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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 June 30, 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 August 4, 1998, 42,463,615 shares of common stock were outstanding.
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CONTENTS
Page
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Part I Financial Information
---------------------
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................... 18
Part II Other Information
-----------------
Item 1. Legal Proceedings............................................................ 18
Item 2. Changes in Securities........................................................ 18
Item 3. Defaults Upon Senior Securities.............................................. 18
Item 4. Submission of Matters to a Vote of Security Holders.......................... 18
Item 5. Other Information............................................................ 19
Item 6. Exhibits and Reports on Form 8-K............................................. 19
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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 For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
REVENUES ............................................... $250.7 $220.9 $473.7 $417.2
EXPENSES(1)
Client Project Expenses........................ 141.1 126.8 264.5 237.1
Other Operating Expenses....................... 74.4 67.4 145.6 131.1
Corporate Expenses............................. 14.3 12.1 26.7 24.3
-------- -------- -------- --------
229.8 206.3 436.8 392.5
INCOME FROM OPERATIONS.................................. 20.9 14.6 36.9 24.7
OTHER (INCOME) EXPENSE
Interest Expense............................... 1.3 1.7 2.2 3.0
Other (Income) Expense......................... (0.7) (0.4) (0.7) (1.4)
-------- -------- -------- --------
0.6 1.3 1.5 1.6
INCOME BEFORE INCOME TAXES.............................. 20.3 13.3 35.4 23.1
INCOME TAXES............................................ 8.3 5.4 14.5 9.5
-------- -------- -------- --------
NET INCOME.............................................. $ 12.0 $ 7.9 $ 20.9 $ 13.6
======== ======== ======== ========
WEIGHTED AVERAGE SHARES................................. 42.3 41.4 42.1 41.3
======== ======== ======== ========
BASIC NET INCOME PER SHARE.............................. $ 0.29 $ 0.19 $ 0.50 $ 0.33
======== ======== ======== ========
WEIGHTED AVERAGE SHARES AND EQUIVALENTS................. 43.1 42.4 42.9 42.2
======== ======== ======== ========
DILUTED NET INCOME PER SHARE............................ $ 0.28 $ 0.18 $ 0.49 $ 0.32
======== ======== ======== ========
- ----------------------------
(1) Certain amounts have been reclassified for comparative purposes.
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American Management Systems, Incorporated
CONSOLIDATED REVENUES BY MARKET(1)
Unaudited
(In millions)
For the Quarter For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
Telecommunications Firms............................ $ 60.5 $75.1 $114.2 $134.0
Financial Services Institutions..................... 56.6 51.1 107.7 100.3
State and Local Governments and Education........... 63.1 42.5 113.8 76.8
Federal Government Agencies......................... 58.3 43.4 112.8 84.0
Other Corporate Clients............................. 12.2 8.8 25.2 22.1
------ ------ ------ ------
Total Revenues...................................... $250.7 $220.9 $473.7 $417.2
====== ====== ====== ======
- ------------------------
(1) Certain amounts have been reclassified for comparative purposes.
