<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the Transition Period Type From: To:
---------- -----------
Commission File No.: 0-9233
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
(Exact name of registrant as specified in its charter)
State of Incorporation: Delaware I.R.S. Employer
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
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock
Par Value $0.01
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 18, 1999 was $1,412,430,756.
As of March 18, 1999, 42,535,290 shares of common stock were outstanding.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
1. Pursuant to Form 10-K General Instruction G(2), registrant hereby
incorporates by reference those portions of the American Management Systems,
Incorporated 1998 Financial Report necessary to respond to items 5, 6, 7, 7A
and 8 of this Form 10-K.
2. Pursuant to Form 10-K General Instruction G(3), registrant hereby
incorporates by reference those portions of the American Management Systems,
Incorporated definitive Proxy Statement for the Annual Meeting of
Shareholders to be held May 21, 1999 necessary to respond to items 10, 11,
12, and 13 of this Form 10-K.
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<TABLE>
<CAPTION>
CONTENTS
Page
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<S> <C>
Part I Item 1. Business..................................................................... 1
Item 2. Properties................................................................... 4
Item 3. Legal Proceedings............................................................ 4
Item 4. Submission of Matters to a Vote of Security Holders.......................... 4
Part II Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters.............................................. 5
Item 6. Selected Financial Data...................................................... 5
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 5
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................... 5
Item 8. Financial Statements and Supplementary Data.................................. 5
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................................... 5
Part III Item 10. Directors and Executive Officers of the Registrant........................... 7
Item 11. Executive Compensation....................................................... 7
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................................... 7
Item 13. Certain Relationships and Related Transactions............................... 7
Part IV Item 14. Exhibits, Financial Statements and Schedules,
and Reports on Form 8-K...................................................... 8
</TABLE>
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PART I
ITEM 1. BUSINESS
OVERVIEW
The business of American Management Systems, Incorporated and its
wholly-owned subsidiaries ("AMS" or the "Company") is to partner with
clients to achieve breakthrough performance through the intelligent use of
information technology. AMS provides a full range of consulting services
from strategic business analysis to the full implementation of solutions
that produce genuine results, on time and within budget. AMS measures
success based on the results and business benefits achieved by its clients.
AMS is a trusted business partner for many of the largest and most
respected organizations in the markets in which it specializes. Each year,
approximately 85-90% of the Company's business comes from clients it worked
with in previous years.
The Company, which operates as one segment, focuses on clients in
specific sectors which are referred to as target markets. Organizations in
AMS's target markets -- telecommunications firms; financial services
institutions; state and local governments and education organizations;
federal government agencies; and other corporate clients -- have a crucial
need to exploit the potential benefits of information and systems
integration technology. The Company helps clients fulfill this need by
continuing to build a professional staff which is composed of experts in the
necessary technical and functional disciplines; managers who can lead large,
complex systems integration projects; and business and computer analysts who
can devise creative solutions to complex problems.
Another significant component of AMS's business is the development
of proprietary software products, either with its own funds or on a jointly
funded basis with other organizations. These products are principally
licensed as elements of custom tailored systems, and, to a lesser extent, as
stand-alone applications. The Company expended $77.4 million in 1998, $50.6
million in 1997, and $30.4 million in 1996 for research and development
associated with proprietary software. The Company expensed in the
accompanying consolidated financial statements $35.4 million in 1998, $30.7
million in 1997, and $26.0 million in 1996 for research and development
associated with proprietary software. As a percentage of revenues, license
and maintenance fee revenues were less than 10% during each of the last
three years.
During 1998, the Company formed a cross-target market practice
that will focus on delivering high-value, customer-facing Web solutions -
including eBill, eCare and eMarketing - tailored to clients in financial
services, telecommunications, government and utilities. These solutions
will help firms achieve greater cost savings, deliver improved customer
service and leverage cross-sell and up-sell opportunities in their markets.
The new "eCustomer" practice builds upon the Company's existing, significant
eCommerce client base.
In order to serve clients outside of the United States, AMS has
expanded internationally by establishing eighteen subsidiaries or foreign
branches. Exhibit 21 of this Form 10-K provides a complete listing of all
active AMS subsidiaries (and branches), showing name, year organized or
acquired, and place of incorporation. Revenues attributable to AMS's non-US
clients were approximately $208.4 million in 1998, $248.6 million in 1997,
and $278.3 million in 1996. Additional information on revenues and assets
attributable to AMS's geographic areas of operation is provided in Note 12
of the consolidated financial statements appearing in Exhibit 13 of this
Form 10-K.
Founded in 1970, AMS services clients worldwide. AMS's
approximately 8,100 full-time employees serve clients from corporate
headquarters in Fairfax, Virginia and from 57 offices worldwide.
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TELECOMMUNICATIONS FIRMS
AMS markets systems consulting and integration services for order
processing, customer care, billing, accounts receivable, and collections,
both for local exchange and interexchange carriers and for cellular/wireless
telephone companies. Most of the Company's work involves developing and
implementing customized capabilities using AMS's application software
products as a foundation.
FINANCIAL SERVICES INSTITUTIONS
AMS provides information technology consulting and systems
integration services to money center banks, major regional banks, insurance
companies, and other large financial services firms. The Company
specializes in corporate and international banking, consumer credit
management, customer value and global risk management, bank management
information systems, and retirement plan systems.
STATE AND LOCAL GOVERNMENTS AND EDUCATION
AMS markets systems consulting and integration services, and
application software products, to state, county, and municipal governments
for financial management, tax and revenue management, human resources,
social services, public safety and transportation functions, and
environmental systems. The Company also markets services and application
software products to universities and colleges.
FEDERAL GOVERNMENT AGENCIES
The Company's clients include civilian and defense agencies and
aerospace companies. Assignments require knowledge of agency programs and
management practices as well as expertise in computer systems integration.
Services provided by AMS include information technology, consulting,
operations and maintenance support, large scale systems integration and
certain Year 2000 remediation. AMS's work for defense agencies often
involves specialized expertise in engineering and logistics.
OTHER CORPORATE CLIENTS
The Company also solves information systems problems for the
largest firms in other industries, including health care organizations and
firms in the gas and electric utilities industry. AMS has systems
integration and operations projects with several large organizations and
intends to pursue more. AMS provides technical training and technical
consulting services in software technology for large-scale business systems.
PEOPLE
People are AMS's most important asset and its success depends on
its ability to attract, retain and motivate well-qualified people. The
Company's largest investment in recent years has been in recruiting,
assimilating, and developing its people.
AMS recruited and successfully assimilated approximately 2,100 new
staff members in 1998, including 324 in Europe. About 40% of the new staff
members came from the Company's college and university recruiting program.
AMS recruits individuals for a career and hires a balanced mix of
recent university graduates and experienced professionals who have
demonstrated extraordinary technical, analytical, and/or management skills.
A large number have advanced degrees in management, computer science, public
policy, or engineering.
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Individuals are assigned to one of the Company's market-oriented
groups to develop expertise in the areas needed for solving its clients'
problems. Transfers within these groups occur regularly to meet the
shifting needs of client's. Performance, in terms of productivity, quality
of work, and creativity in solving problems, determines an individual's
advancement. This motivates staff members to increase their knowledge of
AMS's clients' businesses and industries, to stay current with the
technology most suited to AMS's clients, and to develop the consulting and
managerial skills needed to produce results.
The Company launched a strategic initiative in 1998 to implement a
more integrated, structured career and leadership development program. To
drive this program the Company established "AMS University" as the focal
point for expanded training and development activities. By linking learning
resources directly to the skills required to perform key roles that drive
the business, and by structuring a development program that includes
required as well as elective courses, the Company believes it can accelerate
the development of individual capabilities and the overall capacity of the
Company to take full advantage of market opportunities.
COMPETITIVE FACTORS
AMS's competition comes primarily from the management services
units of large public accounting firms and consulting and systems
integration firms. In addition, prospective clients may decide to perform
projects with their in-house staff.
AMS seeks to meet this competition by exploiting its
industry-specific knowledge, its expertise with important business functions
and with new technologies, its proprietary computer application products,
and its experience in managing very large design and implementation
projects. Although price is always a factor in clients' decisions, it is
typically not the major factor. Other important factors are proven
experience, the capabilities of the proposed computer application products,
the quality of the proposed staff, and the proposed completion time for the
project.
AMS is significantly expanding its systems integration
capabilities by augmenting its delivery expertise and establishing key
alliances and partnerships with "best-of-breed" software providers.
Combining this expanded delivery capability with AMS's thought leadership
consulting provides major market growth opportunities.
MARKETING, CONTRACTS, AND SIGNIFICANT CUSTOMERS
Marketing is performed principally by the senior staff (executive
officers, vice presidents, senior principals, and principals) and by a
relatively small number of full-time salespersons for each large market. In
the U.S. Government markets, AMS replies selectively to requests for
proposals, concentrating on those closely related to previous work done for
the same or similar customers. Certain of the Company's software products
and computer services are sold by a small group of full-time salespersons
and, for those products and services, AMS advertises in trade publications
and exhibits at industry conventions.
For large systems integration projects, AMS typically contracts
for one phase (design, development, or implementation) at a time. Many
contracts may be canceled by the customer on short notice with appropriate
compensation to the Company for actual work performed. Most contracts with
federal government agencies allow for termination for the convenience of the
government and for an annual audit. No contracts are subject to
renegotiation at the client's option. AMS generally contracts either on the
basis of reimbursement of costs plus a fixed fee, a fixed or ceiling price
for each phase, unit rates for time and materials used, or services sold at
unit prices. In most cases, AMS receives monthly or milestone progress
payments.
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In 1998, the Company worked on projects directly for 109 U.S.
Government clients, representing a total of $224.8 million, or 21% of
revenues. No other customer accounted for 10% or more of revenues in 1998.
ITEM 2. PROPERTIES
Headquartered in Fairfax, Virginia, the Company's principal
operations occupy approximately 859,000 square feet of office space under
leases expiring through 2011. The Company also has other long-term lease
commitments totaling approximately 568,000 square feet with varying
expirations through 2014 at other locations throughout the United States.
Additionally, the Company's international staff occupies
approximately 258,700 square feet of office space outside of the U.S. at
locations under leases expiring through 2006.
With regard to its operating environment, the Company is provided
with a mainframe processor environment at the IBM Dedicated Processor Center
in Irving, Texas. In addition to the peripherals, power, and environmentals
provided by the Dedicated Processor Center, the Company owns other mainframe
peripheral equipment and microcomputers, and leases an IBM communications
processor.
The Company believes its facilities and equipment continue to be
adequate for its business as currently conducted.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders
during the fourth quarter of 1998.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Market information for the Company's common stock contained in the
Company's 1998 Financial Report is incorporated herein by reference in
accordance with General Instruction G(2) of Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data contained in the Company's 1998 Financial
Report is incorporated herein by reference in accordance with General
Instruction G(2) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and
results of operations contained in the Company's 1998 Financial Report are
incorporated herein by reference in accordance with General Instruction G(2)
of Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The information set forth on pages 11-13 of the Company's 1998
Financial Report, under the captions "Foreign Currency Hedging" and "Notes
Payable and Capitalized Lease Obligations," is incorporated herein by
reference in accordance with General Instruction G(2) of form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together
with the reports thereon of Deloitte & Touche LLP and PricewaterhouseCoopers
LLP, and the supplementary financial information, contained in the Company's
1998 Financial Report, are incorporated herein by reference in accordance
with General Instruction G(2) of Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 31, 1998, at the Company's regularly scheduled meetings of
its Board of Directors and the Audit Committee of the Board of Directors,
the Company accepted the resignation of PricewaterhouseCoopers LLP because
of conflicts of interest resulting from the July 1, 1998 merger of Price
Waterhouse LLP and Coopers & Lybrand LLP. The Company and Coopers & Lybrand
LLP have long-standing business relationships which both parties wish to
continue. In view of the independence requirements of the Securities and
Exchange Commission regarding the independence of certifying public
accountants, the Company and PricewaterhouseCoopers LLP mutually determined
that it would be inappropriate for PricewaterhouseCoopers LLP to continue as
the Company's accountants. Price Waterhouse LLP was the Company's
independent certifying accountants for 28 years. As a result of the
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above circumstances, the Audit Committee and Board of Directors thereupon
appointed Deloitte & Touche LLP as the Company's independent certifying
accountant for fiscal year 1998.
During the two fiscal years ended December 31, 1997 and December
31, 1996, the reports of PricewaterhouseCoopers LLP on the annual financial
statements have neither contained any adverse opinions or disclaimers of
opinions, nor have they been qualified or modified. During such two year
period, and through July 31, 1998 there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of
PricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers LLP to
make reference to the subject matter of the disagreement in connection with
its reports on the financial statements for such years.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors and executive officers of
the Company contained in the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held May 21, 1999, is incorporated
herein by reference. The Company's definitive Proxy Statement will be filed
within 120 days after the close of the Company's fiscal year in accordance
with General Instruction G(3) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation contained in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders
to be held May 21, 1999, is incorporated herein by reference. The Company's
definitive Proxy Statement will be filed within 120 days after the close of
the Company's fiscal year in accordance with General Instruction G(3) of
Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information relating to the security ownership of certain
beneficial owners and management contained in the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held May 21, 1999, is
incorporated herein by reference. The Company's definitive Proxy Statement
will be filed within 120 days after the close of the Company's fiscal year
in accordance with General Instruction G(3) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related
transactions contained under the headings "Principal Stockholders" and
"Compensation Committee Interlocks and Insider Participation" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders
to be held May 21, 1999, is incorporated herein by reference. The Company's
definitive Proxy Statement will be filed within 120 days after the close of
the Company's fiscal year in accordance with General Instruction G(3) of
Form 10-K.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS
ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The consolidated financial statements of American Management
Systems, Incorporated and subsidiaries filed are as follows:
Consolidated Statements of Operations for 1998 - 1996
Consolidated Balance Sheets as of December 31, 1998
and 1997
Consolidated Statements of Cash Flows for 1998 - 1996
Consolidated Statements of Changes in Stockholders'
Equity for 1998 - 1996
Consolidated Statements of Comprehensive Income
1998 - 1996
Notes to Consolidated Financial Statements
Reports of Independent Accountants
2. FINANCIAL STATEMENT SCHEDULE
The financial statement schedule of American Management
Systems, Incorporated and subsidiaries filed is as follows:
Reports of Independent Accountants on financial
statement schedules
Schedule II - Valuation and Qualifying Accounts for
1998-1996
All other schedules are omitted because they are not
applicable, or the required information is shown in the financial statements
or the notes thereto.
