<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From: ___________ To:__________
Commission File No.: 0-9233
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
(Exact name of registrant as specified in its charter)
State or other Jurisdiction of I.R.S. Employer
Incorporation or Organization: Delaware Identification No.: 54-0856778
4050 Legato Road
Fairfax, Virginia 22033
(Address of principal executive office)
Registrant's Telephone No., Including Area Code: (703) 267-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
As of May 7, 1999, 42,506,863 shares of common stock were outstanding.
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CONTENTS
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Page
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Part I Financial Information
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Item 1. Financial Statements...................................................... 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 17
Part II Other Information
-----------------
Item 1. Legal Proceedings......................................................... 17
Item 2. Changes in Securities..................................................... 17
Item 3. Defaults Upon Senior Securities........................................... 17
Item 4. Submission of Matters to a Vote of Security Holders....................... 17
Item 5. Other Information......................................................... 18
Item 6. Exhibits and Reports on Form 8-K.......................................... 18
</TABLE>
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The information furnished in the accompanying Consolidated Statements of
Operations, Consolidated Revenues by Market, Consolidated Balance Sheets,
Consolidated Statements of Cash Flows, and Consolidated Statements of
Comprehensive Income reflects all adjustments which are, in the opinion of
management, necessary for a fair statement of the results of operations and
financial condition for the interim periods. The accompanying financial
statements should be read in conjunction with the financial statements and notes
for the year ended December 31, 1998, included in the American Management
Systems, Incorporated (the "Company" or "AMS") Annual Report on Form 10-K (File
No. 0-9233) filed with the Securities and Exchange Commission on March 26, 1999.
1
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS(1)
Unaudited
(In millions except per share data)
<TABLE>
<CAPTION>
For the Quarter
Ended March 31,
1999 1998
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<S> <C> <C>
REVENUES ...................................................................... $ 290.9 $ 223.0
EXPENSES
Client Project Expenses............................................... 152.7 123.3
Other Operating Expenses.............................................. 89.4 68.0
Corporate Expenses.................................................... 20.9 15.6
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263.0 206.9
INCOME FROM OPERATIONS......................................................... 27.9 16.1
OTHER (INCOME) EXPENSE
Interest (Income) Expense............................................. (0.1) 0.5
Other (Income) Expense................................................ 0.9 0.4
Loss on Investment in Other Companies................................. 0.3 -
-------- -------
1.1 0.9
INCOME BEFORE INCOME TAXES..................................................... 26.8 15.2
INCOME TAXES................................................................... 11.0 6.2
-------- -------
NET INCOME..................................................................... $ 15.8 $ 9.0
======== =======
WEIGHTED AVERAGE SHARES........................................................ 42.3 41.9
======== =======
BASIC NET INCOME PER SHARE.................................................... $ 0.37 $ 0.21
======== =======
WEIGHTED AVERAGE SHARES AND EQUIVALENTS........................................ 43.2 42.7
======== =======
DILUTED NET INCOME PER SHARE .................................................. $ 0.37 $ 0.21
======== =======
</TABLE>
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(1) Certain amounts have been reclassified for comparative purposes.
2
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American Management Systems, Incorporated
CONSOLIDATED REVENUES BY MARKET(1)
Unaudited
(In millions)
<TABLE>
<CAPTION>
For the Quarter
Ended March 31,
1999 1998
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Telecommunications Firms............................................... $ 74.3 $ 58.3
Financial Services Institutions........................................ 46.8 46.5
State and Local Governments and Education.............................. 88.2 50.7
Federal Government Agencies............................................ 65.0 54.5
Other Corporate Clients................................................ 16.6 13.0
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Total Revenues......................................................... $290.9 $223.0
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</TABLE>
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(1) Certain amounts have been reclassified for comparative purposes.
