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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended June 30, 2000
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)
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State or other Jurisdiction of I.R.S. Employer
Incorporation or Organization: Delaware Identification No.: 54-0856778
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4050 Legato Road
Fairfax, Virginia 22033
(Address of principal executive office)
Registrant's Telephone No., Including Area Code: (703) 267-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-- --
As of August 9, 2000, 41,655,165 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............................................................. 18
Item 3. Defaults Upon Senior Securities................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders............................... 18
Item 5. Other Information................................................................. 18
Item 6. Exhibits and Reports on Form 8-K.................................................. 18
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The information furnished in the accompanying Consolidated Statements of
Operations, Consolidated Revenues by Market, Consolidated Balance Sheets,
Consolidated Statements of Cash Flows, and Consolidated Statements of
Comprehensive Income reflects all adjustments which are, in the opinion of
management, necessary for a fair statement of the results of operations and
financial condition for the interim periods. The accompanying financial
statements and notes thereto should be read in conjunction with the financial
statements and notes for the year ended December 31, 1999, 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 30, 2000.
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In millions except per share data)
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<CAPTION>
For the Quarter For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES.......................................................... $318.0 $305.3 $629.1 $596.2
EXPENSES
Client Project Expenses....................................... 162.9 166.1 325.9 318.8
Other Operating Expenses...................................... 105.7 87.9 207.4 177.3
Corporate Expenses............................................ 21.8 22.1 42.8 43.0
Provision for Specific Contract............................... - 20.0 - 20.0
------- -------- ------- ---------
290.4 296.1 576.1 559.1
INCOME FROM OPERATIONS............................................ 27.6 9.2 53.0 37.1
OTHER (INCOME) EXPENSE
Interest (Income) Expense..................................... 1.4 0.2 1.4 0.1
Other (Income) Expense........................................ - 0.1 (1.8) 1.0
(Gain) Loss on Equity Investments............................. (1.1) 1.1 0.2 1.4
------- -------- ------- ---------
0.3 1.4 (0.2) 2.5
INCOME BEFORE INCOME TAXES........................................ 27.3 7.8 53.2 34.6
INCOME TAXES...................................................... 11.2 3.2 21.8 14.2
------- -------- ------- --------
NET INCOME........................................................ $ 16.1 $ 4.6 $ 31.4 $ 20.4
======= ======== ======= ========
WEIGHTED AVERAGE SHARES........................................... 41.6 42.5 41.4 42.3
======= ======== ======= ========
BASIC NET INCOME PER SHARE........................................ $ 0.39 $ 0.11 $ 0.76 $ 0.48
======= ======== ======= ========
WEIGHTED AVERAGE SHARES AND EQUIVALENTS........................... 42.4 43.2 42.1 43.2
======= ======== ======= ========
DILUTED NET INCOME PER SHARE...................................... $ 0.39 $ 0.10 $ 0.75 $ 0.47
======= ======== ========= ========
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American Management Systems, Incorporated
CONSOLIDATED REVENUES BY MARKET
Unaudited
(In millions)
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<CAPTION>
For the Quarter For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Telecommunications Firms........................................... $ 78.2 $ 84.0 $157.1 $158.3
Financial Services Institutions.................................... 54.5 47.4 109.4 94.2
State and Local Governments and Education.......................... 79.5 83.4 157.4 171.6
Federal Government Agencies........................................ 90.1 74.7 174.2 139.7
Other Corporate Clients............................................ 15.7 15.8 31.0 32.4
-------- -------- -------- --------
Total Revenues..................................................... $318.0 $305.3 $629.1 $596.2
====== ====== ====== ======
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American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions except per share data)
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<CAPTION>
6/30/2000
ASSETS (Unaudited) 12/31/1999
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CURRENT ASSETS
Cash and Cash Equivalents.................................................. $ 22.2 $111.3
Accounts and Notes Receivable.............................................. 315.3 294.7
Prepaid Expenses and Other Current Assets.................................. 22.4 22.8
-------- --------
359.9 428.8
FIXED ASSETS
Equipment.................................................................. 49.3 50.5
Furniture and Fixtures..................................................... 25.4 25.5
Leasehold Improvements..................................................... 21.0 19.1
-------- --------
95.7 95.1
Accumulated Depreciation and Amortization.................................. (63.7) (63.9)
-------- --------
32.0 31.2
OTHER ASSETS
Purchased and Developed Computer Software (Net of Accumulated
Amortization of $82,100,000 and $74,500,000)............................ 141.6 114.7
Intangibles (Net of Accumulated Amortization of $5,600,000 and
$5,500,000).............................................................. 5.8 6.2
Other Assets (Net of Accumulated Amortization of $1,000,000 and
$940,000)................................................................ 50.7 31.6
-------- --------
198.1 152.5
-------- --------
TOTAL ASSETS .............................................................. $590.0 $612.5
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American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions except per share data)
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6/30/2000
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 12/31/1999
