<PAGE> 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 September 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 November 6, 1998, 41,978,593 shares of common stock were outstanding.
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CONTENTS
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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.................................................... 18
Item 6. Exhibits and Reports on Form 8-K..................................... 19
</TABLE>
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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.
1
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In millions except per share data)
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
REVENUES ....................................... $282.2 $225.5 $755.9 $642.6
EXPENSES(1)
Client Project Expenses ............... 156.4 127.4 420.8 364.5
Other Operating Expenses .............. 82.1 77.6 227.7 208.6
Corporate Expenses .................... 18.9 10.6 45.7 34.9
------ ------ ------ ------
257.4 215.6 694.2 608.0
INCOME FROM OPERATIONS ......................... 24.8 9.9 61.7 34.6
OTHER (INCOME) EXPENSE
Interest Expense ...................... 0.5 1.8 2.7 4.8
Other (Income) Expense ................ (0.6) (0.4) (1.4) (1.7)
------ ------ ------ ------
(0.1) 1.4 1.3 3.1
INCOME BEFORE INCOME TAXES ..................... 24.9 8.5 60.4 31.5
INCOME TAXES ................................... 10.2 4.0 24.8 13.4
------ ------ ------ ------
NET INCOME ..................................... $ 14.7 $ 4.5 $ 35.6 $ 18.1
====== ====== ====== ======
WEIGHTED AVERAGE SHARES ........................ 42.3 41.4 42.2 41.3
====== ====== ====== ======
BASIC NET INCOME PER SHARE ..................... $ 0.35 $ 0.11 $ 0.85 $ 0.44
====== ====== ====== ======
WEIGHTED AVERAGE SHARES AND
EQUIVALENTS ................................. 43.2 42.4 43.0 42.2
====== ====== ====== ======
DILUTED NET INCOME PER SHARE ................... $ 0.34 $ 0.11 $ 0.83 $ 0.43
====== ====== ====== ======
</TABLE>
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(1) Certain amounts have been reclassified for comparative purposes.
2
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American Management Systems, Incorporated
CONSOLIDATED REVENUES BY MARKET(1)
Unaudited
(In millions)
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Telecommunications Firms................................ $ 67.6 $ 64.6 $181.9 $198.6
Financial Services Institutions......................... 55.9 49.0 163.6 149.3
State and Local Governments and Education............... 75.9 43.7 189.7 120.4
Federal Government Agencies............................. 66.8 55.0 179.6 139.0
Other Corporate Clients................................. 16.0 13.2 41.1 35.3
------ ------ ------ ------
Total Revenues.......................................... $282.2 $225.5 $755.9 $642.6
====== ====== ====== ======
</TABLE>
- -----------------
(1) Certain amounts have been reclassified for comparative purposes.
3
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American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
9/30/98
ASSETS (Unaudited) 12/31/97
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CURRENT ASSETS
Cash and Cash Equivalents....................................... $ 94.3 $ 49.6
Accounts and Notes Receivable................................... 234.8 240.9
Prepaid Expenses and Other Current Assets....................... 7.6 8.4
------ ------
336.7 298.9
FIXED ASSETS
Equipment....................................................... 62.2 67.0
Furniture and Fixtures.......................................... 23.4 22.4
Leasehold Improvements.......................................... 16.6 13.9
------ ------
102.2 103.3
Accumulated Depreciation and Amortization....................... (63.4) (58.1)
------ ------
38.8 45.2
OTHER ASSETS
Purchased and Developed Computer Software (Net of Accumulated
Amortization of $68,500,000 and $63,400,000).................. 73.2 58.0
Intangibles (Net of Accumulated Amortization of $3,600,000 and
$3,200,000)................................................... 5.6 6.0
Other Assets (Net of Accumulated Amortization of $561,000 and
$815,000)..................................................... 20.2 13.3
------ ------
99.0 77.3
------ ------
TOTAL ASSETS............................................................. $474.5 $421.4
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</TABLE>
4
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American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
9/30/98
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 12/31/97
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<S> <C> <C>
CURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations........................ $ 4.7 $ 7.5
Accounts Payable....................................................... 9.8 10.5
Accrued Incentive Compensation......................................... 34.2 24.7
Other Accrued Compensation and Related Items........................... 36.6 32.2
Deferred Revenues...................................................... 28.3 39.8