3
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American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions except per share data)
<TABLE>
<CAPTION>
3/31/99
ASSETS (Unaudited) 12/31/98
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<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents.............................................. $ 64.6 $119.3
Accounts and Notes Receivable.......................................... 263.1 260.3
Prepaid Expenses and Other Current Assets.............................. 12.7 8.8
------ ------
340.4 388.4
FIXED ASSETS
Equipment ........................................................... 57.9 59.7
Furniture and Fixtures................................................. 23.2 23.6
Leasehold Improvements................................................. 15.9 17.3
------ ------
97.0 100.6
Accumulated Depreciation and Amortization.............................. (64.5) (63.0)
------ ------
32.5 37.6
OTHER ASSETS
Purchased and Developed Computer Software (Net of Accumulated
Amortization of $78,700,000 and $72,000,000)........................ 93.0 83.6
Intangibles (Net of Accumulated Amortization of $4,800,000 and
$4,700,000).......................................................... 6.9 4.3
Other Assets (Net of Accumulated Amortization of $940,000 and
$920,000) ........................................................... 27.5 23.7
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127.4 111.6
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TOTAL ASSETS ........................................................... $500.3 $537.6
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</TABLE>
4
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American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions except per share data)
<TABLE>
<CAPTION>
3/31/99
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 12/31/98
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<S> <C> <C>
CURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations........................ $ 6.3 $ 5.3
Accounts Payable....................................................... 11.7 21.3
Accrued Incentive Compensation......................................... 3.8 55.8
Other Accrued Compensation and Related Items........................... 40.0 39.8
Deferred Revenues...................................................... 33.8 37.7
Other Accrued Liabilities.............................................. 9.4 4.8
Provision for Contract Losses.......................................... 7.2 7.3
Income Taxes Payable................................................... 0.9 9.1
------ ------
113.1 181.1
Deferred Income Taxes.................................................. 9.2 4.9
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122.3 186.0
NONCURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations........................ 21.2 22.7
Other Accrued Liabilities.............................................. 24.3 15.9
Deferred Income Taxes.................................................. 21.2 21.1
------ ------
66.7 59.7
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TOTAL LIABILITIES ............................................................ 189.0 245.7
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 51,057,214 Issued and 42,519,562 and 42,026,510
Outstanding)......................................................... 0.5 0.5
Capital in Excess of Par Value......................................... 90.4 96.7
Retained Earnings...................................................... 256.1 240.3
Currency Translation Adjustment........................................ (9.9) (6.3)
Common Stock in Treasury, at Cost (8,537,652 and
9,030,704 Shares)................................................... (25.8) (39.3)
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311.3 291.9
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $500.3 $537.6
====== ======
</TABLE>
5
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
<TABLE>
<CAPTION>
For the Quarter
Ended March 31,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ..................................................................... $ 15.8 $ 9.0
Adjustments to Reconcile Net Income to Net Cash Used
in Operating Activities:
Depreciation .............................................................. 3.6 4.5
Amortization............................................................... 11.4 3.9
Loss on Investments in Other Companies..................................... 0.3 -
Deferred Income Taxes...................................................... 4.4 2.6
Provision for Doubtful Accounts............................................ 2.1 2.0
Provision for Contract Losses.............................................. (0.1) -
Changes in Assets and Liabilities:
Increase in Trade Receivables.............................................. (4.9) (8.5)
Increase in Prepaid Expenses and Other Current Assets...................... (3.9) (4.0)
Increase in Other Assets................................................... (8.3) (3.4)
Decrease in Accrued Incentive Compensation................................. (46.9) (22.6)
Increase (Decrease) in Accounts Payable, Other Accrued
Compensation, and Liabilities........................................... 3.7 (3.3)
Decrease in Deferred Revenue............................................... (4.0) (4.5)
Decrease in Income Taxes Payable........................................... (8.2) (2.2)
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Net Cash Used in Operating Activities............................................ (35.0) (26.5)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets......................................................... (1.1) (1.9)
Purchase of Computer Software and Investment in Software Products ............... (16.4) (9.2)