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American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions)
6/30/98
ASSETS (Unaudited) 12/31/97
----------- ---------
CURRENT ASSETS
Cash and Cash Equivalents......................................... $ 73.5 $ 49.6
Accounts and Notes Receivable..................................... 222.7 240.9
Prepaid Expenses and Other Current Assets......................... 8.8 8.4
------- -------
305.0 298.9
FIXED ASSETS
Equipment ........................................................ 64.4 67.0
Furniture and Fixtures............................................ 23.1 22.4
Leasehold Improvements............................................ 15.2 13.9
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102.7 103.3
Accumulated Depreciation and Amortization......................... (62.6) (58.1)
------ ------
40.1 45.2
OTHER ASSETS
Purchased and Developed Computer Software (Net of Accumulated
Amortization of $64,500,000 and $63,400,000)................... 65.9 58.0
Intangibles (Net of Accumulated Amortization of $3,500,000 and
$3,200,000)..................................................... 5.7 6.0
Other Assets (Net of Accumulated Amortization of $860,000 and
$815,000) ...................................................... 19.4 13.3
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91.0 77.3
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TOTAL ASSETS............................................................... $436.1 $421.4
====== ======
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American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions)
6/30/98
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 12/31/97
----------- ---------
CURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations......................... $ 3.6 $ 7.5
Accounts Payable........................................................ 13.3 10.5
Accrued Incentive Compensation.......................................... 14.1 24.7
Other Accrued Compensation and Related Items............................ 32.6 32.2
Deferred Revenues....................................................... 29.7 39.8
Other Accrued Liabilities............................................... 4.1 3.5
Income Taxes Payable.................................................... 6.4 8.8
------ ------
103.8 127.0
Deferred Income Taxes................................................... 8.7 3.0
------ ------
112.5 130.0
NONCURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations......................... 26.7 27.9
Other Accrued Liabilities............................................... 14.8 9.5
Deferred Income Taxes................................................... 15.3 15.3
------ ------
56.8 52.7
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TOTAL LIABILITIES................................................................ 169.3 182.7
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,
50,934,303 and 50,115,057 Issued and 42,342,438 and 41,544,299
Outstanding).......................................................... 0.5 0.5
Capital in Excess of Par Value.......................................... 92.0 84.1
Retained Earnings....................................................... 209.4 188.5
Currency Translation Adjustment......................................... (8.3) (8.0)
Common Stock in Treasury, at Cost (8,591,865 and 8,570,758 Shares)...... (26.8) (26.4)
------ ------
266.8 238.7
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................... $436.1 $421.4
====== ======
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
For the Six Months
Ended June 30,
1998 1997
------ -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ................................................................... $ 20.9 $ 13.6
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Depreciation ............................................................ 8.8 9.1
Amortization............................................................. 8.2 8.0
Deferred Income Taxes.................................................... 5.7 4.3
Provision for Doubtful Accounts.......................................... 6.8 2.6
Changes in Assets and Liabilities:
Decrease (Increase) in Trade Receivables........................... 11.3 (12.1)
(Increase) Decrease in Prepaid Expenses and Other Current Assets... (0.4) 4.4
Increase in Other Assets........................................... (7.2) (7.6)
Decrease in Accrued Incentive Compensation......................... (10.6) (28.0)
Increase (Decrease) in Accounts Payable, Other Accrued
Compensation, and Other Accrued Liabilities..................... 9.1 (15.4)
(Decrease) Increase in Deferred Revenue............................ (10.0) 2.9
Decrease in Income Taxes Payable................................... (2.4) (4.3)
------ ------
Net Cash Provided (Used) by Operating Activities......................... 40.2 (22.5)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets....................................................... (4.1) (8.4)
Purchase of Computer Software and Investment in Software Products ............. (15.7) (16.4)
Decrease in Other Investments.................................................. 1.0 0.5
Proceeds from Sale of Fixed Assets and Purchased Computer Software............. 0.4 0.2
------ ------
Net Cash Used by Investing Activities.................................... (18.4) (24.1)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings ................................................................... - 27.5
Payments on Borrowings......................................................... (5.2) (3.4)
Proceeds from Common Stock Options Exercised................................... 8.0 2.7
Payments to Acquire Treasury Stock............................................. (0.4) (0.1)
------ ------
Net Cash Provided by Financing Activities................................ 2.4 26.7
------ ------
INCREASE IN CURRENCY TRANSLATION ADJUSTMENT.......................................... (0.3) (4.7)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................. 23.9 (24.6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................................... 49.6 62.8
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................... $ 73.5 $ 38.2
====== ======
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 For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
------- -------- ------- -------
NET INCOME...................................... $12.0 $ 7.9 $20.9 $13.6
OTHER COMPREHENSIVE INCOME:
Currency Translation Adjustment........... - (2.1) (0.3) (4.7)
------- ------- ------ ------
COMPREHENSIVE INCOME............................ $12.0 $ 5.8 $20.6 $ 8.9
======= ======== ====== ======
- ----------------------------
(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
Total Revenues Period-to-Period Change
-------------- -----------------------------------
Quarter Ended Quarter Ended Six Months Ended
June 30, June 30, 1998 June 30, 1998
vs. vs.
