—–BEGIN PRIVACY-ENHANCED MESSAGE—–
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
LAETCr7f33PWkl+Ma9ClUcWYC+UKNHTfjHhH9M+3I6gA+0asBRgXD4/eQ6mzXcoq
2nterpfs2W97XOelEHDxHg==
ACCESSION NUMBER: 0000950133-98-001349
CONFORMED SUBMISSION TYPE: DEF 14A
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 19980508
FILED AS OF DATE: 19980409
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AMERICAN MANAGEMENT SYSTEMS INC
CENTRAL INDEX KEY: 0000310624
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370]
IRS NUMBER: 540856778
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: DEF 14A
SEC ACT:
SEC FILE NUMBER: 000-09233
FILM NUMBER: 98590673
BUSINESS ADDRESS:
STREET 1: 4050 LEGATO RD
CITY: FAIRFAX
STATE: VA
ZIP: 22033
BUSINESS PHONE: 7032678000
SCHEDULE 114A
(RULE 14a-101)
SCHEDULE 14A INFORMATION
INFORMATION REQUIRED IN PROXY STATEMENT
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
– ——————————————————————————-
(Name of Registrant as Specified in Its Charter)
N/A
– ——————————————————————————-
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: (3) Filing Party:
(2) Form, Schedule or Registration Statement No.: (4) Date Filed:
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
4050 LEGATO ROAD
FAIRFAX, VIRGINIA 22033
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of AMERICAN
MANAGEMENT SYSTEMS, INCORPORATED will be held at 4050 Legato Road, Fairfax,
Virginia 22033 on Friday, May 8, 1998, at 10:00 a.m. local time, for the
following purposes:
To elect ten (10) directors to hold office until the next Annual Meeting
of Shareholders of American Management Systems, Incorporated and until their
successors are elected and qualified; and
To transact such other business as may properly come before the meeting or
any adjournment or adjournments thereof.
Only shareholders of record at the close of business on March 20, 1998,
will be entitled to notice of, and to vote at, the meeting or any adjournment
thereof.
Shareholders are cordially invited to attend the meeting in person. IF
YOU WILL NOT BE ABLE TO ATTEND THE MEETING IN PERSON, PLEASE INDICATE YOUR
CHOICE ON THE MATTERS TO BE VOTED UPON, DATE AND SIGN THE ENCLOSED PROXY, AND
RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
BY ORDER OF THE BOARD OF DIRECTORS,
Frank A. Nicolai
Secretary
April 10, 1998
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
4050 LEGATO ROAD
FAIRFAX, VIRGINIA 22033
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
MAY 8, 1998
TABLE OF CONTENTS
GENERAL
The enclosed Proxy is being solicited by the Board of Directors of
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED (the “Company” or “AMS”) in
connection with the annual meeting of shareholders of the Company to be held
May 8, 1998 (the “Annual Meeting”), or any adjournment or adjournments thereof.
The entire expense of solicitation of proxies will be borne by the Company.
Solicitation will be primarily by mail. However, directors, executive officers,
and employees of the Company may also solicit by telephone or personal contact.
The Company will reimburse brokers and other persons holding shares in their
names, or in the names of nominees, for their expenses of sending proxy
materials to beneficial owners and obtaining their proxies. It is anticipated
that the Proxy Statement and Proxy first will be mailed to shareholders on or
about April 10, 1998.
Any shareholder giving a Proxy has the power to revoke it at any time
before it is voted by giving written notice of revocation to the Secretary of
the Company or by delivering a proxy in accordance with applicable law bearing
a later date to the Secretary of the Company. If you attend the Annual
Meeting, you may, if you wish, revoke your Proxy by voting in person. Proxies
solicited herein will be voted, and if the person solicited specifies in the
Proxy a choice with respect to matters to be acted upon, the shares will be
voted in accordance with such specification. If no choice is indicated, the
Proxy will be voted for the election of the nominees listed on pages 2 to 6
under the caption “Information Concerning Nominees for Director.”
VOTING PROCEDURE
As of March 20, 1998, there were outstanding 42,239,124 shares of the
Company’s Common Stock, $0.01 par value per share (the “Common Stock”). Each
share of Common Stock is entitled to one vote at the Annual Meeting. Only
shareholders of record at the close of business on March 20, 1998, will be
entitled to vote at the Annual Meeting.
Votes cast in person or by Proxy at the Annual Meeting, abstentions and
Broker Non-votes (as defined below) will be tabulated by the election
inspectors appointed for such Meeting and will be counted for purposes of
determining whether a quorum is present. Directors will be elected by the
affirmative vote of the holders of a plurality of the shares present (in person
or represented by Proxy) and voted on the election of directors at the Annual
Meeting. Any other matter submitted to a vote at the Annual Meeting will be
approved by the affirmative vote of the holders of a majority of the shares
present (in person or represented by Proxy) and entitled to vote on such
matter. The election inspectors will treat abstentions on a particular matter
as shares that are present and entitled to vote for purposes of determining the
approval of such matter. Abstentions, therefore, will have the same effect as
a vote against a particular matter. If a broker submits a Proxy indicating
that it does not have discretionary authority as to certain shares to vote on a
particular matter (a “Broker Non-vote”), those shares will not be treated as
present and entitled to vote for purposes of determining the approval of such
matter.
1
ELECTION OF DIRECTORS
Charles O. Rossotti resigned as Chairman of the Board of Directors and
Director of the Company on November 7, 1997, to become Commissioner of the
Internal Revenue Service. Upon Mr. Rossotti’s resignation, the directors voted
to reduce the number of directors constituting the Board from eleven members to
ten members.
Accordingly, ten directors are to be elected at the Annual Meeting, each
to hold office until the next annual meeting of shareholders of the Company and
until his or her successor is elected and qualified. The directors will be
elected by the affirmative vote of the holders of a plurality of the shares
present (in person or represented by Proxy) and voted on the election of
directors. Unless otherwise directed, it is the intention of the persons named
in the Proxy to vote such Proxy for the election of the nominees listed under
the caption “Information Concerning Nominees for Director” on pages 2 to 6.
All of the nominees are now directors of the Company. In the event that any
nominee should be unable to accept the office of director, which is not
anticipated, it is intended that the persons named in the Proxy will vote for
the election of such other person in the place of such nominee for the office
of director as the Board of Directors may recommend. Descriptive information
as to each nominee is set forth below under the caption “Information Concerning
Nominees for Director.”
INFORMATION CONCERNING NOMINEES FOR DIRECTOR
2
3
4
5
6
INFORMATION CONCERNING EXECUTIVE OFFICERS
Information concerning Paul A. Brands, Chairman and Chief Executive
Officer; Philip M. Giuntini, President; Patrick W. Gross, Chairman of the
Executive Committee of the Board of Directors; and Frank A. Nicolai, Executive
Vice President, Secretary, and Treasurer, is set forth above under the caption
“Information Concerning Nominees for Director.”
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 20, 1998, the number and
percentage of outstanding shares of Common Stock beneficially owned by (i) all
persons known by the Company to own 5% or more of such shares, (ii) each
director, (iii) each executive officer, and (iv) all executive officers and
directors as a group. Unless otherwise noted below, each person or entity named
in the table has sole voting and sole investment power with respect to each of
the shares beneficially owned by such person or entity.
7
(1) The amount of beneficial ownership includes stock options granted to
directors and executive officers which have vested and are or will
become exercisable within 60 days of March 20, 1998. Accordingly, Mr.
Altobello has 16,594 options vested and exercisable; Mr. Brands has
24,300 options vested and exercisable; Mr. Forese has 8,249 options
vested and exercisable; Dr. Forman has 12,150 options vested and
exercisable; Mr. Giuntini has 65,459 options vested and exercisable; Mr.
Gross has 13,500 options vested and exercisable; Dr. Leonard has 1,833
options vested and exercisable; Mr. Lewis has 3,749 options vested and
exercisable; Mr. Malek has no options vested and exercisable; Mr.
Nicolai has 13,500 options vested and exercisable; Mr. Rossotti has no
options vested and exercisable; and Mr. Spoon has 1,750 options vested
and exercisable. In addition, Mr. Giuntini’s beneficial ownership
includes 41,159 vested and exercisable options granted to Donna E.
Deeley, his spouse and a Vice President of the Company. All executive
officers and directors as a group (twelve persons) have beneficial
ownership of 161,083 options vested and exercisable within 60 days of
March 20, 1998.
(2) All amounts and percentages of Common Stock were calculated to include
stock options vested and exercisable for those individual directors and
executive officers who had such stock options. The number of shares of
Common Stock was calculated as of March 20, 1998.
(3) Indicates a director of the Company.
(4) Indicates an executive officer of the Company.
8
(5) The amount includes 69,073 shares and 41,159 options owned by Mr.
Giuntini’s spouse, a Vice President of the Company, who has the sole
power to vote and dispose of such shares. Mr. Giuntini disclaims
beneficial ownership with respect to the shares owned by his spouse.
(6) The amount includes 64,875 shares beneficially owned by Mr. Gross’ wife.
Mr. Gross disclaims beneficial ownership with respect to the shares
owned by his wife, who has the sole power to vote and dispose of such
shares. The amount also includes 362,310 shares jointly owned by Mr.
and Mrs. Gross, who share joint power to vote and dispose of such
shares. Lastly, the amount includes 55,350 shares each owned by two
trusts, totaling 110,700 shares, for the benefit of Mr. Gross’ son and
daughter, respectively, of which Mr. and Mrs. Gross are co-trustees.
Mr. and Mrs. Gross share joint power to vote and dispose of those
shares.
(7) The amount includes 64,124 shares beneficially owned by Ms. Nicolai with
respect to which she has sole voting and dispositive power. Mr. Nicolai
disclaims beneficial ownership with respect to the shares owned by Ms.
Nicolai.
(8) The amount includes 179,750 shares each owned by two trusts, totaling
359,500 shares, for the benefit of Mr. Rossotti’s daughter and son,
respectively, of which Mr. and Mrs. Rossotti are co-trustees. Mr. and
Mrs. Rossotti share joint power to vote and dispose of those shares. The
amount also includes 876,853 shares jointly owned by Mr. and Mrs.
Rossotti, who share joint power to vote and dispose of such shares.
(9) The amount includes 2,000 shares jointly owned by Mr. Spoon and his
spouse, who share joint power to vote and dispose of such shares.
(10) This group includes Charles O. Rossotti, who resigned as Chairman of the
Board of Directors and Director effective November 7, 1997.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), requires that the Company’s directors, executive officers, and
persons who own more than 10% of a registered class of the equity securities of
the Company (“reporting persons”) file with the Securities and Exchange
Commission (the “Commission”) initial reports of ownership, and reports of
changes in ownership, of shares of stock, and options to purchase such shares,
of the Company. Reporting persons are required by Commission rules to furnish
the Company with copies of all Section 16(a) reports they file.
