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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, 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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<S> <C>
State or other Jurisdiction of I.R.S. Employer
Incorporation or Organization: Delaware Identification No.: 54-0856778
</TABLE>
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 8, 2000, 41,578,286 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
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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, 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.
1
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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
Ended March 31,
2000 1999
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<S> <C> <C>
REVENUES.......................................................................................... $311.1 $290.9
EXPENSES
Client Project Expenses................................................................... 163.0 152.7
Other Operating Expenses.................................................................. 101.7 89.4
Corporate Expenses........................................................................ 21.0 20.9
-------- --------
285.7 263.0
INCOME FROM OPERATIONS............................................................................ 25.4 27.9
OTHER (INCOME) EXPENSE
Interest (Income) Expense................................................................. - (0.1)
Other (Income) Expense.................................................................... (1.8) 0.9
Loss on Equity Investments in Other Companies............................................. 1.3 0.3
--------- --------
( 0.5) 1.1
INCOME BEFORE INCOME TAXES........................................................................ 25.9 26.8
INCOME TAXES...................................................................................... 10.6 11.0
-------- --------
NET INCOME........................................................................................ $ 15.3 $ 15.8
======== ========
WEIGHTED AVERAGE SHARES........................................................................... 41.3 42.3
======== ========
BASIC NET INCOME PER SHARE....................................................................... $ 0.37 $ 0.37
======== ========
WEIGHTED AVERAGE SHARES AND EQUIVALENTS........................................................... 41.8 43.2
======== ========
DILUTED NET INCOME PER SHARE ..................................................................... $ 0.36 $ 0.37
======== ========
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2
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American Management Systems, Incorporated
CONSOLIDATED REVENUES BY MARKET
Unaudited
(In millions)
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<CAPTION>
For the Quarter
Ended March 31,
2000 1999
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<S> <C> <C>
Telecommunications Firms.................................................................. $ 78.9 $ 74.3
Financial Services Institutions........................................................... 54.9 46.8
State and Local Governments and Education................................................. 77.9 88.2
Federal Government Agencies............................................................... 84.1 65.0
Other Corporate Clients................................................................... 15.3 16.6
-------- --------
Total Revenues............................................................................ $311.1 $290.9
====== ======
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American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions except per share data)
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<CAPTION>
3/31/2000
ASSETS (Unaudited) 12/31/1999
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<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents...................................................... $ 29.2 $111.3
Accounts and Notes Receivable.................................................. 303.2 294.7
Prepaid Expenses and Other Current Assets...................................... 26.8 22.8
-------- --------
359.2 428.8
FIXED ASSETS
Equipment ..................................................................... 49.0 50.5
Furniture and Fixtures......................................................... 25.6 25.5
Leasehold Improvements......................................................... 20.8 19.1
-------- --------
95.4 95.1
Accumulated Depreciation and Amortization...................................... (63.9) (63.9)
-------- --------
31.5 31.2
OTHER ASSETS
Purchased and Developed Computer Software (Net of Accumulated
Amortization of $78,000,000 and $74,500,000)................................ 129.2 114.7
Intangibles (Net of Accumulated Amortization of $5,700,000 and
$5,500,000).................................................................. 6.0 6.2
Other Assets (Net of Accumulated Amortization of $970,000 and
$940,000).................................................................... 40.5 31.6
-------- --------
175.7 152.5
-------- --------
TOTAL ASSETS........................................................................... $ 566.4 $ 612.5
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American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions except per share data)
<TABLE>
<CAPTION>
3/31/2000
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 12/31/1999
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<S> <C> <C>
CURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations..................................... $ 6.1 $ 6.1
Accounts Payable.................................................................... 17.7 24.6
Accrued Incentive Compensation...................................................... 3.2 51.7
Other Accrued Compensation and Related Items........................................ 41.7 40.7