Other Investments and Intangibles................................................ (2.7) 1.0
Proceeds from Sale of Fixed Assets and Purchased Computer Software............... 2.6 0.1
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Net Cash Used in Investing Activities............................................ (17.6) (10.0)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings ..................................................................... - 27.7
Payments on Borrowings........................................................... (0.5) (2.0)
Proceeds from Common Stock Options Exercised..................................... 4.2 6.4
Payments to Acquire Treasury Stock............................................... (2.2) (0.5)
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Net Cash Provided by Financing Activities........................................ 1.5 31.6
------- -------
DECREASE IN CURRENCY TRANSLATION ADJUSTMENT............................................ (3.6) (0.3)
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NET DECREASE IN CASH AND CASH EQUIVALENTS.............................................. (54.7) (5.2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....................................... 119.3 49.6
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CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................. $ 64.6 $ 44.4
======= =======
NON-CASH OPERATING AND FINANCING ACTIVITIES:
Treasury Stock Utilized to Satisfy Accrued Incentive
Compensation Liability........................................................ $ 5.1 $ -
Treasury Stock Utilized to Satisfy Stock Options Exercised....................... $ 6.5 $ -
</TABLE>
6
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(In millions)
<TABLE>
<CAPTION>
For the Quarter
Ended March 31,
1999 1998
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<S> <C> <C>
NET INCOME............................................................. $15.8 $9.0
OTHER COMPREHENSIVE INCOME (LOSS):
Currency Translation Adjustment.................................. (3.6) (0.3)
----- ----
COMPREHENSIVE INCOME................................................... $12.2 $8.7
===== ====
</TABLE>
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") contains certain forward-looking statements. In
addition, the Company or its representatives from time to time may make, or may
have made, certain forward-looking statements, orally or in writing, including,
without limitation, any such statements made in this MD&A, press releases, or
any such statements made, or to be made, in the MD&A contained in other filings
with the Securities and Exchange Commission. The Company wishes to ensure that
such forward-looking statements are accompanied by meaningful cautionary
statements so as to ensure, to the fullest extent possible, the protections of
the safe harbor established by 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"). The effect of inflation and price changes on the Company's
revenues, income from operations, and expenses is generally comparable to the
general rate of inflation in the U.S. economy.
<TABLE>
<CAPTION>
Percentage of Period-to-Period
Total Revenues Change
-------------- ----------------
Quarter Ended Quarter Ended
March 31, March 31, 1999
vs
1999 1998 March 31, 1998
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<S> <C> <C> <C>
Revenues...................................... 100.0% 100.0% 30.4%
Expenses
Client Project Expenses................. 52.5 55.3 23.8
Other Operating Expenses................ 30.7 30.5 31.5
Corporate Expenses...................... 7.2 7.0 34.0
------- -------
Total................................... 90.4 92.8 27.1
Income from Operations........................ 9.6 7.2 73.3
Other (Income) Expense........................ 0.4 0.4 22.2
------- -------
Income Before Income Taxes.................... 9.2 6.8 76.3
Income Taxes.................................. 3.8 2.8 77.4
------- -------
Net Income.................................... 5.4 4.0 75.6
Weighted Average Shares....................... 1.0
Basic Net Income per Share.................... 76.2
Weighted Average Shares and Equivalents....... 1.2
Diluted Net Income per Share.................. 76.2
</TABLE>
8
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RESULTS OF OPERATIONS (continued)
REVENUES
Revenues increased 30% during the first quarter of 1999, compared to the
same 1998 period, with first quarter growth occurring in all of the Company's
target markets. Looking ahead to the rest of 1999, the Company expects revenue
growth Company-wide to continue at approximately the same rates that were
experienced in 1998.
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 increased 9% (to $53.6 million) during the
first quarter of 1999, compared to the same 1998 period and business with non-US
clients now represents 18% of the Company's revenues. The Company increased its
non-US client base and expanded the number of services offered to these clients.
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 increased 27% in the
first quarter of 1999 compared to the first quarter of 1998. This revenue
increase 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 in this market increased 11% for the quarter, compared to the
same 1998 period. 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. Because 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; rather, they, will reduce capitalized software
costs. There is significant market interest in Tapestry.
Notwithstanding actual and projected revenue growth, there continue to
be risks in this market. Competition for experienced staff is especially
intense in the telecommunications field, and staffing remains one of the
Company's critical challenges for the Telecommunications Firms market.