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CURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations............................ $ 17.1 $ 6.1
Accounts Payable........................................................... 16.6 24.6
Accrued Incentive Compensation............................................. 18.2 51.7
Other Accrued Compensation and Related Items............................... 46.4 40.7
Deferred Revenues.......................................................... 36.9 57.4
Other Accrued Liabilities.................................................. 5.8 12.8
Accrued Contract Losses.................................................... 4.7 27.0
Income Taxes Payable....................................................... 3.7 7.0
--------- ---------
149.4 227.3
Deferred Income Taxes...................................................... 5.9 2.8
--------- ---------
155.3 230.1
NONCURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations............................ 13.4 16.5
Other Accrued Liabilities.................................................. 34.7 27.5
Deferred Income Taxes...................................................... 37.9 28.9
-------- --------
86.0 72.9
-------- --------
TOTAL LIABILITIES............................................................. 241.3 303.0
STOCKHOLDERS' EQUITY
Preferred Stock ($0.10 Par Value; 4,000,000 Shares Authorized,
None Issued or Outstanding)
Common Stock ($0.01 Par Value; 200,000,000 Shares Authorized, 51,057,214
and 51,057,214 Issued and 41,644,396 and 41,018,387
Outstanding)............................................................ 0.5 0.5
Capital in Excess of Par Value............................................. 83.1 89.5
Retained Earnings.......................................................... 328.6 297.2
Currency Translation Adjustment............................................ (16.5) (12.2)
Common Stock in Treasury, at Cost (9,412,818 and
10,038,827 Shares)...................................................... (47.0) (65.5)
------- -------
348.7 309.5
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................ $590.0 $612.5
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</TABLE>
5
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
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For the Six Months
Ended June 30,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................................................ $ 31.4 $ 20.4
Adjustments to Reconcile Net Income to Net Cash (Used in) Provided
by Operating Activities:
Depreciation ................................................................. 4.7 6.9
Amortization.................................................................. 7.9 11.6
Loss on Investments in Other Companies........................................ 3.7 1.4
Deferred Income Taxes......................................................... 12.2 1.6
Provision for Doubtful Accounts............................................... 2.4 3.8
Changes in Assets and Liabilities:
Increase in Trade Receivables................................................. (23.0) (0.1)
Decrease (Increase) in Prepaid Expenses and Other Current Assets.............. 0.5 (1.7)
Increase in Other Assets...................................................... (14.0) (6.4)
Decrease in Accrued Incentive Compensation.................................... (29.9) (30.6)
(Decrease) Increase in Accounts Payable, Other Accrued
Compensation, and Liabilities.............................................. (2.1) 10.7
(Decrease) Increase in Provision for Contract Losses.......................... (22.3) 20.0
(Decrease) Increase in Deferred Revenue....................................... (20.5) 4.4
Decrease in Income Taxes Payable.............................................. (3.4) (8.3)
-------- --------
Net Cash (Used in) Provided by Operating Activities............................... (52.4) 33.7
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets.......................................................... (5.4) (3.5)
Purchase of Computer Software and Investment in Software Products ................ (34.8) (27.7)
Other Investments and Intangibles................................................. (8.6) (2.7)
Proceeds from Sale of Fixed Assets and Purchased Computer Software................ (0.1) 3.6
----- ---------
Net Cash Used in Investing Activities............................................. (48.9) (30.3)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings........................................................................ 11.0 -
Payments on Borrowings............................................................ (3.0) (2.1)
Proceeds from Common Stock Options Exercised...................................... 8.6 5.3
Payments to Acquire Treasury Stock................................................ (0.1) (5.9)
------- --------
Net Cash Provided by (Used in) Financing Activities............................... 16.5 (2.7)
------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................................. (4.3) (5.0)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS........................................... (89.1) (4.3)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................... 111.3 119.3
------ -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................................... $ 22.2 $115.0
====== ======
NON-CASH OPERATING AND FINANCING ACTIVITIES:
Treasury Stock Utilized to Satisfy Accrued Incentive
Compensation Liabilities....................................................... $ 3.6 $ 5.2
Treasury Stock Utilized to Satisfy Stock Options Exercised....................... $ 6.4 $ 7.6
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(In millions)
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<CAPTION>
For the Quarter For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
NET INCOME......................................... $ 16.1 $ 4.6 $31.4 $20.4
OTHER COMPREHENSIVE INCOME (LOSS):
Currency Translation Adjustment............... (1.4) (1.4) (4.3) (5.0)
------- ----- ------- -------
COMPREHENSIVE INCOME............................... $ 14.7 $ 3.2 $27.1 $15.4
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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"), excluding percentage changes in de minimus dollar amounts. The
effect of inflation and price changes on the Company's revenues, income from
operations, and expenses, is generally comparable to the general rate of
inflation in the U.S. economy.