Based solely upon a review of Section 16(a) reports furnished to the
Company for the fiscal year ended December 31, 1997 (the “1997 fiscal year”),
and representations by reporting persons that no other reports were required
for the 1997 fiscal year, all Section 16(a) reporting requirements were met,
except as follows. Mr. Giuntini filed a Form 5 for the 1997 fiscal year late.
Such Form 5 reflected two transactions that were not timely reported: a gift
of shares of Common Stock made by his spouse to a charitable foundation in each
of 1996 and 1997. Mr. Giuntini’s spouse had the sole power to vote and dispose
of such shares, and Mr. Giuntini disclaims beneficial ownership with respect
to the shares.
9
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation paid or accrued by the
Company during the three fiscal years ended December 31, 1997, to the Company’s
executive officers.
(1) All amounts were awarded based on the achievement of annual performance
goals under single or multi-year incentive compensation plans.
(2) This amount represents foreign taxes paid by the Company in connection
with compensation paid to Mr. Forman for services performed for the
Company abroad.
(3) Each of these awards of Common Stock is associated with performance under
individual incentive compensation plans and was made by the appropriate
Board committee pursuant to a shareholder-approved stock option plan.
(4) All amounts represent the final cash payment awarded for successful
completion of multi-year performance indicators of individual incentive
compensation plans.
(5) These amounts represent the Company’s contribution to special individual
retirement accounts pursuant to the AMS Simplified Employee Pension/IRA
Plan.
10
OPTION GRANTS IN FISCAL 1997
No stock option grants were made to the Company’s executive officers during
the Company’s 1997 fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
Shown below is information with respect to exercises by the Company’s
executive officers during the Company’s 1997 fiscal year of options to purchase
shares of Common Stock pursuant to the 1996 Amended Stock Option Plan F (“Plan
F”), and earlier stock option plans. Also shown is information with respect to
certain unexercised options to purchase shares of Common Stock held by the
Company’s executive officers as of the end of the Company’s 1997 fiscal year.
(1) Based on the market value of the Common Stock on the date of exercise (as
measured by the NASDAQ closing bid price), minus the option’s exercise
price.
(2) Based on the market value of the Common Stock on the last trading day of
1997 (as measured by the NASDAQ closing bid price of $19.50), minus the
option’s exercise price.
11
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
Awards under the Company’s long-term incentive compensation plans are
based on the Company’s attainment of pre-tax income targets. In view of the
Company’s poor financial performance in 1996, no incentive compensation
payments would have been made under the multi-year incentive compensation plans
in effect for executive officers for the 1996-1997 performance period. In
order to be able to provide meaningful incentives for the executive officers,
the Compensation Committee terminated those two-year plans in mid-1997,
replacing them with similar two-year plans for the 1997-1998 performance
period. The Company’s pre-tax profit for 1997 also ultimately proved to be
considerably lower than initially targeted, making incentive compensation
payments similarly unlikely under the two-year plans put into effect in
mid-1997. At its February 1998 meeting, therefore, the Compensation Committee
terminated the plans for the 1997-1998 period, and approved new two-year plans
for 1998-1999. Had the performance goals for the 1997-1998 period set forth in
the plans been met, the executive officers would have been entitled to receive
the incentive compensation indicated in the table below.
(1) Mr. Forman’s eligibility for additional incentive compensation based on
individual annual goals is not included in this table as long-term
incentive compensation.
(2) If the Compensation Committee determines that the officer has exceeded the
performance goals set forth in his incentive compensation plan, the
Committee may increase his long-term incentive compensation award above
the target level indicated in the preceding column. The increase would be
based on a formula related to pre-tax income.
Notwithstanding anything to the contrary set forth in any of the Company’s
previous filings under the Securities Act of 1933, as amended, or the Exchange
Act that might incorporate future filings, including this Proxy Statement, in
whole or in part, the following report and the Performance Graph shall not be
incorporated by reference into any such filings.
COMPENSATION COMMITTEE REPORT OF EXECUTIVE COMPENSATION
COMPOSITION AND RESPONSIBILITIES OF COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors is responsible for
developing and making recommendations to the Board of Directors with respect to
the Company’s compensation policies generally. It is composed entirely of
outside directors who have never served as officers of the Company or its
affiliates (the “Outside Directors”). The Compensation Committee approves the
compensation plans for the Company’s executive officers, including the Chief
Executive Officer (the “CEO”), and on an annual basis determines the
compensation to be paid to the executive officers. The Compensation Committee
is responsible for the granting and administration of stock options and
incentive compensation granted to the executive officers.
The Compensation Committee has furnished the following report for fiscal
1997:
12
COMPENSATION OBJECTIVES AND PHILOSOPHY
The objectives of the Company’s executive compensation program are to
provide a level of compensation that will attract and retain executives capable
of achieving long-term success for the Company’s shareholders and to structure
their compensation packages such that a significant portion generally is tied
to the achievement of multi-year targets for pre-tax income.
EXECUTIVE OFFICER COMPENSATION
The Company’s executive compensation program consists of three main
components: (i) annual base salary, (ii) potential for an annual cash bonus and
awards of stock options based on Company pre-tax income, the profit
contribution of a particular business unit, individual performance, or some
combination of these factors, and (iii) the opportunity to earn long-term cash
and stock-based incentives which are intended to encourage the achievement of
superior results over time and to align executive officer and shareholder
interests. In addition to research and recommendations furnished by the
Company’s senior management, the Compensation Committee has relied, inter alia,
on information furnished through executive compensation surveys by a recognized
compensation consulting firm, and information known to various members of the
Board of Directors. The Compensation Committee compares salaries and other
elements of executive compensation with the compensation paid to executives in
technology and consulting firms which are actual competitors of the Company.
Few of these companies are in the Hambrecht & Quist Technology Stock Index, the
peer index chosen by the Company for comparison in the “Shareholder Return
Performance Graph” below, because their shares are not publicly traded. They
include, for example, the consulting divisions of certain Big 6 accounting
firms, other prominent consulting firms which are wholly-owned subsidiaries of
publicly-traded companies, and other software firms that are privately held.
The executive officers, including the CEO, are eligible for the same
benefits, including group health and life insurance and participation in the
Company’s Simplified Employee Pension/IRA Plan, as are available generally to
the Company’s professional staff, except that the executive officers do not
participate in the Company’s Profit-Sharing Plan or Employee Stock Purchase
Plan. The Company does not provide material perquisites to any of its executive
officers.
ANNUAL BASE SALARY. The Compensation Committee determines the annual base
salary of each of the Company’s executive officers, including the CEO. Changes
in base salary are generally made effective on March 1. The same principles
are applied in setting the salaries of all executive officers to ensure that
salaries are competitively established. Salaries are determined by considering
the officer’s potential duties and responsibilities within the Company and his
or her business unit, and the officer’s potential impact on the operations and
profitability of the Company. Unlike with respect to the Company’s incentive
compensation arrangements, the Compensation Committee does not consider
achievement of specific corporate performance factors in establishing base
salaries for its executive officers. In general, it is the policy of the
Company to set base salaries lower than would be typical for comparable
positions in similar firms, and to include more compensation in incentive
plans, particularly incentive compensation plans tied to multi-year performance
periods.
INCENTIVE COMPENSATION PLANS. Each executive officer of the Company
generally participates in incentive compensation plans of one to three years in
duration. These plans are similar to multi-year incentive plans in which other
members of the Company’s professional staff participate. Under such plans, the
officer is eligible for annual cash incentive awards, and cash awards which may
be made at the end of each plan if the Compensation Committee determines that
the officer has met the specified goals of the executive’s programs. Some plans
also contemplate awards of stock options under the Company’s
shareholder-approved stock option plans. Each executive officer has a plan
which details the executive officer’s goals, which are comprised of financial
performance, including targets for the Company’s pre-tax income. Each
executive officer also generally has an incentive compensation plan with
targets based on the achievement of various individual goals.
The annual cash awards under the incentive compensation plans and the cash
portion of the award for completion of an incentive compensation plan generally
are based on multiples of a percentage of the executive officer’s salary for
the relevant fiscal period. The number of stock options which may be awarded
is determined at the time the performance goals are established. Such number of
stock options is not determined by reference to any specific criteria other
than the Company’s historical practice of awarding stock options in connection
with incentive compensation plans for certain executive officers. The exercise
price of all options granted in connection with the incentive compensation
plans for the executive officers is the fair market value of the shares on the
date of grant of the option. Achievement of the specified financial or
individual goals for plan years earlier than the final plan year in a
multi-year plan entitles the executive to specified interim cash payments and
stock option grants, all of which are
13
considered advances against the multi-year incentive compensation amounts.
Such interim cash payments are significantly less than a ratable percentage of
the projected incentive compensation payable on successful completion of a
multi-year plan. For example, successful completion of the first year of a
two-year plan typically would entitle the executive to payment of 25% of target
cash incentive compensation. Stock options in connection with multi-year plans
also are granted according to a schedule specified in the plan, typically
including a small percentage of options granted at the time the plans are
approved by the Compensation Committee.
Fiscal 1997 was scheduled to be the second year of two-year compensation
plans for Patrick W. Gross, Paul A. Brands, Philip M. Giuntini, Frank A.
Nicolai, and Fred L. Forman. Charles O. Rossotti as always, had a one-year
incentive compensation plan for 1997. All of these plans included the same
pre-tax income target as a financial goal. In the cases of Messrs. Nicolai and
Forman, the incentive targets also included individual goals based on their
respective areas of responsibility, such as achieving operational goals within
budget, improving the Company’s administrative processes, and expanding the
Company’s Achieving Breakthrough Performance program. All plans required that
a minimum percentage of the stated goal must be achieved before any portion of
the related incentive compensation share was payable. The plans also took into
account projected pre-tax income for the year following the performance year
just ended in determining whether awards are payable and the amounts thereof.
Each plan also included higher award multiples for performance which exceeded
the targets by a stated percentage. In view of the Company’s poor performance
for 1996, however, no incentive compensation payments would have been made
under the 1996-1997 plans. To provide appropriate incentives for the Company’s
most senior officers, therefore, the Compensation Committee determined in
mid-1997 to terminate the 1996-1997 plans and replace them with similar plans
for 1997-1998.
In February 1998, the Compensation Committee determined that the Company
fell considerably short of its financial goals for 1997; no incentive
compensation based on financial goals would be payable for 1997. Accordingly,
the Compensation Committee again determined to terminate the 1997-1998
multi-year plans, and approved new two-year plans for 1998-1999 for the
executives based on the Company’s new pre-tax profit goals for that period.
The Compensation Committee determined however that Mr. Forman had achieved his
non-financial performance goals, and therefore earned 75% of his target cash
payment based on such non-financial goals. This amount is shown above in the
Summary Compensation Table under “Annual Compensation Bonus.” The
Compensation Committee in February 1998 also decided not to grant stock options
to any executive officer for the 1997 performance period because of the
Company’s failure to achieve its pre-tax income target.