Additionally, the Company works in countries located in regions other than
Western Europe and North America and the delivery risks in these other
countries may be higher. Revenues in the Telecommunications Firms market in
these countries were less than 4% of the Company's total revenues for the first
quarter of 1999. The Company has a contract with Bezeq, the Israeli telephone
company ("Bezeq"), for a large telecommunications project. Certain matters
regarding the contract with Bezeq, including issues of scope and process, are
in dispute and the Company and Bezeq have been discussing how to address them.
Accordingly, the Bezeq contract is receiving significant management attention.
In addition, the Company continues to maintain the $7 million provision,
established in 1998, for a potential future loss on this contract.
In the Financial Services Institutions target market, 1999 revenues in
the first quarter were flat when compared to the same 1998 period, due to large
projects winding down in the fourth quarter of 1998 and new projects not ramping
up until late in the first quarter of 1999. Business with non-US clients
accounted for approximately 37% of the first quarter revenues in this market
($17.3 million). 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.
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In the State and Local Governments and Education target market, revenues
increased 74% in the first quarter of 1999, compared to the first quarter of
1998. The revenue increase 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 benefit-funded
contracts. Material revenues from certain of those contracts are not likely to
be recognized until later periods. Revenues for 1999 in the State and Local
Governments and Education market are expected to increase over 1998 at a rate
approximating the Company's overall revenue growth rate and thus at
significantly lower rates than experienced in the first three months of 1999
compared with the same period in 1998.
Revenues in the Federal Government Agencies target market increased 19%
in the first quarter of 1999, compared to the same 1998 period. 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 30% of the first quarter revenue growth. In
addition, there was increased business with existing clients and new business
with both defense and civilian agencies. For the year 1999, the Company expects
revenues in this target market to increase over 1998 at a rate 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 in the Other Corporate Clients market increased 28% during the
first quarter, compared to the same 1998 period. The 1999 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
27% during the first quarter of 1999 compared with the first quarter of 1998,
which was slightly lower than the growth rate in revenues in this period over
the comparable period in 1998. These expenses include a one-time charge of $2.5
million due to the write down in net realizable value of one of the Company's
software products in the Financial Services Institutions target market. For all
of 1999, the Company anticipates that these expenses will continue to grow at
rates lower than the revenue growth. The Company expects to make significant
expenditures related to research and development of the "Tapestry" software. A
majority of these expenditures will be capitalized.
Corporate Expenses increased 34% during the first quarter of 1999,
compared to the first quarter of 1998. 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. For the year
1999, the Company expects corporate expenses to grow in line with the Company's
revenue growth.
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INCOME FROM OPERATIONS
Income from operations increased 73% for the first quarter of 1999,
compared to the first quarter of 1998. 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. For 1999 as a whole, the Company will continue to
emphasize managed growth and expects improved profit margins when compared with
1998 results.
OTHER (INCOME) EXPENSE
Interest (income) expense decreased during the first quarter of 1999
compared with the same period in 1998, because of lower amounts of short-term
borrowings, as a result of significantly improved cash flow from operations. In
addition, the increased cash from operations was invested in short term
instruments, which resulted in higher interest income. Other (income) expense
increased in the first quarter of 1999, compared to the same period in 1998,
primarily because of a write-off of certain leasehold improvements and fixed
assets.
In late 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 $0.3 million in the first quarter of 1999 related to this
joint venture, due to the start up costs of this new company.
FOREIGN CURRENCY EXCHANGE
Approximately 18% of the Company's 1999 first quarter revenues were
derived from non-US business. The Company's practice is to negotiate contracts
in the same currency in which the predominant expenses are incurred, thereby
mitigating the exposure to foreign currency exchange fluctuations. It is not
possible to accomplish this in all cases; thus, there is some risk that profits
will be affected by foreign currency exchange fluctuations. However, the Company
seeks to negotiate provisions in contracts with non-US clients that allow
pricing adjustments related to currency fluctuations. In late 1997, the Company
began to employ limited hedging of intercompany balance sheet transactions
through derivative instruments (foreign currency swap contracts). As of March
31, 1999, 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. Through an available bank facility, the
Company can also provide for cash and currency management with respect to the
short-term impact of certain cyclical uses, such as annual payments of incentive
compensation as well as financing from time to time accounts receivable. At
March 31, 1999, the Company's cash and cash equivalents totaled $64.6 million,
significantly down from $119.3 million at the end of 1998. Cash used in
operating activities for the first quarter of 1999 was $35.0 million due to
payments for incentive compensation and other employee benefits.