1998 1997 June 30, 1997 June 30, 1997
-------- ------- ------------- -------------
Revenues............................................... 100.0% 100.0% 13.5% 13.5%
Expenses
Client Project Expenses.......................... 56.3 57.4 11.3 11.6
Other Operating Expenses......................... 29.7 30.5 10.4 11.1
Corporate Expenses............................... 5.7 5.5 18.2 9.9
------- -------
Total............................................ 91.7 93.4 11.4 11.3
Income from Operations................................. 8.3 6.6 43.2 49.4
Other (Income) Expense................................. 0.2 0.6 (53.8) (6.3)
Income Before Income Taxes............................. 8.1 6.0 52.6 53.2
Income Taxes........................................... 3.3 2.4 53.7 52.6
Net Income............................................. 4.8 3.6 51.9 53.7
Weighted Average Shares................................ - - 2.2 1.9
Basic Net Income per Share............................. - - 52.6 51.5
Weighted Average Shares and Equivalents................ - - 1.7 1.7
Diluted Net Income per Share........................... - - 55.6 53.1
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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 13% during the second quarter and first six
months of 1998, compared to the same 1997 periods. For the second quarter and
first six months of 1998, growth occurred in all target markets except the
Telecommunication Firms market.
Business with non-US clients decreased 29% (to $52.6 million) during
the second quarter and 24% (to $101.8 million) for the first six months of 1998,
compared to the same 1997 periods. The decrease was primarily due to the
previously announced cancellation of two large projects with European
telecommunications clients in 1997. With the exception of the Telecommunications
Firms market, all other business with non-US clients increased 18% during the
second quarter and 15% during the first six months of 1998. For the year 1998,
the Company expects non-US business, and European business in particular, to
show little or no 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 19% in the second
quarter and 15% for the first six months, compared to the same 1997 periods,
principally owing to the above-cited cancellations. Excluding the effects of the
above-cited cancellations, revenues in this market increased 8% during the
second quarter and first half of 1998. Importantly, revenue in this market
increased 13% over the first quarter of 1998. Non-US revenues in this market
declined 44% for the quarter and 38% for the first six months, compared to the
same 1997 periods. For the year 1998, the Company expects revenues in this
market to be approximately equal to or slightly lower than Telecommunications
Firms revenues for 1997. The lack of growth reflects several factors: primarily
the need to replace revenues from the cancellation of the two telecommunications
projects, but also Company-initiated slowdown in business development in the
fall of 1996, which market pipeline is now increasing, reorganization of
management and market orientation and the need to upgrade its customer care and
billing software. The Company is addressing all of these factors in 1998. The
Company's development of its next generation of customer care and billing
software, known as "Tapestry", 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. 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 works in countries other than Western Europe and North
America and the delivery risks in these other countries may be higher. Revenues
in the Telecommunications Firms market for these countries are less than 3% of
the Company's total revenues for the first half of 1998.
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In the Financial Services Institutions target market, 1998 revenues
in the second quarter and first half, increased 11% and 7%, respectively, when
compared to the same 1997 periods, principally owing to build-ups in business
with clients who started large projects in 1997, and start-up work on several
new contracts awarded during the first half of 1998. Business with non-US
clients, primarily European, accounted for approximately 36% of the second
quarter revenues in this market ($20.2 million) and 35% of the six months
revenues ($37.4 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% in both the second quarter and first half of 1998. The
increase for both 1998 periods 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. 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. 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. 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, likely to be 1999. Revenues in the State and
Local Governments and Education market are expected to increase for the
remainder of 1998 at rates exceeding the increase in the Company's overall
revenue rate, but at lower rates than experienced in the first half of 1998.
Revenues in the Federal Government Agencies target market increased
34% during both the second quarter and first six months of 1998, compared to the
same 1997 periods. 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 47% of the 1998 first half
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 the remainder of 1998, to increase at rates ahead of
the overall growth rate of the Company, but at lower rates than experienced in
the first half of 1998. 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 39% during the second
quarter and 14% for the first half of 1998, compared to 1997. This increase is
principally due to increased business with new clients and certain
reclassifications of revenues from the Financial Services Institutions market.