Other Accrued Liabilities.............................................. 7.9 3.5
Provision for Contract Losses.......................................... 3.0 -
Income Taxes Payable................................................... 3.4 8.8
------ ------
127.9 127.0
Deferred Income Taxes.................................................. 16.9 3.0
------ ------
144.8 130.0
NONCURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations........................ 24.2 27.9
Other Accrued Liabilities.............................................. 15.3 9.5
Deferred Income Taxes.................................................. 15.2 15.3
------ ------
54.7 52.7
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TOTAL LIABILITIES............................................................... 199.5 182.7
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,
51,057,214 and 50,115,057 Issued and 42,111,596 and 41,544,299
Outstanding)......................................................... 0.5 0.5
Capital in Excess of Par Value......................................... 93.3 84.1
Retained Earnings...................................................... 224.1 188.5
Currency Translation Adjustment........................................ (5.5) (8.0)
Common Stock in Treasury, at Cost (8,945,618 and 8,570,758 Shares)..... (37.4) (26.4)
------ ------
275.0 238.7
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $474.5 $421.4
====== ======
</TABLE>
5
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income..................................................................... $ 35.6 $ 18.1
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation............................................................. 13.3 13.7
Amortization............................................................. 15.0 12.4
Deferred Income Taxes.................................................... 14.0 6.4
Provision for Doubtful Accounts................................................ 8.8 3.5
Provision for Contract Losses.................................................. 3.0 (15.7)
Changes in Assets and Liabilities:
Increase in Trade Receivables...................................... (2.7) (6.4)
Decrease in Prepaid Expenses and Other Current Assets.............. 0.9 3.5
Increase in Other Assets........................................... (9.6) (8.1)
Increase (Decrease) in Accrued Incentive Compensation.............. 9.5 (18.5)
Increase in Accounts Payable, Other Accrued Compensation, and
Other Accrued Liabilities........................................ 13.8 6.1
(Decrease) Increase in Deferred Revenue............................ (11.5) 1.7
Decrease in Income Taxes Payable................................... (5.4) (4.6)
------ ------
Net Cash Provided by Operating Activities................................ 84.7 12.1
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets....................................................... (7.5) (12.1)
Purchase of Computer Software and Investment in Software Products ............. (28.4) (25.7)
Decrease in Other Investments.................................................. 1.0 0.4
Proceeds from Sale of Fixed Assets and Purchased Computer Software............. 0.9 0.5
------ ------
Net Cash Used by Investing Activities.................................... (34.0) (36.9)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings ................................................................... - 20.8
Payments on Borrowings......................................................... (6.7) (5.1)
Proceeds from Common Stock Options Exercised................................... 10.7 3.2
Payments to Acquire Treasury Stock............................................. (12.5) -
------ ------
Net Cash (Used) Provided by Financing Activities......................... (8.5) 18.9
------ ------
DECREASE (INCREASE) IN CURRENCY TRANSLATION ADJUSTMENT............................... 2.5 (4.4)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................. 44.7 (10.3)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................................... 49.6 62.8
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................... $ 94.3 $ 52.5
====== ======
NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES:
Treasury Stock Utilized to Satisfy Accrued Incentive Compensation
Liabilities.............................................................. $ - $ 2.3
Treasury Stock Utilized to Satisfy Stock Options Exercised..................... $ 1.5 $ -
</TABLE>
6
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(1)
Unaudited
(In millions)
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
NET INCOME............................................. $14.7 $ 4.5 $35.6 $18.1
OTHER COMPREHENSIVE INCOME:
Currency Translation Adjustment.................. 2.8 0.3 2.5 (4.4)
----- ----- ----- -----
COMPREHENSIVE INCOME................................... $17.5 $ 4.8 $38.1 $13.7
===== ===== ===== =====
</TABLE>
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(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.