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Percentage of
Total Revenues Period-to-Period Change
-------------- ----------------------------------------
Quarter Ended Quarter Ended Six Months Ended
June 30, June 30, 2000 June 30, 2000
vs. vs.
2000 1999 June 30, 1999 June 30, 1999
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<S> <C> <C> <C> <C>
Revenues....................................... 100.0% 100.0% 4.2% 5.5%
Expenses
Client Project Expenses..................... 51.2 54.4 (1.9) 2.2
Other Operating Expenses.................... 33.2 28.8 20.3 17.0
Corporate Expenses.......................... 6.9 7.2 (1.4) (0.5)
Provision for Specific Contract............. - 6.6
------- -------
91.3 97.0 (1.9) 3.0
Income from Operations......................... 8.7 3.0 200.0 42.8
Other (Income) Expense......................... 0.1 0.5 (78.6) (108.0)
------- -------
Income Before Income Taxes..................... 8.6 2.5 250.0 53.8
Income Taxes................................... 3.5 1.0 250.0 53.5
------- -------
Net Income..................................... 5.1 1.5 250.0 53.9
Weighted Average Shares........................ (2.1) (2.1)
Basic Net Income per Share..................... 254.5 58.3
Weighted Average Shares and Equivalents........ (1.9) (2.5)
Diluted Net Income per Share................... 290.0 59.6
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RESULTS OF OPERATIONS (continued)
REVENUES
Revenues increased 4% during the second quarter and 6% during the first
six months of 2000, compared to the same 1999 periods. Throughout the second
half, the Company expects revenue growth at higher rates across all target
markets.
The Company continues to focus on expanding its delivery of high-value,
customer-facing Web solutions - including eBill, eCare and eMarketing - tailored
to clients in financial services, telecommunications, government and utilities.
These solutions 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. During the second quarter and first half of
2000, respectively, direct eCommerce revenues increased over 205% (to $61.4
million) and over 145% (to $106.3 million) compared to the same 1999 periods. In
addition, company-wide eCommerce-related revenues for the second quarter and
first half of 2000 increased more than 35% (to $169.3 million) and 30% (to
$313.5 million), respectively, when compared to the same 1999 period. The
Company expects to continue rapid growth in its eCommerce revenue for 2000 in
all of its target markets.
Business with non-US clients decreased 8% (to $51.5 million) during the
second quarter of 2000 and 4% (to $105.1 million) in the first half of 2000,
compared to the same 1999 periods. Business with non-US clients currently
represents 17% of the Company's revenues. The Company continues to focus on its
non-US client base and expand the number of services offered to these clients.
The Company believes that it is well positioned to achieve growth in non-US
business going forward. For the year 2000, the Company expects non-US business
and European business in particular, to show growth over 1999, mainly in the
Telecommunications Firms and the Financial Institutions target markets.