For all of 1998, the Company expects revenue growth in this market to be in line
with the Company's overall revenue growth. The Company has made a conscious
decision to focus business in the health care market and the electric and gas
utilities market.
EXPENSES
Client project expenses and other operating expenses together
increased 11% during the second quarter and first half of 1998, which was
slightly lower than the growth rate in revenues in both of these periods.
Expenses for the quarter included a $1 million write-off of the previously
disclosed receivable from a foreign government. This removes all outstanding
receivable balances due from this client. For all
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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.
Corporate Expenses increased 18% during the second quarter and 10%
for the first six months of 1998, compared to the same 1997 periods. Corporate
expenses increased faster than the revenue growth during the second quarter due
to the dedication of resources applied to the Year 2000 remediation of internal
systems. The reduced rate of growth in corporate expenses generally during the
first half of 1998 reflects the Company's focus on controlling corporate
expenses along with reductions in corporate level performance-based incentive
compensation. For the year 1998, the Company expects corporate expenses to grow
slightly above the Company's revenue growth.
INCOME FROM OPERATIONS
Income from operations increased 43% for the second quarter and 49%
for the first half of 1998, compared to the same 1997 periods. The Company's
profit margins have improved over the second quarter and first half of 1997,
primarily because of the significant amount of management time and staff
resources that had been consumed, during the first half 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 half 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 24% during the second quarter and 27%
during the first six months of 1998, because of lower amounts of short-term
borrowings, as a result of significantly improved cash flow from operations.
Other (income) expense increased in the first half of 1998, compared to 1997,
primarily because of a write-off of certain small investments and a minor amount
of fixed assets.
FOREIGN CURRENCY EXCHANGE
Approximately 21% of the Company's revenues in the first half of
1998 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 limited hedging of intercompany balance sheet transactions
through derivative instruments (foreign currency swap contracts). As of June 30,
1998, the Company had outstanding two such short-term contracts totaling
approximately $2.3 million, 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 from time to time accounts receivable. At June
30, 1998,
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the Company's cash and cash equivalents totaled $73.5 million, up from
$49.6 million at the end of 1997. Cash provided by operating activities for the
first half of 1998 was $40.2 million primarily due to a significant decrease in
trade receivables attributable to improvements in collections Company wide. The
Company expects some build-up in trade receivables for the balance of 1998.
The Company invested over $18.4 million in fixed assets, software
purchases, and development of computer software during the first half of 1998.
Total debt and revolving line-of-credit borrowings decreased by $20.0 million
over year-end 1997; revolving line-of-credit borrowings were zero at June 30,
1998. During the first half, the Company made approximately $5.2 million in
installment payments of principal on outstanding debt owed to banks. The Company
also received proceeds of approximately $8.0 million during the period from the
exercise of stock options.
At June 30, 1998, the Company's debt-equity ratio, as measured by
total liabilities divided by stockholders' equity, was 0.63, down from 0.77 at
December 31, 1997.
On August 3, 1998 the Company announced that its Board of Directors
has authorized the purchase, from time to time, of up to 1 million shares of its
common stock through open market and negotiated purchases. At current stock
prices, completion of this repurchase of common shares would reduce, by slightly
less than half, cash on hand at June 30, 1998.