Deferred Revenues................................................................... 41.4 57.4
Other Accrued Liabilities........................................................... 7.6 12.8
Accrued Contract Losses............................................................. 24.5 27.0
Income Taxes Payable................................................................ 5.9 7.0
--------- ---------
148.1 227.3
Deferred Income Taxes............................................................... 7.3 2.8
--------- ---------
155.4 230.1
NONCURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations..................................... 14.9 16.5
Other Accrued Liabilities........................................................... 31.8 27.5
Deferred Income Taxes............................................................... 32.8 28.9
-------- --------
79.5 72.9
-------- --------
TOTAL LIABILITIES .......................................................................... 234.9 303.0
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 41,539,061 and 41,018,387
Outstanding)..................................................................... 0.5 0.5
Capital in Excess of Par Value...................................................... 83.7 89.5
Retained Earnings................................................................... 312.5 297.2
Currency Translation Adjustment..................................................... (15.1) (12.2)
Common Stock in Treasury, at Cost (9,518,153 and
10,038,827 Shares)............................................................... (50.1) (65.5)
-------- --------
331.5 309.5
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................................. $ 566.4 $ 612.5
======== ========
</TABLE>
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
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For the Quarter
Ended March 31,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income...................................................................................... $ 15.3 $ 15.8
Adjustments to Reconcile Net Income to Net Cash Used
in Operating Activities:
Depreciation .............................................................................. 2.3 3.6
Amortization............................................................................... 3.9 11.4
Loss on Investments in Other Companies..................................................... 1.3 0.3
Deferred Income Taxes...................................................................... 8.5 4.4
Provision for Doubtful Accounts............................................................ 1.2 2.1
Changes in Assets and Liabilities:
Increase in Trade Receivables.............................................................. (9.7) (4.9)
Increase in Prepaid Expenses and Other Current Assets...................................... (3.9) (3.9)
Increase in Other Assets................................................................... (3.4) (8.3)
Decrease in Accrued Incentive Compensation................................................. (44.9) (46.9)
(Decrease) Increase in Accounts Payable, Other Accrued
Compensation, and Liabilities........................................................... (6.9) 3.7
Provision for Contract Losses.............................................................. (2.5) (0.1)
Decrease in Deferred Revenue............................................................... (16.0) (4.0)
Decrease in Income Taxes Payable........................................................... (1.1) (8.2)
--------- --------
Net Cash Used in Operating Activities........................................................... (55.9) (35.0)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets........................................................................ (2.6) (1.1)
Purchase of Computer Software and Investment in Software Products .............................. (18.4) (16.4)
Other Investments and Intangibles............................................................... (6.8) (2.7)
Proceeds from Sale of Fixed Assets and Purchased Computer Software.............................. - 2.6
--------- --------
Net Cash Used in Investing Activities........................................................... (27.8) (17.6)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings...................................................................................... - -
Payments on Borrowings.......................................................................... (1.5) (0.5)
Proceeds from Common Stock Options Exercised.................................................... 6.1 4.2
Payments to Acquire Treasury Stock.............................................................. (0.1) (2.2)
--------- --------
Net Cash Provided by Financing Activities....................................................... 4.5 1.5
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................................................... (2.9) (3.6)
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................................................. (82.1) (54.7)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...................................................... 111.3 119.3
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................................ $ 29.2 $ 64.6
======== ========
NON-CASH OPERATING AND FINANCING ACTIVITIES:
Treasury Stock Utilized to Satisfy Accrued Incentive
Compensation Liabilities..................................................................... $ 3.6 $ 5.1
Treasury Stock Utilized to Satisfy Stock Options Exercised...................................... $ 5.8 $ 6.5
</TABLE>
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(In millions)
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<CAPTION>
For the Quarter
Ended March 31,
2000 1999
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NET INCOME ........................................................................................... $15.3 $15.8
OTHER COMPREHENSIVE INCOME (LOSS):
Currency Translation Adjustment................................................................. (2.9) (3.6)