POLICY ON DEDUCTIBILITY OF COMPENSATION
Under Section 162(m) of the Internal Revenue Code of 1986, as amended (the
“Internal Revenue Code”), the allowable deduction for compensation paid or
accrued with respect to persons who as of the end of the year are employed as
the chief executive officer and each of the four most highly compensated
executive officers of a publicly-held corporation is limited to no more than $1
million per year for fiscal years beginning on or after January 1, 1994. This
limitation does not apply to compensation payable to the Company’s current
executive officers consisting of stock options issuable under Plan F or earlier
stock option plans, nor to compensation payable under certain performance-based
compensation plans approved by shareholders. The Compensation Committee has
taken certain actions to minimize the adverse effects of Section 162(m) on the
after-tax income of the Company. In particular, as recommended by the
Compensation Committee, the 1996 Incentive Compensation Plan for Executive
Officers (the “IC Plan”) was presented to and approved by the shareholders at
the 1996 annual meeting of shareholders of the Company. Grants to executive
officers of incentive compensation based on pre-tax income are generally
expected to be covered by the IC Plan when such coverage is consistent with the
Compensation Committee’s goals. The IC Plan significantly limits the
Compensation Committee’s discretion regarding the structure and amount of
incentive compensation paid to an employee covered by such Plan. Accordingly,
not all incentive compensation payable to executive officers is paid pursuant
to the IC Plan. The Compensation Committee projects that it is unlikely that
deductions will be lost as a result of this practice. The Compensation
Committee will continue to monitor whether compensation that is limited by
Section 162(m) is likely to exceed the deduction limitations under Section
162(m), and the Compensation Committee is expected to take appropriate actions
to reduce the likelihood of a loss of deductions.
CHIEF EXECUTIVE OFFICER COMPENSATION
The Chief Executive Officer’s annual base salary is established by the
Compensation Committee using the same criteria as discussed above for the
executive officers. Paul A. Brands, who has served as Chief Executive Officer
of the Company since September 1993, received an annual base salary of $304,000
for 1997, the same base
14
salary he received for 1996. The Compensation Committee did not base the
decision to pay Mr. Brands the same base salary for 1997 on any specific
corporate performance factors. Mr. Brands’ incentive compensation payments are
determined by the Compensation Committee based on targets for the Company’s
pre-tax income, collection of accounts receivable, and certain other financial
and non-financial goals. Because the Company did not meet its pre-tax income
targets for 1997, as determined by the Compensation Committee in February 1998,
Mr. Brands did not receive an incentive compensation payment or stock option
award for 1997.
At its February 1998 meeting, the Compensation Committee also decided to
increase Mr. Brands’ base salary to $350,000 as of March 1, 1998.
Frederic V. Malek (Chairman)
Daniel J. Altobello
James J. Forese
Dorothy Leonard
W. Walker Lewis
Alan G. Spoon
15
SHAREHOLDER RETURN PERFORMANCE GRAPH
The following graph and table provide a comparison of the cumulative total
return on the Common Stock of the Company for the five-year period beginning
December 31, 1992, with returns on the Standard & Poor’s 500 Composite Index
and the Computer Software Sector Index of the Hambrecht & Quist Technology
Stock Index. The graph and table assume that the value of the investment in
the Common Stock of the Company and each of the aforementioned indices on
December 31, 1992, was $100 and that all dividends were reinvested, although
the Company has never paid dividends on the Common Stock. The historical stock
price performance of the Common Stock of the Company shown below is not
necessarily indicative of future stock price performance.
[GRAPH]
16
COMMITTEES AND COMPENSATION OF THE BOARD OF DIRECTORS
COMMITTEES AND MEETINGS
The Company has a standing Executive Committee, Stock Option/Award
Committee, Compensation Committee, and Audit Committee. The Company does not
have a standing Nominating Committee.
The Executive Committee is presently composed of four directors, all of
whom are executive officers of the Company: Patrick W. Gross (Committee
Chairman), Paul A. Brands, Philip M. Giuntini, and Frank A. Nicolai. The
Executive Committee generally has the power to authorize all corporate actions
that the Board of Directors has the power to authorize, except as may be
limited by law. The Executive Committee met once during 1997.
The Stock Option/Award Committee is presently composed of four directors,
all of whom are executive officers of the Company: Paul A. Brands (Committee
Chairman), Patrick W. Gross, Philip M. Giuntini, and Frank A. Nicolai. The
Stock Option/Award Committee administers the Company’s employee stock option
plans, except as noted below. These directors are eligible to receive options
under the plans, but options, if any, awarded to them are granted and
administered by the Compensation Committee. The Stock Option/Award Committee
also administers the Company’s Profit-Sharing Plan, a stock award plan.
Directors and executive officers are not eligible to participate in the
Profit-Sharing Plan. The Stock Option/Award Committee meets as required and
met twice during 1997.
The Compensation Committee is presently composed of six Outside Directors:
Frederic V. Malek (Committee Chairman), Daniel J. Altobello, James J. Forese,
Dorothy Leonard, W. Walker Lewis, and Alan G. Spoon. The Compensation
Committee is responsible for developing and making recommendations to the Board
of Directors with respect to the Company’s compensation policies generally. The
Compensation Committee approves the compensation plans for the Company’s
executive officers, including the Chief Executive Officer, and on an annual
basis determines the compensation to be paid to the executive officers. The
Compensation Committee alone is responsible for the granting and administration
of stock options granted to the executive officers and to the Controller. In
1997, the Compensation Committee met twice.
The Audit Committee is presently composed of four Outside Directors:
James J. Forese (Committee Chairman), Daniel J. Altobello, Dorothy Leonard,
and Alan G. Spoon. This Committee has the responsibility for making
recommendations to the Board of Directors as to the independent accountants of
the Company; for reviewing with the independent accountants, upon completion of
their audit, the scope of their examination, any recommendations they may have
for improving internal accounting controls, management systems, or choice of
accounting principles, and other matters; and for reviewing generally the
accounting control procedures of the Company. In 1997, the Audit Committee met
five times.
The Board of Directors met five times during 1997. Except for one meeting
that was not attended by one director, all members attended all of the meetings
of the Board and Committees of the Board on which they serve.
COMPENSATION
Directors who also serve as executive officers of the Company are not
separately compensated for attending Board meetings. Outside Directors are
currently entitled to receive fees of $5,000 per Board meeting attended, plus
travel expenses, and such fees and expenses were, in fact, paid for all
meetings attended during fiscal 1997. In addition, Outside Directors were paid
a retainer of $5,000 per year during fiscal 1997. Under the Company’s Outside
Directors Stock-for-Fees Plan, which was approved by shareholders in May 1995,
Outside Directors can elect to have the annual meeting fees and retainer, which
would otherwise be paid to the Outside Directors in cash, paid in the form of
Common Stock. Alternatively, Outside Directors can elect to defer receipt of
the annual meeting fees and retainer pursuant to the Company’s Outside Director
Deferred Compensation Plan (the “Deferred Compensation Plan”). Under the terms
of the Deferred Compensation Plan, Outside Directors making such an election
would be credited with earnings on amounts deferred at an interest rate based
on a corporate bond index and such interest rate would be increased by 300
basis points if the Company achieved certain annual performance goals. W.
Walker Lewis elected to participate in the Deferred Compensation Plan and
deferred receipt of his annual meeting fees for 1997.
Outside Directors also receive automatic grants of stock options, which
vest over five years, pursuant to the Company’s stock option plans. The number
of shares subject to grant, and subject to outstanding options, are adjusted
when stock splits occur. The numbers of options reported below in this
paragraph are the numbers of the original grants and do not give effect to the
June 1992, October 1994, or January 1996 stock splits to the extent such
17
splits occurred after the date of grant. All options granted to Outside
Directors vest at the rate of 1/60th a month for each month the Outside
Director continues to serve as a director. Pursuant to a prior stock option
plan, each Outside Director in May 1988 was granted 5,000 options to purchase
shares of Common Stock. James J. Forese, who became a director in November
1989, was granted 5,000 options on November 10, 1989. Dorothy Leonard, who
became a director in September 1991, was granted 5,000 options on September 27,
1991. Under 1992 Amended and Restated Stock Option Plan E, as amended (“Plan
E”), each new Outside Director was automatically granted 5,000 options (such
number subject to adjustments for splits) upon first becoming a director, and
each Outside Director was automatically granted an additional 5,000 options
(such number subject to adjustments for splits), vesting over five years, when
any options previously granted have fully vested. Plan F provides for the
grant of the same amount of options to Outside Directors. Pursuant to Plan E,
Daniel J. Altobello was granted 7,500 options on July 27, 1993 when he first
became a director, and Frederic V. Malek was granted 5,000 options in April
1993 because his options granted in 1988 had fully vested. The grant to Mr.
Malek was made subject to shareholder approval, which was obtained in May 1993.
In addition, under Plan E, Mr. Forese was granted 7,500 options (after giving
effect to the October 1994 stock split) in November 1994 because his options
granted in 1988 had fully vested, and W. Walker Lewis was granted 5,000 options
on December 1, 1995 when he became a director. Dr. Leonard was granted 5,000
options under Plan E in August 1996 because her options granted in 1991 had
fully vested, and Alan G. Spoon was granted 5,000 options under Plan E in
September 1996 when he became a director.
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
Frederic V. Malek, James J. Forese, Dorothy Leonard, Daniel J. Altobello,
W. Walker Lewis, and Alan G. Spoon served as members of the Compensation
Committee throughout fiscal 1997 and continue to serve as members. Mr. Malek
is Chairman of the Compensation Committee.
During 1997, there were no Compensation Committee interlocks, and there
was no insider participation in the executive compensation decisions of the
Company.
CERTAIN TRANSACTIONS
Shaw, Pittman, Potts & Trowbridge, general counsel to the Company, earned
fees and incurred reimbursable expenses totaling approximately $4 million from
AMS in connection with legal services performed for the Company during 1997.
Barbara M. Rossotti, a member of the firm of Shaw, Pittman, Potts & Trowbridge,
is the spouse of Charles O. Rossotti, who served as Chairman of the Board of
Directors and Director of the Company until his resignation on November 7,
1997.
OTHER MATTERS
A representative from Price Waterhouse LLP, independent public accountants
to the Company, is expected to be present at the Annual Meeting, will have an
opportunity to make a statement should the representative desire to do so, and
is expected to be available to respond to appropriate questions during such
Meeting.
The Board of Directors does not know of any matters to be presented at the
Annual Meeting other than those stated above. If any other business should
come before the Annual Meeting, including a vote to adjourn such Meeting, the
persons named in the enclosed Proxy will vote thereon at the Meeting, or any
adjournment thereof, as they determine to be in the best interests of the
Company.
Under the rules of the Commission, the date by which proposals of
shareholders of the Company intended to be presented at the 1999 annual meeting
of shareholders must be received by the Company for inclusion in the Proxy
Statement and form of Proxy is December 11, 1998.
Notwithstanding the aforementioned deadline, under the Company’s By-laws,
a stockholder must follow certain other procedures to nominate persons for
election as directors or to propose other business to be considered at an
annual meeting of shareholders. These procedures provide that shareholders
desiring to make nominations for directors and/or to bring a proper subject
before a meeting must do so by notice timely received by the Secretary of the
Company. The Secretary of the Company must receive notice of any such proposal
no earlier than February 7, 1999, and no later than March 9, 1999, in the case
of proposals for the 1999 annual meeting of shareholders.
