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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
     

FORM 10-Q

Commission File No.: 0-9233

American Management Systems, Incorporated

4050 Legato Road
Fairfax, Virginia 22033
(Address of principal executive office)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES       X        NO           

As of August 5, 2002, 42,134,514 shares of common stock were outstanding.

CONTENTS

Part I  FINANCIAL INFORMATION

Item 1. Consolidated Unaudited Condensed Financial Statements and Notes

American Management Systems, Incorporated
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Unaudited
(In millions, except per share data)

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American Management Systems, Incorporated
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)

2

American Management Systems, Incorporated
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except share data)

3

American Management Systems, Incorporated
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)

See Accompanying Notes to Consolidated Condensed Financial Statements.

4

American Management Systems, Incorporated
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(In millions)

5

American Management Systems, Incorporated
SUPPLEMENTAL CONSOLIDATED REVENUES BY MARKET
Unaudited
(In millions)

6

American Management Systems, Incorporated
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited interim consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the SEC for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the consolidated financial statements and notes for the fiscal year ended December 31, 2001, included in the Corporation’s Annual Report on Form 10-K filed with the SEC on March 29, 2002. The accompanying consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and reflect all normal, recurring adjustments that are, in the opinion of management, necessary for a fair presentation of results for the interim periods. The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year. Certain prior period amounts have been reclassified to conform with the current period presentation.

NOTE 2 – EARNINGS PER SHARE RECONCILIATION

Basic earnings per share is computed by dividing net income by the weighted average shares outstanding during the year. Diluted earnings per share is computed similarly to basic earnings per share except that the weighted average shares outstanding are increased to include the potentially dilutive effect of outstanding options and restricted stock.

The computations for basic and dilutive EPS are as follows (in millions, except per share data):

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NOTE 3 – RESTRUCTURING CHARGE

Severance & Benefits
In 2001, the Corporation implemented a restructuring plan and recorded a charge for severance and severance–related costs. As of December 31, 2001, the Corporation had a remaining liability of $6.3 million related to staff reductions identified during 2001, all of which have been completed as of June 30, 2002. Continuing the Corporation’s efforts to align its workforce with changing market conditions and new business strategies, for the three months ended June 30, 2002, the Corporation recorded a charge of $11.6 million for severance and severance related costs primarily as a result of identifying approximately 214 additional staff reductions. Staff reductions include individuals at all levels within the Corporation in both professional service and support functions. During the six months ended June 30, 2002, the Corporation paid approximately $9.5 million in severance and severance-related costs. Of the 214 additional staff reductions, approximately 118 had been terminated and separated from the Corporation at June 30, 2002. The remaining $8.4 million liability as of June 30, 2002 for severance and severance-related costs is expected to be paid within one year.

Facilities
As of December 31, 2001, the Corporation had a remaining restructuring liability of $17.8 million related to the closure and consolidation of facilities. For the three and six months ended June 30, 2002, the Corporation recorded an additional charge of $4.5 million related to changes in estimates primarily attributable to current real estate market conditions and the timing of anticipated sub-tenant rental agreements. During the six months ended June 30, 2002, the Corporation made cash payments of approximately $4.0 million related to the closure and consolidation of facilities. Of the remaining $18.1 million liability at June 30, 2002, $11.2 million represents a noncurrent liability for costs to be incurred through 2010.

Restructuring reserve activities as of and for the six months ended June 30, 2002 (in millions) were as follows:

NOTE 4 – COMMITMENTS AND CONTINGENCIES

On July 17, 2001, the Federal Retirement Thrift Investment Board (the “Thrift Board”) gave written notice to AMS stating that the Thrift Board had terminated for default its contract with AMS for development and implementation of an automated record-keeping system for the federal employee Thrift Savings Plan. On the same date, the Thrift Board’s executive director, Roger W. Mehle, purporting to act as “managing fiduciary” of the Thrift Savings Fund, filed a companion lawsuit against AMS relating to AMS’s performance of the contract seeking compensatory damages of $50.0 million and punitive damages of

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$300.0 million, plus re-procurement costs, costs and expenses of litigation (including reasonable attorneys’ fees) and prejudgment interest.