Individual financial statements of the Company and each of
its subsidiaries are omitted because the Company is primarily an operating
company, and all subsidiaries included in the consolidated financial
statements being filed, in the aggregate, do not have a minority equity
interest in and/or indebtedness to any person other than the Company or its
consolidated subsidiaries in amounts which together exceed five percent of
the total assets as shown by the most recent year-end consolidated balance
sheet.
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3. EXHIBITS
The exhibits to the Annual Report on Form 10-K of American
Management Systems, Incorporated filed are as follows:
3. Articles of Incorporation and By-laws
3.1 Second Restated Certificate of Incorporation of
the Company (incorporated herein by reference to the Company's Form 8-A
filed on August 4, 1998).
3.2 Certificate of Designation of Series A Junior
Participating Preferred Stock (incorporated herein by reference to Exhibit 2
to the Company's Registration Statement on Form 8-A filed on August 4, 1998).
3.3 By-Laws of the Company, as amended and restated
February 27, 1998 (incorporated herein by reference to Exhibit 3.2 of the
Company's 1997 Annual Report on Form 10-K).
4. Instruments Defining the Rights of Security Holders
4.1 Specimen Common Stock Certificate (incorporated
herein by reference to Exhibit 4.1 of the Company's quarterly report on Form
10-Q for the quarter ended March 31, 1997).
4.2 Rights Agreement dated as of July 31, 1998,
between the Company and ChaseMellon Shareholder Services L.L.C. as Rights
Agent (incorporated herin by reference to the Company's Form 8-A filed on
August 4, 1998, including form of Rights Certificate).
10. Material Contracts
10.1 1996 Amended Stock Option Plan F (incorporated
herein by reference to Exhibit A to the Company's definitive Proxy Statement
filed on April 11, 1997).
10.2 Outside Directors Stock-for-Fees Plan
(incorporated herein by reference to Exhibit C to the Company's definitive
Proxy Statement filed on April 10, 1996).
10.3 1992 Amended and Restated Stock Option Plan E,
as amended (incorporated herein by reference to Exhibit B to the Company's
definitive Proxy Statement filed on April 17, 1995).
10.4 Executive Deferred Compensation Plan, as amended
September 1, 1997 (incorporated herein by reference to Exhibit 10.4 of the
Company's 1997 Annual Report on Form 10-K).
10.5 Outside Director Deferred Compensation Plan,
effective January 1, 1997 (incorporated herein by reference to Exhibit 10.5 of
the Company's 1997 Annual Report on Form 10-K).
10.6 Multi-Currency Revolving Credit Agreement dated
as of January 9, 1998 among the Company, certain of the Company's
subsidiaries, the Lenders named therein, and NationsBank N.A. as
administrative agent and Wachovia Bank N.A., as documentation agent
(incorporated herein by reference to Exhibit 10.6 of the Company's 1997
Annual Report on Form 10-K).
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10.7 Agreement of Lease between Joshua Realty
Corporation and the Company, dated August 10, 1992, as amended (incorporated
herein by reference to Exhibit 10.7 of the Company's 1997 Annual Report on
Form 10-K).
10.8 Office Lease Agreement between Hyatt Plaza
Limited Partnership and the Company, dated August 12, 1993, as amended
(incorporated herein by reference to Exhibit 10.8 of the Company's 1997
Annual Report on Form 10-K).
10.9 Lease Agreement between Fairfax Gilbane, L.P.
and the Company, dated February 15, 1994, as amended (incorporated herein by
reference to Exhibit 10.9 of the Company's 1997 Annual Report on Form 10-K).
10.10 Deed of Lease between Principal Mutual Life
Insurance Company and the Company, dated December 1996 (incorporated
herein by reference to Exhibit 10.10 of the Company's 1997 Annual Report
on Form 10-K).
10.11 1996 Incentive Compensation Plan for
Executive Officers.
13. 1998 Financial Report
21. Subsidiaries of the Company
23. Consents of Independent Accountants
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of PricewaterhouseCoopers LLP
27. Financial Data Schedules
27.1 Financial Data Schedule for the twelve months
ended December 31, 1998.
27.2 Restated Financial Data Schedule for the
twelve months ended December 31, 1997.
27.3 Restated Financial Data Schedule for the three
months ended March 31, 1998.
27.4 Restated Financial Data Schedule for the nine
months ended September 30, 1997.
27.5 Restated Financial Data Schedule for the six
months ended June 30, 1997.
27.6 Restated Financial Data Schedule for the three
months ended March 31, 1997.
(b) REPORTS ON FORM 8-K
None.
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REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
American Management Systems, Incorporated
Fairfax, Virginia
We have audited the consolidated financial statements of American
Management Systems, Incorporated and subsidiaries (the "Company") as of
December 31, 1998, and for the year then ended, and have issued our report
thereon dated February 17, 1999 (incorporated by reference in this Annual
Report on Form 10-K). Our audit also included the financial statement schedule
for the year ended December 31, 1998 listed in Item 14(a) of this Form 10-K.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audit. In
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Washington, D.C.
February 17, 1999
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REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
American Management Systems, Incorporated
Our audits of the consolidated financial statements referred to in our
report dated February 18, 1998 appearing on page 24 of the 1998 Financial
Report of American Management Systems, Incorporated (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the Financial Statement
Schedule for the years ended December 31, 1997 and 1996 listed in Item 14(a)
of this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
February 18, 1998
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Schedule II
American Management Systems, Incorporated
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
For the Year Ended December 31 (In millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for Doubtful Accounts
-------------------------------
Balance at Beginning of Period $ 5.0 $ 18.9 $ 4.9
Allowance Accruals 10.9 10.6 15.2
Charges Against Allowance (6.1) (24.5) (1.2)
----- ------- ------
Balance at End of Period $ 9.8 $ 5.0 $ 18.9
===== ======= ======
Deferred Tax Asset Valuation Allowance
--------------------------------------
Balance at Beginning of Period $ 0.5 $ 0.4 $ 2.8
Allowance Accruals 0.6 0.1 0.4
Charges Against Allowance - - (2.8)
----- ------- ------
Balance at End of Period $ 1.1 $ 0.5 $ 0.4
===== ======= ======
Provision for Contract Losses
-----------------------------
Balance at Beginning of Period $ - $ 18.5 $ -
Allowance Accruals 7.3 - 18.5
Charges Against Provision - (18.5) -
----- ------- ------
Balance at End of Period $ 7.3 $ - $18.5
===== ======= ======
</TABLE>
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 26th of
March, 1999.
American Management Systems, Incorporated
by s/Paul A. Brands
------------------------------------
Paul A. Brands
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following officers and directors of
the Registrant in the capacities and on the date indicated.
<TABLE>
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Signature Title Date
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<S> <C> <C>
(i) Principal Executive Officer:
s/Paul A. Brands Chairman and March 26, 1999
------------------------- Chief Executive
Paul A. Brands Officer
(ii) Principal Financial Officer:
s/Ronald L. Schillereff Treasurer and March 26, 1999
------------------------- Chief Financial
Ronald L. Schillereff Officer
(iii) Principal Accounting Officer:
s/Nancy Yurek Controller March 26, 1999
-------------------------
Nancy Yurek
</TABLE>
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<TABLE>
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Signature Title Date
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<S> <C> <C>
(iv) Directors:
s/Daniel J. Altobello Director March 26, 1999
-------------------------
Daniel J. Altobello
s/Paul A. Brands Director March 26, 1999
-------------------------
Paul A. Brands
s/James J. Forese Director March 26, 1999
-------------------------
James J. Forese
s/Patrick W. Gross Director March 26, 1999
-------------------------
Patrick W. Gross
s/Dorothy Leonard Director March 26, 1999
-------------------------
Dorothy Leonard
s/W. Walker Lewis Director March 26, 1999
-------------------------
W. Walker Lewis
s/Frederic V. Malek Director March 26, 1999
-------------------------
Frederic V. Malek
s/Frank A. Nicolai Director March 26, 1999
-------------------------
Frank A. Nicolai
s/Alan G. Spoon Director March 26, 1999
-------------------------
Alan G. Spoon
</TABLE>
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
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<S> <C> <C>
3.1 Second Restated Certificate of Incorporation of the Company *
(incorporated herein by reference to the Company's
Form 8-A filed on August 4, 1998).
3.2 Certificate of Designation of Series A Junior Participating Preferred *
Stock (incorporated herein by reference to Exhibit 2 to the Company's
Registration Statement on Form 8-A filed on August 4, 1998).
3.3 By-laws of the Company, as amended and restated February *
27, 1998 (incorporated herein by reference to Exhibit 3.2 of the
Company's 1997 Annual Report on Form 10-K).
4.1 Specimen Common Stock Certificate (incorporated herein by *
reference to Exhibit 4.1 of the Company's quarterly report on
Form 10-Q for the Quarter ended March 31, 1997).
4.2 Rights Agreement dated as of July 31, 1998, between the Company *
and ChaseMellon Shareholder Services L.L.C. as Rights Agent
(incorporated herein by reference to the Company's Form 8-A filed
on August 4, 1998, including form of Rights Certificate).
10.1 1996 Amended Stock Option Plan F (incorporated herein by *
reference to Exhibit A to the Company's definitive Proxy
Statement filed on April 11, 1997).
10.2 Outside Directors Stock-for-Fees Plan (incorporated herein by *
reference to Exhibit C to the Company's definitive Proxy
Statement filed on April 10, 1996).
10.3 1992 Amended and Restated Stock Option Plan E, as amended *
(incorporated herein by reference to Exhibit B to the Company's
definitive Proxy Statement filed on April 17, 1995).
10.4 Executive Deferred Compensation Plan, as amended *
September 1, 1997 (incorporated herein by reference to Exhibit
10.4 of the Company's 1997 Annual Report on Form 10-K).
10.5 Outside Director Deferred Compensation Plan, effective *
January 1, 1997 (incorporated herein by reference to Exhibit
10.5 of the Company's 1997 Annual Report on Form 10-K).
10.6 Multi-Currency Revolving Credit Agreement dated as of *
January 9, 1998 among the Company, certain of the Company's
subsidiaries, the Lenders named therein, and NationsBank N.A.
as administrative agent and Wachovia Bank N.A., as
Documentation agent. (incorporated herein by reference to Exhibit
10.6 of the Company's 1997 Annual Report on Form 10-K).
</TABLE>
16
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.7 Agreement of Lease between Joshua Realty Corporation and the *
Company, dated August 10, 1992, as amended (incorporated herein
by reference to Exhibit 10.7 of the Company's 1997 Annual Report
on Form 10-K).
10.8 Office Lease Agreement between Hyatt Plaza Limited Partnership *
and the Company, dated August 12, 1993, as amended (incorporated
herein by reference to Exhibit 10.8 of the Company's 1997 Annual
Report on Form 10-K).
10.9 Lease Agreement between Fairfax Gilbane, L.P. and the Company, *
dated February 15, 1994, as amended (incorporated herein by
reference to Exhibit 10.9 of the Company's 1997 Annual Report on
Form 10-K).
10.10 Deed of Lease between Principal Mutual Life Insurance Company *
and the Company, dated December 1996 (incorporated herein by
reference to Exhibit 10.10 of the Company's 1997 Annual Report
on Form 10-K).
10.11 1996 Incentive Compensation Plan for Executive Officers
13. 1998 Financial Report
21. Subsidiaries of the Company
23. Consents of Independent Accountants
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of PricewaterhouseCoopers LLP
27. Financial Data Schedules
27.1 Financial Data Schedule for the twelve months ended December 31, 1998
27.2 Restated Financial Data Schedule for the twelve months ended December 31, 1997
27.3 Restated Financial Data Schedule for the three months ended March 31, 1998
27.4 Restated Financial Data Schedule for the nine months ended September 30, 1997
27.5 Restated Financial Data Schedule for the six months ended June 30, 1997
27.6 Restated Financial Data Schedule for the three months ended March 31, 1997
</TABLE>
- ------------
*Previously filed.
17
<PAGE> 1
EXHIBIT 10.11
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
1996 INCENTIVE COMPENSATION PLAN
FOR
EXECUTIVE OFFICERS
This American Management Systems, Incorporated 1996 Incentive Compensation
Plan for Executive Officers (the "Plan") is adopted by AMERICAN MANAGEMENT
SYSTEMS, INCORPORATED (the "Corporation") in order to attract, motivate and
retain eligible officers. The Plan is intended to promote the interests of the
Corporation and its shareholders by providing eligible officers with the
opportunity to earn incentive compensation that is linked to the financial
performance of the Corporation.
Incentive compensation provided under the Plan is intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue Code
of 1986, as amended, and the Plan shall be interpreted consistently with such
intent. Existence of this Plan is not intended to preclude the Corporation from
providing additional incentive compensation to eligible officers or incentive
compensation under other plans, agreements or arrangements to an officer,
whether such officer is eligible to participate in the Plan or actually
participates in the Plan.
I. Definitions
A. "Annual Profit Targets" mean the specified levels of pre-tax profits of
the Corporation that are set forth in an IC Agreement and are used to determine
whether the Participant will receive an Award and the amount of the Award under
the Plan.
B. "Award" means the amount of money payable to a Participant who has
received an IC Agreement.
C. "Board" means the Board of Directors of the Corporation.
D. "Code" means the Internal Revenue Code of 1986, as amended.
E. "Committee" means the committee appointed pursuant to Article II to
administer the Plan.
F. "Corporation" means American Management Systems, Incorporated.
G. "Fiscal Year" means the fiscal year of the Corporation.
H. "IC Agreement" means the incentive compensation agreement evidencing
the terms of a Participant's participation in the Plan.
I. "Interim Award" means with respect to an IC Agreement with a
Performance Period of more than one Fiscal Year, the interim payments made
pursuant to Article V prior to the end of the Performance Period.
J. "Outlook Year" means with respect to an IC Agreement, the Fiscal Year
immediately following the last Fiscal Year included in the Performance Period
for the IC Agreement.
K. "Participant" means an eligible executive officer of the Corporation
that has received an IC Agreement under the Plan.
L. "Percentage of Target Achieved" or "Target Achievement" means the
percentage determined in Step 4 of Article IV, Paragraph C, that reflects the
degree to which all of the Annual Profit Targets applicable to an IC Agreement
have been achieved or exceeded.
M. "Performance Factor" or "Cumulative Performance Factor" means the
multiplicative factor that is used in determining the amount of an Award or
Interim Award, that is based on the Performance Period for an IC Agreement and
the Percentage of Target Achievement, and that is determined under Article IV,
Paragraph C, Step 4 or Article V.
N. "Performance Goal" means one or more preestablished, objective
performance goals stated in a Participant's IC Agreement.
1
<PAGE> 2
O. "Performance Period" means the fiscal years of the Corporation that are
included in an IC Agreement, exclusive of the Outlook Year, for purposes of
determining attainment of the Performance Goals, all as provided in Article IV,
Paragraph A of the Plan.