18
Generally, such shareholder notice must set forth (a) as to each nominee for
director, all information relating to such nominee that is required to be
disclosed in solicitations or proxies for election of directors under the proxy
rules of the Commission; (b) as to any other business, a brief description of
the business desired to be brought before the meeting, the reasons for
conducting such business at the meeting and any material interest in such
business of such shareholder; and (c) as to the shareholder, (i) the name and
address of such shareholder, (ii) the number of shares of Common Stock which
are owned beneficially and of record by such shareholder, (iii) a
representation that the shareholder is a holder of record of Common Stock
entitled to vote at such meeting and intends to appear in person or by proxy at
the meeting to propose such nomination or other business, and (iv) a
representation as to whether the shareholder intends, or is part of a group
which intends, to solicit proxies from other shareholders in support of such
nomination or other business. The chairman of the annual meeting shall have
the power to declare that any proposal not meeting these and any other
applicable requirements imposed by the Company’s By-laws shall be disregarded.
A copy of the Company’s By-laws may be obtained without charge on written
request to Frank A. Nicolai, Secretary, American Management Systems,
Incorporated, 4050 Legato Road, Fairfax, Virginia 22033.
ANNUAL REPORT
A copy of the 1997 Annual Report of the Company (which includes condensed
financial data and a letter to shareholders) accompanies this Proxy Statement.
Appendix 1 to this Proxy Statement, titled “1997 Financial Report,” contains
all of the financial information (including the Company’s audited financial
statements), and certain general information, previously published in the
Company’s Annual Report. Appendix 1 is incorporated herein by reference. A
copy of the Company’s Annual Report on Form 10-K may be obtained without charge
by writing to Frank A. Nicolai, Secretary, American Management Systems,
Incorporated, 4050 Legato Road, Fairfax, Virginia 22033.
BY ORDER OF THE BOARD OF DIRECTORS,
Frank A. Nicolai
Secretary
April 10, 1998
Fairfax, Virginia
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE MEETING ARE REMINDED TO DATE,
SIGN, AND RETURN THE ENCLOSED PROXY IN THE POSTAGE-PAID ENVELOPE PROVIDED.
19
APPENDIX 1
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
1997 FINANCIAL REPORT
CONTENTS
– ——————————————————————————–
BUSINESS OF AMS
OVERVIEW
With 1997 revenues of $872 million, the business of American
Management Systems, Incorporated and its wholly-owned subsidiaries (“AMS” or
the “Company”) is to partner with clients to achieve breakthrough performance
through the intelligent use of information technology. AMS provides a full
range of consulting services from strategic business analysis to the full
implementation of solutions that provide genuine results, on time and within
budget. AMS measures success based on the results and business benefits
achieved by its clients.
AMS is a trusted business partner for many of the largest and most
respected organizations in the markets in which it specializes. Each year,
approximately 85-90% of the Company’s business comes from clients it worked
with in previous years.
Organizations in AMS’s target markets — telecommunications firms;
financial services institutions; state and local governments and education
organizations; federal government agencies; and other corporate clients — have
a crucial need to exploit the potential benefits of information and systems
integration technology. The Company helps clients fulfill this need by
continuing to build a professional staff which is composed of experts in the
necessary technical and functional disciplines; managers who can lead large,
complex systems integration projects; and business and computer analysts who
can devise creative solutions to complex problems.
Another significant component of AMS’s business is the development of
proprietary software products, either with its own funds or on a cost-shared
basis with other organizations. These products are principally licensed as
elements of custom tailored systems and, to a lesser extent, as stand-alone
applications. The Company expended $50.6 million in 1997, $30.4 million in
1996, and $23.6 million in 1995 for research and development associated with
proprietary software; of which $30.7 million in 1997, $26.0 million in 1996,
and $19.4 million in 1995 was expensed in the accompanying financial
statements. As a percentage of revenues, license and maintenance fee revenues
were less than 10% during each of the last three years.
In order to serve clients outside of the United States, AMS has
expanded internationally by establishing eighteen subsidiaries or foreign
branches. Exhibit 21 of this Form 10-K provides a complete listing of all
active AMS subsidiaries (and branches), showing name, year organized
(acquired), and place of incorporation. Revenues attributable to AMS’s non-US
clients were approximately $248.6 million in 1997, $278.3 million in 1996, and
$178.2 million in 1995. Additional information on revenues, operating profits,
and assets attributable to AMS’s geographic areas of operation is provided in
Note 12 of the consolidated financial statements appearing elsewhere in this
financial report.
Founded in 1970, AMS services clients worldwide. AMS’s approximately
7,100 full-time employees serve clients from corporate headquarters in Fairfax,
Virginia and from 55 offices worldwide.
1
TELECOMMUNICATIONS FIRMS
AMS markets systems consulting and integration services for order
processing, customer care, billing, accounts receivable, and collections, both
for local exchange and interexchange carriers and for cellular telephone
companies. Most of the Company’s work involves developing and implementing
customized capabilities using AMS’s application software products as a
foundation.
FINANCIAL SERVICES INSTITUTIONS
AMS provides information technology consulting and systems integration
services to money center banks, major regional banks, insurance companies, and
other large financial services firms. The Company specializes in corporate and
international banking, consumer credit management, customer value and global
risk management, bank management information systems, and retirement plan
systems.
STATE AND LOCAL GOVERNMENTS AND EDUCATION
AMS markets systems consulting and integration services, and
application software products, to state, county, and municipal governments for
financial management, tax and revenue management, human resources, social
services, public safety and transportation functions, and environmental
systems. The Company also markets services and application software products
to universities and colleges.
FEDERAL GOVERNMENT AGENCIES
The Company’s clients include civilian and defense agencies and
aerospace companies. Assignments require knowledge of agency programs and
management practices as well as expertise in computer systems integration.
AMS’s work for defense agencies often involves specialized expertise in
engineering and logistics.
OTHER CORPORATE CLIENTS
The Company also solves information systems problems for the largest
firms in other industries, including health care organizations and firms in the
gas and electric utilities industry. AMS has systems integration and
operations projects with several large organizations and intends to pursue
more. AMS provides technical training and technical consulting services in
software technology for large scale business systems.
2
FINANCIAL STATEMENTS AND NOTES
American Management Systems, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
– —————-
See Accompanying Notes to Consolidated Financial Statements.
3
American Management Systems, Inc.
CONSOLIDATED BALANCE SHEETS
– —————-
See Accompanying Notes to Consolidated Financial Statements.
4
American Management Systems, Inc.
CONSOLIDATED BALANCE SHEETS
– —————-
See Accompanying Notes to Consolidated Financial Statements.
5
American Management Systems, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
– —————-
See Accompanying Notes to Consolidated Financial Statements.
6
American Management Systems, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In millions)
– —————-
See Accompanying Notes to Consolidated Financial Statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The business of American Management Systems, Incorporated and its
wholly-owned subsidiaries (“AMS” or the “Company”) is to partner with clients
to achieve breakthrough performance through the intelligent use of information
technology. AMS is an international business and information technology
consulting firm that provides a full range of services: business
re-engineering, change management, systems integration, and systems development
and implementation. AMS is headquartered in Fairfax, Virginia, with offices in
55 cities worldwide. The Company’s primary target markets include
telecommunications firms, financial services institutions, state and local
governments and education, federal government agencies and other corporate
clients.
A. Revenue Recognition
Revenues on fixed-price contracts are generally recorded using the
percentage of completion method based on the relationship of costs incurred to
the estimated total costs of the project. Revenues on cost reimbursable
contracts and time and material contracts are recorded as labor and other
expenses are incurred.
Revenues from licenses of “off-the-shelf” software products, where the
Company has insignificant remaining obligations, are recorded at the time of
delivery, less a proportionate amount deferred to cover the costs required to
complete the performance of the contract which is later recognized on a
percentage of completion basis. In contracts where the Company has significant
obligations to customize the software, all revenues are recognized on a
percentage of completion basis. Revenues from software maintenance contracts
are recognized ratably over the maintenance period.
On benefit-funded contracts (contracts whereby the amounts due the
Company are earned based on actual benefits derived by the client), the Company
defers recognition of revenues until that point at which management can
predict, with reasonable certainty, that the benefit stream will generate
amounts sufficient to fund the contract. From that point forward revenues are
recognized on a percentage of completion basis.
When adjustments in contract value or estimated costs are determined,
any changes from prior estimates are reflected in earnings in the current
period. Any anticipated losses on contracts in progress are charged to
earnings when identified. The costs associated with cost-plus government
contracts are subject to audit by the U.S. Government. In the opinion of
management, no significant adjustments or disallowances of costs are
anticipated beyond those provided for in the financial statements.
B. Software Development Costs
The Company develops proprietary software products using its own
funds, or on a cost-shared basis with other organizations, and records such
activities as research and development. These software products are then
licensed to customers, either as stand-alone applications, or as elements of
custom-built systems.
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86 — “Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed”. For projects
funded by the Company, significant development costs incurred beyond the point
of demonstrated technological feasibility are capitalized and, after the
product is available for general release to customers, such costs are amortized
on a straight-line basis
8
over a period of 3 to 5 years, or other such shorter period as might be
required. For projects where the Company has a funding partner, the capital
asset is reduced by the amount collected from the partner. The Company
recorded $12.5 million of amortization in 1997, $9.3 million of amortization in
1996, and $9.5 million of amortization in 1995. Unamortized costs were $51.9
million and $32.7 million at December 31, 1997 and 1996, respectively. In
1997, the Company reduced the unamortized costs by $4 million representing
collections from a funding partner. The Company evaluates the net realizable
value of capitalized software using the estimated, undiscounted, net-cash flows
of the underlying products.
The Company expended $50.6 million in 1997, $30.4 million in 1996, and
$23.6 million in 1995 for research and development associated with proprietary
software; of which $30.7 million in 1997, $26.0 million in 1996, and $19.4
million in 1995 was expensed in the accompanying financial statements.
The Company capitalizes costs incurred for the development or purchase
of internal use software at the time when the evaluation and selection of
performance requirements are completed and management authorizes funding of the
project. Once the product is substantially complete, capitalized costs are
amortized on a straight-line basis over the estimated useful life of the
software.
Purchased software licenses are to be accounted for as set forth in
Note 1.C.
C. Fixed Assets, Purchased Computer Software Licenses and Intangibles
Fixed assets and purchased computer software licenses are recorded at
cost. Furniture, fixtures, and equipment are depreciated over estimated useful
lives ranging from 3 to 10 years. Leasehold improvements are amortized ratably
over the lesser of the applicable lease term or the useful life of the
improvement. For financial statement purposes, depreciation is computed using
the straight-line method. Purchased software licenses are amortized over two
to five years using the straight-line method. Intangibles are generally
amortized over 5 to 15 years.