In the Telecommunications Firms market, a market that continues to be
characterized by large projects with relatively few clients, revenues decreased
7% in the second quarter and were flat for the first half of 2000, compared to
the same 1999 periods. The completion of large projects in the fourth quarter of
1999, M&A activity in the industry and certain new projects not ramping up as
quickly as anticipated continued to drive lower revenues than the Company
expected in the first six months of 2000. Non-US revenues in this market
decreased 17% (to $30.0 million) for the quarter and 9% (to $62.7 million) for
the first half of 2000, compared to the same 1999 periods. For the year 2000,
the Company anticipates revenue growth in this market to increase at rates below
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 materially to revenue growth in this market.
Rather, the Company applies such collections as a reduction to the capitalized
software costs. The Company completed work and fully delivered the software to
the client late in the first half of 2000. Beginning in the third quarter of
2000, the Company will start amortizing this asset which will result in
approximately $3.6 million of additional amortization expense each quarter.
There continues to be significant market interest in Tapestry.
Notwithstanding actual and projected revenue growth, there continues 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. Additionally, the Company works in countries located in
regions other than Western Europe and North America from time to time and the
delivery risks in some of these other countries may be higher. Revenues in the
Telecommunications Firms market in these other locations were less than 3% of
the Company's total revenues for the first half of 2000.
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In the Financial Services Institutions target market, revenues increased
15% during the second quarter of 2000 and 16% in the first half of 2000, when
compared to the same 1999 periods. This revenue increase was driven by increased
business with new clients and a rebounding of the marketplace from last year's
slowdown associated with Year 2000 "lockdowns" and M&A activity. Business with
non-US clients accounted for approximately 35% of the second quarter revenues
($19.2 million) in this market and 34% of the first six months revenues ($37.7
million) in this market. For 2000, the Company anticipates revenue growth in
this market to increase at rates greater than the Company's overall revenue
growth rate, with an increased emphasis on eCommerce business and the Company's
new strategic alliance relationships.
In the State and Local Governments and Education target market, revenues
decreased 5% in the second quarter and 8% in the first half of 2000, compared to
the same 1999 periods. The Company anticipated this decrease, due to the
completion of several large projects as well as a slowdown in the marketplace
from Year 2000 "lockdowns" which led to slower project starts in the second half
of 1999 and the first half of this year. In addition, the Company believes this
target market was close to its peak performance throughout the first half of
1999. Throughout the second half of 2000, revenues in the State and Local
Governments and Education market are expected to increase compared to the same
1999 periods. The Company expects annual revenues in this market to remain flat
compared to the prior year's revenue due to a continued slowdown in new
procurements compared to the previous year. On certain contracts with state
taxation departments, the Company's fees are paid out of the benefits (increased
collections) that the client achieves. Depending on certain criteria known at
the beginning of a benefit-funded contract (contracts whereby the amounts due
the Company are payable based on actual benefits derived by the client), the
Company may defer recognition of revenues until that point at which management
could predict, with reasonable certainty, that the benefit stream would generate
amounts sufficient to fund the contract. From that point forward, revenues are
recognized on a percentage of completion basis. All of the current large
multi-year benefit-funded contracts are now being recognized on a percentage of
completion basis.
Revenues in the Federal Government Agencies target market increased 21%
during the second quarter and 25% during the first six months of 2000, compared
to the same 1999 periods. A main driver in this target market continues to be
the expansion and extension of contractual work with the Department of Defense
for its Standard Procurement System ("SPS") stemming from the original award in
mid-1997 of a significant multi-year contract. Revenues with this client
accounted for approximately one-third of the second quarter revenue growth. In
addition, the Company continues to experience a strong ramp up from awards made
in the fourth quarter of 1999 with existing clients as well as new business with
both defense and civilian agencies. For the year 2000, the Company expects
revenue growth in this target market to exceed the Company's overall revenue
growth rate when compared to the same 1999 period. These revenue increases will
continue to be driven primarily by the SPS contract, contracts with clients
using the Company's federal financial systems and contracts leveraging the
Company's new strategic alliance relationships.
Revenues in the Other Corporate Clients market remained flat during the
second quarter and decreased 4% in the first half of 2000, compared to the same
1999 periods. The Company continues to expand its business with clients in the
electric and gas utilities marketplace, but has experienced a slow start in the
Healthcare marketplace as a result of Year 2000 issues. During the second half
of 2000, the Company anticipates a substantial increase in business with new
clients in the healthcare market and the electric and gas utilities market. For
all of 2000, the Company expects revenue growth in this market to increase at
rates above the Company's overall growth rate.