7
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Item 2. 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 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.
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.
<TABLE>
<CAPTION>
Percentage of
Total Revenues Period-to-Period Change
-------------- --------------------------------------
Quarter Ended Quarter Ended Nine Months Ended
September 30, September 30, 1998 September 30, 1998
vs. vs.
1998 1997 September 30, 1997 September 30, 1997
------ ------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues.......................................................... 100.0% 100.0% 25.1% 17.6%
Expenses
Client Project Expenses..................................... 55.4 56.5 22.8 15.4
Other Operating Expenses.................................... 29.1 34.4 5.8 9.2
Corporate Expenses.......................................... 6.7 4.7 78.3 30.9
----- -----
Total....................................................... 91.2 95.6 19.4 14.2
Income from Operations............................................ 8.8 4.4 150.5 78.3
Other (Income) Expense............................................ - 0.6 (107.1) (58.1)
Income Before Income Taxes........................................ 8.8 3.8 192.9 91.7
Income Taxes...................................................... 3.6 1.8 155.0 85.1
Net Income........................................................ 5.2 2.0 226.7 96.7
Weighted Average Shares........................................... - - 2.2 2.2
Basic Net Income per Share........................................ - - 218.2 93.2
Weighted Average Shares and
Equivalents.................................................... - - 1.9 1.9
Diluted Net Income per Share...................................... - - 209.1 93.0
</TABLE>
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RESULTS OF OPERATIONS (continued)
REVENUES
Revenues increased 25% during the third quarter and 18% for the first
nine months of 1998, compared to the same 1997 periods, with third quarter
growth occurring in all of the Company's target markets. For the first nine
months of 1998, growth occurred in all target markets except the
Telecommunications Firms market.
Business with non-US clients decreased 9% (to $54.6 million) during
the third quarter and decreased 19% (to $156.4 million) for the first nine
months of 1998, compared to the same 1997 periods, as the Company has not fully
replaced the revenues from two large projects with European telecommunications
clients whose cancellations were announced in 1997. With the exception of
the Telecommunications Firms market, compared to the 1997 periods all other
business with non-US clients increased 35% during the third quarter and 21%
during the first nine 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 and a large-scale telecommunications project which is
being capitalized.
In the Telecommunications Firms market, a market that is characterized
by large projects with relatively few clients, revenues increased 5% in the
third quarter of 1998, marking the first time in the current year, that there
was an increase in revenues when comparing the quarters of 1998 to 1997.
Revenues decreased 8% for the first nine months of 1998, when compared to 1997,
principally because of the above-cited cancellations and the capitalization of a
large-scale telecommunications project. Importantly, revenue in this market
increased 12% over the second quarter of 1998, which reflects the Company's
continued success in implementing its revised strategy in the telecommunications
marketplace. Non-US revenues in this market declined 27% for the quarter and 35%
for the first nine 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 Company's
development of its next generation of customer care and billing software, known
as "Tapestry", is continuing to progress through a 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 in these countries are less than 3% of the Company's total revenues
for the first nine months of 1998.
In the Financial Services Institutions target market, 1998 revenues in
the third quarter and first nine months increased 14% and 10%, respectively,
when compared to the 1997 periods. These increases are attributable principally
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 accounted for approximately 38% of the third
quarter revenues in this market ($21.1 million) and 36% of the nine months
revenues ($58.5 million). For all of 1998, the Company expects revenue growth in
this market to increase at rates consistent with that shown through the first
nine months, which is less than the overall growth rate of the Company.
9
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In the State and Local Governments and Education target market,
revenues increased 74% in the third quarter and 58% for the first nine months of
1998. The increase for both 1998 periods was driven by the rapid build-up in
1998 of 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. Material revenues from
certain of those contracts are not likely to be recognized until later periods.