The Company's material unused source of liquidity at the end of the
first half of 1998 consisted of approximately $120.0 million under the revolving
credit and term debt facility. 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 a country other than Western Europe
and North America. At June 30, 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 three critical areas: internal
information and communication technology systems, client software systems, and
embedded systems (products which are made with microprocessor (computer) chips
such as environmental systems, physical security systems and elevators). "Year
2000 compliance" means the ability of hardware, software and other processing
capabilities to interpret and manipulate correctly all date data up to and
through the year 2000, including proper computation of leap years. With respect
to embedded systems, Year 2000 compliance means that the occurrence of the Year
2000 will not cause the product in which the microprocessor chip is embedded to
fail to operate properly. Failure of hardware, 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
Year 2000 issues. The Audit Committee of the Board of Directors, in conjunction
with one of the Company's Executive Vice Presidents, the Company's Internal
Auditor and others, is monitoring the Company's analysis and status with respect
to Year 2000 issues. Year 2000 program managers have been designated throughout
the Company to oversee Year 2000 efforts and provide periodic reports to the
Chairman of the Board and Chief Executive Officer, such Executive Vice President
and the Internal Auditor of the Company. The first round of such reports was
concluded in the last quarter and the next round is scheduled for the next
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quarter. Incentive compensation programs have been modified to include
achievement of Year 2000 compliance objectives. Funds expended and to be
expended on Year 2000 compliance have been allocated out of the Company's normal
operating budget. The Company has not delayed any significant projects as a
result of its investment of resources on the Year 2000 compliance issues.
Early in 1997, the Company completed surveys of all of its major
internal application systems for Year 2000 compliance. The Company began a
program of testing and remediation for some systems in 1997, with other systems
scheduled for upgrade or replacement in 1998. Assessment and testing of smaller
software components and systems, and interfaces with vendors where available,
are continuing into 1998. The Company is coordinating centrally all of its
efforts to achieve Year 2000 compliance of its internal systems worldwide by
mid-1999. The Company is also seeking Year 2000 certifications from those
outside vendors with whom the Company contracts for the provision of certain
internal functionality. In addition to relying on certifications from outside
vendors where available, the Company is also beginning a program of testing
certain subcomponents of and interfaces with the systems provided by the outside
vendors. The Company has also developed a limited incentive program to encourage
certain experienced internal systems programmers to remain with the Company
through the Year 2000. The subject of contingency planning with respect to the
Company's internal systems will be fully addressed upon completion of the
Company's analyses and prioritization of the Year 2000 status of its internal
systems which is scheduled for completion by December 1998. Initial contingency
planning for certain high priority internal systems is currently underway.
Total costs of achieving Year 2000 compliance in the Company's
internal systems, which costs will be expensed as they are incurred, are
estimated to be approximately $2.3 million for 1998, $2.6 million for 1999, and
$0.3 million for 2000. For the past two years $1.6 million has been expended by
the Company on Year 2000 compliance in respect of its internal systems.
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 which 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 primarily are either for recent software that is Year 2000
compliant or for which a Year 2000 compliant upgrade is available, or do not
explicitly obligate the Company to furnish an updated release that is Year 2000
compliant. Early in 1997, the Company began a program to test its active
software products (including upgrades, where applicable) and assess their status
relative to Year 2000 compliance. It also has been communicating with clients
regarding Year 2000 compliance, and notifying them of the availability of
updated Year 2000 compliant releases for certain older software known to the
Company still in use by that client. To the extent the Company uses third party
products in its own customer products, the Company is seeking Year 2000
certification from those outside vendors. The Company expects to continue the
ongoing process of monitoring the status of Year 2000 compliance of the
Company-developed software in use by various clients.
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Because of the nature of the Company's business, the Company may be
subject to Year 2000 lawsuits by its clients. Although the ultimate outcome of
any litigation is uncertain, the Company does not believe that the ultimate
amount of liability, if any, from any such actions would have a material affect
on the Company.
Total costs of assessing the Year 2000 compliance of client systems
and of communicating with clients about the Year 2000, which costs will be
expensed as they are incurred, are estimated to be approximately $1.5 million
for 1998, $1.0 million for 1999, and $0.8 million for 2000. For the past two
years, $3.7 million has been expended by the Company on Year 2000 compliance in
respect of client systems in order to expedite development of Year 2000
compliant upgrades for noncompliant systems, to notify clients of the Year 2000
compliance of their AMS products and to staff Year 2000 compliance efforts.
The majority of the embedded systems on which the Company relies in
its day to day operations are owned and managed by the lessors of the buildings
in which the Company's offices are located, or by agents of such lessors. The
Company is in the process of sending letters to its lessors and, as applicable,
their agents requesting certifications of the Year 2000 compliance of the
embedded systems. The Company will prioritize systems and develop a test plan
based on the responses it receives, or does not receive, to its letters.