P. "Performance Share" means with respect to an IC Agreement, a percentage
not in excess of 200% that is specified in a Participant's IC Agreement and that
is used in computing the Award with respect to the IC Agreement.
Q. "Plan" means this Incentive Compensation Plan for Executive Officers.
R. "Salary" means with respect to an IC Agreement, $350,000.00 for 1996,
and for each subsequent year Salary shall equal the preceding year's limit
increased by 10%; provided however, that the Committee may use its discretion to
reduce the amount of an Award to no more than the amount that would be payable
based on the Participant's annual base salary for the last Fiscal Year in the
Performance Period, or the only Fiscal Year in the case of an IC Agreement with
a Performance Period of one year.
II. Administration
The regularly appointed compensation committee of the Board shall serve as
the Committee that administers the Plan unless the Board shall appoint another
compensation committee of members of the Board to administer the Plan. In all
cases, the Committee shall have at least three (3) members and no member of the
Board may serve on the Committee unless such person is an "outside director"
within the meaning of Section 162(m)(4)(C)(i) of the Code, and applicable
guidance issued thereunder.
The Committee shall have the full power and authority, subject to
provisions of the Plan, to select executive officers to receive IC Agreements,
determine the terms of IC Agreements, promulgate rules and regulations as it
deems appropriate for the proper administration of the Plan, interpret the terms
of the Plan, certify whether the Performance Goals and the material terms of an
IC Agreement are met prior to payment of any amount under the Plan, and to
otherwise take any and all action as it deems to be necessary or appropriate in
connection with the operation of the Plan. Decisions and selections of the
Committee shall be made by a majority of its members, and if made pursuant to
the terms of the Plan shall be final.
Action of the Committee may be evidenced by approved minutes of a meeting
of the Committee, or a document executed by any member of the Committee or an
officer of the Corporation authorized by the Committee to execute documents on
the Committee's behalf.
III. Participation
A. Eligibility. Only those officers of the Corporation classified as
-----------
executive officers of the Corporation shall be eligible to participate in the
Plan and receive an IC Agreement under the Plan.
B. Designation of Participants. The Committee shall select those eligible
---------------------------
officers who shall receive an IC Agreement under the Plan. The IC Agreement
shall be in writing, shall specify the Performance Period to which the IC
Agreement relates, and shall include a description of the Performance Share,
Annual Profit Targets, and any other material terms of the IC Agreement.
IV. Incentive Compensation Agreement
A. Performance Periods. IC Agreements under the Plan shall be for
-------------------
Performance Periods of at least one Fiscal Year and for no more than three (3)
consecutive Fiscal Years. The Committee shall specify the Performance Period
applicable to each IC Agreement, and the special weighting to be given to
performance for each Fiscal Year in the Performance Period and the Outlook Year.
An IC Agreement for a Performance Period must be established not later than
ninety (90) days after the beginning of the first day of the first Fiscal Year
in the Performance Period covered by the IC Agreement.
2
<PAGE> 3
A Participant may receive multiple IC Agreements, provided that IC
Agreements that are outstanding at the same time may not have Performance
Periods that cover the same Fiscal Years. The inclusion of the Outlook Year in
determining an Award shall not be treated as part of a Performance Period.
Furthermore, if an IC Agreement is terminated prior to the end of the
Performance Period, the Participant may receive a new IC Agreement that includes
Fiscal Years covered by the original IC Agreement, provided that the Participant
receives no Award for such Fiscal Years.
B. Performance Goals. The right to receive an Award and amount of an Award
-----------------
is conditioned on the Corporation's performance relative to Annual Profit
Targets established with respect to pre-tax earnings of the Corporation for the
Fiscal Years in the Performance Period and the Outlook Year. Pre-tax earnings
means earnings before income taxes as reported or to be reported on the
Corporation's consolidated financial statements, or in the case of an Outlook
Year, the earnings before income taxes that are projected to be reported by the
Corporation.
C. Calculation of Award. The Award to a Participant is determined based on
--------------------
Participant's Salary, the Participant's Performance Share, and the Performance
Factor resulting from the Corporation's attainment of the Annual Profit Targets
specified in the Participant's IC Agreement for the Fiscal Years in the
Performance Period and the Outlook Year. A Participant's Award for the entire
period covered by an IC Agreement is determined in accordance with the following
steps:
Step 1 - Multiply the Annual Profit Target for each Fiscal Year in the
------
Performance Period and the Outlook Year by the weighting given to the Annual
Profit Target for that Fiscal Year or Outlook Year.
Step 2 - Multiply the actual pre-tax earnings for each Fiscal Year in the
------
Performance Period and 110% of the Annual Profit Target for the Outlook Year by
the weighting given to the Annual Profit Target for that Fiscal Year or Outlook
Year.
Step 3 - Divide the sum of each of the amounts determined in Step 2 by the
------
sum of each of the amounts determined in Step 1 to determine the Percentage of
Target Achieved.
Step 4 - Based on the Percentage of Target Achieved, determine a
------
Participant's Cumulative Performance Factor under the following table:
<TABLE>
<CAPTION>
Cumulative Performance Factor
Based on
Length of Performance Period
--------------------------------------------------
For a For a For a
Percentage of Target 1-Year 2-Year 3-Year
Achieved IC Agreement IC Agreement IC Agreement
- - ---------------------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
115% or more* (see below)
110% but less than 115% 1.50 6.00 9.00
105% but less than 110% 1.25 5.00 7.50
100% but less than 105% 1.00 4.00 6.00
95% but less than 100% 0.75 3.00 4.50
90% but less than 95% 0.50 2.00 3.00
85% but less than 90% 0.25 1.00 1.50
less than 85% 0.00 0.00 0.00
</TABLE>
3
<PAGE> 4
* If the Percentage of Target Achieved is 115% or more, the applicable
Performance Factor is determined by adding an additional 25% of the Performance
Factor for 100% of Target Achievement for each additional 5% increment by which
100% of Target Acheivement is exceeded. For example, if the Percentage of Target
Achieved is 115% for an IC Agreement with a Performance Period of 2 years, the
Cumulative Performance Factor is 7.0 (i.e., 6.0, plus 25% of 4.0).
Step 5 - Determine the Participant's Award, if any, under the following
------
formula: Salary x Performance Share x Cumulative Performance Factor = Award
D. Adjustment of Award. The Committee reserves the right to reduce the
-------------------
amount of the Award (including an Interim Award under Article V) to a
Participant. Such reduction, if any, shall be based on the Committee's
determination of the projected pre-tax earnings for the Outlook Year if such
projected amount is less than the assumed amount of 110% of the Annual Profit
Target for the Outlook Year used in Article IV, Paragraph C, Step 2; on the
Participant's annual base salary as provided in Article I, Paragraph R; and on
such additional factors as are specified in the Participant's IC Agreement,
which factors shall be determined by the Committee in its sole discretion. In
reaching its determination of the projected pre-tax earnings for the Outlook
Year, the Committee shall consider, but shall not be bound by, the amount that
the Corporation projects will be reported for such year, as contained in the
Corporation's business plan for the Outlook Year. The Committee may not increase
the Award under the Plan to any Participant in excess of the Award calculated
under the preceding Paragraph C.
V. Payment of Awards and Interim Awards
A. Certification and Payment. No payment of any Award, including an
-------------------------
Interim Award, shall be made to a Participant until the Committee has certified
in writing that the Performance Goals and other material terms of an IC
Agreement have been met and the Participant is entitled to payment.
Unless an IC Agreement provides otherwise, in the case of an IC Agreement
covering a Performance Period of more than one Fiscal Year, Interim Awards
shall, if earned, be made following the end of each Fiscal Year (other than the
last Fiscal Year) included in the Performance Period. Unless the IC Agreement
provides for no Interim Awards or lower levels of Interim Awards, the Interim
Awards shall be determined under the method for determining an Award under
Article IV, Paragraphs C and D with the following modifications. For purposes of
determining the amount of pre-tax earnings for a Fiscal Year for which financial
results have not yet been reported and the amount of pre-tax earnings for the
Outlook Year, each of which is necessary to apply Step 2 or Article IV,
Paragraph C, the pre-tax earnings will be 110% of the Annual Profit Target for
such Fiscal Year or Outlook Year. The Committee may, in its discretion, reduce
the amount of the Interim Award payable by reducing the amount of pre-tax
earnings used in computing an Interim Award to the Committee's determination
regarding the amount of pre-tax earnings for such Fiscal Year or Outlook Year.
In reaching its determination regarding such pre-tax earnings, the Committee
shall consider, but shall not be bound by, the amount that the Corporation
projects will be reported for each of such years, as contained in the
Corporation's business plan prepared for the year in which payment will occur.
Also, in lieu of the Performance Factors provided in Article IV, the Performance
Factors set forth in the following schedule shall be used:
<TABLE>
<CAPTION>
Cumulative*
Projected Percent of Interim* Interim
Target Achieved for the Performance Performance
Performance Period Factor Factor
--------------------------------- --------------- -------------
<S> <C> <C>
115% or more** (see below)
110% but less than 115% 1.50 3.00
</TABLE>
4
<PAGE> 5
<TABLE>
<S> <C> <C>
105% but less than 110% 1.25 2.50
100% but less than 105% 1.00 2.00
95% but less than 100% 0.75 1.50
90% but less than 95% 0.50 1.00
85% but less than 90% 0.25 0.50
less than 85% 0.00 0.00
</TABLE>
* The column "Interim Performance Factor" applies to an Interim Award after
the first Fiscal Year of an IC Agreement with a Performance Period of two
(2) or three (3) years. The column "Cumulative Interim Performance Factor"
applies to an Interim Award after the second Fiscal Year of an IC Agreement
with a Performance Period of three (3) years.
** If the Projected Percentage of Target Achieved is 115% or more, the
Performance Factor is determined by adding an additional 25% of the
Performance Factor for 100% of Target Achievement for each additional 5%
increment by which 100% Target Achievement is exceeded. For example, if the
Projected Percentage of Target Achieved is 115% after the end of the first
Fiscal Year of an IC Agreement that includes two (2) Fiscal Years, the
Performance Factor is 1.75 (i.e., 1.5, plus 25% of 1.0).
Interim Awards for a Fiscal Year in a Performance Period shall be made not
later than the last day of February following the end of the Fiscal Year for
which the Interim Award is made. When determining the amount of the Interim
Award after the second year for an IC Agreement with a Performance Period of
three (3) years, the Interim Award, if any, made with respect to such IC
Agreement after the first Fiscal Year shall be subtracted from the amount
determined using the Cumulative Interim Performance Factor for the second Fiscal
Year. Interim Awards shall be subtracted from the total Award for the
Performance Period. Interim Awards once made are not refundable to the
Corporation.
The final or remaining amount of an Award to a Participant for a Performance
Period shall be determined not later than the last day of February following the
end of the last Fiscal Year included in the Performance Period. If the IC
Agreement is for only one Fiscal Year, the full amount shall be payable not
later than such determination date. Otherwise, not later than such determination
date, an amount equal to X less Y shall be paid, where X is the Award multiplied
----
by a fraction, the numerator of which is the number of months in the Performance
Period reduced by four (4) and the denominator of which is the number of months
in the Performance Period and Y is the total amount of Interim Awards made with
respect to such IC Agreement. The remaining amount of the Award shall be paid in
four (4) equal installments on the last day of each succeeding month.
B. Employment on Payment Date Generally Required. Except as provided in
---------------------------------------------
this paragraph, no Participant shall receive payment of an amount with respect
to an Award (including an Interim Award unless such Participant is an active
employee of the Corporation (or a subsidiary) as of the scheduled payment date
for such amount). A Participant who dies or is disabled during the Performance
Period may continue to receive amounts payable under an IC Agreement, if the
Committee, in its discretion, determines to make such payments. For purposes of
this paragraph, a Participant shall be disabled if the participant is determined
to be disabled under the Corporation's long-term disability plan in which the
Participant participates.
C. Acceleration of Payment. An Award or portion of an Award otherwise
-----------------------
payable by the last day of February may be accelerated by the Committee so that
such Award or portion of Award is paid as early as the preceding December 1st.
The Committee may accelerate payment of an Award only to the extent it certifies
the earnings before taxes and other material terms of the IC Agreement have been
met, the Award made is discounted for early payment to the extent required by
Section 162(m) and the accelerated payment does not affect Awards under the Plan
from qualifying as "performance-based compensation" under Section 162(m)(4) of
the Code.
5
<PAGE> 6
VI. Amendment or Termination
The Board reserves the right to amend, suspend, or terminate the Plan or
adopt a new plan at any time; provided that no such amendment shall without the
consent of the Participant affect the payment of any IC Agreement to the such
Participant. In case any one or more of the provisions contained in the Plan
shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision of the Plan.
VII. Miscellaneous
A. Nonassignment. The interest of any Participant under the Plan shall not
-------------
be assignable either by voluntary or involuntary assignment or by operation of
law, except by will or the laws of descent and distribution.
B. Interpretation. This Plan is intended to provide Participants with the
--------------
opportunity to receive incentive compensation that is deductible by the
Corporation without regard to the limitations of Section 162(m)(1) of the Code
and shall be construed accordingly. The Plan shall otherwise be governed by the
laws of the State of Delaware and construed in accordance therewith.
C. No Employment Right. The granting of an IC Agreement confers on no
-------------------
employee the right to employment or continued employment by the Corporation. The
right of the Corporation to terminate the employment of a Participant shall not
be diminished or affected by reason of receipt of an IC Agreement under the
Plan.
VIII. Effective Date
This Plan is adopted effective as of January 1, 1996, provided that no
payment of an Award shall be made under the Plan unless the Plan is approved by
the shareholders of the Corporation at its 1996 annual meeting of shareholders.
6
<PAGE> 1
Exhibit 13
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
1998 FINANCIAL REPORT
<TABLE>
<CAPTION>
CONTENTS
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Business of AMS 1
Financial Statements and Notes 3
Reports of Independent Accountants 23
Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Assumptions Underlying Certain Forward-Looking
Statements and Factors That May Affect Future Results 33
Five-Year Financial Summary 35
Five-Year Revenues by Target Market 36
Selected Quarterly Financial Data 37
Other Information 38
</TABLE>
<PAGE> 2
BUSINESS OF AMS
OVERVIEW
The business of American Management Systems, Incorporated and its
wholly-owned subsidiaries ("AMS" or the "Company") is to partner with clients to
achieve breakthrough performance through the intelligent use of information
technology. AMS provides a full range of consulting services from strategic
business analysis to the full implementation of solutions that produce genuine
results, on time and within budget. AMS measures success based on the results
and business benefits achieved by its clients.