----- -----
COMPREHENSIVE INCOME.................................................................................. $12.4 $12.2
===== =====
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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 Period-to-Period
Total Revenues Change
----------------------- ---------------
Quarter Ended Quarter Ended
March 31, March 31, 2000
vs
2000 1999 March 31, 1999
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<S> <C> <C> <C>
Revenues.................................................................. 100.0% 100.0% 6.9%
Expenses
Client Project Expenses............................................. 52.4 52.5 6.7
Other Operating Expenses............................................ 32.6 30.7 13.8
Corporate Expenses.................................................. 6.8 7.2 0.5
------- -------
91.8 90.4 8.6
Income from Operations.................................................... 8.2 9.6 (9.0)
Other (Income) Expense.................................................... (0.1) 0.4 145.5
-------- -------
Income Before Income Taxes................................................ 8.3 9.2 (3.4)
Income Taxes.............................................................. 3.4 3.8 (3.6)
------- -------
Net Income................................................................ 4.9 5.4 (3.2)
Weighted Average Shares................................................... (2.4)
Basic Net Income per Share................................................ -
Weighted Average Shares and Equivalents................................... (3.2)
Diluted Net Income per Share.............................................. (2.7)
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RESULTS OF OPERATIONS (continued)
REVENUES
Revenues increased 7% during the first quarter of 2000, compared to
the same 1999 period. Looking ahead to the rest of 2000, the Company expects
continued revenue growth at higher rates across all target markets beginning in
the second quarter.
The Company continues to 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 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 first quarter of 2000 direct
eCommerce revenues increased over 100% (to $47.0 million) compared to the same
1999 period, and eCommerce-related revenues increased more than 20% (to $143.7
million) 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 remained flat during the first quarter
of 2000, compared to the same 1999 period. Business with non-US clients
represents 17% ($53.6 million) of the Company's revenues. The Company continues
to increase 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 State and Local Governments and
Education target markets.
In the Telecommunications Firms market, a market that continues to be
characterized by large projects with relatively few clients, revenues increased
6% in the first quarter of 2000, when compared to the first quarter of 1999.
This revenue increase is slower than the Company expects for the remainder of
the year due to 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. Non-US revenues in this market remained flat for the quarter,
compared to the same 1999 period. For the year 2000, 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 did not
contribute materially to revenue growth in this market in the first quarter of
2000. Rather, the Company applies such collections as a reduction to the
capitalized software costs. This software development effort is scheduled to be
completed and fully delivered to the client late in the first half of 2000.
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 countries were less than 2% of
the Company's total revenues for the first quarter of 2000.
In the Financial Services Institutions target market, revenues in the
first quarter of 2000 increased 17% over the comparable 1999 period. This
revenue increase is driven by increased business
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with new clients and a resurgence of the marketplace rebounding from last year's
slowdown associated with Year 2000 "lockdowns" and M&A activity. Business with
non-US clients increased 7% in this market accounting for approximately 34% of
the first quarter revenues in this market ($18.4 million). 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.
In the State and Local Governments and Education target market,
revenues decreased 12% in the first quarter of 2000 when compared to the first
quarter of 1999. 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 beginning of this year. In addition, the Company believes this target market
was close to its peak performance throughout the first half of 1999. Revenues in
the first quarter of 1999 were driven by a 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. Revenues in the State and Local
Governments and Education market are expected to increase significantly
beginning in the second quarter, with revenues for the year 2000 increasing at
rates below the Company's overall revenue growth rate, due to a continued
slowdown in new procurements compared to the prior 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 target market increased 29% in the
first quarter of 2000, compared to the same 1999 period. A main driver in this
target market continues to be 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 one-third of the first quarter revenue growth. In
addition, the Company experienced 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 revenues
in this target market to increase over 1999 at a rate approximating the
Company's overall revenue growth rate. 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 decreased 8% during
the first quarter, compared to the same 1999 period. The 2000 decrease is mainly
attributable to a slow start in the Healthcare marketplace associated with Year
2000 issues. Beginning in second quarter, the Company anticipates increased
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 the same rate of growth as the Company's overall growth
rate.