AMS moved to dismiss the lawsuit filed by Mr. Mehle. On November 30, 2001, the United States District Court for the District of Columbia granted AMS’s motion to dismiss Mr. Mehle’s lawsuit for lack of jurisdiction. Mr. Mehle has appealed that order. AMS has filed both procedural and dispositive motions with the Court of Appeals. On January 25, 2002, the U.S. Department of Justice filed a motion on behalf of the U.S. Government to intervene which has been granted, and a motion to dismiss Mr. Mehle’s appeal. Both the Government’s motion to dismiss the appeal and the motion by AMS to dismiss the appeal are opposed by Mr. Mehle, and are pending. A motion by AMS, whose position is supported by the United States, to strike the appearance of private counsel representing Mr. Mehle, also is pending and is opposed by Mr. Mehle. The Court of Appeals has disposed of several other motions, largely procedural in nature. The Court of Appeals has set a briefing schedule for the appeal; oral argument is scheduled for March 7, 2003.

AMS believes that the appropriate forum for resolving its dispute over the Thrift Board contract is in the United States Court of Federal Claims (“CFC”), a court of specialized jurisdiction that ordinarily entertains all disputes relating to U.S. Government contracts. To that end, AMS filed suit in the CFC against the United States, which is the contracting party in the Thrift Board contract, seeking reversal of the Thrift Board’s decision terminating the contract for default and asking the court to convert the termination into a termination for convenience. The U.S. Department of Justice is defending the United States in this action. The United States has moved to dismiss AMS’s complaint on jurisdictional grounds, arguing that jurisdiction in the CFC is inappropriate because the Thrift Board is a non-appropriated fund instrumentality (“NAFI”), asserting it does not use or have access to appropriated government funds to pay its expenses and other obligations. AMS has opposed the motion to dismiss, which is pending. The CFC has not set a date for oral argument on the Government’s motion to dismiss. Management is unable to predict the outcome of the litigation. At June 30, 2002, AMS had approximately $40.4 million of accounts receivable, classified as a long-term contract receivable in Other Assets outstanding under this contract.

On July 16, 2002, AMS submitted a contract termination settlement proposal and claim to the Thrift Board seeking recovery of approximately $58.5 million of unpaid costs and fees incurred in performing the contract and winding it down in accordance with the termination for convenience provisions of the contract. The proposal was submitted pursuant to the instructions given by the Thrift Board’s contracting officer at the time of termination and in accordance with the terms of the contract and the Federal Acquisition Regulation. The submission of a government contractor’s settlement proposal is a routine step in the administrative process of terminating a federal government contract.

NOTE 5 – GOODWILL — ADOPTION OF SFAS NO. 142

Effective January 1, 2002, the Corporation adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142"), “Goodwill and Other Intangible Assets.” SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, SFAS 142 requires the Corporation to complete a transitional goodwill impairment test within six months from the date of adoption. In accordance with the standard, the Corporation completed the transitional goodwill impairment test and determined no impairment charge of goodwill is required. Under SFAS 142, goodwill is to be reviewed at least annually thereafter for impairment; the Corporation has elected to perform this review annually as of January 1.

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The following table discloses the reconciliation of reported net income to net income adjusted for goodwill amortization expense (in millions, except per share data).

NOTE 6 – NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations” which is effective January 1, 2003. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Corporation does not believe that the adoption of SFAS 143 will have a significant impact on its financial position or results of operations.

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 (“SFAS 145”), “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Among other things, SFAS 145 rescinds both SFAS 4 “Reporting Gains and Losses from Extinguishment of Debt,” and the amendment to SFAS 4, SFAS 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” Through this rescission, SFAS 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. Generally, SFAS 145 is effective for transactions occurring after May 15, 2002. The Corporation does not believe SFAS 145 will have a material impact on its future earnings or financial position.

In June 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” which is effective January 1, 2003. SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an

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Activity (including Certain Costs Incurred in a Restructuring).” This statement requires that an exit or disposal activity-related cost be recognized when the liability is incurred instead of when an entity commits to an exit plan. The Corporation is currently assessing, but has not yet determined, the impact of SFAS 146 on its financial position and results of operations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2001.

Forward-Looking Statements and Factors that May Affect Our Business

We have included in this Quarterly Report on Form 10-Q forward-looking statements relating to our operations that are based on our current expectations, estimates and projections. We use words such as “expects,” “intends,” “plans,” “projects,” “believes,” “estimates” and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Forward-looking statements are based on assumptions as to future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or implied in these forward-looking statements as a result of changes in general economic and political conditions and other factors, including:

	•		A significant or prolonged economic downturn in the U.S. or internationally could have a material adverse effect on our operating results.
	•		Disruptions in commercial activities occasioned by actual or threatened terrorist activity or armed conflict could have a significant negative effect on our results of operations.
	•		Our inability to complete large projects as expected due to unanticipated delays, re-negotiations, cancellation by the customer, and changing customer requirements and project scope could result in a decline in revenues or profits, a diminution of our professional reputation or legal liability.
	•		Our inability to successfully recruit, retain and assimilate entry-level and experienced employees could adversely affect our operating results and our ability to effectively compete and grow our business.
	•		Our pricing, revenues and margins could be negatively affected if current or prospective clients decide to undertake fewer information-technology systems projects or to consolidate with others in our target markets.
	•		We may be unable to realize revenues from benefits-funded contracts in the amounts or at the times expected if our customers are unable to achieve the amount of benefits anticipated due to factors such as economic downturns, tax base erosion or state cutbacks that result in fewer state resources being available to generate profits.