AMS is a trusted business partner for many of the largest and most
respected organizations in the markets in which it specializes. Each year,
approximately 85-90% of the Company's business comes from clients it worked with
in previous years.
The Company, which operates as one segment, focuses on clients in
specific sectors which are referred to as target markets. Organizations in AMS's
target markets -- telecommunications firms; financial services institutions;
state and local governments and education organizations; federal government
agencies; and other corporate clients -- have a crucial need to exploit the
potential benefits of information and systems integration technology. The
Company helps clients fulfill this need by continuing to build a professional
staff which is composed of experts in the necessary technical and functional
disciplines; managers who can lead large, complex systems integration projects;
and business and computer analysts who can devise creative solutions to complex
problems.
Another significant component of AMS's business is the development of
proprietary software products, either with its own funds or on a jointly funded
basis with other organizations. These products are principally licensed as
elements of custom tailored systems and, to a lesser extent, as stand-alone
applications. The Company expended $77.4 million in 1998, $50.6 million in 1997,
and $30.4 million in 1996 for research and development associated with
proprietary software. The Company expensed in the accompanying consolidated
financial statements $35.4 million in 1998, $30.7 million in 1997, and $26.0
million in 1996 for research and development associated with proprietary
software. As a percentage of revenues, license and maintenance fee revenues were
less than 10% during each of the last three years.
During 1998, the Company formed a cross-target market practice that
will focus on delivering high-value, customer-facing Web solutions - including
eBill, eCare and eMarketing - tailored to clients in financial services,
telecommunications, government and utilities. These solutions will help firms
achieve greater cost savings, deliver improved customer service and leverage
cross-sell and up-sell opportunities in their markets. The new "eCustomer"
practice builds upon the Company's existing, significant eCommerce client base.
In order to serve clients outside of the United States, AMS has
expanded internationally by establishing eighteen subsidiaries or foreign
branches. Exhibit 21 of this Form 10-K provides a complete listing of all active
AMS subsidiaries (and branches), showing name, year organized or acquired, and
place of incorporation. Revenues attributable to AMS's non-US clients were
approximately $208.4 million in 1998, $248.6 million in 1997, and $278.3 million
in 1996. Additional information on revenues and assets attributable to AMS's
geographic areas of operation is provided in Note 12 of the consolidated
financial statements appearing elsewhere in this financial report.
Founded in 1970, AMS services clients worldwide. AMS's approximately
8,100 full-time employees serve clients from corporate headquarters in Fairfax,
Virginia and from 57 offices worldwide.
1
<PAGE> 3
TELECOMMUNICATIONS FIRMS
AMS markets systems consulting and integration services for order
processing, customer care, billing, accounts receivable, and collections, both
for local exchange and interexchange carriers and for cellular/wireless
telephone companies. Most of the Company's work involves developing and
implementing customized capabilities using AMS's application software products
as a foundation.
FINANCIAL SERVICES INSTITUTIONS
AMS provides information technology consulting and systems integration
services to money center banks, major regional banks, insurance companies, and
other large financial services firms. The Company specializes in corporate and
international banking, consumer credit management, customer value and global
risk management, bank management information systems, and retirement plan
systems.
STATE AND LOCAL GOVERNMENTS AND EDUCATION
AMS markets systems consulting and integration services, and
application software products, to state, county, and municipal governments for
financial management, tax and revenue management, human resources, social
services, public safety and transportation functions, and environmental systems.
The Company also markets services and application software products to
universities and colleges.
FEDERAL GOVERNMENT AGENCIES
The Company's clients include civilian and defense agencies and
aerospace companies. Assignments require knowledge of agency programs and
management practices as well as expertise in computer systems integration.
Services provided by AMS include information technology, consulting, operations
and maintenance support, large scale systems integration and certain Year 2000
remediation. AMS's work for defense agencies often involves specialized
expertise in engineering and logistics.
OTHER CORPORATE CLIENTS
The Company also solves information systems problems for the largest
firms in other industries, including health care organizations and firms in the
gas and electric utilities industry. AMS has systems integration and operations
projects with several large organizations and intends to pursue more. AMS
provides technical training and technical consulting services in software
technology for large-scale business systems.
2
<PAGE> 4
FINANCIAL STATEMENTS AND NOTES
American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
(In millions except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $1,057.8 $ 872.3 $ 812.2
EXPENSES
Client Project Expenses 583.2 485.0 525.9
Other Operating Expenses 318.8 283.5 210.4
Corporate Expenses 65.9 49.5 48.3
---------- ------- -------
967.9 818.0 784.6
INCOME FROM OPERATIONS 89.9 54.3 27.6
OTHER (INCOME) EXPENSE
Interest Expense 4.2 5.8 3.2
Other Income (2.3) (2.9) (1.8)
Loss on Investments in Other Companies 0.7 - -
---------- ------- -------
2.6 2.9 1.4
INCOME BEFORE INCOME TAXES 87.3 51.4 26.2
INCOME TAXES 35.5 20.2 10.7
---------- ------- -------
NET INCOME $ 51.8 $ 31.2 $ 15.5
========== ======= =======
WEIGHTED AVERAGE SHARES 42.1 41.4 40.7
========== ======= =======
BASIC NET INCOME PER SHARE $ 1.23 $ 0.75 $ 0.38
========== ======= =======
WEIGHTED AVERAGE SHARES AND EQUIVALENTS 42.9 42.3 41.9
========== ======= =======
DILUTED NET INCOME PER SHARE $ 1.21 $ 0.74 $ 0.37
========== ======= =======
</TABLE>
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 5
American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 (In millions except per share data) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $119.3 $ 49.6
Accounts and Notes Receivable 260.3 240.9
Prepaid Expenses and Other Current Assets 8.8 8.4
------ ------
388.4 298.9
FIXED ASSETS
Equipment 59.7 67.0
Furniture and Fixtures 23.6 22.4
Leasehold Improvements 17.3 13.9
------ ------
100.6 103.3
Accumulated Depreciation and Amortization (63.0) (58.1)
------ ------
37.6 45.2
OTHER ASSETS
Purchased and Developed Computer Software (Net of
Accumulated Amortization of $72,000,000 and
$63,400,000) 83.6 58.0
Intangibles (Net of Accumulated Amortization of
$4,700,000 and $3,200,000) 4.3 6.0
Other Assets (Net of Accumulated Amortization of
$920,000 and $815,000) 23.7 13.3
------ ------
111.6 77.3
------ ------
TOTAL ASSETS $537.6 $421.4
====== ======
</TABLE>
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 6
American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 (In millions except per share data) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations $ 5.3 $ 7.5
Accounts Payable 21.3 10.5
Accrued Incentive Compensation 55.8 24.7
Other Accrued Compensation and Related Items 39.8 32.2
Deferred Revenues 37.7 39.8
Other Accrued Liabilities 4.8 3.5
Provision for Contract Losses 7.3 -
Income Taxes Payable 9.1 8.8
------ ------
181.1 127.0
Deferred Income Taxes 4.9 3.0
------ ------
186.0 130.0
NONCURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations 22.7 27.9
Other Accrued Liabilities 15.9 9.5
Deferred Income Taxes 21.1 15.3
------ ------
59.7 52.7
------ ------
TOTAL LIABILITIES 245.7 182.7
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
42,026,510 and 41,544,299 Outstanding) 0.5 0.5
Capital in Excess of Par Value 96.7 84.1
Retained Earnings 240.3 188.5
Currency Translation Adjustment (6.3) (8.0)
Common Stock in Treasury, at Cost (9,030,704 and
8,570,758 Shares) (39.3) (26.4)
------ ------
291.9 238.7
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $537.6 $421.4
====== ======
</TABLE>
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 7
American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31 (In millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 51.8 $ 31.2 $ 15.5
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation 17.0 17.9 16.1
Amortization 21.6 16.8 23.2
Loss on Investments in Other Companies 0.7 - -
Deferred Income Taxes 7.8 3.2 (9.8)
Provision for Doubtful Accounts 10.9 10.6 15.2
Provision for Contract Losses 7.3 (18.5) 18.5
Changes in Assets and Liabilities:
Increase in Trade Receivables (30.3) (3.7) (56.8)
(Increase) Decrease in Prepaid Expenses and Other
Current Assets (0.4) 4.8 (4.3)
Increase in Other Assets (10.6) (8.2) (7.3)
Increase (Decrease) in Accrued Incentive Compensation 31.1 (9.1) 11.2
Increase (Decrease) in Accounts Payable and Other Accrued
Compensation and Liabilities 26.0 (0.1) 19.0
(Decrease) Increase in Deferred Revenues (2.0) 19.0 (5.7)
Increase in Income Taxes Payable 0.3 1.0 5.5
------ ------ ------
Net Cash Provided by Operating Activities 131.2 64.9 40.3
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets (10.6) (15.9) (27.5)
Purchase of Computer Software (3.3) (2.3) (5.6)
Investment in Software Products (41.8) (31.6) (13.8)
Other Investments and Intangibles (2.3) 0.4 0.5
Proceeds from Sale of Fixed Assets and Computer Software 2.6 0.9 0.7
------ ------ ------
Net Cash Used in Investing Activities (55.4) (48.5) (45.7)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings - 20.0 30.4
Payments on Borrowings (7.5) (51.7) (6.7)
Proceeds from Common Stock Options Exercised 20.9 9.1 9.5
Payments to Acquire Treasury Stock (21.2) (0.1) (0.5)
------ ------ ------
Net Cash (Used in) Provided by Financing Activities (7.8) (22.7) 32.7
------ ------ ------
Increase (Decrease) in Currency Translation Adjustment 1.7 (6.9) (0.3)
------ ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 69.7 (13.2) 27.0
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 49.6 62.8 35.8
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $119.3 $ 49.6 $ 62.8
====== ====== ======
NON-CASH OPERATING AND FINANCING ACTIVITIES:
Treasury Stock Utilized to Satisfy Accrued
Incentive Compensation Liabilities $ - $ 2.3 $ 3.4
Treasury Stock Utilized to Satisfy Stock Options Exercised $ 4.7 $ - $ -
</TABLE>
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
6
<PAGE> 8
American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31, 1998, 1997, and 1996 (In millions)
<TABLE>
<CAPTION>
Common
Stock Capital in Currency Total
(Par Value Excess of Translation Retained Treasury Stockholders'
$0.01) Par Value Adjustment Earnings Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $0.5 $65.4 $(0.7) $141.8 $(31.5) $175.5
Common Stock Options Exercised - 5.1 5.1
Tax Benefit Related to Exercise of
Common Stock Options 4.5 4.5
Currency Translation Adjustment (0.4) (0.4)
Common Stock Repurchased (0.5) (0.5)
Restricted Stock Awarded 3.4 3.4
1996 Net Income 15.5 15.5
---- ----- ----- ------ ------ ------
Balance at December 31, 1996 0.5 75.0 (1.1) 157.3 (28.6) 203.1
Common Stock Options Exercised - 4.1 4.1
Tax Benefit Related to Exercise of
Common Stock Options 5.0 5.0
Currency Translation Adjustment (6.9) (6.9)
Common Stock Repurchased (0.1) (0.1)
Restricted Stock Awarded 2.3 2.3
1997 Net Income 31.2 31.2
---- ----- ----- ------ ------ ------
Balance at December 31, 1997 0.5 84.1 (8.0) 188.5 (26.4) 238.7
Common Stock Options Exercised - 5.3 8.3 13.6
Tax Benefit Related to Exercise of
Common Stock Options 7.3 7.3
Currency Translation Adjustment 1.7 1.7
Common Stock Repurchased (21.2) (21.2)
1998 Net Income 51.8 51.8
---- ----- ----- ------ ------ ------
Balance at December 31, 1998 $0.5 $96.7 $(6.3) $240.3 $(39.3) $291.9
==== ===== ===== ====== ====== ======
</TABLE>
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
7
<PAGE> 9
American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year Ended December 31 (In millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME ..................................... $51.8 $31.2 $15.5
OTHER COMPREHENSIVE INCOME (LOSS):
Currency Translation Adjustment............... 1.7 (6.9) (0.4)
----- ----- -----
COMPREHENSIVE INCOME............................... $53.5 $24.3 $15.1
===== ===== =====
</TABLE>
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
8
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The business of American Management Systems, Incorporated and its
wholly-owned subsidiaries ("AMS" or the "Company") is to partner with clients to
achieve breakthrough performance through the intelligent use of information
technology. AMS is an international business and information technology
consulting firm that provides a full range of services: business re-engineering,
change management, systems integration, and systems development and
implementation. AMS is headquartered in Fairfax, Virginia, with 57 offices
worldwide. The Company which operates as one segment focuses on the following
primary target markets: telecommunications firms, financial services
institutions, state and local governments and education, federal government
agencies and other corporate clients.
A. Revenue Recognition
Revenues on fixed-price contracts are generally recorded using the
percentage of completion method based on the relationship of costs incurred to
the estimated total costs of the project. Revenues on cost reimbursable
contracts and time and material contracts are recorded as labor and other
expenses are incurred.
The Company recognizes revenues on the percentage of completion method
for contracts involving software license fees and the provision of significant
software modifications and customized services. For all other software license
contracts, revenues are recorded upon execution of the contract, provided that
all shipment obligations have been met, fees are fixed or determinable, and
collection is deemed probable. Revenues from software maintenance contracts are
recognized ratably over the maintenance period.
On benefit-funded contracts (contracts whereby the amounts due the
Company are payable based on actual benefits derived by the client), the Company
defers recognition of revenues until the 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 based on the relationship of
costs incurred to the estimated total costs of the project.
When adjustments in contract value or estimated costs are determined,
any changes from prior estimates are reflected in earnings in the current
period. Any anticipated losses on contracts in progress are charged to earnings
when identified. The costs associated with cost-plus government contracts are
subject to audit by the U.S. Government. In the opinion of management, no
significant adjustments or disallowances of costs are anticipated beyond those
provided for in the financial statements.
B. Software Development Costs
The Company develops proprietary software products using its own funds,
or on a jointly funded basis with other organizations, and records such
activities as research and development. These software products are then
licensed to customers, either as stand-alone applications, or as elements of
custom-built systems.
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86 -- "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed" and for software
jointly developed in accordance with Statement of Position 97-2, "Software
Revenue Recognition". For projects funded by the Company, significant
development costs incurred beyond the point of demonstrated technological
feasibility are capitalized and, after the product is available for general
release to customers, such costs are amortized on a straight-line basis over a
period of 3 to 5 years, or other such shorter period as might be required. For
projects
9
<PAGE> 11
where the Company has a funding partner, the capital asset is reduced by the
amount collected from the partner. The Company recorded $14.5 million of
amortization in 1998, $12.5 million of amortization in 1997, and $9.3 million of
amortization in 1996. Unamortized costs were $79.1 million, $51.9 million, and
$32.7 million at December 31, 1998, 1997, and 1996 respectively. In 1998, the
Company reduced the unamortized costs by $14.8 million representing collections
from funding partners. The Company evaluates the net realizable value of
capitalized software using the estimated, undiscounted, net-cash flows of the
underlying products.