D. Income Taxes
Deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities, using enacted tax rates for the year in which the differences are
expected to reverse.
Deferred income taxes are provided for timing differences in
recognizing certain income, expense, and credit items for financial reporting
purposes and tax reporting purposes. Such deferred income taxes primarily
relate to the methods of accounting for revenue, capitalized software
development costs, restricted stock, and the timing of deductibility of certain
reserves and accruals for income tax purposes. A valuation allowance is
recorded if it is “more likely than not” that some portion or all of a deferred
tax asset will not be realized.
E. Earnings Per Share
In February 1997, the Financial Accounting Standards Board (“FASB”)
issued SFAS No. 128, “Earnings per Share”. The Company adopted SFAS No. 128 in
the year ended December 31, 1997 as required and restated earnings per share
(“EPS”) data for all prior periods to conform with SFAS No. 128.
9
SFAS No. 128 replaces the presentation of Primary EPS with a
presentation of Basic EPS. SFAS No. 128 also requires dual presentation of
basic and diluted EPS on the face of the statement of operations and requires a
reconciliation of the numerator and denominator used in the basic and fully
diluted EPS computations. Basic EPS excludes dilution and is computed by
dividing net income by the weighted average of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
F. Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The carrying
amount approximates fair value because of the short maturity of these
instruments.
G. Currency Translation
For operations outside the United States that prepare financial
statements in currencies other than the U.S. dollar, the Company translates
income statement amounts at the average monthly exchange rates throughout the
year. The Company translates assets and liabilities at exchange rates
prevailing as of the Balance Sheet date. The resulting translation adjustments
are shown as a separate component of Stockholders’ Equity.
H. Principles of Consolidation
The consolidated financial statements include the accounts of American
Management Systems, Incorporated and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated.
I. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Future actual results could be different due to these
estimates. Significant estimates inherent in the preparation of the
accompanying consolidated financial statements include: management’s forecasts
of contract costs and progress towards completion which are used to determine
revenue recognition under the percentage-of-completion method, management’s
estimates of allowances for doubtful accounts, tax valuation allowances, and
management’s estimates of the net realizable value of purchased and developed
computer software and intangible assets.
J. Foreign Currency Hedging
The Company enters into foreign exchange contracts as a hedge of
intercompany balance sheet transactions. Market value gains and losses are
recognized, and the resulting credit or debit offset foreign exchange gains or
losses on those transactions. For 1997, the Company entered into two such
short-term contracts with de minimis value.
K. Reclassification
Certain prior year information has been reclassified to conform with
current year presentations.
10
L New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130 entitled “Reporting
Comprehensive Income”, which became effective January 1, 1998. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components. All items that are required to be recognized under accounting
standards as components of comprehensive income must be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company’s principal components of comprehensive income are net
income and foreign currency translation adjustments. Given the uncertainty
with foreign exchange rates, the Company can not estimate the impact of this
pronouncement. This standard will become effective for the Company’s 1998
quarterly reporting beginning in the first quarter of 1998.
In June 1997, the FASB also issued SFAS No. 131 entitled “Disclosures
about Segments of an Enterprise and Related Information” which will become
effective for the Company’s 1998 calendar year financial statements and will
apply to quarterly reporting beginning in the first quarter of 1999. This
Statement may change the way public companies, having segments, report
information about their business in annual financial statements and may require
them to report selected segment information in their quarterly reports issued
to stockholders. It also requires entity-wide disclosures about the products
and services an entity provides, the material countries in which it holds
assets and reports revenues, and its major customers. The Company is currently
evaluating the standard to determine the impact on its reporting and disclosure
requirements.
In October 1997, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position 97-2, “Software Revenue
Recognition” (SoP 97-2), which provides guidance in recognizing revenue on
contracts with multiple elements including software licenses and services, and
superseded the previous authoritative literature (SoP 91-1). The SoP is
effective for the Company for transactions entered into after December 31,
1997. In February 1998, the AICPA proposed deferring, for one year, the
implementation date for certain provisions of SoP 97-2. The Company does not
currently believe that the application of SoP 97-2 will have a material impact
on its historical practice with respect to the timing of revenue recognition in
its consolidated financial statements, subject to the proposed one year
deferral of certain provisions. The Company has not determined the effect of
implementing SoP 97-2 if the provisions are not deferred when the one year
proposed deferral expires.
In March 1998, the AICPA issued Statement of Position 98-1,
“Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use” (SoP 98-1). The SoP is effective for the Company’s 1999 fiscal
year and requires capitalization of costs related to developing or obtaining
internal-use software. Adoption of the SoP is not expected to materially
affect results of operations, as the Company is currently accounting for
internal-use software generally in accordance with the provisions of this SoP.
NOTE 2 — SIGNIFICANT CUSTOMERS
Total revenues from the U.S. Government, comprising 93 clients in
1997, 90 clients in 1996, and 72 clients in 1995, were approximately $171.5
million in 1997, $113.0 million in 1996, and $97.1 million in 1995. No other
customer accounted for 10% or more of total revenues in 1997, 1996, or 1995.
11
NOTE 3 — ACCOUNTS AND NOTES RECEIVABLE
The Company enters into large, long-term contracts and, as a result,
periodically maintains individually significant receivable balances with
certain major clients. At December 31, 1997, the eight largest individual
receivable balances totaled approximately $72 million. No other receivable
exceeded $5 million. The Company expects to receive all funds due from these
clients.
Management believes that credit risk, with respect to the Company’s
receivables, is low due to the credit worthiness of its clients and the
diversification of its client base across different industries and geographies.
In addition, the Company is further diversified in that it enters into a range
of different types of contracts, such as fixed price, cost plus, time and
material, and benefits funded contracts. The Company may also, from time to
time, work as a subcontractor on particular contracts. The Company performs
ongoing evaluations of contract performance as well as an evaluation of the
client’s financial condition.
NOTE 4 — NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
On December 24, 1996, the Company entered into a syndicated $100
million Multi-Currency Revolving Credit ($80 million) and Term Loan ($20
million) Agreement with Wachovia Bank, NationsBank and Commerzbank. This
Agreement replaced the two revolving credit agreements (the NationsBank
Agreement and the Wachovia Agreement), totaling $70 million that the Company
had immediately preceding the execution of the new credit facility, although
outstanding borrowings under the NationsBank Agreement continued in force until
they matured in January 1997. On January 6, 1997, a Term Loan of $20 million
was funded. The Term Loan bears an interest rate of 6.94%, with monthly
interest payments on the unpaid principal balance and quarterly principal
payments commencing in April 1999.
The Agreement described above contains certain covenants with which
the Company must comply. These include (i) maintaining a total debt to total
capitalization ratio of not greater than 0.5 to 1.0, (ii) maintaining a fixed
charge cover ratio of not less than 2.5 to 1.0, (iii) restrictions on using net
worth to acquire other companies or transferring assets to a subsidiary, and
(iv) restrictions on declaring or paying cash dividends. At December 31, 1997,
the Company was in compliance with all covenants under the Agreement.
Effective January 9, 1998, the Company entered into a syndicated
five-year $120 million Multi-Currency Revolving Credit with NationsBank and
Wachovia Bank (the “1998 Agreement”) as agents. This agreement replaces the
$100 million Multi-Currency Revolving Credit Agreement with Wachovia Bank,
NationsBank and Commerzbank; the Term Loan, which remains outstanding, is now
governed by the 1998 Agreement.
12
The aggregate weighted average borrowings under all revolving credit
agreements was approximately $41.3 million in 1997, and $29.2 million in 1996,
at daily weighted average interest rates of approximately 6.6% in 1997 and 5.2%
in 1996. The maximum borrowed under all agreements was $63.1 million in 1997
and $49.2 million in 1996. At December 31, 1997, the Company had $1.8 million
outstanding under its revolving credit facility, and $33.6 million in term
loans.
The Company and most of its existing subsidiaries can borrow funds
under the 1998 Agreement in any of the approved currencies subject to certain
minimum amounts per borrowing. Interest on such borrowings will generally
range from LIBOR plus 12.5 basis points to LIBOR plus 45 basis points
depending on the ratio of total debt to earnings before interest, taxes,
depreciation, and amortization. The Company must also pay a facility fee
ranging from 12.5 basis points to 20 basis points of the total facility, based
on the same performance measure. Based on such measures at December 31, 1997,
interest payments during 1998 will be based on LIBOR plus 22.5 basis points and
the facility fee will be 12.5 basis points.
The 1998 Agreement, and the term loan, contains certain covenants with
which the Company must comply. These include: (i) maintain at the end of each
fiscal quarter for the four fiscal quarters ending on such date a fixed charge
coverage ratio of not less than 2.25 to 1.0, as of December 31, 1997 and March
31, 1998, increasing to 2.5 to 1.0 for the quarter ending June 30, 1998 and
thereafter, (ii) maintain total debt to EBITDA ratio of no more than 3.0 to
1.0, (iii) restrictions on using net worth to acquire other companies or
transferring assets to a subsidiary, and (iv) restrictions on declaring or
paying cash dividends in any one fiscal year in excess of twenty-five percent
of its net income for such year.
The following schedule summarizes the total outstanding notes and
capitalized lease obligations. Differences between the face value and the fair
value are considered immaterial.
Interest paid by the Company totaled $5.8 million in 1997, $3.2
million in 1996, and $2.3 million in 1995.
13
NOTE 5 — EQUITY SECURITIES
At December 31, 1997, the Company had a stock option plan, 1992
Amended and Restated Stock Option Plan E, as amended (the “1992 Plan E”), under
which the Company was authorized to issue up to 3,375,000 shares of common
stock as incentive stock options (“ISOs”) or nonqualified stock options
(“NSOs”). The 1992 Plan E, which was approved by the shareholders in May 1992,
replaced Stock Option Plan E (“Plan E”). On May 10, 1996, the shareholders
approved a new stock option plan for the Company, Stock Option Plan F (“Plan
F”) under which an additional 3,800,000 shares of common stock may be issued as
ISOs or NSOs. On February 21, 1997, the Board of Directors then adopted
certain amendments to Plan F resulting in 1996 Amended Stock Option Plan F
(“Amended Plan F”) which was approved by the shareholders at the May 9, 1997
annual meeting.
Under all plans, the exercise price of an ISO granted is not less than
the fair market value of the common stock on the date of grant and for NSOs,
the exercise price is either the fair market value of the common stock on the
date of the grant or, when granted in connection with one-year performance
periods under the Company’s incentive compensation program, the exercise price
may be determined by a formula selected by the Board or appropriate Board
committee that is based on the fair market value of the common stock as of a
date, or for a period, that is within three months of the date of grant. In
cases where the average market value exceeds the exercise price on the date of
grant, the differential is recorded as compensation expense. Under all plans,
options expire up to eight years from the date of grant. Options granted are
exercisable immediately, in monthly installments, or at a future date, as
determined by the appropriate Board committee or as otherwise specified in the
plan.
At December 31, 1997, there were 152,633 shares available for the
grant of future options under 1992 Plan E and 2,849,806 shares available under
Amended Plan F. No options remain available for grant under any previous stock
option plan. At its February 1998 meeting, the Board terminated 1992 Plan E.
