<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From: To:
------------- ---------------
Commission File No.: 0-9233
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
State of Incorporation: Delaware I.R.S. Employer
Identification No.: 54-0856778
</TABLE>
4050 Legato Road
Fairfax, Virginia 22033
(Address of principal executive office)
Registrant's Telephone No., Including Area Code: (703) 267-8000
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock Par
Value $0.01
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
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
------
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 24, 1997 was $776,421,799.
As of March 24, 1997, 41,240,731 shares of common stock were outstanding.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
1. Pursuant to Form 10-K General Instruction G(2), registrant
hereby incorporates by reference those portions of the American Management
Systems, Incorporated 1996 Financial Report necessary to respond to items 5,
6, 7, and 8 of this Form 10-K.
2. Pursuant to Form 10-K General Instruction G(3), registrant
hereby incorporates by reference those portions of the American Management
Systems, Incorporated definitive Proxy Statement for the Annual Meeting of
Shareholders to be held May 9, 1997 necessary to respond to items 10, 11, 12,
and 13 of this Form 10-K.
i
<PAGE> 3
CONTENTS
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Page
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Part I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 4
Part II Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . 5
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . 5
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . 5
Item 9. Changes in Accountants and Disagreements with
Accountants on Accounting and Financial Disclosure . . . . . . . . . . 5
Part III Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . 6
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . 6
Part IV Item 14. Exhibits, Financial Statements and Schedules,
and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
ii
<PAGE> 4
PART I
ITEM 1. BUSINESS
OVERVIEW
With 1996 revenues of $812 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 produce 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 revenue 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 expensed $26.0 million in 1996, $19.4
million in 1995 and $20.4 million in 1994 for research and development
associated with proprietary software. As a percentage of services and
products (S&P) revenues, license and maintenance fee revenues were less than
15% during each of the last three years.
In order to serve clients outside of the United States, AMS
has expanded internationally by establishing thirteen subsidiaries or
branches. Exhibit 21 of this Form 10-K provides a complete listing of all
AMS subsidiaries (and branches), showing name, year organized or acquired,
and place of incorporation. Services and products revenues attributable to
non-US operations of AMS were approximately $267.8 million in 1996, $170.0
million in 1995, and $92.1 million in 1994. Additional information on
revenues, operating profits, and assets attributable to AMS's geographic
areas of operation is provided in Note 10 of the consolidated financial
statements appearing in Exhibit 13 of this Form 10-K.
Founded in 1970, AMS services clients worldwide. AMS's
approximately 6,800 full-time employees serve clients from corporate
headquarters in Fairfax, Virginia and from 53 offices worldwide.
1
<PAGE> 5
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, global custody and securities control systems, and bank
management information
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, revenue management, human resources, social services,
and public safety functions. 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
knowledge 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 contracts 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.
PEOPLE
People are AMS's most important asset and its success depends
on its ability to attract and motivate especially well-qualified people. The
Company's largest investment in recent years has been in recruiting,
assimilating, and developing its people.
AMS recruited and successfully assimilated approximately 2,250
new staff members in 1996, including 525 in Europe. About one-half of the
new staff members came from the Company's college and university recruiting
program.
AMS recruits individuals for a career and hires a balanced mix
of recent university graduates and experienced professionals who have
demonstrated extraordinary technical, analytical, or management
skills. A large number have advanced degrees in management, computer
science, public policy, or engineering.
2
<PAGE> 6
Individuals are assigned to one of the Company's
market-oriented groups to develop expertise in the areas needed for solving
its clients' problems. Performance, in terms of productivity, quality of
work, and creativity in solving problems, determines an individual's
advancement. This motivates staff members to increase their knowledge of
AMS's clients' businesses and industries, to stay current with the technology
most suited to AMS's clients, and to develop the consulting and managerial
skills needed to produce results.
COMPETITIVE FACTORS
AMS's competition comes primarily from the management services
units of large public accounting firms and consulting and systems integration
firms. In addition, prospective clients may decide to do projects with their
in-house staff.
AMS seeks to meet this competition by exploiting its
industry-specific knowledge, its expertise with important business functions
and with new technologies, its proprietary computer application products, and
its experience in managing very large design and implementation projects.
Although price is always a factor in clients' decisions, it is typically not
the major factor. Other important factors are proven experience, the
capabilities of the proposed computer application products, the quality of
the proposed staff, and the proposed completion time for the project.
MARKETING, CONTRACTS, AND SIGNIFICANT CUSTOMERS
Marketing is done principally by the senior staff (executive
officers, vice presidents, senior principals, and principals) and by a
relatively small number of full-time salespersons for each large market. In
the U.S. Government markets, AMS replies selectively to requests for
proposals, concentrating on those closely related to previous work done for
the same or similar customers. Certain of the Company's software products
and computer services are sold by a small group of full-time salespersons
and, for those products and services, AMS advertises in trade publications
and exhibits at industry conventions.
For large systems integration projects, AMS typically
contracts for one phase (design, development, and implementation) at a time.
Many contracts may be canceled by the customer on short notice. Most
contracts with federal government agencies allow for termination for the
convenience of the government and for an annual audit. No contracts are
subject to renegotiation at the client's option. AMS generally contracts
either on the basis of reimbursement of costs plus a fixed fee, a fixed or
ceiling price for each phase, unit rates for time and materials used, or
services sold at unit prices. In most cases, AMS receives monthly or per
deliverable progress payments.
In 1996, the Company worked on projects directly for 90 U.S.
Government clients, representing a total of $93.9 million, or 12.8%, of
services and products revenues. No other customer accounted for 10% or more
of services and products revenues in 1996.
3
<PAGE> 7
ITEM 2. PROPERTIES
Headquartered in Fairfax, Virginia, the Company's principal
operations occupy approximately 893,000 square feet of office space under
leases expiring through 2011. The Company also has other long-term lease
commitments totaling approximately 541,000 square feet with varying
expirations through 2011 at other locations throughout the United States.
Additionally, the Company's international staff occupies
approximately 212,000 square feet of office space outside of the U.S. at
locations under leases expiring through 2003.
With regard to its operating environment, the Company is
provided with a mainframe processor environment at the IBM Dedicated
Processor Center in Irving, Texas. In addition to the peripherals, power,
and environmentals provided by the Dedicated Processor Center, the Company
owns other mainframe peripheral equipment and microcomputers, and leases an
IBM communications processor.
The Company believes its facilities and equipment continue to
be adequate for its business as currently conducted.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders
during the fourth quarter of 1996.
4
<PAGE> 8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Market information for the Company's common stock contained in
the Company's 1996 Financial Report is incorporated herein by reference in
accordance with General Instruction G(2) of Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data contained in the Company's 1996
Financial Report is incorporated herein by reference in accordance with
General Instruction G(2) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition
and results of operations contained in the Company's 1996 Financial Report is
incorporated herein by reference in accordance with General Instruction G(2)
of Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together
with the report thereon of Price Waterhouse LLP, and the supplementary
financial information, contained in the Company's 1996 Financial Report, are
incorporated herein by reference in accordance with General Instruction G(2)
of Form 10-K.
ITEM 9. CHANGES IN ACCOUNTANTS AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
5
<PAGE> 9
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors and executive officers
of the Company contained in the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held May 9, 1997, is incorporated herein
by reference. The Company's definitive Proxy Statement will be filed within
120 days after the close of the Company's fiscal year in accordance with
General Instruction G(3) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation contained in
the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held May 9, 1997, is incorporated herein by reference.