10
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EXPENSES
Client project expenses and other operating expenses together increased 6%
during the second quarter and 7% during the first half of 2000, compared to the
same 1999 periods. This increase was slightly faster than the growth rate in
revenues for the comparable periods due to the dedication of resources for
marketing, training, building and maintaining infrastructure, developing the
Company's strategic alliances, as well as increased business development efforts
and emphasis on investing activities. For all of 2000, the Company anticipates
that these expenses will grow at rates lower than the revenue growth rate. The
Company has made significant expenditures related to development of the
"Tapestry" software. A majority of these expenditures have been and will be
capitalized. Key software deliveries were completed late in the first half of
2000. Beginning in the third quarter of 2000, the Company will start amortizing
this asset resulting in approximately $3.6 million per quarter of amortization
expense.
During the second quarter and first six months of 2000, corporate
expenses remained flat compared to the same 1999 periods. Corporate expenses
decreased in comparison to the growth in revenues during the first half of 2000
when compared to the same 1999 period. This decrease is due in part to a
reduction in accruals for corporate level performance-based incentive
compensation and profit-based compensation accruals under the Company's
restricted stock program. For the year 2000, the Company expects corporate
expenses to grow at rates below the Company's revenue growth rate.
The Company is continuing to address the ongoing disputes on a project an
AMS subsidiary undertook for Bezeq, the Israeli telephone company ("Bezeq").
This dispute was mentioned in both the Company's Form 10-K for the year ended
December 31, 1999 filed on March 30, 2000, as well as the Company's Form 10-Q
for the quarter ended March 31, 2000 filed on May 11, 2000. During the second
quarter of 2000 the provision established for this contract ($7 million
established in 1998 and $20 million established in 1999) was reduced by
approximately $19.8 million for payments related to bank guarantees that were
provided for under the original contracting terms between a subsidiary of the
Company and Bezeq. This payment was expected by the Company and was included in
the provision as a potential disbursement related to this contract. For the
first six months of 2000, the Company's cumulative reductions to the provision,
established for this contract, were $22.3 million. The Company believes the
remaining provision ($4.7 million) for potential losses related to this project,
continues to be adequate.
INCOME FROM OPERATIONS
Income from operations increased 200% for the second quarter and 43% for
the first half of 2000, compared to the same 1999 periods. This increase is
driven by the above-mentioned provision established for the Bezeq contract in
1999 that is not a recurring expense in the comparable 2000 period. The
Company's profit margins have continued to remain strong due to an ongoing
emphasis on well-structured and well-priced engagements and tightly managed
delivery risk. Additionally, the Company continues to make substantial
investments in marketing, training, and infrastructure focusing on the Company's
strategic alliances as well as business development efforts and investments.
For 2000, the Company continues to focus on controlling expenses while
emphasizing managed growth and expects improved profit margins when compared
with 1999 results.
OTHER (INCOME) EXPENSE
Interest (income) expense increased substantially during the second
quarter and first half of 2000 compared to the same 1999 periods. These
increases were due to temporary increases in the amounts of short-term
borrowings driven by the Company's increased investments in strategic alliances
combined with
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<PAGE> 14
market increases in interest rates. Other (income) expense decreased in the
first half of 2000, compared to the same period in 1999, primarily because of a
reduction of an accrued loss recorded in the fourth quarter of 1999 related to
unoccupied space.
The Company continues to develop its investment strategy and evaluate
opportunities presented by certain business relationships that would generate
additional income for its core business, leverage its existing assets
(customers, competencies, relationships, and technologies) and maximize value.
The Company seeks to manage these investments as a portfolio and thereby
mitigate the Company's risk. In late 1998, the Company established a joint
venture with Bank of Montreal to provide online processing services for loan
applications to small and mid-size financial institutions via a new firm,
Competix.com (formerly Competix, L.L.C.). During the second quarter the Company
sold a small portion of its investment in Competix.com. This sale generated a
$3.5 million gain which essentially offsets the financial impact of the
investments in the strategic business ventures in the Company's portfolio.
