax, Virginia 22033
(Address of principal executive office)
Registrant's Telephone No., Including Area Code: (703) 267-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
As of May 4, 1998, 42,267,564 shares of common stock were outstanding.
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CONTENTS
Page
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Part I Financial Information
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Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . 16
Part II Other Information
-----------------
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . 16
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 16
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The information furnished in the accompanying Consolidated
Statements of Operations, Consolidated Revenues by Market, Consolidated Balance
Sheets, Consolidated Statements of Cash Flows, and Consolidated Statements of
Comprehensive Income reflects all adjustments which are, in the opinion of
management, necessary for a fair statement of the results of operations and
financial condition for the interim periods. The accompanying financial
statements and notes thereto should be read in conjunction with the financial
statements and notes for the year ended December 31, 1997, included in the
American Management Systems, Incorporated (the "Company" or "AMS") Annual
Report on Form 10-K (File No. 0-9233) filed with the Securities and Exchange
Commission on March 27, 1998.
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In millions except per share data)
For the Quarter
Ended March 31,
1998 1997
---------- ----------
REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $223.0 $196.3
EXPENSES
Client Project Expenses . . . . . . . . . . . . . . . . . . . . . . . . 135.3 113.4
Other Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . 60.1 60.7
Corporate Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 12.2
-------- --------
206.9 186.3
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.1 10.0
OTHER (INCOME) EXPENSE
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8 1.3
Other (Income) Expense . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 (1.0)
-------- -------
0.9 0.3
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . 15.2 9.7
INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 4.0
-------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9.0 $ 5.7
======== ========
WEIGHTED AVERAGE SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.9 41.2
======== ========
BASIC NET INCOME PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.21 $ 0.14
======== ========
WEIGHTED AVERAGE SHARES AND EQUIVALENTS . . . . . . . . . . . . . . . . . . . . 42.7 42.1
======== ========
DILUTED NET INCOME PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.21 $ 0.14
======== ========
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American Management Systems, Incorporated
CONSOLIDATED REVENUES BY MARKET
Unaudited
(In millions)
For the Quarter
Ended March 31,
1998 1997
---------- ----------
Telecommunications Firms . . . . . . . . . . . . . . . . . . . . . . . . $ 53.7 $ 58.9
Financial Services Institutions . . . . . . . . . . . . . . . . . . . . 51.1 51.8
State and Local Governments and Education . . . . . . . . . . . . . . . 50.7 34.3
Federal Government Agencies . . . . . . . . . . . . . . . . . . . . . . 54.5 40.6
Other Corporate Clients . . . . . . . . . . . . . . . . . . . . . . . . 13.0 10.7
------ ------
Total Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $223.0 $196.3
====== ======
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American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions)
3/31/98
ASSETS (Unaudited) 12/31/97
----------- -----------
CURRENT ASSETS
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . $ 44.4 $ 49.6
Accounts and Notes Receivable . . . . . . . . . . . . . . . . . . . . 247.3 240.9
Prepaid Expenses and Other Current Assets . . . . . . . . . . . . . . 12.5 8.4
-------- ---------
304.2 298.9
FIXED ASSETS
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66.2 67.0
Furniture and Fixtures . . . . . . . . . . . . . . . . . . . . . . . . 23.1 22.4
Leasehold Improvements . . . . . . . . . . . . . . . . . . . . . . . . 14.1 13.9
-------- --------
103.4 103.3
Accumulated Depreciation and Amortization . . . . . . . . . . . . . . (60.8) (58.1)
------ ------
42.6 45.2
OTHER ASSETS
Purchased and Developed Computer Software (Net of Accumulated
Amortization of $66,800,000 and $63,400,000) . . . . . . . . . . . . 63.3 58.0
Intangibles (Net of Accumulated Amortization of $3,300,000 and
$3,200,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9 6.0
Other Assets (Net of Accumulated Amortization of $840,000 and
$815,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.6 13.3
------ ------
84.8 77.3
------ ------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $431.6 $421.4
====== ======
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American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions)
3/31/98
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 12/31/97
----------- -----------
CURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations . . . . . . . . . . . $ 34.5 $ 7.5