The Company's definitive Proxy Statement will be filed within 120 days after
the close of the Company's fiscal year in accordance with General Instruction
G(3) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information relating to the security ownership of certain
beneficial owners and management contained in the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held May 9, 1997, is
incorporated herein by reference. The Company's definitive Proxy Statement
will be filed within 120 days after the close of the Company's fiscal year in
accordance with General Instruction G(3) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related
transactions contained under the headings "Principal Stockholders",
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" in the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held May 9, 1997, is incorporated herein by
reference. The Company's definitive Proxy Statement will be filed within 120
days after the close of the Company's fiscal year in accordance with General
Instruction G(3) of Form 10-K.
6
<PAGE> 10
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The consolidated financial statements of American
Management Systems, Incorporated and subsidiaries filed are as follows:
Consolidated Statements of Operations for
1996-94
Consolidated Balance Sheets as of December
31, 1996 and 1995
Consolidated Statements of Cash Flows for
1996-94
Consolidated Statements of Changes in
Stockholders' Equity for 1996-94
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedules of American
Management Systems, Incorporated and subsidiaries filed are as follows:
Report of independent accountants on
financial statement schedules
Schedule II - Valuation and Qualifying
Accounts for 1996-1994
All other schedules are omitted because they are not
applicable, or the required information is shown in the financial statements
or the notes thereto or in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Individual financial statements of the Company and
each of its subsidiaries are omitted because the Company is primarily an
operating company, and all subsidiaries included in the consolidated
financial statements being filed, in the aggregate, do not have a minority
equity interest in and/or indebtedness to any person other than the Company
or its consolidated subsidiaries in amounts which together exceed twenty-five
percent of the total assets as shown by the most recent year-end consolidated
balance sheet.
7
<PAGE> 11
3. EXHIBITS
The exhibits to the Annual Report on Form 10-K of
American Management Systems, Incorporated filed are as follows:
3. Articles of Incorporation and By-laws
3.1 Second Restated Certificate of
Incorporation of the Company, (incorporated herein by reference to Exhibit 3
of the Company's 1995 Annual Report on Form 10-K).
3.2 By-laws of the Company,
(incorporated herein by reference to Exhibit 3 of the Company's 1992 Annual
Report on Form 10-K).
10. Material Contracts
10.1 Stock Option Plan F, as amended
(incorporated herein by reference to Exhibit A to the Company's definitive
Proxy Statement filed on April 10, 1996).
10.2 Outside Directors Stock-for-Fees
Plan (incorporated herein by reference to Exhibit C to the Company's
definitive Proxy Statement filed on April 10, 1996).
11. Computation of Net Income per Common Share
13. 1996 Financial Report
21. Subsidiaries of the Company
23. Consent of Independent Accountants
(b) REPORTS ON FORM 8-K
None.
8
<PAGE> 12
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
American Management Systems, Incorporated
Our audits of the consolidated financial statements referred to in our
report dated March 5, 1997 appearing on page 19 of the 1996 Financial Report
of American Management Systems, Incorporated (which report and consolidated
financial statements are incorporated by reference in this Annual Report on
Form 10-K) also included an audit of the Financial Statement Schedules listed
in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement
Schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PRICE WATERHOUSE LLP
Washington, D.C.
March 5, 1997
9
<PAGE> 13
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
(In millions)
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1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for Doubtful Accounts
-------------------------------
Balance at Beginning of Period $ 4.9 $3.3 $1.8
Allowance Accruals 15.2 1.6 1.5
Charges Against Allowance (1.2) 0.0 0.0
------ ---- ----
Balance at End of Period $ 18.9 $4.9 $3.3
====== ==== ====
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10
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on the 28th of
March, 1997.
American Management Systems, Incorporated
by s/Philip M. Giuntini
----------------------
Philip M. Giuntini
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following officers and directors of the
Registrant in the capacities and on the date indicated.
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Signature Title Date
--------- ------------------------- ------------------------
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(i) Principal Executive Officer:
s/Paul A. Brands Chief Executive March 28, 1997
------------------------------- Officer
Paul A. Brands
(ii) Principal Financial Officer:
s/Frank A. Nicolai Secretary and March 28, 1997
------------------------------- Treasurer
Frank A. Nicolai
(iii) Principal Accounting Officer:
s/James E. Marshall Controller March 28, 1997
-------------------------------
James E. Marshall
(iv) Directors:
s/Daniel J. Altobello Director March 28, 1997
-------------------------------
Daniel J. Altobello
</TABLE>
11
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Signature Title Date
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s/Paul A. Brands Director March 28, 1997
------------------------------
Paul A. Brands
s/James J. Forese Director March 28, 1997
------------------------------
James J. Forese
s/Philip M. Giuntini Director March 28, 1997
-------------------------------
Philip M. Giuntini
s/Patrick W. Gross Director March 28, 1997
-------------------------------
Patrick W. Gross
s/Dorothy Leonard Director March 28, 1997
-------------------------------
Dorothy Leonard
s/W. Walker Lewis Director March 28, 1997
-------------------------------
W. Walker Lewis
s/Frederic V. Malek Director March 28, 1997
-------------------------------
Frederic V. Malek
s/Frank A. Nicolai Director March 28, 1997
-------------------------------
Frank A. Nicolai
s/Charles O. Rossotti Director March 28, 1997
-------------------------------
Charles O. Rossotti
s/Alan G. Spoon Director March 28, 1997
-------------------------------
Alan G. Spoon
</TABLE>
12
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EXHIBIT INDEX
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Exhibit
Number Description
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3.1 Second Restated Certificate of Incorporation of the Company, *
(incorporated herein by referenceto Exhibit 3 of the Company's
1995 Annual Report on Form 10-K).
3.2 By-laws of the Company, (incorporated herein by reference *
to Exhibit 3 of the Company's 1992 Annual Report on Form
10-K).
10.1 Stock Option Plan F, as amended (incorporated herein by *
reference to Exhibit A to the Company's definitive Proxy
Statement filed on April 10, 1996).
10.2 Outside Directors Stock-for-Fees Plan (incorporated herein by *
reference to Exhibit C to the Company's definitive Proxy
Statement filed on April 10, 1996).
11. Computation of Net Income per Common Share
13. 1996 Financial Report
21. Subsidiaries of the Company
23. Consent of Independent Accountants
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* Previously filed.
13
<PAGE> 1
Exhibit 11
COMPUTATION OF NET INCOME PER COMMON SHARE
(In thousands except per share data)
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Year Ended December 31 1996 1995 1994
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Weighted Average Common Shares Outstanding 40,657 39,737 38,127
Shares Issuable Upon Exercise of Stock Options 3,504 3,500 3,178
Less Shares Assumed to be Repurchased at Fair
Market Value (2,236) (2,529) (2,574)
------- ------- -------
Total Common Equivalent Shares 1,268 971 604
------- ------- -------
Total Weighted Average Common and Common
Equivalent Shares 41,925 40,708 38,731
======= ======= =======
Net Income to Common Shareholders $15,500 $29,200 $23,100
======= ======= =======
Net Income per Common Share $ 0.37 $ 0.72 $ 0.60
======= ======= =======
</TABLE>
14
<PAGE> 1
Exhibit 13
Set forth following this page is the Company's 1996 Financial Report which is
Exhibit 13 to the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission. The 1996 Financial Report constitutes
pages 16 to 44 of the Form 10-K. Accordingly, the page immediately preceding
this page is numbered 14 and the page following Exhibit 13 is numbered 45.
15
<PAGE> 2
Exhibit 13
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
1996 FINANCIAL REPORT
CONTENTS
- --------------------------------------------------------------------------------
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Business of AMS 1
Financial Statements and Notes 3
Report of Independent Accountants 19
Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Assumptions Underlying Certain Forward-Looking
Statements and Factors That May Affect Future Results 25
Five-Year Financial Summary 26
Five-Year Revenues by Target Market 27
Selected Quarterly Financial Data and Information
on AMS Stock 28
Other Information 29
</TABLE>
<PAGE> 3
BUSINESS OF AMS
OVERVIEW
With 1996 revenues of $812 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 expensed $26.0 million in 1996, $19.4 million in
1995, and $20.4 million in 1994 for research and development associated with
proprietary software. As a percentage of services and products (S&P) revenues,
license and maintenance fee revenues were less than 15% during each of the last
three years.