Specifically, during the first half of 2000, the Company was thereby able to
offset the impact of losses from certain investments and expenditures related to
the expansion of Competix.com operations and the launch of NetCredit. As a
result, the Company incurred a net gain of $1.1 million during the second
quarter and a net loss of $0.2 million during the first half of 2000 related to
the Competix.com joint venture. Additionally, the Company's share of
Competix.com's losses was $2.4 million and $3.7 million for the second quarter
and first six months of 2000. The Company expects Competix.com to continue
generating losses in the year 2000. However, per Generally Accepted Accounting
Principles the Company will only be impacted by such losses up to the amount of
the Company's investment.
FOREIGN CURRENCY EXCHANGE
Approximately 17% of the Company's 2000 first half 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 a further effort to mitigate
foreign currency exchange risk, 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. In the past, the Company has employed limited hedging of
inter-company balance sheet transactions through derivative instruments (foreign
currency swap contracts); however, as of June 30, 2000, the Company had no
outstanding derivative contracts.
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
June 30, 2000, the Company's cash and cash equivalents totaled $22.2 million,
down from $111.3 million at the end of 1999. Cash used in operating activities
for the first half of 2000 was $52.4 million, primarily driven by the
aforementioned $19.8 million payment related to a bank guarantee on a project an
AMS subsidiary undertook for Bezeq, as well as payments for incentive
compensation and other employee benefits.
During the first half of 2000, the Company invested approximately $48.9
million in fixed assets, software purchases, computer software and other
investments. These investments are driven by the Company's expansion of its
strategic alliances and business ventures. Primary drivers were the
12
<PAGE> 15
Company's modification of its state financial systems to link with the Company's
BuySense.com business and the Siebel call center software in addition to the
Company's equity partnership with govWorks, a privately held dot-com company
targeting eBusiness opportunities in the state and local government marketplace.
During the second quarter the Company utilized its revolving line of credit.
Revolving line of credit borrowings were $11.0 at June 30, 2000. During the
first half of 2000, the Company made approximately $3.0 million in installment
payments of principal on outstanding debt owed to banks; the Company also
received proceeds of approximately $8.6 million during the period from the
exercise of stock options and the tax benefits related thereto. The Company made
no material repurchases of common stock during the first half of 2000, although
it intends to make purchases during the second half of 2000.
At June 30, 2000, the Company's debt-equity ratio, as measured by total
liabilities divided by stockholders' equity was 0.69, down from 0.98 at December
31, 1999.
The Company's material unused source of liquidity at the end of the first
half of 2000 consisted of $120.0 million under the multi-currency revolving
credit agreement with Bank of America and Wachovia Bank as agents. The Company
believes that its liquidity needs can be met from the various sources described
above.
As required by the original terms of its contract with Bezeq, a subsidiary
of the Company has entered into bank guarantees in Bezeq's favor securing its
performance under the contract. See "Results of Operations - Expenses," above
for additional information about the Bezeq contract. On August 8, 1999, the
Company's subsidiary sought and received a temporary injunction from the
Jerusalem District Court prohibiting Bezeq from realizing on the guarantees. On
September 3, 1999, Bezeq sent a notice to the AMS subsidiary purporting to
terminate the contract, which the Company does not agree that Bezeq is entitled
to do. On September 9, 1999, Bezeq sued the AMS subsidiary party to the contract
in Jerusalem District Court. Bezeq alleges damages of approximately $39 million
based on breach of contract, which figure includes amounts secured by the bank
guarantees. The Company's subsidiary is contesting these allegations vigorously
in appropriate court submissions. On December 29, 1999, the Jerusalem District
Court ruled that the AMS subsidiary may not enjoin Bezeq from drawing on the
bank guarantees. The AMS subsidiary promptly appealed that decision to the
Israeli Supreme Court; however, the Israeli Supreme Court denied the
subsidiary's Application for Leave to Appeal the District Court's ruling.
Following the Israeli Supreme Court's ruling, Bezeq realized all of the bank
guarantees, which approximated $19.8 million. The Company's liquidity was not
adversely effected as a result of the realization of the bank guarantees; and
the Company does not anticipate any material adverse effect on its liquidity as
a result of the claims alleged by Bezeq against the AMS subsidiary. On January
19, 2000 the AMS subsidiary filed a counterclaim against Bezeq for approximately
$58.8 million in damages due to breach of contract and other claims. The
counterclaim was subsequently amended to include a claim for the return of the
bank guarantees, although the overall value of the counterclaim was not changed.