The Company capitalizes costs incurred for the development or purchase
of internal use software in accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Once the product is substantially complete and ready for its
intended use, capitalized costs are amortized on a straight-line basis over the
estimated useful life of the software.
The Company expended $77.4 million in 1998, $50.6 million in 1997, and
$30.4 million in 1996 for research and development associated with proprietary
software. The Company expensed in the accompanying consolidated financial
statements $35.4 million in 1998, $30.7 million in 1997, and $26.0 million in
1996 for research and development associated with proprietary software.
C. Fixed Assets, Purchased Computer Software Licenses and Intangibles
Fixed assets and purchased computer software licenses are recorded at
cost. Furniture, fixtures, and equipment are depreciated over estimated useful
lives ranging from 3 to 10 years. Leasehold improvements are amortized ratably
over the lesser of the applicable lease term or the useful life of the
improvement. For financial statement purposes, depreciation is computed using
the straight-line method. Purchased software licenses are amortized over 2 to 5
years using the straight-line method. Intangibles are generally amortized over 5
to 15 years.
D. Income Taxes
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities, using enacted tax rates for the year in which the differences are
expected to reverse.
Deferred income taxes are provided for temporary differences in
recognizing certain income, expense, and credit items for financial reporting
purposes and tax reporting purposes. Such deferred income taxes primarily relate
to the methods of accounting for revenue, capitalized software development
costs, restricted stock, and the timing of deductibility of certain reserves and
accruals for income tax purposes. A valuation allowance is recorded if it is
"more likely than not" that some portion or all of a deferred tax asset will not
be realized.
E. Earnings Per Share
Basic EPS excludes dilution and is computed by dividing net income by
the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
and is computed using the treasury stock method.
10
<PAGE> 12
F. Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The carrying
amount approximates fair value because of the short maturity of these
instruments.
G. Currency Translation
For operations outside the United States with functional currencies
other than the U.S. dollar, the Company translates income statement amounts at
the average monthly exchange rates throughout the year. The Company translates
assets and liabilities at exchange rates prevailing as of the Balance Sheet
date. The resulting translation adjustments and gains and losses on intercompany
transactions which are long term in nature are shown as a separate component of
Stockholders' Equity.
H. Principles of Consolidation
The consolidated financial statements include the accounts of American
Management Systems, Incorporated and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated. The Company's
investments in companies in which it has the ability to exercise significant
influence over operating and financial policies are accounted for under the
equity method, with the remaining investments carried at cost.
I. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Future actual results could be different due to these
estimates. Significant estimates inherent in the preparation of the accompanying
consolidated financial statements include: management's forecasts of contract
costs and progress towards completion which are used to determine revenue
recognition under the percentage-of-completion method, management's estimates of
allowances for doubtful accounts, tax valuation allowances, and management's
estimates of the net realizable value of purchased and developed computer
software and intangible assets.
J. Foreign Currency Hedging
From time to time, the Company enters into foreign exchange contracts
as a hedge of intercompany balance sheet transactions. Market value gains and
losses are recognized, and the resulting credits or debits offset foreign
exchange gains or losses on those transactions. For 1997 and 1998, the Company
entered into such short-term contracts with de minimis values. No contracts are
outstanding as of December 31, 1998.
K. Reclassifications
Certain prior year information has been reclassified to conform with
the current year presentation.
L. Comprehensive Income
The Company's principal components of comprehensive income are net
income and foreign currency translation adjustments.
11
<PAGE> 13
M. New Accounting Pronouncements
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
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 standard.
NOTE 2 -- ACCOUNTS AND NOTES RECEIVABLE
<TABLE>
<CAPTION>
December 31 (In millions) 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Trade Accounts Receivable
Amounts Billed $215.5 $195.2
Amounts Not Billed 46.7 45.3
Contract Retention 7.9 5.4
------ ------
Total 270.1 245.9
Allowance for Doubtful Accounts (9.8) (5.0)
------ ------
Total $260.3 $240.9
====== ======
</TABLE>
The Company enters into large, long-term contracts and, as a result,
periodically maintains individually significant receivable balances with certain
major clients. At December 31, 1998, the nine largest individual receivable
balances totaled approximately $94.5 million. No other receivable exceeded $5
million.
Management believes that credit risk, with respect to the Company's
receivables, is low due to the creditworthiness of its clients and the
diversification of its client base across different industries and geographies.
In addition, the Company is further diversified in that it enters into a range
of different types of contracts, such as fixed price, cost-plus, time and
material, and benefits funded contracts. The Company may also, from time to
time, work as a subcontractor on particular contracts. The Company performs
ongoing evaluations of contract performance as well as evaluations of the
client's financial condition.
NOTE 3 -- NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
Effective January 9, 1998, the Company entered into a syndicated
five-year $120 million Multi-Currency Revolving Credit Agreement with
NationsBank (now Bank of America) and Wachovia Bank (the "1998 Agreement") as
agents. A term loan (the "Term Loan"), which was funded by Wachovia Bank and
NationsBank on January 6, 1997 under a term loan agreement, remains outstanding
and is now governed by the 1998 Agreement.
The aggregate weighted average borrowings under all revolving credit
agreements was approximately $4.5 million in 1998, and $41.3 million in 1997, at
daily weighted average interest rates of approximately 4.9% in 1998 and 6.6% in
1997. The maximum borrowed under all agreements was $33.8 million in 1998 and
$63.1 million in 1997. At December 31, 1998 the Company had no amounts
12
<PAGE> 14
outstanding under its revolving credit facility and $28.0 million in term loans
compared to $1.8 million outstanding under its revolving credit facility and
$35.4 million in term loans at December 31, 1997.
The Company and most of its existing subsidiaries can borrow funds
under the 1998 Agreement in any of the approved currencies, subject to certain
minimum amounts per borrowing. Interest on such borrowings will generally range
from LIBOR plus 12.5 basis points to LIBOR plus 45 basis points, depending on
the ratio of total debt to earnings before interest, taxes, depreciation, and
amortization. The Company must also pay a facility fee ranging from 12.5 basis
points to 20 basis points of the total facility, based on the same performance
measure. Based on such measures at December 31, 1998, interest payments during
1999 will be based on LIBOR plus 12.5 basis points and the facility fee will be
12.5 basis points of the total facility.
The 1998 Agreement, and the Term Loan, contain certain covenants with
which the Company must comply. These include: (i) maintain at the end of each
fiscal quarter for the four fiscal quarters ending on such date a fixed charge
coverage ratio of not less than 2.25 to 1.0, as of December 31, 1997 and March
31, 1998, increasing to 2.5 to 1.0 for the quarter ending June 30, 1998 and
thereafter, (ii) maintain total debt to EBITDA ratio of no more than 3.0 to 1.0,
(iii) restrictions on using net worth to acquire other companies or transferring
assets to a subsidiary, and (iv) restrictions on declaring or paying cash
dividends in any one fiscal year in excess of twenty-five percent of its net
income for such year.
The following schedule summarizes the total outstanding notes; there
are no outstanding capitalized lease obligations. The carrying values
approximate the fair values.
<TABLE>
<CAPTION>
December 31 (In millions) 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving Line-of-Credit $ - $ 1.8
Unsecured Notes With Interest at 5.250% - 6.938%
Principal and Interest Payable Monthly Through
January 2004 28.0 33.6
----- -----
Total Notes Payable and Capitalized Lease Obligations $28.0 $35.4
===== =====
Principal amounts are repayable as shown below:
1999 $ 5.3
2000 6.1
2001 6.1
2002 5.5
2003 4.0
2004 and Beyond 1.0
-----
28.0
Less Current Portion 5.3
-----
Long-Term Portion $22.7
=====
</TABLE>
Interest paid by the Company totaled $4.2 million in 1998, $5.8 million
in 1997, and $3.2 million in 1996.
13
<PAGE> 15
NOTE 4 -- EQUITY SECURITIES
At December 31, 1997, the Company had a stock option plan, 1992 Amended
and Restated Stock Option Plan E, as amended (the "1992 Plan E"), under which
the Company was authorized to issue up to 3,375,000 shares of common stock as
incentive stock options ("ISOs") or nonqualified stock options ("NSOs"). The
1992 Plan E, which was approved by the shareholders in May 1992, replaced Stock
Option Plan E ("Plan E"). At its February 1998 meeting, the Board terminated the
1992 Plan E. No grants have been made under this plan since 1996. On May 10,
1996, the shareholders approved a new stock option plan for the Company, Stock
Option Plan F ("Plan F") under which an additional 3,800,000 shares of common
stock may be issued as ISOs or NSOs. On February 21, 1997, the Board adopted
certain amendments to Plan F resulting in the 1996 Amended Stock Option Plan F
("Amended Plan F") which was approved by the shareholders at the May 9, 1997
annual meeting.
Under all plans, the exercise price of an ISO granted is not less than
the fair market value of the common stock on the date of grant and for NSOs, the
exercise price is either the fair market value of the common stock on the date
of the grant or, when granted in connection with one-year performance periods
under the Company's incentive compensation program, the exercise price may be
determined by a formula selected by the Board or appropriate Board committee
that is based on the fair market value of the common stock as of a date, or for
a period, that is within three months of the date of grant. In cases where the
average market value exceeds the exercise price on the date of grant, the
differential is recorded as compensation expense. Under all plans, options
expire up to eight years from the date of grant. Options granted are exercisable
immediately, in monthly installments, or at a future date, as determined by the
appropriate Board committee or as otherwise specified in the plan.
At December 31, 1998 there were 2,191,853 shares available for grant
under Amended Plan F. No options remain available for grant under any previous
stock option plan. The following table summarizes information with respect to
stock options outstanding at December 31, 1998.
<TABLE>
<CAPTION>
Options Exercisable
Total Options Outstanding at 12/31/98 at 12/31/98
-------------------------------------------- ----------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Prices of Shares (Years) Price of Shares Price
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6.44 - $10.33 568,375 1.45 $ 8.55 463,881 $ 8.38
10.44 - 14.83 533,225 2.14 13.34 441,590 13.16
15.00 - 19.08 626,142 3.11 17.79 547,024 17.79
19.33 - 24.00 614,095 3.17 23.12 474,917 23.43
24.63 - 27.50 533,263 5.50 26.19 92,381 26.10
27.81 - 35.63 308,586 4.75 29.04 169,647 28.85
----------- -----------
3,183,686 3.22 $18.92 2,189,440 $17.29
</TABLE>
14
<PAGE> 16
Additional information with respect to stock options awarded pursuant to such
plans is summarized in the following schedule.
<TABLE>
<CAPTION>
Number of Weighted
Option Average
Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance Outstanding at December 31, 1995 3,404,582 $ 9.09
For the Year Ended December 31, 1996:
Options Granted 769,451 23.84
Options Canceled 26,495 16.67
Options Exercised 730,782 7.16
Balance Outstanding at December 31, 1996 3,416,756 12.76
For the Year Ended December 31, 1997:
Options Granted 964,335 20.77
Options Canceled 85,405 19.60
Options Exercised 516,384 7.94
Balance Outstanding at December 31, 1997 3,779,302 15.31
For the Year Ended December 31, 1998:
Options Granted 731,244 25.34
Options Canceled 122,325 21.88
Options Exercised 1,204,535 11.20
Balance Outstanding at December 31, 1998 3,183,686 18.92
</TABLE>
The Company has chosen to continue to account for stock-based
compensation using the method prescribed in APB Opinion No. 25, "Accounting for
Stock Issued to Employees." In 1996, the Company adopted, for disclosure
purposes only, Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" (SFAS No. 123).
If the Company determined compensation cost for these plans in
accordance with SFAS No. 123, the Company's pro-forma net income and earnings
per share for fiscal year 1998, 1997 and 1996 would have been decreased to the
pro-forma amounts indicated below:
<TABLE>
<CAPTION>
December 31 (In millions, except per share data): 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reported:
Net Income $51.8 $31.2 $15.5
===== ===== =====
Basic Net Income per Share $1.23 $0.75 $0.38
===== ===== =====
Diluted Net Income per Share $1.21 $0.74 $0.37
===== ===== =====
Pro-Forma:
Net Income $48.8 $26.8 $13.1
===== ===== =====
Basic Net Income per Share $1.16 $0.65 $0.32
===== ===== =====
Diluted Net Income per Share $1.14 $0.64 $0.31
===== ===== =====
</TABLE>
15
<PAGE> 17
The SFAS No. 123 method of accounting does not apply to options granted
prior to January 1, 1995, and accordingly, the resulting pro-forma compensation
cost may not be representative of that to be expected in future years.
The Company has eight-year and five-year options. For disclosure
purposes, the fair value of each stock option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. Under the Black-Scholes
model, the total value of the eight-year options granted in 1998, 1997 and 1996
was $2.8 million, $2.2 million and $1.8 million, respectively, which would be
amortized on a graded vesting schedule on a pro-forma basis over a seven-year
period. The weighted-average fair value of the eight-year stock options granted
in 1998, 1997 and 1996 was $12.37, $10.56 and $12.36, respectively. The total
value of the five-year stock options granted in 1998, 1997 and 1996 was $5.2
million, $5.5 million and $5.0 million, respectively. These would be amortized
ratably on a pro-forma basis over a five-year period (which varies between four
months and five years). The weighted-average fair value of the five-year stock
options granted in 1998, 1997 and 1996 was $10.18, $7.28 and $8.06,
respectively.
Additionally, the following assumptions were used for both the
eight-year and five-year stock options granted in 1998, 1997 and 1996
respectively.
<TABLE>
<CAPTION>
Eight Year Five Year
-------------------------------- -------------------------------
December 31 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected Volatility 43.86% 39.96% 38.01% 45.44% 39.65% 36.35%
Risk-Free Interest Rate 5.36% 5.60% 6.48% 5.48% 6.29% 5.58%
Expected Life 5 yrs 5 yrs 5 yrs 4 yrs 4 yrs 4 yrs
Expected Dividend Yield 0% 0% 0% 0% 0% 0%
</TABLE>
At its February 1995 meeting, the Board authorized the Company to expend up
to $10 million to repurchase additional shares of its common stock, from time to
time, for its stock based benefit plans or for other corporate purposes. On
August 3, 1998 the Company announced that its Board had 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 repurchased 723,520, 3,358, and
24,600 shares of its common stock during 1998, 1997, and 1996, respectively, for
a total of $21.8 million. In addition, the Company has begun funding stock
option exercises through the reissuance of previously acquired treasury shares.