In order to serve clients outside of the United States, AMS has expanded
internationally by establishing thirteen subsidiaries or branches. Exhibit 21
of this Form 10-K provides a complete listing of all AMS subsidiaries (and
branches), showing name, year organized (acquired), and place of incorporation.
Services and products revenues attributable to non-US operations of AMS were
approximately $267.8 million in 1996, $170.0 million in 1995, and $92.1 million
in 1994. Additional information on revenues, operating profits, and assets
attributable to AMS's geographic areas of operation is provided in Note 10 of
the consolidated financial statements appearing elsewhere in this financial
report.
Founded in 1970, AMS services clients worldwide. AMS's approximately 6,800
full-time employees serve clients from corporate headquarters in Fairfax,
Virginia and from 53 offices worldwide.
1
<PAGE> 4
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, global custody and
securities control systems, and bank management information 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, revenue management, human resources, social services, and public
safety functions. 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
contracts with several large organizations and intends to pursue more of these
contracts. AMS provides technical training and technical consulting services in
software technology for large scale business systems.
2
<PAGE> 5
FINANCIAL STATEMENTS AND NOTES
American Management Systems, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
(In millions except per share data) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Services and Products $732.6 $561.5 $408.8
Reimbursed Expenses 79.6 70.9 51.1
------ ------ ------
812.2 632.4 459.9
EXPENSES
Client Project Expenses 525.9 348.6 246.9
Other Operating Expenses 210.4 192.3 140.1
Corporate Expenses 48.3 40.8 32.6
------ ------ ------
784.6 581.7 419.6
INCOME FROM OPERATIONS 27.6 50.7 40.3
OTHER (INCOME) EXPENSE
Interest Expense 3.2 2.3 1.4
Other Income (1.8) (1.4) (0.6)
------ ------ ------
1.4 0.9 0.8
INCOME BEFORE INCOME TAXES 26.2 49.8 39.5
INCOME TAXES 10.7 20.6 16.1
NET INCOME 15.5 29.2 23.4
DIVIDENDS AND ACCRETION ON SERIES B
PREFERRED STOCK - - 0.3
------ ------ ------
NET INCOME TO COMMON STOCKHOLDERS $ 15.5 $ 29.2 $ 23.1
====== ====== ======
WEIGHTED AVERAGE SHARES AND EQUIVALENTS 41.9 40.7 38.7
====== ====== ======
NET INCOME PER COMMON SHARE $ 0.37 $ 0.72 $ 0.60
====== ====== ======
</TABLE>
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 6
American Management Systems, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 (In millions except per share data) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 62.8 $ 35.8
Accounts and Notes Receivable 247.7 206.1
Prepaid Expenses and Other Current Assets 13.3 8.9
------ ------
323.8 250.8
FIXED ASSETS
Equipment 62.0 47.4
Furniture and Fixtures 18.4 14.2
Leasehold Improvements 10.7 11.4
------ ------
91.1 73.0
Accumulated Depreciation and Amortization (43.1) (35.9)
------ ------
48.0 37.1
OTHER ASSETS
Purchased and Developed Computer Software (Net of
Accumulated Amortization of $50,500,000 and
$47,700,000) 40.2 33.0
Intangibles (Net of Accumulated Amortization of
$2,600,000 and $2,100,000) 6.3 6.8
Other Assets (Net of Accumulated Amortization of
$15,700,000 and $4,900,000) 5.9 9.8
------ ------
52.4 49.6
------ ------
TOTAL ASSETS $424.2 $337.5
====== ======
</TABLE>
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 7
American Management Systems, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 (In millions except per share data) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations $ 53.5 $ 23.1
Accounts Payable 19.6 8.6
Accrued Incentive Compensation 36.1 28.3
Other Accrued Compensation and Related Items 32.3 25.3
Deferred Revenues 20.6 26.3
Other Accrued Liabilities 2.7 2.3
Provision for Contract Losses 18.5 -
Income Taxes Payable 7.8 2.3
------- -------
191.1 116.2
Deferred Income Taxes 7.7 19.0
------- -------
198.8 135.2
NONCURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations 13.7 20.4
Other Accrued Liabilities 1.4 0.7
Deferred Income Taxes 7.2 5.7
------- -------
22.3 26.8
------- -------
TOTAL LIABILITIES 221.1 162.0
STOCKHOLDERS' EQUITY
Preferred Stock ($0.10 Par Value; 4,000,000 Shares
Authorized, None Issued or Outstanding)
Common Stock ($0.01 Par Value; 100,000,000 Shares
Authorized, 49,598,673 and 48,867,891 Issued and
40,939,209 and 40,040,454 Outstanding) 0.5 0.5
Capital in Excess of Par Value 75.0 65.4
Retained Earnings 157.3 141.8
Currency Translation Adjustment (1.1) (0.7)
Common Stock in Treasury, at Cost (8,659,464 and
8,827,437 Shares) (28.6) (31.5)
------- -------
203.1 175.5
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 424.2 $ 337.5
======= =======
</TABLE>
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 8
American Management Systems, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31 (In millions) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 15.5 $ 29.2 $ 23.4
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 39.3 30.2 20.7
Deferred Income Taxes (9.8) 6.0 5.2
Provision for Doubtful Accounts 15.2 1.6 1.5
Provision for Contract Losses 18.5 - -
Changes in Assets and Liabilities:
Increase in Trade Receivables (56.8) (66.5) (41.0)
(Increase) Decrease in Prepaid Expenses and Other
Current Assets (4.3) (2.3) 1.9
Increase in Other Assets (7.3) (9.1) (1.9)
Increase in Accrued Incentive Compensation 11.2 14.1 5.2
Increase in Accounts Payable and Other Accrued
Compensation and Liabilities 19.0 8.7 5.7
(Decrease) Increase in Deferred Revenues (5.7) 0.6 11.0
Increase in Income Taxes Payable 5.5 0.5 1.6
------- ------- ------
Net Cash Provided by Operating Activities 40.3 13.0 33.3
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets (27.5) (22.5) (17.0)
Purchase of Computer Software (5.6) (2.3) (1.5)
Investment in Software Products (13.8) (13.7) (9.9)
Other Investments and Intangibles 0.5 0.4 (0.1)
Proceeds from Sale of Fixed Assets and Computer Software 0.7 0.5 0.2
------- ------- ------
Net Cash Used in Investing Activities (45.7) (37.6) (28.3)
------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 30.4 26.5 12.8
Payments on Borrowings (6.7) (5.4) (4.5)
Proceeds and Related Tax Benefits from Common Stock
Options Exercised 9.5 5.3 5.5
Payments to Acquire Treasury Stock (0.5) (0.8) -
Dividends Paid on Preferred Stock - - (0.3)
------- ------- ------
Net Cash Provided by Financing Activities 32.7 25.6 13.5
------- ------- ------
(Decrease) Increase in Currency Translation Adjustment (0.3) 0.6 0.1
------- ------- ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 27.0 1.6 18.6
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 35.8 34.2 15.6
------- ------- ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 62.8 $ 35.8 $ 34.2
======= ======= ======
NON-CASH OPERATING AND FINANCING ACTIVITIES:
Treasury Stock Utilized to Satisfy Accrued
Incentive Compensation Liability $ 3.4 $ 2.9 $ 0.6
Conversion of Preferred Stock to Common Stock - - 8.5
</TABLE>
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
6
<PAGE> 9
American Management Systems, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions)
<TABLE>
<CAPTION>
Common
Stock Capital in Currency Total
(Par Value Excess of Translation Retained Treasury Stockholders'
$0.01) Par Value Adjustment Earnings Stock Equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $0.5 $44.7 $(1.5) $ 89.5 $(34.2) $ 99.0
Common Stock Options Exercised - 5.4 5.4
Preferred Stock Converted - 8.5 8.5
Tax Benefit Related to Exercise of
Common Stock Options 1.6 1.6
Currency Translation Adjustment 0.1 0.1
Common Stock Repurchased - -
Restricted Stock Awarded 0.6 0.6
1994 Net Income 23.4 23.4
Dividends and Accretion on Series B
Preferred Stock (0.3) (0.3)
--- ----- ----- ------ ------ ------
Balance, December 31, 1994 0.5 60.2 (1.4) 112.6 (33.6) 138.3
Common Stock Options Exercised - 3.3 3.3
Tax Benefit Related to Exercise of
Common Stock Options 1.9 1.9
Currency Translation Adjustment 0.7 0.7
Common Stock Repurchased (0.8) (0.8)
Restricted Stock Awarded 2.9 2.9
1995 Net Income 29.2 29.2
--- ----- ----- ------ ------ ------
Balance, December 31, 1995 0.5 65.4 (0.7) 141.8 (31.5) 175.5
Common Stock Options Exercised - 5.1 5.1
Tax Benefit Related to Exercise of
Common Stock Options 4.5 4.5
Currency Translation Adjustment (0.4) (0.4)
Common Stock Repurchased (0.5) (0.5)
Restricted Stock Awarded 3.4 3.4
1996 Net Income 15.5 15.5
---- ----- ----- ------ ------ ------
Balance at December 31, 1996 $0.5 $75.0 $(1.1) $157.3 $(28.6) $203.1
==== ===== ===== ====== ====== ======
</TABLE>
- ----------------
See Accompanying Notes to Consolidated Financial Statements.
