<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
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)
State or other Jurisdiction of I.R.S. Employer
Incorporation or Organization: Delaware Identification No.: 54-0856778
4050 Legato Road
Fairfax, Virginia 22033
(Address of principal executive office)
Registrant's Telephone No., Including Area Code: (703) 267-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
As of October 24, 1997, 41,479,939 shares of common stock were outstanding.
<PAGE> 2
CONTENTS
<TABLE>
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Page
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<S> <C> <C>
Part I Financial Information
---------------------
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Quantitative and Qualitative Disclosure about Market Risk . . . . . . . . . 13
Part II Other Information
-----------------
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The information furnished in the accompanying Consolidated
Statements of Operations, Consolidated Revenues by Market, Consolidated Balance
Sheets, and Consolidated Statements of Cash Flows reflects all adjustments
which are, in the opinion of management, necessary for a fair statement of the
results of operations and financial condition for the interim periods. The
accompanying financial statements and notes thereto should be read in
conjunction with the financial statements and notes for the year ended December
31, 1996, included in the American Management Systems, Incorporated (the
"Company" or "AMS") Annual Report on Form 10-K (File No. 0-9233) filed with the
Securities and Exchange Commission on March 28, 1997.
1
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In millions except per share data)
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . $225.5 $217.5 $642.6 $587.7
EXPENSES
Client Project Expenses . . . . . . . . . . . . . . . . 132.5 130.0 375.2 354.9
Other Operating Expenses . . . . . . . . . . . . . . . . 72.5 53.9 197.9 149.9
Corporate Expenses . . . . . . . . . . . . . . . . . . . 10.6 14.2 34.9 37.0
------ ------ ------ ------
Total . . . . . . . . . . . . . . . . . . . . 215.6 198.1 608.0 541.8
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . 9.9 19.4 34.6 45.9
OTHER (INCOME) EXPENSE
Interest Expense . . . . . . . . . . . . . . . . . . . . 1.8 1.0 4.8 2.4
Other (Income) Expense . . . . . . . . . . . . . . . . . (0.4) (0.1) (1.7) (0.7)
------ ------ ------ ------
1.4 0.9 3.1 1.7
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . 8.5 18.5 31.5 44.2
INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 4.0 7.8 13.4 18.6
------ ------ ------ ------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.5 $ 10.7 $ 18.1 $ 25.6
====== ====== ====== ======
WEIGHTED AVERAGE SHARES AND EQUIVALENTS . . . . . . . . . . . . 42.4 41.9 42.2 41.8
====== ====== ====== ======
NET INCOME PER SHARE . . . . . . . . . . . . . . . . . . . . . $ 0.11 $ 0.25 $ 0.43 $ 0.61
====== ====== ===== ======
</TABLE>
2
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American Management Systems, Incorporated
CONSOLIDATED REVENUES BY MARKET
Unaudited
(In millions)(1)
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <S> <C> <C> <C>
Telecommunications Firms . . . . . . . . . . . . . . . . $ 64.6 $ 89.8 $198.6 $229.4
Financial Services Institutions . . . . . . . . . . . . 51.5 46.7 157.4 129.9
State and Local Governments and Education . . . . . . . 43.7 33.7 120.4 97.8
Federal Government Agencies . . . . . . . . . . . . . . 55.0 37.3 139.0 99.4
Other Corporate Clients . . . . . . . . . . . . . . . . 10.7 10.0 27.2 31.2
------ ------ ------ ------
Total Revenues . . . . . . . . . . . . . . . . . . . . . $225.5 $217.5 $642.6 $587.7
====== ====== ====== ======
</TABLE>
- ----------------------------------
(1) The 1996 amounts reflect an immaterial reclassification among markets for
comparative purposes.