11
<PAGE> 14
During the first quarter of 1999, the Company invested over $17.6
million in fixed assets, software purchases, and computer software. Revolving
line-of-credit borrowings were zero at March 31, 1999. During the first quarter,
the Company made approximately $0.5 million in installment payments of principal
on outstanding debt owed to banks; the Company also received proceeds of
approximately $4.2 million during the period from the exercise of stock options
and the tax benefits related thereto. The Company repurchased 55,655 shares of
common stock, during the first quarter of 1999, at a cost of $2.2 million.
At March 31, 1999, the Company's debt-equity ratio, as measured by total
liabilities divided by stockholders' equity was 0.61, down from 0.84 at December
31, 1998.
The Company's material unused source of liquidity at the end of the
first quarter of 1999 consisted of approximately $120.0 million under the
multi-currency revolving credit agreement with NationsBank (now Bank of America)
and Wachovia Bank as agents. The Company believes that its liquidity needs can
be met from the various sources described above.
The Company has entered into bank guarantees due upon request for
performance under its contract with Bezeg. At March 31, 1999, the Company had
$19.8 million outstanding under such bank guarantees. See "Results of
Operations - Revenues," above for additional information about the Bezeg
contract.
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 currently
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 3, 1999. This
integration testing is expected to be completed,
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<PAGE> 15
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 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 are estimated to be
approximately $3.5 million for 1999, and $0.5 million for 2000. For the past
three years, approximately $3.8 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 engagements in which it assists clients with the performance 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.
13
<PAGE> 16
The Company has generally 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 delays in current
business and 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 encounter Year 2000 failures of their non-AMS
information technology systems and/or institute "code 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
information technology failures or "code freezes." Additionally, although the
ultimate outcome of any possible Year 2000 litigation is uncertain, the Company
does not believe that the ultimate aggregate amount of liability, if any, from
any such client litigation 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 are estimated to be approximately $1.5 million for 1999,
and $0.8 million for 2000. For the past three years, $5.2 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 has sent 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 a substantial majority of its lessors
indicating that the systems in the buildings either already are, or are expected
to be before the end of 1999, Year 2000 compliant. The Company will prioritize
systems and develop necessary test plans based on the further responses it
continues to receive, or not to receive, to its letters.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133 entitled "Accounting for Derivative Instruments and Hedging
Activities." This Statement requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company will be required to adopt this new
accounting standard by January 1, 2000. The Company does not anticipate early
adoption of this new standard. Due to the recent release and complexity of this
new standard, the Company has not completed an assessment of the impact it will
have on its financial position or results of operations. The Company currently
has no material derivative transactions, which would be impacted by this new
standard.
14
<PAGE> 17
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 and the first quarter of
1999, 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 lawsuit or other dispute with a client
regarding money owed, or damages incurred as a result of alleged non-performance
by AMS and a diminution of AMS's reputation. 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 process issues,
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 the Bezeq
project as described above. 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,
15
<PAGE> 18
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. See "YEAR 2000 ISSUES" section in MD&A for additional information on
Year 2000 compliance issues.
There is also 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.
The Company also faces the risk of increased competition in the markets
in which it participates. In addition to any risk that the Company's competitors
may create, some of the Company's current or prospective clients may decide to
perform projects with their in-house staff that the Company might otherwise have
undertaken. Increased competition from industry rivals, as well as decisions by
clients to outsource fewer projects, could have a negative impact on pricing,
revenues and margins.
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-Q. Increasingly, the Company conducts business in countries other than
Western Europe and North America. Contracts being performed in such non-Western
countries can have higher delivery risks for a variety of reasons. Because the
Company operates in a rapidly changing and highly competitive market, additional
risks not discussed in this Form 10-Q may emerge from time to time. The Company
cannot predict such risks or assess the impact, if any, such risks may have on
its business. Consequently, the Company's various forward-looking statements,
made, or to be made, should not be relied upon as a prediction of actual
results.