7
<PAGE> 10
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 provides a full range of consulting services from strategic
business analysis to the full implementation of systems solutions. 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. AMS services clients worldwide
through its offices in North America and Europe.
A. Revenue Recognition
Revenues on fixed-price contracts are 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 benefits-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
fully 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
<PAGE> 11
over a three-year period or other such shorter period as might be required. The
Company recorded $9.3 million of amortization in 1996, $9.5 million of
amortization in 1995, and $8.4 million of amortization in 1994. Unamortized
costs were $32.7 million and $28.2 million at December 31, 1996 and 1995,
respectively. The Company evaluates the net realizable value of capitalized
software using the estimated, undiscounted, net-cash flows of the underlying
products.
Including the above mentioned amortization expense, the Company expensed
$26.0 million in 1996, $19.4 million in 1995, and $20.4 million in 1994 for
research and development.
Purchased software licenses will continue 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. Net Income per Common Share
Net income per common share has been computed using the treasury stock
method based on the weighted average number of common shares and equivalent
common shares outstanding.
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 year-end exchange rates. The
resulting translation adjustments are shown as a separate component of
Stockholders' Equity.
9
<PAGE> 12
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, and management's estimates of
the net realizable value of purchased and developed computer software and
intangible assets.
NOTE 2 -- SIGNIFICANT CUSTOMERS
Total revenues from the U.S. Government, comprising 90 clients in 1996, 72
clients in 1995, and 69 clients in 1994, were approximately $113.0 million in
1996, $97.1 million in 1995, and $88.5 million in 1994. No other customer
accounted for 10% or more of total revenues in 1996, 1995, or 1994.
NOTE 3 -- ACCOUNTS AND NOTES RECEIVABLE
<TABLE>
<CAPTION>
December 31 (In millions) 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trade Accounts Receivable
Amounts Billed $205.7 $153.6
Amounts Not Billed 48.2 50.3
Contract Retention 11.7 5.7
------ ------
Total 265.6 209.6
Other Receivables 1.0 1.4
Allowance for Doubtful Accounts (18.9) (4.9)
------ ------
Total $247.7 $206.1
====== ======
</TABLE>
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, 1996, the five largest individual
receivable balances totaled approximately $73 million. No other receivable
exceeded $6 million. The Company expects to receive all funds due from these
clients.
10
<PAGE> 13
Credit risk with respect to the Company's receivables is low due to the
credit worthiness of it's clients and the diversification of it's 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.
Approximately 12% of the December 31, 1996 total accounts receivable
balance relates to work performed by the Company under subcontractor agreements
between the Company and a prime contractor in the child support enforcement
business. These amounts span four different contracts which the prime
contractor has with state/local government clients in three states. Accounts
receivable on one of these contracts represents 7% of the Company's total
accounts receivable balance. However, because of the large balance on this
contract and the Company's inability to obtain payment from the prime
contractor in advance of the prime contractor's receipt of funding from it's
client there is more than the usual risk associated with this contract. The
Company expects to receive all funds due under these contracts and has received
some payments in recent months. Additionally, 1.5% of the Company's total
accounts receivable balance relates to a contract with a foreign government
which has been experiencing cash flow difficulties.
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 (the "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.
At December 31, 1996, the Company had $46.8 million outstanding under
revolving credit facilities, approximately $21.3 million of which was
outstanding under the NationsBank Agreement. Additionally, on January 6, 1997,
the Term Loan of $20 million was funded (this $20 million is not included,
either in cash or in Notes Payable, in the December 31, 1996 Balance Sheet).
The Term Loan bears an interest rate of 6.938%, with monthly interest payments
on the unpaid principal balance and quarterly principal payments commencing in
April 1999.
The Company and any of its existing subsidiaries can borrow funds under
the Revolving Credit facility in the borrower's local currency subject to
certain minimum amounts per borrowing. Interest on such borrowings will range
from LIBOR plus 15 basis points to LIBOR plus 30 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 7.5 basis
points to 15 basis points of the total facility, based on the same performance
measure. Based on such measures at December 31, 1996, interest payments will be
based on LIBOR plus 15 basis points and the facility fee will be 7.5 basis
points. Additionally, the maximum amount which may be borrowed under the
revolving credit portion of the Agreement will be lowered by any letters of
credit which are outstanding at any time. At December 31, 1996, outstanding
letters of credit totaled $1 million, which expired on January 31, 1997.
The Agreement 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 coverage
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, 1996, the
Company was in compliance with all covenants under the Agreement.
11
<PAGE> 14
The aggregate weighted average borrowings under all revolving credit
agreements was approximately $29.2 million in 1996, and $15.6 million in 1995,
at daily weighted average interest rates of approximately 5.2% in 1996 and 5.9%
in 1995. The maximum borrowed under all agreements was $49.2 million in 1996
and $23.5 million in 1995.
The following schedule summarizes the total outstanding notes and
capitalized lease obligations. Differences between the face value and the fair
value are considered immaterial.
<TABLE>
<CAPTION>
December 31 (In millions) 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving Line-of-Credit at December 31, $46.8 $16.3
Unsecured Notes With Interest at 5.25% - 6.92%
Principal and Interest Payable Monthly Through
August 2001 20.4 27.2
----- -----
Total Notes Payable and Capitalized Lease Obligations $67.2 $43.5
===== =====
Principal amounts are repayable as shown below:
1997 $53.5 $23.1
1998 5.7 6.7
1999 2.3 5.7
2000 2.2 2.3
2001 and Beyond 3.5 5.7
----- -----
67.2 43.5
Less Current Portion 53.5 23.1
----- -----
Long-Term Portion $13.7 $20.4
===== =====
</TABLE>
Interest paid by the Company totaled $3.2 million in 1996, $2.3 million in
1995, and $1.4 million in 1994.