3
<PAGE> 6
American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions except per share data)
<TABLE>
<CAPTION>
9/30/97
ASSETS (Unaudited) 12/31/96
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<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . $ 52.5 $ 62.8
Accounts and Notes Receivable . . . . . . . . . . . . . . . . . . . . 250.6 247.7
Prepaid Expenses and Other Current Assets . . . . . . . . . . . . . . 9.7 13.3
------ ------
312.8 323.8
FIXED ASSETS
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66.8 62.0
Furniture and Fixtures . . . . . . . . . . . . . . . . . . . . . . . . 21.4 18.4
Leasehold Improvements . . . . . . . . . . . . . . . . . . . . . . . . 12.5 10.7
------ ------
100.7 91.1
Accumulated Depreciation and Amortization . . . . . . . . . . . . . . . . . . (54.8) (43.1)
----- ------
45.9 48.0
OTHER ASSETS
Purchased and Developed Computer Software (Net of Accumulated
Amortization of $59,100,000 and $50,500,000) . . . . . . . . . . . 54.1 40.2
Intangibles (Net of Accumulated Amortization of $3,000,000 and
$2,600,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 6.3
Other Assets (Net of Accumulated Amortization of $790,000 and
$15,700,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.2 5.9
------ ------
73.4 52.4
------ ------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $432.1 $424.2
====== ======
</TABLE>
4
<PAGE> 7
American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions except per share data)
<TABLE>
<CAPTION>
9/30/97
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 12/31/96
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations . . . . . . . . . . . $ 54.4 $ 53.5
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.8 19.6
Accrued Incentive Compensation . . . . . . . . . . . . . . . . . . . . 15.3 36.1
Other Accrued Compensation and Related Items . . . . . . . . . . . . . 37.9 32.3
Deferred Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 22.3 20.6
Other Accrued Liabilities . . . . . . . . . . . . . . . . . . . . . . 2.1 2.7
Provision for Contract Losses . . . . . . . . . . . . . . . . . . . . 2.8 18.5
Income Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 7.8
------ ------
150.9 191.1
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . 14.1 7.7
------ ------
165.0 198.8
NONCURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations . . . . . . . . . . . 28.6 13.7
Other Accrued Liabilities . . . . . . . . . . . . . . . . . . . . . . 9.0 1.4
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . 7.3 7.2
------ ------
44.9 22.3
------ ------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209.9 221.1
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,
50,020,764 and 49,598,673 Issued and 41,450,006 and 40,939,209
Outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 0.5
Capital in Excess of Par Value . . . . . . . . . . . . . . . . . . . . 78.3 75.0
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 175.3 157.3
Currency Translation Adjustment . . . . . . . . . . . . . . . . . . . (5.5) (1.1)
Common Stock in Treasury, at Cost (8,570,758 and 8,659,464 Shares) . . (26.4) (28.6)
------ ------
222.2 203.1
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . $432.1 $424.2
====== ======
</TABLE>
5
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18.1 $ 25.6
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization . . . . . . . . . . . . . . . . . . . . . 26.1 27.3
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 7.0
Provision for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . 3.5 1.8
Changes in Assets and Liabilities:
Increase in Trade Receivables . . . . . . . . . . . . . . . . . . . (6.4) (68.5)
Decrease in Prepaid Expenses and Other Current Assets . . . . . . . 3.5 3.2
Increase in Other Assets . . . . . . . . . . . . . . . . . . . . . . (8.1) (10.3)
(Decrease) Increase in Accrued Incentive Compensation . . . . . . . (18.5) 6.1
(Decrease) Increase in Accounts Payable, Other Accrued
Compensation, and Other Accrued Liabilities . . . . . . . . . . . (9.6) 9.9
Increase in Deferred Revenue . . . . . . . . . . . . . . . . . . . . 1.7 1.5
Decrease in Income Taxes Payable . . . . . . . . . . . . . . . . . . (4.6) (2.3)
------ ------
Net Cash Provided by Operating Activities . . . . . . . . . . . . . . . 12.1 1.3
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . (12.1) (16.9)
Purchase of Computer Software . . . . . . . . . . . . . . . . . . . . . . . (1.8) (4.7)
Investment in Software Products . . . . . . . . . . . . . . . . . . . . . . (23.8) (9.1)
Decrease in Other Investments . . . . . . . . . . . . . . . . . . . . . . . . 0.4 0.5
Proceeds from Sale of Fixed Assets and Purchased Computer Software . . . . . 0.5 0.4
------ ------
Net Cash Used by Investing Activities . . . . . . . . . . . . . . . . . (36.8) (29.8)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.8 20.2
Payments on Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . (5.1) (5.1)
Proceeds from Common Stock Options Exercised . . . . . . . . . . . . . . . . 3.2 4.0
------ ------
Net Cash Provided by Financing Activities . . . . . . . . . . . . . . . 18.9 19.1
Increase in Currency Translation Adjustment . . . . . . . . . . . . . . . . (4.5) (0.2)
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . (10.3) (9.6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . 62.8 35.8
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . . $ 52.5 $ 26.2
====== ======
NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES:
Treasury Stock Utilized to Satisfy Accrued Incentive Compensation
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.3 $ 3.4
</TABLE>
6
<PAGE> 9
Item 2. 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 revenues of major items in the Consolidated Statements of
Operations and the percentage of change in such items from period to period,
excluding percentage changes in de minimus dollar amounts.