EXPENSES
Client project expenses and other operating expenses together
increased 9% during the first quarter of 2000 compared with the first quarter of
1999. This increase was faster than the growth rate in revenues for the
comparable 1999 period due to the dedication of resources for marketing,
training, and infrastructure focusing on the Company's strategic alliances, as
well as increased business development efforts and investments. 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
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development of the "Tapestry" software. A majority of these expenditures have
been and will be capitalized. Key software deliveries were made early in the
fourth quarter of 1999 and the Company is targeting another delivery of the
software for mid-2000. Amortization of the Tapestry product is scheduled to
begin late in the first half of 2000.
During the first quarter of 2000, corporate expenses remained flat
compared to the first quarter of 1999. Corporate expenses increased slower than
the growth in revenues over the first quarter of 1999, 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"), mentioned in the Company's Form 10-K for the year ended December 31,
1999 filed on March 30, 2000. During the first quarter of 2000 the provision
established for this contract ($7 million established in 1998 and $20 million
established in 1999) was reduced by $2.5 million for settlement payments made to
a subcontractor for this contract. These costs were expected by the Company and
were included in the provision as potential costs related to this contract. The
Company continues to maintain the remaining provision ($24.5 million) for
potential losses related to this project, which continues to be deemed adequate.
INCOME FROM OPERATIONS
Income from operations decreased 9% for the first quarter of 2000,
compared to the first quarter of 1999. This decrease is driven by substantial
investments in marketing, training, and infrastructure focusing on the Company's
strategic alliances as well as business development efforts and investments. The
Company's profit margins have continued to remain strong due to an ongoing
emphasis on well-structured and priced engagements and tightly managed delivery
risk. 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 during the first quarter of 2000
compared with the same period in 1999, because of temporary increases in the
amounts of short-term borrowings driven by increased investments in strategic
alliances combined with large payments for the Company's performance-based
compensation plans during the first quarter of 2000. Other (income) expense
decreased in the first quarter 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.
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, Inc. (formerly
Competix, L.L.C.). The Company incurred a loss of $1.3 million during the first
quarter of 2000 compared to a loss of $0.3 million during the comparable 1999
period related to this joint venture. The Company expects Competix, Inc. to
continue generating losses in the year 2000.
11
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FOREIGN CURRENCY EXCHANGE
In the first quarter of 2000, approximately 17% of the Company's
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 March
31, 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
March 31, 2000, the Company's cash and cash equivalents totaled $29.2 million,
down from $111.3 million at the end of 1999. Cash used in operating activities
for the first quarter of 2000 was $55.9 million due to payments for incentive
compensation and other employee benefits.
During the first quarter of 2000, the Company invested over $27.8
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. Specifically, in early 2000 the
Company established an equity partnership with govWorks, a privately held
dot-com company targeting eBusiness opportunities in the state and local
government marketplace. While the revolving line of credit was utilized during
the first quarter, revolving line of credit borrowings were zero at March 31,
2000. During the first quarter, the Company made approximately $1.5 million in
installment payments of principal on outstanding debt owed to banks; the Company
also received proceeds of approximately $6.1 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 quarter of 2000.
At March 31, 2000, the Company's debt-equity ratio, as measured by
total liabilities divided by stockholders' equity was 0.71, down from 0.98 at
December 31, 1999.
The Company's material unused source of liquidity at the end of the
first quarter 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 this contract. At March 31, 2000, approximately
$19.8 million was outstanding under such bank guarantees. See "Results of
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<PAGE> 15
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 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, where the matter is pending. In the event the Israeli Supreme
Court does not grant a permanent injunction, and Bezeq were to call on these
guarantees, the Company's liquidity would not be materially jeopardized. On
September 3, 1999, Bezeq sent a notice to the relevant 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 Bezeq could
seek to draw under the bank guarantees. The Company's subsidiary is contesting
these allegations vigorously in appropriate court submissions. The Company does
not anticipate any material adverse effect on its liquidity as a result of these
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.