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
nine months of 1998.
Revenues in the Federal Government Agencies target market increased
21% in the third quarter and 29% in the first nine months of 1998, compared to
the same 1997 periods. This increase was attributable predominantly 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 33% of the 1998
first nine-month revenue 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 slightly ahead of the overall growth rate of the Company, but
at lower rates than experienced in the first nine months 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 market increased 21% during
the third quarter and 16% for the first nine months, compared to 1997. These
increases are mainly attributable to increased business with new clients in the
health care market and the electric and gas utilities market. For all of 1998,
the Company expects revenue growth in this market to be below that experienced
in the first nine months of 1998 and below the Company's overall revenue growth.
EXPENSES
Client project expenses and other operating expenses together
increased 16% during the third quarter and 13% for the first nine months of
1998, which was lower than the growth rate in revenues in both of these periods.
These expenses include a $3 million provision for a potential future loss on one
of the Company's contracts. For all of 1998, the Company anticipates that these
expenses will continue to grow at rates lower than the 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 78% during the third quarter and 31% for
the first nine months of 1998, compared to the same 1997 periods. Corporate
expenses increased faster than the revenue growth during the third quarter and
the nine months, due to the dedication of resources applied to the Year 2000
remediation of internal systems and increases in accruals for corporate level
performance-based incentive compensation. For the year 1998, the Company expects
corporate expenses to grow at rates above the Company's revenue growth rate.
10
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INCOME FROM OPERATIONS
Income from operations increased 150% for the third quarter and 78%
for the first nine months of 1998, compared to the same 1997 periods. The
Company's profit margins have improved over the third quarter and first nine
months of 1997, primarily because of the significant amount of management time
and staff resources that had been consumed, during the first nine months 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 nine months 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 its profit
margins.
OTHER (INCOME) EXPENSE
Interest expense decreased 72% during the third quarter and 44% during
the first nine months of 1998, because of lower amounts of short-term
borrowings, as a result of significantly improved cash flow from operations.
Other (income) expense decreased in the first nine months of 1998, compared to
1997, primarily because of a write-off of certain small investments and some
obsolete fixed assets. The improved cash flow has increased the Company's cash
investment income, which partially offset the expense increase.
FOREIGN CURRENCY EXCHANGE
Approximately 21% of the Company's revenues in the first nine months
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 began to employ limited hedging of
intercompany balance sheet transactions through derivative instruments (foreign
currency swap contracts). As of September 30, 1998, the Company had outstanding
one short-term contract, which was de minimus in amount. In addition, the
Company has established a notional cash pool with a European bank. This
arrangement allows the Company to better utilize its cash resources, amongst all
of the Company's subsidiaries, without incurring foreign currency conversion and
therefore mitigating foreign currency exposure for these transactions. The
Company also actively manages the excess cash balances in the cash pool which
will increase interest income on short-term investments. The Company accounts
for this cash pool on the net basis rather than grossing up assets and
liabilities.
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
September 30, 1998, the Company's cash and cash equivalents totaled $94.3
million, up from $49.6 million at the end of 1997. Cash provided by operating
activities for the first nine months of 1998 was $84.7 million primarily due to
a significant decrease in trade receivables attributable to Company-wide
improvements in collections. The Company expects some build-up in trade
receivables for the balance of 1998.
11
<PAGE> 14
The Company invested over $34.0 million in fixed assets, software
purchases, and development of computer software during the first nine months of
1998. Total debt and revolving line-of-credit borrowings decreased by $20
million over year-end 1997; revolving line-of-credit borrowings were zero at
September 30, 1998. During the first nine months, the Company made approximately
$6.7 million in installment payments of principal on outstanding debt owed to
banks. The Company also received proceeds of approximately $10.7 million during
the period from the exercise of stock options.
At September 30, 1998, the Company's debt-equity ratio, as measured by
total liabilities divided by stockholders' equity, was 0.73, 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. The Company has
repurchased 400,000 shares through September 30, 1998, at a cost of $12.5
million. In addition, the Company has begun funding stock option exercising
through previously acquired treasury shares.