<TABLE>
<CAPTION>
Percentage of
Total Revenues Period-to-Period Change
-------------- -------------------------------------------------
Quarter Ended Quarter Ended Nine Months Ended
September 30, September 30, 1997 September 30, 1997
vs. vs.
1997 1996 September 30, 1996 September 30, 1996
-------- -------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . 100% 100% 3.7% 9.3%
Expenses
Client Project Expenses . . . . . . . . 58.8 59.8 1.9 5.7
Other Operating Expenses . . . . . . . . 32.1 24.8 34.5 32.0
Corporate Expenses . . . . . . . . . . . 4.7 6.5 (25.4) (5.7)
----- -----
Total . . . . . . . . . . . . . . . . . 95.6 91.1 8.8 12.2
Income from Operations . . . . . . . . . . . 4.4 8.9 (49.0) (24.6)
Other (Income) Expense . . . . . . . . . . . 0.6 0.4 - -
Income Before Income Taxes . . . . . . . . . 3.8 8.5 (54.1) (28.7)
Income Taxes . . . . . . . . . . . . . . . . 1.8 3.5 (48.7) (28.0)
Net Income . . . . . . . . . . . . . . . . . 2.0 5.0 (57.9) (29.3)
Weighted Average Shares and Equivalents . . . - - 1.2 1.0
Net Income per Share . . . . . . . . . . . . - - (56.0) (29.5)
</TABLE>
7
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RESULTS OF OPERATIONS (continued)
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") contains certain forward-looking statements. In
addition, the Company or its representatives from time to time may make, or may
have made, certain forward-looking statements, orally or in writing, including,
without limitation, any such statements made in this MD&A, press releases, or
any such statements made, or to be made, in the MD&A contained in other filings
with the Securities and Exchange Commission. The Company wishes to ensure that
such forward-looking statements are accompanied by meaningful cautionary
statements so as to ensure, to the fullest extent possible, the protections of
the safe harbor established by the Private Securities Litigation Reform Act of
1995. Accordingly, such forward-looking statements made by, or on behalf of,
the Company are qualified in their entirety by reference to, and are
accompanied by, the discussion herein of important factors that could cause the
Company's actual results to differ materially from those projected in such
forward-looking documents.
REVENUES
Revenues increased 4% during the third quarter and 9% for the first
nine months of 1997, compared to the same 1996 periods, with third quarter
growth occurring in all of the Company's target markets except the
telecommunications market. For the first nine months of 1997, growth occurred
in all target markets except the Telecommunications Firms and the Other
Corporate Clients markets.
Business with non-US clients decreased 23% (to $60.1 million) during
the third quarter and decreased 8% (to $193.8 million) for the first nine
months of 1997, compared to the same 1996 periods. This is the first quarter
since the Company began its international expansion in 1989, in which non-US
revenues have declined on a comparative basis. These decreases were primarily
due to two factors. The first factor is the termination of work with the
non-US telecommunications client, Telecom Securicor Cellular Radio Limited
("Cellnet"), that had been the subject of prior statements by the Company
dating back to the fourth quarter of 1996. The Company announced the
termination of the Cellnet project in a press release dated August 13, 1997.
The second factor is the unexpected cancellation at the end of August 1997 by
Swiss Telecom of the second phase of the Customer Care and Billing Systems
project after the successful completion of phase one of such project. The
Company announced the cancellation of the Swiss Telecom project earlier in the
quarter in a press release dated September 4, 1997. All other business with
non-US clients increased 12% and 26%, during the third quarter and first nine
months, respectively.
In the Telecommunications Firms market, a market which is
characterized by large projects with relatively few clients, revenues decreased
28% in the third quarter of 1997 and decreased 13% for the first nine months of
1997, compared to the 1996 periods; non-US revenues decreased 34% for the
quarter, and 17% for the nine months, again compared to the 1996 periods.
These decreases are predominantly attributable to the termination of work on
the Cellnet and Swiss Telecom contracts mentioned above, especially Cellnet.
Excluding revenues from these two contracts, non-US revenues in this market
from other contracts increased 7% in the third quarter and 25% for the first
nine months of 1997. Revenues from all other telecommunications clients (both
US and non-US, but excluding these two contracts) were approximately the same
in the third quarter compared to the third quarter of 1996, and such revenues
increased 15% for the first nine months of 1997 over the same nine-month period
in 1996. For the year 1997 as a whole, and continuing for a period into 1998,
the Company expects revenues in this market to be approximately equal to
Telecommunications Firms revenues for 1996, again reflecting the material
impact of the loss of continued revenues on the Cellnet and Swiss Telecom
contracts, both large contracts.