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 FASB delayed the effective date of this standard
for one year to fiscal years beginning after June 15, 2000. The Company will be
required to adopt this standard by January 1, 2001. The Company does not
anticipate early adoption of this new standard. Due to the 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.
13
<PAGE> 16
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101") entitled "Revenue Recognition in
Financial Statements." This SAB summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. In June 2000, the SEC issued SAB 101B to delay the
effective date of implementation of SAB 101 until no later than the fourth
quarter of fiscal year 2000. The Company does not expect the adoption of SAB 101
to have a material effect on its financial position or results of operations.
14
<PAGE> 17
ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING
STATEMENTS AND
FACTORS THAT MAY AFFECT FUTURE RESULTS
Over the next several years, the Company expects to continue to manage its
growth in revenues. The continuing controlled growth in revenues should enable
the Company to continue improving its profit margins, as in past years,
excluding the after-tax reserves for a troubled contract signed two years ago.
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 rates of
attrition, in view of increased competition for its talent.
There is also the risk of failing to successfully manage large projects
and the risk that the unanticipated delay, suspension, renegotiation or
cancellation of a large project could have an adverse impact on operating
results. Any such development in a project could result in a decline in revenues
or profits, the need to relocate staff, a 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. 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 non-performance, especially
in large complex projects. All of 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, 40% of the Company's total revenues in 1999 was derived
from business with 17 clients.
There is also the risk of revenues not being realized when expected, such
as in certain contracts in the State and Local Governments 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
historically has deferred 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. As the number of such contracts,
and the Company's experience with predicting the timing and certainty of such
revenues, have increased over time, the Company expects to be able to recognize
revenues earlier on such contracts in the future.
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. The Company also faces the risk of shrinking markets resulting from
mergers and other consolidations of clients or prospective clients. Increased
competition from industry rivals, as well as decisions by clients to outsource
fewer projects or to consolidate with others in the Company's markets, could
have a negative impact on pricing, revenues and margins.
15
<PAGE> 18
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, that 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, 1999, filed with the Securities and Exchange Commission on March
30, 2000. There have been no material changes in the Company's market risk from
that disclosed in the Company's 1999 Form 10-K.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
State of Mississippi v American Management Systems, Inc., No
251-99.382-CIV (Circuit Court of Hinds County, Mississippi) - On April 22, 1999
AMS received a letter from the State of Mississippi terminating AMS's contract
with the State for the development of an automated revenue system. On the same
date AMS also was served with a complaint filed in the Circuit Court of Hinds
County, Mississippi, First Judicial District. In the complaint the State alleges
that AMS has failed to deliver software conforming to the contract between the
parties. The State seeks compensatory damages of approximately $234.3 million
and punitive damages of $750.0 million. The compensatory damages include support
for the project, monies paid to AMS, the cost of a new contractor and
inefficiencies arising from continued use of less efficient technology. The
complaint was filed ten days before AMS was to go live on a major portion of the
software. AMS believes the action is without merit. AMS filed an Answer on May
24, 1999 denying Mississippi's allegations and asserting counterclaims for
payment of certain deliverables accepted by the State, including work in
progress. A trial on the merits of the case, which began on August 7, 2000, is
underway.
In the Matter of Bezeq, the Israeli Telecommunications Company Ltd. vs. AMS
Technical Systems, Inc., CIV COMP. 1420/99 and counterclaim. A subsidiary of
the Company signed a contract with Bezeq on September 16, 1997, for the design,
development and implementation of a new customer care and billing system. A
dispute developed between the subsidiary and Bezeq as to the scope of the
project, given its fixed price compensation structure and other project
management issues. On July 14, 1999, Bezeq sent the subsidiary a notice
demanding that the subsidiary cure certain alleged breaches; and on July 23,
1999, the subsidiary responded by denying that it was in breach. On August 8,
1999, the Company's subsidiary sought and received a temporary injunction from
the Jerusalem District Court prohibiting Bezeq from realizing on certain bank
guarantees which were made in favor of Bezeq to secure the subsidiary's
performance under the contract. On September 3, 1999, Bezeq sent a notice to
the Company's subsidiary purporting to terminate the contract, which the Company
does not agree that Bezeq is entitled to do. On September 9, 1999, Bezeq sued
the Company's subsidiary in Jerusalem District Court. Bezeq alleges damages of
approximately $39 million based on breach of contract, which figure includes
amounts secured by the bank guarantees. The Company's subsidiary is contesting
these allegations vigorously in appropriate court submissions. On December 29,
1999, the Jerusalem District Court ruled that the subsidiary may not enjoin
Bezeq from drawing on the bank guarantees. The subsidiary promptly appealed
that decision to the Israeli Supreme Court; however, the Israeli Supreme Court
denied the subsidiary's Application for Leave to Appeal the District Court's
ruling. Following the Israeli Supreme Court's ruling, Bezeq realized all of the
bank guarantees, which approximated $19.8 million. On January 19, 2000, the
subsidiary filed a counterclaim against Bezeq for approximately $58.8 million in
damages due to breach of contract and other claims. The counterclaim was
subsequently amended to include a claim for the return of the bank guarantees,
although the overall value of the counterclaim was not changed.