The Company's material unused source of liquidity at the end of the
first nine months of 1998 consisted of $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 September 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 second round of such reports was
concluded in the last quarter and the next round is scheduled for the next
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 Year 2000 issues.
12
<PAGE> 15
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 major
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. Final integration testing and deployment of
the Company's major systems should be completed during the first half of 1999.
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
continuing to seek Year 2000 certifications from those outside vendors with whom
the Company contracts for the provision of utilities, goods and certain internal
functionality. In addition to relying on certifications from outside vendors
where available, the Company is also engaged in a program of testing certain
subcomponents of and interfaces with the systems provided by the outside
vendors. The Company has also developed and implemented a limited incentive
program to encourage certain experienced internal systems programmers to remain
with the Company through the Year 2000. The Company has developed contingency
plans for certain of the Company's high-priority internal systems and is
continuing to develop plans for other mission-critical systems. These plans are
expected to be finalized after completion of the Company's analyses and
prioritization of the Year 2000 status of its internal systems which is underway
and scheduled for completion by December 1998.
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, $3.0 million for 1999, and
$0.5 million for 2000. For the past two years, $2.2 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. However, in many of the Company's existing engagements, Year
2000 replacement work is implicit, as the Company's clients are replacing
systems for various business reasons. 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 or new 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 its
software product clients regarding Year 2000 compliance of those products, and
notifying them of the status of their software and of the availability of
updated Year 2000 compliant releases for certain older software known to the
Company still in use by that client. The Company has already communicated such
information to a significant number of its product clients. 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.
The Company has historically avoided, and continues to avoid,
accepting contractual liability for failures of third-party software.
Accordingly, the Company does not anticipate any material Year 2000 risk in
connection with such third-party products. Nevertheless, in order to avoid any
disruptions in connection with third-party products, the Company is seeking Year
2000 certification from third-party vendors to the extent the Company uses third
party products in its own customer products.
13
<PAGE> 16
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, $4.1 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 has received responses from more than half of its
lessors indicating that the systems in the buildings either already are, or are
expected to be before the end of 1999, Year 2000 compliant. The Company will
prioritize systems and develop necessary test plans based on the further
responses it continues to receive, or not to 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 this standard to determine the
impact on its reporting and disclosure requirements but does not anticipate any
significant changes to its current disclosures.
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 nine months of 1998, SoP 97-2
did not materially affect the results of operations of the Company.
14
<PAGE> 17
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.
15
<PAGE> 18
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, improving in 1998, were reduced during the last
several years. Cancellations of two major projects and related 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, all contributed to reduced margins.
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
globally. Staffing projects in certain less industrialized countries can pose
special risks and challenges. 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. Changing client requirements, such as scope
changes, and delays in client acceptance of interim project deliverables, are
other examples of risks of performing large complex projects. These risks are
perhaps greater in certain geographic markets where such projects are less
common, for example outside Europe and the United States. 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.
16
<PAGE> 19
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.
Certain other risks, including, but not limited to, the Company's
international scope of operations, are discussed elsewhere in this Form 10-Q.
Increasingly, 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-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.
17
<PAGE> 20
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
(a) Resignation
As reported in the Company's press release dated September 18,
1998, Philip M. Giuntini, President and a member of the Board of Directors of
the Company, resigned from the Company in September. The Board of Directors
thereupon voted at its September meeting to reduce the size of the Board by one,
eliminating the vacancy. The Board of Directors has not yet elected a successor
to the office of President.
(b) Date for Submission of Stockholder Proposals for 1999 Annual
Meeting of Stockholders
Under the rules of the Securities and Exchange Commission (the
"Commission"), the date by which proposals of shareholders of the Company
intended to be presented at the 1999 annual meeting of shareholders must be
received by the Company for inclusion in the proxy statement and form of proxy
to be distributed by the Board of Directors is December 11, 1998. Shareholder
proposals should be submitted to Frank A. Nicolai, Secretary, American
Management Systems, Incorporated, 4050 Legato Road, Fairfax, Virginia 22033.