No grants had been made under this plan since 1996. The following table
summarizes information with respect to stock options outstanding at December
31, 1997.
The Company has chosen to continue to account for stock-based
compensation using the method prescribed in APB Opinion No. 25, “Accounting
for Stock Issued to Employees.” In 1996, the Company adopted, for disclosure
purposes only, Statement of Financial Accounting Standards No. 123, “Accounting
for Stock Based Compensation” (SFAS No. 123).
14
If the Company determined compensation cost for these plans in
accordance with SFAS No. 123, the Company’s pro-forma net income and earnings
per share for fiscal year 1997 and 1996 would have been decreased to the
pro-forma amounts indicated below:
The SFAS No. 123 method of accounting does not apply to options
granted prior to January 1, 1995, and accordingly, the resulting pro-forma
compensation cost may not be representative of that to be expected in future
years.
The Company has eight-year and five-year options. For disclosure
purposes, the fair value of each stock option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. Under the Black-Scholes
model, the total value of the eight-year options granted in 1997 and 1996 was
$2.2 million and $1.8 million, respectively, which would be amortized on a
graded vesting schedule on a pro-forma basis over a seven-year period. The
weighted-average fair value of the eight-year stock options granted in 1997 and
1996 was $10.56 and $12.36, respectively. The total value of the five-year
stock options granted in 1997 and 1996 was $5.5 million and $5.0 million,
respectively, which would be amortized ratably on a pro-forma basis over a
five-year period (which varies between four months and five years). The
weighted-average fair value of the five-year stock options granted in 1997 and
1996 was $7.28 and $8.06, respectively.
Additionally, the following weighted-average assumptions were used for
both the eight-year and five-year stock options granted in 1997 and 1996,
respectively.
15
Additional information with respect to stock options awarded pursuant
to such plans is summarized in the following schedule.
At its February 1995 meeting, the Board authorized the Company to
expend up to $10 million to repurchase additional shares of its common stock,
from time to time, for its stock-based benefit plans or for other corporate
purposes. The Company repurchased 3,358, 24,600, and 60,000 shares of its
common stock during 1997, 1996, and 1995, respectively, totaling $1.4 million.
NOTE 6 – EARNINGS PER SHARE RECONCILIATION
16
NOTE 7 — INCOME TAXES
17 Deferred Tax Liabilities:
Year Ended December 31 (In millions) 1997 1996 1995
– ————————————————————————————————————-
The tax effect of temporary differences that give rise to
significant portions of the deferred tax assets and deferred
tax liabilities at December 31 are as follows:
Deferred Tax Assets:
Deferred Revenue $ 1.5 $ 2.4 $ 2.9
Restricted Stock 3.6 3.2 3.0
Accrued Leave Costs 3.4 2.9 2.2
Allowance for Doubtful Accounts 4.2 13.9 2.2
Loss and Credit Carryforwards 9.0 5.4 2.8
Other 5.0 (1.9) 2.0
——- ——- ——-
Subtotal 26.7 25.9 15.1
Valuation Allowance (0.5) (0.4) (2.8)
——- ——- ——-
Total Deferred Tax Assets $ 26.2 $ 25.5 $ 12.3
——- ——- ——-
Unbilled Receivables $ (20.4) $ (26.9) $ (20.4)
Capitalized Software (21.0) (12.6) (10.0)
Other (3.1) (0.9) (6.6)
——- ——- ——-
Total Deferred Tax Liabilities (44.5) (40.4) (37.0)
——- ——- ——-
Net Deferred Tax Liabilities $ (18.3) $ (14.9) $ (24.7)
======= ======= =======
The net changes in total valuation allowance for the years ending
December 31, 1997 and 1996 were an increase of $0.1 million and a decrease of
$2.4 million, respectively. Certain of the Company’s foreign subsidiaries have
net operating losses, the majority of such losses carry forward over an
indefinite period.
The Company has not provided U.S. federal income and foreign withholding
taxes on $26.6 million of non-U.S. subsidiaries’ undistributed earnings as of
December 31, 1997, because such earnings are intended to be reinvested
indefinitely or have already been taxed at rates in excess of the U.S. federal
rate. If these earnings were distributed, foreign tax credits would become
available under current law to reduce or eliminate the resulting U.S. Income
tax liability. Where excess cash has accumulated in the Company’s non-US
subsidiaries and it is advantageous for tax or foreign exchange reasons,
subsidiary earnings are remitted.
The Company paid income taxes of approximately $14.9 million, $14.3
million, and $16.4 million, in 1997, 1996, and 1995, respectively.
NOTE 8 — DEFERRED COMPENSATION PLAN
The Company has deferred compensation plans which were implemented in
late 1996, and permit eligible employees and directors to defer a specified
portion of their compensation. The deferred compensation earns a specified
rate of return. As of year end 1997 and 1996 the Company had accrued $10.4
million and $2.1 million, respectively, for its obligations under these plans.
The Company expensed $0.6 million in 1997, related to the earnings by the
deferred compensation plan participants.
18
To fund these plans, the Company purchases corporate-owned life
insurance contracts. Proceeds from the insurance policies are payable to the
Company upon the death of the insured. The cash surrender value of these
policies, included in “Other Assets”, was $9.6 million at December 31, 1997.
There were no outstanding loans at December 31, 1997 on these policies.
NOTE 9 — EMPLOYEE PENSION PLAN
The Company has a simplified employee pension plan, which became
effective January 1, 1980. Contributions are based on the application of a
percentage specified by the Company to the qualified gross wages of eligible
employees. The Company makes annual contributions to the plan equal to the
amount accrued for pension expense. Total expense of the plan was $9.8 million
in 1997, $8.3 million in 1996, and $6.3 million in 1995.
NOTE 10 — COMMITMENTS AND CONTINGENCIES
The Company occupies production facilities and office space (real
property) and uses various pieces of equipment under operating lease
agreements, expiring at various dates through the year 2014.
The commitments under these agreements, as of December 31, 1997, are
summarized in the table below. Payments under the real property leases are
generally subject to escalation based upon increases in the Consumer Price
Index, operating expenses, and property taxes.
Gross Rentals and Maintenance Payments
Operating lease expense for 1997, 1996, and 1995 was approximately
$46.5 million, $34.1 million, and $27.9 million, respectively.
The Company has an extended leave program for titled employees that
provides for compensated leave of eight weeks after seven years of service.
The leave is not vested and can be taken only at the discretion of management.
Because of the extended period over which the leave accumulates and the highly
discretionary nature of the program, the amount of extended leave accumulated
at any period end which will ultimately be taken is indeterminable.
Consequently, the Company expenses such leave as it is taken.
The Company has entered into a bank guarantee due upon request for
performance under one of its contracts. At December 31, 1997 the Company had
$6.3 million outstanding under such bank guarantee.
19
AMS performs, at any point in time, under a variety of contracts for
many different clients. Situations can occasionally arise where factors may
result in the renegotiation of existing contracts. Additionally, certain
contracts may provide the client the right to suspend or terminate the
contracts. To the extent any contracts may provide the client with such
rights, the contracts generally provide for AMS to be compensated for work
performed to date and may include provisions for payment of certain termination
costs. However, business and other considerations may at times influence the
ultimate outcome of contract renegotiations, suspension and/or cancellation.
As of December 31, 1997, management is not aware of any major contract where
there was a risk of suspension, termination or significant renegotiation which
would materially impact the Company’s financial position or results of
operations other than those already provided for in the financial statements of
the Company.
NOTE 11 — RELATED PARTY TRANSACTIONS
The Company incurred legal fees and reimbursable expenses payable to
Shaw, Pittman, Potts & Trowbridge, general counsel to the Company, totaling
approximately $4.0 million, $2.7 million, and $2.5 million, in 1997, 1996, and
1995, respectively. A member of the firm of Shaw, Pittman, Potts & Trowbridge
is the spouse of an executive officer of the Company who resigned in November
1997.
NOTE 12 — BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
AMS operates in one industry segment — providing computer and
information technology products and services to large clients in targeted
vertical markets. However, AMS markets its services and products worldwide and
its operations can be grouped into two main geographic areas according to the
location of each AMS company. The two groupings consist of United States
locations and non-US locations (primarily in Australia, Belgium, Canada,
England, France, Germany, Mexico, Poland, Portugal, Spain, Sweden, Switzerland,
and The Netherlands). Pertinent financial data, by geographic area, is
summarized below.
20
Revenues from AMS’s U.S. Companies include export sales to non-US
clients of $58.5 million in 1997, $111.3 million in 1996, and $103.0 million in
1995. As a result, the Company’s total non-US client revenues were as follows:
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
American Management Systems, Incorporated
In our opinion, the accompanying consolidated financial statements
appearing on pages 3 to 21 of the 1997 Financial Report present fairly, in all
material respects, the financial position of American Management Systems,
Incorporated and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company’s management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Washington, D.C.
February 18, 1998
22
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total revenues of major items in the Consolidated Statements of Operations and
the percentage change in such items from period to period (see “Financial
Statements and Notes”). The effect of inflation and price changes on the
Company’s revenues, income from operations, and expenses, is generally
comparable to the general rate of inflation in the U.S. economy.
23
RESULTS OF OPERATIONS (continued)
This Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) contains certain forward-looking statements. In
addition, the Company or its representatives from time to time may make, or may
have made, certain forward-looking statements, orally or in writing, including,
without limitation, any such statements made in this MD&A, press releases, or
any such statements made, or to be made, in the MD&A contained in other filings
with the Securities and Exchange Commission. The Company wishes to ensure that
such forward-looking statements are accompanied by meaningful cautionary
statements so as to ensure, to the fullest extent possible, the protections of
the safe harbor established by the Private Securities Litigation Reform Act of
1995. Accordingly, such forward-looking statements made by, or on behalf of,
the Company are qualified in their entirety by reference to, and are
accompanied by, the discussion herein of important factors that could cause the
Company’s actual results to differ materially from those projected in such
forward-looking documents.
REVENUES
Revenues increased 7% and 28% during 1997 and 1996 compared to the
preceding year. Approximately 85-90% of each year’s revenues come from clients
for whom the Company performed services in prior years. Looking ahead to 1998,
the Company expects continued growth, at higher rates of increase than were
experienced in 1997.
Business with non-US clients decreased 11% during 1997 to $249 million
while it increased 56% in 1996 to $278 million. Business with non-US clients
represents 28% and 34% of the Company’s total revenues for 1997 and 1996,
respectively. This was the first year (1997) since the Company began its
international expansion in 1989 in which non-US revenues have declined on a
comparative basis. These decreases were primarily due to two factors. The
first factor is the termination of work with the non-US telecommunications
client, Telecom Securicor Cellular Radio Limited (“Cellnet”), that had been the
subject of prior statements by the Company dating back to the fourth quarter of
1996. The Company announced the termination of the Cellnet contract in a press
release dated August 13, 1997. The second factor is the unexpected
cancellation at the end of August 1997 by Swiss Telecom of the second phase of
the Customer Care and Billing Systems project, after the successful completion
of phase one of such project. The Company announced the cancellation of the
Swiss Telecom contract in a press release dated September 4, 1997. If revenues
from both such contracts were excluded from total revenues for 1997 and 1996,
all other business with non-US clients increased 6% and 29%, during the twelve
months of 1997 and 1996, respectively. For the year 1998, the Company expects
non-US business, and European business in particular, to show little or no
growth over 1997, owing principally to the impacts of the two clients discussed
above.