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 10.5
Accrued Incentive Compensation . . . . . . . . . . . . . . . . . . . . 2.1 24.7
Other Accrued Compensation and Related Items . . . . . . . . . . . . . 31.5 32.2
Deferred Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 35.2 39.8
Other Accrued Liabilities . . . . . . . . . . . . . . . . . . . . . . 2.7 3.5
Income Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 8.8
------ ------
117.2 127.0
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . 5.6 3.0
------ ------
122.8 130.0
NONCURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations . . . . . . . . . . . 26.6 27.9
Other Accrued Liabilities . . . . . . . . . . . . . . . . . . . . . . 13.7 9.5
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . 15.3 15.3
------ ------
55.6 52.7
------ ------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178.4 182.7
STOCKHOLDERS' EQUITY
Preferred Stock ($0.10 Par Value; 4,000,000 Shares Authorized,
None Issued or Outstanding)
Common Stock ($0.01 Par Value; 100,000,000 Shares Authorized,
50,816,511 and 50,115,057 Issued and 42,228,758 and 41,544,299
Outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 0.5
Capital in Excess of Par Value . . . . . . . . . . . . . . . . . . . . 90.4 84.1
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 197.5 188.5
Currency Translation Adjustment . . . . . . . . . . . . . . . . . . . (8.3) (8.0)
Common Stock in Treasury, at Cost (8,587,753 and 8,570,758 Shares) . . (26.9) (26.4)
------ ------
253.2 238.7
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . $431.6 $421.4
====== ======
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
For the Quarter
Ended March 31,
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9.0 $ 5.7
Adjustments to Reconcile Net Income to Net
Cash Used by Operating Activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 4.7
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9 4.0
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 3.5
Provision for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . 2.0 0.8
Changes in Assets and Liabilities:
Increase in Trade Receivables . . . . . . . . . . . . . . . . . . . (8.5) (3.6)
Increase in Prepaid Expenses and Other Current Assets . . . . . . . (4.0) (0.1)
(Increase) Decrease in Other Assets . . . . . . . . . . . . . . . . (3.4) 0.8
Decrease in Accrued Incentive Compensation . . . . . . . . . . . . . (22.6) (33.8)
Decrease in Accounts Payable, Other Accrued Compensation, and
Other Accrued Liabilities . . . . . . . . . . . . . . . . . . . . (3.3) (20.0)
Decrease in Deferred Revenue . . . . . . . . . . . . . . . . . . . . (4.5) (0.4)
Decrease in Income Taxes Payable . . . . . . . . . . . . . . . . . . (2.2) (4.1)
------- -------
Net Cash Used by Operating Activities . . . . . . . . . . . . . . . . . (26.5) (42.5)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . (1.9) (4.7)
Purchase of Computer Software and Investment in Software Products . . . . . (9.2) (6.0)
Increase in Other Investments . . . . . . . . . . . . . . . . . . . . . . . 1.0 0.3
Proceeds from Sale of Fixed Assets and Purchased Computer Software . . . . . 0.1 0.7
------- -------
Net Cash Used by Investing Activities . . . . . . . . . . . . . . . . . (10.0) (9.7)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.7 22.2
Payments on Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.0) (1.7)
Proceeds from Common Stock Options Exercised . . . . . . . . . . . . . . . . 6.4 2.0
Payments to Acquire Treasury Stock . . . . . . . . . . . . . . . . . . . . . (0.5) -
------- -------
Net Cash Provided by Financing Activities . . . . . . . . . . . . . . . 31.6 22.5
------- -------
INCREASE IN CURRENCY TRANSLATION ADJUSTMENT . . . . . . . . . . . . . . . . . . . (0.3) (2.6)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . (5.2) (32.3)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . 49.6 62.8
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . . $ 44.4 $ 30.5
======= =======
NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES:
Treasury Stock Utilized to Satisfy Accrued Incentive Compensation
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 2.3
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(1)
Unaudited
(In millions)
For the Quarter
Ended March 31,
1998 1997
---------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9.0 $ 5.7
OTHER COMPREHENSIVE INCOME:
Currency Translation Adjustment . . . . . . . . . . . . . . . . . . . . . . (0.3) (2.6)
------ ------
COMPREHENSIVE INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8.7 $ 3.1
====== ======
- ------------------------------
(1) The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," (SFAS No. 130) effective January 1, 1998.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components. The Company's principal
components of comprehensive income are net income and foreign currency
translation adjustments.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the
percentage of revenues of major items in the Consolidated Statements of
Operations and the percentage change in such items from period to period,
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.