18
<PAGE> 21
Under the Company's By-laws, a stockholder must follow certain
procedures to nominate persons for election as directors or to propose other
business to be considered at an annual meeting of shareholders. These procedures
provide that shareholders desiring to make nominations for directors and/or to
bring a proper subject before a meeting must do so by notice timely received by
the Secretary of the Company. The Secretary of the Company generally must
receive notice of any such proposal not less than sixty (60) days and no more
than ninety (90) days prior to the anniversary of the preceding year's annual
meeting of shareholders. In the case of proposals for the 1999 annual meeting of
shareholders, the Secretary of the Company generally must receive notice of any
such proposal no earlier than February 7, 1999, and no later than March 9, 1999
(other than proposals intended to be included in the proxy statement and form of
proxy, which, as noted above, must be received by December 11, 1998). Generally,
such shareholder notice must set forth (a) as to each nominee for director, all
information relating to such nominee that is required to be disclosed in
solicitations or proxies for election of directors under the proxy rules of the
Commission; (b) as to any other business, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
shareholder; and (c) as to the shareholder, (i) the name and address of such
shareholder; (ii) the number of shares of Common Stock which are owned
beneficially and of record by such shareholder, (iii) a representation that the
shareholder is a holder of record of Common Stock entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to propose
such nomination or other business, and (iv) a representation as to whether the
shareholder intends, or is part of a group which intends, to solicit proxies
from other shareholders in support of such nomination or other business. The
chairman of the annual meeting shall have the power to declare that any proposal
not meeting these and any other applicable requirements imposed by the Company's
By-laws shall be disregarded. A copy of the Company's By-laws may be obtained
without charge on written request to Frank A. Nicolai, Secretary, American
Management Systems, Incorporated, 4050 Legato Road, Fairfax, Virginia 22033.
In addition, the form of proxy solicited by the Board of
Directors in connection with the 1999 annual meeting of shareholders will confer
discretionary authority to vote on any mater, unless the Secretary of the
Company receives notice of any such matter no earlier than February 7, 1999, and
no later than March 9, 1999, and such notice complies with the other
requirements described in the preceding paragraph.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed on August 3, 1998, reporting a change in the
Company's certifying accountant by reason of the merger of Price Waterhouse LLP
and Coopers & Lybrand LLP.
19
<PAGE> 22
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: November 13, 1998 /s/ Paul A. Brands
-------------------------- ------------------------------------------
Paul A. Brands, Chairman and Chief
Executive Officer
Date: November 13, 1998 /s/ Nancy M. Yurek
-------------------------- ------------------------------------------
Nancy M. Yurek, Controller
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 94,300
<SECURITIES> 0
<RECEIVABLES> 234,800
<ALLOWANCES> 9,145
<INVENTORY> 0
<CURRENT-ASSETS> 336,700
<PP&E> 102,200
<DEPRECIATION> 63,400
<TOTAL-ASSETS> 474,500
<CURRENT-LIABILITIES> 144,800
<BONDS> 0
0
0
<COMMON> 500
<OTHER-SE> 275,000
<TOTAL-LIABILITY-AND-EQUITY> 474,500
<SALES> 755,900
<TOTAL-REVENUES> 755,900
<CGS> 420,800
<TOTAL-COSTS> 694,200
<OTHER-EXPENSES> 1,300
<LOSS-PROVISION> 8,800
<INTEREST-EXPENSE> 2,700
<INCOME-PRETAX> 60,400
<INCOME-TAX> 24,800
<INCOME-CONTINUING> 35,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,600
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.83
<FN>
* THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<F1>PRIMARY EARNINGS PER SHARE REPRESENTS BASIC EARNINGS PER SHARE AS REQUIRED
PER SFAS NO. 128.
</FN>
</TABLE>