12
<PAGE> 15
NOTE 5 -- EQUITY SECURITIES
At December 31, 1996, 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 April 11, 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.
Under all three 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, the
differential is recorded as compensation expense. Under all three 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, 1996, there were 85,064 shares available for the grant of
future options under the 1992 Plan E and 3,800,000 shares available under Plan
F. No options remain available for grant under any previous stock option plan.
The number of option shares outstanding and exercisable at December 31, 1996,
under Plan E and 1992 Plan E combined was 2,230,944 for which the aggregate
exercise price was $23,894,717. No option shares had been issued under Plan F
at December 31, 1996.
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 Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123),
for disclosure purposes only.
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. The following weighted-average
assumptions were used for the eight-year stock options granted in 1996 and
1995, respectively: expected volatility of 38.01% and 39.25%; risk-free
interest rate of 6.48% and 6.28%; expected average life of five years; and zero
dividend yield. The weighted-average fair value of the eight-year stock options
granted in 1996 and 1995 was $12.36 and $6.47, respectively. The following
weighted-average assumptions were used for the five-year stock options granted
in 1996 and 1995, respectively: expected average life of 36.35% and 38.53%;
risk-free interest rate of 5.58% and 7.26%; expected average life of four
years; and zero dividend yield. The weighted-average fair value of the
five-year stock options granted in 1996 and 1995 was $8.06 and $5.61,
respectively.
Under the above models, the total value of the eight-year stock options
granted in 1996 and 1995 was $1.8 million and $1.6 million, respectively, which
would be amortized on a graded vesting schedule on a pro-forma basis over a
seven-year vesting period. The total value of the five-year stock options
granted in 1996 and 1995 was $5.0 million and $2.8 million, respectively, which
would be amortized ratably on a pro-forma basis over a five-year vesting period
(which varies between four months and five years). 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 would have been $13.1
million and $0.31 in 1996 and $28.0 million and $0.69 in 1995. 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.
13
<PAGE> 16
Additional information with respect to stock options awarded pursuant to
such plans is summarized in the following schedule.
<TABLE>
<CAPTION>
Number of
Option Exercise Price
Shares per Share
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Year Ended December 31, 1994:
Options Granted 726,303 $ 8.45 - $11.50
Options Canceled 48,971 3.60 - 10.11
Options Exercised 1,071,819 1.91 - 10.11
Balance Outstanding at December 31, 1994: 3,242,551 3.45 - 11.50
For the Year Ended December 31, 1995:
Options Granted 737,752 11.53 - 19.33
Options Canceled 9,486 3.59 - 11.53
Options Exercised 566,235 3.44 - 14.83
Balance Outstanding at December 31, 1995 3,404,582 3.59 - 19.33
For the Year Ended December 31, 1996:
Options Granted 769,451 19.08 - 35.63
Options Canceled 26,495 5.24 - 24.00
Options Exercised 730,782 5.11 - 19.08
Balance Outstanding at December 31, 1996 3,416,756 3.59 - 35.63
</TABLE>
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. In 1996 and 1995, the Company repurchased 24,600 and 60,000 shares of
its common stock, respectively, totaling $1.3 million. In 1994, the Company did
not repurchase, other than fractional shares from the October stock split, any
of its common stock.
14
<PAGE> 17
NOTE 6 -- INCOME TAXES
<TABLE>
<CAPTION>
Year Ended December 31 (In millions) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes for the year ended
December 31 was derived in the following jurisdictions:
Domestic $ 8.7 $ 42.6 $ 36.8
Foreign 17.5 7.2 2.7
------- ------- -------
$ 26.2 $ 49.8 $ 39.5
======= ======= =======
The provision for income taxes is comprised of the following:
Current:
Federal $ 10.4 $ 9.4 $ 7.8
State 1.4 1.8 2.1
Foreign 8.7 3.4 1.0
Deferred:
Federal (4.3) 5.4 5.1
State (0.5) 0.6 0.2
Foreign (5.0) - (0.1)
------- ------- -------
Total Provision $ 10.7 $ 20.6 $ 16.1
======= ======= =======
Taxexpenses were different from the amounts computed
by applying the statutory federal income tax rate to
income before income taxes.
The differences were as follows:
Federal Tax Provision Based on Statutory Rates $ 9.2 $ 17.4 $ 13.8
Research and Development Tax Credits, Net of Addback (0.8) (0.5) (0.6)
State Income Tax, Net of Federal Income Tax Benefit 0.5 1.9 1.9
Other 1.8 1.8 1.0
------- ------- -------
Actual Tax Provision $ 10.7 $ 20.6 $ 16.1
======= ======= =======
Deferred tax liabilities (assets) were comprised of the following
for the years ended December 31:
Liabilities:
Unbilled Receivables $ 26.9 $ 20.4 $ 15.0
Capitalized Software 12.6 10.0 9.8
Other 0.9 6.6 3.7
------- ------- -------
Total Gross Deferred Tax Liabilities 40.4 37.0 28.5
Assets:
Deferred Maintenance Revenue (1.6) (2.4) (3.3)
Restricted Stock (3.2) (3.0) (1.9)
Accrued Leave Costs (2.9) (2.2) (1.8)
Bad Debt Expense (13.9) (2.2) (1.6)
Other Deferred Revenue (0.8) (0.5) (0.1)
Other (3.1) (2.0) (1.1)
------- ------- -------
Total Gross Deferred Tax Assets (25.5) (12.3) (9.8)
------- ------- -------
Net Deferred Tax Liabilities $ 14.9 $ 24.7 $ 18.7
======= ======= =======
</TABLE>
The Company paid income taxes of approximately $14.3 million, $16.4
million, and $9.1 million, in 1996, 1995, and 1994, respectively.
15
<PAGE> 18
NOTE 7 -- EMPLOYEE PENSION PLAN
The Company has established 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 $8.3 million
in 1996, $6.3 million in 1995, and $5.2 million in 1994.
NOTE 8 -- 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 2011.
The commitments under these agreements, as of December 31, 1996, 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. Sublease income represents
payments due to the Company from third parties under formal sublease agreements
covering real property.
Operating lease expense for 1996, 1995, and 1994 was approximately $34.1
million, $27.9 million, and $21.4 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.
AMS performs, at any point in time, under a variety of contracts for many
different customers. Situations can occasionally arise where factors may result
in the renegotiation of existing contracts. Additionally, certain contracts may
provide the customer the right to suspend or terminate the contracts. To the
extent any contracts may provide the customer 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 renegotiation, suspension and/or cancellation. Management is not aware
of any major contract where there is presently 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.
The Company's fourth quarter and full year financial results for 1996 were
heavily influenced by one major event. The financial effect of a problem
associated with one large systems program in which the Company was engaged with
a non-US telecommunications industry client decreased the Company's net income
by $23 million, or $0.55 per share. In December 1996, the Company had a delay
in completing one software release in this large multi-release program and the
Company began the process of renegotiating the entire program with the client.
Early in 1997, the client suspended a major part of the program. The Company
made a financial provision in its 1996 financial statements for the expected
impact of this situation in the form of reserves against receivables and the
accrual for contract losses on completion of the remaining work. The Company
does not believe, based on information available at this time, that the outcome
of the matters discussed above will have a further material adverse effect on
its financial position or results of operations.