17
<PAGE> 20
Item 2. Changes in Securities
NONE.
Item 3. Defaults Upon Senior Securities
NONE.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The regular annual meeting of stockholders of the Company was held
in Fairfax, Virginia on May 12, 2000 for the purposes of electing the board of
directors.
(b) Proxies for the meeting were solicited pursuant to Section 14(a) of
the Securities Exchange Act of 1934, as amended, and the regulations promulgated
thereunder, and there was no solicitation in opposition to management's
solicitations. All of management's nominees for director were elected by the
stockholders as follows:
<TABLE>
<CAPTION>
Name For Withheld
---- --- --------
<S> <C> <C>
Daniel J. Altobello 33,547,827 210,863
Paul A. Brands 33,602,050 156,640
James J. Forese 33,548,715 209,975
Patrick W. Gross 33,546,491 212,199
Dorothy Leonard 33,629,142 129,548
W. Walker Lewis 33,548,967 209,723
Frederic V. Malek 33,526,097 232,593
Frank A. Nicolai 33,544,688 214,002
Alan G. Spoon 33,631,749 126,941
</TABLE>
Item 5. Other Information
NONE
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 1995 Annual Report
on Form 10-K, filed on April 1, 1996).
18
<PAGE> 21
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).
3.4 Certificate of Amendment of Second Restated Certificate
of Incorporation of the Company (incorporated herein by reference to Exhibit 3.4
of the Company's quarterly report on Form 10-Q for the quarter ended June 30,
1999).
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 as amended
(incorporated herein by reference to Exhibit A to the Company's definitive Proxy
Statement filed on April 15, 1999).
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).
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).
19
<PAGE> 22
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 (incorporated herein by reference to Exhibit 10.11 of the Company's
1998 Annual Report on Form 10-K).
10.12 1999 Contractor Stock Option Plan (incorporated herein
by reference to Exhibit 10.12 of the Company's 1999 Annual Report on Form 10-K)
13. 1999 Financial Report
27. Financial Data Schedule
(b) Reports on Form 8-K
NONE.
20
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
Date: August 14, 2000 /s/ Paul A. Brands
---------------------- -------------------------------------------
Paul A. Brands, Chairman and Chief
Executive Officer
Date: August 14, 2000 /s/ Ronald L. Schillereff
--------------------------- -------------------------------------------
Ronald L. Schillereff, Chief Financial
Officer, Treasurer, and
Executive Vice President
21
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
<C> <S> <C>
3.1 Second Restated Certificate of Incorporation of the Company *
(incorporated herein by reference to the Company's 1995 Annual
Report on Form 10-K, filed on April 1, 1996).
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).
3.4 Certificate of Amendment of Second Restated Certificate of *
Incorporation of the Company (incorporated herein by reference
to Exhibit 3.4 of the Company's quarterly report on Form 10-Q
for the quarter ended June 30, 1999).
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 as amended (incorporated *
herein by reference to Exhibit A to the Company's definitive Proxy
Statement filed on April 15, 1999).
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>
22
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <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 *
(incorporated herein by reference to Exhibit 10.11 of the Company's
1998 Annual Report on Form 10-K).
10.12 1999 Contractor Stock Option Plan (incorporated herein by reference *
to Exhibit 10.12 of the Company's 1999 Annual Report on Form 10-K)
13. 1999 Financial Report *
27. Financial Data Schedule
</TABLE>
----------------------
*Previously filed.
23