Percentage of Period-to-Period
Total Revenues Change
-------------- ---------------------
Quarter Ended Quarter Ended
March 31, March 31, 1998
vs
1998 1997 March 31, 1997
---------- ---------- --------------
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 13.6%
Expenses
Client Project Expenses . . . . . . . . . . . . . . . 60.7 57.8 19.3
Other Operating Expenses . . . . . . . . . . . . . . . 26.9 30.9 (1.0)
Corporate Expenses . . . . . . . . . . . . . . . . . . 5.2 6.2 (5.7)
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . 92.8 94.9 11.1
Income from Operations . . . . . . . . . . . . . . . . . . 7.2 5.1 61.0
Other (Income) Expense . . . . . . . . . . . . . . . . . . 0.4 0.2 200.0
Income Before Income Taxes . . . . . . . . . . . . . . . . 6.8 4.9 56.7
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . 2.8 2.0 55.0
Net Income . . . . . . . . . . . . . . . . . . . . . . . . 4.0 2.9 57.9
Weighted Average Shares . . . . . . . . . . . . . . . . . . 1.7
Basic Net Income per Share . . . . . . . . . . . . . . . . 50.0
Weighted Average Shares and Equivalents . . . . . . . . . . 1.4
Diluted Net Income per Share . . . . . . . . . . . . . . . 50.0
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RESULTS OF OPERATIONS (continued)
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 the Private Securities Litigation Reform Act of
1995. 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.
REVENUES
Revenues increased 14% during the first quarter of 1998, compared to
the first quarter of 1997, with growth occurring in the State and Local
Governments and Education, Federal Government Agencies, and Other Corporate
Clients target markets.
Business with non-US clients decreased 18% (to $49.1 million) during
the first quarter of 1998, compared to the same 1997 period. The decrease was
primarily due to the previously announced cancellation of two projects with
telecommunications clients. With the exception of the Telecommunications Firms
market, all other business with non-US clients increased 11% during the first
quarter of 1998. For the year 1998, the Company expects non-US business, and
European business in particular, to show little growth over 1997, owing
principally to the impact of the telecommunications clients cancellations.
In the Telecommunications Firms market, a market characterized by
large projects with relatively few clients, revenues decreased 9%, compared to
the same 1997 period, principally owing to one of the telecommunications
project cancellations. Non-US revenues in this market declined 30%. For the
year 1998, the Company expects revenues in this market to be approximately
equal to Telecommunications Firms revenues for 1997. The lack of growth
reflects several factors: the need to replace revenues from the cancellation
of the two telecommunications projects, Company initiated slowdown in business
development, in the fall of 1996, which market pipeline is just now increasing,
reorganization of management and market orientation in this market, and the
need to upgrade software. The Company has begun development of its next
generation of customer care and billing software, known as "Tapestry", which is
well underway through a significant contract with a European client. As that
client is sharing part of the cost of development, collections from that
contract will not contribute to revenue growth in this market in 1998, but will
instead reduce capitalized software costs. A majority of the development
effort is being capitalized. There remain 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 for the
Telecommunications Firms market. Additionally, the Company has begun work in
various emerging countries. Contracts in emerging countries can pose higher
delivery risks than in the Western European and U.S. markets in which the
Company previously concentrated.
In the Financial Services Institutions target market, 1998 revenues in
the first quarter were approximately equal to the comparable 1997 period. The
lack of growth in this market is, in part, attributable to certain
reclassifications of revenues from this market to the Other Corporate Clients
market in the first quarter of 1998 in connection with the re-alignment of
industry categories within the Company.
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The completion of a sizable amount of work in 1997 related to imaging and work
flow projects for bank and insurance clients also accounts for the lack of
revenue growth. Revenue associated with the Company's core finance groups was
up 24% compared to the same 1997 period. Business with non-US clients,
primarily European, accounted for approximately 34% of the revenues in this
market ($51 million). For all of 1998, the Company expects revenue growth in
this market to be in line with the Company's overall revenue growth.