In the Telecommunications Firms market, a market which is
characterized by large projects with relatively few clients, revenues decreased
16% compared to 1996 while there was an increase of 38% comparing 1996 to 1995.
Non-US revenues decreased 20% and increased 65%, again compared to the 1996 and
1995 periods. These decreases are predominantly attributable to the
termination of work on the Cellnet and Swiss Telecom contracts mentioned above,
especially Cellnet. Excluding revenues from these two contracts, non-US
revenues in this market from other contracts remained flat in 1997 and
increased 30% in 1996. Revenues from all other telecommunications clients
(both US and non-US, but excluding these two contracts) were approximately the
same in 1997 when compared to 1996, and such revenues increased 17% between
1996 and 1995.
For the year 1998, the Company expects revenues in this market to be
approximately equal to Telecommunications Firms revenues for 1997. The lack of
growth reflects several factors: the need to replace revenues from the Cellnet
and Swiss Telecom contracts, Company initiated slowdown in business development
in the fall of 1996 which market pipeline is just now increasing,
reorganization of
24
management and market orientation in this market, and the need to upgrade
software. The Company has begun development of its generation of customer
care and billing software, known as “Tapestry”, well underway through a
significant contract with a European client. As that client is sharing part of
the cost of the development, collections from that contract will not contribute
to revenue growth in this market in 1998, but instead reduce capitalized
software costs. A majority of the development effort is being capitalized.
There remain risks in this market. Competition for experienced staff is
especially intense in the telecommunications field, and staffing remains one of
the Company’s critical challenges for the Telecommunication Firms market.
Additionally, the Company has entered various emerging markets. Contracts in
emerging markets can pose higher delivery risks, however, than the Western
European and U.S. markets in which the Company previously concentrated.
In the Financial Services Institutions target market, 1997 revenues
increased 17% over 1996, owing principally to build-ups in business with
clients who started large projects in the second half of 1996 and several new
projects in 1997. Revenues for this market, although strong generally, were
somewhat lower than expectations due to differences with a European client on
the scope of one project that led ultimately in the fourth quarter to
termination of that contract. Business with non-US clients, primarily European,
account for approximately 32% of the revenues in this market ($68 million).
Comparing 1996 to 1995, business in this market had increased 23% owing to new
business in late 1995. For 1998, the Company expects demand in the market to
remain strong, but faces staffing constraints in this market as well. The
Company anticipates revenue growth in this market to increase at rates somewhat
above the Company’s overall revenue growth.
In the State and Local Governments and Education target market,
revenues increased 22% in 1997 and 32% in 1996. The 1997 increase was fueled
by 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. On certain of the
contracts with state taxation departments, the Company’s fees are paid out of
the benefits (increased collections) that the client achieves. On
benefit-funded contracts (contracts whereby the amounts due the Company are
earned based on actual benefits derived by the client), the Company defers
recognition of revenues until that point at which management can predict, with
reasonable certainty, that the benefit stream will generate amounts sufficient
to fund the contract. From that point forward revenues are recognized on a
percentage of completion basis. At the end of 1997, all such contracts had
provided enough benefits to fund the work. In 1998, because the Company has
begun several new large multi-year benefits-funded contracts, revenues from
certain of those contracts are not likely to be recognized until later periods.
The Company enjoys strong demand in this market. The Company has over $500
million in signed contracts in the State and Local Governments and Education
market, to be performed over the next several years. Revenues in the State and
Local Governments and Education market are expected to increase in 1998 at
rates exceeding the increase in the Company’s overall revenues.
Revenues in the Federal Government Agencies target market increased
39% in 1997 and 22% in 1996. This increase was attributable to the award of a
significant multi-year contract with the Department of Defense for its Standard
Procurement System (SPS) which accounted for 40% of the 1997 growth in this
market. In addition, there was increased business with existing clients and
new business with both defense and civilian agencies. The Company expects
revenues in this target market, for 1998, to increase at rates ahead of the
overall growth rate of the Company, but not as high as the rates of increase in
this market when comparing 1997 to 1996. These revenue increases will
continue to be driven primarily by the SPS contract.
Revenues from Other Corporate Clients decreased 11% in 1997 and
increased 4% during 1996. For 1998, revenues from this market, which
represents business in smaller vertical markets, are expected to increase at
rates below the Company’s overall growth in revenues owing to the expected
increased work with health care and electric and gas utilities clients, being
at least partially offset by decreases in various other projects.
25
EXPENSES
Client project expenses and other operating expenses together
increased 4% during 1997, which was slightly lower than the growth rate in
revenues. Comparing 1996 to 1995, client project and other operating expenses
increased 36%. Included in this increase for both 1997 and 1996 are the
provisions and charges the Company recorded with respect to various client
projects, totaling $7.2 million for 1997 and $31.1 million for 1996. The
relevant clients included Cellnet, Swiss Telecom, a Financial Services
Institutions client and in the fourth quarter of 1997 a receivable from a
foreign government experiencing cash flow difficulties which had been owing for
several years. In 1996, the Company recorded losses expected in 1997 related
to the Cellnet project. These expenses were partially offset by significant
reductions in performance-based incentive compensation accruals for the senior
managers in the business units. Without these provisions and charges, client
project and other operating expenses in 1996 would have increased by 31% over
1995, generally in line with the overall growth of the Company for 1996.
Looking to 1998, the Company anticipates that growth in these expenses
generally will be in line with the revenue growth.
Corporate Expenses increased 2% and 18%, in 1997 and 1996,
respectively. The 1997 and 1996 rates of increase were offset in part by
sharply reduced performance-based incentive compensation accruals for the
corporate officers and minimal profit-based compensation accruals under the
Company’s restricted stock program, both owing to the material impact of the
Cellnet and Swiss Telecom contracts discussed earlier. In addition, the lower
rate of growth in corporate expenses reflects the Company’s focus on
controlling expenses. For the year 1998, the Company expects these expenses to
grow slightly above the Company’s revenue growth.
INCOME FROM OPERATIONS
Income from operations increased 97% in 1997 and decreased 46% in
1996. These fluctuations were principally due to the charges associated with
the non-US client projects discussed above. Absent these charges, income from
operations would have increased 31% in 1996, comparable to the growth in
revenues and in line with the Company’s expectations. For 1997, as the Company
was successful in controlling its overall growth rate, the Company’s profit
margins improved, but not at the level expected at the beginning of 1997, due
primarily to the significant amount of management and staff resources that have
been consumed in attempting to resolve the issues with the non-US client
projects, delays in redeploying personnel from those projects, and attrition of
personnel in that market higher than the Company’s historical norms. For
1998, the Company will continue to manage growth and expects to improve on the
profit margins.
OTHER (INCOME) EXPENSE
Interest expense increased 81% in 1997, compared to 1996, because of
significant increases in short-term borrowing to finance accounts receivable,
especially those of one of its foreign subsidiaries and the addition of the $20
million term loan signed in January 1997. It is expected that interest expense
in 1998 will be significantly lower, compared to 1997, because of lower average
outstanding borrowings. Other income increased 61% in 1997, compared to 1996,
due primarily to additional income from landlord-initiated building moves,
which the landlord payments exceeded the actual costs to move.
26
INCOME TAXES
The Company’s effective tax rate for 1997 was 39.3% compared to 40.8%
in 1996. During the fourth quarter of 1997, the Company determined that it
would be able to take advantage of a recent change in U.S. tax law that allowed
certain U.S. tax benefits to accrue in cases where a U.S. company has foreign
subsidiaries with accumulated losses in excess of the equity invested. The
Company took advantage of this new law and was able to lower its 1997 tax rate,
which benefit will not be recurring. The 1995 effective tax rate was 41.4%.
The Company expects that its effective tax rate in 1998 will be generally
consistent with its historical rates.
FOREIGN CURRENCY EXCHANGE
Approximately 28% of the Company’s total revenues in 1997, 34% in
1996, and 28% in 1995, were derived from non-US clients. The Company’s
practice is to negotiate contracts in the same currency in which the
predominant expenses are incurred, thereby mitigating the exposure to foreign
currency exchange fluctuations. It is not possible to accomplish this in all
cases, thus there is some risk that profits will be affected by foreign
currency exchange fluctuations. However, the Company seeks to negotiate
provisions in contracts with non-US clients that allow pricing adjustments
related to currency fluctuations. In late 1997, the Company employed hedging
of intercompany balance sheet transactions through derivative instruments
(foreign currency swap contracts). For 1997, the Company entered into two such
short-term contracts with de minimis value, which gave the Company access to
additional sources of financing while limiting both the foreign exchange risk
and exposure to floating interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company provides for its operating cash requirements primarily
through funds generated from operations, and secondarily from bank borrowings,
which provide for cash and currency management with respect to the short term
impact of certain cyclical uses such as annual payments of incentive
compensation as well as financing to some degree accounts receivable. At
December 31, 1997, the Company’s cash and cash equivalents totaled $49.6
million, down from $62.8 million at the end of 1996. Cash provided from
operating activities for 1997 was $64.9 million. Cash provided from operating
activities increased due to significant improvements in the rate of collection
of the Company’s accounts receivable. Contributing to these improvements was
the collection of most of the outstanding accounts receivable related to
subcontract work with a prime contractor in the child support enforcement
business. At December 31, 1997 receivables outstanding from that prime
contractor are less than 5% of the overall accounts receivable balance. See
Note 3 to the consolidated financial statements for further discussion on
accounts receivable.
The Company invested over $48.5 million in fixed assets and software
purchases, and computer software development during 1997. Revolving line of
credit borrowings during 1997 decreased by $45.0 million over year-end 1996,
which borrowings consisted entirely of foreign currency borrowings by the
Company’s non-US subsidiaries, only $1.8 million of which remained outstanding
at December 31, 1997. Additionally, the Company borrowed $20 million during
the first quarter of 1997 under the term loan provisions of its $100 million
syndicated debt facility then in effect. The aggregate weighted average
short-term borrowings during 1997 was approximately $41.3 million, at an
weighted average interest rate of 6.6%. During 1997, the Company made
approximately $51.7 million in installment payments of principal on outstanding
debt owed to banks; the Company also received proceeds of approximately $9.1
million during the period from the exercise of stock options and the tax
benefits related thereto.
27
At December 31, 1997, the Company’s debt-equity ratio, as measured by
total liabilities divided by stockholders’ equity was 0.77, down from 1.09 at
December 31, 1996.