16
<PAGE> 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is hereby incorporated by
reference to the Company's annual report on Form 10-K for the year ended
December 31, 1998, filed with the Securities and Exchange Commission on March
26, 1999. There have been no material changes in the Company's market risk from
that disclosed in the Company's 1998 Form 10-K.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On April 22, 1999, the State of Mississippi sued AMS in a lawsuit styled
State of Mississippi v. American Management Systems, Inc., No. 251-99.382-CIV
(Circuit Court of Hinds County, Mississippi, filed April 22, 1999). The lawsuit
arises in conjunction with the cancellation by the State of a contract with AMS
for the development of a revenue management system to be used by the Mississippi
State Tax Commission. The complaint filed by the State alleges claims for breach
of contract, bad faith breach of contract, and unjust enrichment, and seeks
various forms of injunctive relief as well as compensatory damages of
approximately $234 million and punitive damages of approximately $750 million.
The Company finds the amounts involved in the complaint inexplicable given that
the contract is valued at $11.2 million, of which approximately $6.0 million has
been paid by the State of Mississippi to the Company.
The lawsuit was filed against AMS soon before the State was to go live
with the Withholding Tax System phase of the project. AMS intends to contest the
lawsuit vigorously, although no responsive pleadings were due to be filed by AMS
as of the date of this 10-Q.
Item 2. Changes in Securities
NONE.
Item 3. Defaults Upon Senior Securities
NONE.
Item 4. Submission of Matters to a Vote of Security Holders
NONE.
17
<PAGE> 20
Item 5. Other Information
Effective May 9, 1999, Dr. Jerrold M. Grochow resigned from his position
as the Company's Chief Technology Officer to become the Chief Technology Officer
of an Internet startup in the financial services industry. Reginald C. Foster,
AMS's Chief eCommerce Officer, will oversee AMS's Corporate Technology Group and
will serve as acting Chief Technology Officer on an interim basis. Paul A.
Brands, Chairman of the Board and Chief Executive Officer of the Company, will
conduct an internal and external search for a new Chief Technology Officer and
will work to ensure that AMS's leadership position in understanding and
effectively applying information technology remains strong.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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 herein 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).
18
<PAGE> 21
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).
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
27. Financial Data Schedule
(b) Reports on Form 8-K
NONE.
19
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
Date: 5/17/99 /s/ Paul A. Brands
------------- ---------------------------------------------------------
Paul A. Brands, Chairman and Chief Executive Officer
Date: 5/17/99 /s/ Ronald L. Schillereff
------------- ---------------------------------------------------------
Ronald L. Schillereff, Chief Financial Officer, Treasurer,
and Executive Vice President
20
<PAGE> 23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<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).
</TABLE>
21
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C> <C>
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).
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 *
27. Financial Data Schedule
</TABLE>
- -----------------------
*Previously filed.
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 64,600
<SECURITIES> 0
<RECEIVABLES> 263,100
<ALLOWANCES> 11,000
<INVENTORY> 0
<CURRENT-ASSETS> 340,400
<PP&E> 97,000
<DEPRECIATION> 64,500
<TOTAL-ASSETS> 500,300
<CURRENT-LIABILITIES> 122,300
<BONDS> 0
0
0
<COMMON> 500
<OTHER-SE> 311,300
<TOTAL-LIABILITY-AND-EQUITY> 500,300
<SALES> 290,900
<TOTAL-REVENUES> 290,900
<CGS> 152,700
<TOTAL-COSTS> 263,000
<OTHER-EXPENSES> 1,100
<LOSS-PROVISION> 2,100
<INTEREST-EXPENSE> (100)
<INCOME-PRETAX> 26,800
<INCOME-TAX> 11,000
<INCOME-CONTINUING> 15,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,800
<EPS-PRIMARY> 0.37<F1>
<EPS-DILUTED> 0.37
<FN>
<F1>PRIMARY EARNINGS PER SHARE REPRESENTS BASIC EARNINGS PER SHARE AS REQUIRED PER
SFAS NO. 128.
</FN>
</TABLE>