In the State and Local Governments and Education target market,
revenues increased 48% during the first quarter of 1998. The 1998 increase was
fueled by several large contracts with state taxation departments looking to
make substantial improvements in their ability to collect delinquent taxes and
several new engagements for financial and revenue systems. On certain of the
contracts with state taxation departments, the Company's fees are paid out of
the benefits (increased collections) that the client achieves. On such
benefit-funded contracts (contracts whereby the amounts due the Company are
earned based on actual benefits derived by the client), the Company defers
recognition of revenues 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. At the end of the first quarter of 1998, all
such contracts had provided enough benefits to fund the work. Beginning in the
second quarter of 1998, the Company started work on several large multi-year
benefits-funded contracts. However, revenues from certain of those contracts
are not likely to be recognized until later periods. The Company enjoys strong
demand in this market. The Company has over $500 million in signed contracts
in the State and Local Governments and Education market to be performed over
the next several years. Revenues in the State and Local Governments and
Education market are expected to increase in 1998 at rates exceeding the
increase in the Company's overall revenue rate.
Revenues in the Federal Government Agencies target market increased
34% during the first quarter of 1998, compared to the first quarter of 1997.
This increase was attributable to the award in mid 1997 of a significant
multi-year contract with the Department of Defense for its Standard Procurement
System ("SPS"), which accounted for 51% of the 1998 first quarter growth. In
addition, there was increased business with existing clients and new business
with both defense and civilian agencies. The Company expects revenues in this
target market, for 1998, to increase at rates ahead of the overall growth rate
of the Company. These revenue increases will continue to be driven primarily
by the SPS contract and by contracts with clients using the Company's federal
financial systems.
Revenues in the Other Corporate Clients target market, which
represents business in smaller vertical markets, increased 21% during the first
quarter of 1998 compared to the first quarter of 1997. This increase is
principally due to certain reclassifications of revenues from the Financial
Services Institutions market to this market in the first quarter of 1998. For
1998, the Company anticipates that revenues in this market will increase at
rates below the Company's overall revenue growth rate. While the Company
expects increased work with health care and electric and gas utilities clients,
it expects work with other clients in this market to decrease during 1998.
EXPENSES
Client project expenses and other operating expenses together
increased 12% during the first quarter of 1998, which was slightly lower than
the growth rate in revenues in this period. For all of 1998, the Company
anticipates that these expenses will continue to grow in proportion to revenue
growth. The Company expects to make significant expenditures related to
research and development of the "Tapestry" software. A majority of these
expenditures will be capitalized.
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Corporate Expenses decreased 6% during the first quarter of 1998,
compared to the first quarter of 1997. The 1998 decrease was owing to reduced
performance-based incentive compensation accruals for corporate officers and
profit-based compensation accruals under the Company's restricted stock
program, both owing to 1997 earnings falling below the expected results. In
addition, the lower rate of growth in corporate expenses reflects the Company's
focus on controlling expenses. For the year 1998, the Company expects these
expenses to grow slightly above the Company's revenue growth.
INCOME FROM OPERATIONS
Income from operations increased 61% for the first quarter of 1998,
compared to the first quarter of 1997. The Company's profit margins have
improved, due primarily to the significant amount of management time and staff
resources that had been consumed, during the first quarter of 1997, in
attempting to resolve the issues with the previously disclosed client
cancellations. In addition, the Company's development of the "Tapestry"
software was expensed in the first quarter of 1997 and is now being
capitalized. The Company is continuing to focus on controlling expenses. For
1998, the Company will continue to manage growth and expects to continue
improving on the profit margins.
OTHER (INCOME) EXPENSE
Interest expense decreased 38% during the first quarter of 1998,
because of lower amounts of short-term borrowings, due to improved cash flow
from operations. Other (income) expense increased in the first quarter 1998,
compared to 1997, due primarily to a write off of certain small investments.
FOREIGN CURRENCY EXCHANGE
Approximately 22% of the Company's first quarter revenues were derived
from non-US business. 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. However, the
Company seeks to negotiate provisions in contracts with non-US clients that
allow pricing adjustments related to currency fluctuations. In late 1997, the
Company employed hedging of intercompany balance sheet transactions through
derivative instruments (foreign currency swap contracts). For the first
quarter of 1998, the Company entered into two such short-term contracts with de
minimis value, which gave the Company access to additional sources of financing
while limiting the foreign exchange risk.
LIQUIDITY AND CAPITAL RESOURCES
The Company provides for its operating cash requirements primarily through
funds generated from operations, and secondarily from bank borrowings, which
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 to some degree accounts receivable. At March 31, 1998, the
Company's cash and cash equivalents totaled $44.4 million, down from $49.6
million at the end of 1997. Cash used by operating activities for the first
quarter of 1998 was $26.5 million due to payments for incentive compensation
and other employee benefits.