16
<PAGE> 18
NOTE 5 -- EARNINGS PER SHARE RECONCILIATION
<TABLE>
<CAPTION>
Year Ended December 31 (In millions except per share data) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings per Share Computation
- ------------------------------------
Net Income (Numerator) $51.8 $31.2 $15.5
----- ----- -----
Weighted Average Shares (Denominator) 42.1 41.4 40.7
----- ----- -----
Basic Net Income per Share $1.23 $0.75 $0.38
===== ===== =====
Diluted Earnings per Share Computation
- --------------------------------------
Net Income (Numerator) $51.8 $31.2 $15.5
----- ----- -----
Weighted Average Shares and Equivalents:
Weighted Average Shares 42.1 41.4 40.7
Shares Issuable Upon Exercise of Stock Options 3.3 2.9 3.5
Less Shares Assumed to be Repurchased at Fair Market Value (2.5) (2.0) (2.3)
----- ----- -----
Total Weighted Average Shares and Equivalents (Denominator) 42.9 42.3 41.9
----- ----- -----
Diluted Net Income per Share $1.21 $0.74 $0.37
===== ===== =====
</TABLE>
17
<PAGE> 19
NOTE 6 -- INCOME TAXES
<TABLE>
<CAPTION>
Year Ended December 31 (In millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes for the year ended
December 31 was derived in the following jurisdictions:
U.S. $58.5 $25.7 $ 8.7
Non-U.S. 28.8 25.7 17.5
------ ------ ------
$87.3 $51.4 $26.2
===== ===== =====
The provision for income taxes is comprised of the following:
Current:
U.S. Federal $15.5 $ 3.3 $10.4
U.S. State 4.1 0.3 1.4
Non-U.S. 8.1 13.3 8.7
Deferred:
U.S. Federal 6.4 3.2 (4.3)
U.S. State (1.9) 0.6 (0.5)
Non-U.S. 3.3 (0.5) (5.0)
----- ------ ------
Total Provision $35.5 $20.2 $10.7
===== ===== =====
The differences between the U.S. federal statutory
income tax as measured based on pre-tax income
and the Company's effective rate are:
U.S. federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 3.3 1.6 1.9
Change in valuation allowance 0.7 0.2 (9.1)
Research tax credits (0.4) (3.6) (3.0)
Meals and entertainment 2.4 3.7 5.7
Goodwill and Other Non-deductibles 0.6 0.4 1.6
Benefit of Non-U.S. Subsidiary Conversion (1.7) (1.7) -
Impact of Non-U.S. jurisdictions 1.4 6.0 4.3
Other (0.6) (2.3) 4.4
------ ------ ------
Effective Rate 40.7% 39.3% 40.8%
====== ====== ======
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
Year Ended December 31 (In millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The tax effect of temporary differences that give rise
to significant portions of the deferred tax assets and
deferred tax liabilities at December 31 are as follows:
Deferred Tax Assets:
Accrued Expenses $ 3.2 $ - $ 5.4
Employee Related Compensation 13.7 8.7 6.1
Deferred Revenue 1.0 1.5 2.4
Allowance for Doubtful Accounts 3.9 4.2 8.5
Loss and Credit Carryforwards 3.5 9.0 5.4
Other 5.0 3.3 (1.9)
------ ------ ------
Subtotal 30.3 26.7 25.9
Valuation Allowance (1.1) (0.5) (0.4)
------ ------ ------
Total Deferred Tax Assets $ 29.2 $ 26.2 $ 25.5
------ ------ ------
Deferred Tax Liabilities:
Unbilled Receivables $(19.9) $(20.4) $(26.9)
Capitalized Software (29.2) (21.0) (12.6)
Other (6.1) (3.1) (0.9)
------ ------ ------
Total Deferred Tax Liabilities (55.2) (44.5) (40.4)
------ ------ ------
Net Deferred Tax Liabilities $(26.0) $(18.3) $(14.9)
====== ====== ======
</TABLE>
The net changes in total valuation allowance for the years ending
December 31, 1998, 1997, and 1996 were an increase of $0.6 million, $0.1
million, and a decrease of $2.4 million respectively. Certain of the Company's
foreign subsidiaries have net operating losses, the majority of such losses
carry forward over an indefinite period.
The Company has not provided U.S. federal income and foreign withholding
taxes on $17.0 million of non-U.S. subsidiaries' undistributed earnings as of
December 31, 1998, because such earnings are intended to be reinvested
indefinitely or have already been taxed at rates in excess of the U.S. federal
rate. If these earnings were distributed, foreign tax credits would become
available under current law to reduce or eliminate the resulting U.S. income tax
liability. Where excess cash has accumulated in the Company's non-US
subsidiaries and it is advantageous for tax or foreign exchange reasons,
subsidiary earnings are remitted.
The Company paid income taxes of approximately $23.4 million, $14.9
million, and $14.3 million, in 1998, 1997, and 1996, respectively.
NOTE 7 -- DEFERRED COMPENSATION PLAN
The Company has deferred compensation plans which were implemented in
late 1996, and permit eligible employees and directors to defer a specified
portion of their compensation. The deferred compensation earns a specified rate
of return. As of year end 1998 and 1997 the Company had accrued $17.3 million
and $10.4 million, respectively, for its obligations under these plans. The
Company expensed $1.4 million in 1998 and $0.6 million in 1997, related to the
earnings by the deferred compensation plan participants.
19
<PAGE> 21
To fund these plans, the Company purchases corporate-owned life
insurance contracts. Proceeds from the insurance policies are payable to the
Company upon the death of the insured. The cash surrender value of these
policies, included in "Other Assets", was $16.6 million at December 31, 1998 and
$9.6 million at December 31, 1997. There were no outstanding loans at December
31, 1998 or December 31, 1997 on these policies.
NOTE 8 -- EMPLOYEE PENSION PLAN
The Company has a simplified employee pension plan, which became
effective January 1, 1980. Contributions are based on the application of a
percentage specified by the Company to the qualified gross wages of eligible
employees. The Company makes annual contributions to the plan equal to the
amount accrued for pension expense. Total expense of the plan was $11.5 million
in 1998, $9.8 million in 1997, and $8.3 million in 1996.
NOTE 9 -- JOINT VENTURE
In 1998, the Company established a joint venture with Bank of Montreal
to provide online loan application and decisioning services to small and
mid-size financial institutions via a new limited liability company, Competix
L.L.C. In 1998, the Company invested $3.6 million for its 50% interest in
Competix, which investment was reduced by $0.7 million related to the Company's
share of the 1998 Competix loss due to the start up costs for this new company.
20
<PAGE> 22
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
The Company occupies production facilities and office space (real
property) and uses various equipment under operating lease agreements, expiring
at various dates through the year 2014.
The commitments under these agreements, as of December 31, 1998, are
summarized in the table below. Payments under the real property leases are
generally subject to escalation based upon increases in the Consumer Price
Index, operating expenses, and property taxes.
Gross Rentals and Maintenance Payments
--------------------------------------
<TABLE>
<CAPTION>
(In millions) Real Property Equipment Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 $ 33.3 $ 7.8 $ 41.1
2000 32.1 3.6 35.7
2001 30.3 1.0 31.3
2002 27.9 0.1 28.0
2003 24.2 0.1 24.3
2004 through 2014 119.0 - 119.0
------ ----- ------
Total $266.8 $12.6 $279.4
====== ===== ======
</TABLE>
Operating lease expense for 1998, 1997, and 1996 was approximately
$45.1 million, $46.5 million and $34.1 million, respectively.
The Company has an extended leave program for certain employees that
provides for compensated leave of eight weeks after seven years of service. The
leave is not vested and can be taken only at the discretion of management.
Because of the extended period over which the leave accumulates and the highly
discretionary nature of the program, the amount of extended leave accumulated at
any period end which will ultimately be taken is indeterminable. Consequently,
the Company expenses such leave as it is taken.
The Company has entered into a bank guarantee due upon request for
performance under one of its contracts in Israel. At December 31, 1998, the
Company had $19.8 million outstanding under such bank guarantee.
AMS performs, at any point in time, under a variety of contracts for
many different clients. Situations can occasionally arise where factors may
result in the renegotiation of existing contracts. Additionally, certain
contracts may provide the client the right to suspend or terminate the
contracts. To the extent any contracts may provide the client with such rights,
the contracts generally provide for AMS to be compensated for work performed to
date and may include provisions for payment of certain termination costs.
However, business and other considerations may at times influence the ultimate
outcome of contract renegotiations, suspension and/or cancellation.
NOTE 11 -- RELATED PARTY TRANSACTIONS
The Company incurred legal fees and reimbursable expenses payable to
Shaw, Pittman, Potts & Trowbridge, general counsel to the Company, totaling
approximately $5.0 million, $4.0 million, and $2.7 million, in 1998, 1997, and
1996, respectively. A member of the firm of Shaw, Pittman, Potts & Trowbridge is
the spouse of a former executive officer of the Company who resigned in November
1997.
21
<PAGE> 23
NOTE 12 -- SEGMENT REPORTING AND SIGNIFICANT CUSTOMERS
The Company has adopted Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information" as
required and comparative information for earlier years is presented below. The
Company engages in business activities in one operating segment which provides
information technology consulting services to large clients in targeted vertical
markets. The chief operating decision-maker is provided information about the
revenues generated in key client industries. The resources needed to deliver the
Company's services are not separately reported by industry. The Company markets
its services worldwide, and its operations are grouped into two main geographic
areas according to the location of each of the Company's subsidiaries. The
Company's long-lived assets are located primarily in the United States. The two
groupings consist of United States locations and non-US locations. Pertinent
financial data is summarized below.
<TABLE>
<CAPTION>
Year Ended December 31 (In millions) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues by Target Market
Telecommunications Firms $ 258.3 $259.3 $310.1
Financial Services and Institutions 218.5 204.8 175.9
State and Local Governments and Education 282.1 171.4 140.7
Federal Government Agencies 241.3 189.2 135.7
Other Corporate Clients 57.6 47.6 49.8
-------- ------ ------
Consolidated Total $1,057.8 $872.3 $812.2
======== ====== ======
Revenues by Geographic Area
U.S. Companies $ 873.3 $682.2 $645.2
Non-US Companies 184.5 190.1 167.0
-------- ------ ------
Consolidated Total $1,057.8 $872.3 $812.2
======== ====== ======
</TABLE>
Revenues from AMS's U.S. Companies include export sales to non-US
clients of $23.9 million in 1998, $58.5 million in 1997, and $111.3 million in
1996. As a result the Company's total non-US client revenues, primarily in
Western Europe, were as follows:
<TABLE>
<CAPTION>
Year Ended December 31 (In millions) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Exports By U.S. Companies $ 23.9 $ 58.5 $111.3
Non-US Companies 184.5 190.1 167.0
------ ------ ------
Total Non-US Client Revenues $208.4 $248.6 $278.3
====== ====== ======
Percent of Total Revenues 19.7% 28.5% 34.3%
====== ====== ======
</TABLE>
Significant Customers:
Total revenues from the U.S. Government, comprising 109 clients in
1998, 93 clients in 1997, and 90 clients in 1996, were approximately $224.8
million in 1998, $171.5 million in 1997, and $113.0 million in 1996. No other
customer accounted for 10% or more of total revenues in 1998, 1997, or 1996.
22
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
American Management Systems, Incorporated
Fairfax, Virginia
We have audited the accompanying consolidated balance sheet of American
Management Systems, Incorporated and subsidiaries (the "Company") as of December
31, 1998, and the related statements of income, comprehensive income, changes in
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of American Management Systems,
Incorporated and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Washington, D.C.
February 17, 1999
23
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
American Management Systems, Incorporated
In our opinion, the accompanying consolidated financial statements
appearing on pages 3 to 22 of the 1998 Financial Report present fairly, in all
material respects, the financial position of American Management Systems,
Incorporated and its subsidiaries at December 31, 1997, and the results of their
operations and their cash flows for each of the two years in the period then
ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
February 18, 1998
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") contains certain forward-looking statements.
In addition, the Company or its representatives from time to time may make,
or may have made, certain forward-looking statements, orally or in writing,
including, without limitation, any such statements made in this MD&A, press
releases, or any such statements made, or to be made, in the MD&A contained
in other filings with the Securities and Exchange Commission. The Company
wishes to ensure that such forward-looking statements are accompanied by
meaningful cautionary statements so as to ensure, to the fullest extent
possible, the protections of the safe harbor established by section 27A of
the Securities Act of 1933, as amended and section 21E of the Securities
Exchange Act of 1934, as amended. Accordingly, such forward-looking
statements made by, or on behalf of, the Company are qualified in their
entirety by reference to, and are accompanied by, the discussion herein of
important factors that could cause the Company's actual results to differ
materially from those projected in such forward-looking statements.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total revenues of major items in the Consolidated Statements of Operations
and the percentage change in such items from period to period (see "Financial
Statements and Notes"). 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>
Period-to-Period
Percentage of Total Revenues Change
---------------------------- ----------------
1998 1997
vs. vs.
1998 1997 1996 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 21.3% 7.4%
Expenses
Client Project Expenses 55.1 55.6 64.8 20.2 (7.8)
Other Operating Expenses 30.1 32.5 25.9 12.5 34.7
Corporate Expenses 6.2 5.7 5.9 33.1 2.5
------- ------- -------
91.4 93.8 96.6 18.3 4.3
Income from Operations 8.5 6.2 3.4 65.6 96.7
Other (Income) Expense 0.2 0.3 0.2 (10.3) 107.1
------- ------- -------
Income Before Income Taxes 8.3 5.9 3.2 69.8 96.2
Income Taxes 3.4 2.3 1.3 75.7 88.8
------- ------- -------
Net Income 4.9 3.6 1.9 66.0 101.3
Weighted Average Shares 1.7 1.7
Basic Net Income per Share 64.0 97.4
Weighted Average Shares and Equivalents 1.4 1.0
Diluted Net Income per Share 63.5 100.0
</TABLE>
25
<PAGE> 27
RESULTS OF OPERATIONS (continued)
REVENUES
Revenues increased 21% and 7% during 1998 and 1997 compared to the
preceding year. Approximately 85-90% of each year's revenues come from
clients for whom the Company performed services in prior years. Looking
ahead to 1999, the Company expects growth to continue at approximately the
same rates that were experienced in 1998, with approximately equal growth
rates in all target markets, except the Telecommunications Firms market which
is expected to grow at a slightly faster rate and the Federal Government
Agencies market which is expected to grow at a slightly slower rate.