16
<PAGE> 19
Gross Rentals and Maintenance Payments
<TABLE>
<CAPTION>
Net Rentals
and
Sublease Maintenance
(In millions) Real Property Equipment Total Income Payments
- --------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
1997 $ 30.3 $3.3 $ 33.6 $0.2 $ 33.4
1998 31.2 2.6 33.8 0.1 33.7
1999 29.6 1.7 31.3 - 31.3
2000 27.5 0.6 28.1 - 28.1
2001 26.1 0.2 26.3 - 26.3
2002 through 2012 155.6 - 155.6 - 155.6
------- ---- ------ ---- ------
Total $ 300.3 $8.4 $308.7 $0.3 $308.4
======= ==== ====== ==== ======
</TABLE>
NOTE 9 -- RELATED PARTY TRANSACTIONS
The Company incurred legal fees and reimbursable expenses payable to Shaw,
Pittman, Potts & Trowbridge, general counsel to the Company, totaling
approximately $2.7 million, $2.5 million, and $2.0 million, in 1996, 1995, and
1994, respectively. A member of the firm of Shaw, Pittman, Potts & Trowbridge
is the spouse of one of the Company's executive officers.
17
<PAGE> 20
NOTE 10 -- 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, Germany, Mexico,
Portugal, Spain, Sweden, Switzerland, and The Netherlands). Pertinent financial
data, by geographic area, is summarized below.
<TABLE>
<CAPTION>
Year Ended December 31 (In millions) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Services and Products Revenues
U.S. Companies $571.2 $490.1 $356.3
Non-US Companies 161.4 71.4 52.5
------ ------ ------
Consolidated Total 732.6 561.5 408.8
====== ====== ======
Income (Loss) From Operations
U.S. Companies 8.0 44.4 37.6
Non-US Companies 19.6 6.3 2.7
------ ------ ------
Consolidated Total 27.6 50.7 40.3
====== ====== ======
Identifiable Assets
U.S. Companies 355.0 290.0 231.5
Non-US Companies 69.2 47.5 20.7
------ ------ ------
Consolidated Total $424.2 $337.5 $252.2
====== ====== ======
</TABLE>
Revenues from AMS's U.S. Companies include export sales to non-US clients
of $106.4 million in 1996, $98.6 million in 1995, and $39.6 million in 1994. As
a result, the Company's total non-US services and products revenues were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31 (In millions) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Exports By U.S. Companies $106.4 $ 98.6 $39.6
Non-US Companies 161.4 71.4 52.5
------ ------ -----
Total Non-US Services and Products Revenues $267.8 $170.0 $92.1
====== ====== =====
Percent of Total Services and Products Revenues 36.6% 30.3% 22.5%
====== ====== =====
</TABLE>
18
<PAGE> 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 18 of the 1996 Financial Statements present fairly, in
all material respects, the financial position of American Management Systems,
Incorporated and its subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, 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.
March 5, 1997
19
<PAGE> 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 comparable to the
general rate of inflation in the U.S. economy.
<TABLE>
<CAPTION>
Period-to-Period
Percentage of Total Revenues Change
---------------------------- ----------------
1996 1995
vs. vs.
1996 1995 1994 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Services and Products 90.2% 88.8% 88.9% 30.5% 37.4%
Reimbursed Expenses 9.8 11.2 11.1 12.3 38.7
------- ------ ------
100.0 100.0 100.0 28.4 37.5
Expenses
Client Project Expenses 64.8 55.1 53.6 50.9 41.2
Other Operating Expenses 25.9 30.4 30.5 9.4 37.3
Corporate Expenses 5.9 6.5 7.1 18.4 25.2
------- ------- -------
96.6 92.0 91.2 34.5 38.6
Income from Operations 3.4 8.0 8.8 (45.6) 25.8
Other (Income) Expense 0.2 0.1 0.2 55.6 12.5
------- ------- -------
Income Before Income Taxes 3.2 7.9 8.6 (47.4) 26.1
Income Taxes 1.3 3.3 3.5 (48.1) 28.0
------- ------- -------
Net Income 1.9 4.6 5.1 (46.9) 24.8
Dividends and Accretion on Series B
Preferred Stock - - 0.1 - -
------- ------- -------
Net Income to Common Shareholders 1.9 4.6 5.0 (46.9) 26.4
Weighted Average Shares and Equivalents 2.9 5.2
Net Income per Common Share (48.6) 20.0
</TABLE>
20
<PAGE> 23
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 the MD&A 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.
The Company's fourth quarter and full year financial results for 1996 were
heavily influenced by one major event. The financial effect of a problem
associated with one large systems program in which the Company was engaged with
a non-US telecommunications industry client decreased the Company's net income
by $23 million, or $0.55 per share. In December 1996, the Company had a delay
in completing one software release in this large multi-release program and the
Company began the process of renegotiating the entire program with the client.
Early in 1997, the client suspended a major part of the program. The Company
made a financial provision in its 1996 financial statements for the expected
impact of this situation in the form of reserves against receivables and the
accrual for contract losses on completion of the remaining work. The Company
does not believe, based on information available at this time, that the outcome
of the matters discussed above will have a further material adverse effect on
its financial position or results of operations. The underlying cause of this
problem was that the Company abbreviated certain of its normal processes,
including certain testing, in an attempt to meet a very ambitious delivery
schedule requested by the client to meet pressing business needs. As a result
of this situation, AMS has undertaken certain specific enhancements to its
management process for the very largest projects.
REVENUES
Services and products revenues ("S&P revenues") increased 30% and 37%
during 1996 and 1995 compared to the preceding year. Over 85% of each year's
S&P revenues came from clients for whom the Company performed services in prior
years. Looking ahead to 1997, the Company expects continued growth, however at
lower rates of increase than were experienced in 1996 and 1995.
Business with non-US clients increased 58% and 85% (to $268 million and
$170 million) during 1996 and 1995, respectively, and accounted for
approximately 57% and 51% of the total S&P revenue increase of the Company for
these two years. Business with European clients has dominated the rise in
non-US business, increasing 65% (to $231 million) and 83% (to $139 million) in
each of the past two years, with revenues from Telecommunications Firms being
the principal driver. For the year 1997, the Company expects non-US business,
and European business in particular, to show little growth over 1996, owing
principally to lower revenues with the non-US telecommunications client
discussed above.
In the Telecommunications Firms market, S&P revenues increased 42%
compared to 1995. Almost all of this increase is attributable to business with
non-US clients, which increased 66% during 1996 (to $214 million). Business in
this market is characterized by very large projects, with relatively few
clients. Approximately 85% of the 1996 S&P revenues in this market came from
work with 12 clients. Comparing 1995 to 1994, S&P revenues had increased 70%
overall, with a 109% increase in non-US business. For 1997, the Company expects
the annual growth in this market will be below that for 1996 and in line with
the Company's overall growth rate, reflecting the impact of reduced revenues
from the non-US project. Most of the revenue increases in this market are
expected to be from domestic sources.
21
<PAGE> 24
In the Financial Services Institutions target market, 1996 S&P revenues
increased 26% over 1995, owing principally to build-ups in business with
clients who started large projects in the second half of 1995. Business with
non-US clients account for approximately 30% of the revenues in this market
($49 million). Comparing 1995 to 1994, business in this market had increased
44%, owing to new business in 1995. For 1997, the Company expects S&P revenue
growth in this market to increase at rates slightly below the Company's overall
revenue growth.
In the State and Local Governments and Education target market, S&P
revenues increased 36% in 1996 and 17% in 1995. The 1996 increase was fueled by
several large contracts with state taxation departments looking to make
substantial improvements in their ability to collect delinquent taxes and
continued subcontract work in the child support enforcement business. On some
of the contracts with state taxation departments, the Company's fees are paid
out of the benefits (increased collections) that the client achieves. For such
contracts where the timing of the benefits are uncertain, the Company defers
revenues (and profits) until a future date. At the end of 1996, all such
contracts had provided enough benefits to fund the work. The Company expects
S&P revenues in the State and Local Governments and Education market to
increase in 1997 at rates slightly ahead of the increase in the Company's
overall S&P revenues.