On December 24, 1996, the Company entered into a syndicated $100
million Multi-Currency Revolving Credit ($80 million) and Term Loan ($20
million) Agreement with Wachovia Bank, NationsBank and Commerzbank. This
Agreement replaced the two revolving credit agreements (the NationsBank
Agreement and the Wachovia Agreement), totaling $70 million that the Company
had immediately preceding the execution of the new credit facility, although
outstanding borrowings under the NationsBank Agreement continued in force until
they matured in January 1997. On January 6, 1997, a Term Loan of $20 million
was funded. The Term Loan bears an interest rate of 6.94%, with monthly
interest payments on the unpaid principal balance and quarterly principal
payments commencing in April 1999.
Effective January 9, 1998, the Company entered into a syndicated
five-year $120 million Multi-Currency Revolving Credit with NationsBank and
Wachovia Bank (the “1998 Agreement”) as agents. This agreement replaces the
$100 million Multi-Currency Revolving Credit Agreement with Wachovia Bank,
NationsBank and Commerzbank; the Term Loan, which remains outstanding, is now
governed by the 1998 Agreement.
The Company’s material unused source of liquidity at the end of 1997
consisted of approximately $78.2 million under the revolving credit and term
debt facility then in effect. The Company believes that its liquidity needs
can be met from the various sources described above.
Companies in the business of providing information technology
services, software products or custom-developed software, such as the Company,
face “Year 2000 compliance” issues in at least two critical areas: internal
systems and client systems. “Year 2000 compliance” means the ability of
software and other processing capabilities to interpret and manipulate
correctly all data that includes the year 2000 or dates thereafter. Failure of
software and related capabilities used by the Company or, under certain
circumstances, furnished to clients, to be Year 2000 compliant could have a
material adverse impact on the Company. Accordingly, the Company is focusing
at the most senior levels on these issues, with the Audit Committee of the
Board of Directors, in conjunction with the Company’s Chief Technology Officer
and others, monitoring the Company’s analyses and status with respect to Year
2000 issues.
Early in 1997, the Company completed surveys of all of its major
internal systems for Year 2000 compliance. The Company began remediation
efforts for some systems in 1997, with others scheduled for upgrade or
replacement in 1998. Assessment of smaller software components and systems,
and interfaces with vendors, is continuing into 1998. The Company is
coordinating centrally all of its efforts to achieve Year 2000 compliance of
its internal systems by 1999. Total costs of achieving Year 2000 compliance in
its internal systems, which costs will be expensed as they are incurred, are
estimated to be approximately $3.0 million for 1998 and $2.5 million for 1999;
the Company expensed $1.1 million for Year 2000 costs in 1997.
With respect to its clients, the Company does not presently anticipate
material costs or risks allocable specifically to Year 2000 compliance issues,
but is continuing to assess the scope and status of such risks. Client
engagements for specific Year 2000 remediation work have not been a strategic
marketing focus for remediation work alone. In many of the Company’s current
engagements, Year 2000 replacement work is implicit, as the Company’s clients
are replacing systems for various business reasons but in the process are
gaining a new Year 2000 compliant system. The Company does not anticipate any
special risks or costs attributable to Year 2000 compliance issues in
performing such contracts. With respect to contractual obligations to active
clients (clients for whom the Company is still obligated to furnish products or
services, such as maintenance), the Company similarly does not anticipate in
the aggregate material costs or risks associated with Year 2000 compliance.
Its contracts
28
with active clients generally are either for recent software that is Year 2000
compliant, or do not obligate the Company to furnish an updated release that is
Year 2000 compliant. Early in 1997, the Company inventoried its active
software products and status relative to Year 2000 compliance. It also has
been communicating with active clients regarding Year 2000 compliance, and
notifying them of the availability of updated Year 2000 compliant releases for
certain older software known to the Company still to be used by that client.
For example, AMS has made available to U.S. Federal Government clients since
early 1997 an updated release of the Federal Financial System software that is
Year 2000 compliant and many such clients are in the process of upgrading to
that release. Given the special emphasis on Year 2000 compliance in the
financial services sector, the Company’s Finance Industry Group has notified
both active and former clients of Year 2000 compliance releases of all current
product offerings. The Company continues to assess the status of Year 2000
compliance of the Company-developed software in use by various clients.
29
ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING
STATEMENTS AND
FACTORS THAT MAY AFFECT FUTURE RESULTS
In the next couple of years, the Company expects growth in revenues
to be somewhat lower than the Company’s historical long-term rates. The more
controlled and lower growth in revenues should enable the Company to improve
its profit margins. These margins were reduced during the last several years
owing to cancellations of two major projects and, related thereto, attrition
rates higher than historical rates for the Company, heavy investment in
building up staff capacity and infrastructure, and the stress of absorbing many
new professional staff.
The Company faces continuing risks in the area of project delivery and
staffing. AMS has established a reputation in the marketplace of being a firm
which delivers on time and in accordance with specifications regardless of the
complexity of the application and the technology. The Company’s customers
often have a great deal at stake in being able to meet market and regulatory
demands, and demand very ambitious delivery schedules. In order to meet its
contractual commitments, AMS must continue to recruit, train, and assimilate
successfully large numbers of entry-level and experienced employees annually,
as well as to provide sufficient senior managerial experience on engagements,
especially on large, complex projects. Moreover, this staff must be
re-deployed on projects throughout North America, Europe, and other locations.
The Company must also manage and seek to reduce rates of attrition, which the
Company expects will continue to be somewhat higher than its historical norms
in view of increased competition for its talent, although not as high as in
1997 when affected by the cancellation of two major projects within one month.
There is also the risk of successfully managing large projects and the
risk of a material impact on results because of the unanticipated delay,
suspension, renegotiation or cancellation of a large project. As was the case
in the past two years, any such development in a project could result in a drop
in revenues or profits, the need to relocate staff, a potential dispute with a
client regarding money owed, and a diminution of AMS’s reputation. These risks
are magnified in the largest projects and markets simply because of their size.
The Company’s business is characterized by large contracts producing high
percentages of the Company’s revenues. For example, 35% of the Company’s total
revenues in 1997 were derived from business with fifteen clients. The
cancellation of phase two of the large Swiss Telecom project in the third
quarter of 1997 after the Company’s successful completion of phase one of the
project, and the Company’s subsequent reduction of net income for 1997 and
redeployment of personnel as a result of such unexpected cancellation,
together with a cancellation of a contract in the Financial Services
Institutions market following management and institutional changes at the
client, are recent examples of the risks inherent in the Company’s business and
the Company’s efforts to manage such risks. 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.
Finally, there is the risk of revenues not being realized when
expected, such as in certain contracts in the State and Local Governments and
Education Market. On certain contracts, the Company’s fees are paid out of the
benefits (increased collections) that the client achieves. The Company
typically defers recognition of such revenues until management can predict,
with reasonable certainty, that the benefit stream will generate amounts
sufficient to fund the contract. From that point forward revenues are
recognized on a percentage of completion basis.
30
Certain other risks, including, but not limited to, the Company’s
increasing international scope of operations, are discussed elsewhere in this
Form 10-K. The Company is also expanding in several emerging markets.
Contracts being performed in such markets can have somewhat higher delivery
risks. Because the Company operates in a rapidly changing and highly
competitive market, additional risks not discussed in this Form 10-K may emerge
from time to time. The Company cannot predict such risks or assess the impact,
if any, such risks may have on its business. Consequently, the Company’s
various forward-looking statements, made, or to be made, should not be relied
upon as a prediction of actual results.
31
FIVE-YEAR FINANCIAL SUMMARY
32
FIVE-YEAR REVENUES BY TARGET MARKET
33
SELECTED QUARTERLY FINANCIAL DATA AND INFORMATION ON AMS STOCK (UNAUDITED)
The following summary represents the results of operations for the two
years in the period ended December 31, 1997.
(In millions except per share data)
The Company has never paid any cash dividends on its common stock and
does not anticipate paying dividends in the foreseeable future. Its policy is
to invest retained earnings in the operation and expansion of its business.
Future dividend policy with respect to its common stock will be determined by
the Board of Directors based upon the Company’s earnings, financial condition,
capital requirements, and other then-existing conditions.
STOCK MARKET INFORMATION
The common stock of American Management Systems, Inc., is traded in
the NASDAQ over-the-counter market under the symbol AMSY. References to the
stock prices are the high and low bid prices during the calendar quarters.
The approximate number of shareholders of record of the Company’s
common stock as of March 20, 1998 was 524.
34
OTHER INFORMATION
TRANSFER AGENT AND REGISTRAR
Chemical Mellon Shareholder Services, L.L.C.
Ridgefield Park, N.J.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
Washington, D.C.
COUNSEL
Shaw, Pittman, Potts & Trowbridge
Washington, D.C.
STOCKHOLDER AND 10-K INFORMATION
Financial inquiries should be directed to Frank A. Nicolai, Secretary of the
Company, American Management Systems, Incorporated, 4050 Legato Road, Fairfax,
Virginia 22033. Telephone (703) 267-8000. A complimentary copy of the
Company’s Annual Report on Form 10-K filed with the Securities and Exchange
Commission will be provided upon written request.
ANNUAL MEETING
The annual shareholders meeting has been scheduled for May 8, 1998 in Fairfax,
Virginia, for stockholders of record on March 20, 1998.
35
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS — MAY 8, 1998
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS.
The undersigned hereby appoints Paul A. Brands, Patrick W. Gross, and
Frank A. Nicolai, and each of them, as proxies, with full power of substitution
in each, to vote all shares of the common stock of American Management Systems,
Incorporated (the “Company”), which the undersigned is entitled to vote at the
Annual Meeting of Shareholders of the Company to be held on May 8, 1998 at
10:00 A.M. local time, and at any adjournment thereof, on all matters set forth
in the Notice of Annual Meeting and Proxy Statement, dated April 10, 1998, a
copy of which has been received by the undersigned, as follows on the reverse
side.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN,
WILL BE VOTED “FOR” EACH OF THE MATTERS STATED.
1. ELECTION OF DIRECTORS: [ ] GRANT AUTHORITY to vote for all nominees
listed to the right (except as marked to
the contrary).
[ ] WITHHOLD AUTHORITY to vote for all
nominees listed to the right.
Paul A. Brands, Philip M. Giuntini, Patrick W.
Gross, Frank A. Nicolai, Daniel J. Altobello,
James J. Forese, Dorothy Leonard, W. Walker
Lewis, Frederic V. Malek, Alan G. Spoon.
INSTRUCTION: To withhold authority to vote for
any individual nominee, write that nominee’s name
in the space provided below.
2 GRANT AUTHORITY upon such other matters as may come before the meeting,
including the adjournment of the meeting, as they determine to be in the
best interests of the Company:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Dated: , 1998
———————-
———————————–
———————————–
Signature of Shareholder(s)
IMPORTANT: Please mark this Proxy, date, sign exactly as your name(s)
appear(s), and return in the enclosed envelope. If shares are
held jointly, signature need only include one name. Trustees and
others signing in a representative capacity should so indicate.
—–END PRIVACY-ENHANCED MESSAGE—–