The Company invested over $10.0 million in fixed assets, software
purchases, and development of computer software during the first quarter of
1998. Revolving line of credit borrowings increased by $27.7 million over year
end 1997, which borrowings principally consisted of domestic currency
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borrowings by the Company. During the first quarter, the Company made
approximately $2.0 million in installment payments of principal on outstanding
debt owed to banks; the Company also received proceeds of approximately $6.4
million during the period from the exercise of stock options.
At March 31, 1998, the Company's debt-equity ratio, as measured by
total liabilities divided by stockholders' equity was 0.70, down from 0.77 at
December 31, 1997.
The Company's material unused source of liquidity at the end of the first
quarter of 1998 consisted of approximately $90.5 million under the revolving
credit and term debt facility then in effect. The Company believes that its
liquidity needs can be met from the various sources described above.
The Company has entered into bank guarantees due upon request for
performance under one of its contracts in an emerging country. At March 31,
1998, the Company had $18.6 million outstanding under such bank guarantees.
YEAR 2000 ISSUES
Companies in the business of providing information technology
services, software products or custom-developed software, such as the Company,
face "Year 2000 compliance" issues in at least two critical areas: internal
systems and client systems. "Year 2000 compliance" means the ability of
software and other processing capabilities to interpret and manipulate
correctly all data that includes the year 2000 or dates thereafter. Failure of
software and related capabilities used by the Company or, under certain
circumstances, furnished to clients, to be Year 2000 compliant could have a
material adverse impact on the Company. Accordingly, the Company is focusing
at the most senior levels on these issues, with the Audit Committee of the
Board of Directors, in conjunction with the Company's Chief Technology Officer
and others, monitoring the Company's analyses and status with respect to Year
2000 issues.
Early in 1997, the Company completed surveys of all of its major
internal systems for Year 2000 compliance. The Company began remediation
efforts for some systems in 1997, with others scheduled for upgrade or
replacement in 1998. Assessment of smaller software components and systems,
and interfaces with vendors, is continuing into 1998. The Company is
coordinating centrally all of its efforts to achieve Year 2000 compliance of
its internal systems by 1999. Total costs of achieving Year 2000 compliance in
its internal systems, which costs will be expensed as they are incurred, are
estimated to be approximately $3.0 million for 1998 and $2.5 million for 1999.
With respect to its clients, the Company does not presently anticipate
material costs or risks allocable specifically to Year 2000 compliance issues,
but is continuing to assess the scope and status of such risks. Client
engagements for specific Year 2000 remediation work have not been a strategic
marketing focus. In many of the Company's current engagements, Year 2000
replacement work is implicit, as the Company's clients are replacing systems
for various business reasons but in the process are gaining a new Year 2000
compliant system. The Company does not anticipate any special risks or costs
attributable to Year 2000 compliance issues in performing such contracts. With
respect to contractual obligations to active clients (clients for whom the
Company is still obligated to furnish products or services, such as
maintenance), the Company similarly does not anticipate in the aggregate
material costs or risks associated with Year 2000 compliance. Its contracts
with active clients generally are either for recent software that is Year 2000
compliant, or do not obligate the Company to furnish an updated release that is
Year 2000 compliant. Early in 1997, the Company inventoried its active
software products and status relative to Year 2000 compliance. It also has
been communicating with active clients regarding Year 2000 compliance, and
notifying them of the availability of updated Year 2000 compliant
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releases for certain older software known to the Company still to be used by
that client. For example, AMS has made available to U.S. Federal Government
clients since early 1997 an updated release of the Federal Financial System
software that is Year 2000 compliant and many such clients are in the process
of upgrading to that release. Given the special emphasis on Year 2000
compliance in the financial services sector, the Company's Finance Industry
Group has notified both active and former clients of Year 2000 compliance
releases of all current product offerings. The Company continues to assess the
status of Year 2000 compliance of the Company-developed software in use by
various clients.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 131 entitled "Disclosures about Segments of an Enterprise and Related
Information" which will become effective for the Company's 1998 calendar year
financial statements and will apply to quarterly reporting beginning in the
first quarter of 1999. This Statement may change the way public companies,
having segments, report information about their business in annual financial
statements and may require them to report selected segment information in their
quarterly reports issued to stockholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Company is currently evaluating the standard to determine the
impact on its reporting and disclosure requirements.