S&P revenues in the Federal Government Agencies target market increased
16% in 1996 and 9% in 1995. The Company expects S&P revenues in this target
market, for 1997, to increase at rates comparable to the overall growth rate of
the Company. The Company is in the final stages of competition with one other
firm for award of a significant contract with the Department of Defense. These
estimates do not include the potential award of such contract, which could
increase revenues from this market by a material percentage for 1997. There can
be no assurance that the Company will be awarded this contract.
S&P revenues from Other Corporate Clients increased 3% in 1996 and 20%
during 1995. S&P revenues from this market, which represents business in
smaller vertical markets, such as the health care market and the electric and
gas utilities market, for 1997, is expected to increase at rates exceeding the
Company's overall growth in S&P revenues.
Beginning with the first quarter 1997, this section of MD&A will focus on
changes in total revenues for each target market, rather than services and
products revenues, consistent with the Company's internal focus on total
revenues.
EXPENSES
Client project expenses and other operating expenses together increased
36% during 1996. Included in this increase are the provisions the Company
recorded for receivables and expected 1997 losses because of the previously
discussed contract with a non-US telecommunications company. These expenses
were reduced by significant reductions in performance-based incentive
compensation accruals for the senior managers in the business unit. Without
these additional expenses, client project and other operating expenses would
have increased by 31%, generally in line with the overall growth of the
Company. While some expenses, such as recruiting, staff development, and
general management, increased at rates equal to the overall Company's growth
rate, other expenses, such as product support, research and development, and
business development, increased at rates below the overall growth rate.
Comparing 1995 to 1994, client project and other operating expenses increased
39%, which was approximately the same growth rate as in S&P revenues. Looking
to 1997, the Company anticipates that these expenses will be more in line with
the revenue growth. The Company expects to make significant expenditures
related to research and development as it produces the next generation of
software used in its telecommunications business. A majority of these
expenditures will be capitalized.
22
<PAGE> 25
Corporate Expenses increased 18% and 25% in 1996 and 1995. The 1996 rate
of increase was lower than expected owing to reductions in performance-based
incentive compensation accruals for the corporate officers and lower
profit-based compensation accruals under the Company's restricted stock
program, both owing to the year end developments in the non-US
telecommunications client project discussed earlier. Without these reductions,
corporate expenses would have increased 24%. For 1995, the slower growth rate
was principally due to corporate sponsored technology and training programs,
and performance-based compensation accruals not increasing as fast as revenues.
INCOME FROM OPERATIONS
Income from operations decreased 46% in 1996, compared to 1995,
principally due to the charges associated with the non-US client project.
Absent these charges, income from operations would have increased 31%,
comparable to the growth in revenues and in line with the Company's
expectations. Comparing 1995 to 1994, income from operations increased 26%.
This rate of increase was less than the S&P revenue increase because 1) the
Company invested heavily in building up its staff capacity and 2) margins at
the project level were reduced because of the stress of absorbing so many new
people. For 1997, if the Company is successful in controlling the overall
growth rate, the Company would expect profit margins to improve. However, due
to the significant amount of management and staff resources that have been
consumed in attempting to resolve the issues with the non-US client project,
the reduced levels of revenues that these resources would have generated, and
incurring a majority of the Company's recruiting costs early in the year,
profit margins in the first half of 1997 will be significantly below the
Company's desired profit margin.
OTHER (INCOME) EXPENSE
Interest expense increased 39% in 1996, and 69% in 1995, because of
additional long-term debt incurred by the Company during 1995 and significant
increases in short-term borrowing to finance the growth of the Company. Other
income increased 29% in 1996, compared to 1995, due primarily to a refund of
property taxes.
INCOME TAXES
The Company's effective tax rate for 1996 was 41.0% compared to 41.4% in
1995. The 1994 effective tax rate was 40.8%.
FOREIGN CURRENCY EXCHANGE
Approximately 36% of the Company's total S&P revenues in 1996, 30% in
1995, and 23% in 1994, were derived from non-US business. The Company's
practice is to negotiate contracts in the same currency in which the
predominant expenses are incurred, thereby mitigating the exposure to foreign
currency exchange fluctuations. It is not possible to accomplish this in all
cases, and the Company does take some risk that profits will be affected by
foreign currency exchange fluctuations. However, these risks are mitigated to
the extent the Company: 1) successfully negotiates short-term contracts (one
year or less), or 2) negotiates provisions that allow pricing adjustments
related to currency fluctuations. To date, the Company has not engaged in any
hedging activities relating to foreign currency exchange fluctuations.
23
<PAGE> 26
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, 1996, the
Company's cash and cash equivalents totaled $62.8 million, up from $35.8
million at the end of 1995. Cash provided from operating activities, for 1996,
was $40.3 million. Although accounts receivable increased by 20%, cash provided
from operating activities increased due to improvements in the rate of
collection of the Company's accounts receivable. The improvements occurred
despite continued delays in collecting accounts receivable related to
subcontract work with a prime contractor in the child support enforcement
business, and a receivable from a foreign government experiencing continued
cash flow problems. See Note 3 to the consolidated financial statements for
further discussion on accounts receivable.
The Company invested over $45.7 million in fixed assets and software
purchases, and computer software development during 1996. Revolving line of
credit borrowings increased by $30.4 million over 1996, which borrowings
consisted entirely of foreign currency borrowings by the Company's non-US
subsidiaries, all of which borrowings remained outstanding at December 31,
1996. The aggregate weighted average short-term borrowings during 1996 was
approximately $29.1 million, at an weighted average interest rate of 5.3%.
During 1996, the Company made approximately $6.7 million in installment
payments of principal on outstanding debt owed to banks; the Company also
received approximately $9.5 million during the period from the exercise of
stock options and the tax benefits related thereto.
At December 31, 1996, the Company's debt-equity ratio, as measured by
total liabilities divided by stockholders' equity was 1.09, up from 0.92 at
December 31, 1995.
In December 1996, the Company entered into a new $100 million syndicated
multi-currency revolving credit ($80 million) and term debt ($20 million)
facility. In January 1997, the Company drew down the term debt. The $20 million
borrowed in January is not included in any of the Company's 1996 financial
statement amounts.
The Company's material unused source of liquidity at the end of 1996
consisted of approximately $53.3 million under the new revolving credit and
term debt facility. The Company believes that its liquidity needs can be met
from the various sources described above.
24
<PAGE> 27
ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING
STATEMENTS AND
FACTORS THAT MAY AFFECT FUTURE RESULTS
In the next few years, the Company expects growth in revenues to be at the
Company's historical long-term rates and not at the exceptional rates posted in
recent years. The more controlled and lower growth in revenues should enable
the Company to improve its profit margins. These margins were reduced during
the last two years owing to heavy investment in building up staff capacity and
infrastructure, and the stress of absorbing many new professional staff. Delays
in the completion of one software release in a major multi-release project
during the fourth quarter of 1996, and the client's subsequent suspension, in
early 1997, of another software release, also contributed to the Company's
reduced profit margin for 1996.
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 it's contractual
commitments, AMS must continue to be able to successfully recruit, train, and
assimilate 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.
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. 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, 34% of the Company's total revenues in 1996 were derived
from business with ten clients. Events such as unanticipated declines in
revenues or profits could in turn result in immediate fluctuations in the
trading price and volume of the Company's stock.
Certain other risks, including, but not limited to, the Company's
increasing international scope of operations, are discussed elsewhere in this
Form 10-K. 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.