8
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In the Financial Services Institutions target market, 1997 revenues in
the third quarter and first nine months increased 10% and 21%, respectively,
when compared to the 1996 periods, owing to build-ups in business with clients
who started large projects in 1996, and start-up work on several new contracts
awarded during the first half of 1997. Business with non-US clients accounted
for approximately 32% of the third quarter revenues in this market ($16.4
million) and 32% of the nine months revenues ($50.4 million). For all of
1997, the Company expects revenue growth in this market to increase at rates
consistent with that shown through the first nine months.
In the State and Local Governments and Education target market,
revenues increased 30% in the third quarter and 23% for the first nine months
of 1997. The increase for both 1997 periods was attributable to continued work
with state taxation departments and several new engagements for financial and
revenue systems. The Company expects revenues in the State and Local
Governments and Education market to increase for all of 1997 at rates
significantly higher than the increase in the Company's overall revenues.
Revenues in the Federal Government Agencies target market increased
47% during the third quarter, and 40% during the first nine months of 1997,
compared to the same 1996 periods. This increase was attributable to increased
business with existing clients and new business with both defense and civilian
agencies. The Company expects revenues in this target market, for all of 1997,
to increase at rates substantially greater than the overall growth rate of the
Company, owing principally to the award of a significant contract with the
Department of Defense, which accounted for 73% of the third quarter growth.
Revenues from Other Corporate Clients increased 7% during the third
quarter and decreased 13% for the first nine months, compared to 1996.
EXPENSES
Client project expenses and other operating expenses together
increased 11% during the third quarter and 14% for the first nine months of
1997. For all of 1997, the Company anticipates that these expenses will
continue to grow slightly faster than revenue growth, due to the termination of
the work with Cellnet and Swiss Telecom, as well as the process of re-deploying
over 350 employees previously assigned to these two projects. The Company
added $2.8 million to its provision for contract losses in the third quarter
for estimated additional costs to complete a custom software sysytem for a
client. During the first nine months, and continuing into 1998, the Company is
making significant expenditures related to research and development as it
produces the next generation of software to be used in its telecommunications
business. A significant portion of these expenditures is being capitalized.
Corporate expenses decreased 25% during the third quarter and
decreased 6% for the first nine months, when compared to the 1996 periods.
These decreases reflect the Company's focus on controlling these expenses
along with reductions in corporate level performance-based incentive
compensation.
INCOME FROM OPERATIONS
Income from operations decreased 49% for the third quarter and 25% for
the first nine months of 1997. One significant factor in the decrease was the
substantial amount of management and staff resources that have been expended to
resolve issues relating to the Cellnet contract. Another significant factor
was the material decreases in revenue from the Cellnet contract, when compared
to 1996, combined with expenses incurred in re-deploying over 350 personnel
that had previously worked on the Cellnet and Swiss Telecom projects. The
unanticipated cancellation of the Swiss Telecom project compounded the
re-deployment issue, coming soon after the termination of the Cellnet contract.
Full deployment, however, of all these personnel is expected to be completed in
the fourth quarter of 1997. The Company expects to show an increase in income
from operations during the fourth quarter.
9
<PAGE> 12
OTHER (INCOME) EXPENSE
Interest expense increased 77% during the third quarter and 95% during
the first nine months of 1997, because of additional long-term debt incurred by
the Company during the first quarter of 1997 and increases in short-term
borrowing to finance the growth of the Company's accounts receivable. Other
income increased 274% in the third quarter and 157% for the first nine months
of 1997, compared to 1996, due primarily to a refund of property taxes combined
with an increase of cash investments in the US.
FOREIGN CURRENCY EXCHANGE
Approximately 30% of the Company's nine month revenues were derived
from non-US business. The Company's practice is to negotiate contracts in the
same currency in which the predominant expenses are incurred, thereby
mitigating the exposure to foreign currency exchange fluctuations. It is not
possible to accomplish this in all cases, and the Company does take some risk
that profits and stockholders' equity 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company provides for its operating cash requirements primarily
through funds generated from operations, and from bank borrowings, which
provide for cash and currency management with respect to the short-term impact
of certain cyclical uses of cash, such as annual payments of incentive
compensation as well as to some degree financing of accounts receivable. At
September 30, 1997, the Company's cash and cash equivalents totaled $52.5
million, down from $62.8 million at the end of 1996. Cash provided from
operating activities was $12.1 million, owing to significant improvements in
accounts receivable, especially collection of substantial receivables related
to subcontract work with a prime contractor in the child support enforcement
business. The Company received a number of large payments during the third
quarter related to the subcontract work in the child enforcement business,
reducing total accounts receivable from this client to 3% of total accounts
receivable. The receivable from a foreign government experiencing continued
cash flow problems remains outstanding.