YEAR 2000 ISSUES
Since 1997, the Company has been engaged in the process of reviewing,
remediating, testing, and contingency planning for any unexpected failures of
its internal information technology infrastructure, its suppliers, and the
software it develops for and licenses to its customers, in order to prevent the
occurrence of any material Year 2000 problems. This company-wide effort included
participation at levels from the Audit Committee of the Board of Directors to
dedicated information technology staff. The Company was able to remediate and
test its critical information technology systems in advance of December 31,
1999. Through the date of this Form 10-Q, the Company has experienced no
material unresolved problems related to Year 2000, including the changeover from
December 31, 1999, to January 1, 2000, and the leap day, February 29, 2000, in
connection with either its internal information technology infrastructure or in
the software it has licensed to its customers. In addition, no major suppliers
have failed to meet their obligations as a result of the Year 2000.
The Company spent approximately $5.0 million during the 1999 fiscal
year on all of its Year 2000 compliance efforts, which, combined with other
expenditures to date, amounts to total expenditures of approximately $11.0
million on Year 2000 compliance over the past 4 years.
The Company will continue to monitor its internal and licensed
information technology and non-information technology systems, as well as those
of the third parties with whom it conducts business, through the middle of the
Year 2000 to ensure that any latent year 2000 issues that may arise are
addressed promptly. Although the Company does not anticipate any additional
material expenditures relating to Year 2000 compliance, it cannot provide any
assurance as to the magnitude of any future costs until a more significant
period of time has passed from the Year 2000 changeover.
13
<PAGE> 16
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.
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.
The Company has experienced, and may continue to experience for
several more months, some diversion of work, both pending and new opportunities,
and decreases in revenues and profit margins, as a result of client Year 2000
compliance issues. Although these risks exist potentially across the Company's
engagements, they are magnified in certain target markets, such as the Financial
Services Institutions and the State and Local Governments markets 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 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.
15
<PAGE> 18
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.
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 $234,296,000 and punitive
damages of $750,000,000. 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.
Discovery is under way and is expected to be completed in May 2000. In February
2000, AMS filed three motions for summary judgment and supporting briefs. These
motions are under consideration by the Court. A mediation is scheduled to occur
on June 6, 2000.
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
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).
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).
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 (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.
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.
<TABLE>
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
<S> <C>
Date: May 12, 2000 /s/ Paul A. Brands
-------------------- ----------------------------------------------------------------
Paul A. Brands, Chairman and Chief Executive Officer
Date: May 12, 2000 /s/ Ronald L. Schillereff
-------------------- ----------------------------------------------------------------
Ronald L. Schillereff, Chief Financial Officer, Treasurer, and
Executive Vice President
</TABLE>
20
<PAGE> 23
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 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>
21
<PAGE> 24
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 *
(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.
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the March
31, 2000 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-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 29,200
<SECURITIES> 0
<RECEIVABLES> 303,200
<ALLOWANCES> 12,000
<INVENTORY> 0
<CURRENT-ASSETS> 359,200
<PP&E> 95,400
<DEPRECIATION> (63,900)
<TOTAL-ASSETS> 566,400
<CURRENT-LIABILITIES> 155,400
<BONDS> 0
0
0
<COMMON> 500
<OTHER-SE> 331,500
<TOTAL-LIABILITY-AND-EQUITY> 566,400
<SALES> 311,100
<TOTAL-REVENUES> 311,100
<CGS> 163,000
<TOTAL-COSTS> 285,700
<OTHER-EXPENSES> (500)
<LOSS-PROVISION> 1,200
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 25,900
<INCOME-TAX> 10,600
<INCOME-CONTINUING> 15,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,300
<EPS-BASIC> 0.37
<EPS-DILUTED> 0.36
</TABLE>