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 that provision is not deferred
when the one-year deferral expires. For the first half of 1998, SoP 97-2 did not
materially affect the results of operations of the Company.
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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.
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133 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 be required to adopt this new
accounting standard by January 1, 2000. The Company does not anticipate early
adoption of this new standard. Due to the recent release and complexity of this
new standard, the Company has not completed an assessment of the impact it will
have on its financial position or results of operations. The Company currently
has no material transactions which would be impacted by this new standard.
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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. The Company could also face delays by clients, or
client suspensions or cancellation of projects, because of client systems'
failures to be Year 2000 compliant. 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 large 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 countries other than Western Europe and
North America. 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
(a) On August 11, 1998 the Company paid a dividend of one Preferred
Share purchase right on each share of Common Stock to holders of record on
August 10, 1998 of such Common Stock. See Item 5 below.
Item 3. Defaults Upon Senior Securities
NONE.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The regular annual meeting of stockholders of the Company was
held in Fairfax, Virginia on May 8, 1998 for the purposes of electing the
board of directors.
(b) Proxies for the meeting were solicited pursuant to Section
14(a) of the Securities Exchange Act of 1934, as amended, and the regulations
promulgated thereunder, and there was no solicitation in opposition to
management's solicitations. All of management's nominees for director were
elected.
The stockholders approved the election of the following
persons as directors of the Company:
Name For Withheld
---- --- --------
Daniel J. Altobello 35,386,155 7,417
Paul A. Brands 35,386,094 7,478
James J. Forese 35,351,653 41,919
Philip M. Giuntini 35,241,871 151,701
Patrick W. Gross 35,388,825 4,747
Dorothy Leonard 35,387,449 6,123
W. Walker Lewis 35,384,419 9,153
Frederic V. Malek 35,238,357 155,215
Frank A. Nicolai 35,388,672 4,900
Alan G. Spoon 35,391,370 2,202
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Item 5. Other Information
On July 31, 1998, the Board of Directors of the Company declared
a dividend of one Preferred Share purchase right on each outstanding share of
its Common Stock, payable to holders of Common Stock of record on August 10,
1998. Each right will entitle shareholders to buy one one-thousandth of a share
of newly created Series A Junior Participating Preferred Stock of the Company at
an exercise price of $185. Such rights presently are evidenced by the
certificates for Common Stock; certificates issued after the record date for
such rights of August 10, 1998 shall bear a legend referring to such rights. The
rights will be exercisable if a person or group acquires 15% or more of the
Common Stock of the Company or announces a tender offer for 15% or more of the
Common Stock. If a person or group acquires 15% or more of the outstanding
Common Stock of the Company, each right will entitle its holder to purchase, at
the exercise price, a number of shares of Common Stock having a market value at
that time of twice the right's exercise price. Rights held by the 15% holder
will become void and will not be exercisable to purchase shares at the bargain
purchase price. The Board of Directors will be entitled to redeem the rights at
one cent per right at any time before any such person acquires 15% or more of
the outstanding Common Stock. For a fuller description of the rights, please see
the Company's Form 8-A, registering the rights, filed on August 4, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Second Restated Certificate of Incorporation, as
amended through August 1, 1998 (including Certificate of Designations for Series
A Junior Participating Preferred Stock, incorporated by reference from Form 8-A,
filed on August 4, 1998)
4. Instruments defining the rights of security holders:
(a) Form of common stock certificate
(b) Rights Agreement dated as of July 31,
1998, between the Company and ChaseMellon Shareholder Services L.L.C. as Rights
Agent (incorporated by reference to the Company's Form 8-A, filed on August 4,
1998, including form of Rights Certificate).
10. Material contracts
(a) Form of Indemnification Agreements for
directors and officers
27. Financial Data Schedule
(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: August 13, 1998 /s/ Paul A. Brands
--------------- ----------------------------------------------------
Paul A. Brands, Chairman and Chief Executive Officer
Date: August 13, 1998 /s/ Nancy M. Yurek
--------------- ----------------------------------------------------
Nancy M. Yurek, Controller
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