The Company invested over $37.7 million in fixed assets and software
purchases, and computer software development during the first nine months of
1997. Revolving line of credit borrowings during the first nine months of 1997
increased by $0.9 million over year-end 1996, which borrowings consisted
entirely of foreign currency borrowings by the Company's non-US subsidiaries,
all of which borrowings remained outstanding at September 30, 1997.
Additionally, the Company borrowed $20 million during the first quarter under
the term loan provisions of its new $100 million syndicated debt facility.
During the first nine months of 1997, the Company made approximately $5.1
million in installment payments of principal on outstanding debt owed to banks;
the Company also received approximately $3.2 million during the period from the
exercise of stock options. At September 30, 1997, by reason of the combined
impact of the Cellnet and Swiss Telecom contract cancellations, the Company
would not have been in compliance with the fixed charge coverage ratio in its
revolving credit agreement. The Company obtained a one-time waiver of
compliance with that covenant prior to September 30, 1997, and expects to be in
compliance with that covenant for future periods.
10
<PAGE> 13
At September 30, 1997, the Company's ratio of total liabilities
divided by stockholders' equity, was 0.94, an improvement from 1.09 at December
31, 1996.
The Company's material unused source of liquidity at the end of the
third quarter 1997 consisted of approximately $33 million under the new
revolving credit facility. The Company believes that its liquidity needs can
be met from the various sources described above.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share", was issued by the Financial Accounting Standards Board in
February 1997. The effective date of SFAS No. 128 is for periods ending after
December 15, 1997 and early adoption is not permitted. The Company will
implement SFAS No. 128 during the quarter and year ended December 31, 1997 and
management does not expect this pronouncement to have a material impact on
Earnings per Share.
11
<PAGE> 14
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. The recent termination of the Cellnet telecommunications
contract, and the problems associated with such contract that date back to the
fourth quarter of 1996, as well as the unanticipated cancellation by Swiss
Telecom of phase two of another telecommunications project in the third quarter
of 1997, have also contributed to the Company's reduced profit margins during
the last two years.
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 terms and delivery schedules. In order to
meet its 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. The cancellation of
phase two of the large Swiss Telecom project in the third quarter of 1997 after
the Company's successful completion of phase one of the project, and the
Company's subsequent reduction of net income for 1997 and re-deployment of
personnel as a result of such unexpected cancellation, is a recent example of
the risks inherent in the Company's business and the Company's efforts to
manage such risks.
Certain other risks, including, but not limited to, the Company's
international operations, are discussed elsewhere in this Form 10-Q. Because
the Company operates in a rapidly changing and highly competitive market,
additional risks not discussed in this Form 10-Q may emerge from time to time.
The Company cannot predict such risks or assess the impact, if any, 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.
12
<PAGE> 15
Item 3. Quantitative and Qualitative Disclosure about Market Risk
NOT APPLICABLE.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
NONE.
Item 2. Changes in Securities
NONE.
Item 3. Defaults Upon Senior Securities
NONE.
Item 4. Submission of Matters to a Vote of Security Holders
NONE.
Item 5. Other Information
NONE.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
NONE.
(b) Reports on Form 8-K
Form 8-K, dated and filed September 12, 1997, relating to the
Company's public announcement of its reduction in projected
net income for 1997 because of the cancellation of the Swiss
Telecom project.
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
<TABLE>
<S> <C> <C>
Date: October 31, 1997 /s/ Philip M. Giuntini
-------------------------- ------------------------------------------
Philip M. Giuntini, President
Date: October 31, 1997 /s/ James E. Marshall
-------------------------- ------------------------------------------
James E. Marshall, Controller
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 52,500
<SECURITIES> 0
<RECEIVABLES> 250,600
<ALLOWANCES> 5,800
<INVENTORY> 0
<CURRENT-ASSETS> 312,800
<PP&E> 100,700
<DEPRECIATION> (54,800)
<TOTAL-ASSETS> 432,100
<CURRENT-LIABILITIES> 165,000
<BONDS> 0
0
0
<COMMON> 500
<OTHER-SE> 222,200
<TOTAL-LIABILITY-AND-EQUITY> 432,100
<SALES> 642,600
<TOTAL-REVENUES> 642,600
<CGS> 375,200
<TOTAL-COSTS> 608,000
<OTHER-EXPENSES> 3,100
<LOSS-PROVISION> 3,500
<INTEREST-EXPENSE> 4,800
<INCOME-PRETAX> 31,500
<INCOME-TAX> 13,400
<INCOME-CONTINUING> 18,100
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<EXTRAORDINARY> 0
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<NET-INCOME> 18,100
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