As part of its growth strategy the Company has formed a cross-target
market practice that will focus on delivering high-value, customer-facing Web
solutions - including eBill, eCare and eMarketing - tailored to clients in
financial services, telecommunications, government and utilities. These
solutions will help firms achieve greater cost savings, deliver improved
customer service and leverage cross-sell and up-sell opportunities in their
markets. The new "eCustomer" practice builds upon the Company's existing,
significant eCommerce client base.
Business with non-US clients decreased 16% to $208 million during 1998
and decreased 11% during 1997 to $249 million, 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, all other business with
non-US clients increased 16% during 1998 and 27% during 1997. Business with
non-US clients represents 20% and 28% of the Company's total revenues for
1998 and 1997, respectively. During 1998, the Company increased its non-US
client base and expanded the number of services offered to these clients. In
Europe, the Company gained 14 new telecommunications clients, and increased
revenues from financial services clients by 27%, during 1998. In addition,
the Company opened a new office in Australia, where work on a large
telecommunications project is underway. During 1998, the Company also
expanded the number of non-US financial services, telecommunications and
government clients it serves. The Company believes that it is well
positioned to achieve substantial growth in non-US business going forward.
For the year 1999, the Company expects non-US business and European business
in particular, to show some growth over 1998, mainly in the
Telecommunications Firms and the Financial Services Institutions target
markets.
In the Telecommunications Firms market, a market that is characterized
by large projects with relatively few clients, revenues were flat in 1998
when compared to 1997, while there was a decrease of 16% comparing 1997 to
1996. The changes in revenues were principally due to the above-cited
cancellations and to the capitalization of a large-scale telecommunications
project. Importantly, revenue in this market increased in each quarter
during all of 1998, which reflects the Company's continued success in
implementing its revised strategy in the telecommunications marketplace,
acquiring new clients, expanding service offerings and initiating several
systems integration engagements. Non-US revenues decreased 30% and 20%,
compared to the 1997 and 1996 periods. For the year 1999, the Company
anticipates revenue growth in this market to increase at rates slightly above
the Company's overall revenue growth. 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 1999, but
instead will reduce capitalized software costs. There is significant market
interest in Tapestry. 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
26
<PAGE> 28
Telecommunications Firms market in these countries are less than 3% of the
Company's total revenues for 1998.
In the Financial Services Institutions target market, 1998 revenues
increased 7% over 1997, 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. Comparing 1997 to 1996,
revenues in this market increased 16% as a result of new business in early
1997. Business with non-US clients, primarily European, account for
approximately 34% of the 1998 revenues in this market ($75 million).
Revenues in Europe increased 27% in 1998 compared to 1997. For 1999, the
Company expects demand in the market to remain strong, but faces staffing
constraints in this market as well. The Company anticipates revenue growth
in this market to increase at rates approximating the Company's overall
revenue growth rate.
In the State and Local Governments and Education target market,
revenues increased 65% in 1998 and 22% in 1997. The increase for both
periods was driven by the rapid build-up 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. 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 benefit-funded contracts (contracts whereby the amounts due the
Company are payable based on actual benefits derived by the client), the
Company defers recognition of revenues until 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 in 1999
at rates approximating the Company's overall revenue growth rate.
Revenues in the Federal Government Agencies target market increased 28%
in 1998 and 39% in 1997. 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 34%
of the 1998 revenue growth and 40% of the 1997 revenue growth. In addition,
there was increased business with existing clients and new business with both
defense and civilian agencies. In 1999, the Company expects revenues in this
target market to increase at rates slightly lower than the overall growth
rate of the Company. These revenue increases will continue to be driven
primarily by the SPS contract and by contracts with clients using the
Company's federal financial systems.
Revenues from Other Corporate Clients increased 21% in 1998 and
decreased 4% in 1997. The 1998 increase is mainly attributable to increased
business with new clients in the electric and gas utilities market and the
health care market. For all of 1999, the Company expects revenue growth in
this market to increase at rates comparable to the Company's overall revenue
growth rate.
EXPENSES
Client project expenses and other operating expenses together increased
17% during 1998, which was slightly lower than the growth rate in revenues.
These expenses include a $7 million provision for a potential future loss on
one of the Company's contracts with an Israeli client in the
Telecommunications Firms target market. Comparing 1997 to 1996, client
project and other operating expenses increased 4%, which was slightly lower
than the growth rate in revenues. Looking to 1999, the Company anticipates
that these expenses will continue to increase, but at rates lower than
revenue increases. The Company expects to make significant expenditures
related to the development of the "Tapestry" software; however, a majority of
these expenditures will be capitalized.
27
<PAGE> 29
Corporate Expenses increased 33% and 2%, in 1998 and 1997,
respectively. Corporate expenses increased faster than the revenue growth
during 1998, due to the dedication of resources applied to the Year 2000
remediation of internal systems, increases in accruals for corporate level
performance-based incentive compensation, and profit-based compensation
accruals under the Company's restricted stock program. The 1997 rate of
increase was offset in part by sharply reduced performance-based incentive
compensation accruals for the corporate officers and minimal profit-based
compensation accruals under the Company's restricted stock program, both
owing to the material impact of the cancellation of the Telecommunication
contracts discussed earlier. For the year 1999, the Company expects these
expenses to grow in line with the Company's revenue growth.
INCOME FROM OPERATIONS
Income from operations increased 66% in 1998 and 97% in 1997. The
Company's profit margins have continued to improve due to an ongoing emphasis
on well-structured engagements and tightly managed delivery risk. In
addition, the Company is continuing to focus on controlling expenses. Income
from operations also increased in 1998, compared with 1997, as a result of
the capitalization of software expenses related to the development of the
Tapestry software. These software costs were expensed during 1997. For
1999, the Company will continue to manage growth and expects to continue
improving on the profit margins.
OTHER (INCOME) EXPENSE
Interest expense decreased 28% in 1998 and increased 81% in 1997,
compared to 1997 and 1996 respectively. The 1998 decrease is due to lower
amounts of short-term borrowings, as a result of significantly improved cash
flow from operations. The 1997 increase was due to significant increases in
short-term borrowings to finance accounts receivable, especially those of one
of its foreign subsidiaries and the addition of the $20 million Term Loan.
It is expected that interest expense in 1999 will approximate the 1998
amount. Other (income) expense decreased 10% during 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.
In 1998, the Company set up a joint venture with Bank of Montreal to
provide online loan application and decisioning services to small and
mid-size financial institutions via a new firm, Competix L.L.C. The Company
incurred a loss of $0.7 million in 1998 related to this joint venture, due to
the start up costs of this new company.
INCOME TAXES
The Company's effective tax rate for 1998 was 40.7% compared to 39.3%
in 1997 and 40.8% in 1996. The Company expects that its effective tax rate in
1999 will be generally consistent with its historical rates.
FOREIGN CURRENCY EXCHANGE
Approximately 20% of the Company's total revenues in 1998, 28% in 1997,
and 34% in 1996, were derived from non-US clients. The Company's practice is
to negotiate contracts in the same currency in which the predominant expenses
are incurred, thereby mitigating the exposure to foreign currency exchange
fluctuations. It is not possible to accomplish this in all cases; thus,
there is some risk that profits will be affected by foreign currency exchange
fluctuations. 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
28
<PAGE> 30
transactions through derivative instruments (foreign currency swap contracts).
As of December 31, 1998, the Company had no outstanding derivative contracts. 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 among
all of the Company's subsidiaries, without incurring foreign currency conversion
risks, thereby mitigating foreign currency exposure for these transactions. The
Company also actively manages the excess cash balances in the cash pool, which
will increase interest income on short-term investments.
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
December 31, 1998, the Company's cash and cash equivalents totaled $119.3
million, significantly up from $49.6 million at the end of 1997. Cash
provided from operating activities for 1998 was $131.2 million compared to
$64.9 million in 1997. Cash provided from operating activities increased due
to significant improvements in the rate of collection of the Company's
accounts receivable and from increases in accrued incentive compensation and
other accrued liabilities. In addition, the Company received $14.8 million
representing collections from funding partners on jointly funded software
development efforts. See Note 2 to the consolidated financial statements for
further discussion on accounts receivable.
During 1998, the Company invested over $55.4 million in fixed assets,
software purchases, and computer software development compared to $48.5
million in 1997. In 1998, the Company invested $3.6 million on the Competix
joint venture, which was reduced by $0.7 million related to the Company's
share of the 1998 Competix loss. Total debt and revolving line-of-credit
borrowings decreased by $20 million over year-end 1997; revolving
line-of-credit borrowings were zero at December 31, 1998. The aggregate
weighted average short-term borrowings during 1998 were approximately $4.5
million, at a weighted average interest rate of 4.9%. During 1998, the
Company made approximately $7.5 million in installment payments of principal
on outstanding debt owed to banks; the Company also received proceeds of
approximately $20.9 million during the period from the exercise of stock
options and the tax benefits related thereto.
At December 31, 1998, the Company's debt-equity ratio, as measured by
total liabilities divided by stockholders' equity was 0.84, up from 0.77 at
December 31, 1997.
At its February 1995 meeting, the Board authorized the Company to
expend up to $10 million to repurchase additional shares of its common stock,
from time to time, for its stock based benefit plans or for other corporate
purposes. On August 3, 1998 the Company announced that its Board had
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
repurchased 723,520, 3,358, and 24,600 shares of its common stock during
1998, 1997, and 1996, respectively, for a total of $21.8 million. In
addition, the Company has begun funding stock option exercises through the
reissuance of previously acquired treasury shares. Furthermore, on March 3,
1999, the Company announced that its Board had authorized the purchase, from
time to time, of an additional 1 million shares. As of March 3, 1999, taking
into account the Company's repurchases through December 31, 1998, the Company
was authorized to repurchase an additional 1.3 million shares.
The Company's material unused source of liquidity at the end of 1998
consisted of approximately $120.0 million under the 1998 Agreement. The
Company believes that its liquidity needs can be met from the various sources
described above.
29
<PAGE> 31
The Company has entered into bank guarantees due upon request for
performance under one of its contracts in Israel. At December 31, 1998, the
Company had $19.8 million outstanding under such bank guarantees.
As part of its growth strategy, the Company intends to pursue
aggressively new opportunities to form strategic alliances and partnerships
and to make acquisitions. Effective February 19, 1999, the Company acquired
Budgeting Technology, Inc. ("BTI"), the leading provider of public sector
budgeting solutions. BTI, headquartered in Bethesda, Maryland, has pioneered
the market for governmental budgeting systems. As a result of the
acquisition, BTI's Budget Reporting and Analysis Support System will become a
significant component of the Company's suite of services and products to
support financial and human resource solutions.
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 the Company's Executive Vice President and Chief Administrative Officer,
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, on at least a quarterly basis, to the
senior management and the Internal Auditor of the Company. 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.
Early in 1997, the Company completed reviews of its major internal
application systems for Year 2000 compliance. The Company began a program of
testing and remediation for its application systems in 1997. The
company-wide application subsystems have now been remediated and have
successfully passed unit testing. A system integration test of the combined
functioning of company-wide application subsystems began, on schedule, on
March 1, 1999. This integration testing is expected to be completed, on
schedule, by mid-1999, for significant transactions required through early in
the year 2000. The integration testing is expected to be completed for other
significant year 2000 and 2001 transactions during the third quarter of
1999. In addition to the scheduled early completion date of testing, the
Company has also developed certain other contingency plans relating to these
internal systems. 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 summer of the Year 2000.
With respect to its company-wide hardware infrastructure, the Company
has obtained Year 2000 certifications from many of the outside vendors with
whom the Company contracts for the provision of
30
<PAGE> 32
utilities, goods and certain internal functionality. The Company is continuing
to work to obtain outstanding certifications from the remaining outside vendors
at this time. 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.
In addition, the Company is coordinating centrally its worldwide
efforts to achieve Year 2000 compliance of its internal hardware and
application systems that are not company-wide by mid-1999.
Total costs of achieving Year 2000 compliance in the Company's internal
systems, which costs will be expensed as they are incurred, were $2.3 million
for 1998, and are estimated to be approximately $3.5 million for 1999, and
$0.5 million for 2000. For the past two years, approximately $3.0 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. In addition, the Company
has accepted limited consulting engagements in which it advises clients on
the general structure of their own Year 2000 projects. The Company has
drafted these contracts to limit or exclude liability for Year 2000 related
claims and does not anticipate any special risks or costs attributable to
Year 2000 compliance issues in performing such projects.
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. Based on the results
of this testing, the Company has been releasing new versions of many of its
software products that have been designed and tested for performance of the
functionality described in their applicable specifications up to and through
the Year 2000. It also has been communicating with its software product
clients regarding Year 2000 compliance of its products, and notifying the
clients of the status of their software and of the availability of updated
Year 2000 compliant releases for certain older software known to the Company
to be still in use by that client. The Company has already communicated such
information to nearly all of its product clients and is undertaking to
contact the remaining clients. The Company also has been reviewing various
custom software contracts to identify and resolve any potential Year 2000
problems with its custom software clients. The Company expects to continue
the ongoing processes 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, or
recommends the use of, third party products in its own customer products.
In the Company's judgment, the most reasonably likely worst case
scenarios in connection with the Year 2000 are possible reductions in the
availability of new business, especially during the second half of 1999; and
the costs of resolving potential Year 2000 lawsuits by the Company's
clients. The potential reductions in business may arise as some current and
prospective clients institute "code
31
<PAGE> 33
freezes" under which no new information technology development projects will be
authorized until after the Year 2000 changeover. Based on the Company's existing
commitments through the Year 2000, the Company does not expect to be affected
materially by any such "code freezes."
Additionally, although the ultimate outcome of any possible litigation
is uncertain, the Company does not believe that the ultimate amount of
liability, if any, from any such Year 2000 actions would have a material
effect 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, were $2.0 million for 1998, and are estimated
to be approximately $1.5 million for 1999, and $0.8 million for 2000. For
the past two years, $4.8 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.
.
32
<PAGE> 34
ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING
STATEMENTS AND
FACTORS THAT MAY AFFECT FUTURE RESULTS
In the next couple of years, the Company expects its managed growth in
revenues to be approximately comparable to that realized for 1998. The
continuing controlled growth in revenues should enable the Company to improve
its profit margins. These margins, improved in 1998, were reduced during
several previous years. Cancellations of two major projects and related
attrition rates which were 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 those
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 requirements. In
order to meet its contractual commitments, AMS must continue to recruit,
train, and assimilate successfully large numbers of entry-level and
experienced employees annually, as well as to provide sufficient senior
managerial experience on engagements, especially on large, complex projects.
Moreover, this staff must be re-deployed on projects globally. Staffing
projects in certain less industrialized countries can pose special risks and
challenges. The Company must also manage and seek to reduce rates of
attrition, which the Company expects will continue to be somewhat higher than
its pre-1997 historical norms in view of increased competition for its talent.