25
<PAGE> 28
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Year Ended December 31
(In millions except share and per share data) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Services and Products Revenues $732.6 $561.5 $408.8 $321.7 $295.5
Total Revenues 812.2 632.4 459.9 364.0 332.5
Client Project Expenses 525.9 348.6 246.9 189.3 175.2
Other Operating Expenses 210.4 192.3 140.1 115.6 104.7
Corporate Expenses 48.3 40.8 32.6 28.4 23.2
------ ------ ------ ------ ------
Total Operating Expense 784.6 581.7 419.6 333.3 303.1
------ ------ ------ ------ ------
Income From Operations 27.6 50.7 40.3 30.7 29.4
Other (Income) Expense 1.4 0.9 0.8 - -
------ ------ ------ ------ ------
Income Before Income Taxes 26.2 49.8 39.5 30.7 29.4
Income Taxes 10.7 20.6 16.1 12.9 11.9
Income Before Cumulative Effect of
Change in Accounting Method 15.5 29.2 23.4 17.8 17.5
Cumulative Effect of Change in
Accounting for Income Taxes(1) - - - - 1.6
------ ------ ------- ------ ------
Net Income 15.5 29.2 23.4 17.8 19.1
Dividends and Accretion on Series B
Preferred Stock - - 0.3 0.8 1.5
------ ------ ------ ------ ------
Net Income per Common Shareholders $ 15.5 $ 29.2 $ 23.1 $ 17.0 $ 17.6
====== ====== ====== ====== ======
PER COMMON SHARE DATA
- --------------------------------------------------------------------------------------------------------------------------
Income per Common Share Before Cumulative
Effect of Change in Accounting Method $ 0.37 $ 0.72 $ 0.60 $ 0.46 $ 0.45
Cumulative Effect per Common Share of
Change in Accounting for Income Taxes1 - - - - 0.05
------ ------ ------ ------ ------
Net Income per Common Share $ 0.37 $ 0.72 $ 0.60 $ 0.46 $ 0.50
Weighted Average Shares and Equivalents 41,925,353 40,707,633 38,731,422 36,663,440 35,466,059
Common Shares Outstanding at Year End 40,939,209 40,040,454 39,294,780 36,258,602 35,265,923
FINANCIAL POSITION
- --------------------------------------------------------------------------------------------------------------------------
Total Assets 424.2 $337.5 $252.2 $185.0 $165.9
Fixed Assets, Net 48.0 37.1 28.7 21.3 16.8
Working Capital 125.0 115.6 89.4 67.3 72.2
Noncurrent Liabilities 22.3 26.8 21.3 19.6 12.0
Stockholders' Equity 203.1 175.5 138.3 99.0 85.8
</TABLE>
- ------------------------
(1) In 1992, the Company adopted FAS 109 -- Accounting for Income Taxes.
26
<PAGE> 29
FIVE-YEAR REVENUES BY TARGET MARKET
<TABLE>
<CAPTION>
Year Ended December 31 (In millions)(1) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Services and Products
Telecommunication Firms $290.9 $205.2 $120.6 $ 77.8 $ 61.2
Financial Services Institutions 165.6 131.3 91.5 59.9 57.1
State and Local Governments and Education 130.6 95.9 81.6 66.0 59.9
Federal Government Agencies 111.1 95.8 87.5 91.6 89.8
Other Corporate Clients 34.4 33.3 27.6 26.4 27.5
------ ------ ------ ------ ------
Total Services and Products Revenues 732.6 561.5 408.8 321.7 295.5
Reimbursed Expenses Revenues 79.6 70.9 51.1 42.3 37.0
------ ------ ------ ------ ------
Total Revenues $812.2 $632.4 $459.9 $364.0 $332.5
====== ====== ====== ====== ======
</TABLE>
- ------------------------
(1) Effective in 1993, the Company eliminated Energy Industry Clients as a
separately reported market with the revenues reclassified under Federal
Government Agencies and Other Corporate Clients.
27
<PAGE> 30
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, 1996. 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.
(In millions except per share data)
<TABLE>
<CAPTION>
Net Income to Net Income Stock Bid Price
Income Before Common per Common ---------------
Revenues Income Taxes Shareholder Share High Low
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996:
- -------------------------------------------------------------------------------------------------------------------------
March 31 $181.4 $ 11.3 $ 6.6 $ 0.16 $26.625 $18.250
June 30 188.8 14.3 8.3 0.20 33.375 24.375
September 30 217.5 18.5 10.7 0.25 31.125 21.625
December 31 224.4 (18.0) (10.1) (0.24) 37.125 20.375
1995:
- -------------------------------------------------------------------------------------------------------------------------
March 31 $135.7 $ 8.3 $ 4.9 $ 0.12 $14.000 $11.417
June 30 157.5 11.5 6.6 0.16 16.917 12.667
September 30 162.7 12.9 7.5 0.19 18.333 15.500
December 31 176.5 17.1 10.2 0.25 20.500 15.583
</TABLE>
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.
The approximate number of shareholders of record of the Company's common
stock as of March 24, 1997 was 888.
28
<PAGE> 31
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 9, 1997 in Fairfax,
Virginia, for stockholders of record on March 21, 1997.
29
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
The following are all of the subsidiaries of the Registrant and are
included in its audited consolidated financial statements filed with its Annual
Report on Form 10-K for the fiscal year ended December 31, 1996. Each
subsidiary listed is either wholly-owned by the Registrant or by the Registrant
and another of its subsidiaries listed below.
<TABLE>
<CAPTION>
Place of
Subsidiary (Year Organized or Acquired) Incorporation
-------------------------------------- -------------
<S> <C>
AMS Technical Systems, Inc. (1983) Delaware
Branch Office in Seoul (1995) Korea
AMS Management Systems Canada Inc. (1983) Canada
American Management Systems Operations Corporation (1984) Delaware
AMS Management Systems Australia Pty Limited (1989) Australia
AMS Management Systems U.K. Ltd. (1989) England
Branch Office in Lisbon (1993) Portugal
AMS Management Systems Europe, S.A./N.V. (1990) Belgium
AMS Management Systems Deutschland GmbH (1990) Germany
Vista Concepts, Inc. (Acquired 1993) New York
AMS Management Systems Mexico, S.A. de C.V. (1994) Mexico
AMSY Management Systems Netherlands B.V. (1994) The Netherlands
Nordic Business Management Systems AB (1994) Sweden
AMS Management Systems Espana, S.A. (1995) Spain
AMS Management Systems (Switzerland) AG (1995) Switzerland
AMS Management Systems Italia, S.p.A (1996) Italy
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements on Form S-8 (Nos. 2-97992, 33-47661, 33-68426, 333-00563, and
333-01557) of American Management Systems, Incorporated of our report dated
March 5, 1997, appearing on page 19, of the 1996 Financial Report which is
incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedules,
which appears on page 9 of this Form 10-K.
PRICE WATERHOUSE LLP
Washington, D.C.
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 62,800
<SECURITIES> 0
<RECEIVABLES> 247,700
<ALLOWANCES> 18,900
<INVENTORY> 0
<CURRENT-ASSETS> 323,800
<PP&E> 91,100
<DEPRECIATION> (43,100)
<TOTAL-ASSETS> 424,200
<CURRENT-LIABILITIES> 198,800
<BONDS> 0
0
0
<COMMON> 500
<OTHER-SE> 203,100
<TOTAL-LIABILITY-AND-EQUITY> 424,200
<SALES> 812,200
<TOTAL-REVENUES> 812,200
<CGS> 525,900
<TOTAL-COSTS> 784,600
<OTHER-EXPENSES> 1,400
<LOSS-PROVISION> 15,200
<INTEREST-EXPENSE> 3,200
<INCOME-PRETAX> 26,200
<INCOME-TAX> 10,700
<INCOME-CONTINUING> 15,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,500
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
</TABLE>