American Management Systems Inc., an Arlington-based computer systems firm that reported to shareholders in 1979 that it expected to collect $3 million in a lawsuit, reported a $1.086 million loss for 1982 and a $189,000 loss for its final quarter based on the negative outcome of that suit.
"Leaving aside this lawsuit and the writeoffs, we actually had a profit," said AMS president Charles O. Rossotti. "The resolution of these contract claims actually overshadowed the results of operations."
AMS announced in January that it had settled the lawsuit against Delphi Associates Inc., a subsidiary of Arthur D. Little Inc., under terms that required AMS to pay $700,000.
That settlement, along with a one-time, unrelated charge of $135,000 that it estimates it may lose as a result of disposing of some equipment, resulted in its net loss for the fourth quarter of 12 cents a share. Without the $835,000 in charges, the company would have reported a net profit of $272,000 (17 cents a share) for the quarter.
For the year ended Dec. 31, 1982, the company said it lost $1.086 million (67 cents a share) compared with a net loss of $749,000 (46 cents) in 1981. Again, without the write-off attributable to the lawsuit, the company would have reported a year-end profit of $947,000 (58 cents).
"We were improving each quarter in 1982. From a business standpoint it looks quite good," said Rossotti. The $3.007 million that the company once claimed as revenues but has now written off, is essentially a paper loss, he said.
In the lawsuit, AMS had claimed that it was owed $4.1 million for work it had done as a subcontractor on a project for the state of Illinois, designing and installing a computerized Medicaid management system. AMS ceased work on the project in October 1979 and later filed a claim for money to cover work that it had done that it contended was outside the scope of the contract but necessary to do the job correctly.
The suit was filed against Delphi Associates, the contractor and Arthur D. Little, as its parent company.
Delphi denied the claims and filed counterclaims for nearly $7 million, charging AMS with breach of contract, among other things.
In 1979, the year in which the firm first sold stock to the public, it reported a profit of $2.18 million for the year, explaining in a footnote in its annual report that $3 million of its annual earnings was money it anticipated from the lawsuit.
"At the time we did it, and even today, we felt we had very good claims," said Rossotti. "We actually did that out-of-scope work, and Delphi got paid for it. We had a darned good case," he said.
Even so, the company decided to settle. "The business decision was not to pour any more money into the case," said Rossotti. "We could have perhaps still won, but the cost of doing it was not proportionate to the claims," he said.
The company received a setback in its claims last October when a U.S. magistrate in Boston, where the claims and counterclaims were filed, issued a recommendation to the federal judge assigned to the case. In it, the magistrate recommended that the judge rule against AMS on several significant motions in the lawsuit. That recommendation, although not binding, prompted AMS to establish a $3 million reserve and eventually to settle the case.
AMS reported that revenues for the quarter and the year were both up. Revenues for the fourth quarter increased 3 percent to $18.020 million, while 1982 revenues grew by 6 percent over the previous year's figure to $69.642 million.
Hardest hit by the lawsuit's outcome was the company's custom systems segment, one of two of the company's biggest revenue generators among its services and products. Revenues for custom systems were up 5 percent for the quarter and 8 percent for the year, but profits declined. Even without the charges related to the lawsuit, profits for the custom systems segment would have declined 16 percent for the quarter and 22 percent for the year, mainly because of increased marketing and other overhead costs, the company said.
The other major segment, computer services, had revenues for the quarter that were down 6 percent but were unchanged over the 12 months. Profits for computer services increased 70 percent for the quarter and 152 percent for the year over a year ago. The improvement resulted from the sale in March 1982 of the company's unprofitable IBM timesharing business and the addition of new business.
In two other segments, packaged systems reduced its losses for both the quarter and the year, and the company's federal consulting segment reported increased profits for the quarter but reduced profits for the year. The improvement resulted from increased business; the decrease from reduction in profits on individual projects, the company said.