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 1996-1997 when cancellations of two major projects occurred, any such
development in a project could result in a decline 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
1998 were derived from business with 17 clients.
Changing client requirements, such as scope changes, and delays in
client acceptance of interim project deliverables, are other examples of
risks of performing, especially in large complex projects. These risks
presently are perhaps the most significant for the Company, particularly in
light of two significant projects underway, one involving substantial
research and development expenditures (Tapestry), and the other an Israeli
client project. These risks are 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. Many companies are expected to impose freezes on changes in code
programming after a specified date in 1999 in order to ensure their systems'
Year 2000 compliance by the end of the year 1999. Any such actions, if taken
by clients of the Company, could result in diversion of work, both pending
and new opportunities, and decreases in revenues and profit margins. Although
these risks exist potentially across the Company's engagements, they may be
magnified in certain target markets, such as the Financial Services
Institutions market, given the need for Year 2000 compliance certainty in
those markets, such as financial services. See "YEAR 2000 ISSUES" section in
MD&A for additional information on Year 2000 compliance issues.
33
<PAGE> 35
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 (for example, increased revenues from tax 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.
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. Certain other risks, including, but not limited to, the
Company's international scope of operations, are discussed elsewhere in this
Form 10-K. 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-K 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.
34
<PAGE> 36
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Year Ended December 31
(In millions except share and per share data) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,057.8 $ 872.3 $ 812.2 $ 632.4 $ 459.9
Client Project Expenses 583.2 485.0 525.9 348.6 246.9
Other Operating Expenses 318.8 283.5 210.4 192.3 140.1
Corporate Expenses 65.9 49.5 48.3 40.8 32.6
----------- ----------- ----------- ----------- -----------
Total Operating Expense 967.9 818.0 784.6 581.7 419.6
----------- ----------- ----------- ----------- -----------
Income From Operations 89.9 54.3 27.6 50.7 40.3
Other (Income) Expense 2.6 2.9 1.4 0.9 0.8
----------- ----------- ----------- ----------- -----------
Income Before Income Taxes 87.3 51.4 26.2 49.8 39.5
Income Taxes 35.5 20.2 10.7 20.6 16.1
----------- ----------- ----------- ----------- -----------
Net Income 51.8 31.2 15.5 29.2 23.4
Dividends and Accretion on Series B
Preferred Stock - - - - 0.3
----------- ----------- ----------- ----------- -----------
Net Income per Common Shareholders $ 51.8 $ 31.2 $ 15.5 $ 29.2 $ 23.1
=========== =========== =========== =========== ===========
PER COMMON SHARE DATA
- ---------------------------------------------------------------------------------------------------------------------------
Basic Net Income per Common Share $ 1.23 $ 0.75 $ 0.38 $ 0.73 $ 0.61
Weighted Average Shares 42,133,843 41,361,967 40,656,760 39,736,747 38,126,715
Diluted Net Income per Common Share $ 1.21 $ 0.74 $ 0.37 $ 0.72 $ 0.60
Weighted Average Shares and Equivalents 42,938,896 42,304,018 41,925,353 40,707,633 38,731,422
Common Shares Outstanding at Year End 42,026,510 41,544,299 40,939,209 40,040,454 39,294,780
FINANCIAL POSITION
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $ 537.6 $ 421.4 $ 424.2 $ 337.5 $ 252.2
Fixed Assets, Net 37.6 45.2 48.0 37.1 28.7
Working Capital 202.4 168.9 125.0 115.6 89.4
Noncurrent Liabilities 59.7 52.7 22.3 26.8 21.3
Stockholders' Equity 291.9 238.7 203.1 175.5 138.3
</TABLE>
35
<PAGE> 37
FIVE-YEAR REVENUES BY TARGET MARKET
<TABLE>
<CAPTION>
Year Ended December 31 (In millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
Revenues
<S> <C> <C> <C> <C> <C>
Telecommunication Firms $ 258.3 $259.3 $310.1 $224.2 $128.6
Financial Services Institutions 218.5 204.8 175.9 147.0 100.0
State and Local Governments and Education 282.1 171.4 140.7 106.9 92.3
Federal Government Agencies 241.3 189.2 135.7 111.5 104.4
Other Corporate Clients 57.6 47.6 49.8 42.8 34.6
-------- ------ ------ ------ ------
Total Revenues $1,057.8 $872.3 $812.2 $632.4 $459.9
======== ====== ====== ====== ======
</TABLE>
36
<PAGE> 38
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summary represents the results of operations for the two
years in the period ended December 31, 1998.
<TABLE>
<CAPTION>
(In millions except per share data)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
- ------------------------------------------------------------------------------------------------------------------------
1998:
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $223.0 $250.7 $282.2 $301.9 $1,057.8
Income Before Income Taxes 15.2 20.3 24.9 26.9 87.3
Net Income 9.0 12.0 14.7 16.1 51.8
Basic Earnings per Share 0.21 0.29 0.35 0.38 1.23
Diluted Earnings per Share 0.21 0.28 0.34 0.38 1.21
1997:
- ------------------------------------------------------------------------------------------------------------------------
Revenues $196.3 $220.9 $225.5 $229.6 $ 872.3
Income Before Income Taxes 9.7 13.3 8.5 19.9 51.4
Net Income 5.7 7.9 4.5 13.1 31.2
Basic Earnings per Share 0.14 0.19 0.11 0.31 0.75
Diluted Earnings per Share 0.14 0.18 0.11 0.31 0.74
</TABLE>
The Company has never paid any cash dividends on its common stock and
does not anticipate paying dividends in the foreseeable future. Its policy is to
invest retained earnings in the operation and expansion of its business. Future
dividend policy with respect to its common stock will be determined by the Board
based upon the Company's earnings, financial condition, capital requirements,
and other then-existing conditions.
STOCK MARKET INFORMATION
The common stock of American Management Systems, Incorporated, is
traded on the NASDAQ over-the-counter market under the symbol AMSY. References
to the stock prices are the high and low bid prices during the calendar
quarters.
<TABLE>
<CAPTION>
1998 1997
---------------------- ------------------
High Low High Low
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1st Quarter $30.000 $18.750 $25.750 $15.750
2nd Quarter 30.000 24.875 26.750 19.000
3rd Quarter 34.500 26.000 27.750 17.625
4th Quarter 40.250 21.875 24.375 18.250
</TABLE>
The approximate number of shareholders of record of the Company's
common stock as of March 18, 1999 was 1,430.
37
<PAGE> 39
OTHER INFORMATION
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C.
Ridgefield Park, N.J.
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Washington, D.C.
COUNSEL
Shaw Pittman Potts & Trowbridge
Washington, D.C.
STOCKHOLDER AND 10-K INFORMATION
Financial inquiries should be directed to Ronald L. Schillereff, Chief
Financial Officer, American Management Systems, Incorporated, 4050 Legato
Road, Fairfax, Virginia 22033. Telephone (703) 267-8000. A complimentary
copy of the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission will be provided upon written request.
ANNUAL MEETING
The annual shareholders meeting has been scheduled for May 21, 1999 in
Fairfax, Virginia, for stockholders of record on March 29, 1999.
38
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE COMPANY
The following are all of the active subsidiaries of the Registrant and
are included in its audited consolidated financial statements filed with its
Annual Report on Form 10-K for the fiscal year ended December 31, 1998. Each
subsidiary listed is either wholly-owned by the Registrant or by the Registrant
and another of its subsidiaries listed below.
<TABLE>
<CAPTION>
Place of
Subsidiary (Year Organized or Acquired) Incorporation
--------------------------------------- -------------
<S> <C>
AMS Technical Systems, Inc. (1983) Delaware
Branch Office in Korea (1995)
Branch Office in Israel (1997)
AMS Management Systems Canada Inc. (1983) Canada
American Management Systems Operations Corporation (1984) Delaware
AMS Management Systems Australia Pty Limited (1989) Australia
AMS Management Systems U.K. Ltd. (1989) England
AMS Management Systems Europe, S.A./N.V. (1990) Belgium
AMS Management Systems Deutschland GmbH (1990) Germany
AMS Management Systems Mexico, S.A. de C.V. (1994) Mexico
AMSY Management Systems Netherlands B.V. (1994) The Netherlands
Nordic Business Management Systems AB (1994) Sweden
AMS Management Systems Espana, S.A. (1995) Spain
AMS Management Systems (Switzerland) AG (1995) Switzerland
AMS Management Systems Italia, S.p.A (1996) Italy
AMS Management Systems Portugal, Lda (1997) Portugal
AMS Management Systems France S.A. (1997) France
AMS Management Systems Poland Sp. ZO.O (1997) Poland
</TABLE>
58
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements of American Management Systems, Incorporated on Form S-8 (Nos.
333-00563, 333-01557, and 333-08371) of our report dated February 17, 1999,
appearing in and incorporated by reference in the Annual Report on Form 10-K of
American Management Systems, Incorporated for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Washington, D.C.
March 26, 1999
59
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements on Form S-8 (Nos. 333-00563, 333-01557, and 333-08371) of American
Management Systems, Incorporated of our report dated February 18, 1998,
appearing on page 24, of the 1998 Financial Report which is incorporated in this
Annual Report on Form 10-K. We also consent to the incorporation by reference of
our report on the Financial Statement Schedule, which appears on page 12 of this
Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
March 26, 1999
60
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 119,300
<SECURITIES> 0
<RECEIVABLES> 260,300
<ALLOWANCES> 9,800
<INVENTORY> 0
<CURRENT-ASSETS> 388,400
<PP&E> 100,600
<DEPRECIATION> 63,000
<TOTAL-ASSETS> 537,600
<CURRENT-LIABILITIES> 186,000
<BONDS> 0
0
0
<COMMON> 500
<OTHER-SE> 291,900
<TOTAL-LIABILITY-AND-EQUITY> 537,600
<SALES> 1,057,800
<TOTAL-REVENUES> 1,057,800
<CGS> 583,200
<TOTAL-COSTS> 967,900
<OTHER-EXPENSES> 2,600
<LOSS-PROVISION> 10,900
<INTEREST-EXPENSE> 4,200
<INCOME-PRETAX> 87,300
<INCOME-TAX> 35,500
<INCOME-CONTINUING> 51,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,800
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 49,600
<SECURITIES> 0
<RECEIVABLES> 240,900
<ALLOWANCES> 5,000
<INVENTORY> 0
<CURRENT-ASSETS> 298,900
<PP&E> 103,300
<DEPRECIATION> 58,100
<TOTAL-ASSETS> 421,400
<CURRENT-LIABILITIES> 130,000
<BONDS> 0
0
0
<COMMON> 500
<OTHER-SE> 238,700
<TOTAL-LIABILITY-AND-EQUITY> 421,400
<SALES> 872,300
<TOTAL-REVENUES> 872,300
<CGS> 485,000
<TOTAL-COSTS> 818,000
<OTHER-EXPENSES> 2,900
<LOSS-PROVISION> 10,600
<INTEREST-EXPENSE> 5,800
<INCOME-PRETAX> 51,400
<INCOME-TAX> 20,200
<INCOME-CONTINUING> 31,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,200
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.74
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 44,400
<SECURITIES> 0
<RECEIVABLES> 247,300
<ALLOWANCES> 7,000
<INVENTORY> 0
<CURRENT-ASSETS> 304,200
<PP&E> 103,400
<DEPRECIATION> 60,800
<TOTAL-ASSETS> 431,600
<CURRENT-LIABILITIES> 122,800
<BONDS> 0
0
0
<COMMON> 500
<OTHER-SE> 253,200
<TOTAL-LIABILITY-AND-EQUITY> 431,600
<SALES> 223,000
<TOTAL-REVENUES> 223,000
<CGS> 123,300
<TOTAL-COSTS> 206,900
<OTHER-EXPENSES> 900
<LOSS-PROVISION> 2,000
<INTEREST-EXPENSE> 800
<INCOME-PRETAX> 15,200
<INCOME-TAX> 6,200
<INCOME-CONTINUING> 9,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,000
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 52,500
<SECURITIES> 0
<RECEIVABLES> 250,600
<ALLOWANCES> 5,800
<INVENTORY> 0
<CURRENT-ASSETS> 312,800
<PP&E> 100,700
<DEPRECIATION> 54,800
<TOTAL-ASSETS> 432,100
<CURRENT-LIABILITIES> 165,000
<BONDS> 0
0
0
<COMMON> 500
<OTHER-SE> 222,200
<TOTAL-LIABILITY-AND-EQUITY> 432,100
<SALES> 642,600
<TOTAL-REVENUES> 642,600
<CGS> 364,500
<TOTAL-COSTS> 608,000
<OTHER-EXPENSES> 3,100
<LOSS-PROVISION> 3,500
<INTEREST-EXPENSE> 4,800
<INCOME-PRETAX> 31,500
<INCOME-TAX> 13,400
<INCOME-CONTINUING> 18,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,100
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.43
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE
30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 38,200
<SECURITIES> 0
<RECEIVABLES> 257,200
<ALLOWANCES> 8,000
<INVENTORY> 0
<CURRENT-ASSETS> 304,200
<PP&E> 98,300
<DEPRECIATION> 51,100
<TOTAL-ASSETS> 419,400
<CURRENT-LIABILITIES> 156,500
<BONDS> 0
0
0
<COMMON> 500
<OTHER-SE> 216,900
<TOTAL-LIABILITY-AND-EQUITY> 419,400
<SALES> 417,200
<TOTAL-REVENUES> 417,200
<CGS> 237,100
<TOTAL-COSTS> 392,500
<OTHER-EXPENSES> 1,600
<LOSS-PROVISION> 2,600
<INTEREST-EXPENSE> 3,000
<INCOME-PRETAX> 23,100
<INCOME-TAX> 9,500
<INCOME-CONTINUING> 13,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,600
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.32
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 30,500
<SECURITIES> 0
<RECEIVABLES> 250,400
<ALLOWANCES> 19,700
<INVENTORY> 0
<CURRENT-ASSETS> 294,300
<PP&E> 94,300
<DEPRECIATION> 46,900
<TOTAL-ASSETS> 395,000
<CURRENT-LIABILITIES> 137,500
<BONDS> 0
0
0
<COMMON> 500
<OTHER-SE> 210,500
<TOTAL-LIABILITY-AND-EQUITY> 395,000
<SALES> 196,300
<TOTAL-REVENUES> 196,300
<CGS> 110,400
<TOTAL-COSTS> 186,300
<OTHER-EXPENSES> 300
<LOSS-PROVISION> 800
<INTEREST-EXPENSE> 1,300
<INCOME-PRETAX> 9,700
<INCOME-TAX> 4,000
<INCOME-CONTINUING> 5,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,700
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