We have no obligation to update publicly or revise any forward-looking statement, whether as a result of new information or otherwise.

Corporation Overview

AMS is an international business and information-technology consulting firm whose customers have included 43 state and local governments, most federal agencies, and hundreds of companies in the Fortune 500. With deep industry experience and technical know-how in all levels of government and throughout the private sector, AMS delivers results that dramatically impact business performance and the relationship

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between an organization and its customers. Founded in 1970, AMS is headquartered in Fairfax, Virginia with 49 offices worldwide.

Our mission is to partner with customers to improve their business performance through the intelligent use of information technology. Our business approach blends deep industry knowledge with strategic services, technology innovation and project delivery expertise to manage mission-critical information technology and eBusiness initiatives. We exploit technology trends through applied research and development, best-of-breed alliances with fellow market leaders and our experienced professional staff.

We operate as one segment and focus on clients in specific industries, which we call target markets. We have five target markets: Federal Government Agencies; State and Local Governments and Education; Communications, Media and Entertainment (formerly New Media and Communications Firms); Financial Services Institutions; and Other Corporate Clients.

Presentation

Revenues
We derive our revenues primarily from contracts for business and information-technology solutions. Revenue recognition is based on the terms of our contracts. Revenues on fixed-price contracts are recognized using the percentage-of-completion method based on the percentage of costs incurred to date in relation to total estimated costs. Revenues on cost-reimbursable contracts are recognized to the extent of costs incurred plus a proportionate amount of the fee earned. Revenues on time-and-materials contracts are recognized to the extent of billable rates times hours delivered plus expenses incurred. Revenues from benefits-funded contracts are deferred until it can be predicted with reasonable certainty that the client’s benefit stream will generate amounts sufficient to fund the contract. After that time, revenues from benefits-funded contracts are also generally recognized on a percentage-of-completion basis. Reimbursements, including those relating to travel and other out-of-pocket expenses, are included in revenues, and an equivalent amount of reimbursable expenses are included in client project expense.

Operating Expenses
Our major types of operating expenses include the following:

	•		Client Project expenses include direct expenses to provide services to our clients such as compensation costs, travel and out-of-pocket expenses, and costs for subcontractors.
	•		Selling, General and Administrative (“SG&A”) expenses include expenses not directly related to the delivery of client services such as compensation for support personnel, costs for information systems, incentive compensation, selling and marketing expenses, and recruiting and training expenses.
	•		Research and Product Support expenses include research and development expenses incurred as part of the software development cycle that are not capitalized as well as support/maintenance of existing software.
	•		Depreciation and Amortization expenses include the amortization of internally developed and purchased software and depreciation of furniture, equipment and leasehold improvements. Prior to January 1, 2002 the amortization of goodwill was also included. Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS

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			142”) which was adopted January 1, 2002, requires the discontinuation of goodwill amortization.
	•		Restructuring Charge includes expenses associated with implementing our formal restructuring plan.
	•		Special Charge includes significant expenses associated with the write-off of certain software assets no longer expected to provide future value and reserves in connection with certain client engagements.

Interest Expense
Interest expense (net of interest income) is related to interest incurred on borrowings and fees on our revolving credit facility. It also includes interest expense related to our deferred compensation plan.

Other Income/Expense
Other income/expense includes activity not related to our primary business. For example, other income/expense includes gains and losses on the disposal of assets, market gains and losses on company-owned life insurance policies and premium expense for company-owned life insurance policies.

Loss on Equity Investments
Loss on equity investments reflects our share, as a joint venture investor, in the operating results of Competix, Inc.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based on our consolidated condensed financial statements. The preparation of these interim financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Application of these policies is particularly important to the portrayal of our financial condition and results of operations. We consider the accounting policies below to be our critical accounting policies:

	•		revenue recognition;
	•		net realizable value of software;
	•		income taxes; and
	•		restructuring.

Our significant accounting policies, including the critical policies listed above, are described in the notes to the consolidated financial statements for the year ended December 31, 2001 included in our Annual Report on Form 10-K filed with the SEC.

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Historical Results of Operations

The following table sets forth the unaudited percentage of revenues represented by items in our consolidated condensed statements of operations for the periods presented.