In October 1997, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position 97-2, "Software Revenue
Recognition" (SoP 97-2), which provides guidance in recognizing revenue on
contracts with multiple elements including software licenses and services, and
superseded the previous authoritative literature (SoP 91-1). The SoP is
effective for the Company for transactions entered into after December 31,
1997. In March 1998, the AICPA issued SoP 98-4 "Deferral of the Effective Date
of a Provision of SoP 97-2", which defers by one year the implementation date
for a provision of SoP 97-2. The Company does not currently believe that the
application of SoP 97-2 will have a material impact on its historical practice
with respect to the timing of revenue recognition in its consolidated financial
statements, subject to the provision deferred in SoP 98-4. The Company has not
determined the effect of implementing SoP 97-2 if the provisions are not
deferred when the one-year deferral expires. For the first quarter of 1998,
SoP 97-2 did not affect the results of operations of the Company.
In March 1998, the AICPA issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SoP 98-1). The SoP is effective for the Company's 1999 fiscal
year and requires capitalization of costs related to developing or obtaining
internal-use software. Adoption of the SoP is not expected to materially
affect results of operations, as the Company is currently accounting for
internal-use software generally in accordance with the provisions of this SoP.
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ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING
STATEMENTS AND
FACTORS THAT MAY AFFECT FUTURE RESULTS
In the next couple of years, the Company expects growth in revenues
to be somewhat lower than the Company's historical long-term rates. The more
controlled and lower growth in revenues should enable the Company to improve
its profit margins. These margins were reduced during the last several years
owing to cancellations of two major projects and, related thereto, attrition
rates higher than historical rates for the Company, heavy investment in
building up staff capacity and infrastructure, and the stress of absorbing many
new professional staff.
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
which 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 schedules. 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 throughout North America, Europe, and other locations.
The Company must also manage and seek to reduce rates of attrition, which the
Company expects will continue to be somewhat higher than its historical norms
in view of increased competition for its talent, although not as high as in
1997 when affected by the cancellation of two major projects within one month.
There is also the risk of successfully managing large projects and the
risk of a material impact on results because of the unanticipated delay,
suspension, renegotiation or cancellation of a large project. As was the case
in the past two years, any such development in a project could result in a drop
in revenues or profits, the need to relocate staff, a potential dispute with a
client regarding money owed, and a diminution of AMS's reputation. 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, 35% of the Company's total
revenues in 1997 were derived from business with fifteen clients. The
cancellation of phase two of a large telecommunications project in the third
quarter of 1997 after the Company's successful completion of phase one of the
project, and the Company's subsequent reduction of net income for 1997 and
redeployment of personnel as a result of such unexpected cancellation,
together with a cancellation of a contract in the Financial Services
Institutions market following management and institutional changes at the
client, are recent examples of the risks inherent in the Company's business and
the Company's efforts to manage such risks. Events such as unanticipated
declines in revenues or profits could in turn result in immediate fluctuations
in the trading price and volume of the Company's stock.
Finally, there is the risk of revenues not being realized when
expected, such as in certain contracts in the State and Local Governments and
Education market. On certain contracts, the Company's fees are paid out of the
benefits (increased collections) that the client achieves. The Company
typically defers 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.
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Certain other risks, including, but not limited to, the Company's
international scope of operations, are discussed elsewhere in this Form 10-Q.
The Company is also expanding in several emerging countries. Contracts being
performed in such countries can have somewhat higher delivery risks. Because
the Company operates in a rapidly changing and highly competitive market,
additional risks not discussed in this Form 10-Q may emerge from time to time.
The Company cannot predict such risks or assess the impact, if any, 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.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
NOT APPLICABLE.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
NONE.
Item 2. Changes in Securities
NONE.
Item 3. Defaults Upon Senior Securities
NONE.
Item 4. Submission of Matters to a Vote of Security Holders
NONE.
Item 5. Other Information
NONE.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Form of Common Stock Certificate
(b) Reports on Form 8-K
NONE.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
Date: May 8, 1998 /s/ Paul A. Brands
----------------------- ---------------------------------------------------------
Paul A. Brands, Chairman and Chief Executive Officer
Date: May 8, 1998 /s/ Nancy M. Yurek
------------------------ ---------------------------------------------------------
Nancy M. Yurek, Controller
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